Speech

'Tis Not Too Late to Seek a Newer World: What Globalization Offers the Poor, Address by Anne O. Krueger, First Deputy Managing Director, IMF

May 9, 2005

Good evening, and thank you for that kind introduction. Let me first say how pleased I am to be here. It is a great honor to be invited to address this august institution.

My topic this evening is globalization and specifically how we can enable more of the benefits of globalization to reach the poor. This is an issue that concerns all of us. It is arguably one of the most important economic policy challenges of the twenty first century.

It is hard for those of us who live in the world's rich countries fully to appreciate the extent of poverty in many developing or low-income countries. More than a billion people live on less than $1 a day. For most of them that means seldom having enough to eat. Many people have no access to safe drinking water. Infant mortality rates are high. All of us here have benefited from many years of school education, followed by the chance to attend university. But the people whose plight I am discussing often have no experience of even the most basic education.

Helping those people escape poverty, to have enough to eat, to have the chance to go to school represents an enormous challenge.

It is a challenge we should relish. The quotation in the title of my talk—Tis not too late to seek a newer world'—comes, as some of you might know, from Tennyson's Ulysses, from the passage in the poem where Ulysses is encouraging his men to set sail again. As he urges them on he says that:

Some work of noble note may yet be done.

Helping to improve the lives of those far less fortunate than we are is certainly noble work. And we have learned much about how best to achieve poverty reduction, especially in the 60 years since the end of World War 2. We in the rich countries can help. But I want to argue this evening that the lesson of the past few decades is that adopting the right economic policies is essential to achieve lasting reductions in poverty.

It is those countries that have introduced and implemented policy reforms and that have exploited the opportunities afforded by the international economic system that have enjoyed the rapid growth that is the prerequisite for rapid poverty reduction. Those countries that have taken most advantage of the international economy are also those that have experienced the greatest advances in poverty reduction. And, conversely, no country has experienced rapid and sustained poverty reduction without rapid growth and opening its economy to international trade.

As you know, in September 2000, world leaders, meeting at the United Nations agreed on the Millennium Development Goals (MDGs). These goals were both explicit and ambitious. They include halving the number of people who live on less than a dollar a day, and halving the number of those who go hungry. Other goals include the provision of universal primary education; a reduction by two thirds in mortality among children under five; a reduction by three quarters in the maternal mortality ratio; and a halving of the number of those without access to safe drinking water.

These are ambitious targets, especially given that they are to be achieved by 2015. But they are not unrealistic, provided that economic reforms are successfully introduced; that the international economy sustains healthy growth; and that the industrial countries enhance the flow of aid to those countries whose policy frameworks are geared to attainment of the MDGs.

Many poor Asian countries are well-placed to meet most of the MDGs. But meeting the MDGs in large parts of Sub-Saharan Africa and a number of other very poor countries around the world will be a considerable challenge.

By the time of the Second World War, the world had become divided into the

haves and have-nots, the rich industrial countries and the developing world. In the six decades since then many of those developing countries have adopted market-friendly policies that have enabled them to grow rapidly. These emerging market economies have experienced rapid growth and a correspondingly rapid reduction in poverty. Their success serves to highlight the problems that the very poorest countries still face. It is not simply that the low income countries have grown more slowly. In many cases they have not grown at all. Income per head in some African countries is now lower in absolute and relative terms than it was fifty years ago. So the world is now divided into three groups: the industrial countries; emerging markets; and the poor countries. Conflict and civil war, corruption and political shortcomings have contributed to this failure to progress in some poor countries. But so too have misguided policies that give the state a dominant role in the economy, that suppress market forces, stifle enterprise and generally undermine the prospects for economic growth..

So this evening I want to outline what we know about poverty reduction. I want to assess the benefits globalization has brought, and to examine how an even greater number of people can reap the benefits that globalization has already provided for so many people around the world.

Poverty reduction

The evidence is clear: the only way to bring about a lasting reduction in poverty is through rapid and sustained economic growth. That sounds straightforward enough. Unfortunately, we cannot legislate for rapid growth any more than we can for poverty reduction. What matters are the policies that will deliver more rapid growth.

In recent years we have learned a great deal about the best way to promote economic growth. Macroeconomic stability is an essential prerequisite. Without that, the potential benefits of other policies will be undermined. So governments need effective counter-inflationary policies that will deliver low inflation. They need prudent fiscal policies. High budget deficits and large and rising public debt burdens undermine growth, and crowd out the private sector investment so important for growth.

