The Geography Of Economic Development

Naval War College Review, Autumn, 2000 by Jeffrey D. Sachs

In the waning days of the Soviet Empire, when the linkages between flagging economic power and the changing state of national security in the Soviet Union were becoming obvious, one story really hit home. It was the story of a gentleman waiting in one of the interminable bread queues in Moscow. Late in the Mikhail Gorbachev era, of course, the lines were getting longer, as the economic chaos in the Soviet Union worsened. Finally the bedraggled Muscovite reached the counter, where the clerk told him, "I'm sorry, we've run out of bread." The poor man exploded. The clerk said, "Now wait a minute, mister. If it weren't for Gorbachev, you would have been shot for saying something like that." The Muscovite went home and lamented to his wife, "Dear, it's much worse than I thought. They've run out of bullets, too."

There was a lot of grim humor in those days, and it has not been much less grim in the last few years. The Russian transformation has been bumpy, to say the least. More accurately, that transformation has been unsuccessful in recent years. This is a topic that I obviously ponder often, having served for two years, 1992 and 1993, as a senior economic advisor to the Russian government. I reflect on what might have been done differently, what we might have advised differently, whether there was another course of action that would have led to a more stable and prosperous society--something that I believe to be in not only Russia's interest but that of the United States as well.

But before getting to particular times and places, it would be useful to take up a very broad theme--nothing less than global economic dynamics--as a way to understand somewhat the nature of the world economy right now: the ways different regions fit into a fast-changing picture, the real economic struggles that engage most of the world.

Without question, the buzzword of our era is globalization. Some say this term is now so hackneyed as to be without content. In fact, it is a real phenomenon, one that is important for us to understand. But it is also important that different parts of the world fit into this fast, globalizing system in thoroughly different ways and have equally different economic prospects. One part of our analysis, then, is the shape of the world system as it is evolving; there is also the important question of why different parts of the world, different geographies or ecologies, face such different futures in it. Let us start, therefore, with some basic ideas about globalization, and then turn to the differences, which I think is the more interesting subject.

GLOBALIZATION

Globalization is a dynamic process of the economic integration of virtually the entire world. At least four aspects of this increased economic integration are worth bearing in mind. What most of us think of as the first part of globalization is increased international trade. There is no doubt that the role of international trade within any individual economy, and therefore for the world as a whole, has been increasing in importance relative to other kinds of economic activity. A typical measure that economists use is an economy's ratio of exports or imports to total output--that is, gross domestic product, GDP. If we look at the ratio of either exports or imports to GDP for virtually any economy in the world, we find that it has been rising; in a number of economies it has been rising particularly rapidly in the last fifteen years. On a day-to-day basis, economies today feel the effect of the international system much more heavily than they did forty years ago. Firms increasingly are directly engaged overseas as exporters or importers, and producers are exposed to competition of imports from the rest of the world.

In general, economic theory has taught--and the idea is very much confirmed by the evidence--that this growth in international trade is a source of increased productivity for all participants. Trade, as economists have been emphasizing ever since Adam Smith in 1776, is not a zero-sum game, where one side wins and the other side loses; rather, it is an opportunity for increased diversity of products, increased specialization, transmission of information and technology, and the like, and therefore a positive-sum game. The most obvious aspect of globalization, then, is simply the increased interpenetration of markets through the trade of goods and services.

A second point, one that is absolutely pivotal, is the increased interpenetration of markets by capital flows. Headlines in the last three years about globalization have been much more about capital flows than about trade. We have witnessed a recurring, sharp, and important kind of economic crisis, that is, crises undergone by countries in the process of globalization--a type of crisis closely linked to the international financial system. We saw them in East Asia beginning in 1997, in Thailand in July, then in Indonesia and Korea. The chaos that continues in Indonesia is rooted not only in geopolitics and local politics but also in the economic collapse that struck the nation at the end of 1997--a collapse clearly rooted in international financial flows. Huge amounts of money poured into Indonesia in the mid 1980s; then, just as suddenly, huge amounts of money flowed out in the fall of 1997. That rapid withdrawal of capital brought down the economy and with it the Suharto regime (which had its own weaknesses, to be sure) and led to cascading political and social change of incredible dynamism and risk.