6.1 Integration with the global economy See Table 6.1 here

Commentary
About the data
Definitions
Data sources

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The pace of global economic integration continues to accelerate dramatically. Between 1985 and 1994 the ratio of world trade to GDP rose three times faster than during the previous decade. During the same 10-year period foreign direct investment (FDI) doubled as a share of global GDP. Developing countries have participated extensively in the acceleration of global integration. Over the past decade their ratio of trade to GDP has increased, and their share of global FDI has risen to more than one-third.

A closer look, however, reveals sharp differences among countries. Although developing countries as a group kept pace with the growth of world trade, the ratio of trade to GDP fell in 44 of 93 developing countries over the past 10 years. There were similar disparities in the distribution of FDI: two-thirds of FDI to developing countries went to just eight countries, and half the countries received little or none. These disparities are likely to continue.

Integration matters because there is an association between integration and growth. Fast growth tends to promote a more open economy, and policies that promote an open economy also promote faster growth. Thus lagging integration is a sign of underlying policy deficiencies. In addition, integration can lead to higher growth through better resource allocation, greater competition, transfer of technology, and access to foreign savings. Many of the countries lagging in global integration are among the world’s poorest.

For many developing countries successful integration depends on fundamental economic reform, requiring difficult policy decisions that often lead to real short-term dislocation. These costs must be acknowledged from the outset, and the effects carefully taken into account in the design of reform programs. But the costs are manageable. In fact, openness to external trade and investment is often the necessary first step to solid, sustainable economic development.

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Indicators of the speed of integration were developed for the World Bank’s Global Economic Prospects and the Developing Countries 1996. The concept underlying the indicators is that the change in variables associated with integration gives an indication of how rapidly an economy is integrating with the global economy. The changes in the integration variables are computed between three-year averages to reduce the effect of a single year. But the results must be interpreted with care. For example, a decline in Switzerland’s credit rating, already one of the highest in the world, probably should not be given the same weight as a similar decline for a developing country. (Selected country risk indicators are shown in table 5.9.)

• Real trade is the sum of exports and imports of goods and services measured in constant prices. The data here differ from those in the World Bank’s Global Economic Prospects 1996, where they were adjusted for population size.

• Institutional Investor credit rating ranks the chances of a country’s default from zero to 100, with 100 representing the least chance of default. For further discussion of these ratings see Shapiro (1996).

• Net foreign direct investment is investment to acquire a lasting management interest (at least 10 percent of voting stock) in an enterprise operating in a country other than that of the investor. It includes equity capital, reinvestment of earnings, other long-term capital, and short-term capital. The indicator is computed as a ratio to GDP converted to international dollars using purchasing power parities (PPPs).

• Manufactured exports are commodities in the Standard International Trade Classification (SITC), revision 1, sections 5–9 (chemical and related products, basic manufactures, manufactured articles, machinery and transport equipment, and other manufactured articles and goods not elsewhere classified), excluding division 68 (nonferrous metals).

These data first appeared in the World Bank’s Global Economic Prospects and the Developing Countries 1996. Data on real trade, net foreign direct investment, total exports, and gross domestic product come from the World Bank’s national accounts and balance of payments files. Data on manufactured exports come from the United Nations COMTRADE database. Credit ratings prepared by Institutional Investor appear in the monthly publication Institutional Investor.

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