Macroeconomic stability is vital—but it isn't enough to deliver sustained rapid growth. To experience sustained growth countries need economic frameworks that promote competition, encourage business and enterprise, provide a level playing field for all economic actors and economic incentives that increase efficiency in the context of an open economy. We now know just how important a strong and healthy financial sector is, if resources are to be allocated efficiently. Flexible labor markets are important: policies that discourage firms from hiring workers harm growth prospects. And liberal trade policies are important if efficiency is to increase and so permit the acceleration of economic growth. No country has maintained a restrictive trade regime and achieved sustained rapid growth.

Experience has taught us that to be effective economic policies need strong, well-functioning institutions. That may seem obvious viewed from the perspective of an advanced industrial democracy. But many countries lack such institutions. Many do not have an effective and fair legal system: individuals and businesses are at the mercy of courts that act in an arbitrary fashion. There is little respect for property rights, though these are vital if investment is to be encouraged. The mechanisms in place for fighting corruption are weak, which means resources are diverted into the hands of a few, to the detriment of the economy as a whole.

Putting policies in place to tackle these problems is essential for more rapid and sustained growth. And there is real-world evidence for the gains that such policies bring. We can see what successfully reforming countries have achieved, and how. We can see where policymakers have made mistakes, and learn from their experience—which is why, for example, we now attach so much importance to issues such as institutional and financial sector reform that in earlier decades were given less prominence than they deserved. We know what policies bring results and lead to more rapid economic growth, though detailed implementation may vary from one country to another.

It is almost always possible to engineer a brief spurt of more rapid growth, to raise the growth rate temporarily without implementing the sorts of policies I've described. But brief periods of expansion have at best a short-lived impact on the incidence of poverty, and are almost always followed by resounding setbacks.

Increasing the size of the cake over a prolonged period is what matters. A temporary rise is of little benefit, and similarly, trying to cut the cake in a different way contributes little to lasting poverty reduction. Redistribution of income and wealth is hardly going to benefit citizens in countries that have low per capita incomes, except to a very small extent at the margin. And, over time, measures to redistribute income on any significant scale will anyway be counterproductive and will hamper an economy's growth prospects. Such measures invariably introduce or worsen distortions in the economy. The allocation of resources becomes increasingly inefficient. The incentives for individuals and firms are skewed. Much more beneficial are policies, such as extending access to education, that provide increased opportunities for individuals to progress.

Of course, rapid growth benefits the richer members of society. But it also clearly benefits the poor.

Globalization: the historical context

Globalization has been an integral part of the process that has made possible rapid growth and poverty reduction in so many parts of the world in recent decades. I want to put the process of globalization in a broader historical context. But first let me start by defining what I mean by the term. I mean the progressive integration of the world economy. As transactions and communications become easier, there is more interaction. And sensitivity to developments in the rest of the world grows. The consequence is more trade and more interaction between and across countries. We are talking about a world benefiting from rapidly falling transport and communications costs, thanks to technological progress, and from sharply rising trade flows thanks to trade liberalization. These forces have led increasingly to world markets driving down prices to consumers, increasing the real incomes and productivity of workers, and opening economies to trade.

This is a process that has been going on for centuries—indeed for thousands of years, ever since man started to trade. The early traders of the Mediterranean; the Greeks and the Romans; Marco Polo, the explorers who opened up the Americas: all these were participants in the process of globalization. They traded, they developed economic relations with each other, sometimes at the individual level and sometimes at the state level. The East India Company, incorporated in 1600, and the Hudson's Bay Company, established in 1670, were examples of globalization at work.

But it was in the nineteenth century, as the effects of the Industrial Revolution began to spread, that globalization intensified. This coincided with enormous advances in transport technologies that led to a dramatic lowering of costs. Between 1830 and 1910, ocean shipping costs fell by close to two thirds. It cost 177.5 pence to ship a quarter (eight bushels) of wheat from Chicago to Liverpool in 1868; by 1902, that same shipment would cost barely one fourth of that (46.5 pence). Such developments fuelled international trade and lowered costs more broadly. The price differentials between countries narrowed sharply. World trade grew rapidly. In the thirty five years or so up to 1913, the value of world exports tripled.

