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10.2.4 Greater mobility of people within and across national borders: migration and urbanization

International migration. Massive movements of labour have been a feature of all three waves of globalization. During the first great wave of modern globalization, from 1870 to 1910, about 10 percent of the world’s population relocated permanently (World Bank, 2001e). International migration was much more modest and geographically limited during the second wave. The main reason was that only a limited number of countries were involved in the second wave of globalization, and where intense migration pressures occurred, strict immigration controls helped to put a brake on labour flows. These controls were somewhat relaxed during the third wave of globalization and had a powerful effect on transnational migration. By 1995, about 150 million people or 2.3 percent of the world’s population lived in foreign countries (Taylor, 2000). Roughly half of this stock of migrants was in the industrial countries and half in the developing world. However, because the population of developing countries is about five times greater than the population of the developed countries, migrants account for a much larger share of the population in developed countries (about 6 percent) than in poor countries (about 1 percent).

The freer movement of people has always had powerful effects on wages in poor and rich countries alike. Initially, different speeds of growth within and across countries promote inequality in wages and wealth, which in turn creates the economic pressure to migrate. Then migration itself, in addition to increased trade and capital flows, helps arrest or even reverse a growing wage inequality. The influx of low-wage labour puts downward pressure on wages in immigrant regions, while raising wages in the emigrant nations. Moreover, wealth is also redistributed when and to the extent that emigrants send back remittances to their countries of origin. As already mentioned in Section 10.1, Lindert and Williamson (2001) conclude that migration was overall a more important equalizing factor than either trade or capital movements.

Globalization also affects international migration in agriculture. During the first wave of globalization, migration was almost exclusively determined by different speeds of agricultural development. But even today many developed countries turn to foreign-born migrants as an important source of agricultural labour. Most rural migrants are attracted by higher wages in developed countries’ fruit, vegetable and horticultural sectors. In the United States, for example, an estimated 69 percent of the 1996 seasonal agricultural workforce was foreign-born (Mines, Gabbard and Steirman, 1997). In California, by far the nation's largest agricultural producer, more than 90 percent of the seasonal agricultural workforce was foreign (Taylor, 2000). The majority (65 percent) of United States migrant farm workers originated from households in rural Mexico. Despite the high concentration of foreign-born workers in farm jobs, the vast majority of immigrants are employed outside agriculture, most in low-skill service and manufacturing jobs.

Agricultural migration is primarily a movement of low-skill labour from developing countries to the higher wage environments of developed countries. As such, it is unlikely to be associated with many of the typical concerns that emigration would lead to a “brain drain” in developing countries and deprive them of their most important capital for future development. In fact, empirical studies show that migrants seldom sever their ties with their source households after they migrate and family members who remain behind (often parents and siblings) reorganize both their consumption and production activities in response to the migrant’s departure. Migrants (often children) typically share part of their earnings with their household of origin through remittances (Taylor, 2000). Remittances or savings accumulated abroad can even create the basis for future investments in the rural economies of their home countries.

The impacts in the countries of immigration are often more ambiguous. While an inflow of unskilled workers from developing countries benefits the highly skilled workers in host countries (their jobs are not threatened by these immigrants, and the presence of immigrants will lower prices for many things that the skilled workers consume, including food, restaurant and hotel services, and personal services), the same inflow will reduce the real wages of unskilled workers. Such competition in the low-wage sector has brought about political tensions within many host countries and has often resulted in increasingly restrictive immigration rules.

As immigration rules tightened and the economic incentives to immigrate remained unabated, illegal immigration and trafficking in human beings increased rapidly. The World Bank estimates that there is an annual inflow of about 300000 illegal workers to the United States alone (World Bank, 2001e). Many more cross temporarily into the United States. In 1999 United States authorities apprehended 1.5 million illegal immigrants along the Mexican border. The great majority sent back to Mexico attempt to cross again within 24 hours. Illegal migration into the EU soared in the 1990s, from an estimated 50000 p.a. in 1993 to half a million in 1999 (World Bank, 2001e).

Intranational migration and urbanization. As discussed in the preceding section, international migration has affected rural populations and agricultural labour forces in developed and developing countries alike. However, despite its importance for certain regions or countries (notably North America), international migration has become negligible compared with migration within national boundaries.

A look at the United Nations population projections by urban and rural areas reveals that a significant proportion of the world's population growth expected between 2000 and 2030 will be concentrated in urban areas. Urban population was estimated at about 2.9 billion in 2000, and is projected to be about 4.9 billion by 2030 (Figure 10.2). Most of the future increase will be in the cities of developing countries. The urban population in developing countries is projected to increase from 1.9 billion people in 2000 to about 3.9 billion people by 2030, thus accounting for almost the entire increment in developing countries’ population growth. But only a part of it is caused by increased rural-urban migration. Also important will be the transformation of rural settlements into urban areas and, most important, natural urban population growth.

Figure 10.2
Past and projected trends in urbanization of developing countries

These shifts in population distribution are considerable. At the beginning of the 1960s, only about 20 percent of the developing countries’ population lived in urban areas. By 2000 the share had risen to nearly 40 percent and is expected to rise to 56 percent by 2030. The rural-urban population ratio declined from about 3:1 in the 1960s to almost 3:2 in 2000 and will be close to 3:4 in 2030. Within the group of developing regions, urbanization will be most pronounced in developing Asia and sub-Saharan Africa. In other developing regions, notably Latin America, urbanization has already progressed to an extent that leaves little room for further growth in urban populations, at least relative to rural ones.

