Financial markets are more efficiently linked. And there is more international movement of people. Cheaper and faster transportation, new information and technological innovation, trade liberalization, better economic management—all have contributed to greater integration.

     Over the past decade integration has come to dominate discussions of the global economy. This section of World Development Indicators looks at measures that help track changes in the movements of goods, financial flows, and people. With more open policies and stronger investment climates, many developing countries are now participating more in financial and trading markets and benefiting from global integration. All regions are growing faster than in the 1990s. The global economy slowed in 2001, but by 2003 the recovery in developing countries appears to have preceded rather than followed recovery in high-income countries. In 2003 growth of developing countries outpaced that of high-income economies.

Movement of goods
     Trade spurs economic growth by encouraging specialization in line with a country’s comparative advantage while increasing consumer choice. And it has reached unprecedented levels in the last decade. Since the economic downturn following the financial crisis in East Asia, the rapid expansion of trade has continued, while investment flows have lagged behind. The annual growth of world trade (the sum of imports plus exports) averaged more than 6 percent in 2003, while developing country trade grew 11 percent. World trade in goods as a share of world GDP increased from 33 percent in 1990 to 42 percent in 2003. The change for developing countries was dramatic: an increase of 21 percentage points, compared with 6 percentage points in high-income economies. China’s continuing expansion into the global marketplace drove trade in East Asia and Pacific from 47 percent of GDP in 1990 to 71 percent in 2003. In 2003 China alone made up 5 percent of world trade and 20 percent of developing country trade (table 6.1).

     Success is based not only on how much is being traded but also on what is traded. In 1980 merchandise exports from developing countries were mainly primary products. But in the past 15 years the largest increase in merchandise exports from developing countries has come from manufactured goods. The share of manufactured goods in the imports of high-income Organisation for Economic Co-operation and Development (OECD) economies from low-income economies increased from 41 percent in 1993 to 53 percent in 2003 and from middle-income economies from 51 percent to 67 percent (table 6.3).

     Despite more than 50 years of trade and tariff negotiations, trade barriers continue to impede global trade. Tariff and nontariff barriers have declined through successive rounds of multilateral trade negotiations, but the reductions have been larger for manufactured and processed primary products than for agricultural goods and natural resources. With more than half the population of most developing countries living in rural areas, reducing agricultural protection is important for reducing poverty. In the 1990s developing countries lowered their average agricultural tariff rates from 30 percent to 18 percent. Tariffs are even lower in industrial countries, but the average tariffs imposed by industrial countries on agricultural products, when they can be measured, are two to four times higher than the tariffs on manufactured products. Average tariffs on imports from developing countries declined between 1993 and 2003, yet tariffs on food exported from low-income countries to high-income OECD countries increased (table 6.3). The continuing expansion of global markets depends, in part, on further trade liberalization under the Doha Round.

Financial flows
     The growing importance of international private capital flows shows greater integration of financial markets. The ratio of gross (two-way) capital flows to GDP increased in low- and middle-income countries from 6 percent in 1990 to 13 percent by 2003 (figure 6a). East Asia and Pacific, the Middle East and North Africa, and South Asia experienced the greatest increases. But the average for developing countries is still half that of high-income countries (table 6.1).

Source: Table 6.1.

     As financial openness has spread across the world, global flows of foreign direct investment have more than doubled relative to GDP. For developing countries, foreign direct investment has been the largest source of external funding. In 2003 China received 9 percent of total net (inward) foreign direct investment flows and 35 percent of developing country flows. But worldwide flows remain far below their peak in 2000. In high-income countries net flows of foreign direct investment hit $1.1 trillion in 2000 but declined to $421 billion in 2003, the lowest since 1997. Developing countries experienced a similar downturn, with flows falling to $152 billion in 2003, down from $182 billion in 1999 (table 6.7).

     Countries that have difficulty tapping financial markets must rely largely on aid flows to fund development programs. Members of the OECD Development Assistance Committee, the largest group of official donors, provided official development assistance (ODA) totaling a record $69 billion in 2003, up from $58 billion in 2002 (table 6.9). Inflation and exchange rate movements, notably the weakening of the dollar, accounted for some of the increase. But aid flows in 2003 were their highest ever, in both nominal and real terms. The war on terrorism is one reason. Between 2001 and 2003 total net aid to Afghanistan increased from $408 million to $1.5 billion. Aid to Iraq increased from $116 million in 2002 to $2.3 billion in 2003 (table 6.10).

