Globalize wgvictor

Economic liberalization as a driving force of globalization: experiences of countries in North and Central

Asia

United Nations Conference on Trade and DevelopmentUnited Nations Conference on Trade and Development

Victor Ognivtsev

Trade Analysis Branch, DITC

UNCTAD

Moscow

29 September, 2005

2United Nations Conference on Trade and DevelopmentUnited Nations Conference on Trade and DevelopmentDivision on International Trade in Goods, Services and CommoditiDivision on International Trade in Goods, Services and Commoditieses

Structure of this Presentation:

General trends of the unfolding globalization process

The role of economic liberalization, particularly of trade liberalization, in the reform transition process

Specific experiences of countries in North and Central Asia and results achieved

Lessons learned


Introduction

Countries in the Northern and Central Asian region have been undergoing 15 years of profound, often historically unprecedented reforms in the process of transition to a market economy from a previously centrally-planned system, in which economic liberalization, particularly trade liberalization and integration in the world economy were major elements of the reform strategy.

The economic and social transition of these countries was carried out against the background of the unfolding globalization process. This made their situation even more challenging.


Economic liberalization and globalization: Brief description of terms

Economic liberalization may be described as the freedom to engage in economic activity at home and/or abroad, a freedom subject to institutional and policy constraints needed to guarantee public interests at large.

Globalization may be seen as a major driving force of global economic integration and has the following main features: (1) internationalization of production with very fast changes in the structure of production; (2) liberalization and expansion of world trade in goods and services; and (3) unprecedented expansion of international financial flows supported by the latest technological advances.


Role of Trade

International trade is widely recognized as an important engine of the world economic growth and the evolving process of globalization. It had also a major contribution to make in the process of transition of formerly centrally-planned economies.

In the transition process, normally, the first measures were trade-related and consisted of phasing out the state foreign trade monopoly, allowing enterprises to carry out foreign trade transactions directly and freeing their access to foreign currency for trade purposes.


Trade Liberalization

Trade liberalization has been the central part of mainstream policy advice for at least 20 years, and has been actively picked up by most developing countries and economies in transition in the design of their development strategies.

However, the intensive international discussion over the benefits of trade liberalization and its welfare effects on developing countries and their societies is far from over. The search for consensus continues, while some simpler postulates like a freer trade alone brings more economic growth, which, in turn, have beneficial effects on social life and leads to better living standards, including reduced poverty – have produced mixed results, thus raising a general concern of whether open trade can contribute substantially and directly to the process of development.


“Washington Consensus” – «One Size Fits All»

John Williamson originally coined the phrase in 1990 “to refer to the lowest common denominator of policy advice being addressed by the Washington-based international financial institutions to Latin American countries”:

Fiscal discipline Tax reform (to lower marginal rates and broaden the tax base) Interest rate liberalization A competitive exchange rate Trade liberalization Liberalization of inflows of foreign direct investment Privatization and deregulation Secure property rights


“Washington Consensus”: Evolution

Over the time, some additional elements were added:

Corporate governance Anti-corruption measuresFlexible labour markets WTO agreements Financial codes and standards “Prudential” regulations over financial flows Effective and stable exchange rate regimes Independent central banks/inflation targeting Social safety nets Targeted poverty reduction


Trade liberalization (cont.)

The approaches to trade liberalization are becoming more complex and realistic in that liberal trade policy are no more entirely “delinked” from other policy issues (e.g. financial, monetary, environmental protection, adjustment costs, supply constraints and capacity building in developing countries, etc.)

It is now widely recognized that the scope and form of government interventions, vis-à-vis markets and the private sector, have to be based on a rational determination of the basic economic state functions, and not on biased ideological approaches.


Transition Reforms in the Region: Gradualism or Radicalism?

Many of the countries in the Northern and Central Asian Region decided to embark on a radical way of transformation. Apart from positive impacts of such approach, such strategy, however, also resulted in a number of cases in drastic decrease of GDP, and consequently substantial lowering in the standard of living of their citizens. By the year 2004, many of these countries still have not reached the GDP level from the year 1989.

The “shock therapy” approach was based on a naive, ideological – indeed, almost religious belief that there is no need for development policy and that the market alone would balance the economy and generate wealth.

