Perspectives on Globalisation

By Analyst
Some see in the recent economic turmoil, a retreat for globalisation. Globalisation has never been a continuous straight path. Despite much loose talk about the "New global economy" today's international economic integration is not unprecedented. During the last quarter of the nineteenth century there was a similar movement towards cross border flows of goods, capital, people and technology. The advent of steam ships and the introduction of railways spearheaded this earlier globalisation. Transport costs came down dramatically and many goods entered international trade. There was also the rapid industrialisation and integration of the whole US economy through the railways.

The British propagated free trade and tariffs came down. But this earlier phase of globalisation came to an end with the outbreak of the first world war. After the war the world moved into a period of trade protection and tight restrictions on capital movements. US capitalism owed much to British capital in the first half of the nineteenth century. But after the first world war America sharply increased its tariffs and other countries retaliated. The volume of world trade fell sharply. International capital flows virtually dried up in the inter-war period as governments imposed capital controls to try to insulate their economies from the impact of a global slump. Britain abandoned the gold standard and with it fixed exchange rates. France had earlier undermined the gold standard by violating its so-called rules which required an inflow of gold reserves to cause a monetary expansion in the domestic economy.

With the collapse of the gold standard, countries engaged in competitive devaluations which were dubbed "beggar thy neighbour policies" since each country tried to isolate its economy from external economic forces. Each country tried to create export surpluses, an effort which was bound to fail collectively since a surplus in one country required a deficit in another. Soon the world was overtaken by the Great Depression. There was political instability and Hitler rose to power in Germany.

At the end of the Second World War the western countries decided to keep their exchange rates fixed - an arrangement under the International Monetary Fund which permitted devaluation only to correct what was called a fundamental disequilibrium in the Balance of Payments of a country.

Capital controls were also maintained after the Second World War upto the 1970's. But the big Economic Powers agreed that world trade expansion required reduction of tariff barriers. So they set up the General Agreement on Tariffs and Trade (G.A.T.T.) which organised a series of tariffs cutting negotiations that gradually reduced import tariffs. The last round of negotiations was held in Uruguay. GATT has now been replaced by the World Trade Organisation. During these years world trade has grown considerably which has benefited practically all nations although the gains may be unequally shared.

In the early 1970's the fixed exchange rate system collapsed after the arbitrary increase in oil prices by the Arab Oil producers. Country after country began to "float" their exchange rates against one another at whatever rates the markets set. This was followed by the demolition of capital controls in Europe and USA Developed countries like Britain, USA, Germany stopped trying to control the inflow and outflow of capital. Britain gave up all capital controls in 1979 and Japan in 1980. USA has a longer history of free capital flows. All this indicates that the earlier globalisation which was stopped in its tracks, had now been resumed. Has the globalisation movement reached another abrupt stop. We hear talk once again of capital controls and protectionism.

Two forces have been driving these increased flows of goods and money. One is the rapid improvement in communications technology with satellite communications and fast cheap computers. There is a revolution in communications which has been dubbed as the Information Revolution. The cost of communications and the cost of processing vast amounts of data and information have come down dramatically.

The second force has been liberalisation. Many countries have not only reduced tariff barriers but also removed capital controls and welcomed foreign capital both direct foreign investment as well as portfolio investments. Over the past decade world trade has increased twice as fast as world output, foreign direct investment three times as fast and cross-border investment cross-border trade in shares ten times as fast as trade.

The Controversy
National economies become more and more integrated as and when cross border flows of trade and investment increase. Consumers are buying more and more foreign goods, many trans-national firms carry on production and marketing in many countries. In fact the production process is so divided up that components are manufactured in several countries and assembled in several other countries.

The entire product being manufactured in one country is no longer the norm particularly in the high-tech industries, the pharmaceutical and drugs industries.

Whether all this is for good or ill is a topic of heated debate. One positive view is that globalisation is a blessing with the potential to boost productivity and living standards everywhere. This is because a globally integrated world economy can lead to a better division of labour between countries, allowing low wage countries to specialise in labour intensive tasks while high wage countries use workers in more productive ways in high tech and service industries. Globalisation also allows firms to exploit bigger economies of scale. And with globalisation capital can move to those countries where it is most productive and yields the highest returns, without being confined to the home countries where it is used to finance projects with poor returns. Such a movement of capital helps the receiving country to increase its production and thereby raise the living standards of that country.

Critics of globalisation take of very gloomy view. They predict that increased competition from low wage developing countries will lead to a loss of jobs in the developed countries and push down wages in all countries both rich and poor as countries attempt to compete with each other by producing cheaper. Not only wages, the governments of these countries will have to cut taxes particularly indirect taxes and welfare benefits to workers which push up the costs of production. Countries will also be tempted to relax environmental controls to attract foreign capital and reduce costs of production. So critics see an all around deterioration of living conditions and standards of living particularly of the workers and the poor.

Critics also worry about the increased power of financial markets as demonstrated in the recent currency crises in South East Asia and East Asia. Financial globalisation is branded as the villain. Financial globalisation has perhaps advanced much more than other forms of globalisation since the deregulation of interest rates and exchange rates created a truly global financial market in i.e. the free flow of capital. This in turn significantly boosts economic globalisation as well as the accompany ideology, namely the free market ideology of liberalisation, deregulation and privatisation. Further, development of industrial globalisation would seem to require a global free market as a necessity. So there are those who argue for the free market ideology. Another aspect that critics dwell on, is that local industry and agriculture will suffer with globalisation. Every industry that is profitable or potentially profitable could attract multi-nationals. This is particularly so for countries with large populations like India or China. The entry of multi-nationals could spell the end of local industry as they buy them over or squeeze them through predatory pricing.

