global is at ion in 2003-04

8/8/2019 Global is at Ion in 2003-04

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Sharad PandeyRoll no: 50

Topic:Globalization

Team: 1College: JGI


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Introduction and Definitions

According to the Oxford English Dictionary, the word 'globalization' was first employed in 1930,to denote a holistic view of human experience in education. An early description of globalizationwas penned by the American entrepreneur-turned-minister Charles Taze Russell who coined theterm 'corporate giants' in 1897, although it was not until the 1960s that the term began to bewidely used by economists and other social scientists. The term has since then achievedwidespread use in the mainstream press by the later half of the 1980s. Since its inception, theconcept of globalization has inspired numerous competing definitions and interpretations, withantecedents dating back to the great movements of trade and empire across Asia and the IndianOcean from the 15th century onwards.

What is globalization?

There are many different definitions of globalization, but most acknowledge the greater movement of people, goods, capital and ideas due to increased economic integration which inturn is propelled by increased trade and investment. It is like moving towards living in a

borderless world.

There has always been a sharing of goods, services, knowledge and cultures between people andcountries, but in recent years improved technologies and a reduction of barriers means the speedof exchange is much faster. Globalization provides opportunities and challenges. Bigger marketscan mean bigger profits which leads to greater wealth for investing in development and reducing

poverty in many countries. Weak domestic policies, institutions and infrastructure and trade barriers can restrict a country's ability to take advantages of the changes. Each country makesdecisions and policies that position them to maximize the benefits and minimize the challenges

presented by globalization.

The issues and perceived effects of globalization excite strong feelings, tempting people toregard it in terms of black and white, when in fact globalization is an extremely complex web of many things. The following table presents ten opposing points of view often expressed aboutglobalization.

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http://en.wikipedia.org/wiki/Charles_Taze_Russellhttp://en.wikipedia.org/wiki/Charles_Taze_Russellhttp://en.wikipedia.org/wiki/Charles_Taze_Russell


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clearly in the process of emerging to be a common world language, at least as a second language,minority languages are making something of a comeback, at least in developed countries. Sportis still very different around the world: the Americans have still not learnt to play cricket, andmost of the rest of us have still not learned to understand what they see in baseball. Although thenation state is far less dominant than it used to be, with significant powers being devolved both

downwards to regional and local authorities and upwards to international and in Europe tosupranational institutions (and although "interfering in the internal affairs of another state" is lessfrowned on than formerly), politics is still organized primarily on the basis of nation-states.

Causes

What explains this globalization? It is certainly not attributable to conquest, the source of most previous historical episodes where a single economic system has held sway over a vastgeographical terrain. The source lies instead in the development of technology. The costs of transport, of travel, and above all the costs of communicating information have fallen

dramatically in the postwar period, almost entirely because of the progress of technology. A 3-minute telephone call from the USA to Britain cost $12 in 1946, whereas today it can cost aslittle as 48 cents, despite the fact that consumer prices have multiplied by over eight times in theintervening period. The first computers were lumbering away with piles of punched cards in theearly postwar years, and telegrams provided the only rapid means of written communication.There was no fax or internet or e-mail or world-wide web, no PCs or satellites or cell-phones.Today we witness phenomena that no futurist dreamed of half a century ago, such as Indianswith medical degrees residing in Bangalore who earn a living by acting as secretaries toAmerican doctors by transcribing their tapes overnight.

It is clearly the availability of cheap, rapid and reliable communications that permits such

phenomena, just as this is the key to the integration of the international capital market. I presumethe same factor is important in nurturing the growth of multinational corporations, since it is thiswhich enables them to exploit their intellectual property efficiently in a variety of locationswithout losing the ability to maintain control from head office. But in this context I wouldsurmise that other factors are also at work, such as the spread of consumer knowledge aboutwhat is available that comes from travel and from advertising, itself encouraged by thecommunications revolution and its children like CNN. The reduction in transport costs is also akey factor underlying the growth in trade.

