globalization

an/

GLOBALIZATION

Editors C.G. Krishnastuamy S.R Keshava RaviM. Tirlapur

BETTER EXPRESSION Department of Post Graduate Studies &: Research in Economics Bangalore University Bangalore - 560 056

RHETORIC OF GLOBALIZATION AND REFORMS: A CASE OF INDIA (1991-2003) mM. Satish Kumar ''Motorcars are travelling faster than they otherwise would because they are provided with brakes" (Schumpeter, J. A 195011942]: 88). 1. INTRODUCTION Globalization invokes images of speed and efficiency in a global world. In a world integrated into the global economy, the chances of encountering a State in the developing world going all out to present a deregulated identity is far higher than what one would observe in the developed west. This dichotomisation is far more explicit now than ever before. If globalization suggest that we all perform our pre-determined roles in this hermeneutic space, then the chances of taking a balanced position is a far cry. Countries, rather selectively are forced to play a role, being pre-determined by the process of globalization of the world economy. In recent years, the notion of globalization has accelerated with the extremely strong 'counter-revolution' (Toye, 1987) in development economics, which placed orthodox economics with its emphasis on the price mechanism and limited government intervention firmly into the policy making saddle.

24

Better Expression on Globalization

The Dirigisme (Lai, 1983,1994) of governments in developing countries was shown to be irrational and inefficient in the allocation of resources, while greater openness and reliance on the price mechanism was pushed vigorously in countries which adopted IMF/ World Bank adjustment programs towards the broader aim of integrating into the world economy. This is explained succinctly by Chomsky (1994) who argued that a consequence of globalization is its changing structures and the governance of power. What in effect has happened is the development of a defacto world government with its own charters and institutions, i.e. the World Bank, IMF and WTO attempting to redirect the governance of the developing world. It is what Chomsky (1994) calls a ''democratic deficit", where people and rulers face a diminishing ability to determine their existence in a multipolar world. While the process of globalization appears inexorable in the present century, it was never always so. In a seminal article on globalization and inequality, Lindert a n d Williamson (2001:19-20) made the prophetic statement that ' some things never c h a n g e s ' ; that globalization and convergence ceased between 1913 and 1950. According to them, it was the rising inequality in developed countries induced by the process of globalization, which was responsible for i n t e r w a r retreat from globalization. Globalization was responsible for more than half of the rising inequality in rich countries and for little over a quarter of the falling inequality among the poorer ones. (Lindert and Williamson, 2001) Therefore, the question is will the world economy soon retreat Irom its commitment to globalization just as it did a century ago? Rather, what prevents it from doing so again? The new phase of globalization appears to have in place.

Rhetoric Globalization and Reforms

25

superior retention mechanism than in earlier periods. Powerful institutions such as the World Trade Organisation (WTO) relentlessly pursue a global agenda which returns us to the point made earlier by Chomsky. As seen by its extreme proponents, globalization is a process that will not only be inevitable in the market-dominated twenty-first century, but one, which subsumes national autonomy to the common goal of global integration. On the other hand, opponents take issue with globalization on two points. They claim that the spread of western cultural ideals and beliefs is damaging indigenous society in the developing countries. Second, they dispute the argument that the state is becoming irrelevant to economic policy. Indeed, some scholars question whether globalization is not a misnomer for greater internationalisation of the world economy (Hirst and Thompson, 1996). While globalization has been critiqued on empirical issues, the danger in extending a Third World model in industrial countries is highlighted by Chomsky (1994). In developing countries he argues, society is two tiered: a p r i v i l e g e d , extremely w e a l t h y section a n d an underprivileged 'superfluous' section. Such division has been deepened by the public policies of the West. Neoliberal policies in effect helped to direct resources to the wealthy and to foreign investors in the hope that the magic hand of the market will assist in trickling down benefits to the underprivileged. Over time some principal ideas they promoted for the Third World have been appropriated into the West. However, the irony was that none of these policies were implemented fully. They picked and chose those, which suited their immediate requirements. Indeed, while such debates highlight the many contradictions in both the understanding and importance of globalization, for the purpose of this paper, we will follow the OECD (1996)

