Globalization and Development A L AT I N A M E R I C A N A N D C A R I B B E A N P E R S P E C T I V E Edited by José Antonio Ocampo Juan Martin ECONOMIC COMMISSION FOR LATIN AMERICA AND THE CARIBBEAN Globalization and Development Globalization and Development A LATIN AMERICAN AND CARIBBEAN PERSPECTIVE Edited by José Antonio Ocampo Juan Martin ECONOMIC COMMISSION FOR LATIN AMERICA AND THE CARIBBEAN A COPUBLICATION OF STANFORD SOCIAL SCIENCES, AN IMPRINT OF STANFORD UNIVERSITY PRESS, AND THE WORLD BANK © 2003 ECLAC United Nations Economic Commission for Latin America and the Caribbean Casilla 179-D Santiago, Chile All rights reserved. 1 2 3 4 06 05 04 03 A copublication of Stanford Social Sciences, an imprint of Stanford University Press, and the World Bank. Stanford University Press The World Bank 1450 Page Mill Road 1818 H Street, NW Palo Alto, Calif. 94304 Washington, DC 20433 The views and opinions expressed here are those of the authors and do not necessarily reflect the official position of ECLAC. ISBN 0-8213-5501-5 (World Rights except North America) ISBN 0-8047-4956-6 (North America) Library of Congress Cataloging-in-Publication Data has been applied for. Latin American Development Forum Series This series was created in 2003 to promote debate, disseminate infor- mation and analysis, and convey the excitement and complexity of the most topical issues in economic and social development in Latin America and the Caribbean. It is sponsored by the Inter-American Development Bank, the United Nations Economic Commission for Latin America and the Caribbean, and the World Bank. The manu- scripts chosen for publication represent the highest quality in each institution's research and activity output, and have been selected for their relevance to the academic community, policymakers, researchers, and interested readers. Advisory Committee Members Inés Bustillo, Director, Washington Office, Economic Commission for Latin America and the Caribbean, United Nations Guillermo Calvo, Chief Economist, Inter-American Development Bank José Luis Guasch, Regional Adviser, Latin America and Caribbean Region, World Bank Stephen Haber, A. A. and Jeanne Welch Milligan Professor, Department of Political Science, Stanford University; Peter and Helen Bing Senior Fellow, the Hoover Institution Eduardo Lora, Principal Adviser, Research Department, Inter-American Development Bank José Antonio Ocampo, Executive Secretary, Economic Commission for Latin America and the Caribbean, United Nations Guillermo E. Perry, Chief Economist, Latin America and Caribbean Region, World Bank Luis Servén, Lead Economist, Latin America and Caribbean Region, World Bank About ECLAC THE ECONOMIC COMMISSION FOR Latin America and the Caribbean (ECLAC), headquartered in Santiago, Chile, is one of the five regional commissions of the United Nations. It was founded for the purpose of contributing to the economic development of Latin America and the Caribbean, coordinating actions directed towards this end, and rein- forcing economic relationships among these countries and with other nations of the world. The promotion of the region's social develop- ment was later included among its primary objectives. Acknowledgments The preparation of this document was coordinated by José Antonio Ocampo, Executive Secretary of ECLAC, and Juan Martin, Special Advisor to the Executive Secretary, with the collaboration of Reynaldo Bajraj, Deputy Executive Secretary, and María Elisa Bernal, Special Assistant to the Secretary of the Commission. Contributions to individual chapters were prepared by Alicia Bárcena, Director of the Sustainable Development and Human Settle- ments Division; Juan Carlos Ramírez, Chief of ECLAC's Bogotá office; Vivianne Ventura-Dias, Director of the Division of Interna- tional Trade and Integration; and Eugenio Lahera, Consultant. Rudolf Buitelaar, Inés Bustillo, Mario Cimoli, Ricardo Ffrench- Davis, Manuel Marfán, María Angela Parra, Wilson Peres, Andrés Solimano, Miguel Villa, and consultants Armando Di Fillipo, Edmund V. FitzGerald, Stephany Griffith-Jones, Gabriel Palma, and Jaime Ros also provided valuable contributions. Contents Preface xiii 1 GLOBALIZATION: A HISTORICAL, MULTIDIMENSIONAL PERSPECTIVE 1 Economic Globalization 2 Noneconomic Dimensions of Globalization 7 Ethical and Cultural Dimensions 7 Political Dimension 11 Opportunities and Risks 12 2 INTERNATIONAL TRADE AND THE NEW GLOBAL PRODUCTION STRUCTURE 17 International Trade 17 International Trade and Economic Growth: A Variable Historical Relationship 17 Development of the Institutional Framework for International Trade 23 Recent Patterns of World Trade 28 Two Challenges Posed by the Relationship between Trade and Economic Growth 37 The New Global Production Structure 44 Microeconomic Foundations 44 New Forms of Production and Market Organization 47 Implications for Business Decisions and Strategies 49 Patterns of FDI and TNC Strategies at the Global Level 54 3 THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 63 International Finance and Macroeconomic Regimes 63 ix x CONTENTS History of the International Financial System 64 Recent Changes and Volatility in Financial Markets 70 Capital Flows to Developing Countries 76 International Migration 88 4 INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 99 Inequalities in Global Income Distribution 99 Long-Term Disparities between Regions and Countries 100 Overall Effect of International and National Inequality 105 Basic Asymmetries in the Global Order 111 Extreme Concentration of Technical Progress in Industrial Countries 113 Developing Countries' Greater Macroeconomic Vulnerability 115 High Capital Mobility and Low Labor Mobility 119 The Rise and Fall of International Cooperation for Development 121 5 AN AGENDA FOR THE GLOBAL ERA 129 Fundamental Principles for Building a Better Global Order 130 Three Key Objectives 130 Global Rules and Institutions that Respect Diversity 132 Complementarity of Global, Regional, and National Institution Building 133 Equitable Participation and Appropriate Rules of Governance 136 National Strategies for Dealing with Globalization 138 The Role and Basic Components of National Strategies 138 Macroeconomic Strategy 139 Building Systemic Competitiveness 142 Environmental Sustainability 145 Social Strategies in an Era of Globalization 148 The Key Role of Action at the Regional Level 151 The Global Agenda 156 The Provision of Global Public Goods in the Macroeconomic Sphere 156 Sustainable Development as a Global Public Good 158 The Correction of Financial and Macroeconomic Asymmetries 163 CONTENTS xi Overcoming Production and Technological Asymmetries 166 The Full Inclusion of Migration on the International Agenda 172 Economic, Social, and Cultural Rights: The Foundations for Global Citizenship 175 References 179 Index 201 BOXES 1.1 Inclusion and Identity: The Issue of Ethnicity 10 2.1 The Long-Term Deterioration of Raw Material Prices 34 3.1 Interest Rates and Emerging-Market Bond Spreads 81 4.1 World Distribution of Research and Development Activities 115 5.1 Economic Links between Puerto Rico and the United States 169 FIGURES 1.1 Ratification of Human Rights Conventions 8 2.1 Trade and Global Output, 1870­1998 18 2.2 Export Growth and GDP Growth in 35 Countries 22 2.3 Exports from Latin America 24 2.4 Real Commodity Price Indexes 34 2.5 Trade and GDP in Latin America, 1870­1998 38 2.6 Relationships among Economic Growth, Trade, and the Technology Gap in Latin America, 1950­2000 39 2.7 Deindustrialization, Foreign Trade, Employment, and Income 42 3.1 International Monetary Fund: Total Credits and Outstanding Loans, 1950­2001 69 3.2 Financial Derivatives Traded on Organized Exchanges 72 3.3 Spreads in Emerging Markets 75 3.4 Net Flows to Developing Countries 77 3.5 Credits of International Financial Institutions 85 3.6 External Debt 87 4.1 International Inequality, Weighted by Population, 1950­98 105 4.2 Global Income Inequality, 1820­1992 106 4.3 Inequality and Per Capita Income 110 4.4 Instability of Economic Growth 117 xii CONTENTS TABLES 2.1 Global Exports, by Origin 20 2.2 GDP Growth: World and Largest Regions, 1820­1998 26 2.3 Structure of World Imports, by Origin and Destination, 1985 and 2000 30 2.4 Dynamic and Nondynamic Products in World Imports, 1985­2000 32 2.5 Export Structure, by Type of Competitive Situation 36 2.6 Foreign Direct Investment 55 2.7 Foreign Direct Investment Inflows 57 2.8 Geographic Concentration of Foreign Subsidiaries in Selected Manufacturing Industries, by Technology Intensiveness, 1999 59 3.1 Financial Holdings of Institutional Investors in Selected OECD Countries 71 3.2 Net Resource Flows, 1973­2001 78 3.3 Net Resource Flows, 1990­99 82 3.4 Organisation for Economic Co-operation and Development: The 10 Main Countries of Destination of Immigrants 90 3.5 Organisation for Economic Co-operation and Development: Nations of Origin of Persons Migrating to the Main Recipient Countries, 1999 91 4.1 Patterns of Interregional Disparities 101 4.2 Indexes of Per Capita Income Inequality in the World 103 4.3 Standard Deviation of Per Capita GDP Growth 104 4.4 World Trend in Income Inequality, 1975­95 107 4.5 World Distribution of Expenditures in R&D and Number of Researchers, 1996­97 116 4.6 International Asymmetries: Share of Developing Countries in the World Economy 120 Preface IT HAS BEEN SAID THAT LATIN AMERICAN thought is the history of a quest to harmonize modernization and identity. Ever since its founding, the Economic Commission for Latin America and the Caribbean (ECLAC) has sought to contribute to this undertaking by highlighting the spe- cific nature of regional situations, while at the same time advocating efforts to change the region's production patterns in conjunction with the promotion of social equity and, more recently, environmental sus- tainability. Globalization shapes the context in which this task must be undertaken. Precisely for this reason, the countries of Latin America and the Caribbean asked ECLAC's Secretariat to prepare a document on globalization and development (ECLAC 2002a) that was discussed in the 29th Session of the Commission (Brasilia, Brazil, May 2002). The main motivation to produce this book lies in our perception of a sharp contrast between problems that are increasingly global in scope and international institution building, which lags behind. This uneven advance jeopardizes the balance of opportunities and risks of globalization. Thus, this book presents an analysis of the opportuni- ties that are open to the developing world, but it also examines the asymmetries and risks entailed in this process, which may hinder development unless suitable institutional frameworks are put in place at the national, regional, and global levels. Although the conceptual considerations explored in this volume are based on one particular region of the developing world, Latin America and the Caribbean, the analysis is undertaken in a broader spirit and may therefore be relevant for other regions as well. Economic globalization has deep historical roots. The current phase of globalization shares certain features with previous stages, but it also has a number of characteristics that set it apart, such as mass real-time access to information; the global planning of production by transnational xiii xiv PREFACE corporations; the expansion of free trade, albeit still limited by multiple forms of protectionism in the industrial world; the contradictory combi- nation of a high degree of mobility of capital and tight restrictions on the migration of labor; evidence of growing environmental vulnerability and interdependence; and an unprecedented trend toward the homogeniza- tion of institutions. This standardization of the applicable rules is biased, however, because only the most powerful international actors have suc- ceeded in safeguarding their interests. The outcome of this bias is an in- complete international agenda. Both of these features--namely the bias and incompleteness of the current order--have profound implications for analysis and for public policy. The vision of globalization set out in this analysis highlights the multidimensional nature of the process and, by extension, underscores the fact that it is not determined by economic forces alone. One of the dimensions of globalization, which ECLAC has termed the "global- ization of values," consists of the gradual spread of common ethical principles, including those embodied in declarations of human rights and the principles enshrined in summits held by the United Nations. These processes have their roots in international civil society's long struggle to instill respect for human rights, social equity, gender equal- ity, and environmental protection and, more recently, the globaliza- tion of solidarity and the right to be different. Given the forcefulness of these processes, the lack of any true inter- nationalization of politics is undoubtedly the greatest paradox of the current phase of globalization. The mismatch between problems that are worldwide in scope and national political processes has translated into a "governance deficit" at the global level, which has made it harder to balance the opportunities and risks inherent in globalization. The fact that the political arena continues to be essentially national in scope also has profound implications for the international order. In particular, it implies that the promotion of democracy as a universal value makes sense only insofar as national processes of representation and participation are allowed to shape strategies of economic and social development and to mediate effectively among sectors that are affected differentially by globalization. Various aspects of globalization offer significant opportunities for developing countries. Potentially, developing nations stand to gain from broader market access and the availability of capital and tech- nology from the rest of the world, but the globalization process also holds out an opportunity for championing human rights and other universal values. In light of these opportunities, the greatest risk of all may lie in exclusion from the process. At the same time, however, glob- alization carries the risks associated with new sources of instability (in PREFACE xv the spheres of trade and, particularly, finance), the risk of exclusion for countries that are ill-prepared for the modern world's relentless demand for competitiveness, and the risk of heightened structural het- erogeneity among social sectors and regions in countries whose inte- gration into the world economy has been segmented. How successful the countries will be in taking advantage of the opportunities of glob- alization and mitigating its risks will depend upon the effectiveness of their national and regional strategies for participating in this process and upon the global institutions that establish the framework for those strategies. The most reasonable response to the complex situation created by globalization is to pursue a positive agenda. Experience has shown, moreover, that in the long run mere resistance to such deeply rooted processes inevitably proves futile. We should not, however, view glob- alization as a natural, unalterable phenomenon that we have no alter- native but to decry or embrace. The existence of various possible global orders is borne out not only by the history of the globalization process itself, but also by the range of different modalities of develop- ment and integration into the global economy pursued by industrial and developing countries alike. The first of this book's five chapters focuses on the multidimen- sional nature of globalization; describes the current phase of the process within its historical context of global economic international- ization; and briefly examines its social, political, and cultural dimen- sions. Chapters 2 and 3 look at how the economic facets of the glob- alization process have evolved. Chapter 2 explores trends in international trade and in the new global production structure, and chapter 3 analyzes the international mobility of capital--within the framework of the various macroeconomic regimes of the world econ- omy--and of labor. Income disparity trends and the underlying asym- metries of the current global order are discussed in chapter 4. The fifth and final chapter proposes an agenda for the global era. As part of this proposal--and on the basis of certain fundamental principles, such as global institutions that respect diversity; complementarity among global, regional, and national institutions; and equitable participation by the countries based on suitable rules of governance--this chapter outlines the national, regional, and global measures that are needed to achieve the three foremost objectives of a new international order: a supply of global public goods, the gradual correction of international asymmetries, and the progressive construction of a rights-based inter- national social agenda. 1 Globalization: A Historical, Multidimensional Perspective IN THE 1990S THE CONCEPT OF globalization was widely employed in ac- ademic and political debates, but the meanings attributed to this term are far from consistent. In this volume globalization will be used to re- fer to the growing influence exerted at the local, national, and regional levels by financial, economic, environmental, political, social, and cul- tural processes that are global in scope. This definition of the term highlights the multidimensional nature of globalization. Indeed, al- though the economic dimensions of globalization are spoken about the most, they are concomitant with noneconomic processes, which have a dynamic of their own and are therefore not determined by economic factors. In addition, the tension that is generated between the different dimensions of globalization is a pivotal element of the process. In the economic sphere, but also--and especially--in the broadest sense of the term, the current globalization process is incomplete and asym- metric and is marked by major shortcomings in terms of governance. The dynamics of globalization are shaped, to a large extent, by the fact that the actors involved in this process are on an unequal footing. Industrial-country governments, together with transnational corpora- tions, exert the strongest influence, whereas developing-country govern- ments and civil society organizations hold much less sway. Moreover, some of these actors--particularly industrial-country governments-- reserve and exercise the right to take unilateral and bilateral action and to participate in regional processes while continuing to engage in global debates and negotiations. The meaning of the term globalization as used in this book is couched in positive terms and is intended to serve the purposes of analysis. It does not embrace the normative use of the concept, which is based on the idea that there is only one possible road to the full 1 2 GLOBALIZATION AND DEVELOPMENT liberalization and integration of world markets and that this path traces the inevitable and desirable fate of all humankind.1 The history of the 20th century refutes such a view; the period between the world wars was marked by a long and conflictive reversal of the internationaliza- tion process. The development of multilateral institutions that has ac- companied the globalization process and the current debate on global governance show that there is not just one possible international order, nor is there a single way of dividing responsibilities among global, re- gional, and national institutions and agencies. Moreover, the course of events in industrial and developing countries has revealed that there are many ways to establish a position in the global economy (Albert 1993; Economic Commission for Latin America and the Caribbean [ECLAC] 2000a; Rodrik 2001b). The differences are a reflection of each country's history and of how each one weighs the opportunities and risks involved in becoming integrated into the world economy. This chapter presents an initial approach to the globalization process as a whole. The first section gives a general description of the history and economic dimensions of the process, and the following sec- tion analyzes the main noneconomic factors (ethical, cultural, and po- litical principles). The chapter concludes with an analysis of the op- portunities and risks inherent in globalization. Economic Globalization The contemporary process of internationalization dates back to the emergence of capitalism in Europe in the late Middle Ages, the new scientific and cultural thinking embodied by the Renaissance, and the establishment of the great European nations and their empires. The ex- pansion of capitalism is the only historical phenomenon to have been truly global (albeit incomplete) in scope. To a greater extent than other parts of the developing world, the history of Latin America and the Caribbean has been strongly influenced by the development of capi- talism ever since the late 15th century. Modern historians distinguish a number of stages in the last 130 years of globalization; with a few adaptations, three stages will be used in this volume.2 The first stage, from 1870 to 1913, was marked by a high degree of capital and labor mobility, together with a trade boom that was the result of reduced transport costs rather than of free trade. This stage of globalization was cut short by the First World War, which gave way to a period that was characterized first (in the 1920s) by the impossibility of resuming the trend of previous years and then (in the 1930s) by an open reversal of the globalization process. GLOBALIZATION: A HISTORICAL, MULTIDIMENSIONAL PERSPECTIVE 3 After the Second World War, there was a new impulse toward global integration. This period consisted of the second and third stages of globalization. The watershed events of the early 1970s marked the changeover from the second to the third stage. These events included the disintegration of the macroeconomic regulation regime established in 1944 in Bretton Woods, the first oil crisis, the increasing mobility of private capital, intensified by the first two events, and the end of the "golden age" of growth in the industrialized countries (1950­73) (Marglin and Schor 1990). If 1973 is taken as the turning point, then the second stage of globalization can be circumscribed to the period 1945­73. This period was marked by a major effort to develop inter- national institutions for financial and trade cooperation and by a sig- nificant expansion of trade in manufactures among industrial coun- tries. It was also characterized by widely varying models of economic organization and limitations on the mobility of capital and labor. The final quarter of the 20th century (1973 onward) ushered in a third stage of globalization, with the gradual spread of free trade, the grow- ing presence on the international scene of transnational corporations operating as internationally integrated production systems, the expan- sion and notable mobility of capital, and a shift toward the standard- ization of development models. At the same time, selective trade pro- tection mechanisms and tight restrictions on the movement of labor persisted. This long process has been fueled by successive technological revo- lutions and, most importantly, by advances that have cut the costs of transportation, information, and communications.3 The shortening of distances, in the economic sense, is a cumulative effect of cost reduc- tions and of the development of new means of transport, in combina- tion with the capacity for the real-time transmission of information, which started with the invention of the telegraph and expanded with the advent of the telephone and television. Access to information on a mass scale, however, became possible only with the development of in- formation and communication technologies in recent years. These technologies have drastically reduced the cost of access to information, though not, obviously, the cost of processing it or of making effective use of it. Advances in transportation, information, and communications are part of a wider range of technological innovations that have resulted in unprecedented advances in productivity, economic growth, and in- ternational trade. In the European countries, the major capital cities have been engaged in international trade ever since the inception of modern capitalism (Braudel 1994). The internationalization of corpo- rate production dates back to the late 19th century, when it emerged 4 GLOBALIZATION AND DEVELOPMENT as a by-product of economic concentration in the industrialized coun- tries. In fact, this phenomenon marked the birth of transnational cor- porations. From the 1970s on, the increasingly common practice of outsourcing labor-intensive tasks, such as assembly or maquiladora activities, to other countries was facilitated by the reduction in trans- port costs and the trade regulations established by the industrial coun- tries. This was the first step toward the development of internationally integrated production systems, in which production can be divided into various 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 partic- ular phases of the production process, or in the assembly of specific models. These changes in the structure of production and trade have en- abled large corporations and business conglomerates to come to the fore. In fact, the development of internationally integrated production systems and increased flows of trade and foreign direct investment go hand in hand with the growing influence of transnational corpora- tions. The key factor has undoubtedly been the liberalization of trade, financial flows, and investment in developing countries, and the pace of liberalization has been increasing over the last two decades. These phenomena are some of the factors behind the huge wave of foreign in- vestment and the marked concentration of production at the world level that were hallmarks of the final decade of the 20th century. As in the case of trade, international financial transactions origi- nated in Europe at about the same time as modern capitalism (Braudel 1994; Kindleberger 1984). In the 19th century, London was the main international financial center and presided over the consolidation of the gold standard as a system of international payments and macro- economic regulation. Paris and, by the early 20th century, New York were its closest competitors. The subscription of capital for large-scale projects, especially in infrastructure and natural resources, and the cre- ation of an international market in public bonds were the predominant sources of long-term international capital movements during the first stage of globalization. These developments were complemented by the emergence of an incipient international banking network that began to create instruments for financing international trade. Long-term fi- nancing arrangements were then hit by a series of crises, however, and nearly disappeared altogether as a result of the worldwide depression of the 1930s, the collapse of the gold standard, and the massive de- faults that ensued. In response to this situation, the Bretton Woods agreements were adopted in 1944 with a view to creating a multi- lateral system of macroeconomic regulation based on fixed but GLOBALIZATION: A HISTORICAL, MULTIDIMENSIONAL PERSPECTIVE 5 adjustable exchange rates and on financial support for countries threatened with balance-of-payments crises. Another response was the establishment of an official international banking system at both the national level (export and import banks) and the multilateral level (the World Bank and, later, the Inter-American Development Bank and other regional banks). In the 1960s, private long-term international flows reappeared, thanks in part to a new phase of global economic stability but also to other factors: the surplus of dollars that built up in the 1960s and of petrodollars in the 1970s; the abandonment of the Bretton Woods sys- tem of fixed rates and the flotation of the main currencies in the early 1970s; the rapid development of institutional saving in the 1980s, led by the United Kingdom and the United States; and the emergence of an increasingly large financial derivatives market in the last decade of the 20th century, which made it possible to hedge the risks associated with different financial assets and liabilities. Globalization has proceeded at a faster pace in the financial sphere than in trade and production, and it can plausibly be argued that we live in an era in which the financial sphere holds sway over the real sec- tor of the economy (ECLAC 2001b). Both processes are taking place within a framework of thoroughgoing institutional restructuring at the global level, the essence of which has been the liberalization of inter- national current and capital transactions. The progress made in de- signing new global economic rules continues to be inadequate, how- ever, and this structure clearly suffers from institutional gaps. On the other hand, there has been no corresponding liberalization of labor flows, which are subject to strict regulation by national au- thorities (except among the member countries of the European Union). This is one of the major differences between the first and current stages of globalization. The first was marked by two major migratory flows: of European labor to temperate zones and of primarily Asian labor to tropical areas. Together, these two migrations encompassed around 10 percent of the world population of the time (World Bank 2002b). In addition, the regulation of migratory flows is biased against un- skilled labor, which consequently tends to seek out irregular channels. This exposes immigrants to abusive practices by traffickers, heightens their defenselessness against the authorities, and generates further downward pressure on wages for unskilled labor in the receiving coun- tries. Meanwhile, as a result of the preference for skilled labor, the most highly qualified--and relatively scarce--human resources are drained out of developing countries. The segmentation of labor mo- bility therefore exacerbates income disparities between workers with different skill levels in both their home and their host countries. 6 GLOBALIZATION AND DEVELOPMENT A number of other factors that are closely associated with economic activity have taken on great importance at the world level. One of these factors is the scope of global environmental problems. In the last three decades it has become clear--and has been scientifically docu- mented--that the entire planet is being subjected to unprecedented im- pacts as a result of the increasing scale and cumulative effect of human activity. The consequences are being felt worldwide and include global warming, the thinning of the ozone layer, the decline in biodiversity, and the spread of desertification and drought, which have taken on the perverse dimension of "global public bads." By revealing the existence of a web of causes and effects that are generated by human activities having global environmental impacts, advances in scientific knowl- edge have highlighted the increasing ecological interdependence and vulnerability of countries, regardless of their level of development. The need to reverse these global ecological processes has given rise to new imperatives and opportunities for international cooperation, which have been reflected in the various world summits and confer- ences held in the 1990s and in the multilateral environmental agree- ments concluded on those occasions. In the course of these processes, governments have adopted a proactive attitude toward cooperating in order to protect and manage global public goods on the basis of inno- vative multilateral arrangements. They have also adopted principles based on the need for an equitable sharing, between rich and poor states, of the responsibilities and costs of reversing environmental damage. Accordingly, the environmental dimension is taking on in- creasing significance as an arena for negotiations between developing and industrial countries. Because regions of the developing world that are rich in biodiversity or are extensively forested provide important global environmental services by, for example, serving as carbon sinks (carbon dioxide is the primary cause of climate change through the greenhouse effect), the developing countries have both the potential and the opportunity to play a key role in solving global problems. The responses that have been developed thus far are clearly inadequate, however, given the magnitude of these problems, especially in view of the threat they pose to the sustainability of economic growth. In the 1990s, great strides were made in this regard with the ap- proval of new international legal principles concerning the environ- ment and development, one of which is principle 7, on "common but differentiated responsibilities," of the Rio Declaration on Environ- ment and Development, adopted at the Earth Summit held in Rio de Janeiro in 1992. Under this principle, industrial countries explicitly ac- knowledge the environmental debt they have accumulated vis-à-vis the rest of the international community as a result of the cumulative global GLOBALIZATION: A HISTORICAL, MULTIDIMENSIONAL PERSPECTIVE 7 externalities generated by their industrialization processes. This princi- ple provides a political basis for industrial countries' assumption of greater environmental commitments than developing countries under multilateral agreements. It also reflects the express recognition that countries cannot and should not aspire to "level the playing field" in the environmental sphere, in contrast to the principles currently governing efforts to change the economic aspects of the international order. Another variety of global public bads that is also linked to economic activity is the spread of international crime: the production, trade, and consumption of narcotics and their close linkage with terrorist financ- ing, arms trafficking, and the international circulation of illicit capital generated by drug trafficking and by the different forms of corruption that transcend national borders. The system has been slow to recog- nize the need to control the circulation of illicit capital in both devel- oping and industrial countries as well as in offshore financial centers, in large part because existing bank secrecy provisions will have to be scaled back to permit the operation of special mechanisms to monitor the circulation of illicit funds. Unfortunately, the systems that have been developed thus far do not include international measures to com- bat a number of forms of corruption that are particularly a problem for developing countries, such as tax evasion, illegal capital flight, bribery, and illicit enrichment. Noneconomic Dimensions of Globalization Ethical and Cultural Dimensions Economic globalization is taking place alongside other processes that have a dynamic of their own. One of the most positive of these processes has been called the "globalization of values." This concept refers to the gradual spread of shared ethical principles (ECLAC 2000a) and is manifested most clearly in declarations on human rights. The two main dimensions of concern in this book are (a) civil and po- litical rights, by virtue of which individuals have autonomy from the power of the state and are entitled to participate in public decision- making, and (b) economic, social, and cultural rights, which reflect the values of economic and social equality, solidarity, and nondiscrimina- tion. This process has also found expression in the accession of a grow- ing number of governments to U.N. human rights conventions (see fig- ure 1.1). It is also reflected in the declarations issued by the participants in world summits held under U.N. auspices on the envi- ronment, social development, population, women, and the rights of 8 GLOBALIZATION AND DEVELOPMENT Figure 1.1 Ratification of Human Rights Conventions Universal ratification 193- 150 conventions the 100 ratified have that 50 Countries 0 1970 1975 1980 1990 1995 2000 Year Rights of the child Discrimination against women Civil and political rights Economic, social and cultural rights Source: United Nations (1999b). children, among others. The Millennium Declaration (United Nations 2000) is one of the most comprehensive expressions of the principles agreed upon at these summits. It is important to note that, like economic globalization, the global- ization of values has a long history that is linked to the aspirations of international civil society. Its most recent manifestation is the forma- tion of a "global civil society" whose capacity for mobilization and for information exchange has been multiplied by the new information and communication technologies. The history of this society dates back to the liberal internationalism that emerged in the wake of the American and French revolutions in the late 18th century, which was expressed most clearly in the French revolution's Declaration of the Rights of Man and of the Citizen. As is well known, these values strongly influ- enced the independence movements in Latin America and the Caribbean, which began with the outbreak of the Haitian revolution in 1791 as a direct consequence of the French revolution. Whereas the civil and political rights enshrined in the Universal De- claration of Human Rights adopted by the United Nations (1948) are GLOBALIZATION: A HISTORICAL, MULTIDIMENSIONAL PERSPECTIVE 9 rooted in the liberal movements of the late 18th century, the Interna- tional Covenant on Economic, Social and Cultural Rights (United Na- tions 1966) is a product of the social movements of the 19th and 20th centuries, whose chief political manifestation has been the Interna- tional Socialist Organization in its successive forms. In addition, throughout the 20th century, feminist internationalism had a decisive influence in winning the recognition of women's equal rights, and en- vironmental internationalism has played a major role since the 1960s in incorporating sustainable development principles into national and international agendas. Beginning at the Stockholm summit in 1972 and extending to the U.N. Conference on Environment and Develop- ment (Rio de Janeiro, 1992) and the World Summit on Sustainable Development (Johannesburg, 2002), global environmental conven- tions have been aimed at implementing some of the mandates of envi- ronmental internationalism. At the same time, it is important to note that this globalization of values sometimes comes into conflict with a diametrically opposed type of globalization that reflects the penetration of market economy values into social relations (in the areas of production, culture, and even the family). The tension generated between these shared ethical principles and the extension of market relations into the sphere of values, which is implicit in the concept of a market society, is another hallmark of the globalization process. This tension sometimes generates conflicts be- cause the international market lacks the mediation mechanisms that the political sphere has traditionally provided at the national level. In recent years, the long history of social movements has taken on a new dimension: the effort to preserve the identity of peoples and so- cial groups that feel threatened by the tendency toward cultural ho- mogeneity that globalization engenders. This "right to be different" is interrelated in various ways with human rights in the traditional sense, which highlight the equality of citizens, both among themselves and before the state. Thus, at the global level, equality and identity are in- terrelated in complex ways. Globalization simultaneously undermines cultural diversity and af- fords new opportunities for its expression. Indeed, large segments of the world population feel that their unique histories and the values that govern their communities are in jeopardy. At the same time, how- ever, globalization builds closer relationships among different cultural traditions and ways of life, thereby increasing their visibility and the likelihood that they will be duly appreciated. This, in turn, promotes the emergence of myriad interpretations of the global order. Nonetheless, the speed of this process poses unprecedented chal- lenges. On the one hand, it threatens to turn the enriching dialogue of 10 GLOBALIZATION AND DEVELOPMENT Box 1.1 Inclusion and Identity: The Issue of Ethnicity Latin America and the Caribbean comprise a melting pot of cultures in which diversity and universality are mixed and blended. The region is home to over 400 indigenous peoples who number 50 million individu- als. These groups have gradually been strengthening their ability to or- ganize politically, to assert their ethnic identities, and to defend their cul- tures. Five countries account for nearly 90 percent of the region's indigenous population: Peru (27 percent), Mexico (26 percent), Guatemala (15 percent), Bolivia (12 percent), and Ecuador (8 percent). The Afro-Latin and Afro-Caribbean populations total almost 150 million people, most of whom live in Brazil (51 percent), Colombia (21 percent), the Caribbean subregion (16 percent), or the República Bolivariana de Venezuela (12 percent). In these early years of the new millennium, the indigenous, Afro-Latin, and Afro-Caribbean peoples of the region have the worst economic and social indicators, enjoy very little cultural recognition, and lack access to public decisionmaking circles. The Latin American and Caribbean coun- tries face a formidable challenge in this respect. Social integration re- quires the acknowledgement and appreciation of cultural diversity, and this means that states, governments, and societies must recognize the rights of the different ethnic groups, incorporate those rights into their legislation, and provide the necessary means of exercising those rights. Development policy must also provide opportunities for these popula- tions to develop their potential and share in the basic codes of modern life without losing their identities. Source: Hernández (2002). cultures into a monologue. On the other, interaction opens up cultural opportunities, including those created by the mixture of different cul- tures, to new and varied groups and individuals (see box 1.1). This process of incorporation through participatory and exclusionary mechanisms has given rise to new forms of organization. New net- works, including some virtual ones, are replacing the organizational channels traditionally used by protest movements, for example. The remarkable development of the communications media has strongly influenced these processes and has also given rise to new prob- lems. First, it has greatly widened the gap between the cultural norms most broadly disseminated through global channels of communication and the cultural and artistic roots of countries and regions. Second, con- trol of the media at the national and international levels is concentrated in the hands of a few. This situation threatens the ideal of cultural GLOBALIZATION: A HISTORICAL, MULTIDIMENSIONAL PERSPECTIVE 11 diversity, because the control of symbolic exchanges influences identity building, opinions, and beliefs.4 Third, the development of audiovisual media has led to greatly heightened personal expectations regarding ma- terial wealth. Access to information is not always in balance with op- portunities for steady employment and incomes and, accordingly, for well-being and consumption. Today, more than ever before, the demon- stration effect cuts across national boundaries. Finally, participation in or exclusion from the electronic exchange of information has become a crucial factor for the exercise of citizenship, thereby posing the basic problem of how to prevent the emergence of a gap between those with access to information technology and those who suffer from what has been called "electronic invisibility" or "electronic blindness." Political Dimension International political relations have also undergone far-reaching changes in recent decades. The end of the cold war brought a dramatic change in the climate of international relations among sovereign states, and the exacerbation and increased visibility of a number of localized conflicts generated international tensions of a very different nature than those seen before. These trends had been in evidence since the 1970s, but they strengthened in the closing decade of the 20th century, particularly as a result of the profound changes that took place after the fall of the Berlin Wall. The heightened predominance of the United States, European efforts to form a bloc capable of playing a leading role in global economic and political affairs, the setbacks suffered by Japan, the increased prominence of China and India, and the sudden transition experienced in the former socialist countries were the most salient features of this period. These sweeping political changes have placed representative democ- racy in a position of unparalleled preponderance. Political discourse is being shaped by an acceptance of the principles of pluralism, alterna- tion of power, division of the powers of the state, election of authori- ties as a basis for legitimacy, and recognition of the majority combined with respect for minorities, and these principles have begun to be ap- plied much more widely. Nevertheless, the transformations now under way have raised ques- tions about how democratic institutions should function in societies where information, "image," and the power of money play a funda- mental role. Criticism along these lines extends to political parties, leg- islatures, the relationship between voters and representatives, and even the very meaning of politics, especially--though not exclusively--in the parts of the developing world that suffer from exclusion and 12 GLOBALIZATION AND DEVELOPMENT poverty. Although democracy is the choice of the majority, there is cer- tainly no scarcity of negative views regarding its workings and its ef- fectiveness in meeting the population's needs.5 As with the peace divi- dend that countries expected to receive after the end of the cold war, which has failed to yield significant benefits, it has not yet been possi- ble to cash in on the "democracy bonus" either. Despite these difficulties, it is generally recognized that democracy is the best means of setting a development agenda (Sen 1999) and that good governance is characterized by a focus on improving the design, management, and evaluation of public policy, which serves as the an- alytical and operational tool of government (Lahera 2002). Nonethe- less, government authorities and political leaders are under pressure to win broad local support and, at the same time, to abide by the rigid rules deriving from specific forms of globalization. In this connection, it may be categorically stated that the promotion of democracy as a universal value is meaningless if national processes to provide for rep- resentation and participation are not allowed to define economic and social development strategies or to mediate effectively among the var- ious actors affected by the tensions inherent in the globalization process. In addition, the reduced capacity of the state in the current context of globalization limits the role the public sector can play in lowering the cost of the "creative destruction" associated with rapid structural change and may exacerbate the difficulties involved in the moderniza- tion of the state itself. It is therefore less than realistic to sing the praises of both globalization and the disintegration of the state at the same time. The role of the social state as a generator of technological and institutional externalities is and will remain very important. In a world of global risks, the claim that economic forces can and should take the place of public policy and the state is less and less convincing. It is helpful, in this connection, to recall the categorical warning issued by Polanyi (1957) in his analysis