     Even so, aid flows have not kept up with the economic growth of DAC members or with the needs of the poorest countries. As a share of donor gross national income (GNI) ODA declined sharply, from 0.33 percent in 1992 to 0.22 percent in 2001. Since then, there has been an upward trend: to 0.25 percent in 2003. Yet only five countries have reached the United Nations ODA target of 0.7 percent of GNI: Denmark, Luxembourg, the Netherlands, Norway, and Sweden. Sweden and Norway are striving for 1 percent, Sweden by 2006 and Norway between 2006 and 2009. Six other countries intend to reach the 0.7 percent target before 2015: Ireland, Belgium, Finland, France, Spain, and the United Kingdom. If donor countries follow through on their promises at the United Nations International Conference on Financing for Development, in Monterrey, Mexico, in 2002, aid is expected to rise to about $88 billion in 2006.

Movement of people
     Migration is another key element of integration. In regions with poor institutions and high transport costs, wages may be low, and the free movement of goods and capital will not bring those wages into line with wages in good locations. The benefits of migration to the sending region include higher wages for those who remain behind. In addition, migrants send a large volume of remittances back to family members. In 2003 the flow of remittances to developing countries from migrants and emigrants working and living abroad was $116.6 billion (figure 6b). India received 18 times as much in remittances from its workers overseas as it received in foreign aid. Brazil received almost 10 times as much. Not all remittances go from high-income to developing countries. Flows also take place between developing countries. (Box 6c provides additional information on measuring remittances.)

Source: OECD DAC and World Bank staff estimates.

     This year, table 6.13, “Movement of people,” includes data on net migration flows, migration stocks, refugees, and remittances for developing and high-income countries. Monitoring and measuring the international movement of people are impeded by poor data availability, quality, and comparability. Illegal migration is especially difficult to capture accurately. In recognition of the importance of the temporary and permanent movement of people, the incomes they earn, and the funds they return to their home countries, efforts are under way to improve measurements of migration and remittance flows.

     In 2000 some 175 million people, 3 percent of the world’s population, lived in a country of which they were not a citizen or in which they were not born. In developing countries the foreign population stock almost doubled, from 44 million in 1960 to 86 million in 2000. In high-income countries the migration stock increased from 29 million to 89 million during the same period. The net outflow of people from developing countries to high-income economies has grown considerably. During 1960–65 developing countries sent 2.8 million people to high-income countries. During 1995–2000 the number increased to 13.6 million. The greatest numbers came from East Asia and Pacific, Latin America and the Caribbean, and South Asia. In addition to trade and investment, migration can also be important for global integration.

Remittances—transfers of resources from individuals in one country to individuals in another—are an important source of private funds in developing countries. Unlike foreign investment, which goes to a limited number of well-established economies, or the volatile earnings from trade, remittances tend to be stable, thus helping to cushion domestic economic shocks. And they are of direct benefit to the individuals and households that receive them.      Aggregate estimates of remittance flows are compiled and reported by countries as components in the balance of payments framework. For many developed countries remittances are relatively small compared with other components, so they do not receive close attention in data collection and compilation. Further, the balance of payments framework does not require a breakdown by origin and destination, which is important for understanding the major remittance pathways. Further, personal remittances are not reported as a specific component in the balance of payments, although an approximation can be obtained by aggregating relevant items (notably workers’ remittances and compensation of employees).      There are also technical problems in collecting remittance data for the balance of payments. One relates to weak data from the source. Reports from banks or money transfer companies often lack the details required to distinguish remittances from other kinds of transfers, and many remittances are made using informal nonbanking mechanisms, such as the havala markets. Another difficulty is that the balance of payments framework requires that migrants be classified either as residents or nonresidents based on a one-year residency rule, which is often difficult to apply in practice. Some countries have developed model-based estimation methods, which use the size of the foreign-born labor force and its propensity to remit, but these methods require good demographic and labor statistics and information on remittances from household surveys.      More detailed studies of remittance mechanisms, motives, and impacts require detailed information from household surveys. Some surveys in developing countries have included modules to collect data on migration and remittances, particularly from households that receive remittances from abroad. Surveys of remittance senders are less common, and the methodology is less well developed. The problems in surveying remittance senders are similar to those in surveying migrant groups. Households containing migrants may be relatively scarce and unevenly distributed, and some migrants are undocumented, so devising representative sampling schemes is difficult. Migrants may also be reluctant to accurately disclose amounts remitted and the remittance methods they use.      Because of these problems and the importance of remittances for development, countries and international agencies are working together to improve statistics on remittances and migration. A new initiative launched by the World Bank and the International Monetary Fund, in collaboration with the United Nations, aims to provide a practical definition of remittances for the collection of aggregate statistics. It also plans to draw on the knowledge and experiences of countries to develop guidelines for cost-effective data collection and estimation. In addition, the World Bank will develop guidance and questionnaire modules for conducting household surveys of remittance senders and receivers.