Does globalization work?

Is globalization working? To answer that question we first have to clarify what we mean by "working". My definition is: spreading ecomomic growth so that (absolute) poverty can be tackled and eliminated. So globalization works if it’s spreads economic growth to other countries with the result that billions of people can be lifted out of poverty.

Now then, is globalization working? Yes, and no.

Yes, it’s working for 80% of the current population living in developing countries. Five billion people live in countries who are growing and developing, and making major inroads against poverty. Some of those countries are developing fast: take just two, China and India. That alone is 2,5 billion people; living in fast growing countries, where globalization thus is working.

No, it’s not working for the "bottom billion", the title of a new book by development expert Paul Collier. They live in countries who are not developing, on the contrary.

Let’s have a recap. Before the 1980’s, with some exceptions in both positive as negative sense, the Northern part of the world was developing and growing fast, while the Soutern part was growing too but not as fast. Over time even small differences can lead to a huge gap. The Grand Canyon also started small. So inequality between North and South (again with some exceptions) became gigantic. And although there was growth five to six billion people remained rather poor.After the 1980’s things started to change. Some developing countries started to grow fast, faster than developed Western countries ever did. Billions of people now live in such countries, and hundreds of millions of people see important gains in their incomes.

But another thing happened aswell. The situation of the bottom billion got worse. And I mean: really worse. Growth actually became negative over the past few decades. People living in small landlocked countries in Africa (not the whole of Africa tough, a Plan for Africa thus is nonsense), and Central Asia, are now poorer then they were in 1970.So the good news is, globalization is working for the biggest part of the worlds population, and it would be foolish to tinker with this process. Giving aid for instance: it isn’t in any way helpful for countries already growing by other means, it’s spread to tin to have any effect, and it does not go to countries that needed it the most. In a nutshell, something that is not broke, doesn’t need fixing.

The bad news is: for the remaining part it’s not working. Here we do need some fixing. Before we continue however, we should emphasize again the formidable gains made since globalization turned into it’s current phase. That we can give five billion people hope for a better future is more than just good news. It’s unprecedented. The remaining poor is a smallest part of world population ever.

But back to our bottom billion. The reason globalization does not work is because the bottom billion live in countries disconnected from the world. Many of them are landlocked. To be sure that in itself is not the problem: Switzerland is one of the richest countries in the world. But it has a global market which say Uganda does not have. Consider it’s neighbours:

- Kenya: has been stagnant for three decades;

- Sudan: civil war

- Rwanda: had a genocide (nevertheless things are going into the right direction here)

- Somalia: collapsed completely, is a so-called failed state

- Congo: do I need to say anything?

- Tanzania: it invaded Uganda

Switzerland has France, Germany, Italy and Austria. Get the picture?

Still more depressing is the fact that government policies tend to make the situation worse. It is possible to overcome the problem of being landlocked, even against all odds. At least it is possible not to make the situation worse. Being landlocked can be overcome: just don’t be air-locked and e-locked as well. Like Congo where air transport is staggeringly expensive, the airlines are run by the state and where the planes are – at least were – commandeered by the First Lady for here shopping trips. Nigeria on the other hand has an open-sky policy.

Another sign of being disconnected: these countries are deprived of private capital, and thus of private investment. As a result there is a lack of equipment for the labor force to work with. The labour force is depressingly unproductive. And because productivity drives wages, the incomes are very low. Such is the problem that their low wages are not enough to compete successfully with the developed countries. Because productivity is so low they cannot break into our markets, even if we let them, and even with the huge gap in wages between them and us.

Now the extraordinary fact is that capital should flow to capital scarce regions because the returns should be highest there. But it doesn’t. Why? Paul Collier gives some reasons:

1.Poor governance: capital does not flow to countries where it is not treated well, or where the risk of investment is too high;

2.We are talking about small and unknown countries. Investors do not have any incentives to learn about them (information gathering is costly). Every major country knows all the latest news about China, but does not know that Uganda even exists. So they get dismissed. It’s hard to get out if this vicious circle even with all the right policies.

Not only does capital not flow to these countries, their own capital goes abroad: capital flight. Of Africa’s private wealth 38% is held abroad. Africa does globalize, but in the wrong direction! Two reasons for this: those in power do loot the country and put the money in Swiss (those lucky land-locked Swiss again) bank accounts. But the more important reason: there are not interesting investment opportunities in Africa itself. Reasons for this? Being landlocked, or bad governance, or civil war… Talk about Catch-22! (Or rather Catch-44).

And so globalization doesn’t work, because it can’t work. Unless we help. Foreign aid for instance surely can help break the traps those countries are in. William Easterly, who is generally skeptical about foreign aid (and other foreign interventions), is right about the five billion living in really developing countries, but he’s wrong about the bottom billion. At least that’s what Paul Collier says in his book.

Go read it.