Linda Lim, Ph.D.
Southeast Asia Business Program
University of Michigan
March 2000

In the wake of the anti-globalization protests at the Seattle WTO meeting, many Americans concerned about the impact of globalization on social welfare in developing countries have ignored or forgotten that the mostly elected representatives of these countries were in Seattle looking for greater, not lesser, participation for their citizens in the world economy.

The main complaint of developing country governments at Seattle was that past WTO trade accords had imposed greater demands on them to, for example, protect intellectual property rights held mostly by rich country companies, and open markets in sectors (such as financial services and telecommunications) where rich country companies had a dominant competitive advantage, without simultaneously opening rich country markets in sectors where producers in poor countries are internationally competitive, primarily agriculture and labor-intensive manufacturing such as the heavily protected textile and garments industry.

This asymmetry in global economic relations between the poor and the rich restricts developing country citizens' access to the only proven path to higher productivity and incomes that latecomers to industrial development have experienced-that of export-oriented agricultural and industrial development-and thus deprives them of the jobs, incomes and social welfare generated by such comparative advantage-based participation in the world economy.

It is common in analyses that seek to disparage the economic and social impact of globalization on poor countries to note that globalization has benefited only a handful of such countries, most of them in Asia. But these Asian countries account for a large proportion-indeed, a majority--of the developing world's population.

World Bank statistics show, for example, that East Asian and Pacific countries, with over 1.8 billion people in 1998, grew two-and-a-half times faster in real GDP, and twice as fast in real per capita GDP, than the world's high-income countries, with real GDP growth averaging 7.3 percent a year from 1965 to 1980, 8 percent from 1980 to 1990, and 8.1 percent from 1990 to 1998. The next most populous group of countries, those of South Asia, with a 1998 population of 1.3 billion, grew at roughly the same rate of the high-income countries between 1965 and 1980, but between 1980 and 1998 they grew at 5.7 percent a year, or more than double the rate of growth of the high-income countries.

In the last twenty years, then, the 3.1 billion people who live in the developing countries of Asia, and account for 62 percent of the entire developing world's population, experienced annual real per capita income increases of 5% in the 1980s and 5.7 percent in the 1990s, much higher than the 2 percent average annual increases in real income experienced in high-income countries.

This is not all. This increase in real incomes for the majority of the world's developing country population has been accompanied by all the usual indicators of improved living standards, including declining rates of poverty and illiteracy, higher daily caloric consumption, lower infant mortality, higher status of women, and longer life expectancy-not to mention, in recent years, an increase in democratic government and other liberties such as press freedom, worker rights, and so on. The United Nations' Human Development Index not only documents these social improvements, but also shows that they are highly correlated with per capita income levels determined by GDP growth.

While human rights in China, the largest of the countries which has seen high growth, remain well below international standards, they have vastly improved since it liberalized internal markets and began participating in world trade and capital flows two decades ago, and are today substantially better than at any previous time in the country's long history.

What has been the source of these real GDP increases and the concomitant social improvements that they have made possible? Well, it turns out that the dozen fastest-growing economies of the 1980s and 1990s, more than half of which are in Asia, are also among the dozen largest exporters and largest recipients of foreign investment among developing countries. China, Malaysia, Singapore, Indonesia, Thailand and Korea, with a total population of over 1.5 billion, rank in the top dozen countries by GDP growth, total exports and total foreign investment in the 1990s. Hong Kong and Taiwan rank in the top dozen in terms of exports and foreign investment, but not in terms of growth. In terms of the proportion of GDP accounted for by exports in 1997, Singapore ranked No. 1 in the world, Malaysia No. 2, Hong Kong No. 3, Indonesia No. 4, Thailand No. 5, Taiwan No. 7, Korea No. 10, and China No. 12.

