Economics of Globalization

 

Notwithstanding the criticisms globalization has received, one thing is for sure – globalization is here to stay. The success of BRIC (Brazil, Russia, India and China) until now suggests that globalization has done more good than harm to the developing nations. Surely, one has to understand that success would depend on how globalization is pursued and at what pace? Perhaps, the South East Asian Crisis underlines this fact better.

“There is nothing new about globalization; it’s been around since long before Britain ruled the waves – and waived the rules. Historians and economists argue that the world of the late 1800s and early 1900s was more tightly integrated through trade than today…What is new is the accelerating speed of change, and the fact that people are now able to observe and judge changes as they take place.”

– Mike Moore, Author, A World Without Walls

Globalization is not a recent phenomenon. Much before it became a buzzword the world economy had already globalized a century ago. However, it is now far more developed and deeply integrated in terms of business activities than during that time. The present era has distinctive features like shrinking space, time and vanishing borders and these developments are linking people across the globe more intensively than ever before. This is causing the growing interdependence of the people across the globe. Some countries are integrating more quickly into the global economy than others and are experiencing faster growth and reduced poverty. During the past couple of decades, the structural changes that took place in the world economy have brought about increased cross-border economic relations, leading towards a global economy, creation of global interdependence, and an economic global village.

Globalization is the process of integrating not just the economies but culture, technology, and governance. In short, it’s a process of denationalization of markets, politics, and legal systems, etc., eventually giving rise to a global economy. During the past decade, globalization has become a buzzword for every event happening in the world economy. Whether, people like it or not, it is a foreseeable and permanent process.

The Growing Prominence

The global economy in the 20th century has witnessed the gradual liberalization of trade and capital flows, followed by the deeper version of globalization mainly attributed to technological changes and politico-economic liberalization, and has created a world, that is more unified than ever before. The advent of World Wide Web has made time and distance immaterial and also eliminated physical and cultural distances among nations. So, the process of globalization is not only helping growing interdependence in economic relations but also social and political interaction among organizations and individuals across the globe. In fact, in the emerging global landscape, globalization has set in motion a process of far-reaching consequences affecting every person across the globe. Unlike the past, this growing interconnectivity among people is fostering the realization that they are all part of a global community with shared universal values. With this mindset, the global economy has demonstrated immense productive capacity going by better managerial skills, which in return generated better jobs for all, and finally contributing significantly to reduce the world poverty.

Going by this, globalization has acquired considerable attention across the globe. Some view it as a process that is beneficial – a key to future world economic development. Others regard it with hostility, even fear, believing that it increases inequality within and between nations, threatens employment and living standards, and thwarts social progress. However, the 20th century saw unparalleled economic growth, with global per capita GDP increasing almost fivefold, which was a remarkable average income growth. As globalization progressed, living conditions improved significantly in all countries virtually. But the advanced countries benefited more and of course some of the developing countries like China and India as well. India has benefited tremendously as it joined the globalization wave. The post-reform process has seen notable changes in the country’s macroeconomic policies, which are more or less in harmony with globalization, and as a result the economy today is far more open and integrated with the global system than anytime in the past.

Dissent on the rise, as well?

However, on the other hand, it is also quite obvious that the progress has not been evenly dispersed. The gaps between rich and poor countries, and rich and poor people within countries, have grown. The income gap between high-income and low-income countries has grown wider, and is a matter of concern. The richest quarter of the world’s population saw its per capita GDP increase nearly sixfold during the century, while the poorest quarter experienced less than a threefold increase. It is clear that the income gap between rich and poor countries has been widening for many years. The countries like China and India that have sound management policies in place can actually raise their national incomes under the impact of globalization. However, they should learn a lesson or two from the South East Asian Crisis of 1997. It annoyed the Malaysian Prime Minister so much so that he put the entire blame on one man, George Soros, the billionaire investor and hedge fund guru, for the fall of its currency and the financial crisis Malaysian economy got into. A slew of crises followed after that. Argentina got into a severe crisis, after that Brazil too had come face to face with an economic crisis. And, more surprisingly, the growing backlash in America, the biggest advocate of globalization against outsourcing to developing nations like India, China, and Philippines, presents the other side of the globalization.

In the process of setting international rules of globalization (especially, those related to WTO) the developing and underdeveloped nations have largely been powerless. Against this backdrop, is it correct then to jump to the conclusion that globalization has caused the divergence, and that nothing can be done to improve the situation? Supporters of globalization say that low-income countries have not been able to integrate with the global economy as quickly as others, partly because of their chosen policies and partly because of factors beyond their control. The international community should endeavor to strengthen the international financial system, through trade and aid to help the poorest countries integrate into the world economy, grow more rapidly, and reduce poverty. They further say that it would be a great mistake to blame globalization for increasing inequality within and between the nations. Globalization is much bigger, much greater, and has significant benefits for the people in terms of wide variety of choices, improved product quality and downward pressure on prices. In the developing world, globalization of knowledge has brought improved health, with life spans increasing at a rapid pace. Besides, the global exchange of knowledge, culture, and commerce is broadly beneficial.

According to a research (both anecdotally and empirically) done by Gary Quinlivan, Dean of the McKenna School of Business, Economics, and Antony Davies, Assistant Professor of Economics, at the Duquesne University, Pittsburgh, the improvement to world welfare is a direct result of increased globalization. In those regions (South Asia and Sub-Saharan Africa) where trade has been severely restricted, welfare changes over the past 15 to 30 years have been stagnant or negative. The research further says, the improvement in world welfare has also been primarily due to a free market initiative. As a percent of GNP, from 1990 to 1999, of the top 20 Human Development Index (HDI) ranked industrialized countries, 12 had reduced their Official Development Assistance, and the United States had cut its percentage of GNP aid by one-half. It concludes that there are some obvious lessons for developing countries to follow globalization in order to maximize their growth and welfare.

However, according to Joseph Stiglitz, a Nobel laureate and former chief economist at the World Bank and the author of the book, Globalization and its Discontents, globalization today is not working for many of the world’s poor, and is not working for much of the environment, and also it is not working for the stability of the global economy. He says that to some, there is an easy answer. That is, abandon globalization. That is neither feasible nor desirable. He advises that the problem is not with globalization, but with how it has been managed. Part of the problem lies with the international economic institutions like IMF, World Bank and WTO which help set the rules of the game. He further adds, all these too often have served the interests of the more advanced industrialized countries and particular interests within those countries rather than those of the developing world. He believes that globalization can be reshaped to realize its potential for good and international economic institutions can be reshaped in ways that will help ensure that this is accomplished.

George Soros in his book on Globalization opines, globalization is indeed a desirable development in many ways. He says private enterprise is better at wealth creation than the state. Moreover, states have a tendency to abuse their power; globalization offers a degree of individual freedom that no individual state could ensure. Free competition on a global scale has liberated inventive and entrepreneurial talents, and accelerated technological innovations. However, he says that globalization also has a negative side. Firstly, many people, particularly in less-developed countries, have been hurt by globalization without being supported by a social safety net; many others have been marginalized by global markets. Secondly, globalization has caused a misallocation of resources between private goods and public goods. Thirdly, global financial markets are crises prone. People living in the developed countries may not be fully aware of the devastation wrought by financial crises. All these factors combine to create a very uneven playing field. In spite of these deficiencies, he is a keen supporter of globalization.

N Janardhan Rao, Senior Economist.