Of course, it needed a reasonably peaceful world to induce economic agents to exploit theopportunities for globalization presented by technological progress. But the technological basisfor the phenomenon of globalization implies that, barring an end to the "Pax Americana" or elseextremely vigorous conscious actions to reverse the process, globalization is here to stay.

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Consequences

Globalization certainly permits an increase in the level of global output. Whether as a result of the old Heckscher-Ohlin theory of the basis of comparative advantage as lying in different factor

abundance in different countries, or as a result of the new trade theories that explain trade byincreasing returns to scale, trade will increase world output. Likewise FDI brings the besttechnology, and other forms of intellectual capital, to countries that would otherwise have tomake do without it, or else invest substantial resources in reinventing the wheel for themselves.It may also bring products that would otherwise be unavailable to the countries where theinvestment occurs, which presumably increases the quality, and therefore the value, of worldoutput. And international capital flows can transfer savings from countries where the marginal

product of capital is low to those where it is high, which again increases world output.

Globalization must be expected to influence the distribution of income as well as its level. So far as the distribution of income between countries is concerned, standard theory would lead one to

expect that all countries will benefit. Economists have long preached that trade is mutually beneficial, and most of us believe that the experience of widespread growth alongside rapidlygrowing trade in the postwar period serves to substantiate that. Similarly most FDI goes where amultinational has intellectual capital that can contribute something to the local economy, and istherefore likely to be mutually beneficial to investor and recipient. And a flow of capital thatfinances a real investment is again likely to benefit both parties, since the yield on the investmentis expected to be higher than the rate of interest the borrower has to pay, while that rate of interest is also likely to be higher than the lender could expect at home since otherwise therewould have been no incentive to send it abroad. Loose talk about free trade making the richcountries richer and poor countries poorer finds no support in economic analysis. Nor is thereany reason for supposing that the North benefits itself at the expense of the South by imposing

import restrictions like non-tariff barriers or agricultural subsidies: standard theory says that,while this does indeed impoverish the South, the public in the North also suffers, and it losesmore than the producers gain. This suggests that a promising strategy for eliminating such

barriers is to seek a coalition with Northern consumers, rather than to engage in North-bashingwhich will simply alienate potential Northern allies.

The effects on domestic income distribution are less clear. Standard theory says that trade willtend to hurt unskilled labor in rich countries and to help it in poor ones, since the poor countrieswill be able to export-labor-intensive goods like garments to rich countries, thus increasing thedemand for unskilled labor in the poor countries and decreasing it in the rich ones. That is,within rich countries, there is a good analytical reason for arguing that trade will tend to makethe rich richer and the poor poorer. There has in recent years been a lively debate amongeconomists in the developed countries as to whether the increase in imports of labor-intensivegoods has been a major factor in causing the fall in the relative (and sometimes absolute) wagesof the unskilled in these countries: the majority of economists seem to have concluded that it is acontributory factor, but that the major part of the explanation lies instead in the skill-intensiveform of technological progress.

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It seems more difficult to doubt that exports of labor-intensive goods have been a factor that hasdone something to increase the demand for unskilled labor, and therefore to equalize the incomedistributions, in the exporting countries like Sri Lanka. Hence I find it betrays a sad lack of concern with the prospects of the poor to hear, as I have during this conference, garment exports

being denigrated as likely in some unexplained way to bring negative impacts. On the other

hand, some of the effects of the communications revolution must surely have had a disequalizingeffect on income distribution in these countries: think of the Indian doctors who are acting assecretaries to American doctors rather than treating Indian patients, thereby earning more for themselves and also tending to pull up the pay of other doctors in India, who are relativelyaffluent by Indian standards. Similarly, differential mobility of skilled versus unskilled labor tends to pull up the salaries of the skilled in developing countries toward world levels, therebyleaving less for the immobile poor. The same result will occur if the owners of highly-mobilecapital are able to evade taxes by investing abroad, and also if governments are induced to avoidimposing high tax rates on internationally mobile capital, or on those who might be prompted toemigrate, in the hope of keeping these factors at home. Thus the net effect of globalization onincome distribution within developing countries seems to me distinctly ambiguous.

