World Development Indicators 2006

Global Links

In an era of uncertain alliances and global fears, it is striking that the world economy continues to become more integrated. Celebrated by some, deplored by others, globalization has been loudly debated over the past decade. But globalization is not a single process. It proceeds as people and institutions seek profits and competitive advantage through expanding trade in goods and services and cross-border flows of financial resources and people. It has been propelled by cheaper and faster transportation, more innovative information technology, fewer or lower trade barriers, and better economic management.

As the world becomes more integrated, decisions made in Washington, London, or Tokyo along with decisions made in New Delhi and Lagos and deals brokered in the virtual world of electronic communications can all have an impact on the lives and prospects of the world’s people. But not all people have shared in the benefits of an expanding global economy. Compared with other developing country regions, Sub-Saharan Africa lags in this integration process and has not yet been able to take full advantage of opportunities brought by globalization.

Expanding trade

In an integrated world, trade spurs growth and growth spurs trade (figure 6a). The five fastest growing economies in the world from 1990 to 2004 measured by GDP per capita—Albania, Vietnam, Ireland, China, and Bosnia and Herzegovina—all experienced double-digit annual growth in trade. Rapid expansion of China’s trade has not only been a driving force of China’s continuous high growth, but has also helped its trading partners in East Asia and Pacific to integrate faster into the global manufacturing sector.

Trade spurs growth and growth spurs trade

Annual growth of real GDP per capita and real trade by size of economy, 1990–2004

Source: World Bank staff estimates.

The global economy has become more open. In 1990 the total value of trade was less than 40 percent of global GDP; by 2004 the world economy had grown 50 percent and two-way trade exceeded 55 percent of global GDP. Trade in goods makes up 81 percent of trade and has been increasing 7 percent a year on average between 1990 and 2004. Although the nominal value of global trade in services nearly tripled over the same period and its share of GDP rose from less than 8 percent to more than 10 percent, its share of global trade has remained largely unchanged (table 6.1). In a world economy where services account for 70 percent of output, there appear to be unrealized opportunities for further trade.

During the last decade developing countries have become more important players in world trade. By 2004 low- and middle-income economies accounted for 28.5 percent of world trade, up from 22.3 percent in 1999. Between 1990 and 2004 their trade grew 11.5 percent a year compared with 7.2 percent for high-income economies. The middle-income economies were by far the fastest growing traders. Still, high-income economies, which account for more than 70 percent of world trade and almost 80 percent of global output (measured at market exchange rates), remain the most important markets (table 6.3).

Many obstacles to trade remain, especially for low-income economies. Trade-supporting infrastructure is essential and is improving due to more efficient communication and transportation technology. But landlocked economies and those lacking suitable seaports remain at a disadvantage. Poor roads and high inland transportation costs have kept many people from trading with the outside world.

Other obstacles include an unfriendly business environment and inadequate policies and institutions. For example, in Sub-Saharan Africa it takes twice as long to comply with the procedures required to export or import goods as it does in East Asia and Pacific and four times as long as in high-income countries (World Bank 2006a; see also table 5.3). Lack of access to capital and a small entrepreneurial class willing or able to take risks also impede the growth of trade.

But the greatest barriers are those erected by high-income economies. Even in an era of falling tariffs (table 6.7), developing countries have a hard time reaching high-value markets. Tariff escalation is one of the rich countries’ protectionist strategies. EU tariffs are almost zero for cocoa beans but rise to about 10 percent for semiprocessed cocoa and to about 30 percent for chocolate. So tariff escalation penalizes producers when they add value.

Subsidies paid by Organisation for Economic Co-operation and Development (OECD) governments to their agricultural produces (see table 1.4) are another source of formidable disadvantage for developing economies. Cotton subsidies, particularly in the United States, lower world prices and cost West African economies an estimated $250 million a year.

The economies of Sub-Saharan Africa are far from reaching their potential for trade. Their share in global trade is low—about 1.5 percent in 2004—and has changed little since 1999. However, the region’s export structure is improving slowly. In 1984 primary products accounted for 88 percent of merchandise exports from Sub-Saharan Africa to high-income countries. By 2004 that share had fallen to 73 percent.

The decline of primary products in overall exports is more pronounced if petroleum exports and South Africa are excluded, dropping from 67 percent to 46 percent over the same period. Some Sub-Saharan countries have made significant progress in specific product sectors: cut flowers from Rwanda; music from Mali; clothing and textiles from Mauritius, Lesotho, and Madagascar; and outsourced services from Ghana are making headway into world markets.

