Annual Bank Conference on Development Economics: Globalization, trade linkages, and infrastructure policies draw scrutiny

• Author: Jacqueline Irving
• Position: IMF External Relations Department
• Pages: 208-209

Page 208

Widely recognized as the "father of experimental economics," Smith commented during a keynote address on the functions served by markets for commodities and services, which he described as the foundation of wealth creation, and on the worldwide extension of such markets-that is, globalization. Markets for capital, in contrast, are far more uncertain than markets for commodities and services, he explained, because a function of capital markets is to anticipate innovation-including the commodities and services of the future.

Globalization is not new, Smith emphasized. Rather, it is a modern word describing an ancient human process of migration and the search for betterment, and the worldwide expansion of resource specialization. At many times and places in its prehis- tory, exchange was extended to strangers through barter and ultimately the use of commodity markets (money). "Early humans set the stage for a vast expansion of wealth and well-being," Smith noted, "whenever a tribe discovered that it was better to trade with neighboring tribes than to kill them."

Crucial linkages

A more current look at three different facets of globalization-trade, foreign direct investment (FDI), and human migration-reveals that the complementari- ties among them have become increasingly pervasive, said Faini. This is both good and bad news for the global economy, however, in that the effects of a more liberal regime tend to be mutually reinforcing but backtracking in one area tends to have a negative effect on other areas.

Trade liberalization should not be examined in isolation from other aspects of globalization, Faini said. Crucial linkages between trade liberalization, on the one hand, and FDI and human migration, on the other, have further knock-on effects on trade liberalization itself. For example, one of his main findings is that trade liberalization-aside from its standard, though somewhat controversial, effects on growth- can enhance a host country's attractiveness for FDI, adding a channel through which a more liberal trade regime can favor growth. Moreover, Faini found evidence based on cross-country analyses that a skilled labor force is important in helping a country attract FDI and that liberal trade policies and the stock of FDI in a country are positively correlated with incentives in that country to acquire an education.

Other empirical research has shown that trade...