of the collapse of the first stage of globalization: if the market seeks to subordinate society, it will end up destroying its own foundations. Opportunities and Risks In terms of access to new technologies, as in the area of trade and fi- nancing, globalization offers developing countries ample opportunity to integrate themselves more fully into the world economy. The sus- tained growth of international trade and the strengthening of multilat- eral rules and dispute settlement mechanisms within the framework of GLOBALIZATION: A HISTORICAL, MULTIDIMENSIONAL PERSPECTIVE 13 the World Trade Organization (WTO) are promising signs in this re- gard, as is regionalism when understood in the positive sense of open regionalism proposed by ECLAC (1994). However, although inroads are certainly being made in these directions, progress is being hindered by the incomplete liberalization of industrial economies. The partial nature of this process is itself a reflection of the protectionist practices that still predominate in the world, as well as the oversupply of certain goods in international trade, particularly raw materials. In addition, developing countries face the challenge of adapting their policies to the institutional mechanisms required by the WTO. This task has not been easy, and it may have consequences that are more restrictive than desired. The explosive pace of global financial development has created op- portunities for financing and for hedging financial risk, but it has also revealed the enormous problems caused by the asymmetry existing be- tween the powerful market forces and the weak institutional structures that exist for regulating them (see ECLAC 2001a; UNCTAD 1998, 2001a; United Nations 1999a). The coexistence of financial globaliza- tion and national macroeconomic policies, which are still formulated on the basis of domestic interests and contexts, creates considerable tension for developing countries. Their governments are subject to the uncertainty generated by the macroeconomic policies of industrial countries, which do not adequately internalize their effects on the rest of the world and lack coordination mechanisms to ensure global co- herence. These difficulties are compounded by the problems inherent in the financial market, particularly its volatility, which have had such a strong impact on the Latin American and Caribbean countries in re- cent decades. These phenomena are related to the market's inability to distinguish properly between different groups of borrowers, which produces contagion effects that influence the behavior of the financial market during both booms and busts. The developing countries are thus threatened by the globalization of financial volatility, which can have adverse effects on economic growth and social equity (Ffrench- Davis and Ocampo 2001; Rodrik 2001a). Financial instability is the clearest, but not the only, manifestation of the increasing asymmetry between the power of the market and the lack of adequate economic governance. Other manifestations include the considerable economic concentration in evidence throughout the world and the multiple distributional tensions caused by the globalization process both between and within countries (see Bourguignon and Morrison 2002; Cornia 1999; Rodrik 1997; UNCTAD 1997; UNDP 1999b; see also chapter 4 of this book). These phenomena reflect, among other factors, the stringent educational and knowledge 14 GLOBALIZATION AND DEVELOPMENT requirements of global technologies and markets, which threaten to marginalize those who are not fully prepared and to further confine the availability of these technologies and of new knowledge to just a few countries, social groups, and enterprises. This process is part of an ar- ray of old and new threats to the economic and social security of the population, whose position is being made all the more precarious by a progressive debilitation of the entire range of social safety nets, includ- ing both those provided by the family and those furnished by the state. Globalization can also promote the emergence and valuation of en- vironmental comparative advantages, including the sustainable use of natural capital that has economic value (forests, fisheries, tourist at- tractions); ecological value (genetic information afforded by biodiver- sity or the role of forests in absorbing carbon dioxide and other pollu- tants); or aesthetic, historical, or scientific value. These positive developments can serve as the basis for countless policies on the de- velopment of ecotourism, research on new medicines or agricultural products, the use of empirical knowledge concerning natural resources management and the economic properties of local biodiversity, the use of the regional ecological supply (such as biomass and natural re- sources), the productive utilization of unique ecological niches, and in- ternational negotiations on regional environmental services of global interest. In addition, new technologies for clean production, low-emis- sions transport, and energy efficiency and the use of renewable sources represent a new wave of technological innovation and market cre- ation, and these processes will no doubt flourish in the coming decades. At the national level, globalization can promote the improve- ment of public policies by raising the cost of implementing unsustain- able strategies that adversely affect long-term development. One of the risks that arise in this connection, however, is the possibility that tra- ditional comparative advantages may be lost without necessarily being replaced by new ones. By definition, global environmental processes affect all countries, but small tropical countries, particularly island states, are especially vulnerable to global environmental changes, as is demonstrated by the increasing frequency and violence of weather-related disasters. Indeed, unless specific national and international policies are adopted, the trend toward the overexploitation of certain natural resources, the un- derutilization of others, and the transfer of environmental costs from major polluting countries to the region can be expected to intensify. Globalization also provides unprecedented opportunities in noneconomic areas. The spread of global values, the struggle for the right to be different, and the establishment of international mecha- nisms to defend the exercise of citizenship are notable advances that are reflected in the consolidation--insufficient though it may be at this GLOBALIZATION: A HISTORICAL, MULTIDIMENSIONAL PERSPECTIVE 15 point--of respect for human rights, democracy, gender equality, and ethnic diversity. The breakdown of archaic structures of domination and the control of abuses of power at the country level are some of the areas in which advances have been made during this new global era. Nonetheless, tensions continue to arise owing to the lack of channels for reducing the enormous imbalances of power existing at the global level and, in some cases, for legitimizing international actions. The globalization and concentration of the communications media also pose new problems. A particularly disturbing noneconomic aspect of globalization is the enormous distance existing between symbolic inte- gration into the globalized world and the achievement of true integra- tion; sharp inequalities militate against the latter. In the term used in the financial debates of recent years, all of this underscores the need for a new "international architecture" for this era of globalization based on a wide-ranging agenda and a representa- tive and pluralistic negotiation process. Such a global agenda should be aimed at correcting serious flaws in the existing international order. One of the flaws of the current international structure is the contrast between the rapid development of markets and the slow development of global governance, which has resulted in a suboptimal supply of global public goods (Kaul, Grunberg, and Stern 1999). A second cate- gory of problems are the asymmetries faced by developing countries in the global order in the areas of production and technology, finance and macroeconomics, and factor mobility (Ocampo 2001b). A third problem area has to do with the lack of effective international instru- ments for guaranteeing the achievement of the development goals that have been formulated on numerous occasions, most recently in the U.N. Millennium Declaration (United Nations 2000). In the first decades following the Second World War, the need to correct the asymmetries of the international economic system was ex- pressly acknowledged. The commitments entered into in relation to of- ficial development assistance and preferential treatment for developing countries in international trade were some of the partial results of this effort to build a "new international economic order," although they clearly fell short of what was required. This vision has been seriously undermined in recent decades and has been replaced with an alterna- tive paradigm whereby the basic objective of changes in the interna- tional economic order should be to "level the playing field" in the reg- ulatory sphere to allow market forces to operate freely. However, in the absence of genuine equality of opportunity, this "leveling" can actually lead to greater inequalities. The evidence that inequalities have worsened over the last half century (and especially in the last quarter of the 20th century), thereby prolonging more long-standing trends, makes it clear that neither approach has had the hoped-for results. 16 GLOBALIZATION AND DEVELOPMENT The lack of global governance, which is implicated in all these prob- lems, reflects another deep-rooted conflict: the contrast between global issues and local political processes. The exercise of citizenship and democracy remains confined to the national and local spheres6; in fact, in today's world, this is still the most basic meaning attached to the concept of a nation. The lack of global governance means that there are no decision-making mechanisms at the global level to ensure that the interests of the least powerful countries and social sectors are ade- quately represented. These tensions are all the more significant because globalization has made it more difficult for countries to reconcile the demands of their citizens, which have increased with the advent of democracy, with the limitations that globalization itself has imposed on the ability of governments to take action. Notes 1. Helleiner (2000a) presented a comparison of these two visions. 2. See Dowrich and DeLong (2001), Lindert and Williamson (2001), Mad- dison (1991, 1995, 2001), O'Rourke (2001), and O'Rourke and Williamson (1999). The starting point, set at around 1870, is somewhat arbitrary, but it reflects the incipient and still limited integration at the international level (and even at the domestic level, in large countries) of goods, capital, and labor mar- kets up to that time, as well as the restricted scope of the industrialization process in most of the countries that formed the nucleus of the world economy. 3. In fact, globalization could not have come about without the railway, the steamship, and the telegraph in the 19th century; the construction of canals connecting oceans (Suez in 1869 and Panama in 1903); automobiles, air- planes, telephones, and television in the 20th century; and, of course, the rev- olution in information and communication technologies in the final decades of the 20th century. 4. None of the world's 20 largest multimedia groups is Latin American, and four of the five largest conglomerates are from the Anglo-Saxon world. In 1999, just four agencies controlled the international flow of news in print. 5. This is definitely the situation in Latin America, as shown by the results of successive Latinobarómetro polls. See The Economist (2002). 6. Certainly, there are areas in which a form of "global citizenship" is emerging, as manifested in the participation of civil society organizations in U.N. world summits and in global debates on the environment and trade. This was demonstrated very clearly by the civil society event that took place in par- allel with the Ministerial Meeting on Trade of the Summit of the Americas (Toronto 1999) and by stand-alone events such as the World Social Forum in Porto Alegre (2001 and 2002). The clashes surrounding the WTO Ministerial Conference in Seattle (1999), the annual meeting of the International Mone- tary Fund and the World Bank in Prague (2000), and the meeting of the Group of Eight in Genoa (2001) are further examples of this kind of participation. 2 International Trade and the New Global Production Structure ALTHOUGH THE GLOBALIZATION PROCESS is a multidimensional phe- nomenon, some of its most visible and influential aspects are economic in nature. This chapter analyzes major trends in international trade and the new global production structure; the mobility of capital and labor is considered in the next chapter. This analysis covers a long pe- riod in history, from the last quarter of the 19th century to the pres- ent, and is structured according to the successive stages of globaliza- tion identified in the preceding chapter. The first section focuses on the development of trade and investment flows among the major regions of the world, and on the main challenges faced by developing countries as a result of these global trends. The second section highlights the mi- croeconomic foundations of the new forms of production and market organization, their impact on business decisions and strategies, and the corresponding dynamics of foreign direct investment. International Trade Contrary to what is often believed, there has been no clear association between the expansion of trade and economic growth throughout suc- cessive stages in the internationalization of the world economy. International Trade and Economic Growth: A Variable Historical Relationship During the 19th century world trade expanded rapidly, outpacing world gross domestic product (GDP), which also grew briskly (see figure 2.1). This expansion can be traced to a number of factors, including the early industrial revolutions and the consequent drop in transport costs, the "pax Britannica" imposed at the end of the 17 18 GLOBALIZATION AND DEVELOPMENT Figure 2.1 Trade and Global Output, 1870­1998 A. Growth in world output and exports of goods Growth in world GDP 9 Growth in exports of goods 8 7 rate 6 growth 5 4 average 3 2 Annual 1 0 1870­1913 1913­1950 1950­1973 1973­1990 1990­1998 B. Ratio of exports to world GDP 20 18 16 GDP of 14 12 10 percent as 8 6 4 Exports 2 0 1870 1913 1929 1950 1973 1998 Note: GDP gross domestic product. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from Maddison (2001). Napoleonic wars, and the replacement of the principles of mercantilist regulation with those of free enterprise. This period and, in particular, what was referred to in the preced- ing chapter as the first stage of globalization (1870­1913) were marked by a considerable degree of international capital and labor mobility and by the spread of the gold standard, from 1870 on, as a system of international payments and macroeconomic regulation. Contrary to what is widely believed, however, another notable feature of the period was the emergence of new forms of state regulation, not only in the economy (currency and financial system) and in social areas INTERNATIONAL TRADE 19 (principles of worker protection and social security), but also, most important, in the persistence of numerous trade restrictions. In fact, except in the European powers committed to free trade (England and the Netherlands, in particular), in colonies whose eco- nomic relations with their ruling powers were governed by this system, and in some independent powers on which similar requirements were imposed (China, Japan, which did not regain tariff autonomy until 1911, and the Ottoman Empire, among others), and apart from a more widespread trend toward this form of trade in the 1860s and 1870s,1 trade protectionism was the rule of the day in all nations that maintained tariff autonomy. Indeed, protectionism was the predomi- nant practice in the self-governing territories of the British Empire that kept their autonomy (Australia and Canada), continental Europe, many Latin American countries, and the United States.2 Bairoch (1993) rightly argued that it was economic growth that fueled the ex- pansion of international trade during this period, not vice versa. This being the case, the idea that free trade was the primary engine of world economic growth between the mid-19th century and the First World War is one of the great myths of economic history. The rapid growth of international trade was interrupted between the two world wars. Factors contributing to this break in the trend included global political instability, the deceleration of economic growth in the in- dustrial countries, the inability to restore the gold standard, and in par- ticular the frequent use of protectionist measures (exchange and import controls) and the widespread breakdown of the multilateral payments system during the depression of the 1930s. This combination of factors explains the importance that was attached, after the Second World War, to the establishment of standards and the founding of international or- ganizations, which evidently were shaped by the unequal power structure of the players taking part in that process (discussed later in this chapter). As a reflection of the manner in which the international trading sys- tem was structured in the postwar period, the most dynamic trade flows were originally centered in the two large European trading blocs. Subsequent developments in the two blocs were dissimilar because the European Community (now the European Union) succeeded in con- solidating its position, whereas the Council for Mutual Economic As- sistance--consisting of the socialist countries of Central and Eastern Europe--began to decline in importance and eventually disappeared altogether. Japan and the first generation of "Asian tigers" also began to increase their share of world trade shortly after the end of the war, thanks to their use of planning systems in which the conquest of for- eign markets was a central component of development strategy. All the other regions of the world saw their shares of world trade shrink be- tween 1950 and 1973 (see table 2.1). 5.6 4.9 9.5 5.0 1.5 1998 47.4 41.7 18.6 13.1 100.0 6.1 5.4 3.5 9.5 1.7 1990 51.9 45.8 17.0 11.0 100.0 5.8 9.2 9.6 3.9 5.1 2.9 1973 50.3 44.6 19.1 100.0 (2001). 7.8 5.7 9.3 7.9 5.4 38.6 12.0 26.6 25.3 Africa 100.0 Including Maddison 1950 from 8.3 6.0 9.8 8.4 -- data 40.8 12.7 28.1 26.7 of Africa 100.0 Excluding basis the 6.6 6.2 7.9 -- on 1929 47.4 12.1 35.3 21.4 10.5 100.0 ) Caribbean, 6.0 4.7 7.2 9.3 -- 1913 56.3 15.0 41.3 16.4 the 100.0 countries and 56 5.8 2.8 4.9 -- 65.7 21.7 44.1 10.3 10.6 rate, 1870 100.0 America Origin by Latin for exchange States. Exports, Caribbean current Europe the United Commission at countries countries the a and Global share Eastern and Economic 2.1 Europe Kingdom available. and America industrial America developing Not Canada United Continent -- a. Source: Table Percentage( Region Western Central North Other Latin Asian Africa World 20 INTERNATIONAL TRADE 21 Beginning in the mid-1970s, the emergence of a highly dynamic trading bloc in East Asia ultimately came to be the most striking fea- ture of world trading activity. Japan lost its lead in the last decade of the 20th century, and China emerged as a hub for the expansion of in- ternational trade. Other major changes that took place in the 1990s included an upsurge in exports from the United States. This brief historical overview illustrates how the relationship be- tween trade and economic growth has varied, not only in the course of the century that preceded the Second World War, but also during more recent stages of globalization. As shown in figure 2.1, world trade and world economic growth accelerated simultaneously between 1950 and 1973, but the upswing in world trade was largely a result of the rever- sal of the trend toward national isolationism observed between 1913 and 1950. The slowdown of the world economy between 1973 and 1990 also coincided with more sluggish growth in world trade, but the latter's great dynamism in the last decade of the 20th century was not accompanied by a commensurate global economic expansion. This variable relationship is confirmed by the data shown in fig- ure 2.2. The upswings in GDP growth seen in the various countries be- tween 1950 and 1973 were associated with widely differing patterns of integration into the world economy. Thus, the second stage of glob- alization was not characterized by a strong positive correlation be- tween export growth and GDP growth in the different countries, even though it is true that some of the fastest growing economies in that pe- riod--particularly Japan, the Republic of Korea, and Taiwan (China)--were also highly successful exporters. This correlation was, however, quite positive in the third stage of globalization. Thus, even though the liberalization and expansion of world trade did not trans- late into faster world economic growth in the period after 1973, the success achieved by individual countries has been closely linked to their effective integration into international trade flows. In the developing world, the relationship among development strat- egy, external trade, and economic growth has undoubtedly varied since the end of the Second World War. Comparative analyses (see, for example, Helleiner 1994) categorically demonstrate that trade policy has played an important role in development strategies, but they also show that there is no simple correlation applicable to all countries in all time periods or to a given country in different periods. The import substitution strategy yielded benefits in terms of rapid economic growth at certain stages and was even a necessary factor in enabling many countries to begin exporting manufactures at a later stage, as noted by Chenery, Robinson, and Syrquin (1986). Nonetheless, the effects of protectionist policies tended to weaken over time. 22 GLOBALIZATION AND DEVELOPMENT Figure 2.2 Export Growth and GDP Growth in 35 Countries A. 1950­1973 12% Taiwan, China 10% growth Japan GDP Republic 8% of Korea Denmark Spain 6% Italy annual 4% Burma 2% Average Bangladesh 0% -5% 0% 5% 10% 15% 20% 25% B. 1973­1998 Republi 8% of Kore 7% China Thailand growth 6% Pakistan Taiwan, China 5% GDP 4% Mexico 3% Peru annual Spain 2% Venezuela, 1% R.B. de Switzerland 0% Average -1% 0% 5% 10% 15% -2% the former Soviet Union Average annual export growth Note: The 35 countries are the following: Argentina, Australia, Austria, Bangladesh, Belgium, Brazil, Canada, Chile, China, Colombia, Denmark, Finland, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Myanmar, Netherlands, Norway, Pakistan, Peru, the Philippines, the former Soviet Union, Spain, Sweden, Switzerland, Taiwan (China), Thailand, the United Kingdom, the United States, and the República Bolivariana de Venezuela. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from Maddison (2001). INTERNATIONAL TRADE 23 Furthermore, as noted earlier, in recent decades rapid economic growth has increasingly been linked to success as an exporter, but such success has been achieved under widely varying trade policy strategies. There is no close linkage between export growth and a liberal trade regime (Rodríguez and Rodrik 2001). Moreover, as indicated in the extensive literature on East Asia (see, for example, Akyüz 1998; Amsden 1989, 2001; Chang 1994; Wade 1990), cases of strong economic growth have been accompanied by mechanisms for state intervention in external trade, the financial sector, and technology. As noted by Rodrik (1999, 2001b), rapid growth in developing countries has coin- cided with various combinations of economic orthodoxy and "local heresies." In the particular case of Latin America and the Caribbean, the re- gion's share of world exports fell steeply between 1950 and 1973, sta- bilized between 1973 and 1990, and then began to increase. Admit- tedly, most of the increase is attributable to the upsurge in Mexican exports under the North American Free Trade Agreement (NAFTA). Nevertheless, swift growth in exports from small economies, as com- pared to the growth of aggregate output, can be observed starting as early as the mid-1950s, whereas exports from large and medium-size economies began to speed up shortly thereafter (see figure 2.3).3 It was then that the countries of the region began to implement various com- binations of import substitution and export promotion measures, in- cluding a number of subregional integration arrangements, the first of which was in Central America in the 1950s. It was this "mixed model"--rather than import substitution alone, as is often claimed-- that was the most widely used arrangement in the region beginning in the 1960s (Cárdenas, Ocampo, and Thorp 2000b) and that had been advocated by the Economic Commission for Latin America and the Caribbean (ECLAC) since the late 1950s (Bielschowsky 1998; ECLAC 1998b; Rosenthal 2001). As early as the mid-1970s export growth be- gan to surpass GDP growth in the region as a whole. This trend inten- sified during the "lost decade" of the 1980s, but more as a result of the slowdown in GDP growth than of an increase in exports and, in the last decade of the 20th century, as a consequence of export expansion. Development of the Institutional Framework for International Trade Such was the scale of the new international institutional framework that took shape after the Second World War that it marked a turning point in trade and financial history. Economic transactions had obvi- ously begun to expand and bring about changes in international 24 GLOBALIZATION AND DEVELOPMENT Figure 2.3 Exports from Latin America A. Percentages of GDP 35% Latin America (excluding Venezuela, R.B. de) prices 30% Simple average (excluding Venezuela, R.B. de) 1995 25% 20% constant at 15% GDP of 10% 5% Percentage 0% 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 B. Percentages of GDP by size of countries (simple averages) 40% Large countries Medium-size countries except Venezuela, R.B. de 35% prices Small countries 1995 30% 25% constant at 20% GDP 15% of 10% 5% Percentage 0% 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 Note: GDP gross domestic product. The large countries are Argentina, Brazil, and Mexico; the medium-size ones are Chile, Colombia, Peru, and the República Bolivariana de Venezuela; and the small ones are Bolivia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Nicaragua, Panama, Paraguay, and Uruguay. Source: Economic Commission for Latin America and the Caribbean, on the basis of official figures from the countries. relations in the 19th century, two of which changes were the adoption of the "most favored nation" principle in trade agreements (although it was frequently contravened in the 1930s) and recourse to interna- tional arbitration to settle disputes between states. In addition, the gold standard came to be adopted by an increasing number of coun- tries, although this primarily reflected a gradual acceptance of the monetary system employed by the leading international power of the INTERNATIONAL TRADE 25 time, rather than the implementation of principles of international co- operation. The application of this system was confined to weak forms of cooperation among the main central banks of the industrial coun- tries during this period (Eichengreen 1996). In the 19th century, a number of conventions were signed and various specialized agencies were established, including the World Health Organization and the Pan American Health Organization, the Universal Postal Union, and the Paris Convention for the Protection of Industrial Property, but the most significant step in terms of international cooperation came later with the creation of the League of Nations in 1919. None of these processes, however, matched the scope of the international coopera- tion seen after the Second World War. The period in which the international institutional framework de- veloped most prolifically--the final years of the war and those imme- diately following it--was characterized by a vision whose first mani- festation was the founding of the United Nations. In the economic domain, this vision led to the establishment of three key institutions: the International Monetary Fund (IMF), which was to restore multi- lateralism in current operations and provide financial support in times of crisis; the International Trade Organization, which was to oversee the development of multilateral trade principles; and the International Bank for Reconstruction and Development, or World Bank, which was to facilitate the reconstruction of countries devastated by war. When the effort to create the International Trade Organization failed following the Havana Conference of 1948, the role it was intended to perform passed to the General Agreement on Tariffs and Trade (GATT), which had fewer members. There were two major counterweights to the strengthening of mul- tilateralism in trading activity. The first was the formation of regional blocs, within whose borders trade expanded rapidly. The European Economic Community was the most striking example, and a number of agreements were established on a smaller scale, including several in Latin America and the Caribbean. The former Council for Mutual Economic Assistance also served to boost trade among the centrally planned economies. The second counterweight to multilateralism was widespread re- course to protectionism in the developing world. This took the form not only of high tariffs, but also of quantitative restrictions, local con- tent requirements for assembly industries, and minimum export requirements for firms and industrial sectors experiencing foreign exchange shortages. For newly independent countries, protectionism amounted to an expression of autonomy, as the colonial past was per- ceived as an era of economic failure that had to be overcome by means 26 GLOBALIZATION AND DEVELOPMENT Table 2.2 GDP Growth: World and Largest Regions, 1820­1998 (Weighted average annual growth rates) Region 1820­1870 1870­1913 1913­1950 1950­1973 1973­1998 Western Europe 1.65 2.10 1.19 4.81 2.11 Australia, Canada, New Zealand, and United States 4.33 3.92 2.81 4.03 2.98 Japan 0.41 2.44 2.21 9.29 2.97 Asia (not including Japan) 0.03 0.94 0.90 5.18 5.46 Latin America 1.37 3.48 3.43 5.33 3.02 Eastern Europe and the former Soviet Union 1.52 2.37 1.84 4.84 ­0.56 Africa 0.52 1.40 2.69 4.45 2.74 World 0.93 2.11 1.85 4.91 3.01 Source: Economic Commission for Latin America and the Caribbean, on the basis of data from Maddison (2001). of deliberate action on the part of the nation-state. In Latin America and the Caribbean the increasing use of interventionism and protec- tion represented what was perceived as a success. In fact, in the early stages of the import substitution period, between the two world wars, the region had achieved rapid economic growth, which facilitated a relatively easy transition from export-based development to the "in- ward-looking" development model (see table 2.2). In addition, during the period between the two world wars devel- opment and industrialization were considered to be one and the same, and interventionism and state planning were standard practice world- wide, with very few exceptions. In several cases this represented an ex- tension of the strict public controls imposed during periods of armed conflict. Consequently, in the developing world the choice was seen as being between central planning and the weaker forms of planning typ- ical of mixed economies, rather than between state planning and a free market. There were also some notable departures from the move toward trade liberalization within the framework of GATT. In fact, although the first six rounds of negotiations promoted the liberalization of intraindustrial trade in the industrial economies, the areas requiring internal adjustments on the part of the industrial countries--including the agricultural and textile sectors--remained outside the scope of multilateral trade rules. These rounds reduced levies on imports of INTERNATIONAL TRADE 27 nonagricultural products from industrial countries to a low average level.4 From the late 1960s on, and in parallel with the lowering of tar- iffs, the multilateral trade agenda began to be focused on other public policies affecting competition between domestic and imported goods, such as administrative barriers, technical standards, contingency pro- tection measures (safeguards), and trade protection (antidumping and subsidies), many of which came to be used for openly protectionist purposes. Voluntary export restraints, which became more wide- spread in the 1970s and 1980s, added to the use of protectionist instruments outside the GATT framework. The Uruguay Round (1986­94) was unquestionably the most com- prehensive of all the rounds of multilateral trade negotiations. The countries agreed to lower the effective average level of industrial tar- iffs even further. In addition, the number of duty-free tariff lines was increased, virtually all the tariff structures were bound, and stricter trade remedies (antidumping, countervailing, and safeguard measures) were adopted. With respect to issues that had previously remained out- side the GATT framework, commitments were established for the agricultural sector not only to protect trade, but also to address export and production subsidies; agreement was reached on the gradual dis- mantling of the Multifibre Arrangement, voluntary export restraints were prohibited, and the signatories agreed to eliminate trade-related investment measures (local content or export requirements), which were used liberally by many developing countries. In addition, when the World Trade Organization (WTO) was given its mandate to take over the role formerly played by GATT, two new areas were included in its terms of reference: the liberalization of services and the develop- ment of international rules on the protection of intellectual property. In addition, a new dispute settlement mechanism was created. More than seven years after the entry into force in 1995 of the Mar- rakesh Agreement establishing the World Trade Organization, the great majority of the member countries are well aware that the proper functioning of the WTO is important for the orderly conduct of inter- national economic relations. WTO has fostered the settlement of trade disputes through mutually beneficial cooperation between countries and, as a result, has helped to create a framework of trade rules that are more reliable and predictable than those of the past. The fact that developing countries have made increasing use of the WTO dispute settlement mechanism demonstrates the importance of the organiza- tion's active role in upholding the system of standards in order to ar- bitrate trade disputes. There is a serious imbalance, however, in the distribution of the ben- efits deriving from the Marrakesh Agreement. The industrial countries 28 GLOBALIZATION AND DEVELOPMENT have continued to gain the most from the liberalization of trade in goods and services.5 First, these countries were able to reduce the costs of adjusting their agricultural and textile sectors because they made sure they were given generous transition periods to make the changeover to more open and competitive markets. In addition, they introduced varying degrees of flexibility into the disciplines relating to their policies on agriculture and on certain industries. They also ex- tended the GATT rules, which originally referred only to products, to cover the rights of private agents (firms) and brought into the multi- lateral trading system those areas in which they enjoy a solid techno- logical predominance, including the protection of intellectual property rights. Although there are no specific agreements on investment or the safeguarding of competition, the industrial countries ensured that the commitments on investments, subsidies, and trade in services confer national treatment to transnational corporations (TNCs). Further- more, they laid a firm legal foundation for the liberalization of some service delivery modes and sectors, such as financial services, basic telecommunications, electronic commerce, and information technolo- gies. By contrast, despite the commitments undertaken, not only have the sectors that could be important markets for developing countries' exports been slow to open up, but their liberalization, such as it is, has been coupled with the introduction of measures that undermine exist- ing obligations and new forms of selective protectionism, such as an- tidumping measures. This asymmetry in the distribution of benefits and the slow progress made since the 1960s in terms of special and differential treatment prompted the developing countries to seek a new round of trade nego- tiations that would focus on areas of particular interest to them (chap- ter 4 analyzes this issue in greater depth). The commitment to develop measures to address this situation forms the basis of the Doha Decla- ration, which was adopted at the Fourth World Trade Organization Ministerial Conference (Qatar, November 2001), and lays out the work program of the WTO. This program covers several areas of in- terest to the multilateral trading system.6 Deliberations and negotia- tions, to be completed by 2005, will be conducted to review, broaden, or alter the rules established at the Uruguay Round. Recent Patterns of World Trade In view of the increasing importance of export strength for countries' economic growth, it is important to pinpoint exactly what patterns have promoted an expansion of exports in recent decades. Table 2.3 illustrates the changes that have taken place in the international trade INTERNATIONAL TRADE 29 matrix, by geographic origin and destination, between 1985 and 2000. The most striking trend that can be discerned is the increase in the Asian developing countries' share of world trade. This was achieved largely at the expense of the relative volume of trade among industrial countries, which, in any case, still represents more than half of the world total. The share held by Canada and the United States grew as well, thanks to the considerable expansion of their exports to the developing world. Intraregional trade also rose steadily in Latin America and the Caribbean and, even more, within the Asian bloc. In contrast, the weighted share of Africa and the rest of the world (chiefly the countries of Central and Eastern Europe) continued to fall. The Latin American and Caribbean region's share of exports rose, but to a much lesser extent than its share of imports, with the re- sult that the region's large trade surplus of 1985 had turned into a deficit by 2000, sharply contrasting with the Asian developing coun- tries' hefty trade surplus. The composition of world trade by category of goods has changed substantially over the last 15 years.7 Table 2.4 classifies products as dynamic or nondynamic and indicates their importance relative to two categories of international trade: the category involving the intensive use of natural resources or technology, as identified by ECLAC,8 and the Standard International Trade Classification (SITC). The slow growth of trade in commodities and natural resource­based manu- factures is one of the most striking phenomena in this regard. More- over, increasing market competition has resulted in a severe downturn in raw material prices, which constitutes a continuation of a more long-standing trend (see box 2.1). Among manufactures, those based on the use of advanced technology show a much higher growth rate than manufactures as a whole. The shares of agricultural products, nonfood raw materials, and especially fuel are declining. Finally, the largest increases are found in the category of machinery and equip- ment, especially electrical equipment and equipment related to the in- formation and communications industry, whose share swelled by 9 percentage points. An analysis of the growth of international trade can be combined with an analysis of the "revealed competitiveness" of various regions, as reflected in their share of different types of products. This gives rise to four categories: (a) dynamic products in which a given region's share of trade is increasing ("rising stars"), (b) dynamic products in which its share is falling ("missed opportunities"), (c) nondynamic products in which the region's market share is increasing ("falling stars"), and (d) products that combine low relative growth with a loss of market share ("retreat products"). by 5.8 4.3 4.9 9.4 41.4 16.4 11.1 68.9 16.1 26.2 36.1 17.9 63.5 origin 100.0 Total 4.6 3.2 3.0 0.9 4.3 0.4 5.7 1.1 4.5 5.7 3.7 Total 10.8 17.6 13.9 countries developing Africa 1.2 0.3 0.2 1.7 0.1 0.2 0.1 0.4 0.3 2.3 0.6 0.1 0.1 0.8 2.5 1.8 2.6 6.9 0.2 3.8 0.2 4.3 0.8 2.9 2.4 3.4 8.7 Asian 12.0 2000 developing and destination the of Latin 0.8 1.1 0.3 2.2 0.7 0.3 0.1 1.1 0.1 3.4 1.0 3.2 0.3 4.4 America and 1985 Caribbean Region 8.1 4.8 3.9 3.8 5.7 Total 36.8 13.3 58.1 11.7 20.5 82.4 31.7 12.2 49.5 industrial Destination, and 1.6 2.4 1.0 5.0 0.4 4.1 0.2 4.7 0.3 1.5 1.9 0.6 4.0 Other 10.0 industrial Origin 5.2 7.1 4.8 2.9 4.2 0.8 7.9 0.2 4.6 6.6 3.1 by United States 17.1 25.2 14.3 3.8 2.3 1.5 3.5 2.9 7.9 3.3 3.7 2.0 30.0 36.1 47.3 25.5 31.2 Imports, Western Europe ) World imports of Caribbean States world the countries States countries and total United United Structure of destination origin Europe and industrial developing world by Europe and industrial 2.3 of industrial America developing industrial of Total Total Total Total Western Canada Other Latin Asian Africa Rest Western Canada Other Table Percentages( Region 1985 2000 30 6.0 2.2 5.1 23.3 31.4 it 100.0 "1985" reporting origin, trade. as 1.3 8.9 0.5 0.7 rld ansa 10.7 25.3 wo Other of included and, otn 0.0 0.2 0.1 0.3 0.1 1.2 percent 90 Switzerland. information countries and of The 0.3 8.2 0.4 8.8 0.5 lack 18.0 of Norway, approximately (2002). to 1999­2000. because Iceland, 1.0 0.5 0.1 1.6 0.1 6.1 for UNSD forth. plus so from corresponding averages destination Union a and data as of 4.7 1.7 4.4 14.4 20.7 74.7 annual zones, basis countries, the European free included the are not on 0.2 3.8 0.1 4.1 0.2 8.3 is reporting figures Europe Zealand, 82 of world New of Caribbean, 3.7 5.9 0.4 0.5 "2000" Western and the 10.0 24.8 Rest imports and total Australia 0.8 4.7 1.1 6.6 3.7 transition. 41.6 the 1984­1986. in Zealand. America to New except period Latin refer and the economies for Oceania for Caribbean imports with Japan, the countries countries world averages those Israel, transition, Commission and on in destination data annual primarily developing world by Australia, the Economic America developing The are of economies are Total Total to Latin Asian Africa Rest Note: Source: figures countries industrial refers 31 B) ­ increase 1.3 reduction ­3.8 1.3 1.1 0.8 0.0 ­2.9 ­0.1 ­2.6 ­8.6 ­0.3 ­1.6 (A ­10.8 11.3 11.3 Net or (3) ­ Loss (4) ­5.4 ­2.2 ­3.3 ­0.9 ­0.5 ­3.2 ­0.2 ­2.7 ­8.6 ­0.3 ­1.2 ­3.1 ­2.3 ­10.9 ­23.1 B (4) products 8.9 4.9 8.6 1.3 0.9 4.3 0.6 3.4 8.6 0.3 3.3 6.1 5.6 11.6 36.1 2000 (3) 7.1 2.2 1.4 7.5 0.7 6.1 0.6 4.5 9.1 7.9 Nondynamic 22.5 14.3 11.8 59.2 17.2 1985 7 7 items 90 21 77 96 18 15 56 70 132 134 111 495 115 Number of 1985­2000 (1) ­ (2) 0.1 1.6 3.5 4.4 1.4 0.3 0.1 0.0 0.0 0.0 2.4 1.4 Increase 12.2 23.1 13.6 Imports, A (2) World 0.8 6.8 2.8 1.4 0.3 0.1 0.1 0.1 6.0 7.9 products 10.8 21.1 21.6 63.9 35.6 in 2000 (1) Dynamic 0.7 5.3 7.3 9.5 1.4 1.1 0.3 0.1 0.1 0.0 3.6 6.5 16.7 40.8 22.0 1985 Products items 51 4 4 8 2 3 65 71 91 45 17 39 76 89 291 Number of fuels Nondynamic related by ) food except fats, and and equipment manufactures for oils, products imports manufactures classified category manufactures manufactures inedible, total transport animals tobacco lubricants, related goods Dynamic of products vegetable and technology classification live and and 2.4 resource-based fuels, and materials, and waxes technological Total SITC materials and material Table Percentage( Product By Commodities Natural Low-technology Midlevel High-technology Unclassified By Food Beverages Crude Mineral Animal Chemicals Manufactured Machinery 32 0.5 ­0.4 0.0 0.6 3.4 1.8 5.1 0.2 0.2 2.8 0.8 are behind lagged products ­0.2 ­0.6 ­0.1 ­0.2 ­0.2 ­0.3 0.0 ­0.4 ­0.3 ­1.1 ­0.6 growthfo Dynamic l). rate 0.4 1.3 0.3 1.0 0.3 0.8 -- leve 1.1 0.3 3.6 0.5 whose those (four-digit 0.5 1.9 0.4 1.2 0.4 1.2 -- 1.5 0.7 4.7 1.0 are (2002). subgroup 4 4 6 0 5 8 4 of products UNSD 10 22 11 36 level from the at data nondynamic of 0.7 0.2 0.0 0.7 3.6 2.1 5.1 0.6 0.6 3.9 1.3 used and is basis it the and imports, on 2.3 1.1 0.3 2.6 6.0 3.7 9.8 8.1 1.6 9.6 2.7 2) world (Rev. of Caribbean, 1.6 0.9 0.3 1.9 2.4 1.6 4.7 7.6 1.1 5.8 1.3 the growth of and Classification 9 6 4 7 6 8 8 2 16 25 52 rate Trade America average data the Latin and cushion not imports. for and articles sound particular air International world for automatic and apparatus, exceeded of machinery machinery and equipment Standard Commission machinery including transactions growth growth equipment apparatus manufactured the of and is of specialized machinery, classified industrial rate rate machines appliances Economic vehicles, transport available. SITC equipment processing recording and vehicles Not whose equipment -- Note: average Source: Power-generating Machinery industries Metalworking General Office Telecommunications Electrical Road Other elsewhere Miscellaneous Commodities those the 33 34 GLOBALIZATION AND DEVELOPMENT Box 2.1 The Long-Term Deterioration of Raw Material Prices The terms of trade between commodities and manufactures have a cru- cial influence on both short-term macroeconomic performance and the developing countries' growth prospects, owing to the importance of com- modities in these countries' export structures. In the 1950s Prebisch (1951) and Singer (1950) formulated the hypothesis of a secular trend to- ward a decline in the terms of trade for commodities. This hypothesis has been studied in depth since then, and both its theoretical and empirical bases have been called into question. Be that as it may, price data for 24 commodities in the period between 1900 and 2000 show that the terms of trade for nonfuel commodities have deteriorated to such an extent that they now represent less than one-third of their pre-1920 levels (see fig- ure 2.4). This is equivalent to an annual decrease of 1.5 percent over the last 80 years, which is obviously a significant decline. Figure 2.4 Real Commodity Price Indexes, 1900 100 150 130 110 90 70 50 30 1880 1900 1920 1940 1960 1980 2000 Variable weighting by share of world trade Industrial commodities Source: The Economist (2002). A time series analysis does not reveal a persistent downward trend, however, but rather two structural changes, one occurring around 1920 and the other around 1980. Historical analyses indicate that the First World War ushered in a period of slow economic expansion in the in- dustrial countries, particularly the European countries, which interrupted the brisk growth that had characterized the first stage of globalization. The first structural change in the terms of trade coincided with the severe postwar crisis of 1920 and 1921, when real raw material prices plum- meted by 45 percent. As a consequence of overproduction in both indus- trial and developing countries, the terms of trade improved over the rest (Box continues on the following page.) INTERNATIONAL TRADE 35 Box 2.1 (continued) of the decade but never again reached their prewar levels, despite the fleeting growth spurt in the world economy and especially the U.S. econ- omy. The global economic collapse of 1929 triggered another slide in the prices of raw materials, which remained low until the end of the 1940s. Economic growth sped up sharply throughout the world after the Sec- ond World War, but commodity prices never regained the ground they had lost in earlier decades. The expansion of supply hindered their re- covery, despite increased demand. The 1973 oil shock brought a strong upturn in commodity prices but also the onset of a new period of slower growth worldwide. The real turning point in commodity price trends, however, came in 1979, when the U.S. economic authorities decided to raise interest rates to curb inflation and protect the value of the dollar. Since then, despite the upswing in the U.S. economy in the 1990s, world economic growth has been sluggish, and the industrial countries have stepped up their policies of instituting protectionist measures and provid- ing agricultural subsidies. The deterioration of the terms of trade for com- modities, which accelerated during this period, has not been reversed. Currently, the oversupply of commodities and the slowdown in the world economy hold out little hope for a recovery in the near future. Source: Ocampo and Parra (2003). Export growth in the Asian developing countries and in Canada and the United States in the 1990s was associated with the first group of products (see table 2.5). In contrast, Europe's market reveals the increasing weight of low-growth products in which the region also is losing its market share. In the group of other industrial countries (dominated by Japan), dynamic products prevail, although with a loss of market share. The export position of Africa is marked by an over- whelming predominance of nondynamic products in which the region is losing its market share, and the export position of the rest of the world (basically Central and Eastern Europe) is characterized by a loss of market share in dynamic products. Within these parameters the Latin American and Caribbean region has a large share of the less dynamic products, which, in fact, represent the largest proportion of its exports (more than three-fourths in the 1990s). However, there are actually two main patterns of specializa- tion. In one, the relative share of exports of manufactures is on the rise (some Caribbean and Central American countries and Mexico); in the other, natural resource­intensive products--whose share of world trade is growing sluggishly--predominate (South America). The most notable change between the periods 1985­90 and 1990­2000 was the 36 GLOBALIZATION AND DEVELOPMENT Table 2.5 Export Structure, by Type of Competitive Situation (Percentage of exports) Dynamic products Nondynamic products Regional Increasing Decreasing Increasing Decreasing change in regional regional regional regional market Region and year share share share share share 1985­1990 Western Europe Base year 30.7 36.7 20.5 12.1 3.3 Final year 36.5 38.9 16.7 7.9 North Americaa Base year 15.3 44.5 13.3 26.9 ­0.6 Final year 22.9 47.2 11.8 18.0 Other industrial Base year 21.0 47.0 11.2 20.9 ­0.1 Final year 30.9 44.1 12.4 12.6 Latin America and the Caribbean Base year 11.4 20.8 23.9 43.8 ­1.1 Final year 22.6 24.3 24.5 28.6 Africa Base year 5.2 11.0 14.3 69.5 ­1.4 Final year 12.5 13.4 17.2 56.9 Asian developing countries Base year 38.2 6.7 44.4 10.7 1.2 Final year 57.8 6.3 31.0 4.8 Rest of world Base year 10.8 30.4 7.9 50.9 ­1.3 Final year 21.9 34.4 14.2 29.5 1990­2000 Western Europe Base year 2.7 37.9 4.8 54.5 ­8.6 Final year 5.7 44.8 5.7 43.8 North Americaa Base year 31.3 13.3 32.3 23.2 2.1 Final year 43.2 14.7 28.9 13.2 Other industrial Base year 6.4 48.8 19.5 25.3 ­1.5 Final year 10.4 51.3 22.0 16.3 Latin America and the Caribbean Base year 18.1 2.7 57.2 22.0 1.3 Final year 37.0 2.2 49.8 11.0 INTERNATIONAL TRADE 37 Table 2.5 (continued) Africa Base year 2.5 8.6 19.8 69.1 ­0.8 Final year 6.6 9.1 23.9 60.4 Asian developing countries Base year 31.4 3.9 37.0 27.6 6.0 Final year 50.1 3.0 31.7 15.2 Rest of world Base year 24.3 2.0 44.1 29.6 1.5 Final year 49.8 1.2 39.0 9.9 a. Canada and the United States. Note: Dynamic products are those whose rate of growth exceeded the average rate of growth of world imports, and nondynamic products are those whose rate of growth lagged behind the average rate of growth of world imports. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from UNSD (2002). expansion in the market share of nondynamic products (both raw materials and manufactures), as reflected in the increase in falling stars relative to retreat products. In addition, as the region upped its market share in dynamic products, the weight of the rising stars increased rel- ative to the products classified as missed opportunities. In sum, the fac- tor that has contributed most to the growth of regional exports has been not their reorientation toward the fastest growing products in international trade, but rather the enhancement of competitiveness within the existing export structure. Two Challenges Posed by the Relationship between Trade and Economic Growth In recent decades, the relationship between external trade and eco- nomic growth has raised two basic issues for developing countries, whose responses will have significant implications for the future. The first question is how to translate the opportunities provided by world markets into rapid economic growth. The second issue concerns the pattern of change in the structure of employment. There is no simple answer to the first of these questions. As noted previously, countries' opportunities for advancement have been linked to their success as exporters, but the swift growth seen in international trade, especially over the 1990s, has not resulted in a commensurate expansion of world output. Figure 2.5 shows that this was clearly the case in Latin America; although export growth was faster in the 1990s 38 GLOBALIZATION AND DEVELOPMENT Figure 2.5 Trade and GDP in Latin America, 1870­1998 10 9 GDP growth 8 Growth of goods exports (percent) 7 rate 6 5 growth 4 average 3 2 Annual 1 0 1870­1913 1913­1950 1950­1980 1980­1990 1990­2000 Note: GDP gross domestic product. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from Maddison (2001). than at any other time in the region's history, that decade was also a period of relatively slow economic expansion, with the growth rate un- questionably falling short of the rates recorded in the region in the pe- riod of state-led industrialization between the 1950s and the 1970s. This situation can be explained in part by the dynamics of interna- tional trade itself. When more successful countries seize the few opportunities that arise in a sluggish international environment, they deprive other developing countries of potential markets, including their own domestic markets, or they cause export prices to fall, as hap- pened with commodity prices over the last two decades. In addition, trade liberalization has entailed a restructuring of the do- mestic macroeconomic framework and production sector, which has not been conducive to rapid economic growth. From a macroeconomic standpoint, increased openness to foreign trade has reduced the antiex- port bias of protectionist regimes, but it has also led to a contraction in the sectors that compete with imports. Indeed, export success has been based in large part on the more intensive use of imported raw materials and capital goods. For most developing countries, the net result has been a structural deterioration in the correlation between economic growth and the trade balance (UNCTAD 1999). The case of Latin America and the Caribbean, as shown in figure 2.6A, illustrates this situation: The re- gion's trade deficit in the 1990s was similar to that of the 1970s, but its growth rate was much lower than it was earlier. Furthermore, this INTERNATIONAL TRADE 39 Figure 2.6 Relationships among Economic Growth, Trade, and the Technology Gap in Latin America, 1950­2000 A. Relationship between trade balances and economic growth 7% 1970­1980 6% 1960­1970 growth 5% 1950­1960 1990­2000 4% GDP 3% average 2% 1% 1980­1990 Annual 0% ­2% ­1% 0% 1% 2% 3% Trade balance as a percentage of GDP B. Relationship between the rate of reduction of the productivity gap and the income-elasticity of imports 3.5 3.0 1970­1980 gap Virtuous 2.5 trends 2.0 1.5 productivity 1950­1960 1960­1970 Vicious trends the 1.0 of 1990­2000 0.5 0.0 45° reduction ­0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 ­0.5 of ­1.0 1980­1990 Rate ­1.5 Income-elasticity of imports Source: Economic Commission for Latin America and the Caribbean, on the basis of data from Maddison (2001). deficit increased the region's dependence on international financing, which, as will be discussed in the next chapter, has been volatile. Another facet of this process is that certain features of the production structure have hindered the achievement of sustained high rates of eco- nomic growth.9 Although a number of developing countries, especially 40 GLOBALIZATION AND DEVELOPMENT those of Latin America and the Caribbean, have managed to increase their share of world markets and of foreign investment flows, the pro- duction linkages of these dynamic activities have been weak. In addition, the increasing use of imported intermediate and capital goods, which is characteristic of internationally integrated production systems, has led to a breakdown in pre-existing production chains and national innova- tion systems. Moreover, developing-country participation in the fastest- growing activities in international trade, especially those that are tech- nology intensive, has been limited in most cases (UNCTAD 2001a, 2002a). As a result, progress in narrowing the productivity gap has been slow. Figure 2.6B illustrates the relationship between the rate at which the gap separating the region's average labor productivity from that of the United States has been reduced, and the income- elasticity of imports, which is consistent with equilibrium in the balance of trade. From the 1950s to the 1970s, Latin America and the Caribbean were on the part of the curve characterized by a "virtuous" growth trend--that is, a trend in which GDP grew faster than exports. The increase in the income-elasticity of imports in the 1970s was thus accompanied by a still faster reduction in the productivity gap. In the 1990s, however, the increase in the income-elasticity of imports far outpaced the reduction in the productivity gap; consequently, the region entered a "vicious" economic growth cycle in which robust export growth translated into lackluster economic growth (Cimoli and Correa 2002). It should be added that given the insufficient "pull" exerted by high- growth sectors and the low rate of overall economic growth, the struc- tural heterogeneity (dualism) of production sectors has increased: although there are now many more "world-class" firms, many of which are subsidiaries of TNCs, a growing proportion of the work- force is concentrated in low-productivity informal sector activities. The second basic issue is related to patterns of change in the struc- ture of employment over the course of the development process and how this structure has been affected by worldwide technological change and the international specialization of different countries. As is well known, the primary sector of the economy is not a major source of new jobs, whereas the manufacturing sector tends to create a large number of jobs at first, then stabilizes and finally trends downward as per capita income rises, following the inverted U pattern propounded by Rowthorn (1999). The tertiary sector accounts for the remaining jobs. In view of the particular trend followed by job creation in the manufacturing sector, the tertiary sector will be considered in more detail. INTERNATIONAL TRADE 41 Palma's (2002) analysis, which is based on a wide sample of coun- tries, not only confirms the inverted U pattern of job creation in the manufacturing sector, but also introduces three striking considera- tions, two of which are illustrated in figure 2.7A. One of these is the continuous downward curve seen over the last four decades, which in- dicates a decrease in the share of manufacturing in total employment at all levels of per capita income. Palma attributed this trend to the fact that productivity has increased more rapidly than GDP, which implies that employment in manufacturing has expanded at a slower pace and, in some cases, has contracted in absolute terms.10 The other is a shift in the peak rate to lower levels of per capita income from 1980 on- ward. This means that the point at which the manufacturing sector's share in total employment begins to decrease is located at progressively lower levels of per capita income. In 1990, more than 30 countries recorded per capita incomes that were higher than the level at which manufacturing employment begins to decrease. The services sector ex- hibits a very different trend, with productivity growing much more slowly than GDP; as a result, employment in the sector has increased as a proportion of the total.11 The third consideration points to the need to assess the phenome- non of "Dutch disease" from a fresh perspective.12 First, the ratio be- tween the share of manufacturing in total employment and per capita income is a function of the pattern of international trade. Both indus- trial- and developing-country exporters of raw materials or services-- especially financial services and tourism--thus exhibit a lower ratio than exporters of manufactures at all levels of per capita income (see figure 2.7B). Although these countries are usually less industrialized than ex- porters of manufactures, this does not alter the general trend toward deindustrialization in either group. In fact, as figure 2.7C shows, from 1960 to 1998 manufacturing employment as a proportion of the total decreased by half in both groups of countries: from 39 percent to 21 percent in exporters of manufactures and from 29 percent to 16 per- cent in exporters of natural resource­based goods or services. The peak rate on the respective curves also shifted to a level of per capita income equivalent to half as much as before (from US$18,000 to US$9,000 in that period). Dutch disease should thus be understood as an excess of deindus- trialization owing to a change in the reference group. This occurred in the Netherlands, Norway, and the United Kingdom, as well as in Cyprus, Greece, and Malta (tourism); and Hong Kong (China), Luxembourg, and Switzerland (financial services). None of these con- siderations give substance to the idea that what has been called the 42 GLOBALIZATION AND DEVELOPMENT Figure 2.7 Deindustrialization, Foreign Trade, Employment, and Income A. Sources of deindustrialization, 1960­1998 35 1960 30 1970 25 total) 1980 employment of 20 15 1990 (percent 10 1998 5 Manufacturing 0 5.4 5.9 6.3 6.7 7.1 7.5 7.9 8.2 8.6 9.0 9.4 9.8 10.1 10.5 Logarithm of per capita GDP (1985 US$) B. Foreign trade effect, 1998 25 Jp Kr Eu5 20 Tn Sg Lk 1998a Eg total) Ca employment 15 of Cn Gb Pk Cl My Gr No Au Br Ve 10 Jm Pa 1998b (percent Bw 5 Py Zw Manufacturing Ng 0 6.5 6.9 7.3 7.7 8.1 8.4 8.8 9.2 9.6 10.0 10.3 Logarithm of per capita GDP (1985 US$) C. Changes in employment and income, 1960 and 1998 45 1960a 40 35 1960b 30 total) employment of 25 20 1998a 15 (percent 10 1998b 5 Manufacturing 0 5.4 6.0 6.5 7.0 7.5 8.0 8.4 8.9 9.4 9.9 10.3 10.8 Logarithm of per capita GDP (1985 US$) INTERNATIONAL TRADE 43 Figure 2.7 (continued) D. Latin America and the Caribbean, 1998 25 20 Sv Co Hn Do Mx 1998a Cr total) Bo Ec employment 15 Gt of Uy Pe Cl Ar Ve 10 Ni Br Ht 1998b (percent 5 Manufacturing 0 7.0 7.4 7.8 8.1 8.5 8.9 9.3 9.7 10.1 Logarithm of per capita GDP (1985 US$) Note: Ar Argentina; Au Australia; Bo Bolivia; Br Brazil; Bw Botswana; Ca Canada; Cl Chile; Cn China; Co Colombia; Cr Costa Rica; Do Dominican Republic; Ec Ecuador; Eg Arab Republic of Egypt; Eu5 Austria, Germany, France, Italy, and Belgium; Gb United Kingdom; Gr Greece; Hn Hon- duras; Ht Haiti; Jm Jamaica; Jp Japan; Kr Republic of Korea; Lk Sri Lanka; Mx Mexico; My Malaysia; Ng Nigeria; Ni Nicaragua; No Norway; Pa Panama; Pe Peru; Pk Pakistan; Py Paraguay; Sg Singapore; Sv El Sal- vador; Tn Tunisia; Uy Uruguay; Ve República Bolivariana de Venezuela; Zw Zimbabwe. a. Specialization in manufactures. b. Specialization in natural resources and services. Source: Palma (2002). "curse of natural resources" is at work here, however. In fact, in a number of well-known cases, such as those of Finland and of Malaysia and other Asian countries (all of which have a generous endowment of natural resources), the countries concerned have been able to avert this phenomenon, either by carrying forward the industrialization process using the resources available or by developing a complementary man- ufacturing industry for the domestic market and for export. This indi- cates that although opportunities do exist, few countries appear to be prepared to take advantage of them. One of the striking features of Latin America and the Caribbean is that whereas the ratio of manufacturing employment to total em- ployment was similar in most of the countries of the region before they embarked on economic reform programs, marked divergences have emerged since then (see figure 2.7D). Brazil and the three South- ern Cone countries (Argentina, Chile, and Uruguay) have exhibited the greatest degree of deindustrialization following their economic re- form efforts and now conform to the typical pattern of raw material 44 GLOBALIZATION AND DEVELOPMENT exporters, of which the República Bolivariana de Venezuela is a clas- sic example. The second pattern corresponds to a number of Central American (El Salvador, Honduras) and Caribbean countries (the Do- minican Republic), in which manufacturing employment has increased considerably as a result of their active involvement in assembly activi- ties. Finally, in Costa Rica, Mexico, and the other Andean countries (Bolivia, Colombia, Ecuador, and Peru), economic reform has not sig- nificantly altered the share of total employment provided by the man- ufacturing sector, which can be taken as a sign that these countries have not been affected by either Dutch disease or the assembly activi- ties that have had a pronounced impact on other economies. The New Global Production Structure The technological revolution is at the heart of the forces driving the third stage of globalization. The emergence of new technologies and the ever-faster evolution of existing ones have significantly altered the ways in which production is organized in firms, production sectors, and ultimately the world economy. In fact, these changes are so far- reaching that they have been called one of the greatest transformations in history (Piore and Sabel 1984). Of all these new technologies, in- formation and communication technologies (ICTs) have had the most direct impact on the globalization process. Microeconomic Foundations The effects of the microeconomic forces generated by the ongoing technological revolution are mediated by social and political variables, and particularly by the policy of opening up the countries' economies to international trade and foreign investment. These variables can ei- ther speed up or slow down the absorption of new technologies. To understand the implications of this premise, it is important to identify the features of new technologies and to determine how they affect pro- duction, the structure of markets, and business decisions. Industrial organization in the digital age involves a complex net- work of markets (such as markets for equipment, fixed or cellular tele- phone services, fiber-optic cable, connectivity, and application services) that converge in the transmission of data, voice, and sound. Each of these markets has its own types of industrial organization, intellec- tual property rules, conditions for reaping the benefits of research and development (R&D) investment in new products and processes, regulatory frameworks and bodies, competition rules, and forms of INTERNATIONAL TRADE 45 interdependence among production agents. Some of these markets are highly competitive, and others are characterized by collusion among firms to set exclusionary prices that block new competitors' access to the market. Of particular significance is the nonrivalrous nature of many digital goods and services, which opens up virtually infinite pos- sibilities for realizing economies of scale. The industrial countries' technological leadership accounts for the advantages they enjoy in the current stage of globalization, as well as the disadvantages faced by de- veloping countries (Katz and Hilbert 2002). The impact of ICTs on the structure of the economy can be seen in the digitization of information flows, communication processes, and coordination mechanisms. This, in turn, has altered variables relating to firms' cost structures, in many cases practically eliminating the im- portance of segments that, until a few decades ago, determined the conditions of supply. In particular, these technologies have reduced the cost of processing and transmitting information; lowered the cost associated with distance; led to smaller product sizes and miniaturiza- tion; and absorbed complexities in the organization of production that previously had been handled by management teams, thereby paving the way for flexible forms of production (Cairncross 1997; Turner and Hodges 1992). The new technologies have also made it possible to achieve higher quality, greater precision, and enhanced product com- patibility, which have significantly reduced the unit cost of products of a given quality. What is more, technological change has been a key component of the changes that have taken place in dynamic learning curves, in com- bination with changes in learning processes themselves and in economies of scale (Chesnais 1993), all of which affect business deci- sions, the structure of markets, and patterns of productive specializa- tion. Firms respond to signals from their environment when they ac- quire, adapt, and refine technologies in order to build up their technological capacities and competitive advantages. Because these signals come from the incentive structure, from factor and resource markets (skills, capital, technology, suppliers), and from institutions (in the fields of education and training, technology, and finance, among others) with which the firm interacts, innovation is the out- come of an interactive process linking agents that respond to market incentives--such as firms--with other institutions that operate on the basis of strategies and rules that are independent of market mecha- nisms.13 The reduction in the cost of transporting goods and transmitting in- formation made possible by the technological revolution has led to a broadening of markets, which in some cases have reached global 46 GLOBALIZATION AND DEVELOPMENT proportions.14 As markets increase in size, economies of scale become more important in firms' cost functions. Both processes have been re- inforced by the trend toward the homogenization of the preferences of large groups of consumers. This has, in turn, expanded the market for products that can meet this type of demand on the basis of keen price competition. In this context, there has been a relative decline in the im- portance of economies of scope, especially because of the impossibility of preventing competitors capable of operating in the world market from reproducing product mixes that achieve these kinds of economies. As competition has come to focus on the variable of price, the tendency toward technological homogenization has strengthened. This, together with the homogenization of preferences, is leading to the emergence of a "global consumer" in a global market dominated by economies of scale (Levitt 1983). This stylized fact is a key element in the current stage of globalization, but the extent to which it can be generalized will be considered later in this chapter. Forms of global consumption have been available to elite social groups for at least a century. The current stage stands out because it has made this pattern of consumption available on a massive scale, en- compassing many more people and categories of goods and services than it did a few decades ago. In any case, this trend toward the ho- mogenization of consumption patterns is only a trend and does not, therefore, imply that all markets have become globalized. The trend toward the homogenization of production technologies and consumer preferences in many markets, as well as the consequent trend toward the homogenization of products, has changed the condi- tions of competition. In particular, it has prompted firms to move away from competition based on mechanisms for covering variable costs--an example of which was the "redeployment" of industrial ac- tivities to some developing countries that began in the 1970s--toward competition in covering fixed costs. Production, especially manufac- turing, has tended to become an activity involving a very large pro- portion of fixed costs. This does not mean that competition to cover variable costs has disappeared, but only that it has become relatively less important. This is particularly true of cutting-edge activities and processes; it is far less applicable to the production of goods, which continue to be assembled in locations with low variable costs (partic- ularly wages). By reducing labor costs, the increased flexibility of la- bor markets has hastened the reduction of the proportion of variable costs. This is illustrated by the fact that in some manufacturing seg- ments, variable costs amounted to 10 percent of total costs or less in the 1990s, after having represented some 25 percent just two decades earlier (Oman 1994). INTERNATIONAL TRADE 47 In particular, the development of global brands and the intensifica- tion of product and process R&D have raised firms' fixed costs, which they cannot meet without increasing the scale of production. Thus, economies of scale in R&D and in marketing are combined with economies of scale in production. This sets the stage for the emergence of global producers that vie for market shares that are large enough to cover their fixed costs. This process, in turn, reinforces the trend to- ward market expansion, and the organizational structure of those markets changes accordingly. New Forms of Production and Market Organization The technological revolution has changed the way in which produc- tion is organized. In the early and mid-20th century, firms responded to the emergence of new markets and the expansion of existing ones by organizing production according to the Taylor/Ford paradigm, which was based on a strict separation between design and planning activities, on the one hand, and direct production operations, on the other. Many firms adopted the organizational features of this mode of production: a very high, narrow hierarchical pyramid; specialization in narrowly defined activities and skills; and separation between thought and action. In sum, these were the well-known "principles of scientific management." The revolution in technology, and particu- larly in ICTs, has made this form of organization obsolete and shifted the emphasis to a new set of features that are summed up in the idea of "flexible production" (Dussel Peters 2000). This new way of organizing production can be described on the ba- sis of six activities, all of which make use of ICTs to break down the old paradigm's dichotomy between thought and action. Specifically, it involves techniques of (a) simultaneous engineering, which integrates the design and manufacturing stages into a single process; (b) continu- ous, incremental innovation, sometimes by means of quality circles; (c) teamwork involving multiskilled workers; (d) production and man- agement of just-in-time and real-time inventories, which permit pro- duction to adjust more quickly to changes in demand; (e) incorpora- tion of quality control into the production process itself in order to avoid the costs associated with the ex post facto correction of errors; and (f) increasing interaction between suppliers and users in the areas of innovation, design, and production, which gives rise to global pro- duction and marketing chains and networks (Oman 1994). One particularly important form of interaction has been the devel- opment of horizontal links between firms that have led to the forma- tion of strategic alliances. Because technical progress has involved the 48 GLOBALIZATION AND DEVELOPMENT use of many basic technologies, which no single firm can master in their entirety, firms have had to develop networks of agreements to complement one another--while continuing to compete with each other--in the area of innovation. The combination of operations under the flexible production para- digm and the expansion of markets has given rise to two of the traits of the current model of market organization: the trend toward eco- nomic concentration and the trend toward the consolidation of global production chains or internationally integrated production systems, which cover the whole range of design, production, and marketing ac- tivities for a given product (Gereffi 1994; Mortimore and Peres 2001). In more analytical terms, the new forms of business organization, such as outsourcing, virtual cooperation, and strong vertical integration, are contingent on the trend in transaction costs and their impact in set- ting the production frontier between hierarchical coordination and market coordination (Hilbert and Katz 2002). Depending on whether transaction costs are reduced further within firms or within markets, this frontier will move toward either the expansion of firms or a greater reliance on outsourcing. Global oligopolies are not new in the world economy, having char- acterized the production and marketing of products such as petroleum, minerals, and even some types of machinery and equipment since the first stage of globalization in the late 19th century. What is new is the increase in the number of sectors where oligopoly is the typical form of productive organization, as it is now the predominant configuration of supply in most industries with a strong technological R&D compo- nent and in manufacturing segments with sizeable economies of scale (Chesnais 1993). The ubiquity of oligopolistic structures is a product of efforts to achieve economies of scale in production, marketing, and technological research and development, which have surpassed even the market expansion driven by the new technologies. These oligopolistic structures and the trend toward concentration exhibit dissimilar features in two types of internationally integrated production systems, with these systems being defined according to whether they are led by producers or marketers. In producer-led sys- tems, large manufacturers (generally TNCs) coordinate the entire pro- duction chain, including its backward and forward linkages. In these systems, profits are derived from economies of scale and technological advances, as in the case of the automotive, aeronautical, computer, semiconductor, and heavy machinery industries. However, in systems led by wholesalers and other vendors, such as large retail chains, wholesalers, and own-brand producers, more de- centralized networks are set up. This is true in the clothing, footwear, INTERNATIONAL TRADE 49 toy, appliance, consumer electronics, and even handicraft sectors. In these systems, profits are derived from value added in the areas of design, marketing, and financial services. Through these activities, leading firms link outsourced production with direct producers located anywhere in the world and carve out demand niches in the principal consumer markets (Gereffi 1994). In both types of systems, coordination of the entire production chain is a key source of competitive advantage, and the network is therefore used as a strategic asset. Information flows are the basic means by which firms improve or consolidate their position in the production chain, whereas the appropriation of benefits depends on the influence that leading firms can exert on different segments of the chain, and this influence naturally changes over time (Gereffi 2000). Also in both cases, as in the trend toward the formation of global oligopolies, the most dynamic economic players have been TNCs. The reduction in information costs--because the flow of information is vital in coordinating activities worldwide--and market expansion have added to the traditional advantages enjoyed by TNCs in terms of technology, management, and scale. Accordingly, TNCs have been able to respond faster to shifts in the organization of production to- ward flexible arrangements and have capitalized on their competitive advantages to organize internationally integrated production systems, positioning themselves in the links of the production chain that enable them to capture a significant share of the profits it generates. The expansion of TNCs has entailed a sharp upswing in foreign direct in- vestment (FDI) flows and has taken the form of both new investment and acquisition of existing assets, although to different degrees. Implications for Business Decisions and Strategies In a context in which production technologies and preferences tend toward homogenization, economies of scale necessarily lead to greater concentration. In fact, when firms are able to differentiate their prod- ucts on the basis of trade or technological development strategies, mar- ket expansion tends to increase the average size of such firms. In some cases, product differentiation efforts are based on increases in variable production costs. For example, in furniture making, differ- entiation may be based on the use of better wood, higher quality paints, or more labor per unit produced. In such situations, when the size of the market increases, there is always the possibility that new and relatively small firms may enter the market and capture part of its growth (Hotelling 1929). In this case, an increase in market size does not result in a concomitant increase in concentration. 50 GLOBALIZATION AND DEVELOPMENT However, when differentiation is sought on the basis of sunk costs incurred in creating a brand image or publicity or in moving forward along the technology curve, these efforts result in escalation. Some firms will expand, and the market structure will become more concen- trated. The essence of this mechanism is that differentiation efforts that are not profitable in smaller markets become profitable in larger ones. Strategies for creating and defending global brands and for com- peting on the basis of technological progress are typical not only of technology-intensive activities, but also of marketing-intensive ones, even when they involve low- or mid-level technologies. These processes account for the highly concentrated supply structure for products such as certain processed foods and beverages, in which tech- nology intensiveness is low (Sutton 1991, 1998). Thus, there are forces that lead to larger average firm size and greater concentration, both when supply is highly homogenized and when significant differentiation efforts are made. In principle, this seems to conflict with the flexible production features that make it possible to reduce the scale of production and offer customized prod- ucts. In this regard, it is important to distinguish between two types of concentration: technical concentration, which results directly from the minimum size requirements for optimal plant operation, and economic concentration, which takes the firm, rather than plants or production lines, as the relevant unit. Although some evidence points to a reduc- tion in the technical scale of production activities involving dissimilar products, this does not mean that there is a trend toward smaller-sized firms. Only large firms can directly produce a broad range of products or coordinate internationally integrated production systems capable of supplying them. In these cases, economies of scope are usually signifi- cant but can be achieved only by firms or systems with considerable economies of scale (mass customization). This background explains why, despite the deverticalization and tertiarization of nonessential activities, large firms are the leading eco- nomic players in the current stage of globalization and why, within that group, TNCs play an especially significant role. TNCs are the ones that set up both producer-led and marketer-led internationally in- tegrated production systems either through new investment or by means of mergers and acquisitions, as will be discussed later in this chapter. The ways in which TNCs organize production have changed during the current stage of globalization as a result of the interaction between two types of variables: the international location of their production processes (dispersed or concentrated activities) and the intensity of their coordination activities (high or low). Under the old paradigm, INTERNATIONAL TRADE 51 firms usually followed a strategy of managing relatively similar activi- ties in different locations and made little effort to coordinate them (Porter 1986). Then, however, the increasing importance of economies of scale led them to adopt a supply structure based on the provision of products to the global market from one or a few locations (Hamel and Prahalad 1985; Levitt 1983), and the coordination of the work being done at these locations was based on their physical proximity; a pio- neering example of this was provided by Japanese automobile makers in the 1960s and 1970s. Then, the ICT revolution led to a second change: as the cost of long-distance coordination has fallen, business strategies have aimed at combining activities in several, although not many, locations while making major efforts to ensure their real-time coordination. Since the 1980s, TNCs have experimented with various forms of or- ganization. Some of the more noteworthy structures include elements of head office organization, or networks in which the components have different relative weights in order to allow the concentration of decisionmaking processes and operations between the parent company and its subsidiaries (Bartlett and Goshal 1989). The number of loca- tions involved varies considerably depending on what economies of scale can be achieved in production, ranging from configurations that are highly concentrated in producer-led internationally integrated pro- duction systems to configurations that are much more widely dis- persed in marketer-led systems. In both cases, however, coordination is more intensive than in the past. The number of locations is deter- mined by the characteristics of the firms' learning curves and the economies of scale available to them, whereas the choice of locations is determined by the comparative advantages of each place and the coordination advantages to be derived from the geographic concentra- tion of production, design, and technological R&D activities (Porter 1986). Meanwhile, firms seeking agglomeration economies have become concentrated in areas where they have easy access to global markets and factors of production, as well as appropriate innovation capacity, suppliers, and institutions.15 The mobility afforded by technological advances has turned TNC subsidiaries, which used to operate as geo- graphically dispersed but self-contained production units, into inte- grated production and distribution networks at the regional and global levels. Within these networks, firms can purchase the inputs they need locally and produce for the local or regional market, or they can inte- grate economic activities scattered over different regions. From this standpoint, the regionalization of the world economy is, paradoxi- cally, a corollary of globalization.16 52 GLOBALIZATION AND DEVELOPMENT The comparative and coordination advantages of different loca- tions raise the question of how the global and local (including supra- national or regional) dimensions are related in business strategies. The positions taken on this point have tended to illustrate the need to com- bine the two. In particular, Akio Morita of Sony highlighted the need to think globally while taking local culture and demand into account, in a process of so-called global localization (Turner and Hodges 1992). Kenichi Ohmae, meanwhile, extolled the advantages of replicating, in different markets, strategies that have proved successful in North American, Western European, or East Asian markets as a means whereby firms can become "global insiders" (Ohmae 1985). The local dimension is particularly important for national firms that cannot become transnational players in the globalization process, either as leaders of internationally integrated production systems or as participants in more or less significant segments of such systems. The firms that fit this description are highly diverse in terms of both their size and their managerial and learning capacity. These firms' strategies revolve around the opportunities offered by niches that are generated or strengthened in global markets having a strong tendency toward ho- mogenization. Rising income levels (which enable consumers to in- dulge their taste for variety, quality, and novelty), regional and local differences in taste (idiosyncratic goods), and the demand for special- ized inputs and equipment on the part of certain types of users are some of the factors that ensure the survival of what are sometimes very profitable niches for nonglobal firms (Mariti 1993). Within these niches, such firms have advantages over their global competitors, par- ticularly because of their superior ability to monitor changes in local markets and their capacity to operate more flexibly. Niche-oriented strategies can fail over the long term if global firms decide that a niche is profitable enough to warrant their entry with identical or substitute products or even their acquisition of the local producer. Usually, local firms are unable to counter such moves, be- cause their more limited scale leaves them no resources for effectively developing a defensive strategy. For more advanced nonglobal firms, a particularly serious risk is that of falling into the "R&D trap" or the "marketing trap": in other words, trying to defend their niche through ever-greater efforts in technological R&D and in marketing, which make mounting resource demands and cannot be sustained over the long term. International experience has shown that small and medium-size en- terprises (SMEs) not taking part in internationally integrated produc- tion systems are nonetheless capable of maintaining market niches as well. This is true not only of low-value-added activities that hold little INTERNATIONAL TRADE 53 attraction for global firms, but also of sectors in which "disadvantages of scale" are offset by the advantages of flexibility and interaction with networks of similar firms that are usually in the same location. Indus- trial districts are one of the best-known examples of this type of con- figuration. There is a wide diversity of markets and business strategies. Even in the face of the overall trend toward homogenization that has given rise to global firms and internationally integrated production systems, niche strategies are still viable for nonglobal firms as a group, though they may entail high risks for the individual firms. In any event, competitiveness conditions in different locations have not become homogenized, and global players see clear advantages of configuration and coordination in maintaining their operations in a limited number of locations in the world (Porter 1990). In particular, globalization and the lower cost of processing and transmitting infor- mation have not been mirrored by similar developments in the area of knowledge and the capacity to generate it, which remain highly local- ized and confined to specific individuals and, especially, institutions. In this respect, globalization has not eliminated the national, local, or sec- toral dimensions of innovation systems and may even have strength- ened them (Dosi 1999). The components of an innovation system are arranged in a three- tiered structure (Cimoli and Dosi 1995; Freeman 1987; Nelson 1993). First, firms and the production system are crucial (though not exclu- sive) recipients of knowledge, which to a large extent is incorporated into operational routines and changes over time in response to rules of conduct and higher-level strategies (such as research activities, vertical integration, and horizontal diversification). Second, firms link up with networks consisting of other firms, nonprofit institutions, public sec- tor agencies, universities, and organizations devoted to the promotion of production activities. These networks, as well as policies for im- proving the environment in which scientific and technological activi- ties are carried out, are key elements because they can either strengthen or constrain firms' opportunities to improve their technological capa- bilities. Finally, in the broader context of a given country, microeco- nomic behavior is influenced by a series of macroeconomic effects, so- cial relations, rules, and political constraints. The generation and absorption of technology--and the consequent achievement and improvement of international competitiveness--are thus systemic processes, because an innovation system's performance depends on synergies and externalities that transcend a firm's efforts to optimize its position in response to changes in incentives. Techno- logical opportunities and obstacles and the experience and skills acquired by the different participants in an innovation system flow 54 GLOBALIZATION AND DEVELOPMENT through the system from one economic activity to another and set up a specific context in each country or region, so that a given set of eco- nomic incentives will have widely varying effects in terms of stimulat- ing and constraining innovation. Patterns of FDI and TNC Strategies at the Global Level Historically, TNCs have focused on the exploitation of natural re- sources (where they sometimes come into conflict with nationalist in- terests in developing countries), on the construction and management of key segments of the infrastructure for agriculture- and mining-based export complexes, on the provision of domestic services in rapidly growing urban areas, and on capturing protected industrial markets under national import substitution strategies while, in some cases, also taking advantage of incipient subregional integration arrangements. As a result of the changes in technology, production, and marketing analyzed in this chapter, FDI has soared, and the share of international production in the world economy has grown along with it. In the 1990s, FDI flows grew remarkably, particularly in the second half of the decade, rising from an annual average of about US$225 billion be- tween 1990 and 1995 to nearly US$1.5 trillion in 2000. Nonetheless, in 2001, for the first time since 1991, worldwide FDI flows declined significantly, dropping to around US$735 billion.17 Even so, this level is still equivalent to more than three times the annual average for 1990­95 and exceeds the values for each year of the 1990s, with the exception of 1999 and 2000 (see table 2.6). Thus, between 1982 and 1999, the percentage of worldwide gross fixed capital formation represented by FDI rose from 2 percent to 14 percent, and the value added by TNCs climbed from 5 percent to 10 percent of world GDP (UNCTAD 2000). Moreover, sales by TNC subsidiaries grew much faster than world exports. This global expansion is driven by the operations of more than 60,000 TNCs with nearly 800,000 foreign subsidiaries. Industrial countries remain the primary source and destination of FDI flows; in 2000, 92.2 percent of total FDI came from such countries, and 82.3 percent was directed to them. FDI flows have also increased signifi- cantly in developing countries, however, more than tripling their aver- age level for the period 1990­95 in the year 2000 (see table 2.6). The primary recipients were China, Hong Kong (China), and India in Asia and Argentina, Brazil, and Mexico in Latin America. A comparison of the global distribution of inflows and outflows in 1985 and 2000 shows that FDI has become a very important variable for more countries than in the past. FDI inflows of over US$10 billion 3.5 0.0 2.2 1.9 2001 27.2 36.6 85.9 11.7 55.6 735.1 503.1 204.8 620.7 580.6 593.9 496.3 534.2 4.0 0.0 1.7 6.0 26.6 70.6 17.1 48.5 2000 237.9 104.2 1,491.9 1,227.4 1,379.5 1,271.3 1,143.8 1,056.1 1,087.6 2.4 2.1 1.5 0.3 25.4 73.6 74.0 10.4 63.5 1999 837.8 225.1 966.1 766.1 679.5 700.8 1,088.3 1,042.1 (2002b). 