Economic Challenges for Global Governance

Trade and investment liberalization policies put in place in the 1980's ushered in a new era of globalization and currently form the mainstay of global development policy. However, underdevelopment itself originated in the context of globalization in the 19th century. I first summarize the salient facts of global economic growth and development since the Industrial Revolution, namely: the central roles of productivity, trade and foreign direct investment (FDI), the concentration of innovation, the deindustrialization of the periphery, the Great Divergence, persistence of middle per-capita income levels, miracle growth, the demographic transition, the role of institutions and conditional convergence. I then present, in diagrammatic form, a model of endogenous technological change explaining how trade and FDI raise the world growth rate but focus innovation in advanced and larger countries, thus generating multiple steady states in economic growth. The theory explains the simultaneous historical emergence of development and underdevelopment. So long as underdevelopment persists this generates a polarized, rather than an equal, form of globalization. Nevertheless, an adequate orchestration of the forces of globalization ensuring that technological change accrues equally across countries can break the cycle of inequality and generate economic development everywhere. Such policies, based on export promotion, technological adoption, human capital formation and infrastructure investment, not only are economically favorable to all, tending to raise the world growth rate, but also tend to strengthen democratic institutions everywhere, to accelerate the demographic transition in the Third World, and promote a more harmonious global economic integration.