Making Sense of Globalization

Making Sense of Globalization
A Guide to the Economic Issues
CEPR Policy Paper No. 8
François Bourguignon, DELTA, Paris
Diane Coyle, Enlightenment Economics
Raquel Fernández, New York University and CEPR
Francesco Giavazzi, IGIER, Università Bocconi, Milano and CEPR
Dalia Marin, Universität München and CEPR
Kevin O’Rourke, Trinity College, Dublin and CEPR
Richard Portes, London Business School and CEPR
Paul Seabright, Université des Sciences Sociales de Toulouse and CEPR
Anthony Venables, London School of Economics and CEPR
Thierry Verdier, DELTA, Paris and CEPR
L. Alan Winters, University of Sussex and CEPR
A study commissioned from the Centre for Economic Policy Research
by the
European Commission Group of Policy Advisors

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Centre for Economic Policy Research
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primarily in European universities. The Centre coordinates the research activities of its Fellows and
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necessarily endorse the views expressed therein.
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and long-run policy questions. CEPR research may include views on policy, but the Executive Committee
of the Centre does not give prior review to its publications, and the Centre takes no institutional policy
positions. The opinions expressed in this report are those of the authors and not those of the Centre for
Economic Policy Research.
Executive Committee
Chair
Guillermo de la Dehesa
Vice Chair
Hans de Gier
Villy Bergström
Denis Gromb
Michael Saunders
Jan Krysztof Bielecki
Marc Hendriks
Kermit Schoenholtz
Diane Coyle
Bengt Holmström
Miguel Sebastián Gascón
Kevin Darlington
Jan Häggström
Andrew Smith
Quentin Davies
Giles Keating
Juha Tarkka
Bernard Dewe Mathews
John Lipsky
Philippe Weil
Fernando Fernández Méndez
Sergio Lugaresi
de Andes
Gerard Lyons
David Folkerts-Landau
Sanjit Maitra
Francesco Giavazzi
Rafael Repullo
Officers
President
Richard Portes
Chief Executive Officer
Hilary Beech
Research Director
Mathias Dewatripont
Centre for Economic Policy Research
90-98 Goswell Road
London EC1V 7RR
UK
Tel: (44 20) 7878 2900
Fax: (44 20) 7878 2999
Email: cepr@cepr.org Website: www.cepr.org
© European Commission
July 2002

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Contents
Foreword by Romano Prodi
v
Executive Summary
vii
1. Globalization and its discontents: a response
1
1.1 Introduction
1
1.2 What is new about this wave of globalization?
2
1.3 Gainers and losers from globalization
3
1.4 How are our institutions responding?
4
1.5 How can policy help?
10
1.6 Shaping globalization in future
11
1.7 Conclusions
14
2. What is old and what is new about the current wave of
globalization? an historical perspective
17
2.1 International commodity market integration
19
2.2 International capital market integration
27
2.3 International migration
28
2.4 Globalization and inequality during the late nineteenth
century
29
2.5 The late nineteenth century anti-globalization backlash
31
2.6 Summary
32
3. Globalization and markets: what have been the effects?
33
3.1 Markets for goods and services
34
3.2 Capital markets
43
3.3 Labour markets
52
3.4 Overview
56
4. The effects of globalization on world poverty and inequality
57
4.1 The changing world distribution of income
58
4.2 What is driving the evolution of between-country inequality?
60
4.3 The evolution of within-country inequality
63
4.4 Conclusions
67

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5. Globalization and future generations
69
6. The institutional responses to globalization
73
6.1 Globalization, governments and corporations
73
6.2 Corporations
75
6.3 Governments, corporations and national policies
79
6.4 Globalization and the citizen (civil society)
91
7. Cooperation among governments and the role of the EU
95
7.1 The role of regionalism in today's world
95
7.2 The international financial architecture and policies towards
capital flows
97
7.3 The role of the European Union
100
8. The concerns of the street protestors: what are the answers?
103
Twelve charges against globalization
104
References
108