The picture is clear. Heavy participation in international trade and investment, as predicted by economic theory and confirmed by the statistical data, results in rapid economic growth. In particular, reliance on labor-intensive export manufacturing is the secret to successful development-it not only increases productivity and incomes, but also creates the most jobs (being labor-intensive, and thus absorptive of relatively unskilled and thus low-income workers), reduces poverty rates most rapidly (as World Bank studies have found), and disproportionately favors female employment, resulting in large increases in female labor force participation, advances in female education, increases in the female age of marriage and dramatic declines in birth rates.

These developments positively influence growth in another, demographic, way-by reducing dependency ratios (through low birth rates and high female labor force participation), they increase the capacity to save, and are responsible for much of the high savings rates, averaging 40 percent of income, which have enabled the East Asian countries to sustain high rates of investment, and thus of growth, for decades.

Certainly some of these Asian countries have protected their domestic markets, for at least part of the period of rapid growth. But it is the liberalized, globalized sectors of their economies which grew the fastest, and liberalization itself-including political and social liberalization--increased with growth, as the examples of Taiwan and Korea in particular testify, as well as vice versa.

One need only contrast the growth experience of China with that of India, of China after market reforms with China before those reforms, of Southeast Asia with South Asia, and of those Southeast Asian countries which participated actively in international trade and investment-Singapore, Malaysia, Thailand, Indonesia-with those which withdrew from it-Burma, Cambodia, Laos and, until recently, Vietnam-to realize that openness and engagement with the world economy is by far the superior path.

Labor-intensive export manufacturing, in particular, leads to skill and technology acquisition and market expertise which can propel a country up the industrial ladder to higher productivity and incomes, narrowing the gap with advanced industrial countries, From producing simple garments, toys and footwear, for example, many East Asian countries have moved into electronics and computer equipment, and now into software and other state-of-the-art information industries. As a consequence, between 1981 and 1996, per capita income rose in South Korea from 13 percent to 36 percent of the U.S. level, in Taiwan from 26 percent to 46 percent of the U.S. level, and in Singapore and Hong Kong from 40 percent to 99 percent of the U.S. level.

In short, globalization in terms of increased international trade and investment, not to mention the diffusion of technology and information that it makes possible, has proven to be the surest path to social as well as economic progress for late-developing countries, and Asia, especially East Asia, has been the showcase for this progress. Does not the recent Asian financial crisis, then, dispute the sustainability of this success?

Not really. First, the Asian crisis had many causes, only one of which was premature capital market liberalization in advance of the necessary institutional underpinnings, which led to the problem of excessive debt and bad investments that precipitated the crisis. Second, as one might expect given the multivariate nature of the crisis, not all of the East Asian showcase economies suffered badly from the crisis-Taiwan, Singapore and China emerged mostly unscathed and without experiencing negative GDP growth. Third, the more open economies-Singapore, Hong Kong and Taiwan-were not more severely hurt by the crisis; in fact, the opposite is true. Fourth, the 18-24 months of recession following the crisis were hardly sufficient to wipe out two to three decades' worth of 5-6 percent annual increases in living standards.

Fifth, the recovery from crisis has so far been swift, sharp and robust-largely due to favorable external markets to which the export-oriented industrial infrastructures of the crisis-hit countries were well-placed to respond, and to the trade and investment liberalization which all except Malaysia put in place during the crisis-despite the fact that the domestic financial and corporate restructuring required by the crisis has been slow and far from complete. Sixth, the long-term growth prospects for most of these economies remain strong unless they completely botch up their domestic restructuring.

But what about the oft-repeated "lack of a social safety net" that reportedly plunged so many people in the region into misery during the crisis? Powerful media anecdotes notwithstanding, the fact is that nowhere in the Asian crisis countries, except Indonesia (see below), did unemployment or inflation rise into the double digits, despite currency depreciations of 40 percent in very open economies, and recessions in 1998 that reached nearly 10 percent of GDP. This, surely, was a "miracle", reflecting the cushion of high savings, continued existence of traditional extended family networks and village-based social safety nets, the willingness to "share the misery" by accepting temporary wage cuts (which were larger for managers than for workers in Thailand and Korea) rather than endure mass lay-offs, and the entrepreneurial resilience of the laid-off who moved into self-employment instead.

