Globalization: Concept and Concerns

Writing for The Hindu, India’s national newspaper, C. Rangarajan outlines the concept of economic globalization and its problems. One of the concerns of the current period of globalization is its connection to unequal distribution of wealth within and between countries. Looking at ‘developing economies,’ and at India in particular, Rangarajan examines the impact globalization has had so far and what countries like India can do in the next round of WTO talks to make the calls for ‘free and fair trade’ more fair for them. He also discusses how India can strengthen its comparative advantages and make itself more competitive in international trade. – YaleGlobal

Globalization: Concept and Concerns

C. Rangarajan
Monday, January 6, 2003

It is very difficult to trace the changes in the distribution of income within countries directly to globalisation. Trade liberalisation need not necessarily come in the way of adopting poverty reduction policies.

GLOBALISATION has become an expression of common usage. Unfortunately, it connotes different things to different people. To some, it represents a brave new world with no barriers. For some others, it spells doom and destruction.

Broadly speaking, the term `globalisation' means integration of economies and societies through cross country flows of information, ideas, technologies, goods, services, capital, finance and people. The essence of globalisation is connectivity. Cross border integration can have several dimensions - cultural, social, political and economic. In fact, some people fear cultural and social integration even more than economic integration. However, the term globalisation is used here in the limited sense of economic integration which can happen through the three channels of (a) trade in goods and services, (b) movement of capital and (c) flow of finance. Besides, there is also the channel through movement of people.

Globalisation has been a historical process with ebbs and flows. During the Pre-World War I period of 1870 to 1914, there was rapid integration of the economies in terms of trade flows, movement of capital and migration of people. The inter-war period witnessed the erection of various barriers to restrict free movement of goods and services. Although after 1945 there was a drive to increased integration, studies point out that trade and capital markets are no more globalise today than they were at the end of the 19th Century. However, there are more concerns about globalisation now than before because of the nature and speed of transformation. What is striking in the current episode is not only the rapid pace but also the enormous impact of globalisation on market integration, efficiency and industrial organisation.

The gains and losses from globalisation can be analysed in the context of the three types of channels of economic globalisation identified earlier. According to the standard theory, international trade leads to allocation of resources that is consistent with comparative advantage. This results in specialisation which enhances productivity. It is accepted that international trade, in general, is beneficial and that restrictive trade practices impede growth. However, even in relation to trade in goods and services, there is one concern. Emerging economies will reap the benefits of international trade only if they reach the full potential of their resource availability. This requires time. That is why international trade agreements make exceptions by allowing longer time to developing economies in terms of reduction in tariff and non-tariff barriers. "Special and differentiated treatment," as it is described, has become an accepted principle. It is this aspect which needs to be stressed, while arguing the case of developing countries.

Capital flows across countries have played an important role in enhancing the production base. This was very much true in the 19th and 20th Centuries. Capital mobility enables the total savings of the world to be distributed among countries which have the highest investment potential. Under these circumstances, one country's growth is not constrained by its own domestic savings. The inflow of foreign capital has played a significant role in the recent period in the development of the East Asian countries. In fact, at the peak, the foreign capital inflow into Malaysia in 1993 was 17.4 per cent of its GDP, while in Thailand in 1995 it was 12.7 per cent of the GDP. A major concern with respect to foreign capital is the potential for its sudden withdrawals. However, even in the recent East Asian crisis, it was found that foreign direct investment was a stable element. While to some extent fresh capital inflow was moderated, there was no outflow of foreign direct investment. The possibility of sharp outflows through the withdrawal of portfolio investment, as it happened in the Mexican case, is a danger to guard against.

The rapid development of the capital market has been one of the important features of the current process of globalisation. The expansion in foreign exchange markets and capital markets is a necessary pre-requisite for international transfer of capital. However, the volatility in the foreign exchange market and the ease with which funds can be withdrawn from countries have often times created panic situations. The most recent example of this was the East Asian crisis. While there is, no doubt, that countries benefit by capital flows, the need to keep a watchful eye on foreign exchange markets becomes essential. What applies to trade may not necessarily apply to finance in a full measure.

On the impact of globalisation, there are several concerns. These may be described as even fears. Under each concern there are many related anxieties. A major concern is that globalisation leads to a more inequitous distribution of income among countries and within countries.

Empirical evidence on the impact of globalisation on inequality is not very clear. The share in aggregate world exports and in world output of the developing countries has been increasing. In aggregate world exports, the share of developing countries increased from 20.6 per cent in 1988-90 to 29.9 per cent in 2000. In fact, in comparing the share of the developing countries over time, care has to be taken to compare the share of the same set of countries over the entire time frame. In fact, four of the countries which were developing countries are now classified as newly industrialised Asian economies. Similarly the share in aggregate world output of developing countries has increased from 17.9 per cent in 1988-90 to 40.4 per cent in 2000. The growth rates of the developing countries both in terms of GDP and per capita GDP have been higher than those of the industrial countries. These growth rates have been even higher in the 1990s than in the 1980s. All these data do not indicate that the developing countries as a group have suffered in the process of globalisation. In fact, there have been substantial gains. But within developing countries, Africa has not done well and some of the South Asian countries have done better only in the 1990s. While the growth rate in per capita income of the developing countries in the 1990s is nearly two times higher than that of industrialised countries, in absolute terms the gap in per capita income has widened because of the wide difference in the base year.

As for income distribution within the countries, it is difficult to judge whether globalisation is the primary factor responsible for any deterioration in the distribution of income. We have had considerable controversies in our country on what happened to the poverty ratio in the second half of 1990s. Most analysts for India would agree that the poverty ratio has declined in the 1990s. Differences may exist as to the rate at which this has fallen. Nevertheless, whether it is India or any other country, it is very difficult to trace the changes in the distribution of income within countries directly to globalisation. Trade liberalisation need not necessarily come in the way of adopting poverty reduction policies.