Within Sub-Saharan Africa intraregional trade is also limited. A recent study found that only 15 percent of merchandise exports go to other countries in the region, and only 10 percent of merchandise imports originate in the region (Newfarmer 2006). Because of gaps in the statistical reporting, it is hard to know whether intraregional trade is accurately estimated. The United Nations Statistics Division’s Comtrade database shows no entries for three-quarters of all possible two-way trade flows between Sub-Saharan economies in 2004.

Although regional agreements have proliferated, significant barriers to trade remain because of imperfect implementation of agreements, high border and behind-the-border costs, absence of common standards, restrictive rules of origin even within customs unions, and inconsistent (and inconsistently applied) tax policies. All of these issues will have to be dealt with before Africa can achieve effective regional integration.

Expanding flows of financial resource

Global capital markets are expanding rapidly. One measure of financial market integration is the size of gross private capital flows recorded in the balance of payments (table 6.1). Between 1990 and 2004 flows to and from high-income economies tripled as a share of their GDP. Expansion has been slower for most developing countries. Gross capital flows as a share of GDP have more than doubled but remain less than half those in high-income countries.

For developing countries foreign direct investment (FDI) is the largest source of external funding, but portfolio equity and bond investments continue to expand following the turnaround in 2002 (figure 6b). Although low- and middle-income economies still receive only one-third of global FDI, the absolute level has increased nearly tenfold between 1990 and 2004, growing much faster than in high-income economies. But their net inflow as a share of GDP has still not fully recovered to the peak achieved before the East Asian financial crisis.

Foreign direct investment is the largest source of external finance for developing countries

Resource flows to developing countries, 1990–2004 (% of GDP)

Source: World Bank staff estimates.

There are large differences in FDI inflows among developing economies. Middle-income economies received more than 90 percent of net FDI inflows in 2004, and if measured as a share of GDP, these inflows are twice those to low-income countries. The increase in FDI inflows has been greatest in Europe and Central Asia, followed by Latin America and the Caribbean and East Asia and Pacific. Although Sub-Saharan Africa has larger inflows than South Asia and the Middle East and North Africa, FDI in Sub-Saharan Africa is dominated by extractive industries, including oil and minerals. Four countries—Angola, Chad, Nigeria, and Sudan—together received nearly half of Sub-Saharan Africa’s FDI inflows in 2004 (table 6.8).

Countries that have difficulty tapping financial markets must rely largely on aid flows to fund development programs. In 2004 developing countries received official development assistance and official aid totaling $85.5 billion, up from $76.7 billion in 2003 and $56.6 billion in 2000. Aid to Afghanistan (up from $141 million in 2000 to $2.19 billion in 2004) and Iraq (up from $116 million in 2000 to $4.66 billion in 2004) accounted for a large part of the overall increase in aid (table 6.11).

Even so, a substantial increase in aid flows and private capital flows will be required to help developing countries achieve the Millennium Development Goals. For example, aid is the largest source of external finance for the countries of Sub-Saharan Africa, but as a share of GDP aid declined from more than 6 percent at the beginning of the 1990s to 4 percent at the end of the decade (figure 6c). It has since increased to 5 percent.

Aid is the largest source of external finance for Sub-Saharan Africa

Resource flows to Sub-Saharan Africa, 1990–2004 (% of GDP)

Source: World Bank staff estimates.

If measured as a share of donors’ gross national income, aid also declined sharply in the 1990s and rebounded somewhat after 2000. Only five rich countries have fulfilled the UN official development assistance target of 0.7 of GNI: Denmark, Luxembourg, the Netherlands, Norway, and Sweden. If donor countries follow through on their promises at the United Nations International Conference on Financing for Development, in Monterey, Mexico, in 2002 and at the more recent Group of Eight summit at Gleneagles, Scotland, aid is expected to rise to about $97 billion in 2006 and to reach $128 billion in 2010 (box 6d).

New promises of aid and debt relief

	At the Group of Eight (G-8) summit at Gleneagles, Scotland, in 2005 commitments were made to relieve poor countries of their debts, increase aid and make it more effective, remove trade barriers, improve governance, and build stronger development partnerships.
	Specific commitments included agreements to relieve 100 percent of the multilateral debts owed to the International Development Association, the African Development Bank, and the International Monetary Fund by all countries that have reached the completion point under the Heavily Indebted Poor Countries Debt Initiative. Also notable were EU commitments to spend at least 0.56 percent of gross national income on aid by 2010 and G-8 commitments to double aid to Africa.
	The Organisation for Economic Co-operation and Development estimates that if all 2005 commitments to increase aid are met, official development assistance from Development Assistance Committee countries alone will rise by $50 billion in real terms between 2004 and 2010, to nearly $130 billion.

