False Prophet, or Genuine Savior? Assessing the Effects of Economic Openness on Sustainable Development, 1980-1999

Abstract

While many herald globalization - the increasing interconnectedness of national economies - to be associated with rising standards of living across the globe, others fear its effects on sustainability. Anti-globalization forces and environmentalists view these developments as a threat to the welfare of future generations because of profligate and excessive current consumption. This study is the first to estimate the effects of dependence on trade, foreign direct investment (FDI), and an index of economic freedom on the World Bank's measure of sustainability (the genuine savings rate), which measures the rate at which investment in the total stock of manufactured, human, and natural capital exceeds its depreciation. Contrary to pessimists' fears, our indicators of economic openness show positive effects on sustainability, results that are robust to sample size, testing procedure, and several alternative specifications. The results support those who suggest that distorted economies tend to be both inefficient and damaging to future generations. If increasing trade, foreign direct investment, and economic freedom are hallmarks of globalization, then worries about its effects on future well-being are misplaced.