2.5 5.1 0.7 1.0 0.0 1998 22.6 50.3 82.7 21.7 694.5 484.3 187.6 684.0 631.2 531.6 443.1 508.9 UNCTAD from 4.2 5.6 0.0 0.3 0.0 1997 19.1 74.8 67.1 35.2 478.1 267.9 191.1 474.0 395.0 304.8 232.1 269.3 data of 1.3 3.6 0.0 0.5 0.1 basis 1996 13.5 61.3 35.7 29.6 386.1 219.9 152.7 395.0 332.4 227.0 187.7 196.8 the on 6.0 0.3 2.1 0.0 9.2 0.1 0.1 74.3 32.0 12.7 Average 225.3 145.0 253.3 221.0 117.9 103.1 108.5 Caribbean, 1990­1995 the and countries. two America outflows than Latin Investment and more for acquisitions Direct inflows purchase of and of involving sale Commission ) transition transition of transition a transition a Foreign countries countries countries region countries US$ countries in countries in mergers countries in countries in purchases distribution inflows outflows by 2.6 of region or Economic FDI FDI by Sales Industrial Developing Economies Industrial Developing Economies Industrial Developing Economies Multinational Industrial Developing Economies Multinational a. Source: Table Billions( Regional Total Total Cross-border Total Sales, Purchases, 55 56 GLOBALIZATION AND DEVELOPMENT are now concentrated in more than 50 countries (including 24 devel- oping countries), compared to only 17 countries (including 7 develop- ing countries) 15 years ago. The pattern of investment abroad is simi- lar: The number of countries with more than US$10 billion in investments abroad rose from 10 to 33 and currently include 12 developing countries, compared to 8 in 1985. Cross-border mergers and acquisitions have been one of the chief mechanisms for the expansion of TNCs. These operations, which in- tensified in the second half of the 1990s (see table 2.6), enable firms to rapidly acquire a portfolio of localized assets, which are essential in strengthening their competitive positions in the local, regional, or world economy. In many cases, a firm's survival is the primary strate- gic incentive for engaging in these operations, especially because firms that hesitate to do so may run a serious risk of being absorbed or of being placed at a competitive disadvantage when rival firms merge.18 The intense interplay between changes in the global economic envi- ronment and the factors that induce firms to engage in cross-border mergers and acquisitions accounts for the steady increase in such op- erations.19 Although FDI has expanded geographically, its distribution re- mains highly asymmetrical. The parent companies of 90 of the 100 largest nonfinancial TNCs (classified as such based on the value of their assets abroad) are located in the European Union, Japan, and the United States. In 1999, for the first time, three developing-country firms were among the world's 100 largest (Hutchison Whampoa of Hong Kong, China; CEMEX of Mexico; and Petróleos de Venezuela). The 50 largest developing-country firms--the biggest of which are just barely comparable to the smallest of the world's 100 largest--are scattered among 13 newly industrialized economies in Asia and Latin America. They include firms in Hong Kong (China), the Republic of Korea, Malaysia, Mexico, and the República Bolivariana de Venezuela. In terms of major sectors of economic activity, the most striking fea- ture is the significant expansion of services. The share of FDI inflows corresponding to services between 1988 and 1999 rose by more than 6 percentage points worldwide, thus representing over half of cumula- tive FDI by the end of that period (see table 2.7). In developing coun- tries the share of services increased even more rapidly (by almost 17 percentage points). This important change is essentially attributable to two factors. First, the liberalization and privatization policies adopted by developing countries in the last decade have prompted a copious in- flow of FDI in financial services, telecommunications, and other com- ponents of infrastructure. Second, the emergence of new marketable services (including software development, data processing, telephone INTERNATIONAL TRADE 57 Table 2.7 Foreign Direct Investment Inflows (Millions of US$ and percentages) Industrial countries Developing countries World Sector 1988 1999 1988 1999 1988 1999 Primary 10.3 5.7 13.7 5.4 10.7 5.6 Secondary 39.4 36.4 65.0 54.5 42.4 41.6 Tertiary 46.9 55.5 20.7 37.3 43.9 50.3 Unspecified 3.4 2.4 0.6 2.8 3.0 2.5 Total 890,456 2,520,194 119,016 1,014,657 1,009,472 3,534,851 Note: The data are for 47 countries in 1988 and 57 countries in 1999, which represent more than 80 percent of foreign direct investment inflows in both years. Eastern Europe is excluded for both years. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from UNCTAD (2001b). calling centers, and business support services) has enabled developing countries to benefit from localization advantages. Moreover, organi- zational innovations such as just-in-time production require logistical and inventory management solutions that are supplied largely by in- dependent service firms. This process of services expansion has taken place alongside the re- structuring of the industrial economies; as a result the relative share of services has risen to more than two-thirds of total value added in the Organisation for Economic Co-operation and Development (OECD) countries (OECD 2000a). Meanwhile, the share of manufacturing activities as such has declined, and they now represent less than a quar- ter of the final price of goods; the rest is derived from the service activities that come into play all along the way, from the product's conception to its final marketing (Giarini 1999). A majority of the earnings of firms classified as manufacturers now come from sales of services, which has prompted some authors to speak of an "encapsu- lation" of services in manufactures.20 Alongside the growth in the share of the service sector and the de- cline in the relative share of the manufacturing sector, a pattern marked by a strong geographic concentration of technology-intensive industrial production has proliferated. Table 2.8 shows indicators of geographic concentration for a number of industries, grouped accord- ing to whether their technological level is high (semiconductors and biotechnology), intermediate (motor vehicles, radios, television sets), or low (food, beverages, textiles). The resulting picture is very clear: The more advanced the industry's technology, the greater its geo- graphic concentration, both within a small number of countries and within a small number of locations in each country. This is the case of biotechnology, which is highly concentrated in certain areas of industrial 58 GLOBALIZATION AND DEVELOPMENT countries, and of the semiconductors industry, which is concentrated in those same countries and in some Southeast Asian nations. The manufacture of radios and television sets is somewhat less concen- trated geographically and also extends to some developing countries, and this pattern is stronger in the case of the automotive industry. Fi- nally, textiles and, particularly, the food and beverage industries are less concentrated in industrial countries. Industrial countries' predominance as recipients of FDI flows con- tinues to be based on industries with high and intermediate levels of technological sophistication, but it has also increased in low-technol- ogy industries, which were more geographically dispersed in 1988 than they were in 1999. This trend shows that the availability of low- skilled, low-cost labor, as well as opportunities to gain access to pro- tected markets, holds less attraction currently for manufacturing in- dustries than in the past. In this sector, flows from some developing countries, especially in Asia but also in Latin America and the Caribbean, have increased significantly. In contrast, many countries rich in natural resources have only a marginal share in such flows, in- dicating that an abundance of natural resources is, by itself, an insuf- ficient condition for the development of internationally competitive enterprises. Another salient feature of recent decades has been the close rela- tionship between international trade and FDI. Although the participa- tion of industrial-country firms in international trade is hardly new-- as mentioned earlier, it dates back at least as far as the 19th century-- this phenomenon took on greater importance after the Second World War. Indeed, there is evidence that the growth of international trade in recent decades, the expansion of TNCs, and the emergence of interna- tionally integrated production systems are closely related. As early as the mid-1990s, it was estimated that two-thirds of world trade in goods and nonfactor services was derived, in some way, from the in- ternational production structure of TNCs.21 One especially significant phenomenon has been the increased trade in intermediate products and services as a result of the deepening of the international division of labor between industrial and developing countries (Baldwin and Martin 1999; Feenstra 1998; Feenstra and Hanson 2001). The interaction between the growth strategies of TNCs and pat- terns of production and competition in specific sectors, combined with localization factors, determine the characteristics of trade flows in products, parts, and components (Dunning 1993). One OECD study (1996) concluded that trade in the most science-intensive sectors (such as the pharmaceuticals industry) tends to take place within an in- trafirm framework, whereas trade in scale-intensive industries and 77 0.287 0.401 0.601 0.795 1,445 Textiles by technology and 101 Low 0.237 0.353 0.561 0.747 2,250 Food beverages Industries, and 36 253 0.356 0.502 0.696 0.893 Radio television receivers (2001b). technology world. the Manufacturing 55 UNCTAD 0.44 0.71 Mid-level 0.294 0.884 1,296 from Automobiles throughout Selected data in of 28 basis 0.71 169 subsidiaries 0.627 0.852 0.953 the on Biotechnology foreign Subsidiaries technology industry's Caribbean, High 31 Foreign 272 the 0.496 0.629 0.787 0.945 each of of owned. and Semiconductors foreign number America b ) total Latin 1999 the primarily for countries of as Concentration subsidiaries subsidiaries of a identified foreign recipient proportion Commission countries countries countries countries of of a Intensiveness, number Geographic industry as total subsidiaries Economic 2.8 total recipient recipient number number of of recipient recipient 3 5 10 20 Calculated Only Total Total a. b. Source: Table Technology Share( Share First First First First Memorandum 59 60 GLOBALIZATION AND DEVELOPMENT those that use more mature technologies (motor vehicles and consumer electronics, among others) primarily reflects assembly operations and intraregional trade. Natural resource­intensive products show low levels of intrafirm trade, and international integration is usually hori- zontal, meaning that it involves trade in homogenous products. In the garment industry, trade flows may involve either products assembled in different parts of the world (vertical specialization) or finished prod- ucts (horizontal specialization). Both types of specialization generate intraindustry trade flows, which may or may not also be intrafirm flows.22 Thus, in trade based on the segmentation of the value chain (Krugman 1995), countries specialize, in line with their absolute ad- vantages, in activities rather than production sectors (Feenstra 1998; Knetter and Slaughter 1999; Rayment 1983). The links between FDI and free trade have also been facilitated by changes in the regulatory frameworks governing trade and invest- ment23 and by other factors related to the ongoing technological and managerial revolution. Furthermore, the increasing competition faced by business enterprises, the technological advances that have made it possible to establish real-time links over vast distances, and the liber- alization of external trade policies have resulted in greater geographic dispersion of all business functions, even essential ones such as design, R&D, and financial management. Some important manifestations of this phenomenon are the establishment of subsidiaries catering to re- gional markets (such as those in Singapore for the Asian market) and the international division of labor among various regions (as in the au- tomotive sector) and continents (as in the case of semiconductors). In these complex systems, the reassigned functions encompass a wide range of activities; the simplest tasks, such as assembly, are assigned to less industrialized areas, whereas functions requiring specialized ex- pertise and technology are transferred to more industrially advanced areas. Notes 1. The most notable exception was the United States, which adopted highly protectionist policies after the northern states won the Civil War. 2. The Latin American countries concerned include Brazil, Chile, Colom- bia, and Mexico (Bairoch 1993; Cárdenas, Ocampo, and Thorp 2000a; Coatsworth and Williamson 2002; Maddison 1989). 3. The República Bolivariana de Venezuela is not included in the figure because its trend diverges radically from the regional average and, in fact, al- ters it significantly. Venezuelan oil exports were very robust in terms of vol- ume in the first decades after the Second World War, but this trend reversed INTERNATIONAL TRADE 61 direction beginning in the 1970s, partly as a result of the commitments entered into within the Organization of Petroleum Exporting Countries (OPEC). 4. The Kennedy Round (1963­1967) was the first in which an agreement was reached on effective tariff reductions, covering nearly 35 percent of tariff items corresponding to nonagricultural products, which represented 80 per- cent of dutiable trade (Winham 1986). 5. See, among others, Finger and Schuknecht (1999), François, McDonald, and Nordström (1996), Thomas and Whalley (1998), and United Nations Conference on Trade and Development and World Trade Organiza- tion (1996). 6. This agreement was reached after the failure of the Third Ministerial Conference (Seattle, Wash., 1999). The work program is set forth in the "Min- isterial Declaration" (WT/MIN(01)/DEC/1 of 14 November 2001). This text and other declarations and final decisions of the Fourth Conference are avail- able for consultation on the WTO Web site at www.wto.org. 7. The most recent report of UNCTAD (2002a) contains a complemen- tary analysis of recent trends in international trade. 8. ECLAC (1992a) presented a system of classification by technology in- tensiveness in line with the Standard International Trade Classification four- digit classification system. 9. See ECLAC (2001b), Katz (2001), and Mortimore and Peres (2001) for a more extensive analysis of these issues. 10. In the European Union, for example, manufacturing employment de- creased by almost a third in just three decades (from 1970 to 2000), whereas in the United Kingdom it fell by half during the same period. 11. This is also true of the European Union, in which the productivity of the services sector has increased at less than half the rate of GDP growth (1.1 percent and 2.6 percent, respectively) since 1973. 12. Dutch disease usually refers to a sharp appreciation of the local cur- rency as a result of the discovery of internationally tradable natural resources. 13. The combination of agents, institutions, and rules on which techno- logical absorption processes are based is called an innovation system, gener- ally a national innovation system. These systems determine the speed with which technological know-how is generated, adapted, acquired, and dissemi- nated in all production activities (ECLAC 1996b; Nelson 1988). 14. Other technological revolutions, such as the one driven by the devel- opment of the railroad in the mid-19th century, had similar effects, breaking down local barriers to merchandise trade and creating national markets, even in countries of continental proportions such as the United States (Sylos Labini 1957). What sets the current revolution apart, however, is not the broadening of markets as such, but rather its scope, which has resulted in the emergence of truly global markets and the inclusion of services in this process, thereby considerably reducing the number of products that cannot be traded in world markets. 15. Agglomerations of innovative activities, such as Silicon Valley in Cali- fornia (United States), Silicon Fen in Cambridge (United Kingdom), Wireless Valley in Stockholm (Sweden), and Zhong Guancum in Beijing (China), have evident advantages for attracting high-value FDI. Bangalore, India, has be- come a magnet in the area of software development, as have Penang, Malaysia, in the electronics industry and Singapore and the Special Administrative Region of Hong Kong, China, in the financial services industry. 62 GLOBALIZATION AND DEVELOPMENT 16. Feenstra (1998) referred to this as the "integration of trade and disin- tegration of production." See also Burda and Dulosch (2000). 17. The sudden drop that occurred in 2001, which then steepened in 2002, is attributable to a number of factors, including the smaller number of cross- border mergers and acquisitions, the slowdown in the world economy and the sharp decline in stock prices, the heightened macroeconomic uncertainty that prevailed, and the strong impact of the telecommunications sector, which was hurt by the less-than-successful introduction of third-generation mobile te- lephony in Europe. 18. One of the most interesting examples in this regard is the strategy adopted by Spanish firms to expand their operations in a number of Latin American countries. 19. Changes in the environment are associated with technological innova- tions, changes in the regulatory frameworks that influence a firm's operations, and the development of capital markets. The primary strategic objectives are access to new markets, an increased share of such markets or a dominant po- sition in them, ownership of natural resources, particularly nonrenewable ones, the use of synergies to boost efficiency, achievement of economies of scale through the firm's enlargement, hedging of risks through the diversifica- tion of activities, and financial considerations (UNCTAD 2001b). 20. For example, according to the relevant data, more than 50 percent of the earnings of IBM and Siemens come from service activities (Howells 2000). 21. According to this estimate, one-third of world trade in goods and non- factor services consisted of operations between the parent companies, sub- sidiaries, and associates of transnational conglomerates, valued at transfer prices, whereas another third consisted of exports by TNCs to nonassociated firms (UNCTAD 1995). 22. The practice of producing and assembling a product in one country for subsequent re-export to the country in which the firm is based began in the late 1960s as a strategy adopted by U.S. firms in Asian countries. In 1966 these op- erations represented about 10 percent of the sales of subsidiaries of U.S.­owned firms in those countries; in 1977, they represented 25 percent (Grunwald and Flamm 1985). 23. Between 1991 and 2000, a total of 1,185 changes were introduced into national laws on FDI; 1,121 (95 percent) of these changes were aimed at cre- ating more favorable conditions for such investment. 3 The International Mobility of Capital and Labor THE RELATIONSHIP BETWEEN CAPITAL mobility and the movement of la- bor has varied a great deal during the different phases of the global- ization process. Whereas both factors were highly mobile in the first phase of this process (1870­1914), their movement was relatively lim- ited in the period between the two world wars and in the second phase of globalization (1945­73). By contrast, one of the central features of the current phase is a marked asymmetry in this respect: Whereas cap- ital has become more mobile than ever before, the movement of labor--particularly unskilled labor--is subject to tight restrictions. This chapter begins by looking at the major historical developments and more recent changes in international finance and macroeconomic regimes. The second section presents an overview of international la- bor migration. The relative magnitude of migratory flows and the reg- ulatory environments in which they have taken place during the dif- ferent phases of globalization are compared, as are the various patterns to be found around the world in terms of migrants' points of origins and destinations. International Finance and Macroeconomic Regimes After discussing how the international financial system has evolved over the last century, this section focuses on the volatility and conta- gion that have characterized capital flows in the third stage of global- ization. It then goes on to analyze the scale and composition of capital flows to developing countries. 63 64 GLOBALIZATION AND DEVELOPMENT History of the International Financial System The growth of international trade in the 19th and early 20th centuries was accompanied by an expansion of international finance and the consolidation of the gold standard as a system of international pay- ments and macroeconomic regulation. This expansion required the de- velopment of instruments for the settlement and financing of commer- cial transactions (e.g., bills of exchange), and an international network of branches of large European and U.S. banks grew up around this sys- tem. Long-term financing instruments, including both public bond is- sues and private financing mechanisms, were developed around the same time. One of the main sources of private financing was the sale of equities in financial centers to fund infrastructure projects, espe- cially railways, mining operations, and other ventures in different countries and territories. The first transnational corporations, many of which operated in the natural resources sector, came a little later on, but they developed rapidly and by the early 20th century had become a well-established feature of the international scene. The gold standard, which was based on pre-existing monetary sys- tems that relied on other metals, became an established feature of the system in the last three decades of the 19th century. Its emergence was the result of voluntary adherence to the system that had been adopted by what was by then the world's major power--the United Kingdom. The stability of monetary units was reinforced by their convertibility into gold at fixed rates established by law, but the key factor in the ex- pansion of the monetary base was the fiduciary money provided by banks of issue. These banks, which were generally privately owned or had been founded primarily by private agents, acquired monopolies over the issuance of currency (sometimes after a period of unrestricted issues) in exchange for services rendered to the state. The system there- fore consisted of convertible bank notes backed only partially by gold reserves and, at locations further away from the financial centers, by holdings of foreign exchange; that is, the currency issued by these cen- ters. Consequently, full confidence in the currencies' convertibility into gold played a vital role in ensuring the system's continued stability by averting a potential run on these banks' reserves, which would invari- ably be insufficient. In addition, this banking system operated with minimum legal reserve requirements that provided only partial back- ing for deposits and for notes issued by private banks in economies and periods in which free stipulation was permitted. These minimum re- quirements could pose the risk of a domestic financial crisis in the event that problems experienced by one institution were to trigger a loss of confidence in others, or even throughout the banking system. THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 65 The systemic effects of such "contagion" led to the belated assignment of another function to the banks of issue: that of serving as lenders of last resort to commercial banks (Eichengreen 1996). In order to sustain confidence in convertibility, the gold standard's "rules of the game" required a procyclical approach to macroeco- nomic policy in times of crisis: in the event of a dislocation in the sys- tem of international payments, central banks were supposed to raise discount rates to generate contractionary pressures; if the misalign- ment persisted, the outflow of gold would erode the monetary base, which could be expected to translate into a decrease in the money sup- ply and hence lower demand. Finally, fiscal deficits could not exceed the amount of financing available, and in times of crisis, when financ- ing dwindled and tax receipts were also likely to shrink, governments therefore had no alternative but to respond with austerity policies. As indicated by Triffin (1968) and further substantiated by more recent studies (Aceña and Reis 2000), this system operated in an asymmetric manner to the detriment of countries on the periphery of the system, who were both exporters of raw materials, whose prices tended to fall in times of economic turmoil, and importers of capital, whose inflows behaved procyclically. The strong pressures thus generated by the "rules of the game" in these cases account for the frequent episodes of inconvertibility seen in the peripheral countries, including several Latin American economies, during the crises of the late 19th and early 20th centuries. The European countries themselves abandoned the gold standard en masse during the First World War. Efforts to reinstate this system in the 1920s ran into difficulties, and it was finally abandoned alto- gether during the Great Depression of the 1930s. Thus, the dual ten- sions generated between belt-tightening policies and social pressures in the countries during crises, on the one hand, and between the central banks' responsibilities as monetary regulators and as lenders of last re- sort, on the other, ultimately spelled the end of this system in the in- dustrial countries. The demise of the gold standard was followed by an episode of macroeconomic anarchy at the international level whose hallmarks were exchange rate instability and, especially, widespread and dis- criminatory exchange controls. This was exacerbated by the collapse of international finance. The First World War had raised New York's profile as a new international financial center. The center's expansion in the 1920s and subsequent breakdown in 1929, in combination with widespread moratoria during the depression of the 1930s, led to the al- most total disappearance of long-term international financing. This absence was later compounded by the economic impact of the Second 66 GLOBALIZATION AND DEVELOPMENT World War and, in particular, by sharp structural imbalances between the United States and Western Europe, which gave rise to a chronic dollar shortage. This was the context in which the countries embarked upon the in- ternational cooperation efforts that ultimately led to the adoption of the Bretton Woods agreements in 1944. These efforts were channeled in two directions. First, even though Keynes's ambitious proposals were rejected, a new international system of macroeconomic regula- tion was established. This regulatory regime was intended to surmount the problems of both the gold standard and the chaotic period follow- ing its downfall. The new system was built on three pillars. The first was a system of fixed but adjustable parities with respect to an inter- national standard (known as the gold­dollar, as the parity between the two was fixed). The second pillar was the provision of exceptional fi- nancing to countries that lapsed into deficit positions in times of crisis, on the condition that they make a commitment to carry out economic adjustments, which could include exchange rate variations. This un- precedented combination of adjustment and international support was intended to prevent economic turmoil from spreading to the rest of the world via weaker demand for imports, excessive devaluation, in- creased protectionism, and in particular restrictions on current pay- ments. The third pillar was a return to the principle of convertibility and nondiscrimination in respect of current payments; no commitment to capital convertibility was made, however, and the control of capital movements was thus accepted as a legitimate international practice.1 This element of the system released domestic policies, especially mon- etary policy, from the limitations that the free movement of capital could place on the pursuit of full employment. The resources used by the International Monetary Fund (IMF) to fund its exceptional financ- ing programs initially came from the contributions of member coun- tries, in addition to credit lines that some industrial countries began to extend from 1962 on (General Arrangements to Borrow) and issues of a strictly international reserve currency, special drawing rights (SDRs), in 1969; these issues have been repeated twice, the last time in 1981. The second direction taken by the postwar financial reforms was the development of new forms of long-term international financing. In response to the scarcity of private financing, official banking institu- tions began to perform this role, first through the World Bank and later through regional development banks and domestic export-import banks as well. The Marshall Plan and, subsequently, official devel- opment assistance served as complementary sources of long-term financing. THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 67 Although official banks played a key role in providing trade financ- ing, private banks also continued to perform this function even during periods when tension within the international payments system was at its height. The dollar surpluses generated by the United States's per- sistent external deficits in the 1960s--which succeeded the initial shortage of dollars more quickly than expected--and by the petrodol- lars of the 1970s were recycled to provide the resources for a new growth phase in private international financing. The privileged posi- tion that private banks had acquired enabled them to play a key role in this recycling process. As is widely known, the dollar surplus also undermined the appli- cability of the Bretton Woods agreements. The abandonment of the dollar­gold parity in 1971 and the decision to allow the major cur- rencies to float rendered the first pillar of the agreement (fixed but ad- justable parities) obsolete and profoundly altered the third (principle of convertibility). These changes were simply a consequence of events as they unfolded, rather than the outcome of explicit international agreements, nor were they the subject of broad negotiations such as those that had led to the Bretton Woods accords. The first pillar was replaced by national autonomy in the definition of each country's ex- change regime. The countries took widely varying approaches to man- aging the new risks posed by exchange rate instability. The European Community attempted to reduce fluctuations among its members' cur- rencies, thereby giving priority to economic integration. This marked the beginning of a process that lasted a quarter of a century and cul- minated in the formation of a monetary union; the final stage of this process was the replacement of most of the members' national curren- cies with the euro on January 1, 2002. The developing countries es- poused a number of strategies, including the adoption of one of the major currencies as a reference or the diversification of risks by link- ing their exchange rate to a currency basket. The floating of the major currencies represented a genuine "privati- zation of exchange risk." This created a need for financial instruments to hedge against that risk and led to a steep increase in the volume of currency transactions. In fact, the ratio of currency transactions to the value of international trade soared from 2:1 in 1973 to 10:1 in 1980 and 70:1 in 1995 (Eatwell and Taylor 2000). This, in combination with the burgeoning growth of international banking, substantially al- tered the third pillar of the Bretton Woods accords. In practice, the lib- eralization of capital flows became the norm in the industrial coun- tries, which one by one eliminated controls on capital transfers in the 1970s and 1980s. A number of developing countries followed suit. The convertibility of the capital account was, in fact, to be officially 68 GLOBALIZATION AND DEVELOPMENT endorsed at the 1997 annual meeting of the IMF in Hong Kong. The formulation of this principle was then postponed, however, because of the series of financial crises that then began to erupt in a number of Asian countries and that have yet to come to an end. As actually ap- plied by international financial institutions, the principle of capital ac- count convertibility has given way to a gradual liberalization of the capital account and of domestic financial sectors. The aim has been to sequence this process properly and to align it with the development of a parallel institutional structure in order to ensure domestic financial stability. As will be discussed later in this chapter, this has resulted in the emergence of new responsibilities for the Bretton Woods institu- tions. The second pillar of the Bretton Woods agreement (exceptional fi- nancing in times of crisis) also saw substantial changes for two rea- sons. First, in the late 1970s, the IMF stopped lending to industrial countries, which had been a very significant part of its financing activ- ities up until that time (see figure 3.1). The Fund thus began to con- centrate on developing countries and, increasingly, on countries in which its operations were likely to have "systemic effects." The second change was an upswing in the demand for resources because of the structural nature of certain types of balance-of-payments problems, the severity of the cyclical disturbances associated with fluctuations in raw materials prices, and especially the volatility of capital flows. The need for larger volumes of funding over longer periods of time led to the establishment of new lines of IMF financing in the final two decades of the 20th century. In a parallel development, in 1979 the World Bank launched its structural adjustment programs. These arrangements gradually came to take precedence over the traditional lines of project financing that had previously been the focus of its lend- ing strategy. New conditionalities grew up around these changes and gave rise to a new function that came to be performed jointly by the IMF and the World Bank from the 1980s on. This new duty, which was not con- templated in the Bretton Woods accords, was the promotion of eco- nomic liberalization in developing economies, based on the assump- tion that their structural rigidities were caused by excessive state intervention. Like others before it, this new shift in the responsibilities of the Bretton Woods agencies did not arise from explicit negotiations but was instead a response to changes in the ideologies and power re- lationships prevailing at the global level. The growing internationalization of finance made it necessary to have new regulatory standards. An awareness of this need had existed since the start of the 1970s, and in 1975 the Basel Committee on Bank- ing Supervision was established under the auspices of the Bank for THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 69 Figure 3.1 International Monetary Fund: Total Credits and Outstanding Loans, 1950­2001 A. Proportion of international reserves World Developing countries 20 Industrialized countries gold) 18 16 including 14 (not 12 10 8 reserves of 6 4 2 Proportion 0 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 B. Proportion of exports World 8 Developing countries 7 Industrialized countries 6 5 exports of 4 3 Proportion 2 1 0 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 Source: Economic Commission for Latin America and the Caribbean, on the basis of data from IMF (2001b). International Settlements (BIS). The most significant result of this ini- tiative was the adoption of the Basel principles on the regulation and supervision of banks in 1988. A number of reform proposals have been made since 1999 with a view to bringing the Basel principles into line with recent developments in the global banking industry and 70 GLOBALIZATION AND DEVELOPMENT rectifying the system's shortcomings.2 The definition of minimum reg- ulatory principles has extended to a growing range of issues, including rules on debt issues in financial markets, the insurance industry, and fi- nancial accounting. One of the elements of this reform movement that has received strong backing in recent years is the creation of a program to strengthen financial systems in developing countries. Such a pro- gram would include the adoption of these international standards, as well as a set of principles for the management of external and public debt and international reserves. This new function of the Bretton Woods institutions has not been clearly differentiated from the respon- sibilities of other agencies, however, particularly in the case of the BIS. Recent Changes and Volatility in Financial Markets Developments in the macroeconomic environment have been accom- panied by far-reaching changes in industrial countries' financial sys- tems. Broadly speaking, this process of change, which began in the 1980s and was consolidated in the 1990s,3 has involved three basic trends. The first is the concentration of the industrial economies' fi- nancial systems.4 During the 1990s the world's major private finan- cial institutions embarked on an intensive process of mergers and ac- quisitions. This process, which became the hallmark of the decade, quickened its pace as the decade drew to a close.5 As a result, the number of banking institutions declined in almost all countries, and banking concentration, calculated on the basis of the proportion of deposits controlled by the largest banks, tended to rise. In fact, this trend would be even more marked if operations off the balance sheet (particularly trading of financial derivatives) were included in the cal- culations. Second, a widespread trend toward banking disintermediation and an institutionalization of savings has accompanied the emergence of nonbank financial intermediaries, such as mutual and pension funds, investment banks, and insurance companies (see table 3.1). Competi- tion from these agents has eroded the predominant position in inter- national financial intermediation enjoyed by the banks in the 1960s and 1970s. It has also obliged traditional banking institutions to form conglomerates that offer an ever-broader range of financial services. As a result, the dividing line between bank and nonbank activities has become increasingly blurred. The operations of nonbank intermediaries were deregulated in the 1980s and this, in combination with the elimination of capital controls in industrial countries, allowed these institutions to play an increas- ingly important role in international financial markets and their THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 71 Table 3.1 Financial Holdings of Institutional Investorsa in Selected OECD Countries (Percentages of GDP) Country 1992 1994 1996 1999 2000 Australia 61.6 65.9 92.4 127.9 131.2 Canada 68.6 80.2 92.1 112.7 111.3 France 61.9 71.8 86.6 125.4 133.3 Germany 34.0 41.3 50.6 76.8 79.7 Hungary 2.5 3.9 6.1 10.7 12.8 Iceland 55.3 66.7 79.6 111.3 110.1 Italy 21.8 32.2 39.0 96.9 -- Japan 78.0 81.6 89.3 100.5 -- Republic of Korea 51.8 53.7 57.3 88.5 72.6 Luxembourg 1,574.3 1,945.6 2,057.0 4,172.3 -- Netherlands 131.5 144.5 167.6 212.8 209.6b Spain 21.9 32.3 44.3 65.4 62.1 United Kingdom 131.3 143.8 173.4 226.7 -- United States 127.2 135.9 162.9 207.3 195.2 -- Not available. Note: GDP gross domestic product; OECD Organisation for Economic Co-operation and Development. a. Insurance companies, investment firms, pension funds, and other institutional savers. b. Insurance companies include life insurance only. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from OECD (2001a). expansion, which did a great deal to bolster the growth of secondary debt markets. In these markets, as in stock markets, the increased par- ticipation of institutional investors and of a large number of individual financial agents tended to push values higher, generating what was viewed by some as a virtuous circle and by others as a financial bub- ble. In any event, it paved the way for the development of new sources of financing. This process lasted for quite some time, until it was in- terrupted by the international crisis that began in 2000. The expansion of secondary markets helped to deepen financial markets in industrial countries (Fornari and Levy 1999) and facilitated the emergence of new sources of corporate financing. One result was that the volume of bond issues in industrial-country markets, headed by Japan and the United States, more than doubled in the 1990s, and significant increases were seen in a number of Latin American coun- tries as well. The depth and liquidity of this well-developed secondary market, particularly in the United States, helped to finance the new high technology sectors, which led the economic expansion of the 72 GLOBALIZATION AND DEVELOPMENT 1990s. Another recent innovation, the creation of risk capital funds, contributed to the growth of these activities; both processes came to an abrupt halt with the outbreak of the recent crisis, however. The development of these markets has also given credit rating agen- cies a considerably broader role than they had played before, as they provide information to investors and are consulted increasingly for regulatory purposes; for example, the Basel Committee on Banking Su- pervision recently put forward a proposal to use agency ratings in the regulation of the banking sector. There has been widespread criticism of the short-term horizon and procyclicality of agency ratings, how- ever, particularly in terms of their impact on financing for developing countries (Reisen 2001, 2002). Third, the rapid growth of institutional investors' financial holdings has boosted demand for new financial instruments and has encouraged risk diversification. Hence the development of specialized markets for particular instruments, such as high-yield bonds, bonds issued by emerging economies, and securitized assets (based on mortgages, au- tomobile loans, and credit card receivables), as well as shares in for- eign firms (American depository receipts and global depository re- ceipts). This phenomenon, in combination with the privatization of exchange risk, is also behind the rapid expansion of the demand for financial derivatives designed to hedge specific kinds of risk (see fig- ure 3.2). The Asian crisis has severely decreased the volume of ex- change-risk hedging contracts that are being concluded, however. These trends have had both positive and negative effects on indus- trial economies. On the positive side, financing opportunities for Figure 3.2 Financial Derivatives Traded on Organized Exchanges (Millions of contracts at the end of each year) 5.0 60 4.0 50 equity 40 contracts 3.0 and 30 2.0 contracts 20 rate 1.0 10 Currency index 0.0 0 Interest 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Currency contracts Interest rate contracts Equity index contracts Sources: Economic Commission for Latin America and the Caribbean, on the basis of data from the Bank for International Settlements, Quarterly Review, several issues from 1986 to 2003. THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 73 production enterprises have increased substantially, with both high technology and medium-size firms reaping the benefits. On the nega- tive side, however, these trends have heightened financial fragility, be- cause many of the fastest growing activities are not covered by the reg- ulatory mechanisms of traditional banking activities. In fact, the activities that entail the highest risks and the greatest degrees of lever- age--those associated with the derivatives market--remain outside the existing regulatory frameworks, and there are as yet no proposals to extend regulatory standards to this domain. Even in the case of insti- tutional investors, regulatory coverage is far from sufficient (D'Arista and Griffith-Jones 2001). There is, of course, nothing new about the volatility of financial markets, as economic history amply demonstrates (Kindleberger 1978), even in recent times (BIS 2001). This volatility is clearly re- flected in the remarkable frequency with which financial crises have broken out in both industrial and developing countries ever since the mid-1970s (IMF 1998). Because the transactions conducted on finan- cial markets are essentially intertemporal operations, the lack of infor- mation about the future constitutes the prime "market failure" of fi- nancial markets (Keynes 1936; Eatwell and Taylor 2000). This volatility can thus be attributed to changes in agents' opinions and ex- pectations, which continually shift back and forth between optimism and pessimism.6 The impact of these shifts is magnified by the effects of the "contagion" of opinion and expectations from one market to another.7 These externalities constitute another market failure, be- cause they can give rise to multiple equilibria and to what amount to self-fulfilling prophecies when the expectations of a majority of agents point in the same direction. Information asymmetries between debtors and creditors (Stiglitz 1994) are yet another market failure. These asymmetries translate into a bias in favor of borrowers that are considered low risk and generate a strong inclination to rely on creditors' flawed information about their borrowers, especially the highest-risk debtors. Because confi- dence varies over the course of the business cycle, the spreads on what are deemed to be the highest-risk loans on the market follow a strongly procyclical pattern, giving rise to alternating periods of investor ap- petite for high-risk activities and flights to quality. These variations in confidence also account for the fact that secondary markets display much greater liquidity in times of plenty, as they too depend on the market's confidence in the information available to buyers. For this same reason, derivatives markets also tend to behave procyclically, and the types of transactions considered to entail excessive risk may even dry up altogether during times of crisis. 