	Aid commitments after the G-8 meeting at Gleneagles, Scotland

	2004		2010 Projection

					Real change in ODA compared with 2004

Country	Net ODA ($ millions)	ODA/GNI (%)	Net ODA ($ millions)	ODA/GNI (%)	Amount ($ millions)	Percent
Denmark	2,037	0.85	2,185	0.80	148	7
France	8,473	0.41	14,110	0.61	5,638	67
Germany	7,534	0.28	15,509	0.51	7,975	106
Italy	2,462	0.15	9,262	0.51	6,801	276
Luxembourg	236	0.83	328	1.00	93	39
Netherlands	4,204	0.73	5,070	0.80	867	21
Spain	2,437	0.24	6,925	0.59	4,488	184
Sweden	2,722	0.78	4,025	1.00	1,303	48
United Kingdom	7,883	0.36	14,600	0.59	6,717	85
Other EU members^a	4,899	0.36	9,206	0.60	4,306	88
EU members, total	42,886	0.35	81,221	0.59	38,335	89
Canada	2,599	0.27	3,648	0.33	1,049	40
Japan	8,906	0.19	11,906	0.22	3,000	34
Norway	2,199	0.87	2,876	1.00	677	31
United States	19,705	0.17	24,000	0.18	4,295	22
Other DAC members^b	3,218	0.30	4,477	0.37	1,260	39
DAC members, total	79,512	0.26	128,128	0.36	48,616	61


	a. Austria, Belgium, Finland, Greece, Ireland, and Portugal. b. Australia, New Zealand, and Switzerland. Source: OECD Journal on Development 2006.

Movement of people

The movement of people across national borders is another mark of integration. International tourist arrivals worldwide for 2005 exceeded 800 million—an all-time high—and these tourists also spent considerable amounts of money on their trips. Receipts from international tourists were 6.5 percent of exports in 2004 for middle-income countries and as high as 17 percent for the Middle East and North Africa (table 6.15).

Meanwhile, an estimated 190 million people (3 percent of the world’s population) are living in countries in which they were not born. International migration has enormous economic, social, and cultural implications in both origin and destination countries.

Demographic trends in both developed and developing countries point to significant potential gains from migration. In many developed countries the population is aging fast, while in many developing countries the population is young and growing rapidly. This imbalance is likely to create strong demand in developed country labor markets for developing country workers, especially to provide services that can be supplied only locally. The share of immigrants in the total population of high-income countries increased to 11 percent in 2005, up from 7 percent two decades ago, while the shares for low- and middle-income countries have remained about the same (figure 6e).

Immigrant populations are expanding in high-income economies

Immigrants as a share of total population (%)

Source: World Bank staff estimates based on United Nations Population Fund data.

Immigrants in OECD countries are better educated

Working-age immigrants by level of education, 1990 and 2000 (millions)

Source: Özden and Schiff 2005.

The large wage gap between developed and developing countries, especially for unskilled and semiskilled labor, indicates that migration from developing countries to developed countries can generate significant welfare gains. The flow of formal remittances from migrants back to their country of origin has been increasing rapidly and has become the largest source of foreign capital for many developing countries.

Remittance flows have more than tripled since 1990, reaching $227.6 billion in 2004, with $161 billion going to developing countries (table 6.14). Already twice the size of foreign aid, remittances are expected to continue growing. Empirical studies have found that remittances typically boost income levels, especially for the poor, and may encourage investment in physical and human capital and help to buffer the impact of negative shocks.

Among these international migrants are millions of highly educated people who have moved to developed countries from developing countries that already suffer from low levels of human capital and skilled workers. The flight of human capital, or “brain drain,” may increase the concentration of poverty and reduce the beneficial impact of globalization. A recent study estimates that highly skilled immigrants represented 34.6 percent of the OECD immigration stock in 2000, while only 11.3 percent of the world labor force had a tertiary education (Özden and Schiff 2006). The most affected areas are Sub-Saharan Africa and small island economies in the Caribbean. Although Sub-Saharan Africa’s emigration rate is not particularly high, 13 percent of those who do migrate have a tertiary education. In Jamaica four of five trained doctors were employed outside the country.


6a	Trade spurs growth and growth spurs trade




6b	Foreign direct investment is the largest source of external finance for developing countries



6c	Aid is the largest source of external finance for Sub-Saharan Africa




6d	New promises of aid and debt relief


6e	Immigrant populations are expanding in high-income economies




6f	Immigrants in OECD countries are better educated