As globalisation proceeds, the state finds its financial problem worsening. It cannot tax industries already exposed to globalisation. Rather it has to subsidize the activities of foreign firms in order to attract them to set up in their country. So the state will have to cut its services. Countries like ours which are already fighting an expensive war will have even greater need to cut the public services. So the state will have to privatise and reform its services. The state will also have to fit into the globalised economy by becoming efficient and cost effective.

So critics say globalisation makes the livelihoods of many people insecure. Like long job security will disappear. It will create and re-inforce economic inequality.

Liberal democracy
Liberal democracy rests on free choice, free competition and a free market in labour, goods and ideas. But democracy is not a once and for all state of affairs. There is a process of democratisation which is very important if the benefits of a free market are to be enjoyed by a wider cross section of the people. People we know are often not rewarded for hard work and merit. Political patronage, politically backed crime, poor implementation of laws, particularly laws relating to taxes, customs, excise etc. all favour the rich as against the poor, the powerful against the ordinary people. Sociologists also refer to "false consciousness", a view of society that makes people who are disadvantaged accept their situation in life. For example the fault is in the stars or due to sins in a past life. People who are poor or unemployed blame themselves rather than bad governance or discrimination against them or bad government handling of the economy.

Soon we are going to have a surplus of doctors. The medical profession has come out with its own solution - spend more money on health. But there are other demands for investment - our economic or physical infrastructure of roads, railways, power, ports etc. have been starved of capital for far too long. The returns from such investments are far larger than on health care. The profession also wants to limit the intake of medical students to the universities. This will of course raise the incomes of the profession.

Not only medical graduate but all graduates have invested a great deal of time and effort in their education, but have not gained an adequate return. If they had to bear the costs of such education, they would no doubt choose their courses after an appraisal of costs and returns. Perhaps what is required is to abolish private practice for doctors so that those who now make good money from private practice would give up their government jobs rather than forego private practices.

In this way jobs will be created in the public service and private hospitals will be able to fix doctors fees in a market which is more level. The government for its part must recognise that professional associations workers trade unions, and even ethnic groups all use monopoly power or monopolisation to their own advantage.

Now the bank employees who are enjoying much higher wages than those with similar educational attainments, are threatening to strike. If they all have their way, inequality in incomes will increase. Should the state promote greater equality or inequality. If the latter then it must stay clear of such wage disputes.

We take a lot about equality. But have we promoted equality or inequality by our policies. Poor people suffer from discrimination in hiring for jobs, in obtaining good schools, although education is free.

People become wealthy when they have a lot of pull or contacts, can attend good schools, get special treatment from the government. Now democratisation involves freedom of thought and expression to the extent that freedom flourishes these abuses can be checked somewhat. If there are checks and balances on the exercise of power by politicians in the three different branches of government, then the abuse of such power to benefit friends, relations, ethnic groups, caste groups etc. will be checked somewhat.

Many believe that economic development and liberal democracy will reduce economic inequality both within countries and between countries of the world. But if economic development is directed by a state which has been captured by a social group or elite, then the type of development that takes place will be that which is acceptable to that group. For example Brazil with its high per capita income could easily provide adequate food and clothing, basic medical care and literacy to all its inhabitants yet a majority of Brazilians lack these amenities altogether, while a minority have more than enough.

Perhaps this is because development programs tend to spread a culture of consumerism, not economic equality. Consumerism is a way of life exported from Europe and USA to the rest of the world. It has been avidly adopted by the middle classes in the developing countries. It generates a desire for television sets, refrigerators, cars etc. The urban middle classes have accepted this style of living. What is wrong however is that they are not paying the proper social costs. Just see our duty free complexes - for whose benefit are they provided. Haven't they become a cheap source of middle class consumption.

People aspire to a level of consumption they see on television. But this level exceed the capacity of the national economy. Only a minority can develop from development programs that aim to provide these things. Or consider cars and private motor vehicles. They create congestion on the roads add to pollution of the atmosphere and adversely affect health and safety of the majority of people. But government policy and government expenditure is designed to provide these benefits for the minority rather than the majority who need cheaper food, clothing, shelter, basic medical care etc.

Since the budget is limited, particularly in the context of globalisation, money spent on the urban middle class, the doctors, the big Colombo schools, urban hospitals etc. is money not spent on the rural poor. It follows that an expanding middle class will necessarily create more poverty. This is accentuated with the free health, free education and other consumer subsidies given to the middle classes without confining them to the poor.

But people blame the open economy or the free market system for an increase in poverty and a widening of the gap between the rich and the poor. It may be possible to reduce the number of poor by approaching the middle class standard gradually bringing along all the members of the society. But this requires a different pattern of development. More money spent on urban facilities make the cities grow while the rural areas dwindle. More money on urban expressways mean less money for irrigation schemes to improve agriculture, employ the rural poor and feed everyone. So villagers leave the country side and flock to densely packed towns where they become shanty dwellers. Nearby, in plain view, the middle class life style flourishes. But can it all last. In the city of Sao Paulo, the middle class has to live in a forfeited part of the city with its own shops, supermarkets and offices. Venturing outside their fortitied enclaves means mugging and robbing.

The influence of the middle class in determining the course of development is strong even when there is democracy, where the rural people outnumber them several times and is the largest part of the electorate. The middle class has access to the best schools through the admissions procedure which given the past students a say. Schooling and influences enable it to pass its status to its young and so the middle class elite tends to be hereditary. Being middle class also means certain kinds of work. Office work at a salary that permits house, car etc. The wages and salaries structures has been built up to reward such work more than more socially productive work.