Many economic historians regard the nineteenth century as the first extended period of intensive globalization, when international trade grew rapidly, capital flows rose sharply, and the industrializing economies expanded at what was then an unprecedented rate. As a result living standards in these countries improved significantly. Poverty was reduced, life expectancy rose. In countries like Britain, more and more people had access to education. Life indisputably became better.

Note, though, that most of the benefits from this first era of globalization flowed to the industrial countries. These had grown rapidly, and had become significantly richer than the countries outside the industrializing core—what some scholars have termed the convergence club. The countries that came to be known collectively as the developing world saw much slower, if any, growth and fewer of the benefits of nineteenth century globalization.

Any prospect that these benefits might have begun to spread more rapidly beyond the industrial countries was lost when the process of globalization went into reverse with the onset of the First World War. The war itself was a major disruption to the international economic system, which did not fully recover until after the Second World War. Even before the collapse of confidence at the end of the 1920s, tensions among the industrial countries had a dampening effect on trade and capital flows. But the beggar-thy-neighbor trade policies of the 1930s wreaked havoc on the international economy. Tariffs among the main industrial countries rose sharply. By 1931 the average tariff on manufactured goods in the US was 48 percent; it was 30 percent in France, and 46 percent in Italy. As protectionism worsened, trade flows shrank and international capital flows—which had been such an important factor in the spread of industrialization in the nineteenth century—fell.

Protectionism intensified the impact of the Great Depression. Restrictions on trade and capital flows hampered recovery. Misguided monetary and fiscal policies also contributed.

In the early 1940s, those planning for the postwar world had learned the lessons of the 1930s. They recognized that a new international framework was needed, one that fostered international financial stability and generated economic growth through the gradual liberalization of trade. The Bretton Woods conference in 1944 established the International Monetary Fund and the World Bank as part of this new multilateral framework. These two institutions were charged with helping to maintain stability. Today, they do this principally by the provision of development assistance in the case of the World Bank and through economic surveillance and the provision of short-term financial support for member countries in difficulties in the case of the IMF.

Creation of the Bretton Woods institutions went hand in hand with trade liberalization: those responsible for creating the post war framework realized from the beginning that this was crucial. The General Agreement on Tariffs and Trade—or GATT—was signed in 1947: it was succeeded, in 1995, by the World Trade Organization.

The multilateral framework thus put in place was far more successful than its creators could have imagined possible. I mentioned a moment ago the unprecedented economic growth that the industrializing countries experienced during the nineteenth century. From the late 1940s to the early 1970s, we saw growth rates among the major industrial countries that made the achievements of the nineteenth century seem modest. America saw average annual growth in real GDP per capita of 2.4 percent between 1950 and 1973; the comparable figure for Germany was 5 percent—and for Western Europe as a whole it was over 4 percent. Japan experienced average annual growth of real GDP per capita of more than 8 percent. Inflation rates were a little higher than than we have grown accustomed to in recent years—but only a little—while unemployment was much lower than even America or the U.K. have recently managed.

But in the immediate aftermath of the Second World War, the world was broadly divided into two groups of countries aside from those in the Communist bloc in Eastern Europe. There were the haves and the have-nots, the rich industrial and rapidly-growing economies, and the developing countries which had been on the sidelines during the rapid growth in the industrial world in the nineteenth and early twentieth centuries.

In the early postwar period, many developing countries adopted policies that depended on considerable government involvement in the economy. Instead of pursuing the economic opportunities afforded by multilateral trade liberalization, the focus was on protecting domestic industries, attempting to substitute domestic production for foreign imports in a misguided belief that this was the route to growth and prosperity. For some countries, such policies did bring brief periods of growth, but such spurts petered out relatively quickly.

It is important nonetheless to remember that in the immediate aftermath of the Second World War, as world trade and the world economy grew rapidly, even countries that avoided much economic engagement with the rest of the world saw some increase in growth rates and a corresponding, though in many cases modest, reduction in poverty. As inappropriate policies persisted, however, slowly-growing poor countries fell further and further behind their growing neighbors.

By the 1960s, we began to see the developing countries diverge from one another. Some remained stuck with misguided policies and government intervention that stymied their growth prospects and hampered poverty reduction. But an increasing number of developing countries started to implement more effective pro-growth policies. The results were dramatic. Before long, the remarkable postwar growth rates in the industrial countries began to seem quite modest, as growth accelerated in the newly industrializing countries—what we now call emerging markets.