What impact is globalization likely to have on the long-term possibilities of economic growth indeveloping countries? My vision of the growth process is that it takes off when the elite in adeveloping country comes to understand the opportunities of applying world-class technologieswithin their country, and introduces institutional arrangements that permit individual pursuit of self-interest to serve, in general, the social good. Once that happens the country is able to grow ata rapid rate, unless some political accident obstructs the process, until it catches up with best-

practice technology, and therefore attains the living standards of the developed countries.Globalization is tending to make the technologies and the knowledge for this process to occur more readily available, and therefore to enable the process to be telescoped in time

But it is surely also true that globalization is bringing new dangers. The virulence of the EastAsian crisis was primarily a result of countries exposing themselves to the full force of theinternational capital market before they had built up an unquestioned reputation for being able aswell as willing to service their debts come what may, which meant that when investors becameconcerned about their potential vulnerability as a result of the Thai crisis there were no other investors willing to step in and provide stabilizing speculation even after exchange rates andinterest rates had clearly overshot. Of course, one can argue that this increased vulnerability toexternal shocks has to be weighed against a decreased vulnerability to internal shocks: think howmuch more Bangladesh would have suffered this year (1998) if the international community hadnot provided aid to partially offset the cost of the floods, let alone how much more hunger, or even starvation, there would have been had Bangladesh been unable to import additional rice.But this does not justify dismissing the increased dangers from external shocks. Moreover, Imight note that Professor Indraratna offered you a much longer and more imaginative list of dangers than I have here identified, which looks beyond narrow economic questions andconsiders the role of globalization in spreading such unsavory phenomena as drugs, the sex trade,crime, and terrorism.

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Policy Issues

If I am right in arguing that globalization stems from technological developments rather than policy choices, trying to reverse it would be rather like playing at King Canute. It would be more

productive to seek to maximize the benefits it offers and minimize the risks it creates. Let mediscuss what I see that involving, while restricting myself to the narrow economic questions.

It will be clear from what was said above that I see little reason to doubt that the citizens of adeveloping country can expect to benefit from being open to trade and FDI. This gives them theadvantages of being able to make relatively good use of their abundant unskilled labor and beingable to access world-level technology. However, if they rely simply on exploiting unskilledlabor, they will never be able to advance far beyond the living standards of their poorestcompetitors, who will be exporting similar goods. In order to raise living standards progressivelyover time, it is at least as important to raise educational standards as it is in a relatively closedeconomy. To a first approximation, one may summarize the policy advice of how to prosper in a

global economy as: give one's citizens a relevant set of skills through education, and then letthem get on with the job of producing whatever is useful to the world economy.

However, a second approximation requires one to recognize also the increased risks of fullexposure to the world economy. Are there ways of reducing those risks? I am convinced thatthere is at least one important dimension in which prudence suggests that developing countriesare well-advised to limit their integration in the world economy, and that concerns theliberalization of short-term capital flows. If one asks what distinguishes those countries thatsuffered contagion from the East Asian crisis from those that escaped it, the answer seems to mevery clear: that the victims were those that had built up a substantial stock of short-term dollar-denominated debt as a result of having established capital account convertibility, while those

who escaped catastrophe were those that had been cautious in liberalizing their capital accountsat the short end. Since there is no persuasive analytical reason or empirical evidence (Rodrik 1998) for believing that freedom of short-term capital flows is a significant factor in contributingto economic growth, let alone distributional equity, I conclude that prudence suggests seeking to

postpone rather than accelerate this particular bit of liberalization.

Furthermore, one needs to ask whether there are mechanisms that can protect individuals whenrisks to the economy actually materialize. The recent experience in East Asia is again instructive:the World Bank has put a lot of effort into a crash course in developing social safety nets in thecountries that fell victim to the crisis in the past year. I am sure that many of you will recall thatin the past the Bank has been critical of Sri Lanka for having put too many resources into toowide a safety net, but I do not see any contradiction: the Bank was concerned that Sri Lanka wastrying to provide a safety net more expensive than the economy could afford, and soindiscriminate that it eroded incentives. Those considerations need to be taken into account, butat the same time, as Dani Rodrik's (1997) work has emphasized, an open economy has a

particularly compelling need for an adequate social safety net. I hope that you will find somereassurance that the Bank is not unmindful of the concerns that motivated your generous welfare

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e policies by the fact that we have recently been so active in promoting the cause of social safetynets in East Asia.