In fact, the aim of any economic policy is development, while everything else is the means to achieve this aim. Unfortunately, quite often in policy-making the aim is confused with instruments to achieve that objective. For example, stable exchange rates are sometimes taken for the target of economic policy. The lowest possible inflation, whatever the cost, is sometimes assumed to be the ultimate policy aim. The same goes for accession to certain international organizations like the WTO.


Reform Experiences of Other Countries in the Region and Elsewhere

The experiences of now developed countries, as well as of some countries in the Region would also suggest that a more empirical analysis of approaches to reforms, particularly to trade liberalization is required. The effects of freer trade, as suggested by such experiences, can be quite beneficial after a country has achieved a certain level of economic and institutional development, as well as after its economy has reached a degree of international competitiveness and has effective access to world markets for its exported products and services.Thus, a certain “Triad” could be formulated for a successful trade liberalization strategy – Supply Capacity, International Competitiveness and Market Access.Such empirical approach also reveals that trade liberalization requires the existence and smooth functioning of a number of interrelated institutions, which facilitate the implementation of liberalization measures at the lowest possible social and political costs. To mention just a few of the institutions required: a social safety net for those who become unemployed; retraining for the labour force which is becoming redundant; assistance for business entities in introducing the necessary structural adjustments; and labour mobility to facilitate the movement of labour among different regions of the country.


Experiences of Countries in North and Central Asia– several considerations

The accumulated experience of transition economies in the Regionwarrants some inconclusive considerations:

The importance of legal and regulatory issues The need for coherence and coordination of all components of economic

strategy and policiesFull account of national cultures and other specificities Trade policy reform, in particular, should include not only the removal of

tariffs and traditional trade barriers, but also the development of appropriate regulations and institutionsTrade liberalization should be assessed not only in terms of its effects on

trade flows, but also by its contribution to stimulating economic growth, increasing overall economic efficiency, improving economic regulations and institutions

Reform sustainability and public support depend on the capacity of the governments to deal with inevitable adjustment costs that emerge in the initial stages of the reform process

A favourable business and economic environment should be created


Role of Regional Integration

Regional integration should play an important supportive and positive role both in the context of economic reforms and globalization process. It has a very strong potential manifested by the empirical evidence in other Regions and ongoing efforts in the North and Central Asian Region.


Results of Reforms in the Region: Selected Development Indicators

To illustrate the reforms achieved so far, let us explore some selected development indicators on a country-by-country basis. The sources of data are from UNCTAD and the World Bank.


Population growth (annual %)

Countries

Armenia Azerbaijan China Georgia India Kazakhstan Korea, Rep. Kyrgyz Republic Mongolia Russian Federation Tajikistan Turkmenistan Ukraine Uzbekistan

2000

-1 1 1 -1 2 -1 1 1 1

-1 1 2 -1 1

2001

-1 1 1 -1 2 -1 1 1 1

-1 1 2 -1 1

2002

-1 1 1 -1 2 -0 1 1 1

-0 1 2 -1 1

2003

-0 1 1 -1 1 0 1 1 1

-0 1 1 -1 1


GNI (current US dollars)