74 GLOBALIZATION AND DEVELOPMENT Contemporary financial markets exhibit a number of features that have tended to exacerbate their volatility8: · Inadequate regulation, as mentioned above, affects the activities of both institutional investors and agents in the derivatives market, and the existing regulations have a procyclical bias.9 · Problems of contagion to different markets are caused by the liq- uidity constraints faced by institutional investors. When the price of a given instrument falls, these investors may be obliged to sell other types of holdings--even assets that bear no relation to the first instru- ment--in order to restore their own liquidity. This pressure is even greater when funds are withdrawn from a market that generally oper- ates on the basis of spot transactions or when these investors have to settle an account or make some other payment, including the collater- als required for certain types of derivatives transactions. accordingly, the larger the stake of highly leveraged institutions in the market, the more serious this problem becomes. · Agents tend to use the same risk assessment systems, which heightens the correlation between the financial behavior of sometimes dissimilar instruments and exacerbates the effects of contagion. · There is a tendency to evaluate the performance of institutional investors over short time horizons, which has a similar effect. · The behavior of credit rating agencies is procyclical. Figure 3.3A shows the correlation between two risk markets during the turbulent period that began with the crisis of 1997: the bond market in emerging economies and high-yield bonds in the United States. In both markets, spreads narrowed during the bond market boom and widened sharply in response to the Asian crisis and, especially, the Russian crisis, after which they moved part of the way back toward more normal lev- els. Throughout this cycle, the fluctuations were much sharper in emerg- ing bond markets. By contrast, in the more recent crisis, which radiated from its epicenter in the United States, just the opposite occurred. Dur- ing the period as a whole, there was a strong positive correlation be- tween the two markets.10 The changing nature of contagion is illustrated in figure 3.3B, which shows the increase in spreads in the main Latin American economies during the five most recent crisis periods. All the countries exhibited an upward trend at these times, but the impact was much more powerful during the Asian and especially the Russian crises than during episodes centered in Latin American countries. This suggests that crises in industrial countries have a much greater impact, especially when they affect highly leveraged agents, some of which have with- drawn from emerging markets in recent years. THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 75 Figure 3.3 Spreads in Emerging Markets A. Merrill Lynch High-Yield Master Index and J.P. Morgan EMBI+ 2,500 2,000 1,500 points 1,000 Basis 500 0 Mar-1996 Jun-1996 Sep-1996 Dec-1996 Mar-1997 Jun-1997 Sep-1997 Dec-1997 Mar-1998 Jun-1998 Sep-1998 Dec-1998 Mar-1999 Jun-1999 Sep-1999 Dec-1999 Mar-2000 Jun-2000 Sep-2000 Dec-2000 Mar-2001 Jun-2001 Sep-2001 Spreads on high-yield bonds in the United States EMBI+ excluding Latin America Latin American EMBI + B. Increase in bond spreads (percentages) 250 Argentina Brazil Ecuador 200 Mexico Peru 150 Venezuela, R.B. de Latin America 100 50 0 Asian crisis Russian default Brazilian devaluation Argentine crisis I Argentine crisis II (October 1997) (August 1998) (January 1999) (October 2000) (July 2001) Note: EMBI+ Emerging Markets Bond Index Plus. Sources: Economic Commission for Latin America and the Caribbean, on the basis of data from Bloomberg 2002, electronic database, and J.P. Morgan Chase (2002). State intervention to correct these market failures can easily give rise to "government failures" if adequate incentive systems are not in place. Regulation is the most important line of action, because it fo- cuses on preventive measures aimed at ensuring that economic agents avoid assuming an excessive level of risk. The development of regula- tory systems tends to lag behind that of the market, however, and can itself lead to evasion and avoidance (transactions conducted off the 76 GLOBALIZATION AND DEVELOPMENT balance sheet, for example) or the use of suboptimal intermediation mechanisms. Supervision is also preventive, but it tends to be subject to information problems, and its discretionary nature can lead to abuses. Government intervention in response to systemic crises also of- fers incentives for excessive risk taking (moral hazard). Lastly, inter- vention intended to compensate for a market bias toward risk-seeking investors can create similar problems of moral hazard, such as the pro- vision of guarantees to high-risk borrowers. The use of official financ- ing to resolve the problem can generate dependence on the state ("graduation" problems) and can even oblige private creditors to take on higher risks owing to the preferred creditor status of official agen- cies. For this reason, all that the authorities can do is to offset volatil- ity and risk discrimination partially using an appropriate combination of instruments. Capital Flows to Developing Countries Over the last three decades, the developments in international markets described in the preceding section have also been reflected in major changes in capital flows to developing countries.11 The most striking aspect of these trends is the contrast between the slow growth of offi- cial financing flows and the increase in highly volatile private flows. As shown in figure 3.4, official financing has tended to decline as a pro- portion of developing-country gross domestic product (GDP), espe- cially in the 1990s. This primarily reflects the scaling back of its main component, bilateral assistance, which, over a large part of that decade, declined both in real terms and as a proportion of industrial-country GDP (from 0.35 percent in the mid-1990s to an average of 0.22 percent in the period 1998­2000). The decrease in bilateral assistance has been most pronounced in the case of the largest industrial countries, al- though this has been partly offset by the rising proportion of grants vis- à-vis concessional credits. Moreover, unlike private flows, official fi- nancing has not been procyclical and, indeed, some components of it--particularly balance-of-payments support and multilateral develop- ment finance--have displayed countercyclical behavior. Private external financing has fluctuated sharply owing to the ef- fects of its most volatile components: short-term flows and long-term commercial bank lending (which, in figure 3.4, includes portfolio flows). During the most critical years, including both the debt crisis of the 1980s and the period since 1997, short-term flows have actually been negative at times. Together, these two sources of funding in- creased from 1.0 percent of developing-country GDP in 1971­74 to 2.3 percent in 1977­82, fell to 0.5 percent in 1983­90, peaked at 2.8 THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 77 Figure 3.4 Net Flows to Developing Countries Official flows Direct investment 6 Equity investment Long-term debt 5 Short-term debt GDP 4 of 3 2 Percentages 1 0 -1 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Note: GDP gross domestic product. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from the World Bank (2001a). percent in 1993­97, and dropped again to 0.7 percent in 1998­2000. A recovery began in 2000 but was interrupted in 2001. Foreign direct investment (FDI) has remained largely independent of this cycle and has tended to follow long-term trends instead, which were upward in the 1980s and reflected a significant upsurge in the 1990s. FDI was not affected by the series of crises that began in 1997 either, although it was affected in the 2001 crisis. This cycle reflects only part of the instability that has characterized private financial markets. Since the Asian crisis, turbulence in these markets has taken various forms over shorter time spans: periodic in- terruptions in market access that have lasted varying amounts of time, simultaneous increases in risk spreads, and a shortening of maturities (see, in this regard, the preceding section).12 In any event, it must be borne in mind that these short-term phenomena are compounded by the effects of contagion, which manifests itself over the medium term and affects access to financing for relatively long periods of time. In both cases, the essential characteristic of contagion is that it tends to have similar effects on countries regardless of whether they have sound or unsound economic fundamentals if the market classifies those coun- tries in the same risk category. The changes in the composition of financing that have occurred over the last three decades are detailed in table 3.2. The upsurge in the financing received by Latin America and the Caribbean in the 1970s 9.1 1.8 0.0 6.3 0.1 2.6 1.9 1.8 1.5 0.0 4.0 0.0 0.0 2.1 1.9 Africa 17.3 20.3 14.9 Sub-Saharan South Asia 8.4 7.3 0.2 0.0 0.9 0.0 0.4 0.5 0.1 8.0 0.4 0.1 4.7 0.3 2.4 1.3 0.6 13.0 and Africa 1.5 21.1 11.9 ­0.9 0.0 0.1 2.2 4.7 3.0 9.5 1.8 0.0 6.0 0.2 2.3 2.0 10.1 17.3 Middle East North and 6.6 7.9 0.0 1.9 1.7 9.1 7.3 0.2 5.1 Latin 62.6 48.1 28.3 16.2 21.7 ­0.6 6.1 ­2.3 1.9 Caribbean America and Asia 3.0 0.2 0.0 7.4 0.0 4.7 0.6 2.1 2.4 0.4 0.0 7.1 1.4 2.2 1.1 2.4 10.5 10.0 a Europe Central prices) Asia Pacific 6.8 2.3 0.0 0.4 5.9 5.5 2.3 8.0 6.6 0.8 9.7 1.5 3.8 3.1 1.3 23.2 14.2 25.0 constant East and 1973­2001 1995 at Flows, US$ 0.0 2.6 1.3 2.8 7.5 44.6 11.4 87.1 44.1 29.4 11.0 51.8 17.9 36.5 16.0 10.1 143.2 107.5 of Developing countries Resource billions Net banks banks 3.2 averages, flows investment investment flows investment investment flows flows Bonds Short-term Other Bonds Short-term Other Table (Annual Resources 1973­81 Total Official Direct Equity Debt Commercial 1982­90 Total Official Direct Equity Debt Commercial 78 3.7 1.3 1.2 0.7 20.9 14.6 ­0.7 1.0 0.2 7.9 1.4 18.9 10.5 ­1.0 0.8 ­1.0 ­0.4 ­0.3 5.8 2.2 2.7 1.2 0.6 0.9 5.8 1.1 11.9 ­0.6 0.4 4.3 3.2 ­2.8 1.7 ­0.2 ­0.6 ­3.7 (2001a). 4.4 2.8 0.6 3.1 0.3 0.2 2.5 0.0 5.7 1.2 2.7 0.6 1.2 1.7 0.2 Bank 10.9 ­0.1 ­0.6 World the from 3.5 80.5 29.9 12.6 34.4 14.3 10.7 10.8 ­1.5 5.5 4.0 95.1 71.0 14.7 10.1 10.5 ­5.0 ­0.9 data States. of basis United the the on of 2.7 4.3 2.0 3.2 2.5 7.7 3.0 7.9 5.9 2.0 37.4 11.6 11.1 12.0 50.7 25.7 14.2 ­1.6 deflator Caribbean, GDP the the and 7.3 3.3 0.4 1.5 10.3 43.3 12.3 44.7 14.1 20.0 51.3 10.9 50.9 17.5 by 110.7 ­28.0 ­17.2 ­12.7 America adjusted Latin were 5.0 1.6 for 50.2 93.1 32.2 96.6 34.4 20.4 36.9 40.1 27.6 22.6 ­1.7 ­2.4 272.2 230.8 161.5 ­16.9 prices current Commission at banks banks data Economic flows investment investment flows investment investment flows flows Original Bonds Short-term Other Bonds Short-term Other a. Source: 1991­97 Total Official Direct Equity Debt Commercial 1998­2001 Total Official Direct Equity Debt Commercial 79 80 GLOBALIZATION AND DEVELOPMENT and its subsequent contraction were primarily a reflection of trends in both long- and short-term bank financing. Whereas long-term syndi- cated credits were the most common type of bank financing during the 1970s, in the 1990s short-term financing took on much greater im- portance. The Basel principles were undoubtedly a major factor in this respect, because they have resulted in a preference for lending short- term, low-risk credits. In the 1990s, the East Asia and Pacific region was the epicenter of the boom in short-term bank credit and of its sub- sequent contraction, which was much more severe and widespread in the developing world than the Latin American and Caribbean debt cri- sis of the 1980s. Reflecting the trend toward banking disintermedia- tion and the institutionalization of savings, the 1990­97 boom was particularly evident in the bond market and in portfolio equity flows. Their performance during the financing crunch of 1998­99 varied widely from one region to another in relation to the averages for 1990­97: net bond issues turned negative in East Asia and the Pacific but rose in Latin America and the Caribbean and in Central Europe, whereas just the opposite occurred in the case of portfolio equity flows. FDI, meanwhile, tended to increase in all regions up to 1999. The private credit boom of the 1990s was triggered not only by changes in financial intermediation, but also by monetary policy in the United States. Low interest rates were a decisive factor in the prefer- ence shown by institutional investors for emerging economies (Calvo, Leideman, and Reinhart 1992; D'Arista and Griffith-Jones 2001). Risk spreads were reduced in response to the greater supply of funds, strengthening the effects of low rates on these economies' financing terms. Rates in the United States and risk premiums in emerging mar- kets developed in a diametrically opposite manner in the period of tur- bulence that began in 1997, demonstrating that varying perceptions of risk in emerging markets have been the predominant factor influenc- ing the determination of those premiums and the size of capital flows (see box 3.1). What is more, U.S. interest rates have often responded endogenously to varying perceptions of risk, either because the flight to quality has raised the prices of U.S. government bonds, thereby re- ducing their yields, or because the Federal Reserve has responded to market uncertainty by lowering interest rates. In the 1990s, private flows were concentrated in middle-income countries (see table 3.3). Conversely, the share of total private financ- ing received by low-income countries not only has been smaller than their share of the total population, but also has been less than their contribution to the total GDP of the developing countries. This fact is particularly striking in bond issues, commercial banking, and equity flows (with the exception of India in the latter case). In all these THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 81 Box 3.1 Interest Rates and Emerging-Market Bond Spreads One of the key external variables that influence emerging-market risk premiums are changes in U.S. interest rates (Calvo, Leideman, and Rein- hart 1992). Theoretically, a rise in U.S. interest rates is supposed to lead, other things being equal, to an increase in the debt service to be paid by emerging-market borrowers, which will increase the likelihood of default and thus raise the corresponding risk premiums. Higher U.S. interest rates could also reduce investors' appetite for risk and, accordingly, their par- ticipation in risky markets (Kamin and von Kleist 1999). Similarly, a fall in U.S. interest rates ought to lead to a decrease in emerging-market risk premiums, both because of the positive impact lower rates will have on borrowers' ability to pay and because investors will tend to prefer emerg- ing-market debt instruments whenever returns in mature markets fall. Evidence for the 1990s indicates that prior to the Mexican financial crisis of December 1994, movements in emerging-market risk premiums and U.S. interest rates bore out this hypothesis. However, data for the sec- ond half of the decade indicate that emerging-market risk premiums and U.S. interest rates moved in opposite directions. From March 1996 to September 2001 there was a strong negative correlation (­0.6) between 10-year U.S. Treasury bond yields and the Emerging Markets Bond Index Plus (EMBI+) and Latin EMBI+ spreads estimated by J.P. Morgan. The correlation between risk premiums and the U.S. Federal Reserve's bench- mark interest rate was also negative, albeit less so (­0.3 for the EMBI+ and ­0.4 for its Latin American component). One of the factors at work is that during this period, financial conta- gion became more intense than ever before and triggered a widespread in- crease in emerging-market risk premiums during the bouts of market tur- bulence set off by the Asian and Russian crises. Movements in risk premiums on U.S. high-yield corporate bonds were also strongly and pos- itively correlated with movements in emerging-market risk premiums. Moreover, flows to Latin America responded more to movements in risk premiums than to changes in U.S. interest rates during the period un- der analysis. Other things being equal, an increase in the latter should be associated with capital outflows from emerging markets, and a decrease should be associated with inflows to emerging markets. However, when periods of expansionary and contractionary U.S. monetary policy are iso- lated, the correlation between capital flows to Latin America and changes in U.S. interest rates does not show the expected negative sign. Instead, these flows (including debt paper issued abroad and Brady bonds) showed a positive correlation (0.6) with 10-year U.S. Treasury bond yields. This correlation was stronger in the periods corresponding to the Asian, Russian, and Brazilian crises. 5.6 2.2 3.4 4.0 8.5 2.8 5.4 96.0 90.4 15.9 15.9 13.7 28.2 100.0 Percentage Bonds 1.7 0.7 1.0 1.2 4.9 2.6 0.9 4.9 4.2 1.6 8.6 30.6 29.4 27.7 Amount 7.2 6.9 4.0 3.8 5.1 3.3 4.3 IMF) 88.0 42.4 35.2 12.0 45.6 18.1 financing 100.0 Percentage (excluding 6.7 1.1 5.6 1.9 7.2 1.1 0.6 0.6 0.8 0.5 0.7 2.9 15.8 13.9 Multilateral Amount 0.3 2.5 62.4 59.9 59.6 37.6 ­5.6 9.2 ­9.7 100.0 ­20.4 32.1 27.0 ­30.1 financing Percentage 4.1 2.6 2.5 0.0 2.5 1.6 0.1 Bilateral ­0.2 ­0.8 1.3 0.4 ­0.4 1.1 ­1.2 Amount 1.8 1.0 0.1 0.2 0.9 0.0 0.1 2.7 99.0 51.0 49.2 48.0 44.0 100.0 Percentage Grants 0.5 0.3 0.0 0.1 0.3 0.0 0.0 0.8 29.8 29.5 15.2 14.7 14.3 13.1 Amount 6.0 8.0 4.1 5.9 2.7 89.4 14.0 10.6 74.6 10.1 13.5 13.5 24.8 100.0 Percentage investment 3.9 1.7 2.2 2.9 1.1 2.8 1.6 3.7 3.8 0.8 6.9 Equity 27.7 24.8 20.7 Amount 1990­99 percentages) 9.8 1.4 8.4 6.4 2.0 2.5 7.9 1.7 and 72.7 27.3 62.8 10.5 31.9 100.0 Percentage Flows, investment US$ of 1.5 8.7 6.6 2.1 2.6 8.2 1.8 75.4 10.2 28.3 65.2 10.9 33.1 Direct Amount 103.7 Resource billions b Net countries Korea countries China countries of 3.3 averages, Federation countries countries a Excluding India Other Argentina Brazil Indonesia Republic Mexico Russian Other Table (Annual Countries Developing Low-income China Middle-income 82 0.7 3.3 4.1 0.9 1.9 3.1 74.8 46.7 19.4 27.3 25.2 28.1 14.0 100.0 group. Percentage Population Memo 6.3 4.5 2.9 7.0 6.7 7.6 GDP 88.2 17.0 10.8 11.8 71.1 11.0 31.4 100.0 Percentage dle-income mid 2.2 6.8 8.6 3.0 6.8 7.4 3.2 (2001b). the 84.2 16.4 19.7 15.8 67.6 31.8 flows 100.0 in Percentage and it net Total 5.7 7.8 8.2 42.0 50.3 40.5 17.5 21.9 17.2 18.9 81.1 (2001a) Amount 255.4 214.9 172.7 includes Bank 2.9 4.5 96.2 ­1.7 3.8 4.0 1.2 67.1 93.3 15.1 26.4 ­3.4 45.4 category. (2001a) 100.0 flows Percentage World Bank the Short-term debt separate 0.7 a 22.5 21.7 ­0.4 0.9 3.4 1.0 0.9 5.9 0.3 15.1 21.0 ­0.8 10.2 from Amount in World the data of 2.6 6.0 9.0 3.0 4.9 8.0 3.9 83.0 17.7 15.1 17.0 65.1 30.5 100.0 presented flows Percentage basis is however, it the Long-term debt 6.1 6.9 9.0 41.3 35.2 39.6 14.1 20.9 11.3 18.6 70.9 on table, Amount 232.8 193.2 151.7 country; this in 9.1 2.0 7.1 26.6 73.4 17.6 ­1.3 ­9.3 ­1.3 ­3.6 ­6.5 51.1 100.0 ­11.6 Caribbean, credits Percentage the high-income country; a and Other 4.0 1.1 0.4 0.1 0.3 2.9 0.7 ­0.1 ­0.4 ­0.1 ­0.1 ­0.3 2.0 ­0.5 Amount Korea of America 4.5 2.9 1.6 2.9 3.7 1.0 97.1 92.5 30.2 ­5.5 1.1 15.0 47.1 middle-income 100.0 Latin a credits Percentage Republic on China the Commercial bank 0.8 0.5 0.3 0.5 0.6 5.2 0.2 17.1 16.6 15.9 ­0.9 2.6 0.2 8.1 Amount Commission considers considers b countries Bank Bank Korea countries China countries of Federation Economic Word World countries countries a The The Excluding India Other Argentina Brazil Indonesia Republic Mexico Russian Other Source: a. b. Developing Low-income China Middle-income 83 84 GLOBALIZATION AND DEVELOPMENT instances, flows of private financing to poor countries are minimal. The share of FDI received by low-income countries is also smaller than their contribution to the developing countries' GDP. For these reasons, the volatility of capital flows and issues of contagion have become par- ticularly relevant to middle-income developing countries. Accordingly, low-income countries have continued to depend on the dwindling supply of official funding. These countries rely heavily on official development assistance, particularly grants, most of which come in the form of bilateral aid. This is the only component of net re- source flows to developing countries whose distribution is progressive. Multilateral financing has followed the same pattern, except in the case of IMF resources. The volatility of private financial flows and their concentration in middle-income countries have created a strong demand for exceptional financing in a small number of emerging economies. As a result, IMF financing has exhibited a strongly countercyclical pattern and has been concentrated in the few countries where it could have systemic effects. However, exceptional financing has been lower than it was in the 1980s, whether measured in terms of the level of the recipient countries' international reserves or of their exports and also, in the case of inter- national reserves, lower than it was in the 1960s (see figure 3.1). This is a clear sign that the level of IMF exceptional financing has tended to lag behind that of international economic transactions. Obviously, the comparison is even less favorable if the capital account shocks faced by the developing countries are taken as a point of reference, even though, in the view of the chairman of the U.S. Federal Reserve Board, "the size of the breakdowns and required official finance to counter them is of a different order of magnitude than in the past" (Greenspan 1998). As shown in figure 3.5A, the countercyclical pattern of financing and its concentration in a small number of countries are closely re- lated. The proportion of IMF financing directed to large borrowers13 has trended sharply upward over the last two decades. Indeed, IMF fi- nancing data underestimate the provision of emergency funds to large borrowers, as they do not include bilateral contributions for the largest bailouts of recent years (Brazil, Indonesia, the Republic of Korea, Mexico, the Russian Federation, and Thailand, as well as the "finan- cial armor" provided to Argentina in 2000).14 These programs have been severely criticized in industrial countries as creating moral haz- ard, which has translated into a less favorable attitude toward excep- tional financing. The outright renegotiation of external debts, on the other hand, has been supported, but the implementation of this type of process will nonetheless require the establishment of appropriate in- ternational institutions to address this problem. THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 85 Figure 3.5 Credits of International Financial Institutions A. International Monetary Fund credits 100,000 Large borrowersa 90,000 Upper-middle-income, except Argentina, Brazil, and Mexico Lower-middle-income, except China, Indonesia, and Russia 80,000 Low-income, except India 70,000 US$ 60,000 1995 of 50,000 40,000 Millions 30,000 20,000 10,000 0 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 B. Development bank credits 25 20 Middle-income Low-income US$ Total (including regional banks) 15 1995 of 10 Millions 5 0 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 a. The Republic of Korea, which belongs to this group of countries, is classified as a high-income country by international financial institutions. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from the IMF (2001a). Financing for middle-income countries provided by the World Bank and by multilateral development banks in general has displayed a sim- ilar countercyclical pattern (see figure 3.5B). This kind of financing complements the credit supplied by IMF, because it provides govern- ments with long-term resources. In view of the volatility of private financing, these funds are usually the primary, and sometimes the only, source of long-term financing available in times of crisis. 86 GLOBALIZATION AND DEVELOPMENT The concentration of loans to middle-income countries has not completely crowded out low-income countries. Indeed, the flow of IMF resources to the latter has been fairly stable and has even in- creased slightly when they have needed additional balance-of- payments support. This occurred in Latin America and the Caribbean in the 1980s and in East Asia and the Pacific during the 1997­98 cri- sis. In the case of the World Bank, the flow of resources to low-income countries has followed an upward trend in recent decades. Overall, the trend in developing countries' external debt positions has not been positive, although the patterns do vary considerably from one region to another. External debt-to-GDP ratios for all parts of the developing world are higher than they were in 1980 (i.e., prior to the Latin American debt crisis), but for certain developing regions (in- cluding Latin America and the Caribbean), these ratios have fallen in relation to the critical levels reached in the mid- or late 1980s (see fig- ure 3.6A). External debt-to-exports ratios, meanwhile, have developed somewhat more favorably (see figure 3.6B). The problem appears more serious when both debt ratios are compared to certain bench- marks that reflect the sustainability of levels of indebtedness. On the basis of World Bank data on 84 developing nations for which infor- mation is available for the period 1980­2000, the number of countries with external debt-to-GDP ratios of less than 40 percent fell from 45 to 23 between the beginning and end of this period, whereas the num- ber with external debt-to-exports ratios of less than 200 percent also fell, from 56 to 33. Nonetheless, the risk of another interest rate spike such as the one seen in the early 1980s has declined as industrial countries have brought inflation under control. In any event, it should be remembered that real interest rates in these countries remained high in the last two decades of the 20th century (although they declined during the recent crisis) and, in particular, that the margins applying to developing countries in private capital markets are usually very high. In terms of the traditional sustainability criteria for debt ratios, calculated by com- paring economic growth to real interest rates, the ratio continues to be unfavorable in most countries. A final factor is that the banking system's tendency toward concen- tration at the international level has spread to developing countries. This process reflects both the expansion of large international banks and the strategy adopted by smaller ones to deal with international competition, as in the case of Spanish banks in Latin America. How- ever, the degree to which banking is concentrated in foreign hands varies widely from one region to another and across countries within the same region. Central Europe and Latin America, for example, THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 87 Figure 3.6 External Debt A. Percentage of GDP (in current US$) 80% 1970 1975 1980 1985 1990 1995 1999 70% 60% 50% 40% 30% 20% 10% 0% Latin America and the Middle East and North Southeast Asia Sub-Saharan Africa East Asia and Pacific Caribbean Africa B. Percentage of exports 500% 1970 1975 1980 1985 1990 1995 1999 400% 300% 200% 100% 0% Latin America and the Middle East and North Southeast Asia Sub-Saharan Africa East Asia and Pacific Caribbean Africa Note: GDP gross domestic product. Source: Economic Commission on Latin America and the Caribbean, on the basis of data from the World Bank (2001a). exhibit much higher levels of concentration than the countries of East Asia and the Pacific (52 percent, 25 percent, and 6 percent, respec- tively, of total bank assets in 1999). The share of foreign banks ranges from a high of between 42 percent and 54 percent in Argentina, Chile, and Venezuela to a low of around 18 percent in Brazil, Colombia, and Mexico. This process of concentra- tion has been encouraged by the regulatory authorities of industrial countries as a means of reducing the banks' exchange rate risk (Hawkins 2001). The financial services annex to the World Trade Organization General Agreement on Trade in Services constitutes an international in- stitutional framework that provides legal guarantees for this process. 88 GLOBALIZATION AND DEVELOPMENT The combination of financial liberalization, penetration by foreign banks, and new private sector external linkages has led to a profound restructuring of developing countries' financial systems. In many ways, national financial sectors are now more diversified in terms of services, but some of their traditional shortcomings persist. The bias toward short-term operations and high intermediation margins is still the norm, as is credit rationing, especially for small and medium-size en- terprises and low-income households. Although local stock markets have expanded in some countries, primary equity issues have not in- creased, as large firms have preferred to issue their shares in interna- tional financial centers. Finally, despite major changes in banking reg- ulation and supervision, the stability of local markets has shown no significant improvement, as demonstrated by the number and fre- quency of banking crises. This confluence of strong external dependency and underdeveloped national financial systems has dimmed the expectations that prevailed in the early 1990s with regard to the preferred approach to developing countries' financial integration into the world market. It also reflects a rarely mentioned asymmetry in the globalization process. Essentially, the "one world, one financial system" approach has represented an at- tempt not only to level the playing field, but also to reorganize the de- veloping countries' financial markets on the basis of the U.S. model by promoting convergence toward a financial structure based on the cap- ital market. The application of this approach has had negative consequences for the developing world. The most obvious one has been the aforemen- tioned destabilizing effect of highly volatile capital flows. Another ma- jor adverse consequence, however, has been the imposition of a finan- cial structure that is alien to the institutional traditions of developing countries and even to those of certain industrial countries.15 This mis- match can have adverse repercussions if the process of dismantling ex- isting institutions takes precedence over the construction of new ones, given the crucial importance of financial intermediation for economic development.16 International Migration In the first stage of globalization, from the last quarter of the 19th cen- tury to the early 20th century, the expansion of trade and high capital mobility were accompanied by an increase in migratory flows, with the result that this period is also known as the "era of mass migration" (Castles and Miller 1993; Hatton and Williamson 1998). This wave of THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 89 migration was directed toward a number of countries in the New World (Argentina, Australia, Brazil, Canada, and the United States). Between 1870 and 1920, the United States, which was the chief recip- ient of these migrants, took in more than 26 million people, primarily from Europe, who came to represent more than 10 percent of the country's total population (Solimano 2001). Some of these migratory flows contributed to interregional and in- traregional economic convergence (European emigration to the New World and to other European countries, respectively), whereas others accentuated the inequality of the international economic order, as in the case of the Chinese "coolies" and the Indians who were trans- ported to tropical plantations and cities. Thus, two disparate trends prompted by these migratory flows emerged: a trend toward the con- vergence of wages at high levels in the industrial world and a trend to- ward their convergence at low levels in the developing world (Lewis 1978). During that period, the countries of the New World adopted liberal immigration policies, and in a number of cases governments used var- ious means to encourage foreigners to take up residence as they sought to increase the labor force and to populate their territories at a time of rapid economic expansion. In the early 20th century, governments be- gan to apply increasingly restrictive policies, accompanied, in some countries (Australia, Canada, and the United States), by measures that discriminated against Asian immigrants, especially those from China (O'Rourke and Williamson 1999). Then, after more than half a century, migratory movements once again began to gather momentum as part of the third stage of global- ization during the last quarter of the 20th century. In that period, mi- gration to nearly all the countries of the Organisation for Economic Co- operation and Development (OECD) was greater than it had been in previous decades, although these flows were still much smaller in vol- ume than those of the late 19th century.17 In some countries of desti- nation (Canada, Germany, Japan, and the United States), this process peaked in the early 1990s, whereas in others (Australia and the United Kingdom) it had reached its high point some years earlier. Since that time, migratory flows have declined significantly, largely as a result of the widespread imposition of legal limits on immigration (see table 3.4). Major changes also occurred with respect to the immigrants' re- gions and countries of origin (see table 3.5). Immigration to the United States during the third stage of globalization has consisted primarily of Latin Americans and Caribbeans (46 percent) and Asians (34 per- cent), in sharp contrast to the trend of the 19th century, when nearly 90 percent of the immigrants to the United States came from Europe 93 92 79 979 812 265 223 220 190 102 Average of 84 86 78 (2001). 1999 647 674 282 277 190 268 104 SOPEMI Countries 77 75 82 1998 661 606 266 258 174 111 138 and Main -- 86 73 77 10 1997 798 615 275 237 216 102 (2000b), The OECD -- 76 99 74 77 1996 916 708 225 216 226 from data -- 77 87 88 67 of 1995 721 788 210 206 213 Development: basis the -- 92 70 92 68 and 1994 804 774 238 194 224 on -- 99 76 88 1993 904 987 235 190 256 104 Caribbean, the Co-operation -- 83 and 974 267 204 253 117 107 112 1992 1,208 sources. America -- -- 84 other Economic 921 258 231 110 122 110 1991 1,827 or Latin for for records. -- -- 81 permits 842 224 214 102 121 101 1990 1,537 Immigrants residence population Commission of a persons) on on Organisation of a b b country based based Economic b available. a 3.4 States Kingdom a a b Not Data Data a -- a. b. Source: Table Destination (Thousands Recipient United Germany Japan United Canada Italy France Australia Switzerland Netherlands 90 39.3 40.1 67.6 49.8 42.9 44.2 36.3 53.1 47.5 27.3 Cumulative Persons of Republic States States Origin Fifth (3.1) Russia (4.1) Korea (8.2) Zealand (5.7) Korea (3.8) China (4.1) (2.6) India (3.1) (5.8) (4.2) Portugal of New United United Dominican (2001b). Nations OECD States origin Africa of Fourth (5.2) Italy (5.2) (8.8) India (7.1) (4.8) (7.8) (3.8) (5.9) Italy (7.0) (5.4) from Tunisia Turkey Philippines United Philippines Romania South data of Development: countries basis the and Africa Kingdom on Primary Third India (5.5) (7.0) Turkey Brazil (9.3) (8.7) (4.9) (9.1) (5.5) (7.2) (5.6) Pakistan Turkey (10.5) France South Yugoslavia Morocco United 1999 Caribbean, the Co-operation and Second China (5.6) Poland (10.7) (20.3) (12.1) India (9.2) (9.3) (5.7) Australia Morocco Algeria (10.9) China (11.4) (12.8) Philippines Germany Germany Countries, America Economic Latin for States for Recipient First Zealand Kingdom Mexico (19.9) (13.1) China (21.0) (16.2) China (20.2) Albania (13.9) (13.5) (22.2) (14.7) (6.4) Yugoslavia Morocco United Yugoslavia New Main United Commission the Organisation to country Economic 3.5 States Kingdom Source: Table Migrating (Percentages) Recipient United Germany Japan United Canada Italy France Australia Switzerland Netherlands 91 92 GLOBALIZATION AND DEVELOPMENT (Solimano 2001). In the European Union, internal migration predom- inates, representing two-thirds of the total (66.2 percent); other major regions of origin are Africa (16.2 percent) and Asia (10.6 percent) (Salt 1999). Almost three-fourths of Japan's immigrants come from Asia (53.3 percent), Latin America and the Caribbean (10.2 percent), and the United States (8.8 percent) (Salt 1999; OECD 2001b).18 (The data in this paragraph correspond to 1997­98.) The composition of these flows reflects the influence that factors such as distance, language, historical relations, and cultural affinity have on migrants' choices of destination. More than half of Japan's immigrants come from China, the Republic of Korea, and the Philip- pines, whereas nearly a quarter of the immigrants to the United States come from Canada, the Dominican Republic, and Mexico. The coun- tries of origin of migrants to France and the United Kingdom reflect strong historical and cultural ties. These ongoing migratory movements have taken place in the con- text of significant changes in the relevant legislation. In general, im- migration laws are much more restrictive than in the past and are ori- ented toward achieving greater control over irregular immigration. In the United States, such legislation has been changed several times since the 1960s. The 1965 reform of the Immigration and Natural- ization Act established a system of preferences based on family rela- tionships with U.S. citizens, encouraged the immigration of individu- als with the skills and training in greatest demand in the labor market, set quotas by country of origin, and introduced measures to eliminate ethnic discrimination. Further legislative changes were introduced in 1986 with the aim of controlling irregular immigration through in- creased vigilance at the country's borders and programs to regularize the status of undocumented immigrants. Another reform was intro- duced in 1996 with a view to strengthening the control of irregular immigration. Since the early 1990s, the immigration policies of the European countries have been set by the European Union. The main feature of this legislation is the clear distinction laid down in the Treaty of Rome between immigrants from within the European Community and those of non-Community origin. Whereas the former have every right to re- side and work in any country of the European Union, the latter are subject to strict limitations and are required to obtain a work visa be- fore they can become residents. Australia, Canada, and Japan have also adopted restrictive immigration policies in recent years, particu- larly with respect to the issuance of permanent residence visas. To counterbalance this situation, special programs have been imple- mented to facilitate temporary residence, usually through the issuance THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 93 of work permits in specific areas, as a means of either lending greater flexibility to the labor market or alleviating labor shortages in certain sectors (OECD 2001b). One particularly disturbing issue is the selective "brain drain" of scientific researchers, engineers, and other qualified personnel engen- dered by the OECD countries' migration policies. This phenomenon is worsening the already sharp asymmetries between industrial and de- veloping countries in terms of their capacity to carry out research and development activities (see chapter 4). In addition, as the literature on economic development has shown, although it is true that this can lead to virtuous circles, it may also create poverty traps (Easterly 2001a). Two factors have combined to trigger larger migratory flows of scien- tific researchers and engineers from developing to industrial countries. One is the fact that the creation of knowledge has generated growing returns and strong externalities that encourage the clustering of scien- tific communities. The other factor consists of the special migration policies adopted by the industrial countries in response to the rising de- mand for highly qualified personnel. The main magnet has been the United States, which in the 1990s received nearly a million specialists from the developing world in the field of information technology alone, under the special H1-B visa program. A number of other OECD countries (Australia, Germany, New Zealand, and the United King- dom) have also implemented selective programs, such as Germany's "green card" scheme (Solimano 2002). Thus, even though it has coincided with an increased tendency to re- duce obstacles to capital mobility, the free movement of persons is lim- ited to specific regions within the OECD countries and to workers who are highly or very highly qualified. Yet the persons having the greatest propensity to emigrate are relatively low-skilled workers wishing to move from South to North. In addition, since the disappearance of so- cialist governments, a strong trend toward emigration has been ob- served in the countries of Central and Eastern Europe, especially to Eu- ropean Union countries. Consequently, tighter controls over irregular migration and the employment of undocumented workers, along with limitations on the right to asylum on political and humanitarian grounds, have become another pillar of industrial countries' immigra- tion policies (OECD 2001b). In the 1990s this relationship between the propensity to migrate and restrictions on the free movement of labor resulted in a consider- able increase in irregular migration to OECD countries, which, by its very nature, is impossible to measure with complete accuracy. The per- sistence of irregular migration has prompted nearly all the OECD countries to tighten controls on the entry, residence, and employment 94 GLOBALIZATION AND DEVELOPMENT of foreigners. At the same time, various programs have been adopted to regularize the status of undocumented residents. International migration has a far-reaching impact on the basic structures of the sending and receiving countries. It is widely acknowl- edged that inequalities in levels of development are the primary deter- minant of migration. Accordingly, if globalization results in the accen- tuation of these inequalities, the propensity to migrate will persist and may even increase. At the same time, growing interdependence among nations has heightened the transnationalization of communities and has led to the diversification of mobility patterns. Another factor that encourages migration is the wider dissemination of cultural models, modes of behavior, and aspirations, because potential migrants are more aware of existing global inequalities in levels of development. Moreover, advances in communications and transport have reduced the direct costs of migration. In contrast to past trends, migration is not currently linked to the occupation of unpopulated areas. Because it is directed primarily from South to North, one of the challenges posed by migration is to incor- porate immigrants into highly structured societies whose economic, social, and demographic conditions differ considerably from those of the immigrants' countries of origin. The integration of immigrants into the host societies and the definition of their rights and demands for cit- izenship have become a major political issue. Institutional responses to this situation have varied and have included both humanitarian and re- strictive attitudes, with the latter based on the defense of sovereignty. In the countries of origin, ties with emigrants have become especially important, because they represent not only a source of funds (in the form of remittances), but also the potential for change and innovation. These links represent the reverse side of integration and, as shown by the emergence of immigrant communities and their social networks, one of the seeds of transnationalization. Organizations of immigrants in the main recipient countries, such as those that have emerged in the United States, provide frames of refer- ence for strengthening collective identity and facilitate the globalization of immigrants' cultural expressions and the spread of their products in the host societies. Such organizations help immigrants to maintain close bonds with their places of origin; one of the most important of these ties is the sending of remittances. The use and origin of remittances, the channels used for them, and their real and potential effects on the de- velopment of the recipient communities have been only partially as- sessed, and few policies have thus far been introduced in this area. Although the debate on migration, its causes, and its consequences has awakened greater interest today than ever before, the controversial THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 95 nature of these issues hinders the adoption of global agreements and specific courses of action on the subject. In recent years, it has become clear that international migration must be understood as a phenome- non requiring the adoption of multilateral measures based on cooper- ation among states. It is also clear that governments and civil society organizations in countries of origin, destination, and transit share a concern for the human rights of migrants, in relation both to the deci- sion to emigrate or stay in the country of origin and to the possibility of exercising the rights of citizenship in the countries of origin and des- tination. These convictions have been strengthened by the need to join forces to mount a frontal attack on crime, which has grown to serious proportions: trafficking in immigrants is a source of illicit profits for organizations that operate on an international scale. Notes 1. Article VI of the IMF Articles of Agreement provides that "Members may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payments for current transactions." 2. There has been criticism of the procyclicality of regulation, which the new proposals would tend to accentuate, and of the adverse impact this can have on risk markets, including those of emerging countries. See Reisen (2001) and Griffith-Jones and Spratt (2001). 3. See, among others, Blommestein (1995), Culpeper (1995), D'Arista and Griffith-Jones (2001), Feeney (1994), Franklin (1993), and Group of Ten (2001) for a more detailed account of the changes that have occurred in the fi- nancial systems of the main industrialized economies. 4. The Group of Ten (2001) has offered a comprehensive analysis of the causes and consequences of this process. 5. Most of these mergers and acquisitions--70 percent, in fact--correspond to banking institutions. In addition, joint ventures and strategic alliances between institutions increased significantly. 6. There are many examples of the change of mood vis-à-vis emerging markets since the mid-1970s. One of the most outstanding recent examples is that of Argentina, which went from "irrational exuberance" up to the Asian crisis to "irrational panic" in 2001. Levels of external debt that were consid- ered manageable up to the late 1990s suddenly became unsustainable to mar- ket analysts and the access to private financing was, in practice, closed off. As the financier George Soros has pointed out, the market has sometimes the ca- pacity to impose its own views on reality, even when those expectations are ir- rational. It may be argued that, beyond the fundamental factors that deter- mined it, the recent Argentinean crisis was not totally alien to such "self-fulfilling expectations." 7. As Bustillo and Velloso (2002) have pointed out, these contagion ef- fects were stronger for Latin America during the Asian and Russian crisis of 1997 and 1998 than during the later events in Brazil and Argentina. Nonethe- 96 GLOBALIZATION AND DEVELOPMENT less the 2001 Argentinean crisis had strong effects on other Mercosur members and associates. Strong IMF support to Brazil and Uruguay was one of the fac- tors that helped those countries avoid the meltdown that Argentina faced dur- ing the last months of 2001 and the first few months of 2002, when this coun- try lacked IMF support and even faced open criticism from that institution. 8. An extensive range of literature has been produced on this subject. Among many other contributions, see Calvo, Arias, Rheinhart, and Talvi (2001), Dodd (2001), and Persaud (2000). 9. In the case of banking regulation, the rules on capital and loan loss re- serves have this effect. In boom periods, increased earnings lead to credit ex- pansion, which is further facilitated by the fact that debtors tend to make their payments on time, which permits creditors to reduce their reserves. During economic busts, however, defaults increase, which means that the reserve po- sition must be strengthened, thereby reducing banks' profits and thus their lending capacity. A number of proposals have been put forward to mitigate this procyclical phenomenon (Ocampo 1999, 2002a). 10. The correlation of monthly spreads on Latin American instruments and high-yield bonds in the U.S. market was 0.56 in the period from March 1996 to September 2001 but rose to 0.79 between September 1997 and November 1999. 