16


definition of globalization as: ''the growth or more precisely the accelerated growth, of economic activity across national and regional political boundaries. It finds expression in the increased movement of tangible and intangible goods and services, including ownership rights, via trade and investment and often people via migration. It can be and often is facilitated by a lowering of government impediments to that movement, and / o r by technological progress, notably in transport and communications. Globalization is thus a centrifugal process, a process of economic outreach, and a microeconomic phenomena" (p.6). By taking a deliberately narrow approach to globalization the many other complexities that involve the process will be effectively omitted and the focus shall be on the state and its role in economic development. The format of this paper is as follows. Section 1 will place the c u r r e n t debate on globalization in a historical context. An empirical analysis of globalization and national economic planning will be conducted through a case study of the East Asian NIEs in Section 3. The rhetoric that has surrounded globalization in India since 1991 shall be examined in section 4. Finally the paper will conclude by arguing that the state and market are not mutually hostile terms and that national sovereignty is not compromised by the spread of globalization if the priorities of the nation and the people who inhabit it are central to all policy guidelines. SECTION 1 2. THE HISTORICAL EVOLUTION OF GLOBALIZATION If globalization is understood to be a "fundamental process of change that is transforming the world economy, reflected in widening and intensifying international linkages in trade and finance" (World Bank, 1996, p.l) then it is not a new

Rhetoric Globalization and Reforms..

27

phenomena. Cross-border trade and financial linkages have been intensifying since the nTid-19th century. Table 1 encapsulates the broad historical evolution of the globalization of the world economy. Table 1: The Historical Evolution of Globalization Period

Monetary Standard

Main Features

Principal Influences

18701915

International Gold Standard

Emergence of joint stock firms, significant Increases in cross-border trade

Colonialism

1950s, 1960s

Semi-fixed dollar standard and Bretton Woods: fixed-butadjustable exchange rates

large increases in trade driven by GATT led tariff lowering and Common Market in the EU; the rise of the MNC and foreign direct investment; control of states on economic Policy-making in developing countries

Development economics and its stress on state in planning for growth; Large MNCs; the beginning of the East Asian 'Miracle/

1980s, 1990s

Plaza-Louvre intervention accords; Market determined Exchange rates-fixed Fixed and adjustable.

"Volcker Shock" in 1982: Debt crisis in Latin America; massive capital flows as part of aid; deregulation in OECD Countries-Reagan &:Thatcher "revolutions" in US & Britain; massive increases in cross- border financial flows; opening up on non-OECD countries through structural adjustment programs (SAP); decline of the nation-state as a decider of economic policy-

Neoliberal economics and its stress on price mechanism and allocative efficiency of the market; put into policy by multilateral institutions such as the World Bank, IMF, WTO and OECD

Source: Compiled from OECD (1996), and Hirst and Thompson (1996)


28

In the fifty odd years preceding the First World War, the strong growth of international financial flows and trade marked the emergence of a globalizing economy. International trade had expanded rapidly (at about 3.4 percent per annum between 1870-1913 (Hirst and Thompson,1996: p.20). The period also saw colonial conquests reach their peak and along with advances in technology and manufacturing, production and trade soared. The globalization of the world economy was spurred by the emergence of the precursors of the modem day MNC in the form of joint stock firms in the United Kingdom,United States, Europe and the Zaibatsu in Japan. As Table 2 reveals, trade growth between 1853-72 was faster than the growth in world population; from 1872-1911 it grew at roughly the same rate. The devastation of two wars considerably slowed down the rate of trade growth and since 1950 world trade is once again on its upward spiral. Table 2: Growth of Output and Foreign Trade, 1853-1984 (percent per annum) 1872-99