Countries


2000

2,026,622,336 4,912,775,680

1,063,813,120,000 3,111,522,048

455,611,187,200 18,864,269,312

460,375,031,808

1,373,377,664 941,419,264

250,308,493,312 1,112,984,576 2,885,190,912

34,353,143,808 15,431,982,080

2001

2,172,214,528 5,341,731,328

1,138,632,818,688 3,064,528,128

477,931,077,632 20,108,328,960

501,103,591,424

1,382,703,872 957,899,328

259,626,418,176 1,065,393,600 3,338,782,976

35,354,198,016

13,868,641,280

2002

2,441,106,432 5,857,832,448

1,237,896,658,944 3,285,784,832

493,996,867,584 22,618,537,984

537,129,254,912

1,453,215,488 1,037,427,328

305,521,033,216 1,135,435,776 4,064,029,184

38,213,963,776

11,488,569,344

2003

2,888,358,144 6,714,029,056

1,416,683,454,464 3,846,015,744

571,260,731,392 26,911,703,040

577,223,065,600

1,725,416,704 1,198,585,600

373,874,327,552 1,344,935,936 5,289,255,936

46,928,003,072

10,832,100,352


GNI per capita (current US dollars) Countries


2000

650 610 840 660 450

1,250 9,790 280 390

1,720 180 620 690 630

2001

700 660 900 660 460

1,350 10,580

280 400

1,790 170 710 720 560

2002

800 720 970 710 470

1,520 11,270

290 420

2,120 180 850 780 450

2003

950 820

1,100 840 540

1,810 12,050

340 480

2,610 210

1,090 970 420


GDP growth (% annual)Countries


2000

6 11 8 2 4

10 8 5 1

10 8

19 6 4

2001

10 10 8 5 5

14 4 5 1

5 10 20 9 4

2002

13 11 8 5 4

10 7 -0 4

5 9

20 5 4

2003

14 11 9

11 9 9 3 7 6

7 10 17 9 4


Agriculture value-added (% of GDP)

Countries


2000

26 17 16 22 25 9 4

37 33

6 29 25 17 34

2001

28 16 16 22 25 9 4

37 30

7 29 25 16 34

2002

26 15 15 21 23 9 4

38 30

6 29 ..

15 35

2003

24 14 15 20 22 8 3

39 28

5 23 ..

14 35


Industry value-added (% of GDP)

Countries


2000

35 45 50 22 27 40 36 29 19

38 26 45 36 23

2001

33 47 50 22 26 39 35 29 17

36 25 44 35 23

2002

35 50 51 24 27 39 34 23 16

34 25 ..

38 22

2003

39 55 52 25 27 38 35 23 15

34 20 ..

40 22


Services value-added (% of GDP)

Countries


2000

39 38 33 56 49 51 59 34 48

56 45 30 47 43

2001

38 37 34 56 49 52 61 34 53

58 45 30 49 43

2002

39 35 34 55 51 53 63 39 54

60 46 ..

47 44

2003

37 31 33 54 51 54 62 38 57 61 56 ..

46 43


Export of goods and services (% of GDP) Countries


2000

23 39 26 23 14 57 41 42 65

44 81 54 62 25

2001

25 41 25 25 13 46 38 37 64

37 63 41 55 28

2002

29 43 29 29 15 47 35 40 67

35 64 ..

55 31

2003

32 43 34 32 14 50 38 38 68

32 60 ..

53 37


High-technology exports (% of manufactures exports)

Countries


2000

5 4

19 13 5

11 35 .. 0

14 ..5 5 ..

2001

.. 9

21 38

5 10 30

.. 0

14 .. .. 5 ..

2002

2 8

23 .. 5 ..

31 6 0

13 .. .. 5 ..

2003

1 5

27 24 5 9

32 2 0

19 .. .. .. ..


Internet users (per 1,000 people)Countries


2000

11 2

17 5 5 6

414 11 13

20 0 1 7 5

2001

13 3

26 9 7 9 .. ..

17

.. 1 2

12 6

2002

16 37 46 15 16 16 .. ..

21

.. 1 ..

19 11

2003

37 ..

63 31 17 ..

610 38 58

.. 1 .. ..

19


COUNTRY (out of 155 studied countries)

New ZealandSingaporeUnited StatesCanadaJapanMalaysiaKoreaArmeniaMongoliaBangladeshRussian FederationKyrgyz RepublicKazakhstanChinaTurkeyAzerbaijanGeorgiaIndiaUkraineUzbekistan

EASE OF DOING BUSINESS

1234

102127466165798486919398

100116124138

STARTING A BUSINESS

4531

815797414952312733

12646965590

11067

DEALING WITH LICENSES

27

17215

10125552253

14365

11213613713912712498..

REGISTERING PROPERTY

11412273653649

2115135546824495117

101127149


LESSONS LEARNED

(1) Effective Social Protection:

The development of a reasonably effective social protection system oriented to renewed progress in terms of human development is essential and requires growth in real terms of social expenditure.


LESSONS LEARNED (Cont.)(2) Professional public administration:

The vital role of a professional public administration cannot be overestimated. Enforcing laws and regulations on enterprises, affluent people and local bodies cannot be achieved by demoralized, ill-informed, and poorly paid officials. In other words, the administrative functioning of the state must be considerably strengthened. Beyond being reasonably well-paid, so as to provide motivation and to lower the probability of civil service corruption, officials in public administration must be well-trained in technical and cultural terms, know foreign languages.


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