11. For a detailed analysis of these trends, see UNCTAD (1999) and World Bank (1999). 12. For detailed analyses of these trends, see the IMF's periodic reports on emerging markets and ECLAC (2001a). 13. This group consists of Argentina, Brazil, China, India, Indonesia, the Republic of Korea, Mexico, and the Russian Federation. 14. It is true, however, that a smaller proportion of the bilateral financing that is pledged for such bailout packages tends to be disbursed than in the case of the multilateral financing. 15. This is evident in the policies that the industrial countries adopted in an effort to build up their financial institutions after the Second World War. These policies varied considerably from one country to another, depending on each country's institutional features and the financial problems it had inher- ited. In Germany, which had long had a universal banking system closely linked to production activities, the authorities decided to reconstruct large pri- vate universal banks and introduce regulations and incentives so that these banks would provide intermediation between private saving and the financing needs of production firms. In France, on the other hand, efforts focused on re- constructing the state banks in view of the prominent role those banks had played prior to the war. Japan, too, reorganized its financial system according to a credit-based banking structure. It should be recalled that Japan had main- tained a strong push toward industrialization since the last third of the 19th century, while at the same time establishing a financial system that was mod- ern and sophisticated in terms of promoting development. The simultaneous development in these two areas was not spontaneous, but rather the result of deliberate public policies. In fact, Japan's big banks were of decisive impor- tance in financing large-scale enterprises under a system based on high lever- age and low, stable interest rates. 16. A great deal of the recent economic literature highlights the importance of financial development for economic growth (see, among others, King and Levine 1993; Demirgüc-Kunt and Maksimovic 1998; Rajan and Zingales THE INTERNATIONAL MOBILITY OF CAPITAL AND LABOR 97 2001), which adds to the earlier analyses done more than half a century ago (such as Gerschenkron 1962; Keynes 1936; Schumpeter 1939). In these stud- ies, economic development was normally associated with a significant demand for resources to finance the accumulation of capital, technological innovation, and growth and is linked to the fact that, in modern economies, these resources are mobilized through the creation of credit and financial intermediation. It is therefore not surprising that all the economies that have succeeded in achiev- ing sustained growth have also developed financial structures that have en- abled them to meet financing demands in the short, medium, and long terms (see Studart 1995). 17. In the case of the United States, the main country of destination, im- migration rose to nearly 7.5 million people in the last two decades of the 20th century, compared to about 2.5 million in the 1950s and 1.0 million in the 1940s. However, measured as a proportion of the country's total population and in terms of annual averages, immigrants represented less than 3 percent of the population in the last third of the 20th century, which was much lower than the percentages recorded between 1870 and 1920 (over 10 percent). 4 Inequalities and Asymmetries in the Global Order GLOBALIZATION HAS NOT ONLY engendered growing interdependence; it has also given rise to marked international inequalities. Expressed in terms of a metaphor widely used in recent debates, the world economy is essentially an "uneven playing field" (in contrast to a level playing field) whose distinctive characteristics are a concentration of capital and technological innovation in industrial countries and the strong influence of those countries on trade in goods and services. These asymmetries in the global order are at the root of profound interna- tional inequalities in income distribution. This chapter analyzes those inequalities and asymmetries, whose accurate identification is essential in order to mitigate and, eventually, overcome these problems. The first section reviews the empirical evi- dence on the inequalities existing in global income distribution over the last two centuries. The second examines the asymmetries that exist between industrial and developing countries and the different ways in which these asymmetries have been addressed in the international de- bate since the Second World War. Inequalities in Global Income Distribution Per capita income disparities have been pervasive in the world econ- omy both between regions and countries and among citizens in each society in more developed and less developed countries alike. Although there had been a few episodes of convergence in per capita income among some developed countries in the past, one of the central features of the third stage of globalization is the widening of inequality in both dimensions. 99 100 GLOBALIZATION AND DEVELOPMENT Long-Term Disparities between Regions and Countries A widening income gap between different regions and countries has been a feature of the world economy for the last two centuries. Indeed, whereas per capita gross domestic product (GDP) in the more devel- oped regions of the world was around three times that of the less developed regions in the early 19th century, this ratio has grown steadily and currently stands at just under 20:1 (see table 4.1). The only exception to this trend was the period 1950­73, in which the dif- ferential decreased slightly (Madisson 1995, 2001).1 Major interregional disparities in per capita GDP were already evi- dent prior to the First World War, but they intensified rapidly between then and the mid-20th century2 and have continued to increase ever since, although more slowly. These disparities follow a pattern that has been repeated by other indicators of inequality in global income distribution. The relatively slower increase in inequality after the Sec- ond World War coincided with the acceleration of economic growth in the developing world, which was one of the distinguishing charac- teristics of the second stage of globalization. This acceleration, how- ever, was initially associated with protectionist policies that did not give way until much later--the trend began in the 1960s but did not really take hold until the 1980s and 1990s--to greater openness and participation in global trade (see chapter 2). Latin America has exhibited a number of distinctive features in this connection. First, it was one of the first regions in the developing world to join in the trend toward globalization.3 Ever since the initial phases of that process, this region, together with Central and Eastern Europe, has made up the group of middle-income countries, which has ex- panded to include several Asian nations in recent decades. Although no precise data are available on the subject, the gap in per capita out- put between this group and the industrial region of the world widened between 1820 and 1870 but then stabilized. In fact, the disparity be- tween the per capita GDP of Latin America and that of the industrial region remained constant, hovering in the 27­29 percent range, for a little more than a century and began to decrease only in 1973, drop- ping to 23 percent in 1990 and to 22 percent by the end of the 20th century (see table 4.1). In terms of mean global GDP, the disparity in- creased from 1870 to 1950 and then began to decrease, slowly until 1973 and more rapidly from 1973 to 1990. The Latin American countries' relatively good performance--in comparison with that of other developing countries--in the first stage of globalization (1870­1913) was followed by similar successes during the first phases of "inward-looking development," which took place at 5.2 7.7 8.7 5.3 3.1 22.2 20.6 25.1 29.5 1998 2,936 5,795 4,354 1,368 5,709 101.5 423.6 100.0 17,921 26,146 20,413 6.2 8.6 8.3 9.8 3.2 22.6 98.1 22.3 24.6 23.3 1990 2,117 5,055 6,445 1,385 5,154 365.0 100.0 15,988 22,356 18,789 7.6 7.7 8.7 3.3 28.0 25.7 25.3 16.4 12.9 1973 1,231 4,531 5,729 1,365 4,104 110.4 368.1 100.0 11,534 16,172 11,439 (2001). 635 852 6.8 3.0 7.9 3.6 1950 27.5 26.3 30.6 15.5 13.0 4,594 9,288 1,926 2,554 2,601 2,114 120.8 402.2 100.0 Maddison from 640 585 2.6 4.5 2.7 1913 11.1 28.7 33.5 21.7 21.9 13.1 3,473 5,257 1,387 1,511 1,501 1,510 100.1 258.3 100.0 data of 737 543 698 917 444 867 2.3 2.5 3.6 basis 18.3 28.7 80.5 33.6 10.2 36.0 11.7 1870 1,974 2,431 157.2 100.0 the on 669 575 665 667 418 667 1.9 3.0 2.0 8.8 4.5 1820 33.9 54.0 99.7 23.6 56.2 1,232 1,201 159.1 100.0 Caribbean, the and States States Disparities United United America US$. (percentages) and Union and Union Latin for region product. Interregional Soviet Soviet a region Zealand, (percentages) region international of production Zealand, region New former New former domestic world Commission by Japan) and of Japan) and gross Patterns disparities region/industrial Geary-Khamis GDP, Canada, Canada, Economic 4.1 Disparity Europe share Europe Europe Europe GDP 1990 of capita (excluding America America/industrial America/world America/developing (excluding America In Note: a. Source: Table Area Per Western Australia, Japan Asia Latin Eastern Africa World Interregional Developing Latin Latin Latin Regional Western Australia, Japan Asia Latin Eastern Africa World 101 102 GLOBALIZATION AND DEVELOPMENT a time when the globalization process was stalled at the international level. In the second stage of globalization (1945­73), the region expe- rienced the highest rates of per capita GDP growth in its history, although they were nonetheless slightly slower than the global rate.4 Thus, the most notable characteristic of the period between 1870 and 1973 was the region's inability to make steady progress in approach- ing industrial-country levels. Within this general pattern, some coun- tries experienced periods of rapid expansion,5 followed by periods of much slower growth or even declines. Over this long period, Latin America could be described as having stabilized at an intermediate po- sition within the world context, with individual cases of "truncated convergence" rather than divergence from the industrial countries, al- though divergence did occur in some instances. In reality, the region began to fall behind only during the third stage of globalization (which began in 1973) as it failed to achieve a suffi- cient degree of integration into the financial globalization process and was then overtaken by the ensuing debt crisis. Moreover, its recovery from the "lost decade" of the 1980s proved to be a hesitant one. As the Economic Commission for Latin America and the Caribbean (ECLAC) has shown in various studies, this has been reflected in the fairly dis- appointing growth rates attained by the region in the wake of its ma- jor economic reform effort, which began in the 1970s in some coun- tries and spread throughout the region between the mid-1980s and the early 1990s.6 Variations in per capita GDP and differences in population dynam- ics between the different regions of the world have led to a significant skewing of the distribution of world production (see table 4.1). In the 19th century, the most notable event was the preeminence of Western Europe and the emergence of "Western offshoots"--as Maddison (1989) called them--in the Americas and Oceania (Canada, Australia, New Zealand, and the United States,) at the expense of Asia. This process led to an overwhelming concentration of the world's produc- tion of manufactured goods in the main bastions of capitalism. The trend reversed itself after the Second World War, but more than half of world output is still concentrated in the industrial countries (now in- cluding Japan), especially in the technology-intensive manufacturing and service sectors. Table 4.2 shows the differences in per capita GDP between groups of countries. As in the case of interregional disparities, the most striking characteristic is the pronounced and sustained increase in inequalities across countries. This process also accelerated until 1950 and then slowed, especially during the second stage of globalization. The only apparent case of convergence in levels of per capita output occurred among industrial countries during this second stage, which INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 103 Table 4.2 Indexes of Per Capita Income Inequality in the Worlda Index 1870 1913 1950 1973 1990 1998 Deviation indexb Industrial OECD countries 0.43 0.45 0.50 0.24 0.22 0.22 34 countries 0.58 0.72 48 countries 0.70 0.87 141 countries 0.96 1.07 1.13 1.22 Developing countries 0.85 0.93 0.94 1.04 Latin America 0.51 0.56 0.60 0.70 Mean logarithmic deviationc Industrial OECD countries 0.08 0.09 0.11 0.03 0.02 0.02 34 countries 0.16 0.23 48 countries 0.24 0.33 141 countries 0.54 0.56 0.58 0.65 Developing countries 0.53 0.50 0.42 0.51 Latin America 0.14 0.14 0.16 0.21 Note: GDP gross domestic product; OECD Organisation for Economic Devel- opment and Co-operation. a. In 1990 Geary-Khamis international US$. b. Standard deviation of the logarithm of per capita GDP. c. Average of the logarithms of the mean ratio of per capita GDP/per capita GDP of each country. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from Maddison (2001). was their "golden age" (see table 4.2). This phenomenon has been the subject of several detailed studies (see, among others, Maddison 1991). The process proceeded steadily until 1990, albeit at a slower pace, but then came to a halt in the final decade of the 20th century. A historical period in which wage convergence was clearly occurring was the first stage of globalization in the second half of the 19th century. O'Rourke and Williamson (1999) have demonstrated that during this period, the United States and Europe witnessed a convergence of wage levels, basically as a result of the mass migration of European labor to the New World. Within Western Europe, this process of wage equal- ization also occurred between several of what were then peripheral countries (especially Austria, the Scandinavian countries, and to a lesser extent Ireland and Italy) and the most industrial countries (France, Germany, the Netherlands, and the United Kingdom). How- ever, the same authors also note that the process did not encompass other countries of the European periphery (the countries of Central and Eastern Europe and the Mediterranean countries, with the 104 GLOBALIZATION AND DEVELOPMENT exception of Italy) or other regions of the world. Hence, even within the group of countries that today make up the Organisation for Economic Co-operation and Development (OECD), there was a slight divergence in the trend of per capita GDP, and this divergence appears to have been greater when considered in the context of a wider group of countries (see table 4.2). This subject has been examined thoroughly in the literature on eco- nomic growth in the last quarter century.7 In general, these analyses confirm that there was no worldwide convergence of per capita in- come levels in the sense in which the term is used in this book. To use the terminology of the literature, there was no "unconditional conver- gence." However, various studies indicate that there is some statistical evidence of "conditional convergence," in which other factors that in- fluence the growth of countries are taken into account, including the education level of the population; infrastructure; macroeconomic sta- bility; and the level of development of political, social, and economic institutions. These determinants of economic growth are distributed just as unequally as per capita GDP, or even more so. This fact has led some authors to question the validity of the concept of "conditional convergence." Table 4.3 illustrates another phenomenon that differs completely from those described above: the marked and growing dispersion of growth rates among the developing countries during the last quarter of the 20th century--in other words, the increasing number of "winners" and "losers" among developing nations. This dispersion increased just as much in the period 1973­90 as it did in the 1990s. This trend has been much more widespread than the trend toward greater interna- tional disparities in per capita GDP; indeed, it has affected all regions Table 4.3 Standard Deviation of Per Capita GDP Growtha Countries 1870­1913 1913­1950 1950­1973 1973­1990 1990­1998 OECD 0.37 0.62 1.53 0.59 1.16 34 countries 0.54 1.04 48 countries 1.01 2.76 141 countries 1.73 2.35 2.95 Developing 1.69 2.50 3.09 countries Latin America 1.50 1.43 2.15 Note: GDP gross domestic product; OECD Organisation for Economic Co-operation and Development. a. In 1990 Geary-Khamis international US$. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from Maddison (2001). INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 105 and both low- and middle-income countries. Within countries, a simi- lar differentiation has occurred across both different social sectors and different geographic regions. Undoubtedly, all these factors contribute to the tremendous uncer- tainty about the future that exists in contemporary society. This inse- curity places further demands on the international system and on the social safety nets of each country, in addition to the more traditional demands for a reversal of the trend toward greater distributional in- equality. Overall Effect of International and National Inequality Several recent studies offer a much more detailed view of trends in in- ternational inequality. Figure 4.1 shows the results of Milanovic's (2002) study on disparities in population-weighted per capita GDP. Figure 4.1 International Inequality, Weighted by Population, 1950­98 A. World 0.580 World 0.540 0.500 0.460 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 B. Excluding China and India 0.600 World (excluding China) 0.560 0.520 0.480 0.440 World (excluding China and India) 0.400 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 Source: Milanovic (2002). 106 GLOBALIZATION AND DEVELOPMENT The calculations are highly sensitive to the inclusion of China and In- dia, given their extremely large populations. Both of these countries registered relatively little economic growth during the second stage of globalization (1945­73) but rank among the most successful countries during the third stage (1973 to the present). When these two countries are excluded, it appears that the international disparities between the mean values lessened substantially from the 1950s to the 1970s, al- though they widened considerably later, in the last two decades of the 20th century. However, when China and India are included in the analysis, the results are quite different. Indeed, their excellent per- formance in recent decades counterbalances the adverse distributional trend seen in the rest of the world. The study by Bourguignon and Morrison (2002) examined the combined effect of trends in disparities between countries and in- equalities within them.8 This analysis uses a broader concept of world inequality, according to which the units of analysis are not countries, but their inhabitants. Based on this concept, the authors concluded that international inequalities increased significantly between 1820 and 1910, remained stable from 1910 to 1960, and grew again from 1960 to 1992 (see figure 4.2). Up to 1910, the dominant aspect of this process was the deepening of international disparities, which increased quite sharply until the mid-20th century. However, during the period associated with a reversal of the globalization process (1914­50), this trend coincided with an improvement in income distribution within countries, which curbed the further growth of international inequality. Figure 4.2 Global Income Inequality, 1820­1992 0.90 Global inequality 0.80 0.70 Inequality 0.60 between countries coefficient 0.50 0.40 Internal inequality inequality 0.30 0.20 Theil 0.10 0.00 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 Source: Bourguignon and Morrison (2002). INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 107 This improvement was linked both to the emergence of the "welfare state" in the United States and Western Europe and to the socialist rev- olutions in Central and Eastern Europe. The trend toward an amplifi- cation of international inequalities in recent decades, on the other hand, can be attributed not only to moderate growth in international disparities, but also to a sharp increase in inequalities within countries. The combination of these two trends is, in fact, one of the hallmarks of the third stage of globalization (see U.N. Conference on Trade and Development [UNCTAD] 1997; U.N. Development Programme [UNDP] 1999a; and Milanovic 1999). Indeed, several studies have shown that the relative stability of inequality within countries that marked the world economy in the decades after the Second World War (see Deininger and Squire 1996) was followed by a steady upward trend in inequality during the last quarter of the 20th century. Cornia's (1999) figures are very informative (see table 4.4). According to his analysis, 57 percent of the population included in a sample of 77 na- tions lived in countries that exhibited growing inequality in income distribution during the period 1975­95. Only 16 percent lived in na- tions where inequality decreased. The rest of the population lived in countries that had stable levels of inequality or in countries for which no trends could be discerned. These general trends were observed, with some variations, across the major regions of the industrial, transi- tional, and developing worlds. In the case of the industrial countries, the trend toward an increas- ingly unequal distribution of income was more marked, because 72 percent of the population lived in countries where the gap was Table 4.4 World Trend in Income Inequality, 1975­95 (Percentages of population) Growing Stable Decreasing No identifiable Groups of countries inequality inequality inequality trend Africa 31.6 11.9 7.7 48.8 East Asia 79.4 4.4 16.1 0.1 Eastern Europe 98.1 0.0 0.0 1.9 Industrial countries 71.8 1.2 27.0 0.0 Latin America 83.8 0.0 11.4 4.8 South Asia and Middle East 1.4 70.2 14.4 14.0 Former Soviet Union 100.0 0.0 0.0 0.0 World 56.6 22.1 15.6 5.7 Source: Economic Commission on Latin America and the Caribbean, on the basis of data from Cornia (1999). 108 GLOBALIZATION AND DEVELOPMENT widening. This relatively widespread deterioration in income distribu- tion did not occur in the industrial world during the two earlier stages of globalization.9 According to several analyses (Atkinson 1996, 1999; Cornia 1999), inequality rose because of an expanding wage gap, caused mainly by the erosion of institutions for the protection of labor, coupled with technical progress that favored more highly skilled work- ers, although trade liberalization may also have been a contributing factor. Some authors (Wood 1998) have attached more importance to this last element. Industrial countries in which centralized institutions continued to be responsible for wage setting (e.g., Germany and Italy) and those that placed greater emphasis on the role of labor organiza- tions and on upholding the minimum wage (e.g., France) were able to blunt these factors' tendency to heighten existing levels of inequality. The greatest increases in the inequality of income distribution took place in Australia, New Zealand, the United Kingdom, and the United States, where wage negotiations are carried out in a decentralized man- ner and labor markets are more flexible. The developing and transition countries displayed a more heteroge- neous pattern. The greatest deterioration in these areas occurred in the countries of Central and Eastern Europe, especially those of the former Soviet Union (see also UNDP 1999b). East Asia also registered greater degrees of inequality, mainly as a result of the widening gap between levels of development in urban and coastal areas of China, on the one hand, and rural areas and the interior, on the other. However, East Asia was also the developing region in which the highest proportion of the population lived in countries where inequality was on the decline. In contrast, most of the population of Africa, the Middle East, and southern Asia lived in countries where either indexes of inequality re- mained unchanged or there was no clearly identifiable pattern. In all these regions, the existence of sharp inequalities was associated with disparities between rural and urban areas. In Latin America, the vast majority of the population lived in coun- tries in which the inequality of income distribution increased in the last quarter of the 20th century. In general, as indicated in several ECLAC studies (1997, 2000b, 2001b, and 2001c), the upward trend in inequality seen in the 1980s was not reversed in the 1990s. On the con- trary, in the 1990s the number of countries that witnessed a deteriora- tion in income distribution rose. One explanation for this trend is the asymmetric nature of trends in poverty and income distribution in the different phases of the business cycle: the debt crisis had a devastating effect on the poorest sectors, but the subsequent resumption of growth was not accompanied by a commensurate rise in income in these sec- tors (Cornia 1999; La Fuente and Sáinz 2001). The growing wage gap INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 109 between skilled and unskilled workers, and especially between work- ers with and without a university education, appears to be one of the main effects of the economic liberalization process (see Berry 1998; ECLAC 1997, 2000b, 2001b, 2001c; Morley 2000). This global state of affairs suggests that new factors--in combina- tion with more traditional ones, such as the distribution of assets and access to education--are strongly influencing income inequality. These new factors, which are associated with the third stage of glob- alization and with some of the national policy approaches that have accompanied it, are a reduction in earned income as a proportion of total income and a simultaneous increase in business profits and fi- nancial returns, growing skill-based wage differentials, and erosion of the state's redistributive capacity. The impact of these factors varies from region to region and even across countries within the same region. Finally, national income distribution structures reflect very dissim- ilar regional situations. Latin America has the most unequal income distribution in the world (see figure 4.3), followed by the countries of Africa and the second generation of newly industrial countries in East- ern Asia. The next group consists of the countries of southern Asia, those of the former Soviet Union, those of North Africa, the first gen- eration of newly industrial countries in Asia, and the Anglo-Saxon OECD countries. The last group, which has the best income distribu- tion, comprises the other members of OECD and the countries of Cen- tral Europe (Palma 2001). The existence of a highly unequal distribution of income is an important consideration not only because of the ethical and political problems it poses, but also because of its implications for economic growth (Solimano 2001). Although the reciprocal relationships between growth and equity have long been a subject of controversy, in recent years numerous studies have highlighted the negative effects of inequality on economic growth--the so-called inequality trap (see ECLAC 1992b; Ros 2000; Stewart 2000; and the review of recent lit- erature by Aghion, Caroli, and García-Peñalosa 1999). The tremen- dous distributional inequalities found in several regions of the devel- oping world, especially Latin America, may thus help account for international differentials in development levels or the blockage of convergence factors. Inequality as an obstacle to growth was a favorite topic of economic debate in the 1960s, and it has awakened new interest in recent years. However, unlike the debates of that ear- lier period (which focused on whether the concentration of income impeded the development of domestic markets or whether, on the contrary, it facilitated capital accumulation), the current analyses are 110 GLOBALIZATION AND DEVELOPMENT Figure 4.3 Inequality and Per Capita Income B. Share of the richest decile A. Regional Gini indexes in household income 60 50 LA 10 50 LA AF EA2 decile 40 of AF indexes 40 EA2 SA NA share OECD 2 Gini Ex-C2 EA1 OECD 2 30 SA NA 30 EA1 Ex-C2 Ex-C1 OECD 1 Income OECD 1 Ex-C1 20 20 4.6 6.6 8.6 10.6 4.6 6.6 8.6 10.6 Logarithm of per capita income in 1997 Logarithm of per capita income in 1997 (1995 dollars) (1995 dollars) Note: LA Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and República Bolivariana de Venezuela. AF Burkina Faso, Burundi, Côte d'Ivoire, Gambia, Ghana, Guinea, Guinea Bissau, Kenya, Lesotho, Madagascar, Mali, Mauritania, Mozambique, Niger, Nigeria, Rwanda, Senegal, South Africa, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe. EA1 Republic of Korea, Singapore, and Taiwan (China). EA2 Malaysia, Philippines, and Thailand. NA Algeria, Republic of Egypt, Jordan, Morocco, and Tunisia. SA Bangladesh, Cambodia, China, India, Indonesia, Lao People's Democratic Republic, Pakistan, Sri Lanka, and Vietnam. OECD 1 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland. OECD 2 Australia, Canada, Ireland, New Zealand, United Kingdom, and United States. Ex-C1 Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia. Ex-C2 Belarus, Estonia, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Moldova, Russian Federation, Turkmenistan, Ukraine, and Uzbekistan. Source: Palma (2001). paying more attention to the implications of inequality in terms of political economy. The linkages between inequality and political econ- omy encompass a number of different aspects, including the relation- ship between social cohesion and investment risk; the interaction between business and political cycles, which can undermine the sus- tainability of public decisions, particularly in the fiscal area; and the positive impact that a more equal distribution of production assets can have on human capital formation and the development of small and medium-size enterprises (SMEs). All of these processes are facili- tated by a more smoothly operating capital market and by greater ac- cess to that market. INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 111 Taken together, the foregoing considerations leave no doubt as to the existence of a definite trend toward distributional inequality world- wide, both across and within countries. At the international level, there is no evidence whatsoever that income levels are converging. When convergence has occurred, it has done so only among industrial coun- tries and only at specific stages in the evolution of the world economy. Trends toward divergence in development levels, truncated conver- gence, and stagnation in mean income levels have been much more common. By contrast, the deterioration of income distribution within countries has been widespread in recent decades. These conclusions suggest the need for caution when examining re- cent analyses that downplay the second stage of globalization's favor- able effects on the developing countries because of their belated and limited integration into the world economy, even as they emphasize the advantages some of them have gained through greater liberaliza- tion and integration in recent decades (World Bank 2002b). In fact, the relative isolation of the developing countries during the second stage of the globalization process coincided with a general acceleration in the rate of economic growth throughout the developing world--for the first time in history--as well as reductions in some indicators of international inequality (between regions and countries). As we noted in chapter 2, this positive assessment does not mean that the problems associated with the development process at that stage should be over- looked. Nonetheless, the fact remains that the most recent stage of globalization has been marked by increasing inequality at the interna- tional and national levels, even though, at the world level, this trend has been less pronounced than it was in the 19th century and the first half of the 20th (thanks, undoubtedly, to the economic success of China and India). Basic Asymmetries in the Global Order The persistence and exacerbation of international inequalities in development levels described in the preceding pages have been the sub- ject of considerable debate ever since the Second World War. This debate arose at a time when the concept of economic development was gaining prominence on the international agenda as the world strove to build a new community of nations. From the very inception of the United Nations, economic and social development and peace have been considered vital and interrelated elements in the construction of a new world order. A third such element that serves as their ethical foundation is the defense of human rights (Emmerij, Jolly, and Weiss 112 GLOBALIZATION AND DEVELOPMENT 2001). These elements characterize the prevailing vision in the United Nations to this day (Annan 2000, 2001). Debates about development have revolved around two schools of thought: one that sees development or a lack thereof as essentially a consequence of national forces and another that, although it recog- nizes the importance of these factors, points to elements at the inter- national level that tend to engender or perpetuate existing inequalities. This discussion is similar to the controversy about the determinants of social inequalities at the national level, which has been widely debated in the social sciences and in political circles. In this debate, one side views inequality as an effect of differences in individual effort, whereas the other side believes that a lack of true equality of opportunity has a decisive impact. ECLAC has taken the second position in both of these debates. This stance is rooted in an awareness of the fact that true equality of opportunity does not exist in the real world, either at the national or the international level. Consequently, market mechanisms tend to re- produce, and sometimes exacerbate, existing inequalities. As noted earlier in reference to the international sphere, this acknowledgment of inequality should not be construed as an attempt to disregard the importance of national policies. On the contrary, a recognition of the fundamental role of national factors is entirely consistent with the idea that institution building, social cohesion, and the accumulation of hu- man capital and technological capacity are essentially endogenous processes--an idea that is deeply ingrained in the thinking of ECLAC. This position is also consonant with the fundamental importance that ECLAC attaches to national efforts aimed at achieving a sound macro- economy, dynamic productive development, greater equity, and envi- ronmental sustainability, together with the active involvement of soci- ety as a whole in shaping the public interest (ECLAC 2000a). The fundamental role played by the international structure, how- ever, has to do with the way it influences what opportunities will be available to countries and what risks they will face, as well as the effectiveness of national efforts to maximize the benefits of integration into the world economy. Just as the state must take redistributive action at the national level to ensure equality of opportunity, national efforts can fully succeed at the global level only if they are comple- mented by equitable and stable rules of the game, together with inter- national cooperation designed to put an end to the basic asymmetries of the global order. These asymmetries fall into three basic categories: (a) extreme concentration of technical progress in industrial countries, (b) developing countries' greater macroeconomic vulnerability, and (c) high capital mobility and low labor mobility. INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 113 Extreme Concentration of Technical Progress in Industrial Countries The first asymmetry is the extreme concentration of technical progress in industrial countries, which is the factor that all schools of economic thought identify as the primary source of economic growth in those countries. This concentration means that not only are research and de- velopment as such concentrated in those countries, but so are the pro- duction segments and activities that are most closely linked to techno- logical change--sectors that are highly dynamic components of world trade flows and of the international production structure and that re- ceive high innovation rents (see chapter 2). The growth impulses gen- erated by technical progress originating in the countries of the "cen- ter" are transmitted to the "periphery" through four main channels: derived demand for raw materials; relocation to developing countries of production sectors considered to be "mature" in industrial coun- tries; technology transfer per se, including technologies embedded in production equipment; and the possible participation of developing countries in the most dynamic production domains. The main problems that arise in this area stem from the fact that, as Prebisch (1951, p. 3) affirmed in his classic work, "The spread of tech- nical progress from the countries where it had its source to the rest of the world has . . . been relatively slow and irregular." This spread is slow because all of these mechanisms are subject to constraints or costs. In general, demand for raw materials is not income elastic, and because the entry cost associated with the corresponding activities is low, de- mand is often affected by downward pressure on prices, especially dur- ing periods of diminished global activity (see chapter 2, box 2.1). The mature industrial sectors have narrow margins and low entry costs. Their low entry costs may also lead to a sharp deterioration in profits and prices, much like what occurs in the case of raw materials during times of slow growth. The protectionist pressures generated by indus- trial countries are also concentrated in these two sets of sectors. In addition, economies of scale and external economies, which have been the focus of the classic literature on urban and regional develop- ment and of more recent studies on international trade, may give rise to agglomeration economies that tend to lead to the polarization-- rather than the convergence--of development levels.10 This is one of the arguments highlighted by the various proponents of classical theo- ries of economic development.11 In addition, technology transfers are subject to the payment of innovation rents, which are increasingly protected by the universaliza- tion of strict regulations concerning intellectual property rights. 114 GLOBALIZATION AND DEVELOPMENT Because of the "tacit" nature of technology--that is, the fact that it cannot be fully specified because it is so closely linked to the collective human capital accumulated by innovating companies--it may not be easy to transfer, or its transference may be attractive only if it occurs through transnational corporations' networks of subsidiaries. The production of knowledge is the epitome of an activity subject to strong agglomeration economies, as indicated by its overwhelming concen- tration at the world level. Developing countries therefore have very limited opportunities to participate in the most dynamic areas of activity, or else their participation is concentrated in low-skill areas (e.g., the assembly of electronic products in export assembly plants). What is more, the external economies linked to education and knowl- edge can, by themselves, hinder any trend toward convergence in pro- ductivity levels, as has been pointed out in the literature on endoge- nous growth.12 Technological development also requires substantial government subsidies, a situation that rewards greater fiscal capacity as well as, perhaps, the less urgent nature of competing demands for the use of public resources in industrial countries. The combined effect of these factors accounts for the trend toward the stagnation of mean income levels and the truncated convergence or outright divergence of income levels, in place of the convergence pos- tulated by conventional theories of economic growth. In fact, the divergence of development levels has persisted despite the impressive in- dustrialization process undertaken in many developing countries over the last half century and, in Latin America, even before that. Although this process has translated into a more diversified production structure in the developing world, except in the most backward regions, at the global level the production structure has continued to exhibit major asymmetries: an intensive and continuing concentration of technical progress in industrial countries (see box 4.1), their sustained predom- inance in intellectual property registrations13 in the most dynamic seg- ments and activities of international trade, and their preeminent posi- tion in the founding of large transnational corporations (see table 4.6). Thus, the economic opportunities available to developing countries continue to be determined largely by their position in the international hierarchy. Certainly, "technical progress" has spread from the center through the aforementioned channels, but this transfer continues to be "relatively slow and irregular," and its fruits have been distributed unequally in the developing countries. Few countries--or sectors or companies within them--are able to move fast enough to catch up to the moving target represented by the world technological frontier (Pérez 2001); many others succeed only in advancing at the same rate as the frontier, and not a few are left behind altogether (Katz 2001). INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 115 Box 4.1 World Distribution of Research and Development Activities Empirical evidence shows that the richer a country (or region) is in both absolute and relative terms (in per capita gross domestic product, or GDP), the more likely it is to undertake research and development (R&D) projects. In addition, as involvement in such activities increases, so does the probability that the country or region will engage in more technolog- ically sophisticated and capital-intensive projects, possibly in association with other countries and regions. And in fact, industrial countries account for 84.4 percent of gross expenditure on research and development (GERD) and a somewhat smaller percentage of scientific researchers and engineers (71.6 percent) (see table 4.5). Other indicators paint a more dramatic picture of the ex- isting asymmetries between industrial and developing countries: the ratio of GERD per capita is 19:1, the ratio of the number of scientific re- searchers and engineers per capita is 7:1, and GERD per researcher is more than double. This last indicator points not only to sharp differences in remuneration (whose share of GERD ranges from one-half to two- thirds), but also to a wide disparity in terms of the financial resources, in- struments, and equipment available for these activities. As noted in the Declaration on Science and the Use of Scientific Knowl- edge, "Most of the benefits of science are unevenly distributed, as a result of structural asymmetries among countries, regions and social groups, and between the sexes. As scientific knowledge has become a crucial factor in the production of wealth, so its distribution has become more inequitable. What distinguishes the poor (be it people or countries) from the rich is not only that they have fewer assets, but also that they are largely excluded from the creation and the benefits of scientific knowledge" (Declaration adopted at the UNESCO World Conference on Science for the Twenty- First Century, paragraph 5, Budapest, Hungary, 2001). Developing Countries' Greater Macroeconomic Vulnerability A second type of asymmetry is associated with the developing coun- tries' greater macroeconomic vulnerability to external shocks, which also strains these countries' lesser and very limited means of coping with them. Vulnerability to such shocks has tended to increase with the greater financial integration that has characterized the third stage of globalization, as have trade vulnerabilities, which have persisted or intensified as a result of fluctuations in demand and the terms of trade. The increased instability of economic growth in developing countries per 58 29 33 38 76 48 10 power 105 124 111 167 102 203 ($PPP) GERD researcher purchasing million 946 347 211 595 454 151 715 with 3,033 1,451 2,211 6,498 3,802 3,697 1996­97 Per inhabitants dollars world 2.5 4.6 3.2 2.8 6.7 $PPP (2001). total 28.4 71.6 10.6 15.9 15.8 10.8 18.9 100.0 % Researchers Researchers, UNESCO of in economies; 132 241 168 552 825 143 817 348 562 981 from 5,189 1,476 3,713 Number thousands data of Number industrialized 6 Per 20 66 49 17 11 34 39 basis and capita 100 377 370 661 750 newly the on (GERD) R&D of NIEs in % GDP 1.8 0.6 2.2 0.3 1.1 0.8 0.6 1.9 0.7 2.8 0.5 0.9 2.6 R&D on Caribbean, the world 0.7 4.9 1.0 3.9 2.0 3.1 1.0 15.6 84.4 25.2 15.2 36.4 % GERD 100.0 development; and and Expenditures expenditure of 4 6 6 America 86 27 21 11 83 17 547 461 138 199 research Gross Amount ($PPP) on Latin for development. Distribution Europe expenditure and Commission gross World countries Eastern research countries countries Union and Federation Economic 4.5 and NIEs States America GERD R&D Developing Industrial Africa Asian Central China European India Japan Latin Russian United Note: Source: Table Groups World Memo parity; 116 INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 117 Figure 4.4 Instability of Economic Growth (Regional average standard deviation of growth, by country) 10% 8% 1950­1973 1974­1998 6% 4% 2% 0% and Latin Asia East OECD Eastern Europe Africa industrial countries Caribbean America Middle the Note: OECD Organisation for Economic Co-operation and Development. Source: Economic Commission for Latin America and the Caribbean, on the basis of data from Maddison (2001). during the third stage of globalization is a reflection of this fact (see fig- ure 4.4). The existing financial asymmetries stem from four characteristics of developing countries: (a) the currencies in which their foreign debt is denominated, (b) the maturity structures offered on financial mar- kets, (c) the scope of secondary markets, and (d) the highly disadvan- tageous relationship between the size of developing-country financial markets and the speculative pressures they face. As a result of the first three of these features, agents that have access to international mar- kets (governments and large firms) must contend with currency mis- matches, whereas those that do not have access to international mar- kets (SMEs) are affected by maturity mismatches, and it is generally impossible to have a financial structure that avoids both risks at the same time. These mismatches mean that developing-country financial markets are much more incomplete than international markets and, consequently, that some financial intermediation must necessarily take place in the international market. This state of affairs also points to the fact that international financial integration is an example of integration between unequal partners (ECLAC 2000a, 2001a; Studart 1996). 