A version of this column appeared in the International Herald Tribune on October 19, 2007.
In the Spring and Fall of each year the International Monetary Fund (IMF), publishes its World Economic Outlook (WEO), in which it puts forth its analysis of the world economy. The Fund's analysis is taken seriously by the many journalists who come to Washington for the IMF/World Bank meetings. The Fund, until the last few years, was arguably the most powerful international financial institution in the world. It has 185 member countries, but it is effectively controlled by Washington (or "the G-1" as we say around here.)
This year the IMF surprised its audience by publishing a chapter that is likely to provide some ammunition for its critics. The IMF found that foreign investment and technology (but not trade) were associated with an increase in inequality in developing countries.
But there is much less here than meets the eye. What the Fund has missed - and has pretended not to notice for the last quarter century - is a much more profound change in the world economy that has accompanied the set of economic reforms, including "globalization," that the Fund has forcefully advocated. Over the last twenty-six years there has been a sharp slowdown in the growth of income per person in the vast majority of low-and-middle income countries.
As would be expected when growth rates fall off, these countries have also seen substantially reduced progress on major social indicators, including life expectancy and infant and child mortality.
The Fund is taking advantage of the generalized lack of knowledge of economics and economic trends among its audience. Although the distribution of income gains is an important determinant of economic and social well-being, if income does not grow, then there is nothing to distribute. In a country as rich as the United States, one could argue about how much we might reduce poverty and unemployment, and improve the quality of life through redistribution and policy changes such as universal health care - although politically it is generally more difficult to accomplish much in these areas if the economy is stagnating. But, for the poorest countries, increasing productivity is a matter of survival, and for developing countries generally it is a necessity if they are going to be able to provide education and health care to their citizens.
Especially these days, as countering global climate disruption takes its rightful place as an urgent priority, economic growth is often seen as a problem rather than a solution. But increasing productivity - and that is basically what we are talking about when economists refer to growth in income or GDP per person - is not inherently environmentally destructive. The Internet, for example, has increased productivity while expanding the potential for environmentally-positive outcomes through telecommuting and reduced paper usage. At a more basic level, technical, organizational, and distributional changes - including land reform, and the provision of credit and seeds -- that allow poor farmers to produce more food per acre and per labor hour are also not necessarily environmentally destructive. Growth is also what the IMF and its affiliated institutions have promised that their policies would deliver - not redistribution. All the pain and "creative destruction" associated with privatizations, indiscriminate opening to trade and capital flows, more restrictive monetary and fiscal policies, and other generally unpopular reforms were supposed to increase economic growth.
But, the typical country in the middle quintile of the world income distribution (per capita income only $2364-$4031 in 2000 dollars) in 1960 could expect its income per person to increase by 67 percent in two decades. A similarly situated country in 1980 could expect an increase of only 22 percent over the same time period.* This growth collapse has had a vastly greater effect on most people in the countries affected than any measurable impact of globalization on inequality.
There are a handful of countries that actually did grow faster in the post-1980 era of "globalization." But these countries - such as China, India, and Vietnam - did not follow the policy formula prescribed by the IMF. China is a good example: the World Bank now likes to cite it one of "their" success stories because it increased its per capita income more than sixfold over the last quarter-century. But it did so while maintaining a mostly state-owned banking system, strict controls over foreign exchange and a lot of control over foreign direct investment, a lack of foreign participation in the financial system, and a gradual transition to from a centrally planned to a mixed (market and planned) economy. The IMF and World Bank would never allow such policies in the many developing countries where it could exert influence.
Fortunately, most countries have voted with their feet and have paid off the IMF, thus avoiding having to take its advice. The Fund's loan portfolio has shrunk from $105 billion in 2003 to just $17 billion today, with most of this owed by Turkey and Pakistan. This has freed most middle-income countries, but the poorest countries still remain under the tutelage of the Fund and its allied institutions, which are dominated by the US Treasury Department. These countries, too, will have to become more independent if they are to reach their development potential.
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*This slowdown is not attributable to "diminishing returns," i.e. the fact that it becomes harder to achieve the same rate of growth as a country gets richer. The slowdown in progress on social indicators (life expectancy, infant and child mortality) is also not attributable to diminishing returns (i.e. it is more difficult to increase life expectancy from 60 to 65 than from 45 to 50). For more data and information on the methodology, see "The Scorecard on Development."