Average growth of trade*

4.3

3.1

3.9

0.5

9.4

3.6

Average grov^th of output**

3.7

3.3

3.6

1.9

5.3

2.1

*

1899-1911 1913-50

1950-73 1974-84

1853-72

1853-1911: UK, France, and Germany 1913-1984: US, France, Germany, Netherlands and Japan

** 1853-1911: Industrial production only 1913-1984: GDP Source: Hirst and Thompson, 1996


29

Kenichi Ohmae (1990) one of the strongest proponents of a globalized world and a renowned corporate strategist believed that corporations belonging to some nationality are out of date. Providing examples of the transnational nature of large corporations, which increasingly know little loyalty to nationality. The bottom line he writes: " Is IBM Japan an American, or a Japanese company? Its workforce of over 20,000 is Japanese, but its equity holders are American. Even so, over the past decade IBM Japan has provided on average three times more tax revenue to the Japanese government than has Fujitsu. What is its nationality?" (Ohmae, 1990:10) The pace of globalization increased significantly in the 1980s as OECD countries made a concerted move towards deregulation in finance, transportation, and services to counter stagflation. The move began under the Carter administration with monetary shock treatment and the sharp rise of interest rates under the Chair of the Federal Reserve, Paul A Volcker. Deregulation of the economy, which was directed by the monetarist and hastened by reforms initiated by Reagan and Thatcher saw a rise in competitiveness by lowering of prices and improving the quality of transportation, communications and financial services. The impact on the financial sector has been most important not only enabling the creation of new instruments, but also facilitating the rapid spread of capital. Indeed, globalization of finance has been the most important catalyst in integrating world markets. The ease with which capital can be transferred across space due to massive technological advances has made globalization a reality. The era of information technology which has made the financial world virtually seamless and borderless promises to keep the pace of globalization rapid. Associated with this phenomenon is the way in which there are increased linkages of investment and sales by giant MNCs.

30


SECTION 2 3. ECONOMIC RESTRUCTURING IN A STATELESS WORLD Thus, part of the reason that financial flows and FDIs have grown so rapidly since the 1960s and especially the 1980s has been the changes in the investment regime of developing countries, embodying the shifts in attitudes from sovereign discretion and inward-looking policies to the free flow of foreign investment. Apart from East Asian NIEs, which pursued exportorientated industrialisation, most other developing countries had a highly regulated, inward looking economies. However, China (1978), Latin America (mid 1980s) and India (1991) embarked upon a restructuring of their economies to take advantage of the global benefits of trade and investment. As these previously closed economies opened up and reformed their economies, they integrated into the global economy. Reflecting the neoUberal dominance on policy-making, nearly all the investment codes and bilateral treaties on investment such as the Uruguay Round's Trims, GATT, WTO, and the regional arrangements such as APEC, ASEAN, NAFTA and MERCOSUR espouse substantial liberalization to move towards the larger goal of globalization. One of the key a s s u m p t i o n behind the relentless globalization of the world economy is the declining role of the nation-state in determining its own economic policymaking. Multilateral agreements bind nations to common goals and uncontrollable financial flows, which can threaten any country's stability, weaken government's ability to control and regulate their economies. This perception is reflected by the OECD, which notes that, "the globalization of the financial

