Globalization and the economic well-being of citizens

The past three decades have marked an era of economic integration between nations, even though different macroeconomic policies have been followed by different countries. Country's responses to changes in the external environment have been very different, but why? This paper attempts to explain why reactions to changes in the external environment have been so varied and compares the reform experiences of Latin America and the Middle East over the past two decades.

Key changes in the external environment and the corresponding reforms across regions are highlighted. Reform experiences of Latin America and the Middle East are compared in the last two decades.

The paper provides theoretical explanations of reform variability in response to changes in the external environment. It is assumed that reforms are at least necessary for rapid and more equitable growth as well as for alleviating poverty.

Evidence collected for Latin America suggests that:

• crises are characterised by falls in real incomes and negative rates of growth facilitate the adoption of trade reform
• inflationary crises tend to be associated with financial reforms
• capital flows to Latin America as whole have been a major engine of reform
• tax reforms are more likely in countries with open trade regimes
• real devaluations of the exchange rate retard rather than facilitate trade reforms.

Evidence on the slow pace of reforms in the Middle East is scarce. However the paper suggest a number of hypotheses to explain why reforms have been slow:

• when countries face no major short term crises
• when countries’ problems are of a medium-term nature
• when oil shocks occur in capital abundant countries
• lack of external commitments involving, for example, the World Bank, IMF, or WTO.

The paper recommends further research to answer the following questions:

• what motivated reforms, what explains lagging reforms and what was the link between reform elements
• which crises accelerate or delay reform
• why devaluations could retard reform as opposed to predictions
• have trade agreements contributed to trade reform or introduced obstacles to further multilateral liberalisation
• does the causality run from privatization to inflows of external capital or from capital inflows to privatisation
• are fragmented societies less open to reform.

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