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Foreword
In the light of the on-going debate on globalization, the events surrounding the
European Council of Göteborg and the meeting of the G8 in Genoa in 2001 as well as
the forthcoming UN conference in Johannesburg, the European Commission
considered that public discussion of these issues should be able to draw on as wide a
factual base as possible established by acknowledged specialists of irreproachable
standing. To this effect, it commissioned from CEPR a review of the existing literature
and research on globalization to make available the most up-to-date findings to a
wide audience in an easily accessible format presented in non-technical language.
In its mandate, the Commission decided to concentrate the treatment of globalization
on economic issues in order to make the task manageable. As a result, other important
dimensions to the process have had to be left out. The report does not attempt to
provide a comprehensive treatment of all possible issues but an in-depth treatment of
those that appear significant in the elected field. Within these self-imposed limitations,
it succeeds in providing the comprehensive and timely discussion of globalization that
the Commission requested.
Since the report has been written by the independent experts of CEPR and under their
authority, it does not represent an official position of the European Commission on the
question of globalization. In many respects the findings will prove controversial, at least
to those outside the circle of professional economists, contradicting as they do certain
deeply held beliefs about the negative consequences of globalization. Equally, they
point to the very real difficulties that certain parts of the world have experienced in
trying to integrate with the world economy and to draw positive benefits from the
process of globalization. Nor do they neglect the crucial issue of equity, in particular
with regard to income inequality and its possible causes. Indeed, the message that
governments of both developed and developing countries need to play an active role
by putting in place policies which can both enable a successful transition towards
open markets and the necessary support for those affected by this transition is well
made and one that the Commission would certainly support. Nevertheless, while
endorsing broadly the conclusions reached and appreciating the high quality of
analysis that has gone into producing the report, the Commission cannot concur with
all of its analysis. Since this is an independent report, such a result can be considered
as normal.
The Commission will use the report along with other contributions, the on-going
dialogue with civil society and the work of Commission departments to maintain its
efforts to ensure that Europe contributes forcefully to the development of a more
humane and more just world order with the instruments at the disposal of the European
Union and respecting the rights and individual charteristics of nations large and small.
Romano Prodi
President of the European Commission
June 2002

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vi
Foreword
Globalization is, in some respects, a centuries-old phenomenon. Only now, however,
are we examining which aspects of the current wave are old and which are new and
the effects of these on poverty and inequality in the world. Furthermore, it is difficult to
be sure whether the poor economic performance of some countries (notably in sub-
Saharan Africa) is due to their having been insufficiently open to the world economy, or
whether they lacked the institutions and capacities (such as in human capital) that
would have enabled them to embrace globalization successfully. This report analyses
how various institutions, including corporations, national governments and the many
institutions of civil society, have responded or potentially could respond to these
developments. The authors consider the scope for more effective cooperation
between national governments, devoting particular attention to the appropriate
response of the European Union. They conclude by summarizing what economic
research has to say about the concerns of the anti-globalization campaigners, how the
potentially significant costs of globalization can be mitigated, and how a failure to
address them would risk provoking a backlash that could destroy many of the real
gains that globalization has achieved.
The opinions expressed in this report are those of the authors and not those of the
Centre for Economic Policy Research, which takes no institutional positions. The study
was commissioned by the Group of Policy Advisors to the President of the European
Commission, whose Foreword puts it in context. The report also does not represent the
views of the Commission, which takes no responsibilty for any use of this material.
Hilary Beech
Chief Executive Officer
CEPR
24 June 2002

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Executive Summary
This study surveys recent research about the economic effects of globalization. In some
respects globalization is a centuries-old phenomenon, so we begin by asking what is
old and what is new about the current wave, drawing particular comparisons with the
late nineteenth century. We then go on to ask what is known about how globalization
expands the reach of markets, including the markets for goods and services, as well as
the markets for capital and labour. We summarize what have been the effects on
poverty and inequality in the world, and assess the risks to future generations. World
inequality in incomes has increased dramatically over the last two centuries. But much
of this increase took place before 1950, and the proportion of the world’s population in
absolute poverty is now lower than it has ever been, although continued population
growth means that the total numbers of those in destitution remain disturbingly high.
It is difficult to be sure whether the poor economic performance of some countries
(notably in sub-Saharan Africa) is due to their having been insufficiently open to the
world economy, or whether they lacked the institutions and capacities (such as in
human capital) that would have enabled them to benefit from the opportunities such
openness might in principle provide. At all events, the presence of complementary
institutions does appear to make an important difference to whether countries are able
to embrace globalization successfully. The report therefore turns to how various
institutions have responded and potentially could respond to these developments,
including corporations, national governments and the many institutions of civil society.
We consider the scope for more effective cooperation between national governments,
devoting particular attention to the appropriate response of the European Union.
We conclude by summarizing what economic research has to say about the concerns
of the anti-globalization campaigners. Although many campaigners are poorly
informed about the historical record, and appear not to be aware of the important
contribution played by globalization in the struggle against poverty, we argue that
there are potentially significant costs to the process. There is an important role for
policy in mitigating these costs, and a failure to address them would risk provoking a
backlash that could destroy many of the real gains that globalization has achieved.