FJietoric Globalization and Reforms

33

markets and financial deregulation together are the major cause of the perceived weakening of national autonomy visa-vis the global market" (OECD, 1996:13). Financial globalization directly diminishes a country's ability to control its monetary policy. Central banks are unable to neutralise attacks on the domestic currency or cauterise outflows that can wreck the often weakly integrated financial system in developing countries (the case of Malaysian dollar becoming a victim of market speculation and the resultant Asian crisis is a case in point). Therefore, financial globalization not only weakens Central Bank's ability to manage exchange rates, but also weakens the effectiveness and autonomy of national monetary and fiscal policy and more broadly of the state's ability to govern the market. 'Mood swings' in countries and investors have a cascading effect on nation- states. As Weiss (1997:13) noted, " the power of global finance, especially of the bond market to undermine the monetary and fiscal policies of the government seems an inconvertible truth. It is also viewed as the key constraining feature of a globalized economy: forcing all government to adopt similar neoliberal, deflationary and fiscal conservative policies. From this perspective two conclusions follow: first global money markets are all powerful, forcing on governments fiscal conservatism or 'powerlessness'. Second, it matters not whether a state is weak or strong, all national governments are impotent in the face of global finance". A similar view is expressed by Stiglitz (2002) that in many countries, "market fundamentalism signified as 'privatisation' has become a term standing for anarchic theft by all from all". As Ghosh, (2002) notes, "no doubt, stabilisation is on the agenda and job creation is off. There is money to bail out banks but not to pay for improved education and health services, let alone

32


bail out workers who are thrown out of their jobs as a result of the IMFs macroeconomic mismanagement" (p2). The assumption that national governments are unable to fully control their economic destiny has been developing since 1950s when the first MNCs began to appear in the developing world. Proponents of globalization argued that as the world becomes more consumer driven, they also become less conscious of the nationality of the firm from where products have been sourced. However, now with the rapid advances of information technology, consumers are more conscious of the ethical dimensions of the product they are purchasing. This has led to the boycott of products distributed by major MNCs, i.e. Nike, Nestle, Nutregena to name a few of the consumer products. So we see that as the barriers to trade, investment and capital are lowered, a nation's economic decision-making prerogative becomes automatically more vulnerable to events outside the domestic economy. Therefore, globalization in effect proposes a complete change in government attitudes among developing nations. This is expressed by Ohmae, (1990), " government officials exercise power by regulating and deregulating the market, but their new role is to assume a backseat, not a driver's position and to make sure that their country is benefiting fully from the best performing corporations and producers all over the world" (p.l3). SECTIONS 4. GLOBALIZATION AND THE STATE: EAST ASIA Since one of the most important aspects of globalization is the apparent erosion of national economic sovereignty, it was decided to examine briefly the growth strategy of the highly successful East Asian NIEs. They have been highlighted


33

by the proponents of globalization as exemplars of openness. These states have been touted as being efficient in taking advantage of the global economy to lead industrialisation through an active export policy, by keeping governmental interference to the minimum or succeeding despite tinkering by the State. These are sweeping generalisations that explain a country's growth strategy and mythologise a basis for an ideal model to be written about. The World Bank, the IMF and indeed the West are looking for a 'good success story' told in the words of the unsophisticated and the uninitiated. One such example being the Asian Miracle model, used to describe a heterogeneous g r o u p of nation-states. The projection is only of idealised features that suit the hegemonic powers that be. For neoliberals, to claim that openness to global economy has been responsible for 30 years of high growth is full of myths. In essence what we observe as a common denominator in all these debates is the role of a strong developmental state in promoting directed growth in these countries. The claim to fame is far more sophisticated than has been made out to be. In examining the path of development in the NIEs, the prominent role of the State in dictating both the pace and nature of exposure to the external environment is very apparent- It is clear that governments were aware of the growing trends towards globalization of trade, manufacturing and finance linkages created by MNCs in the 1960s. However, they did not subordinate their growth strategies t#^the dictates of the global economy. Instead, as shall be seen, they evolved interventionist strategies that allowed them to gain competitive a d v a n t a g e s within the world economy and p u s h for aggressive export strategy. The State supported Import Substitution Industrialising (ISI) in the initial phase through