Numerous factors have promoted and will continue to promote urbanization in developing countries. These factors are often classified as push and pull factors, i.e. factors that either incite people to leave their rural homes or attract them to urban areas. Typical push factors include low and declining profitability of agricultural production, lack of non-agricultural employment opportunities and a general lack of services such as schools, medical treatment and entertainment. They have resulted from a general neglect of, or even an outright bias against, agriculture.

On the pull side, expectations for better services, housing, higher wages and more reliable sources of food are the main factors that attract migrants to urban areas. The typical drivers of globalization, notably better information facilities (television, etc.) have been instrumental in creating these expectations. There is, however, a large and widening gap between the expectations and the realities of urban areas in developing countries. Access to food, jobs and services is becoming more limited and other amenities that are often associated with “urbane” or “civilized” city life are entirely missing. This so-called premature urbanization is associated with numerous externalities. These include huge social costs caused by health and sanitation problems, urban poverty, crime, etc.

Despite these problems, it is widely accepted that urbanization is unstoppable, let alone reversible (The Economist, 2002c). Moreover, while it may not even be economically desirable to stop or reverse urbanization, it can be very profitable to slow the trend and mitigate or avoid the externalities associated with premature urbanization. The most important factor is a revival of rural areas in developing countries, which would amount to a reversal of the internal and external policy bias against agriculture in developing countries (as discussed in Chapter 8).

10.2.5 How important are geographic location and infrastructure?

Geographic location. Economists have long noted the crucial role of geographic location for economic development. Adam Smith, who is most remembered for his prescription of free market forces for economic development, emphasized that the physical geography of a region can influence crucially its economic performance (Smith, 1976). He contended that the economies of coastal regions, with their easy access to sea trade, usually outperform the economies of inland areas. Smith's rationale for the importance of geographic location is that productivity gains depend on specialization, and that specialization depends on the size of the market. The size of the market in turn depends on both the openness of markets and the costs of transport. Geography is a crucial factor in determining transport costs.

Empirical studies based on geographic information systems (GIS) have drawn renewed attention to the importance of the physical location for economic development. A frequent point of departure for the GIS-based analyses of location-based development questions is a map of income density, a measure of how much GDP is produced within a given area of land.15

Figure 10.3 provides such a map. The map underlines two principal geographic factors that affect economic well-being. First, almost all high-income countries are in the mid- and high latitudes, while nearly all countries in the geographic tropics are poor. Second, coastal economies have generally higher incomes than landlocked countries and coastal, temperate, northern hemisphere economies have the highest economic densities in the world. Indeed, outside Europe, there is not a single high-income landlocked country, although there are 29 non-European landlocked countries (Gallup, Sachs and Mellinger, 1999). Four areas – western Europe, Northeast Asia (coastal China, Japan and the Republic of Korea), and the eastern and western seaboards of the United States and Canada – are the core economic zones of the modern world. These regions are the overwhelming providers of capital goods in global trade, the world’s financial centres, and the generators of a large proportion of global production.

Figure 10.3 GDP density map of the world

A look at the regions within the United States, western Europe and temperate-zone East Asia that lie within 100 km of the coastline reveals that these areas account for a mere 3 percent of the world’s inhabited land area, 13 percent of the world’s population and at least 32 percent of the world’s GDP measured at purchasing power parity. If coastal China is excluded from the calculations (since it lags far behind the other economies in this group), then the core coastal region has a mere 9 percent of the world’s population but produces at least 30 percent of world GDP. According to WTO data (1995), just 11 countries in North America, western Europe and East Asia, with 14 percent of the world’s population, account for 88 percent of global exports of capital goods (machinery and transport equipment).

Moreover, nearly all landlocked countries in the world are poor, except for a few in western and central Europe that are deeply integrated into the regional European market and connected by low-cost trade. Even mountainous Switzerland has the vast bulk of its population in the low-elevation cantons north of the Alps, and these population centres are easily accessible to the North Atlantic by land and river-based traffic. There are 35 landlocked countries in the world with a population greater than 1 million, of which 29 are outside western and central Europe. The difference in the average GDP per capita is striking: the landlocked countries outside western and central Europe have an average income of about US$1771, compared with the non-European coastal countries, which have an average income of US$5567. The difference in economic density is even greater, since the landlocked countries tend to be very sparsely populated16 (Gallup, Sachs and Mellinger, 1999).

The most important points that arise from the inspection of GIS-based information can be summarized as follows:

Endowment with, and importance of, infrastructure. Infrastructure can offset much of the disadvantage that may arise from an unfavourable geographic location. In fact, in many developed countries and regions, access to infrastructure offsets possible disadvantages caused by unfavourable locations. The extensive and efficient transportation and communication systems in landlocked parts of Europe or North America effectively link these regions to one another and integrate them into world markets. A look across other regions of the world provides a more mixed picture. While parts of East Asia and Latin America hold relatively high stocks of infrastructure, Africa and many countries in sub-Saharan Africa in particular suffer from both unfavourable location and a lack of infrastructure.