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Is there any way of ameliorating the potential negative effect on income distribution throughincreased possibilities of tax evasion and a consequential incentive to limit taxes on mobilefactors that I discussed above? One can certainly envisage such measures, although they willrequire extensive international agreements, in the form of tax-information sharing and potential

withholding of taxes on income earned by foreigners. It is my hope that such issues will becomea part of the future agenda for international negotiation. A globalized world is going to have todeal with a broader policy agenda than simply liberalization if the outcome is to be reasonablyequitable.

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Benefits and Problems of Globalization

Benefits of globalization Problems of globalization

1.

Economies of countries that engage well withthe international economy have consistentlygrown much faster than those countries thattry to protect themselves. Well managed openeconomies have grown at rates that are onaverage 2 percentage points higher than therate of growth in economies closed to theforces of globalization.

There are social and economic costs toglobalization. Trade liberalization rewardscompetitive industries and penalizesuncompetitive ones, and it requires

participating countries to undertakeeconomic restructuring and reform. Whilethis will bring benefits in the long term,there are dislocation costs to grapple with in

the immediate term, and the social costs for those affected are high.

2.

Countries which have had faster economicgrowth have then been able to improve livingstandards and reduce poverty . India has cutits poverty rate in half in the past two decades.China has reduced the number of rural poor from 250 million in 1978 to 34 million in1999. Cheaper imports also make a wider range of products accessible to more peopleand, through competition, can help promoteefficiency and productivity.

Some countries have been unable to takeadvantage of globalization and their standards of living are dropping further

behind the richest countries. The gap inincomes between the 20% of the richest andthe poorest countries has grown from 30 to 1in 1960 to 82 to 1 in 1995.

3.

Improved wealth through the economic gainsof globalization has led to improved access tohealth care and clean water which hasincreased life expectancy . More than 85

percent of the world's population can expect tolive for at least sixty years (that's twice as longas the average life expectancy 100 years ago!)

Increased trade and travel have facilitatedthe spread of human, animal and plantdiseases , like HIV/AIDS, SARS and birdflu, across borders. The AIDS crisis hasreduced life expectancy in some parts of Africa to less than 33 years and delays inaddressing the problems, caused byeconomic pressures, have exacerbated thesituation.

Globalization has also enabled theintroduction of cigarettes and tobacco todeveloping countries, with major adversehealth and financial costs associated withthat.

4. Increased global income and reducedinvestment barriers have led to an increase in

The increasing interdependence of countriesin a globalised world makes them more

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foreign direct investment which hasaccelerated growth in many countries. In 1975,total foreign direct investment amounted toUS$23 billion while in 2003 it totaled US$575

billion.

vulnerable to economic problems like theAsian financial crisis of the late 1990's.

5.

Improved environmental awareness andaccountability has contributed to positiveenvironmental outcomes by encouraging theuse of more efficient, less-pollutingtechnologies and facilitating economies'imports of renewable substitutes for use in

place of scarce domestic natural resources.

The environment has been harmed asagricultural, forest, mining and fishingindustries exploit inadequate environmentalcodes and corrupt behaviour in developingcountries. Agricultural seed companies aredestroying the biodiversity of the planet, anddepriving subsistence farmers of their livelihood.

6.

Increasing interdependence and globalinstitutions like WTO and World Bank, thatmanage the settlement of government-to-government disputes, have enabledinternational political and economictensions to be resolved on a "rules based"approach, rather than which country has thegreatest economic or political power.Importantly it has bolstered peace ascountries are unlikely to enter conflict withtrading partners and poverty reduction helpsreduce the breeding ground for terrorism.

The major economic powers have a major influence in the institutions of globalization,like the WTO, and this can work againstthe interests of the developing world . Thelevel of agricultural protection by richcountries has also been estimated to bearound five times what they provide in aidto poor countries

7.