118 GLOBALIZATION AND DEVELOPMENT The existence of these macroeconomic asymmetries is attributable to the fact that the international currencies in use today are those of the industrial countries and to the procyclical nature of capital flows to developing countries. This pattern is linked to the perception that, with few exceptions, the developing countries are high-risk markets that are subject to sharp financial cycles in which phases marked by a greater appetite for risk alternate with droughts triggered by a flight to quality (see chapter 3). The effect of all these factors is a very sharp macroeconomic asym- metry. Whereas the industrial countries have greater freedom to adopt countercyclical policies14 that help stabilize financial markets, the de- veloping economies have virtually no breathing space, because their fi- nancial markets tend to intensify cyclical fluctuations and market agents expect the authorities to behave procyclically. From a historical perspective, the industrial countries have largely succeeded in exempting themselves from the rules of the game associ- ated with the gold standard, but those rules have continued to deter- mine the macroeconomic behavior of developing countries. The industrial countries' freedom from those restrictions came with the gold standard's abandonment in the 1930s. Since then, they have main- tained a high degree of autonomy within the framework of the inter- national macroeconomic agreements associated with the second and third stages of globalization. The developing countries, on the other hand, remained subject to strong external macroeconomic constraints during the second stage of globalization, whereas in the third they have become increasingly vulnerable to financial volatility. This vul- nerability to fluctuations has translated into an increase in the center- periphery macroeconomic asymmetries already evident in the late 19th century during the heyday of the gold standard (Aceña and Reis 2000; Triffin 1968). These asymmetries have become glaringly evident during the fre- quent crises suffered by developing countries in recent decades, when markets have pressured them to adopt "depression (macro)econom- ics," as Krugman (1999) put it. More specifically, the developing economies' main response to global financial instability has been a ten- dency to alternate between phases of "boom macroeconomics" and "depression macroeconomics" (ECLAC 2000a, 2001a). Since the Sec- ond World War, multilateral macroeconomic and financial agree- ments have offered some temporary relief at critical junctures, but their scope has been relatively limited in comparison with the financial shocks that the developing countries have had to grapple with, and their application is invariably subject to the adoption of austerity mea- sures. Moreover, they have not induced countries to take preventive INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 119 measures during economic booms. This issue has been the focus of increasing attention in the international debate sparked by the Asian crisis. High Capital Mobility and Low Labor Mobility There is also a third type of asymmetry associated with the contrast between the current high degree of capital mobility and the restrictions placed on international movements of labor, especially among low- skilled workers. This asymmetry is a distinctive feature of the third stage of globalization; it was not observed in the first stage (when la- bor was highly mobile) or the second stage (when both factors showed little mobility). As Rodrik (1997) pointed out, the asymmetries exist- ing in the international mobility of production factors skew the distri- bution of income, placing the less mobile factors at a disadvantage. In addition, these asymmetries have a disproportionate effect on devel- oping countries owing to the relative abundance of low-skilled labor in those countries. The limited international mobility of low labor costs also tends to help create a glut on international markets for goods that are produced mainly by developing countries, which typically have low entry costs. Leveling the playing field by regulatory means does not eliminate these asymmetries; on the contrary, it may end up making them worse, both because of the different countries' widely varying levels of insti- tutional capacity for assimilating and enforcing such regulations and because of the differing effects that such regulations have on industrial and developing countries. Indeed, the high cost of building the national institutions needed to implement the Marrakesh Agreement, which established the World Trade Organization (WTO), has been regarded as one of its main flaws. The distribution of the costs and benefits of leveling the playing field by regulatory means is also clearly unequal, especially because the poli- cies and standards whose application is being extended to the global level are those of the industrial countries. Protection of intellectual property is the most conspicuous case. Regardless of its virtues in terms of creating incentives for world technological development, the benefits of protecting intellectual property rights accrue mainly to the industrial countries, where the bulk of new technology is generated (see table 4.6). The WTO subsidies code rewards the industrial countries for their greater fiscal capacity to allocate resources for authorized purposes while, on the other hand, prohibiting the use of alternative instruments that have no fiscal costs (tariffs, investment and export performance requirements, and free trade zones) and that have been used extensively 120 GLOBALIZATION AND DEVELOPMENT Table 4.6 International Asymmetries: Share of Developing Countries in the World Economy (Percentages of the world total) Basic information 1990 1999 Population 84.0 85.0 Gross domestic product (current US$) 22.3 23.8 Gross domestic product (purchasing power parity) 43.6 46.9 Gross fixed capital formation (1995 US$) 23.9 24.0 Industrial value added, 1998 (1995 US$) 27.5 Rights granted to residents 1995 1999 Patents 6.1 8.7 Designs 15.3 11.0 Trademarks 33.9 21.9 Utility models 15.3 44.4 Plant varieties 7.0 17.8 500 largest firms 1999 Number of firms 5.0 Sales 4.6 Assets 3.6 Market value 5.8 Employees 12.0 Market quotas by categories of technology intensiveness 1985 2000 Primary products 62.0 59.6 Resource-based manufactures 31.3 31.8 Low-technology manufactures 33.6 50.3 Midlevel-technology manufactures 10.8 21.4 High-technology manufactures 16.8 36.6 Other transactions 28.8 41.6 Source: Economic Commission for Latin America and the Caribbean, on the basis of data from the World Bank (2001a); Fortune magazine, "America's Largest Corpo- rations, 2001"; and Patent Information Services in the World Intellectual Property Organization (www.wipo.org). by developing countries. The regulations on agriculture facilitate the industrial countries' traditional forms of protection (tariffs and quotas) and reward them for being the only countries with the fiscal capacity to devote a considerable volume of resources to subsidizing agriculture. Prohibiting the application of local content requirements to foreign investors in developing countries runs counter to the general acceptance of rules of origin, which constitute another form of local content requirement because they force producers to use inputs of a specified origin in order to qualify for a preferential tariff. This situation has a parallel in the financial arena. As has been made clear in the recent debate surrounding the Basel agreement on banking INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 121 regulation, the establishment of more rigorous standards or the appli- cation of internal bank standards to lender ratings may reduce the sup- ply of funds on markets carrying high risk ratings, which include the developing countries as well as SMEs in all countries (Griffith-Jones and Spraat 2001; Reisen 2001). In addition, the establishment of mandatory debt workout mechanisms, unless accompanied by a suffi- cient supply of official emergency credits, may drive up these coun- tries' borrowing costs. It should be noted that this regulatory leveling of the playing field is unique to the current stage of globalization; no attempt was made to carry out this type of process in either of the prior stages. In fact, dur- ing those periods the industrial countries frequently relied on produc- tive development instruments whose use is not permitted in the devel- oping countries (see Chang 2001, 2002). The Rise and Fall of International Cooperation for Development The creation of international institutions to regulate the interdepen- dent relations among states was one of the innovative developments in international law to occur in the 20th century. Indeed, until the beginning of that century, the purpose of the rules established under international law was to ensure the sovereignty of nations. States defended their full autonomy in the conduct of matters related to their national interests, and they ardently opposed any limitation of this principle. In reality, however, these principles of autonomy applied only to the imperial powers and to independent nations possessing considerable military power, because in many cases bilateral agree- ments between nations having unequal degrees of power limited the autonomy of the less powerful nation. Agreements in the 19th cen- tury that opened up China and Japan to international trade and imposed the principles of free trade on the Ottoman Empire were clear examples of this phenomenon, as were, in an even more extreme manner, colonial expansion and military occupation of foreign territories. In any case, the increase in international trade and financial trans- actions called for the formulation of new rules and the creation of new institutions to ensure that international markets could operate effi- ciently and that nations could settle disputes without resorting to force. However, as pointed out earlier, these institutions were based on the existing balance of power among the major states. It was not until after the Second World War, with the creation of the United Nations and the adoption of the principle of decolonization, that developing countries begin to enjoy respect for their autonomy and their right to 122 GLOBALIZATION AND DEVELOPMENT express their views in international forums. This recognition allowed them to begin to help build international institutions and to gain access to formal mechanisms for voicing their opinions about the asym- metries in the global order. This shift in international power relations, together with the bipolar confrontation that continued for several decades thereafter, formed the global political framework that shaped the evolution of international cooperation for development. The chief elements of this process were the emergence of official development as- sistance (ODA) and the introduction of the principle of special and dif- ferentiated treatment for developing countries in trade agreements. This change was brought about through the efforts of economists, thinkers, and political figures to formulate the concept of economic de- velopment, which was then extended to include the sphere of interna- tional economic law. Legal experts recognized that, as at the domestic level, the application of the same conditions to vastly different eco- nomic and social situations resulted in greater inequalities. For a num- ber of years, international economic law was conceived of as a com- pensatory mechanism for protecting weaker states from stronger ones by granting more rights to the former and imposing greater obligations on the latter. On the basis of this notion of international "affirmative action" for development, the governments of the developing countries endeavored to introduce and operationalize the development dimen- sion in multilateral forums. In the years following the Second World War, the reconstruction of Europe took clear priority, and international cooperation for develop- ment was relegated to a position of secondary importance. This em- phasis was reflected both in the origins of the World Bank and, espe- cially, in the priority attached to the Marshall Plan. The Latin American countries' failure to win approval for the implementation of a program in the region along the lines of the Marshall Plan was also a reflection of the priorities of that time. The region's interests did not, in fact, meet with a favorable response until the late 1950s, with the creation of the Inter-American Development Bank, and early 1960s, when the Alliance for Progress was launched. This period in the region's history paralleled, to a certain extent, what was occurring at the international level. International develop- ment cooperation and the debates that surrounded it gathered consid- erable momentum in the 1950s and reached their zenith in the 1960s and 1970s, when UNCTAD was established, the generalized system of preferences was put in place, progress was made in promoting ODA, the United Nations introduced its international development strategy, and the dialogue on the new international economic order com- menced. Nevertheless, the debates and activities that took place in INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 123 those years did so within a context of international polarization, and the actual progress achieved was fairly modest. The breakdown of the debate on the new international economic order in the early 1980s ushered in a radically different period. Those years were marked by waning interest in ODA; the "graduation" of the developing (especially middle-income) countries; a growing em- phasis on regulatory standardization, to the detriment of the principles of special and differential treatment; and the promotion of uniform structural reforms within the framework of an excessive amplification of conditionality by the Bretton Woods institutions. Under this new paradigm, the chief objective of efforts to reorder the international economy was to guarantee equitable conditions (a level playing field) that would ensure the efficient operation of free market forces. In this context, the principal gains for the developing countries would be the possible dismantling of the protectionist measures used by industrial countries in "sensitive" sectors and the assurance of an export-led form of development within an international trading system based on clear and stable rules. According to this line of thinking, the correction of international asymmetries would be based exclusively on the recog- nition of the international community's responsibility to the develop- ing countries. This was tantamount to a replication at the international level of the social policy strategy of targeting the poorest sectors as beneficiaries of state action. Here again, the developing countries' gains during this period were no more than moderate. The evolution of trade relations between industrial and developing countries clearly illustrates this shift in the principles of international development cooperation. From 1948 to 1955--in the early years of the General Agreement on Tariffs and Trade (GATT)--the developing countries participated in the negotiations on an equal footing, with the same rights and obligations as the other parties. What is more, the first six rounds of GATT negotiations focused on intraindustry specializa- tion within industrial economies, and the areas in which internal ad- justments would be required in order to respond to possible competition from developing countries (liberalization of trade in agricultural prod- ucts, textiles, and clothing, among others) were taken off the agenda and were not addressed by multilateral trade rules. As pointed out by Tussie (1987, 1988), intraindustry specialization made it possible for these countries to overcome some of the more painful aspects of their adjust- ment to changing patterns of international trade. Instead of causing pro- duction to contract and industries to emigrate to other countries, the change could be managed on an intrafirm basis or, at least, within each industry. None of the countries engaging in intraindustry specialization had to cease production or let its control slip from their hands. 124 GLOBALIZATION AND DEVELOPMENT In 1958, a decade after the inception of GATT, the Haberler report (GATT 1958) concluded that the barriers imposed by the industrial countries on imports from developing countries were the main cause of their trade problems.15 This report served as the basis for the cre- ation of Committee III of GATT, which was given responsibility for identifying trade measures that restricted exports from the developing countries and for devising a program to reduce those barriers. In 1963, after the committee had been working for five years without making any apparent progress, the developing countries succeeded in passing a resolution within GATT calling for an action program to freeze all new tariff and nontariff barriers, eliminate all duties on tropical com- modities, and adopt a schedule for phasing out tariffs on semi- processed and processed products.16 In reality, the developing coun- tries were only seeking the application of GATT principles and greater consistency between the industrial countries' policies and their dis- course in defense of trade liberalization (Dam 1970). Nevertheless, when the Uruguay Round negotiations began three decades later, the industrial countries were still applying most of the barriers identified by Committee III. The first session of UNCTAD was held in 1964, and in November of that year part IV of GATT was adopted. Part IV provided the legal framework for the Committee on Trade and Development, whose work, however, remained largely symbolic. Later, in 1968, the devel- oping countries succeeded in establishing the generalized system of preferences under the auspices of UNCTAD. At the Tokyo Round negotiations in the 1970s, a coordinated group of developing countries, in which Latin American diplomats played a prominent role, achieved the inclusion of an enabling clause that provided a more solid legal ba- sis for special and differential treatment by industrial countries.17 However, the industrial countries made sure that the generalized sys- tem of preferences was established on a voluntary basis and that the preferences did not become binding under GATT (Michalopoulos 2000). These concessions could therefore be annulled unilaterally, without conferring any right to retaliatory trade measures. In retrospect, it can be seen that at no time in the history of GATT did the governments of the industrial countries balk at the developing countries' demands for special and differentiated treatment so long as such provisions did not require them to do more than take a tolerant view of the use of more closed trade regimes by developing countries (especially in cases where they were closed only in respect of goods, rather than capital or transnational corporations). However, the indus- trial countries have never acquiesced to demands for more secure and stable access to their markets. This refusal has gradually undermined INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 125 the real significance of special and differential treatment, because pref- erential access for developing countries has never translated into con- tractual obligations. Together with the international community's growing recognition of the specificities of development, new factors began to take on greater importance and to push the multilateral system in another direction. On the one hand, tariff reductions made the effects of trade and industrial policies more apparent, and the need to deal with non- tariff measures gradually eroded tolerance for diversity in national policies, which was the pivotal element of the international consensus to create and maintain the multilateral trading system. On the other hand, as a result of the slowdown in growth and the transformation of the industrial countries, these countries were less inclined to support affirmative action on behalf of developing countries within the frame- work of international development cooperation. The context of the Uruguay Round negotiations proved particularly adverse for the developing countries. The preparations for that round marked a turning point in their negotiating capacity, because the 1982 GATT ministerial meeting (at which several industrial countries ex- pressed their intention to deepen the liberalization process initiated at the Tokyo Round) preceded the announcement of Mexico's financial insolvency by just a few months. Large debtors, including Argentina and Brazil, recognized the frailty of their bargaining position, which remained quite weak throughout the 1980s.18 The institutional prob- lems confronting these governments hindered society as a whole from becoming more involved in the diplomatic trade debate. Furthermore, because these countries' decisionmakers lacked sufficient training in technical matters and negotiation skills, their tendency was to continue to pursue the traditional market access agenda and maintain a defen- sive stance in relation to the new issues that were being brought into the debate. In response both to internal factors and to pressure from the struc- tural reform programs being promoted by multilateral financial agen- cies, many developing countries embarked upon a unilateral liberaliza- tion of their economies.19 By the end of the Uruguay Round, they had consolidated almost all their tariff structures and had, for the most part, given up their demands for greater autonomy in designing and execut- ing policies on investment and productive diversification and even in using trade restrictions to cope with balance-of-payments crises.20 The provisions on special and differential treatment contained in the Uruguay Round agreements were limited to the extension of deadlines for meeting commitments and the implementation of technical assis- tance programs.21 To a certain extent, these agreements were a 126 GLOBALIZATION AND DEVELOPMENT throwback to the early days of GATT, as they reflected the belief that the increase in trade brought about by liberalization would be enough to stimulate the growth and development of all the parties concerned. More recent international debates and negotiations suggest that a new stage has begun, although its exact nature is not yet entirely clear. Many different factors have contributed to this situation, including the following: · the adoption of the Heavily Indebted Poor Countries (HIPC) debt initiative, which began to function in the late 1990s; · the commitment of some industrial countries to curb the down- ward trend in ODA; · the debate surrounding the unbalanced results of the Uruguay Round and the difficulties encountered in implementing the WTO agreements; · the priority attached to various development issues at the Doha round of WTO negotiations initiated in November 2001; · criticism of excessive increases in conditionality as a result of the adoption of structural adjustment programs during the debt crisis; · the transition being made by the economies of Central and East- ern Europe and the Asian crisis; · formal acceptance of the principle of developing-country owner- ship of economic and social policies within the context of international cooperation policies and multilateral lending arrangements; · rejection of policy standardization, which, in part, extends to the Bretton Woods institutions that promoted it in the past; and · within the policy debate, widespread criticism of the Washington Consensus (for a recent discussion of the Washington Consensus, see Kuczynski and Williamson 2003). In fact, many of these positions are formally shared by the principal international financial cooperation agencies (IMF 2001a; World Bank 2002b). Thus, this is a particularly good time to engage in a constructive debate on development cooperation. Such cooperation should seek to correct the basic asymmetries of the international economic order within the framework of a world economy that is much more open today than it was during the debates on development cooperation of the 1960s and 1970s. It may well be that the U.N. Millennium Declaration (United Nations 2000) is the fullest expression of a new vision of the relation- ship between peace, democracy, and development that can serve as the foundation for a new era of international cooperation for development. INEQUALITIES AND ASYMMETRIES IN THE GLOBAL ORDER 127 Notes 1. See also Bairoch (1981). However, this author's estimates of per capita income differentials in the late 18th and early 19th centuries are substantially lower than Maddison's (1995, 2001). 2. Because of Asia's relative weight in the world population, one of the basic reasons for these trends was that the Asian economies (except those of Japan and a handful of other countries) stagnated until the middle of the 20th century, but then grew rapidly in the period following the Second World War. 3. Bulmer-Thomas (1994); Cárdenas, Ocampo, and Thorp (2000a, 2000b); Hofman (2000); and Thorp (1998) present more detailed analyses of the region's performance since the mid-20th century. 4. If the figures are adjusted for the effects of the demographic transition, both the acceleration of the region's growth rate in 1950­73 and its later de- celeration appear to have been even more pronounced. In fact, if GDP is cal- culated in relation to the working-age population instead of the total popula- tion, growth sped up from 1.4 percent in 1913­50 to 2.7 percent in 1950­73, then slowed to 0.4 percent in 1973­98. Furthermore, in the postwar period, the Eastern and Western European countries, as well as Japan and a number of developing nations, began to recover from the sharp contraction that im- mediately followed the Second World War, whereas the Latin American and Caribbean region was not comparably affected at either of these stages. 5. Among the most noteworthy are the periods of rapid growth experi- enced by three Southern Cone countries (Argentina, Chile, and Uruguay) in the late 19th and early 20th centuries; by Cuba in the first quarter of the 20th century; and by Brazil, Mexico, and Venezuela for several decades during the 20th century. 6. See, in particular, ECLAC (1996a, 2001b), Escaith and Morley (2001), and Stallings and Peres (2000). 7. See Barro (1997), Barro and Sala-i-Martin (1995), Easterly (2001a, 2001b), Kenny and Williams (2000), Pritchett (1997), Quah (1995), and Ros (2000), among many others. 8. Studies that paved the way for this type of analysis include the works of Berry, Bourguignon, and Morrison (1983, 1991). 9. The trends characteristic of the second stage of globalization have al- ready been described. In the opinion of Lindert and Williamson (2001) and O'Rourke and Williamson (1999), during the first stage trends varied from one type of country to another, with a deterioration in distribution in coun- tries rich in natural resources, improvements in European countries with a broad agrarian base (especially the large countries of continental Europe), and no clearly discernible trend in the most highly industrial European countries. 10. As examples of the copious literature on the subject, see Fujita, Krug- man, and Venables (1999); Krugman (1990); and Rodrik (2001b). 11. See, among others, Hirschman (1958), Myrdal (1957), Nurkse (1953), Rosenstein-Rodan (1943), and, for a more contemporary perspective, Ros (2000). 12. See, for example, the now classic essays of Lucas (1988) and Romer (1990) and the extension of this analysis to international trade by Grossman and Helpman (1991). 128 GLOBALIZATION AND DEVELOPMENT 13. The only exception is the registration of "utility models," which are granted only for "minor" improvements or adaptations of existing products. The World Intellectual Property Organization's legal definition of a utility model specifies that, although the requirement of novelty is always to be met, that of "inventive step" may be much lower or absent altogether. Moreover, the term of protection is much shorter than for patents, and the registration process is significantly simpler (www.wipo.org). 14. The degree of freedom enjoyed by the United States is certainly greater than it is for the rest of the industrial economies because the U.S. dollar car- ries the greatest weight internationally. 15. The panel of experts that produced this report was composed of Gottfried Haberler, James Meade, Jan Tinbergen, and Roberto Campos. 16. Srinivasan (1996) noted that some elements of this action program were still on the developing countries' negotiating agenda 20 years later at the 1982 GATT ministerial meeting. 17. This enabling clause, also known as the Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Develop- ing Countries, became the legal basis for the generalized system of preferences and the global system of trade preferences. 18. See Abreu (1993), Jara (1993), and Tussie (1993), which discuss the debtor countries' negotiating capacity and positions. 19. See Sáez (1999) for an analysis of the negotiations and Krueger and Rajapatirana (1999) for an examination of World Bank policies on the pro- motion of trade reforms. 20. Several countries (including Bolivia, Costa Rica, El Salvador, Mexico, and Venezuela) consolidated their tariffs before the end of the Uruguay Round, because this was one of the commitments required for their accession to GATT (Jara 1993). The provisions of the Understanding on the Balance-of- Payments Provisions of the General Agreement on Tariffs and Trade (1994) severely limit the use of quantitative restrictions for balance-of-payments pur- poses (GATT 1994). In 1995 the Committee on Balance-of-Payments Restric- tions rejected Brazil's arguments for imposing tariff restrictions in order to contend with short-term balance-of-payments problems (see document WT/BOP/R/7 of 24 November 1995, available on the WTO Web site). 21. According to the WTO, the Uruguay Round agreements contain 97 provisions on special and differential treatment for developing countries, which may be grouped into the following six categories: (a) provisions aimed at increasing trade opportunities, (b) provisions that require WTO members to safeguard the interests of developing-country WTO members, (c) flexibility of commitments, (d) transition periods, (e) technical assistance, and (f) provisions relating to measures to assist the poorest developing countries (see the WTO Web site). 5 An Agenda for the Global Era ON THE BASIS OF THE ANALYSIS IN chapters 1 through 4, this chapter will explore a number of elements that are considered essential for the de- velopment of a better international economic, social, and environmen- tal order. The basic assumption underlying this proposal is that the developing countries, and particularly Latin America and the Caribbean, must adopt a positive agenda for the construction of a new interna- tional order and make a firm commitment to its implementation. This view is founded upon an essential lesson of history: that efforts to sim- ply ignore or resist processes whose roots run as deep as those of the current globalization process, as well as the negative agendas that emerge out of such efforts, are doomed to failure. Finding ways to build a qualitatively better form of globalization and to achieve the best possible position within that process are, consequently, the best option. The agenda to be proposed in this chapter seeks to overcome the shortcomings of existing institutions. These institutions have, first of all, exhibited a disturbing inability to provide a sufficient supply of global public goods. This failing is compounded by adverse distribu- tive trends at the global level and the absence or weakness of institu- tional systems for ensuring international solidarity. All of this indicates that the globalization process requires a new institutional framework in which more efficient management of global interdependence can be combined with the introduction of firm, clearly defined principles of international solidarity. Only then will it be possible, as stated in the U.N. Millennium Declaration, "to ensure that globalization becomes a positive force for all the world's people" (United Nations 2000). There are a number of major obstacles that will have to be sur- mounted in order to build a new global order. The first is the absence of a set of shared principles that are embraced by all the major stake- holders. The second is the fact that given the asymmetrical power 129 130 GLOBALIZATION AND DEVELOPMENT relations found in global society, the various actors differ in their abil- ity to influence this process. The third is the difficulty of forming international coalitions capable of offsetting those inequalities, whether through developing-country partnerships or international alliances of social sectors whose members feel that their interests are being harmed by the globalization process. In addition to these obstacles, there is the central paradox of the world of today, as discussed in chapter 1: the gap between global issues and what continue to be essentially national and local political processes. The challenges involved in building a new institutional order are therefore enormous. The first section of this chapter sets out the basic principles for the creation of a better world order. The second section draws together the elements of various proposals regarding national strategies for dealing with globalization: macroeconomic stability in a broad sense, systemic competitiveness, environmental sustainability, and active social policies. The third section looks at the crucial role played by regional actors in a globalized world. The fourth and final section discusses some of the main issues that the Economic Commis- sion for Latin America and the Caribbean (ECLAC) feels should figure on the world agenda: the provision of global public goods; the correc- tion of the global order's asymmetries in the areas of finance and macroeconomics, production, technology, and factor mobility; and the consolidation of a rights-based international social agenda. Fundamental Principles for Building a Better Global Order The construction of a better world order calls for a determined effort to pursue the above key objectives, to establish rules and institutions that respect diversity, to develop complementarities among national, regional, and international institutions and, finally, to guarantee equi- table participation coupled with appropriate standards of interna- tional governance. Three Key Objectives The globalization process has highlighted the importance of certain global public goods, such as the defense of democracy (and, hence, of civil and political rights), peace, security (including the war on terror- ism), disarmament, international justice, the struggle to do away with international organized crime and corruption, environmental sustain- ability, the effort to combat and eventually eradicate pandemics and to AN AGENDA FOR THE GLOBAL ERA 131 increase cooperation in the field of health and sanitation in general, the worldwide war on drugs, the accumulation of human knowledge, cul- tural diversity, the defense of public spaces held in common by all, global macroeconomic and financial stability, and, more generally, the development of an appropriate institutional structure for the manage- ment of economic interdependence (Kaul, Grunberg, and Stern 1999).1 There is a huge gap, however, between the recognition of these global public goods, on the one hand, and, on the other, the weakness of the existing international supply structures for these goods and the amount of resources allocated for them. Support for the international institutions needed to supply or coor- dinate the provision of global public goods is therefore essential. The emphasis should be on the coordination of supply rather than on sup- ply functions as such, because in many cases the regional level may be the most appropriate one for the provision of public goods. Another reason for focusing on the regional level is that the concerted efforts of nongovernmental organizations and the private sector must be brought to bear on this task. As a general rule, the provision of global public goods is accomplished through the efficient operation of networks of various types of institutions rather than by individual agencies. The need to provide sufficient financing for the supply of global public goods has been underscored by a number of recent reports (United Nations 1999a; Zedillo and others 2001). It is important to differentiate between these kinds of contributions and official devel- opment assistance (ODA), because all countries should play a part in financing global public goods based on the principle of "common but differentiated responsibilities" laid down in the Rio Declaration on Environment and Development adopted at the 1992 U.N. Conference on Environment and Development. The supply of global public goods is not the only item on the inter- national agenda, of course. It must be backed up by the accomplishment of two complementary tasks: overcoming the asymmetries of the global order and formulating a rights-based international social agenda. These tasks might also be included on the global public goods agenda. Doing so would create confusion, however, because in the final analysis these two tasks are aimed at the equitable distribution of essentially private goods. Moreover, the elimination of international asymmetries and the formulation of a rights-based social agenda involve different spheres of activity; the former focuses on rectifying disparities between countries, whereas the latter focuses directly on individuals. In order to surmount international asymmetries, the global agenda must include action on three different fronts. The first involves enhancing the transmission of growth impulses from industrial to 132 GLOBALIZATION AND DEVELOPMENT developing countries via international trade and technology transfer. The second is to work through international lending agencies to give developing countries more breathing space for the adoption of coun- tercyclical macroeconomic policies, help reverse the international con- centration of credit, and expedite the financial development of these countries. The third concerns efforts to make sure that the global agenda places just as much emphasis on the international mobility of labor as it does on that of capital. If an international social agenda is to be established, every member of the global society must be acknowledged as a citizen of the world and, hence, as possessing certain rights. The most cogent expressions of these rights are found in international declarations on civil, politi- cal, economic, social, cultural, and labor rights; on the rights of women, children, and different ethnic groups; and on the right to development.2 The commitments made by countries at world summits, some of which are accorded special recognition in the U.N. Millen- nium Declaration, complement those instruments to a great extent. These instruments also reflect a recognition of the fact that states bear the primary responsibility for fulfilling their provisions. Because they represent international commitments, however, they will eventually have to become enforceable at the international level, because this is the only way they can help to build a true world citizenry. These three key objectives of the global agenda reflect the fact that in an interdependent world, the rights of all ultimately depend on the existence of a global social covenant. Embracing this widely accepted principle of nation building is tantamount to an acknowledgment that economic affairs cannot be separated from the social and political fab- ric and that if nations are to survive and prosper, market forces must therefore function within the framework of an institutional order based on broader, more inclusive social values and aims. The existing international order suffers from serious shortcomings in terms of its capacity to achieve these three objectives. The United Nations is the appropriate institutional framework for a dialogue about ways of ensuring the global coherence of the system and of fill- ing the voids that exist in the area of international cooperation. Deci- sionmaking authority and executive capacity in certain fields are, how- ever, held by a wide range of specialized agencies that work not only at the global level but in the regional and national arenas as well. Global Rules and Institutions that Respect Diversity The essentially national and local nature of policy making has pro- found implications for the international order. The globalization AN AGENDA FOR THE GLOBAL ERA 133 process notwithstanding, for a long time to come the primary setting for the exercise of democracy will continue to be nations and local communities. The focus for global institutions should therefore be on acknowledging interdependence and managing it proactively. Ulti- mately, however, these institutions rely on national responsibilities and policies, as sovereignty will continue to reside in communities of people organized into nations. One of these principles' implications is that it is futile to promote democracy unless national representative and participatory processes give the people a say in the formulation of countries' economic and so- cial development strategies (Ocampo 2001a). For this reason, respect for diversity--within the bounds of interdependence and, thus, of the common good of a "cosmopolitan society"--is a crucial element of any democratic international order.3 This view fits in with the idea that institution building (institutional capital), social consensus (social capital), the development of human capital, and technological capacity (knowledge capital) are essentially endogenous processes. It also reflects the belief that there is not just one "right" path to development and integration into the global econ- omy. There are a range of different options depending on the political and institutional history of each country and the differing challenges and requirements to be met (Albert 1993; ECLAC 2000a; Rodrik 1999, 2001a). This principle is embodied in the more recent thinking on coopera- tion for development, which emphasizes that its effectiveness will de- pend on there being a sense of national policy ownership. In fact, this principle has won formal acceptance as a basic guideline for the design of ODA and the policies of international lending agencies (Organisa- tion for Economic Co-operation and Development [OECD] 1996; World Bank 1999; and, on conditionality, International Monetary Fund [IMF] 2001a). However, quite frequently, it is ignored in prac- tice. Indeed, an effort is often made to "compel" ownership of the poli- cies that international agencies feel are appropriate (Helleiner 2000b). Even so, the importance of ownership is one of the overarching rules governing the operations of international agencies. Their role is to sup- port national decisionmaking, not take its place. Complementarity of Global, Regional, and National Institution Building In the absence of suitable institutions, globalization is proving to be a disintegrative force. At the national level, some regions, production sectors, and social groups are coming out as "winners" and others as 134 GLOBALIZATION AND DEVELOPMENT "losers" in the intense Schumpeterian process of "creative destruc- tion" that is now being witnessed worldwide (ECLAC 2000a). This process is not only increasing each country's internal heterogeneity, but also undermining the state's ability to ensure its cohesiveness. The powerful centripetal forces that the global economy has been generat- ing for several centuries now (Prebisch 1984) impel developing coun- tries to focus on carving out a foothold in industrial-country markets and competing among themselves to attract footloose investments. Under these circumstances, integration efforts aimed at forming larger economic units are relegated to a position of secondary importance. A virtuous circle of complementary global, regional, and national insti- tution building is needed in order to cope with these forces. International debate has gradually given rise to a broad consensus as to the fundamental role of national strategies in determining how successful a country will be in forming linkages with the world econ- omy. Such strategies are also essential in order to handle the disinte- grative forces being generated by globalization within each nation. Moreover, as noted earlier, they continue to be the main vehicle for democracy in the global era. Without a suitable international framework, however, the supply of global public goods will inevitably be insufficient, and this, in turn, will hinder national development. What is more, unless a frontal at- tack is launched against the strong tendency toward inequality at the international level, which has been in evidence for the past two cen- turies, national efforts may prove relatively ineffective. More specifi- cally, within the context of a developing world whose overall growth prospects continue to be a source of dissatisfaction, the heterogeneity existing across countries and between winning and losing social groups and production sectors may intensify. Action at the regional and subregional levels plays a critical role as a midway point between the global and national orders. This arena for what ECLAC (1994) has termed "open regionalism" has, however, been either ignored or regarded as a negative element in many of the chief proposals being made regarding international economic and social reform. But there are at least four arguments that attest to the importance of this intermediate sphere. The first is the complementarity existing between global and regional institutions in a heterogeneous international community. Advo- cacy efforts toward democracy, peace, and disarmament are all exam- ples of instances in which, given the existing degree of international heterogeneity, it is best to base the provision of the corresponding global public goods on a network of world and regional organizations. The protection of strategic ecosystems and many spheres of economic AN AGENDA FOR THE GLOBAL ERA 135 activity--such as macroeconomic policy coordination and others that will be touched upon later in this chapter--are other cases in point. The second argument refers to the exceedingly unequal positions of the actors involved in global processes. In political terms, this means that within the global order, the smaller countries will be able to make their voice heard more clearly (or perhaps heard at all) only if they speak with a regional voice. This voice must be heard not only in the development of rules and standards, but also in the defense of their interests under existing rules and standards. In fact, the paradox is that such global rules are most important for small countries, which are, however, precisely the ones that have the least influence over their formulation and advocacy. Meanwhile, the most influential actors try to avoid making commitments or to compel other actors to accept their rules. These problems can be solved only if the smaller countries organize themselves. The third argument, which is closely tied to the first two, is that regional and subregional institutions enjoy a greater sense of ownership. There are opponents to this view as well, of course, who contend that these institutions are less powerful than their individual members. The validity of these arguments will therefore depend on the depth of the corresponding regional and subregional agreements, which is what ul- timately determines their effectiveness. As the world becomes increasingly interdependent, the scope of autonomy has shifted to the subregional or regional level in some areas, as in the case of macroeconomic policy. It is also the case with the regulation of competition and of public utilities when transna- tional corporations enter the market. In all these fields, the regional arena is becoming the crucial sphere for the exercise of some degree of true autonomy, and it is possible that this may increasingly become the case as time goes on. The main conclusion to be drawn from this analysis is that global public goods should be provided by a network of world and regional institutions, rather than by one or a few international institutions. A system of this type can be made to function efficiently and may prove to be more balanced in terms of power relations. In fact, this is the most advantageous system for the less powerful countries within the global order. The construction of a truly new international architecture is founded upon the overall effect of global and regional institutional reforms. Unfortunately, many of the reform proposals put forward in recent years regarding the financial and, above all, social aspects of the international architecture focus almost entirely on adapting national structures to the global era. In other words, these proposals are 136 GLOBALIZATION AND DEVELOPMENT looking at the national rather than the international architecture, and therein lies their main weakness. Equitable Participation and Appropriate Rules of Governance The insufficient degree to which developing countries participate in international economic institutions has been a controversial issue in recent years. In some cases--in the formulation of financial rules and standards, for example--they play little or no role at all, and even when they do have some role, their involvement is not commensurate with the size of their economies, much less with that of their popula- tions. In other instances, even though decisions are understood to be made by consensus, in practice agreements are reached on a different basis, as happens in the world trading system. In addition, the cost of active participation in a complex world order may be prohibitive for the poorest and smallest countries. These circumstances demonstrate the importance of ensuring ade- quate participation in decisionmaking at the international level. Achieving adequate participation will require affirmative action in favor of poor and small countries on the part of the international community. As discussed in the preceding section, it will also require an effort on the part of the smaller countries to organize themselves at the regional or subregional level. Another point to be made is that preference should be given to institutional schemes having the largest possible number of active par- ticipants. Although groups formed by countries that share a particular interest or specific purpose may contribute to consensus building, such groups should channel their views through established multilateral mechanisms rather than taking their place.4 The adoption of appropriate rules of governance is another essen- tial element. Principles developed at the national level in relation to democratic and corporate governance can serve as the foundations for building and improving international institutions (Marfán 2002). There is no single formula for accomplishing this, because constitu- tions, laws, rules and regulations, and traditions differ in each histori- cal context and evolve over time. It can be said, however, that the most effective and legitimate forms of governance are based on shared prin- ciples. These principles do not, moreover, develop spontaneously, and an explicit effort must therefore be made to institutionalize them. Four basic principles of good governance can be outlined here. The first is that government functions should be carried out by a body with executive powers rather than by an assembly. The second is that the AN AGENDA FOR THE GLOBAL ERA 137 rights of the governed take precedence over rules and regulations estab- lished by the various levels of government. Consequently, the rights of minorities should be clearly established, while bearing in mind that their identification and recognition as fundamental rights are the end result of a learning process. The third principle is that the authorities should regularly give an accounting of what they have done to safe- guard the interests of the community and uphold the rights of all its members. Transparency, timely disclosure, and, more generally, accountability are essential components of this community process. The fourth principle is that the authorities should submit to the scrutiny of independent bodies and to outside audits that will build confidence among minority groups. These groups do not govern, but they do have the right to oversee the actions of those who hold power. Furthermore, the bodies in charge of enforcing individual rights should have the power to penalize wrongdoing. A good example of the application of these principles is provided by political governance in a representative democracy, where executive power is exercised by representatives who have been elected by the ma- jority. It is the duty of this branch of government to uphold the fun- damental rights of citizens as set down in the constitution and other laws that apply equally to all citizens and to provide a regular ac- counting of the ends and means of government action. Oversight of its acts and its enforcement of citizens' rights and of the law are carried out by independent agencies. An important part of this function is the watchdog role performed by the principal parliamentary minority (the opposition). Another example can be found in corporate governance. In this case, majority shareholders control the firm's board of directors and management. The dispersion and varying interests of minority stake- holders, on the other hand, make it difficult for them to organize them- selves effectively. Good corporate governance seeks to prevent the shareholders that have a controlling interest from obtaining a dispro- portionate share of profits or other benefits relative to the size of their holdings. To achieve this, executives and members of the board are required to comply with certain rules concerning transparency and timely disclosure and with regulations that set out their responsibili- ties. In addition, there are independent oversight agencies (including outside auditors) and in-house auditing committees (usually formed by members of the board elected by minority shareholders). These bodies complement the work of regulatory agencies and the judiciary, which have the power to penalize wrongdoing. Recent major corporate scan- dals in the United States (ENRON and others) are dramatic evidence of the consequences of evading full compliance with these principles. 