The case of sub-Saharan Africa. Numerous studies (e.g. Finger and Yeats, 1976; Amjadi, Reinke and Yeats, 1996) have analysed and quantified the importance of infrastructure as a factor for the successful integration into international markets. Amjadi, Reinke and Yeats focus on sub-Saharan Africa and how the region’s inadequate endowment with infrastructure weighs on its export performance. The study also documents the importance of insufficient infrastructure and related policies relative to other factors such as tariffs and non-tariff barriers.

The importance of the region’s infrastructure relative to its competitors is also underlined by a comparison of the barriers that sub-Saharan African exporters face in markets abroad, relative to those its competitors faced when they embarked on export-oriented policies. For example, pre-Uruguay Round tariffs facing African exports to the EU, Japan and the United States averaged three-quarters of a percent (about 18 points lower than those the Asian newly industrializing countries [NICs] faced when they began their sustained export-oriented industrialization drive), and preferences give Africa an edge over some competitors (Amjadi, Reinke and Yeats, 1996). As long as transport is expensive, electricity unavailable or unreliable and access to phones restricted, the costs and risks of doing business remain high and the possibilities of reaping the benefits of globalization remain limited. But globalization also offers new opportunities to leapfrog traditional constraints. These new options will be discussed in Section 10.3 of this chapter.

10.2.6 What are the impacts on food consumption patterns?

The effects of freer trade in agriculture, the operations of TNCs in the global food sector as well as urbanization and migration become visible in changes in food consumption patterns. In general, these factors promote a convergence of food consumption patterns across different countries and regions. The channels through which these factors operate are either direct or indirect via the link of income growth in poorer countries. Rising incomes have an equalizing effect on food consumption patterns as they promote a shift of poorer consumers to higher-value food items, while higher-income segments are constrained by natural consumption limits even for higher-value food items.

A number of concerns revolve around the growing convergence in food consumption patterns. Some analysts see convergence as an indicator of a loss of cultural identity that reflects in part the growing market power of transnationally operating food enterprises (“McDonaldization”). Moreover, there are concerns that a fast convergence in food consumption patterns may have unexpected resource implications. A growing global convergence on, say, a typical United States diet is associated with rapid growth in feedgrain needs and thus with an extra burden on the available agricultural resource base. Another concern associated with a convergence in food consumption patterns is that food would have to travel over ever longer distances and that the externalities associated with these extra “food kilometres” are not, or not fully, reflected in the price of food. This section examines to what extent food consumption patterns have already converged and what the projections to 2015 and 2030 imply for future convergence.

Measuring convergence in consumption patterns.
The comparison of food consumption patterns was undertaken on the basis of 29 primary product groups.18 The need to compare diets of some 150 countries over a period of 70 years (1961 to 2030) strongly favoured the use of a single indicator, namely the consumption similarity index (CSI). This index measures the overlap in the diets of two countries by comparing how many calories consumed in two given countries originate in the same primary products. The CSI is expressed as:

A CSIj,k of 1 means that the diets of country j and country k are identical, i.e. that consumers draw the same number of calories from each of the 29 food categories distinguished in this study, while a CSIj,k of 0 means that the diets of the two countries are entirely different, i.e. that consumers in country j and k draw their calorie consumption from completely different food categories. In principle, the CSI allows the food consumption pattern of any country j to be compared with the one of any other country k.19 It is important to stress that the CSI only captures the similarities in the structures of the diet in terms of primary products as defined in this study, but does not necessarily capture similarities in the final processed products that are actually consumed. This means that it measures to what extent consumers in two countries rely on a wheat-based or meat-based diet but not whether the wheat-based calories are consumed in the form of noodles or bread, or that meat is consumed in the form of hamburgers or traditional meat products. It is also important to note that the CSI measures similarities in diet structures, regardless of the absolute calorie intake levels. This can result in surprisingly high similarities in diets that are indeed very similar as far as the overall structures are concerned but very different regarding their respective levels of calorie intake (e.g. high shares of meat consumption in pastoral societies with low overall calorie consumption generate a high similarity with meat-intensive OECD diets).

The CSI has been used to compare the food consumption patterns across countries and over years. While CSI calculations have been undertaken for all combinations of countries, the results are only reported for the United States as a “comparator” country. All CSI coefficients are based on a comparison of any given country’s diet with the one of the United States. Convergence over time is convergence towards the United States consumption patterns. The convergence in food consumption reported here may thus be regarded an “Americanization” rather than a globalization of food consumption patterns.

Evidence for convergence. A look at CSI developments suggests that diets have indeed become increasingly similar over time. The speed of convergence, however, differs markedly across countries. The traditional OECD countries form a cluster with consumption patterns that are very close to the United States diet. About 75 percent of the calories in many OECD countries originate from the same sources as in the United States. These countries are fully integrated into the global food economy and their food economies are tied to one another through effective and efficient transportation and communication infrastructures, similar food distribution systems, cold chains, etc. One of the striking features in the group of OECD countries is the high similarity in consumption patterns within the cluster of English-speaking countries (Australia, New Zealand and the United Kingdom) where 80 percent and more of all calories stem from the same foodstuffs.