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viii
Executive summary
This study has been commissioned by the Group of Policy Advisors of the European
Commission. The views expressed here are those of the authors writing in their personal
capacity. Their opinions are entirely independent from CEPR and the European
Commission. The European Commission cannot be held responsible for the use that
could be made of the content of this report.

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1. Globalization and its discontents: a response
1.1 Introduction
‘Globalization’ means many things to many people. There is no commonly accepted
definition, yet globalization is at the centre of a starkly polarized debate over the major
policy issues in the world today. Attempts to define globalization usually seem clumsy.
Our working definition is ‘an increase in the extent to which individuals and institutions
transact or exchange with others based in nation states other than their own, or
otherwise influence them through their economic and social behaviour’. Globalization
has opponents, often highly vocal, and supporters, sometimes hesitant, sometimes
unattractively brash. Little wonder, then, that popular coverage of globalization focuses
on its costs, real and imagined.
Its critics say globalization increases inequality, pollutes the environment, causes
economic instability, exploits workers and undermines the ability of governments to
raise the taxes that finance public spending and welfare. Such strong claims are
clearly affecting the political climate. Public opinion reveals a deep scepticism about
trade, financial flows and migration.
Yet there is a wealth of economic evidence demonstrating that globalization brings
great benefits as well as imposing costs. It offers the opportunity for a higher rate of
sustainable growth - growth that translates into longer, healthier lives and improved
living standards. These gains must be weighed against the adverse effects of
globalization. While the effects of international liberalization on the world’s poorest
countries and people must be the greatest concern, this report concludes that the true
benefits strongly outweigh the costs. What is more, the evidence also shows that many
of the charges against globalization are misguided. It does not, for example, inevitably
increase the inequality of incomes. Indeed, trends in income distribution have not
been as negative as they are usually portrayed - the nineteenth century saw an
explosion of inequality, but by around the middle of the twentieth century it had
stopped rising. And the proportion of the world’s population in absolute poverty is
almost certainly lower than it has ever been. The effects of increasing economic
openness depend critically on the circumstances of individual countries and the
policies they follow. There is similarly little evidence that governments are losing power
to multinational corporations or other agents of globalization, or that there is a ‘race to
the bottom’ in environmental or labour standards or taxation.
The chasm between the economic evidence and the popular view has emerged for
two main reasons. One is that global flows, of goods, capital or people, can indeed
have adverse results when there are domestic market failures or regulatory

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2
Globalization and its discontents
weaknesses. Many of the policy recommendations in this report are proposals for
dealing with these directly. This will help limit or reduce the costs of globalization. The
second reason is that improved communications (including broadcasting) have made
the world much more aware of differences between rich and poor, differences that
have always been present but of which in the past many of the poor themselves were
much less aware.
Both the presence of real dangers from globalization, and the greater awareness of
such dangers, make it vital to implement policies to deal with them. The alternative is a
backlash that would reverse some forms of international economic integration and
could undermine some of the great progress that has already occurred.
Already, 11 September and its aftermath, together with the slowdown in world growth,
have exercised a more effective brake on globalization than all the preceding
protests. To compound this with well-intentioned but misguided ‘anti-globalization’
policies would harm poor countries and poor people throughout the world.
1.2 What is new about this wave of globalization?
Globalization in the general sense of the term is not new. All innovative and dynamic
societies in history have been in some way cosmopolitan. Nor is it irreversible. The last
episode of globalization from 1870-1913 fell victim to a backlash following the First
World War. Much of the concern about the current era of globalization has arisen out
of the responses of different institutions - corporations, governments and civil society -
to different aspects of closer international integration. It is hardly surprising that there
should be new tensions in times of great change. It is natural to worry about how well
our societies are responding.
There are useful lessons from the wave of globalization a century ago, although there
are important differences between the two eras. While migration flows are lower now,
economic openness has been rising during the past half century. Transport costs have
declined, and tariffs have fallen substantially. The increase in intra-industry trade and
outsourcing has been significant, as have increased foreign direct investment and
financial capital flows. These point to qualitative changes in the nature of international
integration that are probably more important than the quantitative measures of the
degree of globalization. Even so, at the beginning of the twenty-first century distance
and national borders are still powerful barriers to economic interaction. International
migration is significantly lower than in the 1870-1913 period. By some measures net
capital flows are no bigger now than then, although they are broader in the sense that
there is investment in a wider range of sectors. And trade between countries, taking
account of their economic mass, falls off steeply with distance - trade in capital and
ideas no less than trade in goods and services.
But perhaps the most important lesson concerns the shape of the backlash against the
globalization of 1870-1913. This was motivated in part by its distributional
consequences, and it generated protectionist responses - protection against

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