138 GLOBALIZATION AND DEVELOPMENT The governance of the globalization process could be substantially improved by adherence to these same principles. The most powerful nations are obviously the leaders of the globalization process and occupy a dominant position in the major international financial insti- tutions, in which voting power--and, in a few cases, veto power--is based on capital contributions. The resemblance ends there, however, because the other principles of governance are not clearly established. For example, it is not certain that the more powerful nations' control over the process is legitimized by their respect for the rights of all coun- tries, nor is there a universally accepted institutional structure for up- holding the rights of less powerful nations. In fact, quite often there is not even a clear idea of what those rights are. The application of these principles to improve the governance of the globalization process will therefore entail according priority to the fundamental rights of developing countries (especially the smaller ones), institutionalizing accountability, and increasing oversight by bodies that will inspire confidence in all the parties concerned. This approach involves placing certain limits on the power of the most influential countries, as this is the only way to improve the governance of the globalization process. It will also lead to a greater commitment to the global institutional structure on the part of developing countries by increasing their sense of ownership. National Strategies for Dealing with Globalization After reviewing the appropriate national context for applying strate- gies capable of dealing with globalization, this section examines some major policy components: macroeconomic management, the dynamic transformation of production structures, environmental sustainability, and social cohesion. The Role and Basic Components of National Strategies As has been discussed at length in the literature on institution building in recent years, in today's global era, any development strategy must be founded upon a solid, democratic social covenant to ensure its political stability; nondiscretionary local systems and modes of behavior that provide security of contract performance; and the formation of an impartial, efficient state bureaucracy. These are also, of course, basic components of a proinvestment environment. These general sorts of institutional elements are not sufficient in themselves, however. They are the backdrop for the development AN AGENDA FOR THE GLOBAL ERA 139 process, but they do not account for the specific forces that drive growth in developing countries or, in many cases, lead to the depletion of growth impulses.5 National strategies for today's global era should incorporate at least four additional elements: (a) macroeconomic poli- cies designed to reduce vulnerability and facilitate productive invest- ment; (b) strategies for developing systemic competitiveness; (c) a keen awareness of the priorities of the environmental agenda, which, by its very nature, is essentially global in scope; and (d) highly active social policies, especially in the fields of education, employment, and social protection (ECLAC 2000a 2000b, 2001a; ECLAC and U.N. Environ- ment Programme [UNEP] 2001). There are no universally valid models in any of these areas. Thus, the institutional learning process and, most importantly, the exercise of democracy have a broad sphere of action in which to function. One of the most serious mistakes made in the last quarter of the 20th cen- tury was the promotion of a single "solution" in each of these fields based on the principle of full market liberalization. The tendency to equate successful integration into the globalized world with economic liberalization overlooks the fact that many strategies have not been based on all-out market liberalization but instead on various ways of forming virtuous circle linkages between the state and the market. It would be just as mistaken, however, to take the opposite approach and try to resuscitate models that were successful when the world economy was less integrated but that are suited only to stages in the develop- ment of the world economy that are now clearly a thing of the past. Macroeconomic Strategy The experiences of Latin America and the Caribbean in the final quar- ter of the 20th century demonstrate that all forms of macroeconomic disequilibrium are economically and socially costly. This recognition implies, first of all, that macroeconomic discipline is essential, but it should be defined in a much broader sense than it generally has been in economic discourse in recent decades, which has focused on fiscal bal- ances and low inflation. This narrower view overlooks other equally im- portant dimensions of macroeconomic stability: balance-of-payments sustainability, the soundness of national financial systems, and the sta- bility of real variables such as economic growth and employment. Macroeconomic management should be directed toward avoiding un- sustainable public or private deficits, guarding against financial imbal- ances in all institutions (in terms of both flows and the way balances are structured), controlling inflation, and curbing any instability in real eco- nomic variables (ECLAC 2000a, 2001a; Ffrench-Davis 2000). 140 GLOBALIZATION AND DEVELOPMENT Achieving these objectives will entail some quite complex policy decisions, and, for these purposes, there is no simple way of defining stability or any universally valid system of macroeconomic manage- ment. In a volatile international environment, some degree of flexibil- ity in macroeconomic management should be combined with suitable regulations. Recent events leave no doubt that, in the long run, macro- economic authorities' credibility can be strengthened more effectively through prudently managed flexibility than through the adoption of overly rigid rules.6 Within this framework, one of the authorities' aims should be to lengthen the time horizon for macroeconomic policy management in or- der to take in the whole of the business cycle and support dynamic long- term growth. Encompassing the entire cycle will provide the necessary scope for the adoption of countercyclical macroeconomic policies that can help forestall unsustainable booms and afford sufficient flexibility in dealing with external crises (ECLAC 2000a; Ocampo 2002a). The option of using countercyclical policies is quite limited without the sup- port of international institutions, however, and this has consequently become one of these institutions' basic functions in the current stage of the globalization process. The short- and long-term objectives of macro- economic policy are, to a great extent, complementary--because more stable economic growth is one of the strongest incentives for fixed cap- ital investment--but they can also confront policy makers with some difficult choices (ECLAC 2001a; Ocampo 2002b). Based on these principles, fiscal policy should be designed using a pluriannual horizon. It should also be based on long-term guidelines for ensuring a structural fiscal balance. These guidelines should either make allowance for the use of moderate, temporary surpluses or deficits for countercyclical purposes or, alternatively, set an explicit target for the ratio between the public debt and GDP. The active use of stabilization funds (or equivalent instruments) can be the most effective way to build up surpluses during booms that can then be used to contend with crisis situations. The desirable level and structure of public revenues and expenditures will, in the long run, depend on what kinds of demands each society's fiscal covenant places on the state (ECLAC 1998c). In countries with very low tax burdens (as is true of a number of Latin American nations), taxes can be increased to finance the basic functions of the state, especially in social sectors. In fact, as recently stated by the World Bank (2002b), the tax burden and levels of public expenditure in the developing world tend to be low in com- parison to those of industrial countries. Monetary and exchange rate management are, of course, closely related. Some degree of flexibility in the exchange regime is necessary AN AGENDA FOR THE GLOBAL ERA 141 for countercyclical monetary management (i.e., the application of restrictive policies during booms and expansionary ones during the downswing in the cycle). The desirable degree of flexibility will be greater in the larger economies that have well-developed capital and exchange markets. It may be wise to allow the exchange rate to appreciate in order to soak up excess foreign exchange during booms, whereas a depreciation may be needed to spur the production of trad- ables during economic busts and to provide enough breathing room for reactivation-oriented fiscal and monetary policies. In financially open economies, the prudential regulation of capital flows, either through the use of reserve requirements or taxes on exter- nal borrowing or by means of direct regulation,7 is an extremely useful supplementary tool for avoiding excessive external borrowing during booms and preventing liability structures from becoming skewed toward short-term obligations. In more closed economies, caution should be used in opening up the capital account. In fact, if a country does not have a solid financial system, there is really no convincing argument for opening the capital account up at all. Strengthened prudential regula- tion and supervision are one of the pillars of any sound macroeconomic policy; their core function is to prevent unsustainable financial struc- tures from being spawned during economic booms. From a macro viewpoint, economic growth in the long run hinges on a combination of sound fiscal systems that provide the necessary re- sources for the public sector to do its job, a competitive exchange rate, moderate real interest rates, and the development of a deep financial market. Macroeconomic policy should be focused on ensuring the first three elements. The last is a very important complementary process. The main objective of financial deepening is to provide suitably priced investment finance with sufficiently long maturities. In the ab- sence of a well-developed financial market, many investors (particu- larly the larger ones) will turn to international lenders, thereby substi- tuting exchange risk for maturity risk. Use of this escape valve therefore entails serious hazards, as well as being beyond the reach of smaller firms. The liberalization of financial systems in Latin America and the Caribbean has not deepened financial markets or reduced the region's high intermediation costs as much as had been expected. Con- sequently, the public sector still has an important role to play in pro- moting the emergence of new intermediaries and financing mecha- nisms (e.g., pension and investment funds, bond and mortgage markets, and hedging systems) or in arranging for the direct provision of such facilities by well-run development banks. The existence of this unsatisfied demand for investment finance is compounded by the absence of suitable financial services for 142 GLOBALIZATION AND DEVELOPMENT micro- and small enterprises and for the poorest households. This sit- uation creates a greater demand for direct or indirect public interven- tion. Low national savings rates are another constraint on investment financing in Latin America and the Caribbean. Efforts to increase public-sector saving, the creation of corporate saving incentives (espe- cially to encourage firms to retain profits), and special mechanisms to foster household saving (for retirement, in particular) may be useful means of raising national savings rates (ECLAC 2001a). Building Systemic Competitiveness A dynamic transformation of production structures should not be viewed as a reactive phenomenon or as an automatic result of good macroeconomic management, but rather as an active and essential component of any development strategy, even at this juncture in the globalization process (ECLAC 2000a; Rodrik 1999). The core objec- tive of these strategies should be to build systemic competitiveness. This concept, whose first formulations date back to work done by ECLAC over a decade ago (ECLAC 1990; Fajnzylber 1990),8 is based on three elements. The first is the role of knowledge as the foundation for competitiveness, because it is the only factor that enables countries to produce goods and services capable of "making the grade" on international markets while protecting and increasing their citizens' real incomes. The second is the idea that competitiveness depends less on individual firms than on the performance of each sector as a whole, its interaction with suppliers, and ultimately the smooth operation of the entire economic system. In sum, it is essentially a systemic phenome- non. The third is that given the serious imperfections existing in tech- nology markets and strong externalities among economic agents asso- ciated with the systemic nature of competitiveness, the development of sound technology markets and production linkages is in large part the outcome of the deliberate efforts of the state and business associations and, particularly, of collaborative initiatives undertaken by the state and the private sector to create a virtuous circle that will bolster the system's competitiveness. The three basic components of this strategy are (a) the creation of innovation systems to speed up the accumulation of technological capacity, (b) support for changes in production structures and the for- mation of production linkages, and (c) provision of quality infrastruc- ture services. The creation of adequate social safety nets and sustain- able environmental management are important complements to this effort. These elements concern other spheres of activity, however, and will be considered later on in this chapter. AN AGENDA FOR THE GLOBAL ERA 143 Given the key role of knowledge, any competitiveness strategy must be based on increased investment in education, vocational and busi- ness training, and science and technology (ECLAC and U.N. Educa- tional, Scientific and Cultural Organization [UNESCO] 1992). This process, whose aim is the creation of dynamic innovation systems, should be led by the state, but the private sector should also be actively involved. These efforts should focus on increasing the capacity of all actors to absorb knowledge and on developing appropriate mecha- nisms for the adaptation of technology and business skills, especially for medium-size and small firms. Business associations and incentives for various forms of collaboration between these associations and providers of educational and vocational training play a fundamental role in this effort. Innovation systems should be strengthened at all levels (i.e., local, national, and to a growing extent regional). In view of the intrinsic importance and crosscutting nature of new information and communications technologies, efforts to promote their active use throughout the economic, social, and even political (e-government) systems are of vital importance. Access to a quality telecommunications network and to competitively priced information and communications equipment is one of the pillars of this endeavor. Other mainstays include the production of software, incorporation of technology into production and trade, and formation of business net- works that make effective use of new technologies. The incorporation of such technologies into educational and health care systems requires special state support and community mechanisms to give low-income sectors access to them, because the emergence of a "domestic digital divide" (produced by disparities between different social sectors' access to new technologies) is a much more serious threat in Latin America and the Caribbean than the international digital divide. Economic growth necessarily entails an ongoing process of chang- ing production patterns in which some branches of production func- tion as growth leaders and others lag behind. This process is not nec- essarily automatic or harmonious; the expansion of new sectors involves the development of a complementary set of activities based on a technological learning process, the establishment of commercial net- works, and significant coordination costs (Chang 1994; Hirschman 1958; Ocampo 2002c). The diversification of the production structure must therefore be an explicit priority of any competitiveness strategy. This idea has been expressly recognized in the industrial world, where the process has become virtually synonymous with the development of cutting-edge technologies. It also enjoyed wide acceptance in the past as a component of state-driven industrialization strategies in develop- ing countries, and today it is an essential tenet in the most successful 144 GLOBALIZATION AND DEVELOPMENT developing economies, especially those of East Asia. In contrast, di- versification strategies have been discarded by most countries of the region. Within the context of the globalization process, the diversification of production is guided by three priorities. The first is to diversify the export base and target markets, which calls for a very active form of commercial diplomacy aimed at securing stable access to external mar- kets and the development of a competitive, high-quality service infra- structure--in the areas of finance, insurance, promotion, and certifi- cation--to back up exports of goods and services (ECLAC 1998a). In this endeavor, one obvious priority is to increase the region's share of world trade in technology-intensive goods and services. The second priority is to develop programs to broaden the linkages of activities oriented toward the international market or dominated by transnational corporations. The weakening of such linkages is one of the most problematic aspects of recent trends in the region. For this reason, linkage policies designed to increase value added in export sec- tors and sectors with a high proportion of foreign direct investment (FDI) should be adopted as a forward-looking priority. Among these linkages, those associated with the provision of technology-intensive services are of special importance. These policies would, in practice, amount to a shift away from a policy aimed at maximizing the quan- tity of exports and FDI to a policy aimed at improving their quality. A final priority in this regard is to support the formation of pro- duction clusters in particular locations. This process is a response to the growing dynamism of local spheres of economic activity in the global era. It is particularly important in steering small and medium- size enterprises (SMEs) toward production for the international mar- ket or linkage with export sectors (ECLAC 2000a). The other core aspect of competitiveness policy is the provision of quality infrastructure services. In a number of countries, various pub- lic-private partnerships have succeeded in making significant progress in this regard, particularly in telecommunications, port services, and maritime transport, and--to a lesser extent and with some differences from one country to another--in energy services (electricity and gas; ECLAC 2001b). It must be acknowledged, however, that private par- ticipation in these sectors has been accompanied by serious regulatory gaps and, in some cases, has burdened the state with contingent liabil- ities that do not always have a sound rationale (ECLAC 1998c, 2000a). The main problems in terms of infrastructure continue to be found in land transport, including both railways and roads. Short- comings in both the quantity and the quality of road networks are par- ticularly severe. Accordingly, priority should be given to substantially AN AGENDA FOR THE GLOBAL ERA 145 improving road infrastructure, correcting regulatory gaps, and ration- alizing the management of contingent liabilities, while also improving the efficiency of state enterprises in areas where the state continues to provide services directly. Progress on all these fronts will require major institutional and organizational efforts to formulate and implement active competitive- ness policies, because the pre-existing systems of government interven- tion in productive development were dismantled or severely curtailed in most of the countries of the region during the economic liberaliza- tion phase. Such systems would, in any case, be ill-suited to the new environment. In this area, as in others, it is necessary to "invent" new institutions, whose management will no doubt require an intensive learning process. The possible models for these institutions are certainly not uniform, as they depend on the specific characteristics of each situation. A pub- lic-private partnership is essential to fill the information gaps found in each of these sectors (i.e., the former's limited microeconomic infor- mation and the latter's insufficient familiarity with global and cross- sectoral processes). In other words, institutional design must take into account both the forest and the trees. The instruments to be developed for this purpose should be based on checks and balances that establish a clear link between incentives and results (Amsden 2001) and thereby preclude rent-seeking behavior on the part of beneficiary firms. This endeavor should comprise various combinations of horizontal and selective instruments, depending on each country's institutional context, to be chosen on the basis of shared strategic visions of the di- rections to be emphasized in joint public-private efforts. This choice is less an exercise in picking winners, as it is commonly called, than an effort to identify opportunities and direct the actions needed to ensure that some of them bear fruit. This type of strategic exercise is one in which all private investors engage on a routine basis. It is hard to un- derstand why some schools of economic thought consider it illegiti- mate to carry out such an exercise in relation to a particular territory, whether it be a town, a country, or even a subregion or region. Environmental Sustainability The agenda for environmental sustainability has gradually made its way into the institutions, public policies, and business practices of the Latin American and Caribbean countries. Although it is not yet, in the fullest sense, an integral part of the development process, the progress achieved thus far constitutes a much better institutional and social foundation than the one available 10 years ago when the U.N. 146 GLOBALIZATION AND DEVELOPMENT Conference on Environment and Development was held in Rio de Janeiro. The concept of sustainable development has also been gradu- ally incorporated into educational systems, and the change in society's perception of environmental issues has strengthened citizens' aware- ness and commitment. The primary hurdles that remain in this area have to do with institutional and financial considerations and with the perception within business circles in the region of environmental sus- tainability as a cost rather than an opportunity (ECLAC and UNEP 2001). With respect to institutional mechanisms, steps should be taken to set up clear and consistent regulatory frameworks and to achieve a stable level of public expenditure with a view to generating significant synergies with international financing and private investment. On the basis of existing management methods, the time has come to develop a new generation of more effective and prevention-oriented instru- ments for the integration of economic and environmental considera- tions. This process should primarily involve the use of economic instruments to provide adequate incentives to meet sustainability goals and to promote a greater use of clean production technologies by SMEs. One of the most promising lines of action in this area is the cre- ation of genuine domestic (and regional) markets for environmental services, following the pioneering example of the Kyoto Protocol's clean development mechanism. Such instruments have the dual pur- pose of generating incentives to minimize environmental costs (the central objective of economic instruments), while at the same time channeling resources to the actors that are best able to provide envi- ronmental services most efficiently (ECLAC and U.N. Development Programme [UNDP] 2002). A more active sustainable development strategy will require the allocation of more government resources. One option is to introduce "green taxes," as has been done in some industrial countries. Although great strides have already been made in reducing government subsidies for polluting industries, further reductions are needed. In addition, current frameworks must be adapted to integrate explicit environmental policies with the implicit ones associated with sectoral economic policies and the patterns of structural change they entail. In view of the regressive trend in energy efficiency taking shape in the region, such integration and the use of this array of instruments should give priority to the reversal of that trend (ECLAC and UNEP 2001). The formation of effective linkages between economic and environ- mental issues also requires a shift from a reactive agenda to one that takes a proactive approach to the relationship between environmental AN AGENDA FOR THE GLOBAL ERA 147 sustainability and economic development. This involves, first of all, identifying the opportunities offered by the international environmen- tal agenda, in particular in regard to the supply of global public goods and the possibility of becoming net providers of environmental ser- vices, primarily in connection with the climate change and biodiversity agendas. The opportunities afforded by the Kyoto Protocol's clean development mechanism are particularly noteworthy in this regard. This proactive approach also entails taking advantage of opportunities to expedite scientific and technological development through the sus- tainable use of biotic resources, a better understanding of the region's natural resources, and the development of its own technologies for tapping these resources in sustainable ways (ECLAC 2000a). In addition, this approach involves the active use of foreign invest- ment as a potential channel for the transfer of clean technologies, the exportation of goods and services having a high environmental content (e.g., organic agricultural products and ecological or environmentally certified tourism), and the promotion of the international certification mechanisms increasingly demanded by industrial-country consumers. In fact, foreign investment and export activities in the region are turn- ing out to be the areas in which the most progress is being made in incorporating clean technologies. Types of production that rely on an abundant supply of natural re- sources but are slow in leading to the diffusion of technical progress are being eclipsed by economies that are successfully developing knowledge-based forms of production. It is therefore necessary to redi- rect the region's model of competitiveness toward new activities and toward an increase in the value added of natural resource-intensive ac- tivities. This shift requires the promotion of industrial activities and complementary services, including those that will increase the sustain- ability of primary activities. Because of the territorial specificity of environmental management functions, strong operational links with local authorities need to be forged. Solving high-priority environmental problems in such areas as water resources management, solid waste disposal, ecological land use, and urban management requires the decentralization of environmental policies and instruments and a more balanced distribution of public expenditure and private investment. It is at the local level that the com- mitment between the state and the citizenry is expressed most clearly. Hence the importance of continuing to promote social consensus building in relation to the environmental agenda, particularly within the context of provincial and municipal sustainable development councils and the local Agenda 21 framework (United Nations 2002). Forums of this sort can become powerful tools for organizing public 148 GLOBALIZATION AND DEVELOPMENT affairs and mobilizing additional resources to promote environmental sustainability at the subnational level (ECLAC 2000a). Social Strategies in an Era of Globalization Globalization has made it all the more urgent to achieve greater inter- national competitiveness. Owing to the interrelationship between competitiveness and employment, however, competitiveness also entails new social risks. National globalization strategies should there- fore focus on three areas within the social sector: education, employ- ment, and social protection. Progress in these three areas is a prereq- uisite for equitable participation in the global era. Moreover, such progress is essential for the implementation of a rights-based interna- tional agenda at the national level. Advances in these three areas are mutually reinforcing. Education is the primary means of halting the intergenerational reproduction of poverty and inequality. At the same time, globalization has increased the need for human resources capable of engaging in new modes of production, competition, and coexistence. Employment is at the heart of social integration, as an aspect of social fulfillment and as a source of income, and it therefore determines individuals' ability to gain ac- cess to basic consumer goods and thus avail themselves of their basic rights. Such access is crucial in the absence of societywide safety nets. Among the risks faced by the population are those associated with macroeconomic volatility, the adaptation of new technologies and ways of organizing work, and the elimination of jobs in many sectors in response to international competition (ECLAC 1997, 2000b). In education, national efforts should focus on reducing disparities in attendance and achievement between income levels and between ru- ral and urban areas at all levels of schooling (preschool, elementary, technical, university). Efforts to achieve greater equity should there- fore focus on achieving universal coverage, preferably up to the end of secondary school, and reducing socioeconomically based differences in the quality of the education that is provided. In developing their educational systems, the Latin American and Caribbean countries face both traditional challenges and challenges re- lated to new technologies. Meeting them will require a diversified package of policies, which each country must tailor to fit its own char- acteristics and objectives. Public education expenditure must also be increased, of course, with the general objective being to reach levels similar to those found in OECD countries: around 5 percent of GDP. To improve educational continuity, governments must give pri- ority to increasing the coverage of preschool education, which is still AN AGENDA FOR THE GLOBAL ERA 149 comparatively limited; expanding secondary education coverage and completion rates; increasing the availability and range of technical and professional educational options; and achieving greater consistency between technical-vocational and higher education, on the one hand, and the requirements of the job market and competitiveness, on the other. These efforts should be supplemented by targeted compensatory measures designed to have long-lasting effects in areas in which edu- cational performance is poor, as well as more relevant curricula, use of new technological resources on a mass scale, and the empowerment of communities to assist in furthering educational goals. Achieving social inclusiveness requires the development of new ap- proaches to learning based on access to knowledge, networking, and the use of information and communication technologies (ICTs). Edu- cators need to make better use of the cultural and educational audio- visual industry by merging cultural programming in the media with schooling so that the two will reinforce each other. Urgent steps should be taken to ensure that students in poor rural and urban areas can learn to use interactive media that are not available to them at home, because school is the ideal environment for ensuring, distributing, and democratizing their use. The modernization of educational tools is not enough, however. It is even more important, in conjunction with these new tools, to develop higher cognitive functions by orienting the learn- ing process toward problem identification and problem solving, an in- creased capacity for reflection, creativity, the ability to distinguish be- tween what is relevant and what is not, and planning and research skills. All these functions are vital in an information-saturated world. Progress also has to be made in the design and use of portals (educa- tional content) and in the training of educators (teachers, administra- tors, and families). In this era of globalization, the primary challenge in the area of em- ployment is to prevent the expansion of world trade from resulting in the violation of workers' basic rights or in the downward convergence of wages and working conditions in countries at different levels of de- velopment. The Declaration on Fundamental Principles and Rights at Work and its follow-up (ILO 1998) reaffirm the member countries' commitment to such fundamental rights as freedom of association and the right to collective bargaining, the prohibition of forced or slave la- bor, the progressive abolition of child labor, and nondiscrimination. The creation of new jobs is sustainable only when the economic ac- tivities concerned are competitive in the long term. This means that pro- ductivity must be enhanced and, therefore, that comprehensive strate- gies must be devised to increase investment in human resources and ensure that gains in competitiveness are not based on the reduction of 150 GLOBALIZATION AND DEVELOPMENT labor costs or the concentration of wage increases in the most dynamic or well-organized sectors. Productive restructuring and increased labor mobility make it necessary to give workers opportunities to learn how to adapt to new conditions and thus increase their employability. Countries will therefore have to invest in worker retraining based on a new approach and, possibly, a different institutional framework. The development of basic competencies, rather than specific skills, will give workers a knowledge base that will enable them to adapt more easily to the demands of new jobs. Because informal activities, microenter- prises, and small businesses play a major role in job creation, they should be given access to factors of production (capital and land) and to the tools they need to modernize their operations (managerial and technological know-how), and programs should be set up to help them gain access to dynamic industrial networks (ECLAC and UNESCO 1992). To these ends, ministries of labor should adopt labor policies that place more emphasis on self-regulation by social actors (social dia- logue) and that focus on the large groups of workers who remain out- side modern sectors (unemployed and informal-sector workers). In ad- dition, they should be repositioned in political and administrative terms so as to give them a place in economic cabinets and to restore, in many cases, their role in setting the direction for labor policy. The development of social safety nets should be guided by the prin- ciples of universality, solidarity, efficiency, and integrality (ECLAC 2000a). Progress cannot be made toward universality unless the sharp inequities in access to services and in their quality are corrected. Soli- darity should be ensured through a combination of compulsory con- tributions, public transfers, and cross-subsidies between different in- come strata and risk groups. Social safety nets are seriously flawed in terms of both coverage and the new risk structure associated with globalization. The countries of the region, with their chronic shortcomings in the coverage of tradi- tional risks (illness, old age, disability, and death, as well as those existing in the areas of nutrition, housing, and education), now face the additional burden of protecting their populations from the effects of such risks as employment and income vulnerability. Sharp business cycles and the rigidity of real wages--which have been heightened by the steps taken to curb inflation--have made wage earners more vulnerable to changes in those cycles. Because many of the existing social safety nets were designed to serve wage earners, it has now become necessary to develop a system of social protection whose coverage extends to persons who do not hold formal-sector jobs and to create more comprehensive unemployment insurance schemes. Job AN AGENDA FOR THE GLOBAL ERA 151 creation policies will continue to be of crucial importance in this con- text, of course. As the experience of some European countries demon- strates, social protection policies should focus on boosting employment as a means of helping to ensure universal social protection. In emergency situations, it is necessary to develop special employment and poverty al- leviation programs for vulnerable sectors based on permanent institu- tional arrangements that allow such measures to be implemented quickly and that link them to other objectives such as job training, in- frastructure provision, and territorial development (ECLAC 2001d). Given the current scope of informal-sector employment and unem- ployment, the potential for providing comprehensive coverage through traditional social safety nets is quite limited, as is the useful- ness of wage-based taxes and levies as a source of funding. Accord- ingly, emphasis should be placed on the implementation of systems based on citizenship rather than on employment. Reforms in general, and reforms in the social security system in particular, should therefore introduce combined and complementary insurance mechanisms that reflect the diverse forms of employment now in use. These types of arrangements will also promote labor mobility and provide protection in times of externally generated adversity. The quantity and quality of the social safety nets that can be funded by mandatory contributions, general taxes, or a combination of the two depend on each country's current level of economic development and on the nature of its fiscal covenant, which embodies political and social agreements about the level of well-being that should be guaran- teed to citizens. A country's fiscal situation is not static, of course, and a fiscal covenant for the protection of citizens' rights should therefore include an element of progressivity whereby public contributions for social protection and poverty reduction can be increased at the mar- gin. Moreover, an inclusive system of social protection must place spe- cial emphasis on the views of target groups and provide for a constant flow of information to the public regarding opportunities for and means of accessing social safety nets and for taking part in decision- making (ECLAC 2000a). The Key Role of Action at the Regional Level Latin America and the Caribbean have progressed further in terms of regional integration than any other developing region, and these coun- tries' experiences may therefore be instructive for other regions. Progress in this area was sparked by the political impetus that built up around the issue of integration in the late 1980s and early 1990s. 152 GLOBALIZATION AND DEVELOPMENT Unfortunately, this momentum has waned in the last few years. In ad- dition, the institutional structure for integration remains fragile, and the convergence of existing agreements toward the formation of larger areas and the consolidation of customs unions are tasks yet to be ac- complished. It is therefore imperative for the countries to renew their political commitment to regional integration. Such a commitment would not necessarily be incompatible with global negotiations or broader trade negotiations, such as those directed toward the forma- tion of the Free Trade Area of the Americas. Nonetheless, if regional integration processes are to remain relevant within the context of a hemispheric free trade area or the globalization process, they will need to be deepened further. The momentum displayed by the regional integration process in the late 1980s was a paradoxical phenomenon inasmuch as, according to the more orthodox doctrines, integration was (and still is) a force that distorts trade flows. Empirical evidence indicates, however, that inte- gration actually tends to create rather than divert trade flows. More- over, the flows it generates tend to be of high quality (ECLAC 1998b), demonstrated by the tendency of regional flows to have greater tech- nological content and to create more production linkages. One of the main advantages of these processes is that countries with similar levels of development can take advantage of specialization economies for in- traindustry trade. Another advantage is that lower transaction costs al- low smaller firms to participate in intraregional trade, especially be- tween neighboring countries, helping to counter the traditional tendency for external trade operations to be monopolized by larger firms within each sector of production or trade.9 In consequence, regional markets can provide an excellent training ground for firms--especially smaller enterprises--to learn how to deal with external markets and can therefore help new firms and sectors to venture into export activity. A further benefit of such integration processes is that they provide an opportunity to harmonize a wide range of differing rules and thus reduce the associated transaction costs, thanks not only to geographic proximity but also to the similar- ity of institutional traditions. This positive vision of integration is borne out by the increase recorded in intraregional trade, especially within South America, between 1990 and 1997,