Many of these countries share not only the same language, but have also a common food and cooking culture. The absence of language barriers and the similarity in food culture are important parameters for an effective and low-cost operation of transnational food enterprises. These similarities allow them to employ the same or similar advertising and marketing strategies and thus reap economies of scale in their market penetration strategies. Finally, there is also a geographic element that plays a role in explaining similarities in diets. For instance, 85 percent of all calories consumed in Canada stem from the same primary commodities as in the United States. Similarly high values exist when diets of North African or western European countries are compared among each other (not with the United States).

Outside the group of the well-integrated western countries, the similarity with the United States consumption pattern is often considerably smaller. Again, there are a number of different groups of countries that exhibit different levels of overlap and different dynamics in moving towards United States food consumption patterns. Very dynamic change can be observed within the group of East and Southeast Asian countries. Japan's consumers are among the most dynamic adapters of a United States-type food consumption pattern. Starting from an overlap of only 45 percent in 1961, similarity had increased to about 70 percent in 1999 and is expected to reach a level of 75 percent in 2030 (Figure 10.4).

Figure 10.4 Food consumption convergence in OECD countries

Note: The dip for Japan in 1975 reflects a change in diet caused by the drastic price increases in world markets during the world food crisis in the mid-1970s.

Outside the group of OECD countries, a number of different clusters can be identified across continents and regions. Within Africa, three major trends in consumption patterns emerge. First there is the group of North African countries, where consumption patterns are characterized by a grain-rich diet and where often more than 70 percent of the calorie intake stems from cereals, notably from wheat. Within this group, food consumption similarity reaches levels of more than 90 percent. Compared to a United States diet, however, similarity has reached a level of about 60 percent (Figure 10.5) and is, even by 2030, not expected to exceed about 65 percent. This could seem surprising at first sight, given the geographic vicinity to, and increasingly important economic integration with OECD markets. However, other factors override the integrating forces of globalization/Americanization on food consumption patterns. These are rooted in (i) the traditional food culture characterized by high consumption levels of wheat-based staples (bread, couscous); and (ii) the non-consumption of pork that limits the potential for shifts towards meat consumption.

Figure 10.5 Food consumption convergence in Africa and Asia

In summary, the forces of globalization have had a significant impact on food consumption patterns and have resulted in a growing convergence of consumption patterns. Even though the relative importance of the various driving forces of globalization is difficult to gauge, openness to trade and investments, geographic location, income levels and growth and TNC activity are almost always associated with a rapid convergence in food consumption patterns. Many of these factors are interrelated. Well-integrated countries also often enjoy higher income growth that works, within the boundaries of income responsiveness and overall calorie intake levels, as a force for convergence. There are, however, factors of a longer-term nature that put a cap on the convergence of food consumption patterns. They include cultural and religious constraints as well as deeply rooted traditions in food consumption and preparation. As a result they limit convergence, even in the most integrated OECD markets, to a level of about 80 percent, a level that is not expected to be topped over the next 30 years. Outside the OECD area, convergence levels off at about 60 percent overlap.

10.3 Some options to integrate developing countries better

Multimodal transportation systems. The smart combination of various transportation modes (sea, air, rail and road) can help to overcome the financing constraints that many developing countries face in building up traditional infrastructure components. So-called multimodal transportation systems have gained a considerable momentum in integrating hitherto remote areas of Asia and Latin America (Box 10.4).

Box 10.4 Multimodal transport offers new opportunities for developing countries

The advent of multimodal transportation systems adds to numerous new opportunities for developing countries to integrate faster and more easily into the global economy. In China, for instance, a new service has been established connecting the country’s hitherto isolated hinterland with Europe. Multimodal Logistics, a Rotterdam-based company, is now offering rail transport for containers from Rotterdam to northwest China. The Marco Polo Rail Express, as the service is commonly called, has two connecting points at Almaty and Druzhba. The transit time is between two and three weeks depending on its destination in China, which could be Alataw-Shankou, Jinghe, Wusu, Ürümchi, Turpan, Korla or Hami/Yumen (UNCTAD, 1999a).

There is also an effort to connect Singapore and Europe by rail. So far, India, the Islamic Republic of Iran, Pakistan and Turkey have been active in the project. Each participating country must bear the cost of completing the link within its national boundary. The aim is to reduce the transit time for deliveries from Singapore to Europe and vice versa by two weeks. There is also a proposal to construct a tunnel that will link Taiwan Province of China and mainland China in order to accommodate the increase in goods traded and transported between the two countries. The Taiwanese private sector has already responded by investing in new depots in Shanghai and Shenzen in China.

There are also plans to create a land bridge that would connect Latin America’s Atlantic side with its Pacific coast. These plans have grown out of the anticipated congestion of the Panama Canal, which is projected to face serious capacity constraints within the next 15 years. The proposal is to integrate Bolivia’s eastern and Andean railways to form a link to and from the Chilean port of Arica and the Brazilian port of Santos. The increase in traffic from such a link is expected to be between 2 and 20 million tonnes with a cut in transport costs of about US$16 per tonne (UNCTAD, 1999a).

The new transportation systems can be particularly efficient if combined with new communication tools. These new technologies offer considerable potential to overcome the location handicap that many remote areas in the developing world face; they could provide new trade opportunities for bulky or perishable goods that were previously excluded because of prohibitively high transaction costs. This in turn could help integrate agricultural producers and provide a stimulus to rural areas, perhaps comparable to the rapid expansion of agricultural production in the United States Midwest during the first wave of globalization.

