The Hindu Business Line : World Bank in makeover mode

The World Bank has come a long way from harping on liberalisation and economic reforms to highlighting the potential adverse consequences of globalisation if left unregulated.

The World Bank has come a long way from its "Washington Consensus" days when it hard-sold globalisation, liberalisation and economic reforms to one of highlighting potential adverse consequences of globalisation if left unchecked and unregulated. If proof were needed for this proselytisation, the 2007 edition of Global Economic Prospects (GEP) released recently under the rubric "Managing the Next Wave of Globalisation" makes a compelling case for compassionate globalisation.

As the Bank's Chief Economist and Senior Vice-President of the Bank, Mr Francois Bourguignon, perceptively put it in the foreword, the next globalisation — deeper integration with the world economy through trade, flows of information technology, finance and migration — would offer renewed and enhanced opportunities to increase productivity and raise incomes.

Dislocation, eco pressures

But, he said, along with this might come "dislocations and environmental pressures". Hence, the GEP analyses three possible consequences — growing inequality, labour market pressures and threats to the global commons such as pollution-free planet.

The Report makes the obvious point that demographic trends would be a major driver of future events. The current population of the planet of some 6.5 billion is likely to rise to 8 billion by 2030, an average increase of 60 million annually. More than 97 per cent of this growth would occur in developing countries with the European Union and Japan experiencing a decline in population, while most of the increase in other rich countries would be due to migration.

The Report's burden is the fact that globalisation would expand the global economy from $35 trillion in 2005 to $72 trillion in 2030. Global trade in goods and services could more than treble to $27 trillion in 2030 and trade as a share of the global economy would rise from one-quarter today to more than a third.

Roughly half of the increase is likely to flow from developing countries. Developing countries that only two decades ago supplied 14 per cent of the manufactured imports of rich nations, today account for 40 per cent and by 2030 are likely to raise this to over 65 per cent. This has already exposed workers in rich countries to competition from low-wage nations, a pressure that can only rise and intensify over the next 25 years.

Competitive pressures

Particularly noteworthy is that the continuing integration of markets would make jobs around the world subject to more competitive pressures. As trade expands and technologies rapidly diffuse to developing countries, unskilled workers around the world — as well as some low-skilled white-collar workers — would face increasing competition across borders.

The Report said globalisation offers opportunities for export growth and access to a wide range of cheaper imported products that could fuel productivity growth and raise average living standards. But by fostering a progressively more integrated global market for labour, it imposes adjustment costs on certain groups within countries, exerting downward pressure on some wages, lowering job security and making retraining and relocation necessary.

The Bank Report concedes that though wages of unskilled workers in virtually all countries have risen as productivity has increased with globalisation, the unskilled have received wage increases that are lower than those for skilled workers — and they have encountered greater difficulty in sustaining their employment. Particularly challenging is the rise of China, India and other developing countries as manufacturing powerhouses and with growing tradability of services, as suppliers of services to the global market.

Emerging markets

It says that the growth of the Chinese, Indian and other emerging markets offer enormous offsetting opportunities for other developing and developed countries to increase exports. As China and India increase their exports, they will have to enhance imports of intermediate inputs, energy, technology and investment goods.

Second, as exports and domestic living standards rise in the emerging economies, wages (and exchange rates) rise as well, creating space for low-income countries to move into low-skill activities abandoned by producers in the large economies. Wages already have risen in China faster than in many other developing countries, a trend likely to continue.

Third, developing social institutions that bolster a dynamic market economy in China and India would take time, providing a chance for smaller, more flexible countries to progress faster in institutional development and for rich nations to continue to lead in productivity-enhancing innovation.

Hammering out right solutions

In fine, the GEP Report is predicated on the proposition that the threats to continued global growth and poverty reduction from environmental damage, social unrest or the recent spurt in protectionist sentiment are potentially serious. Hence, there is a need to seek the right solutions now to ensure sustainable global growth in the future.

For the World Bank, accused of foisting its policies on hapless borrowers, the wheel has come full circle. It is now preaching the virtues of preemptive action to preclude the global economy from sliding into familiar divides pushed by unsustainable economic and environmental policies.

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