The misery of these two lean years would have been much less tolerable if not for the twenty to thirty fat years that preceded them. It would also have lasted much longer if integration into the global economy had not provided the stimulus of strong external demand which maintained and even grew the region's export industries after their domestic markets collapsed. The most widespread, efficient and cost-effective social safety net in this case is a quick return to full employment, which cannot occur without a revival of export-led growth.

At the same time, the export-led recovery of the Asian crisis countries was not to the detriment of Americans. On the contrary, Alan Greenspan himself testified before Congress that "the Asian crisis could not have come at a better time for us"-since cheap Asian imports due to devalued currencies and capital flight out of Asia helped restrain U.S. inflation and interest rates, contributing to the historically unprecedented extension of the U.S. economic boom and record-low unemployment rates, benefiting American workers and consumers.

So what is the downside to this story? It is, simply, that whereas globalization is necessary for economic growth and social progress, it is not sufficient to ensure maximum benefit for all. Globalization-the opportunities and competition provided by international markets-by itself cannot overcome, though it may mitigate, bad (or non-existent) government policy (including policies to restrict trade and investment), wealth and income inequality, the evils of corruption and cronyism, ethnic conflict and gender discrimination, environmental degradation, political oppression, human rights violations, the sexual exploitation of women and children, and any number of social ills which are rooted in particular societies.

Thus globalization could not rescue Indonesia from the El Nino drought which ravaged its eastern half, causing crop failure and widespread hunger in 1997 and 1998 before the rains came again. It could not make up for government corruption and mismanagement, or for the military incompetence and venality that led to vicious ethnic and religious violence and the resultant flight of capital that deepened the crisis. The combination of these events-not the financial crisis alone-set the country back five to ten-but not thirty-years in average living standards. Even in Indonesia, however, the chaos led to peaceful and open elections and the emergence of a new democratic government, while booming agricultural exports sustained many in the rural areas, and positive growth is emerging again this year.

Globalization is also not, so far, powerful enough to overcome the inherent inequality in multilateral policy-making between rich and poor countries-with the rich still able to dictate the terms of the poor's participation in the world economy, often (as in the case of rampant agricultural and textile protectionism) in contraindication to what global market forces would dictate. And globalization also generates its own negative (as well as positive) externalities-most notably, the degradation of the natural environment which results from economic and industrial growth, and the spread of diseases such as AIDS.

What, then, is to be done? For developing countries, despite the promise of globalization, dealing with social and economic problems must begin at home-with creating the political, social and economic institutions that are necessary to maximize the gains from globalization while minimizing its costs and dealing with problems which it is ill-equipped to handle. These include the development of democratic, accountable and transparent political, legal and business institutions, including labor market institutions, public investments in education and health care, and the development of appropriate incentive and disincentive systems to deal with the environmental problem.

Despite the role that various non-governmental organizations can play in these developments, I believe that the main responsibility in most developing countries lies with government-which alone has the resources, organization and authority to provide these public goods at the scale and speed which is required for rapid improvement.

What role can the well-meaning citizens of sympathetic rich countries play in this process? Through globalization, they can contribute their capital, skills, technology, expertise and experience to this endeavor. And they can resist and provide pressure to roll back the short-sighted, self-preservationist and anti-competitive actions which their own misguided governments and vested interest-groups have taken in the global arena to prevent poor countries from taking full advantage of the benefits that globalization not only promises, but delivers to those fortunate enough to be allowed to participate in it. Rich country citizens can petition their governments to grant the resources and market access which is necessary to help poor countries help themselves.

Globalization is not the only answer to the social problems of the developing world, but neither can there be solutions to these problems without the resources and access that it provides to new technologies, new information, new employment, and new forms of social and democratic organization that can improve the lives of people everywhere.