Leapfrog traditional communication constraints: the Internet for trade facilitation. As during the first wave of globalization, the availability of more efficient transportation systems has been accompanied by the advent of more efficient communication systems. These new communication technologies enabled shippers to tailor volumes and delivery dates of goods to the precise needs of importers. The Internet now allows even smaller-sized companies to compete with their larger counterparts, who had gained a competitive advantage through the dedicated but more expensive electronic data interchange (EDI) systems. For the low initial cost of a personal computer, a modem and an Internet connection, anyone can now access the Internet. More and more shippers and carriers choose to do business through the Internet because of the lower administrative costs involved in conducting transactions. This means significant savings because carriers and shippers depend less on third-party value-added networks that are normally required to run EDI transactions.

There is also a growing expectation that the Internet will soon provide all the advantages that had previously been restricted to expensive EDI systems. Most important, Internet data transfer will become increasingly safe. Moreover, it is available 24 hours a day, allowing business deals to be made at the shipper’s and carrier’s convenience. It could provide niche markets for smaller carriers, enabling them to capture a greater market for small package deliveries.

Economic agglomeration and special economic zones. Despite the possibilities of exploiting further efficiencies in the existing infrastructure, investments in a uniform expansion of infrastructure in every location may be neither an efficient nor an affordable option for most developing countries, particularly in areas where income and population densities are low. As an alternative, a number of manufacturing/ service agglomerations could be developed. Large areas with low population densities (sub-Saharan Africa and Central Asia) would still require several such locations and a considerable labour mobility to populate these places. Of particular interest from the perspective of globalization is the formation of dynamic economic regions and export processing zones (EPZs), which often thrive in the open trading environment (Scott, 1998). These zones can become centres of industry, producer services and urban amenities. Their growth derives from trade, the capacity to attract financing and skills, and the use of agglomeration effects to create networking relationships yielding the maximum of synergy. Recent research also suggests that advances in telecommunications, by increasing the frequency of contact between people, can motivate greater face-to-face interaction and make it more desirable to live in cities (Gaspar and Gleaser, 1999).

Box 10.5 The benefits and limits of economic agglomeration

China’s special economic zones are a well-known example of a successful formation of spatial agglomerations. These zones have attracted substantive but spatially limited public investments in infrastructure. They have offered free trade with otherwise protected countries and have thus been particularly successful in attracting foreign investment. Alongside foreign investment, skills, production techniques and management knowledge in private companies improved while domestic policy-makers gathered institutional knowledge and practical policy experience. This hands-on experience then helped to attract additional foreign capital and is now helping to develop China’s hinterland.

Mauritius’ export processing zone (EPZ) provides another example of a successful spatial agglomeration strategy. Operating under free-trade principles, it enabled an export boom in garments to European markets and an accompanying investment boom at home. The Mauritian EPZ was created as part of an overall development strategy in the 1970s. Given the small size of the home market, it was not surprising that Mauritius would benefit from an outward-oriented strategy. The challenge, however, was to smooth the adjustment process for the existing domestic garment sector that had been long protected under the country’s ISI regimes. The EPZ scheme also provided a way around political difficulties. The EPZ generated new opportunities of trade and employment, without taking protection away from the import-substituting groups and from the male workers who dominated the established industries. The segmentation of labour markets early on between male and female workers, with the latter predominantly employed in the EPZ, was particularly crucial, as it prevented the expansion of the EPZ from driving wages up in the rest of the economy, thereby disadvantaging import-substituting industries. New employment and profit opportunities were created at the margin, while leaving old opportunities undisturbed. This in turn paved the way for the more substantial liberalization that took place in the mid-1980s and 1990s.

Where these linkages to the domestic sector are not developed, the success of the EPZ model is often less sustainable. For example, during the 1980s the Dominican Republic was able to diversify out of its dependence on agricultural commodity exports by expanding its production of garments for the United States market. However, the country’s increasing share of the North American market owed less to domestic competitiveness than to the arrival of United States subsidiaries and their subcontractors in the country’s EPZ. When wages increased, foreign investors relocated to lower-wage economies in Central America. Because the export industry never established domestic linkages or generated a national supply base, export growth did little to raise long-term capacity (Vincens, Martínez and Mortimore, 1998). Problems can also arise out of the extensive tax inducements granted in EPZs. EPZs typically offer tax concessions for five to ten years and, in some cases, as in Honduras, they are granted on a permanent basis (Agosin, Bloom and Gitli, 2000). The resulting revenue losses for the national governments can be substantial. For Bangladesh, the revenue losses associated with tax concessions in the EPZ amount to around US$84 million p.a.

In most developing countries, a small number of cities – with the capital city in the lead – generate half or more of the country’s GDP. These interlocking metropolitan areas comprising an economic region could become the principal “growth pole” for countries (Simmie and Sennet, 1999). These regions could be located in a single country as in Brazil, India and China or straddle two or three countries as they do in Southeast Asia.

Most developed countries have vastly benefited from the productivity gains that economic agglomerations and clusters provide. Agglomeration gains were probably most pervasive during the second wave of globalization, when trade between developed countries became determined not so much by comparative advantage based on differences in factor endowments but by cost savings from agglomeration and scale. Because such cost savings are quite specific to each activity, although each individual industry became more and more concentrated geographically, the industry as a whole remained very widely dispersed to avoid costs of congestion.

