Globalization and liberalization: the impact on developing countries

Abstract

Summary This paper analyzes the impact of globalization on developing countries over the last several decades. The first section examines the components and mechanisms of globalization. The second turns to financial globalization –considered to be the most important aspect of a multifaceted process– and looks in more detail at the changing trends in finance for developing countries. The third analyzes the impact of the new pattern of finance in terms of growth, equity, and government autonomy. The concluding section offers policy recommendations for making globalization a more positive force. Four basic arguments are developed in the paper with respect to the impact of financial globalization. First, globalization has increased the capital available to developing countries, which potentially increases their ability to grow faster than if they had to rely exclusively on their own resources. Not all capital flows contribute equally to growth, however; short-term flows and the purchase of existing assets are less valuable than investment in new facilities. At the same time, the increasing mobility of capital can also lead to greater volatility, which is very costly for growth. Second, capital flows are unequally distributed by region and country, thus skewing the patterns of growth. There is also an unequal distribution of capital within countries by geographic area, sector, type of firm, and social group, creating a division between winners and losers. Third, government attempts to extract the benefits from the globalization of capital, while limiting the costs, is more possible than usually thought. The source of many problems is local rather than global, and the experience of several countries indicates that 'Heterodox' policies can be followed. Finally, policy changes at the global, regional, and national levels could improve the picture just sketched out.