Improved technology has dramaticallyreduced costs and prices changing the waythe world communicates, learns, does businessand treats illnesses. Between 1990 and 1999,adult illiteracy rates in developing countriesfell from 35 per cent to 29 per cent.

Trade liberalization and technologicalimprovements change the economy of acountry, destroying traditionalagricultural communities and allowingcheap imports of manufactured goods. Thiscan lead to unemployment if not carefullymanaged, as work in the traditional sectorsof the economy becomes scarce and peoplemay not have the appropriate skills for the

jobs which may be created.

8.

Modern communications and the globalspread of information have contributed to thetoppling of undemocratic regimes and agrowth in liberal democracies around theworld.

Modern communications have spread anawareness of the differences betweencountries, and increased the demand formigration to richer countries. Richer countries have tightened the barriers againstmigrant workers, xenophobic fears haveincreased and people smugglers have

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exploited vulnerable people.

9.

The voluntary adoption by global companiesof workplace standards for their internationalized production facilities in

developing countries has made an importantcontribution to respect for international labor standards. Wages paid by multinationals inmiddle- and low-income countries are onaverage 1.8 to 2.0 times the average wages inthose countries.

Globalised competition can force a 'race tothe bottom' in wage rates and labor standards. It can also foster a 'brain drain'

of skilled workers , where highly educatedand qualified professionals, such as doctors,engineers and IT specialists, migrate todeveloped countries to benefit from thehigher wages and greater career and lifestyle

prospects. This creates severe skilled labor shortages in developing countries.

10.

International migration has led to greater

recognition of diversity and respect forcultural identities which is improvingdemocracy and access to human rights.

Indigenous and national culture and

languages can be eroded by the modernglobalised culture.

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Impact on India

India opened up the economy in the early nineties following a major crisis that led by a foreignexchange crunch that dragged the economy close to defaulting on loans. The response was a slew

of Domestic and external sector policy measures partly prompted by the immediate needs and partly by the demand of the multilateral organisations. The new policy regime radically pushedforward in favour of a more open and market oriented economy.

Major measures initiated as a part of the liberalization and globalization strategy in the earlynineties included scrapping of the industrial licensing regime, reduction in the number of areasreserved for the public sector, amendment of the monopolies and the restrictive trade practicesact, start of the privatisation programme, reduction in tariff rates and change over to marketdetermined exchange rates.

Over the years there has been a steady liberalization of the current account transactions, more

and more sectors opened up for foreign direct investments and portfolio investments facilitatingentry of foreign investors in telecom, roads, ports, airports, insurance and other major sectors.

The Indian tariff rates reduced sharply over the decade from a weighted average of 72.5% in1991-92 to 24.6 in 1996-97.Though tariff rates went up slowly in the late nineties it touched35.1% in 2001-02. India is committed to reduced tariff rates. Peak tariff rates are to be reduced to

be reduced to the minimum with a peak rate of 20%, in another 2 years most non-tariff barriershave been dismantled by March 2002, including almost all quantitative restrictions.

Globalization and Poverty :

Globalization in the form of increased integration though trade and investment is an importantreason why much progress has been made in reducing poverty and global inequality over recentdecades. But it is not the only reason for this often unrecognised progress, good national polices,sound institutions and domestic political stability also matter.

Despite this progress, poverty remains one of the most serious international challenges we faceup to 1.2 billion of the developing world 4.8 billion people still live in extreme poverty.

But the proportion of the world population living in poverty has been steadily declining andsince 1980 the absolute number of poor people has stopped rising and appears to have fallen inrecent years despite strong population growth in poor countries. If the proportion living in

poverty had not fallen since 1987 alone a further 215million people would be living in extreme poverty today.

India has to concentrate on five important areas or things to follow to achieve this goal. Theareas like technological entrepreneurship, new business openings for small and mediumenterprises, importance of quality management, new prospects in rural areas and privatisation of financial institutions. The manufacturing of technology and management of technology are twodifferent significant areas in the country.