However, while agglomeration economies are good news for those in the clusters, they are bad news for those left out. A region may be uncompetitive simply because not enough firms have chosen to locate there. As a result “a ‘divided world’ may emerge, in which a network of manufacturing firms is clustered in some ‘high wage’ region, while wages in the remaining regions stay low” (Yussuf, 2001).

Box 10.6 Why and when is two-way trade in agriculture important for developing countries?

There is growing recognition that developing countries can reap important benefits from two-way trade (TWT) and there is evidence that TWT can provide an avenue for successful globalization strategies.

First, a shift towards TWT is typically associated with a shift in trade to processed products and thus higher-value goods. Within a given infrastructure, a shift in trade towards higher-value goods reduces the share of transaction costs per unit of merchandise and thus helps overcome the geographic and infrastructure constraints faced by many developing countries. Second, TWT helps to cope with adjustments in factor markets arising from the large swings in international commodity prices witnessed over the last decades. As trade is largely the exchange of similar and processed products, shocks result in a reallocation of production factors within an industry, rather than between industries. The latter is typically a process that involves the discontinuation of activities in one sector and the loss of jobs, in order to move factors to other industries or sectors. This type of resilience against international shocks can be an important argument for policy-makers in developing countries to integrate their economies faster and more fully into international markets.

Third, TWT in food and agriculture offers economies of scale in the food industry. It enables domestic producers and processors to sell products that are homogeneous with respect to factor requirements but heterogeneous with respect to utilization and marketing to both domestic and foreign markets. Like increased natural protection, scale economies are particularly important when countries want or have to integrate their domestic economy into international markets and expose their domestic sectors to greater competition from abroad. This is a particular benefit for small developing countries, notably small islands, for which TWT could provide an interesting avenue to reap economies of scale, diversify trade and escape the volatility of price swings that they would face otherwise. Fourth, if intra-industry adjustments dominate, commitments towards freer trade are likely to be more comprehensive and to last longer. Empirical studies (Caves, 1981) suggest that increasing IIT following trade liberalization keeps pressures from import competition low. As a consequence, politicians are more likely to press ahead with the process of trade liberalization since the high political cost associated with resources shifting between industries is limited. Finally, IIT in food and agriculture enables those developing countries that are scarcely endowed with productive natural resources (land, water, climate, etc.), to create and foster trade opportunities independent of the ability to produce primary agricultural products. TWT in food and agriculture has boosted the food processing sector in many Asian economies and created a trade surplus for countries that lack the climatic and agronomic conditions for a flourishing agricultural export economy.

Intra-industry trade in agriculture. Classical trade theory suggests that countries specialize in international trade according to differentials in production costs for different goods. These cost differentials can result either from efficiency differences in the use of production factors (Ricardian trade specialization) or from differentials in factor endowment (Heckscher/Ohlin). When developing countries specialized in producing and exporting agricultural products for which they seem to have a classical “comparative advantage”, they were facing increasingly binding constraints for their potential to grow (relative to world markets). This was not necessarily as a result of limits in domestic factor endowments or as a result of trade barriers in markets abroad (see Chapter 9), but simply because the export markets they produced for exhibited low and declining demand elasticities, while their own import demand remained elastic.20 This created the so-called “elasticity pessimism” and the economic rationale for the import-substituting industrialization (ISI) strategies pursued by many developing countries in the 1950s and 1960s (see Section 10.2.1 above).

Krugman (1986) showed how a country could overcome the elasticity constraint by embarking on intra-industry trade (IIT) or two-way trade (TWT) in differentiated products. The principle is as follows: if consumers have a certain taste for variety, each new differentiated product creates a niche and the corresponding demand. If the number of products produced in a given country is related to the size of the economy, then the countries with the fastest growth also tend to produce more products. Contrary to the traditional view, this mechanism does not need a price (exchange rate) or demand adjustment to equilibrate the trade balance. Instead, the mechanism works endogenously. The country with higher growth produces more product variety, which in turn generates its own export markets.

These microeconomic effects play a role in the growth process and interact with macroeconomic policies, notably with the exchange rate. For example, there is evidence from a comparison between the Republic of Korea and Taiwan Province of China that the latter was able to generate more product variety than the Republic of Korea and rely less on a continuous competitive devaluation to gain a market share (Oliveira Martins, 1992 and Feenstra, Yang and Hamilton, 1999). More recent work has also shown a positive and significant impact of product variety on relative export intensity and growth (Funke and Ruhwedel, 2001).

In practice, however, TWT in food and agriculture was largely limited to trade within developed countries. In developing countries, trade patterns in food and agriculture remained biased towards a traditional (inter-industry) trade specialization, which broadly reflected two major factors. First, a great number of developing countries experienced low GDP growth rates and failed to attain the GDP levels required to stimulate a greater diversification of demand and eventually rising IIT. Second, growing TWT goes hand in hand with the development of an internationally competitive food processing industry, a process for which most developing countries faced major constraints. Food processing industries are well established in the industrialized countries.

Box 10.7 How has two-way trade been quantified?

To measure the order of magnitude and the development in IIT specialization, a modified Grubel-Lloyd (GL) index of two-way trade (TWT) has been computed. The modification of the GL index was necessary to account for the overall trade imbalance in food and agriculture that is characteristic of many developing countries. The TWT index for n products (i) and a given country j is computed as follows:

where Xij, Mij are export and import values in current US$.

