The opportunities and risks of globalisation

16. The word globalisation is used in different ways. The contested nature of the concept is part of the explanation for the confusion of so much of the public debate. For some, globalisation is inextricably linked with the neo-liberal economic policies of the 1980s and early 1990s. For them, globalisation is synonymous with unleashing market forces, minimising the role of the state and letting inequality rip. They denounce the increasingly open and integrated global economy as an additional more potent source of global exploitation, poverty and inequality.

17. In fact, globalisation means the growing interdependence and interconnectedness of the modern world. This trend has been accelerated since the end of the Cold War. The increased ease of movement of goods, services, capital, people and information across national borders is rapidly creating a single global economy. The process is driven by technological advance and reductions in the costs of international transactions, which spread technology and ideas, raise the share of trade in world production, and increase the mobility of capital. It is also reflected in the diffusion of global norms and values, the spread of democracy and the proliferation of global agreements and treaties, including international environmental and human rights agreements.

18. Globalisation is characterised, too, by the growth of transnational companies, which now account for about a third of world output and two-thirds of world trade. Around a third of world trade takes place within transnationals, between subsidiaries of the same corporation based in different countries.

19. Managed wisely, the new wealth being created by globalisation creates the opportunity to lift millions of the world's poorest people out of their poverty. Managed badly and it could lead to their further marginalisation and impoverishment. Neither outcome is predetermined; it depends on the policy choices adopted by governments, international institutions, the private sector and civil society.

20. Globalisation brings with it rapid change. And this has generated uncertainty and anxiety amongst millions of people across the world. It has also raised legitimate public concerns, for example about the impact of globalisation on people's culture, the environment, inequality within and between countries, and the effect on the world's poorest people. If democrats and internationalists do not address these concerns, then those who advocate narrow nationalism, xenophobia, protectionism and the dismantling of multilateral institutions will gain in strength and influence with disastrous consequences for us all.

21. To many people, the most visible impact of globalisation is the near universal availability of the same consumer goods - such as soft drinks, hamburgers, popular music and television programmes. Some fear that this is leading to a single homogeneous culture dominated by western commodities and values.

22. However, throughout human history, exposure to outside influence has tended to enrich, rather than impoverish, individuals and societies. Globalisation has accelerated this process and produced elements of a 'global culture'. But it has also encouraged a re-assertion of local cultural identity and, in many cases, greater respect for diversity and pluralism.

23. English is emerging as a means of communicating internationally, but this does not pose a threat to the languages that are spoken in daily life in communities across the world. The risk of a global monoculture of values and aspirations is vastly greater if the developing world remains poor and marginalised rather than an equal and respected part of a rich international diversity of culture and language.

24. There is also concern that globalisation is damaging the global environment. It is certainly true that the global environment continues to deteriorate, and that many renewable resources - freshwater, forests, plant and animal species - are being exhausted at a rate beyond their natural recovery level. Seventy per cent of the world's fishing areas, for example, are over or fully fished, yet a billion people depend on fish as their main source of protein. It is also true that the consumption patterns of people in developed countries are the major source of global environmental degradation.

25. But this process was at work before global integration speeded up. Indeed openness and integration into the global economy can help countries to meet the new environmental challenges. Poverty and environmental degradation are often linked. Economic development gives countries improved access to new, less resource-intensive and less polluting technologies. Over the last fifty years, it has been more closed economies - such as the former Communist countries - that have had the worst record of industrial pollution and urban environmental degradation.

26. Stronger international institutions and a much stronger commitment to sustainable development at the national and the international level are needed to help the world shift to more sustainable patterns of production and consumption. But if the world remains deeply divided and the poorest countries believe that improved environmental standards will prevent or hinder their development, international agreement to protect global environmental resources will become impossible. A world commitment to sustainable development is dependent on the guarantee of development for the poor.

27. Many believe that globalisation causes rising levels of inequality and poverty. The best evidence to date suggests that there is no systematic relationship between openness and inequality, or between growth and inequality^v.

