Trading in Illusions

Advocates of global economic integration hold out utopian visions of the prosperity that developing countries will reap if they open their borders to commerce and capital. This hollow promise diverts poor nations' attention and resources from the key domestic innovations needed to spur economic growth.

BY DANI RODRIK | MARCH 1, 2001

A senior U.S. Treasury official recently urged Mexico's government to work harder to reduce violent crime because "such high levels of crime and violence may drive away foreign investors." This admonition nicely illustrates how foreign trade and investment have become the ultimate yardstick for evaluating the social and economic policies of governments in developing countries. Forget the slum dwellers or campesinos who live amidst crime and poverty throughout the developing world. Just mention "investor sentiment" or "competitiveness in world markets" and policymakers will come to attention in a hurry.

Underlying this perversion of priorities is a remarkable consensus on the imperative of global economic integration. Openness to trade and investment flows is no longer viewed simply as a component of a country's development strategy; it has mutated into the most potent catalyst for economic growth known to humanity. Predictably, senior officials of the World Trade Organization (WTO), International Monetary Fund (IMF), and other international financial agencies incessantly repeat the openness mantra. In recent years, however, faith in integration has spread quickly to political leaders and policymakers around the world.

Joining the world economy is no longer a matter simply of dismantling barriers to trade and investment. Countries now must also comply with a long list of admission requirements, from new patent rules to more rigorous banking standards. The apostles of economic integration prescribe comprehensive institutional reforms that took today's advanced countries generations to accomplish, so that developing countries can, as the cliché goes, maximize the gains and minimize the risks of participation in the world economy. Global integration has become, for all practical purposes, a substitute for a development strategy.

This trend is bad news for the world's poor. The new agenda of global integration rests on shaky empirical ground and seriously distorts policymakers' priorities. By focusing on international integration, governments in poor nations divert human resources, administrative capabilities, and political capital away from more urgent development priorities such as education, public health, industrial capacity, and social cohesion. This emphasis also undermines nascent democratic institutions by removing the choice of development strategy from public debate.

World markets are a source of technology and capital; it would be silly for the developing world not to exploit these opportunities. But globalization is not a shortcut to development. Successful economic growth strategies have always required a judicious blend of imported practices with domestic institutional innovations. Policymakers need to forge a domestic growth strategy by relying on domestic investors and domestic institutions. The costliest downside of the integrationist faith is that it crowds out serious thinking and efforts along such lines.

EXCUSES, EXCUSES

Countries that have bought wholeheartedly into the integration orthodoxy are discovering that openness does not deliver on its promise. Despite sharply lowering their barriers to trade and investment since the 1980s, scores of countries in Latin America and Africa are stagnating or growing less rapidly than in the heyday of import substitution during the 1960s and 1970s. By contrast, the fastest growing countries are China, India, and others in East and Southeast Asia. Policymakers in these countries have also espoused trade and investment liberalization, but they have done so in an unorthodox manner -- gradually, sequentially, and only after an initial period of high growth -- and as part of a broader policy package with many unconventional features.

The disappointing outcomes with deep liberalization have been absorbed into the faith with remarkable aplomb. Those who view global integration as the prerequisite for economic development now simply add the caveat that opening borders is insufficient. Reaping the gains from openness, they argue, also requires a full complement of institutional reforms.

Consider trade liberalization. Asking any World Bank economist what a successful trade-liberalization program requires will likely elicit a laundry list of measures beyond the simple reduction of tariff and nontariff barriers: tax reform to make up for lost tariff revenues; social safety nets to compensate displaced workers; administrative reform to bring trade practices into compliance with WTO rules; labor market reform to enhance worker mobility across industries; technological assistance to upgrade firms hurt by import competition; and training programs to ensure that export-oriented firms and investors have access to skilled workers. As the promise of trade liberalization fails to materialize, the prerequisites keep expanding. For example, Clare Short, Great Britain's secretary of state for international development, recently added universal provision of health and education to the list.

 SUBJECTS: DEVELOPMENT, ECONOMICS
 

Dani Rodrik is professor of international political economy at the John F. Kennedy School of Government at Harvard University.