New Global Economy and Developing Countries: Making Openness Work

Author: Rodrik
Publisher:
Publish Date: 2004-12-01
Features: The process of global economic integration has profoundly altered the external environment in which most countries formulate their economic development policies. The "influence" of the world economy and international economic integration has reached an unprecedented level. For many "emerging economies," the pursuit of the goal of "international competitiveness" has largely replaced traditional economic development objectives such as industrialization and poverty reduction. Opening up the domestic economy to the world economy can potentially yield multiple economic benefits. Introducing capital and intermediate products that cannot be acquired domestically at comparable costs, importing ideas and technologies from developed countries, and accessing foreign savings can all reduce traditional bottlenecks that constrain the rapid economic growth of poor countries. However, these are merely "potential" gains, and only under domestic conditions where policies and institutional arrangements are introduced in coordination with openness can these gains be translated into reality. The arguments put forward by proponents of international economic integration are often exaggerated, even completely erroneous. The countries that have developed relatively well since World War II are typically those capable of formulating effective domestic investment strategies to drive growth, those that can establish appropriate institutions to overcome external negative shocks, rather than those that rely on lifting trade and capital flow restrictions. The past two decades of economic performance have provided very clear evidence: the countries with the fastest economic growth since the mid-1970s are those with higher investment as a share of GDP and the capacity to maintain macroeconomic stability. The correlation between economic development speed and the degree of openness (primarily referring to the levels of tariffs and non-tariff barriers and the extent of control over capital flows) is very low, and the two may even have no correlation at all. In light of this, policymakers must focus on the fundamentals of economic growth, i.e., they must prioritize efforts in promoting investment, stabilizing macroeconomic conditions, developing human capital, and establishing sound governance systems, rather than allowing international economic integration to dictate their development perspective.