False Prophet , or Genuine Savior ? Assessing the Effects of Economic Openness on Sustainable Development , 1980 – 2000

While many herald globalization—the increasing interconnectedness of national economies—to be associated with rising standards of living across the globe, many others fear its effects on economic sustainability. Anti globalization forces and environmentalists in particular view these developments as a threat to intergenerational equity and the health of the environment because of profligate consumption. This study is one of the first to estimate the effects of dependence on trade, Foreign Direct Investment, and an index of economic freedom on the World Bank’s measure of sustainability (the genuine savings rate), which measures the rate at which the stocks of physical, human, and natural capital exceeds its depreciation. Contrary to pessimists, openness to the global economic system has positive effects on national rates of genuine savings, 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 inefficient converters of natural and human resources into wealth. If trade openness and increasing economic freedom are hallmarks of globalization, then worries about its effects on future well-being are misplaced.