The most spectacular growth performance was in Asia. Growth accelerated rapidly in Korea, Hong Kong and Singapore, the first members of the group known as the Asian tigers. In 1960, Korea embarked on a radical program of economic policy reform, aimed at opening the economy up to trade. Korea's per capita income grew roughly tenfold in the four decades from 1960. In any single ten-year period between 1960 and 1995, Korean real per capita income grew by more than British real per capita income during the whole of the nineteenth century. The rapid growth of trade, spurred by the removal of trade barriers, was integral to this. And with rapid export growth—in excess of 40 percent a year over quite a long period—employment and real wages grew rapidly.

Other countries in the region soon followed suit: Malaysia, Thailand, and Indonesia among others. More recently we have seen high rates of growth over more than two decades in China, lifting hundreds of millions out of poverty. Indian growth accelerated significantly once economic reforms were introduced in 1991.

Just as in the period of the industrial revolution, falling transport and communications costs have played their part. A few years ago, one study found that a three minute phone call between New York and London that had cost $298 in 1933 cost $1 in 2001. It has since plummeted still further. Even from a standard landline phone that call costs just a few cents. Phone calls made via the internet are even cheaper.

The progressive liberalization of trade in the postwar period has been one of the most important sources of economic growth. In 1947, average tariffs on manufactured imports were over 40 percent. A succession of international trade rounds resulted in a progressive lowering of these tariffs, so that by the late 1990s they had been lowered to less than 5 percent in the European Union, the United States, and Japan. They had also fallen dramatically in many other countries. At the start of this new century, world trade was worth around $8 trillion—25 percent of global GDP. That's up from $1.5 trillion, in comparable dollar terms, in 1970, and 13 percent of world GDP. According to the WTO world trade in 2000 was 22 times its level in 1950. Merchandise exports have grown by 6 percent a year on average for the past 50 years.

Having open trade policies was what enabled all these countries to harness the opportunities offered by falling transport and communications costs and by the explosion of world trade. Successive rounds of multilateral tariff reduction and the progressive removal of non-tariff barriers made possible many of these gains from trade. No country in modern times has achieved sustained rapid growth without implementing policy reforms that open up the economy to the market and to the world.

The benefits of globalization

I noted the rising living standards and improvements in the quality of life that the rapid economic growth precipitated by the Industrial Revolution brought. The rapid economic growth of the postwar period brought more dramatic improvements in living standards around the world. Such growth performance transformed the lives of millions. If anyone doubts the causal link between economic growth and rising living standards for most and not just a few, they need only look at the numbers.

Infant mortality rates fell sharply in most developing countries. In Thailand the rate fell from 103 deaths per 1000 live births in 1960 to 23 in 2003. In Indonesia it was 128 deaths per 1000 births in 1960; in 2003 the number had fallen to 31. In China, the comparable numbers are 150 deaths per 1000 births in 1960, down to 30 in 2003. Even in Bangladesh, one of the world's poorest countries, mortality rates have fallen, from 149 deaths per 1000 births in 1960, to 46 in 2003. In Korea, whose rapid growth I have already mentioned, the improvement was truly impressive: 90 deaths per 1000 births in 1960, to just 5 in 2003—a lower figure than either the UK or the US.

Or take literacy rates. In 1970, 53 percent of Chinese adults were literate; by 2000, that had risen to 91 percent. Over the same period, India's literacy rate rose from 33 percent to 61 percent.

Perhaps the most telling statistic is life expectancy. In general, life expectancy in developing countries has risen at an astonishing pace. In the late 1940s, life expectancy for men in India was 28 years for women, and 32 years for men. In 2003, it was 63 years for all Indian adults. In Korea life expectancy rose from 55 years in 1962 to 74 years in 2003. And Chinese life expectancy virtually doubled between in the four decades from 1960: it was 36 years then, and by 2000 it had risen to 71 years.

Since 1960 life expectancy in the developing countries has risen at roughly double the rate in the richest. The gap between life expectancy in industrial and developing countries has narrowed from around 30 years in 1950, to around 10 years today.