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There will be new prospects in rural India. The growth of Indian economy very much dependsupon rural participation in the global race. After implementing the new economic policy the roleof villages got its own significance because of its unique outlook and branding methods. For example food processing and packaging are the one of the area where new entrepreneurs canenter into a big way. It may be organised in a collective way with the help of co-operatives to

meet the global demand.

Understanding the current status of globalization is necessary for setting course for future. For allnations to reap the full benefits of globalization it is essential to create a level playing field.President Bush's recent proposal to eliminate all tariffs on all manufactured goods by 2015 willdo it. In fact it may exacerbate the prevalent inequalities. According to this proposal, tariffs of 5% or less on all manufactured goods will be eliminated by 2005 and higher than 5% will belowered to 8%. Starting 2010 the 8% tariffs will be lowered each year until they are eliminated

by 2015.

GDP Growth rate:

The Indian economy is passing through a difficult phase caused by several unfavourabledomestic and external developments; Domestic output and Demand conditions were adverselyaffected by poor performance in agriculture in the past two years. The global economyexperienced an overall deceleration and recorded an output growth of 2.4% during the past year growth in real GDP in 2001-02 was 5.4% as per the Economic Survey in 2000-01. The

performance in the first quarter of the financial year is5.8% and second quarter is 6.1%.

Export and Import:

India's Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362 million

respectively. Many Indian companies have started becoming respectable players in theInternational scene. Agriculture exports account for about 13 to 18% of total annual of annualexport of the country. In 2000-01 Agricultural products valued at more than US $ 6million wereexported from the country 23% of which was contributed by the marine products alone. Marine

products in recent years have emerged as the single largest contributor to the total agriculturalexport from the country accounting for over one fifth of the total agricultural exports. Cereals(mostly basmati rice and non-basmati rice), oil seeds, tea and coffee are the other prominent

products each of which accounts for nearly 5 to 10% of the countrys total agricultural exports.

Where does Indian stand in terms of Global Integration?

India clearly lags in globalization. Number of countries have a clear lead among them China,large part of east and far east Asia and eastern Europe. Lets look at a few indicators how muchwe lag.

Over the past decade FDI flows into India have averaged around 0.5% of GDP against 5% for China 5.5% for Brazil. Whereas FDI inflows into China now exceeds US $ 50 billion annually. Itis only US $ 4billion in the case of India Consider global trade - India's share of world

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merchandise exports increased from .05% to .07% over the past 20 years. Over the same periodChina's share has tripled to almost 4%.

India's share of global trade is similar to that of the Philippines and economy 6 times smaller according to IMF estimates. India under trades by 70-80% given its size, proximity to markets

and labour cost advantages.

It is interesting to note the remark made last year by Mr. Bimal Jalan, Governor of RBI. Despiteall the talk, we are now where ever close being globalised in terms of any commonly usedindicator of globalization. In fact we are one of the least globalised among the major countries -however we look at it.

As Amartya Sen and many other have pointed out that India, as a geographical, politico-culturalentity has been interacting with the outside world throughout history and still continues to do so.It has to adapt, assimilate and contribute. This goes without saying even as we move into what iscalled a globalised world which is distinguished from previous eras from by faster travel and

communication, greater trade linkages, denting of political and economic sovereignty and greater acceptance of democracy as a way of life.

Consequences:

The implications of globalization for a national economy are many. Globalization has intensifiedinterdependence and competition between economies in the world market. This is reflected inInterdependence in regard to trading in goods and services and in movement of capital. As aresult domestic economic developments are not determined entirely by domestic policies and

market conditions. Rather, they are influenced by both domestic and international policies andeconomic conditions. It is thus clear that a globalising economy, while formulating andevaluating its domestic policy cannot afford to ignore the possible actions and reactions of

policies and developments in the rest of the world. This constrained the policy option available tothe government which implies loss of policy autonomy to some extent, in decision-making at thenational level.

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Conclusion

Sensible policy involves asking how one can get the most out of it while limiting the risks that it brings. The answers on the economic level, involve educating citizens with relevant skills and

opening up to trade and FDI while maintaining controls on short-term capital flows, constructingan appropriate social safety net, and seeking international actions to reverse erosion of the tax base.

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global is at ion in 2003-04

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