The network of economic links binding nations has become stronger in the past four decades. World trade has grown faster than GDP. Foreign investment has increased rapidly. International financial markets have expanded enormously in their scale and in the diversity of their instruments. And new technologies have revolutionized international communications and altered long-standing patterns of production and employment. All a striking contrast to the first half of the century, when wars, autarky, and depression impeded the growth of trade and international finance.
In some ways the past four decades can be viewed as a return to the pre-1913 era—when goods, labor, and capital moved around the world relatively freely. But there also are striking differences. Compared with the reign of commodities before 1913, trade now has a higher share of manufactures and services, in part a reflection of the declining price of commodities relative to manufactures. Other differences between the current period of financial integration and that of the late 19th century are the greater global scope and depth of integration and the speed with which the market can now react.
Global economic integration—the widening and intensifying of links between the economies of industrial and developing countries—has accelerated rapidly. Underpinning the intensification of these links—which include trade, finance, investment, technology, and migration—are several structural factors. The progressive liberalization of trade policies negotiated during consecutive rounds of trade talks—culminating in the Uruguay Round—has lowered tariffs and stimulated trade. The integration of the world economy through trade has been reinforced by increases in private capital flows, particularly in the 1990s. And technological advances in transport and communications have lowered the cost of operating globally and provided developing countries with new opportunities to benefit from the growing world economy.
Despite a brief reversal in the mid-1970s and early 1980s, the global economic environment has become increasingly favorable, with expanding opportunities for developing countries that have adopted an outward orientation. This environment has been characterized by buoyant growth in industrial countries, low world inflation and energy prices, and modest real interest rates (table 6a).
The principal beneficiaries of economic integration have been a few larger and more rapidly growing developing economies, while the poorer and more slowly developing economies remain heavily dependent on official aid flows from high-income countries. These poorer economies typically are also less diversified and more dependent on exports of primary commodities to high-income economies—and vulnerable to price fluctuations in global markets.
This section provides information on the links between the high-income, industrial economies of the Organization for Economic Cooperation and Development (OECD) and low- and middle-income economies—focusing on trade, private and official capital flows, and labor migration.
Disparities in global integration
Over the past decade the ratio of trade to GDP, a common measure of integration, has risen—strongly in such regions as East Asia and Europe and Central Asia (table 6.1). The amount of foreign direct investment flowing to developing and transition economies has increased fourfold, raising the ratio of FDI to GDP in some regions. But there are wide disparities: the ratio of trade to GDP fell in many economies, especially in Africa, and rose only slightly in South Asia. The distribution of FDI across developing economies is also highly skewed: eight developing countries accounted for two-thirds of FDI flows during 1990–93.
Growing trade links . . .
Trade has been the main engine driving global integration in the second half of the 20th century. Since 1950 trade has grown faster than output, and the trade links between high-income OECD members and other countries have strengthened significantly, particularly for manufactured goods (tables 6.2 and 6.3). The importance of trade for all economies derives from its impact on production efficiencies—through economies of scale and scope as production expands beyond the size limits of the domestic market and through increases in competitiveness as exposure to global learning spreads technological innovation.
Spurred by the success of the newly industrializing economies in Asia and a growing body of evidence supporting the growth-enhancing effects of integration, more developing countries are seeking to use trade, particularly manufactured exports, as a vehicle for growth and diversification. The share of manufactured exports, an important indicator of integration, has risen most significantly in dynamic, fast-growing regions.
While OECD import growth will continue to be healthy, developing country import demand will be even more buoyant—particularly in East and South Asia, as capital and intermediate goods are imported to support their large infrastructure needs and their fast-growing export sectors. International trade is expected to continue to grow rapidly, spurred by reductions in trade barriers agreed to in the Uruguay Round (table 6.4). It is bolstered by regional trade arrangements—such as the North American Free Trade Agreement, the European Union–Mediterranean Initiative, the Asia-Pacific Economic Cooperation Forum, and the Southern Cone common market, Mercosur—and by unilateral trade liberalization in many developing countries. Over the next decade world trade is projected to grow in volume by an average of 6.4 percent a year—almost twice the pace of world output growth.
The relative decline of primary exports from the developing world is a striking trend—real commodity prices fell by more than half in 1980–93 (table 6.5). Production and trade of primary commodities have not grown as fast as world income because of the low elasticity of demand for most commodities, especially food, and the declining intensity of metals and agricultural raw materials in industrial economies. Although prices are expected to be flat in the longer term, this trend will be better than the large price declines suffered during the 1980s and early 1990s—and will provide a more stable environment for primary goods exporters to pursue long-term economic restructuring.
The terms of trade remain a major issue for Sub-Saharan Africa, however, which is still the least diversified region in primary exports. Failure to obtain higher export prices hampers the ability of Sub-Saharan countries to reduce their debt burdens and to channel other resources into priority sectors.
. . . as barriers to trade fall
The progressive liberalization of trade policies agreed to during consecutive rounds of negotiations of the General Agreement on Tariffs and Trade (GATT) has culminated in the reduction of tariffs from about 40 percent in the immediate postwar era to about 6 percent today for OECD countries. From the mid-1970s onward, support for trade liberalization weakened as industrial and developing countries began to establish new nontariff barriers to trade, such as voluntary export restraints and quotas. But the latest round of negotiations—the Uruguay Round—resulted in an agreement by the OECD countries to lower tariffs even further—to 3.8 percent on manufactured goods by the second half of the 1990s.
The full impact of the Uruguay Round on the strength of the global trading system is difficult to gauge. Several studies have estimated the global income gains at up to $200 billion a year. Between a quarter and a half of these gains—which come from the reduction and binding of tariffs and the elimination of nontariff barriers and voluntary export restraints—are expected to go to developing countries. High-income economies reduced tariffs by an average 39 percent on imports from developing countries, giving an overall trade-weighted tariff on manufactured imports of 2.5 percent, down from 4.1 percent—with the reductions to be phased in over five years. Developing countries reduced tariff rates by an average 21.3 percent on manufactured products from all sources, giving an overall trade-weighted tariff of 13.3 percent.
The effects of the Round on real incomes and real wages will differ depending on the efficiency gains from each country’s liberalization, terms of trade effects, and the implications of abolishing the Multifibre Arrangement (MFA) quotas on textiles and clothing. Liberalizations that translate into large reductions in the domestic prices of imports will lead to larger gains in real income. The reason? Reduced trade barriers mean that consumers can buy from the most efficient source and producers can reorient production toward items in which they have a comparative advantage.
Further gains can come from greater exploitation of scale economies in production—and from improvements in the range and quality of specialized products available to producers and consumers. In addition, countries can gain from reductions in protection by their trading partners, particularly if reduced protection increases the demand for their exports and improves their terms of trade. The phasing out of the MFA (over 10 years) is expected to generate considerable benefits for exporting and importing countries alike. In South Asia, for example, its abolition could mean a substantial increase (200 percent in one estimate) in the output of textiles and apparel exports.