WHAT SHOULD India's attitude be in the environment of growing globalisation? At the outset, it must be mentioned that opting out of globalisation is not a viable choice. There are at present 142 members in the World Trade Organisation (WTO). Some 30 countries are waiting to join the WTO. What is needed is to evolve an appropriate framework to wrest maximum benefits out of international trade and investment. This framework should include (a) making explicit the list of demands that India would like to make on the multilateral trade system, (b) measures that rich countries should be required to undertake to enable developing countries to gain more from international trade, and (c) steps that India should take to realise the full potential from globalisation.

Before elaborating each of these elements, it must be pointed out that India's balance of payments position has been considerably strengthened in recent years. The current account deficit which peaked to 3.2 per cent of GDP in 1990 has been declining and is remaining around only one per cent of GDP in the last few years. The import growth rate has not shown any alarming rise. In fact, this has been the most comfortable period as far as the external sector is concerned.

There is considerable concern about the next round of negotiations in the WTO. Developing countries including India should project strongly their viewpoint. Without being exhaustive, the demands on the multilateral trading system should include: (1) establishing symmetry as between the movement of capital and natural persons, (2) delinking environmental standards and labour related considerations from trade negotiations, (3) zero tariffs in industrialised countries on labour intensive exports of developing countries, (4) adequate protection to genetic or biological material and traditional knowledge of developing countries, (5) prohibition of unilateral trade action and extraterritorial application of national laws and regulations, and (6) effective restraint on industrialised countries in initiating anti-dumping and countervailing action against exports from developing countries.

Negotiations are not that easy. We have to yield in some areas to gain in others. But what is important is the approach. We must stay and fight whether they be intellectual property rights or public policy considerations. Doha showed some success in this direction.

The purpose of the new trading system must be to ensure "free and fair" trade among countries. The emphasis so far has been on "free" rather than "fair" trade. It is in this context that the rich industrially advanced countries have a role to play. While requiring developing countries to dismantle barriers and join the mainstream of international trade, they have been raising significant tariff and non-tariff barriers on trade from developing countries. Although average tariffs in the United States, Canada, the European Union and Japan - the so called Quad countries - range from only 4.3 per cent in Japan to 8.3 per cent in Canada, their tariff and trade barriers remain much higher on many products exported by developing countries. Major agricultural food products such as meat, sugar and dairy products attract tariff rates exceeding 100 per cent. Fruits and vegetables such as bananas are hit with a 180 per cent tariff by the European Union, once they exceed quotas. Even in the case of dismantling the Multi-Fibre Agreement (MFA), it is stretched up to 2005 and has been back-loaded so that much of the benefits will accrue to countries like India only towards the end. In fact, these trade barriers impose a serious burden on the developing countries. It is important that if the rich countries want a trading system that is truly fair, they should on their own lift the trade barriers and subsidies that prevent the products of developing countries from reaching their markets.

The third set of measures that should form part of the action plan must relate to strengthening India's position in international trade. India has many strengths, which several developing countries lack. In that sense, India is different and is in a stronger position to gain from international trade and investment. India's rise to the top of the information technology industry in the world is a reflection of the abundance of skilled manpower in our country. It is, therefore, in India's interest to ensure that there is a greater freedom of movement of skilled manpower. At the same time, we should attempt to take all efforts to ensure that we continue to remain a frontline country in the area of skilled manpower. We must maintain a competitive environment domestically so that we can take full advantage of wider market access. We must make good use of the extended time given to developing countries to dismantle trade barriers. Wherever legislation is required to protect sectors such as agriculture, they need to be enacted quickly. In fact, we had taken a long time to pass the Protection of Plant Varieties and Farmers' Rights Bill. We must also be active in ensuring that our firms make effective use of the new patent rights. South Korea has been able to file in recent years as many as 5,000 patent applications in the U.S. whereas in 1986, the country filed only 162. We need a truly active agency in India to encourage Indian firms to file patent applications. In effect, we must build the complementary institutions necessary for maximising the benefits from international trade and investment.

Globalisation, in a fundamental sense, is not a new phenomenon. It is as old as history, starting with the large migrations of people across the great landmasses. Only, recent developments in computer and communication technologies have accelerated the process of integration, with geographic distances becoming less of a factor. Is this `end of geography' a boon or a bane? Borders have become porous and the sky is open. With modern technologies which do not recognise geography, it is not possible to hold back ideas either in the political, economic or cultural spheres. Each country must prepare itself to meet the new challenges so that it is not bypassed by this huge wave of technological and institutional changes.

Nothing is an unmixed blessing. Globalisation in its present form though spurred by far reaching technological changes is not a pure technological phenomenon. It has many dimensions including ideological. To deal with this phenomenon, we must understand the gains and the losses, the benefits as well as the dangers. To be forewarned, as the saying goes, is to be forearmed. But we should not throw the baby out with bath water. We should also resist the temptation to blame globalisation for all our failures. Most often, as the poet said, the fault is in ourselves.

Risks of an open economy are well known. We must not, nevertheless, miss the opportunities that the global system can offer. More than many other developing countries, India is in a position to wrest significant gains from globalisation. However, we must voice our concerns and in cooperation with other developing countries modify the international trading arrangements to take care of the special needs of such countries. At the same time, we must identify and strengthen our comparative advantages. It is this two-fold approach which will enable India to meet the challenges of globalisation which may be the defining characteristic of the new millennium.

C. Rangarajan is Governor of Andhra Pradesh.

Copyright © 2003, The Hindu

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