34

Better'Expression on Globalization

policies designed to manage balance of payments, by trade and exchange rate controls and explicit industrial policies designed to increase the rate of return to manufacturing. An important change occurred when these countries shifted from ISI to export-oriented industrialisation strategy, with the government offering selective credit, incentives and targets. Since the 1980s development of inceased technology and capital-intensive sectors h a s been p r o m o t e d by the government by accurately anticipating changes in the industrial structure and by targeting certain industries. In all these countries the government had a significant role to play in economic development, where "development was planned and implemented by a State apparatus that remained committed to sustaining rapid growth" (World Bank, 1993: x). While there is no common set of policies associated with the East Asian miracles, there are nevertheless important commonalties in East Asian experience. These consist of exceptional achievements in three basic dimensions: 1) stable political environment that encouraged investment and enterprise; 2) powerful incentives to guide resources and initiatives into efficient activities, and ; 3) dynamic engine of growth to provide leadership for hyper-speed development" (World Bank, 1993:4). In addition powerful bureaucrats had wide powers of punishment to check corruption and rewards and to provide incentives to companies that performed well. The challenge to the dominant neo-classical viewpoint on East Asia coincided with the general 'revolt' against neoclassical doctrine towards the end of the 1980s. The State was revived as an important actor in development and this view was adapted for East Asia by Wade (1990), Amsden (1989), White(1988).and Johnson (1982). The revisionist or Statist

RJietoric Globalization and Reforms

35

argument notes that governnrents played an important role in controlling domestic market forces and harnessing them for specific national ends. In the revisionist view, if markets were governed prices would be wrongly determined and therefore incentives would be misplaced. In their view, strong interventions were the key to the region's success because it would not have been possible to develop infant industries without the government. In this respect, the revisionist view of late development shares the Gerschenkronian view arguing the importance of a strong state, one, which overcomes market imperfections, and various bottlenecks of industrialisation. Developmental State manifested a variety of forms. The elite, a u t o n o m o u s b u r e a u c r a c i e s such as the Ministry of International Trade and Industry (MTTI) in Japan could design and implement sectoral policies without becoming the tool for special interests. Other government agencies targeted specific sectors by ''getting prices wrong" to encourage certain industries, applied selective trade restrictions, provided preferential access to credit and devised a performance-based criteria for continued support. Korea, Taiwan, Singapore and Japan are all examples of government-led development. The States importance in Korean development was addressed by Amsden as, "all liberalization amounted to nothing more than a footnote to the basic text of Korean expansion. To attribute the role of equilibrator in such expansion to the market mechanism rather than to the government's dual policy of discipline and support is to misrepresent a fundamental p r o p e r t y of the most successful cases of late industrialisation"(Amsden,1989:78), The more difficult question and which is the bone of contention between classical and structuralist interpretations of East Asian development is whether outward orientation

36


resulted from a neutral incentive system or the promotion of selective industries. This is really the crux of the issue, which reveals the extent of government intervention in the East Asian NIEs. In some of these coiintries. Hong Kong, Singapore and Malaysia, the outward orientation was the result of neutral incentives since these countries largely eliminated trade barriers to the global economy. However, of the three, it should be remembered that Singapore and Hong Kong are port cities and it is important for them to adopt freer trade policies, since a large part of their income is derived from the international movement of goods and services. Other economies, especially Korea and Taiwan selectively supported exports without dramatically reducing import barriers. These policies worked because they channelled support to a few targeted industries, which became the engines of growth. Some limited empirical evidence on this debate is offered in Table 3 below, which compares effective protection rates in several East Asian and non-Asian trade regimes. The thrust of the evidence seems to indicate that East Asian economies did have generally more neutral, less anti-export-biased trade regimes than other developing countries. Korea, Taiwan and Singapore all had overall stronger export incentives. Their strong export biases can be attributed to goverrunent policy, which repeatedly intervened in the domestic market to allocate credit often at negative real interest rates for exportoriented projects. The State also provided incentives for keeping the exchange rates favourable for the exporters. However, export liberalization was at first not accompanied by reductions in import tariffs. The government was clearly utilising the global economy to boost growth but not allowing domestic competition in the form of imports.


37

Table 3: Incentives f