More people have become better off and at a more rapid pace than ever before. The benefits of rapid and sustained economic growth have been passed on to ordinary citizens as living standards have risen and poverty has been reduced. In his recent book, Martin Wolf cites World Bank figures showing that the number of people in extreme poverty fell by about 100 million between 1987 and 1999 and it has clearly fallen further since then.

Extending the benefits of globalization

We can see then that some countries, especially many of those in Asia, have made spectacular progress in the past four or five decades. They have grown so much more rapidly than the industrial countries that they have begun to catch up in terms of per capita incomes and living standards—though even they have a good way still to go to close the gap.

A second group of countries that started the postwar period in the have-not group has also achieved significant growth over the period. Some of them have done so erratically—growth rates have been volatile, and there have been setbacks along the way because economic policies have not been followed as consistently as in the most rapidly-growing economies. But countries such as Brazil and Turkey have nevertheless made substantial progress. Recent policy reforms in some of these countries means that for them too, sustained rapid growth in now in prospect. That leaves the group of low income countries, many in Sub-Saharan Africa, but some in other regions including parts of Central and South Asia. Many in this group have made little or no headway in the postwar period. And it is these countries that, by and large, continued until recently to pursue the state-dominated, market-unfriendly policies and trade restrictions that stifled growth.

So can the benefits of globalization be extended to those who have yet to see very much change in their lives?

I believe the answer is yes—provided that the appropriate economic reforms are put in place in those poor countries. Establishing a sound macroeconomic framework and pursuing the market-friendly polices I outlined earlier will create an economic environment that fosters enterprise and competition. Only then will rapid growth be attainable over a sustained period. Several African countries have begun to implement economic reforms, supported by the IMF's Poverty Reduction and Growth Facility which provides financial assistance to countries undertaking reform programs. They have begun to put in place policies aimed at delivering macroeconomic stability, and some have begun to liberalize their trade regimes. As a result, we have seen some lowering of inflation rates and some modest upturns in growth.

The poorest countries need to pursue the appropriate policies, including opening up their economies to competition and trade, if they are to achieve sustained rapid growth and so reduce poverty. With such policies in place, additional resources in the form of aid transfers can certainly help. The advanced economies have pledged to provide extra funds to accompany policy reforms. But policy reforms are needed if countries are to be able to absorb those additional resources and exploit them for the benefit of their poorest citizens.

Trade liberalization remains important for sustained rapid growth, although it is not sufficient. The Doha round of world trade negotiations, currently under way under the auspices of the WTO, is crucially important. The World Bank has estimated that around two thirds of the benefits of a successful Doha round would flow to developing countries themselves. Since estimates of those benefits ranges widely from several hundred million dollar upwards over a ten year period, that is a result worth striving for.

And it is important to note that many of those benefits would come from unilateral trade liberalization by the developing countries; those benefits will be larger if the liberalization is undertaken in a multilateral context, but they will be significant even without that. Yes, the industrial countries need to back up words with deeds and open up their markets and reduce the export subsidies that distort trade. But developing countries impose higher tariffs on each other than they face from the industrial countries. By liberalizing their trade they could experience a growth in trade and, in turn, more rapid growth in GDP.

Conclusion

Let me briefly conclude.

The process of globalization is as old as man. It has always brought benefits; countries that have traded have always grown more rapidly than those that haven't. But the process of globalization has intensified in the past 60 years—and so, too, have the benefits. The reduction in global poverty that has accompanied global growth has been dramatic. Hundreds of millions of people are better off—so much so that it is hard to remember how poor were most of the world's citizens less than a century ago. Globalization has been a hugely beneficial process for mankind as a whole.

Now we have the chance to spread the benefits even more widely, to the poorest citizens in the poorest countries who have yet to see the gains that others already enjoy. To do that we need to lock in the progress already made. The lesson of the 1930s, when the process went into reverse, is a salutary one. We must press on and complete the Doha round of trade liberalization and reduce and then eliminate trade barriers and trade-distorting subsidies.

But we must also help poor countries take full advantage of the benefits to be had from globalization. That means helping them as they implement economic reforms—with advice, yes, but also with additional resources to support policy reforms under way. In this way, all countries should be able to view the Millennium Development Goals as realistic objectives.

Helping to reduce poverty is a challenge for which we should all feel some responsibility. It is unequivocally desirable. And it is achievable. Ulysses was right: there is a newer, better world to find.

Thank you.