The Changing Development Landscape

• Author: Shahid Yusuf
• Position: Directed the World Bank's World Development Report 1999/2000

The development landscape in the early twenty-first century will be shaped by globalization and localization. Although these forces offer poor countries unprecedented opportunities for growth, they may prove politically and economically destabilizing unless institutional frameworks are strengthened.

Since the birth of the modern nation-state, countries have gone back and forth between seeking closer integration with the rest of the world (globalization) and retreating into isolationism and protectionism, while local groups have sought greater autonomy (localization). However, despite the long history of globalization and localization, their impact has been weak and fleeting, until now. The dramatic acceleration of globalization and localization and the enduring changes they have brought about distinguish the closing decades of the twentieth century from earlier periods. The response of nation-states to these two forces will determine whether incomes in poor countries converge with those in industrial countries and whether efforts to banish poverty are successful.

Why globalization?

Globalization entered the discourse on development in the early 1980s, with the publication of John Naisbitt's book, Megatrends: Ten New Directions Transforming Our Lives. The word is now common currency and denotes both positive developments, such as the integration of markets for goods and factors of production, and negative developments, such as damage to the environment and the increasing exposure of countries to external shocks that can precipitate banking and currency crises. The growth of international trade and of factor movements was as swift in the first 10 years of the twentieth century as in the century's last decade, but the current phase of globalization is of a different order, in particular because of the increasing share of tradables now exported, advances in technology, changes in the composition of capital flows, and the larger role of international agencies, nongovernmental organizations (NGOs), and transnational corporations. The completion of the Uruguay Round of trade talks in 1994 was a milestone: trade barriers were lowered; the ambit of trade liberalization was expanded to include services, intellectual property rights, agricultural commodities, and textiles; and the new rules of the game that grew out of the talks were anchored in the World Trade Organization (WTO).

In the 1980s, many countries-industrial as well as developing-began dismantling controls on capital movements and adopting policies that encouraged foreign direct investment. Declining transport costs and impressive advances in communications technologies and information processing boosted the integration of goods and capital markets. The adoption of common rules to regulate banking and financial reporting decreased information asymmetry and lent further momentum to globalization, as did the creation of the World Wide Web and international coalescence around product standards such as ISO 9000.

As countries began to welcome foreign direct investment and transacting business over long distances grew easier, companies were motivated to reorganize their activities; they sliced up the value-added chain and established production facilities in different markets. This proliferation of production networks has allowed firms to specialize, focus their research efforts, and leverage their scarce managerial and marketing skills; it has also reinforced the openness resulting from trade liberalization and the removal of barriers to capital mobility.

Even with these changes, globalization might not have taken off were it not for a seismic shift in attitudes. Countries worldwide have moved to market-based economies and democratic forms of government, the decisive...