28. Take the question of inequality between countries. After increasing between 1960 and 1990, this has more recently started to fall. In 1960, the average real income in the countries containing the richest fifth of the world's population was 12 times greater than in the countries containing the poorest fifth; in 1990 it was 18 times greater; by the late 1990s this had fallen to 15 times greater².

² The figures for 1960 and 1990 are drawn from the 1996 UNCTAD Report on Least Developed Countries. The figures for the late 1990s have been estimated by DFID using World Bank Indicators 2000 data, and are adjusted to form a consistent time series. All these figures are based on purchasing power parity comparisons. Purchasing power parity (ppp) is essentially a hypothetical exchange rate which equalises the buying power of currencies. With a dollar converted to another country’s currency at the ppp exchange rate, you should on average be able to buy the same set of goods in that country as you could for one dollar in the USA.

29. The explanation for these figures lies in differences in economic performance. The world's richest countries have continued to grow; the world's two biggest nations - India and China, containing huge numbers of the world's poor - have accelerated their growth rates over the last two decades; while many of the poorest countries in Africa have stood still, or experienced negative growth. Whether inequality between countries rises or falls in the years ahead depends on the policies that they pursue. If the poorest countries improve their economic performance then global inequality should fall; if they do not, it is likely to rise.

30. Similarly within countries, the evidence indicates that there is no systematic relationship between increased openness and changes in inequality - in some cases the poor gain more from trade than the average citizen; in other cases they gain less.

31. Everywhere it is clear that openness is a necessary - though not sufficient - condition for national prosperity. No developed country is closed. The initially poor countries that have been most successful in catching up in recent decades - the newly industrialising east Asian countries and China - seized the opportunity offered by more open world markets to build strong export sectors and to attract inward investment. This contributed, along with massive investment in education, to the largest reduction in abject poverty that the world has ever seen. In most east Asian countries the proportion of the population living in poverty is now under 15 per cent, down from around 40 per cent forty years ago.

32. There is no systematic relationship between economic growth and inequality. Over recent decades, inequality has risen in some cases and fallen in others, in both fast-growing and slower-growing economies.

33. Through expanding access to ideas, technology, goods, services and capital, globalisation can certainly create the conditions for faster economic growth. And the progress which has been made over the last few decades in reducing the proportion of people living in poverty has been largely the result of economic growth: raising incomes generally, including those of poor people. Economic growth is an indispensable requirement for poverty reduction.

34. But by itself it is not enough. Pro-poor development requires growth and equity. Poverty reduction is faster where growth is combined with declining inequality. And poverty reduction is also more easily achieved in less unequal countries - the lower the level of inequality, the larger the share of the benefits of growth that accrue to the poor.

35. In practice the impact of globalisation on poor people varies widely, both between countries and within them, depending on initial circumstances and on the policies that governments pursue. Within China, for example, poor people living in coastal provinces have benefited more from increased exports and foreign investment than those in inland provinces. In Ghana, the lowering of barriers to trade let in imports of low-priced garments, many of them from China, which benefited poor consumers but displaced workers from garment factories.

36. The reality is that all profound economic and social change produces winners and losers. The role of government in these circumstances is to help manage the process of change - to maximise economic opportunities for all, and to equip people, through education and active labour market policies, to take advantage of these opportunities.

37. We must not forget that many of the world's poor people, living in remote or inaccessible rural areas of Africa and south Asia, have so far not been much affected by globalisation one way or the other. For them, the real risk is that they will be marginalised from the new wealth that globalisation is creating. That is why it is so important to design economic strategies that recognise and respect countries' specific needs and circumstances, and to promote sustainable and inclusive economic and social development that spreads its benefits to all sections of society.

38. Globalisation also brings some systemic risks. For example, the damaging effects of financial volatility were vividly illustrated in the Asian crisis of 1997. Greater access to the global pool of savings through capital markets offers developing countries the chance to raise growth rates above the levels that can be supported from domestic savings alone. But the Asian experience indicates clearly that openness to short-term portfolio flows can be damaging in the absence of a sound macroeconomic position, adequate domestic regulation and transparency in relationships between companies and banks. Strong and effective regulatory systems are needed at the national and the international level.