WHEN THE BROOKINGS Panel on Economic Activity began in 1970, the world economy roughly accorded with the idea of three distinct economic systems: a capitalist first world, a socialist second world, and a developing third world which aimed for a middle way between the first two. The third world was characterized not only by its low levels of per capita GDP, but also by a distinctive economic system that assigned the state sector the predominant role in industrialization, although not the monopoly on industrial ownership as in the socialist economies. The years between 1970 and 1995, and especially the last decade, have witnessed the most remarkable institutional harmonization and economic integration among nations in world history. While economic integration was increasing throughout the 1970s and 1980s, the extent of integration has come sharply into focus only since the collapse of communism in 1989. In 1995 one dominant global economic system is emerging. The common set of institutions is exemplified by the new World Trade Organization (WTO), which was established by agreement of more than 120 economies, with almost all the rest eager to join as rapidly as possible. Part of the new trade agreement involves a codification of basic principles governing trade in goods and services. Similarly, the International Monetary Fund (IMF) now boasts nearly universal membership, with member countries pledged to basic principles of currency convertibility. Most programs of economic reform now underway in the developing world and in the post-communist world have as their strategic aim the 2 Brookings Papers on Economic Activity, 1:1995 integration of the national economy with the world economy. Integration means not only increased market-based trade and financial flows, but also institutional harmonization with regard to trade policy, legal codes, tax systems, ownership patterns, and other regulatory arrangements. In each of these areas, international norms play a large and often decisive role in defining the terms of the reform policy. Most recently, China made commitments on international property rights and trade policy with a view toward membership in the WTO, and membership in the world system more generally. Russian economic reforms are similarly guided by the overall aim of reestablishing the country's place within the world market system. In several sections of its April 1995 agreement with the IMF, the Russian government commits to abide by WTO principles, even in advance of membership. The goal of this paper is to document the process of global integration and to assess its effects on economic growth in the reforming countries. Using crosscountry indicators of trade openness as the measures of each country's orientation to the world economy, we examine the timing of trade liberalization, and the implications of trade liberalization for subsequent growth and for the onset or avoidance of economic crises. Of course, trade liberalization is usually just one part of a government's overall reform plan for integrating an ...