In general the TWT index measures the proportion of total trade (sum of values of imports and exports) that is composed of trade in “similar products”. A value of the index close to one indicates that there is predominantly IIT (i.e. in differentiated products), while a TWT value close to zero suggests that trade is primarily inter-industry trade, i.e. in different products. The computations reported are made at the highest possible disaggregation level that is allowed by the data (the FAO trade database for food and agriculture comprises a maximum of 521 different products).

But indicators for trade diversification and specialization (Table 10.3) also show that the difference in the levels of TWT between developed and developing countries was not always as pronounced as in the 1990s. Throughout the 1960s and 1970s, IIT in agriculture has been low when compared to manufactures, in developed and developing countries alike. However, while TWT remained at low levels in developing countries, many developed countries recorded a rapid growth in TWT trade over the 1980s and 1990s. For the United States and the EU, for instance, the level of TWT in agriculture increased rapidly since the early 1970s, while the TWT coefficients remained largely unchanged throughout the developing world. In sub-Saharan Africa, TWT accounts for merely 16 percent of total agricultural trade and this share has remained unchanged since 1970. The level is higher in the Near East/North Africa and South Asia but there too IIT in food and agriculture stagnated.

Table 10.3: Two-way trade in food and agriculture, by region


TWT (percentage)

Number of products traded







Developed countries














   North America







   Other countries







Developing countries







   East Asia







   Latin America and the Caribbean







   Near East/North Africa







   South Asia







   Sub-Saharan Africa







Transition economies







   Eastern Europe







Source: own calculations.

A closer inspection of country-specific information suggests that the level of TWT in agriculture increases rapidly when trade barriers are reduced and even more so when countries integrate their economy into a common economic market (Figure 10.6). Such a change is accompanied not only by the increasing amount of IIT, i.e. by the volume of exports and imports of similar products, but also by a rapid increase in the number of products traded. For countries that are firmly integrated into a common market (the Netherlands, Belgium), TWT in food and agriculture has reached levels that are comparable to those attained in manufactures. Country-specific data also reveal that a rising TWT is often associated with a growing trade surplus in food and agriculture and vice versa. This suggests that the ability to generate a trade surplus in food and agriculture does not so much depend on the ability of a country to produce a certain amount of raw material as on the country’s capacity to produce differentiated products and to cater for specific markets, including market niches.

Figure 10.6
Two-way trade in food and agriculture, the effects of economic integration

10.4 Concluding remarks

Globalization – the growing integration of economies and societies around the world – is a complex process that affects the world’s food and agricultural economy in numerous ways. Cheaper and faster transportation, easier communication and the development of the Internet are important drivers. Also important are a growing number of international agreements that have codified and liberalized the flow of goods and capital. These factors have resulted in a rapid expansion of trade and FDI but also in the rise and growing influence of transnational companies. The impacts of these new factors have been very positive overall, even though the benefits are distributed unevenly. For example, globalization has helped to fight poverty and undernourishment in China, Viet Nam and Thailand, but has done little so far to integrate the poorest in sub-Saharan Africa, to improve their food security, or to enable the region’s farmers to make significant inroads into markets abroad.

This raises the question as to what factors determine success or failure, integration or marginalization. Why have some countries been able to take advantage of the great development potential that globalization offers while others have failed to do so?

Some of the correlates of success or failure have been identified in this chapter. To begin with, openness to trade and capital flows, and the ability to adopt and to adapt technological innovations are undoubtedly among the important factors for success. Also geographic location and endowment with infrastructure can play a crucial role in determining whether a country thrives or falls further behind in an increasingly globalized economic environment. But probably most important are the domestic incentive system and the companion policies that facilitate the integration process.

A number of examples have been presented to document success and failure in the process of globalization. No claim is being made that these examples are representative or comprehensive. Nonetheless, the examples suggest that a number of common features are associated with success or failure in the process of global integration.

First, while openness to trade and investment flows is an important contributor to a successful global integration process, openness alone is not a guarantor for success. In many cases, openness has emerged gradually alongside overall economic and agricultural development. At the same time, no country has recorded high growth in the long term on the back of infant-industry protection and import substitution policies. Nowhere have insulation and protection spurred on agricultural growth and overall development in a sustainable manner.

Second, successful globalizers are masters in managing adjustment. They succeed in rationalizing excess capacities and create exit possibilities for farmers and new employment opportunities at minimal cost. The creation of township and village enterprises in China, the pruning of excess capacity in Viet Nam’s coffee sector and credit restrictions imposed on unproductive chaebols in the Republic of Korea have been mentioned. Gradual adjustment is particularly important for agriculture, as a large part of the human and financial capital of the sector is fairly immobile in the short term. Managed transition provides an opportunity to reallocate resources or gradually depreciate them. Active adjustment management also helps to mitigate adverse impacts for the poor.

While the process of structural change often creates greater opportunities for the poor in the medium term, it also means that they have to bear short- to medium-term transitional costs that they are ill positioned to absorb. This is particularly true of trade reforms, where the adjustment costs often come upfront, while the benefits are seen only over a longer period of time. The policy measures to manage adjustment entail an appropriate mix, sequencing and phasing of trade reforms; they also include measures that prepare farmers and processors for international competition, e.g. through training and technical assistance. Even where and when border protection is largely removed, farmers can vastly benefit from measures that protect them from excessive price swings (e.g. China and Viet Nam).

Successful integration is also a process of learning and experimenting and there are measures that promote this learning process. The two-track system in China’s agriculture (both in terms of export orientation and in terms of free market plus government control) seems to work. It has allowed policy-makers to gather experience as to what system works and what does not, as to what farmers can do best and what not. Two-track systems have also proved useful in opening up to international competition without facing the costs of massive and rapid adjustments for a whole economy. Probably the most prominent examples for successful two-track systems are China’s special economic zones and Mauritius’ EPZ. There are various channels through which these two-track systems facilitate transition towards freer environments. They allow, for example, a country to provide foreign investors with special conditions that may be difficult to guarantee for the whole economy. They also help domestic companies to prepare for growing competition from abroad and allow policy-makers to adjust the domestic framework of competition policies to an environment of freer trade and capital flows.

Globalization has generated growth in FDI that exceeded growth in trade flows. FDI inflows can play a catalytic role for development. FDI provides not only an important source of finance. More important, it is a carrier of technology, skills and management techniques. But, as with trade, success rests not only on the degree of openness. As important as the quantity of inflows is the quality of FDI. High-quality FDI is characterized by low repatriation levels and intensive linkages to domestic farmers. Experience from FDI in India’s food industry, in particular, has demonstrated its potential for promoting agriculture and overall rural development. TNCs provided farmers with better seeds, enhanced technologies and more stable prices and thus boosted crop yields and farm incomes. The contracts that forge these linkages are crucial for success. But there are also examples where FDI largely failed to create linkages with local farmers and even instances where TNCs have added to the marginalization of whole farm populations. Developments in the global coffee markets illustrate this point. There is evidence for a growing concentration in trading and processing of coffee and there is also evidence that TNCs managed to reap a growing share in the total value created in the coffee marketing chain. It is however less clear to what extent these developments reflect the abuse of market power and the absence of an appropriate competition policy framework that can address the new competition policies in a globalized market.

Globalization in agriculture has also been brought about by an internationalization of production technologies. The green revolution was the single most important vehicle in this process. Again, while some countries have been phenomenally successful in adopting these new technologies, others have largely failed to do so. As with trade and investment flows, the correlates of success are not merely openness to innovation. Numerous studies suggest that it is more important to create the appropriate domestic environment that allows local producers to employ the new technologies gainfully. In short, adoption has to be accompanied by adaptation to provide success. Similarly, success or failure in reaping the benefits of biotechnologies will depend less on availability than on the capacity to adapt the new technologies to the agronomic and economic environments that prevail in a specific location. Finally, geographic location and infrastructure endowment play a crucial role in successfully tapping potential world markets. There is ample evidence that the lack of infrastructure (not the existence of trade barriers) has been the crucial impediment that hindered sub-Saharan Africa’s farmers from making significant inroads into OECD markets.

But there is also evidence that globalization can offer new opportunities to leapfrog old obstacles resulting from unfavourable locations or inadequate infrastructure. In general, new technologies are cheaper and faster and can bring the most remote areas to the heart of the markets. These include Internet-based business communication systems as well as multimodal transportation systems. In sparsely populated regions, transaction costs can be reduced by promoting economic agglomeration.

In summary, globalization offers a great potential for farmers and the entire food sector of developing countries. Many developing countries are successfully tapping this potential, but not all of them are able to take full advantage of the new opportunities. The ability of a country to reap the benefits of globalization depends on factors such as openness to trade and capital flows, ability to adopt technological innovations, and also geographic location or infrastructure endowment. The various examples suggest that openness and outward-oriented policies characterize many successful globalizers but per se they are not guarantors for success. More important are the companion policies on the domestic front that facilitate integration into global markets. These are policies that provide appropriate transition periods towards freer trade; help adapt new, external technologies to the domestic environment; and provide competition policy settings and design contracts that also allow small-scale agriculture to thrive within the operations of TNCs.

15 Ideally, such an income density map depicts information about population density and the spatial distribution of income. In the absence of the latter, Figure 10.3 simply combines population density with average per capita income levels (1997/99) for a given country.
16 Fifty-nine people per km2 in landlocked countries compared with 207 people per km2 in coastal countries.
17 Obvious reasons for this are: cross-border migration of labour is more difficult than internal migration; infrastructure development across national borders is much more difficult to arrange than similar investments within a country; and coastal economies may have military or economic incentives to impose costs on interior landlocked economies.
18 The 28 food commodities given in Annex 1 of this study and a commodity, “other calories”, i.e. all calories consumed and not covered by the 28 commodities of this study.
19 Note that a CSI of 0.5 between country 1 and country 2 and a CSI of 0.5 between country 1 and country 3 do not mean that the overlap/similarity in the diets between country 2 and 3 has to be 0.5 as well.
20 Even for the development of a competitive food processing sector, most developing countries are simply too small to reach the necessary economies of scale. Where developing countries have made significant inroads into food processing – for example, orange juice production in Brazil, canned pineapples in Thailand and soluble coffee production in Colombia and Brazil – the scale required for efficient production means that upstream access to raw materials and downstream access to markets must also be secured on a large scale. Many developing countries lack the raw materials, capital and market access to make processing viable (UNCTAD, 2000).

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