The outlook for globalization is turning grimmer with a fragile or uncertain global economic recovery.Recession has tended to strengthen protectionism.

And the turnaround is being made more difficult by the split among major powers on the Iraq issue, which combines with commercial disputes between EU and America, carry the risks of a trade war. Many European and American businessmen are concerned over tensions within the Atlantic Alliance.

The slump in industrial economies cannot either be explained by the threat of war in Iraq or 9/11 as many economists assert but by a long- term cyclic crisis.The problem is much deeper specially in the United States: It is the excesses of the bubble years, such as heavy corporate government and consumer debts, excess productive capacity, a nominal saving rate and a massive current account deficit.

What appears at stake is the leading role of the world’s largest and most developed market economy in fuelling global economic growth. And corresponding changing political reality is that the American unipolar authority is being challenged by European multilateralism led by France and Germany, imparting globalization a regional underpinning.

The split between major powers has provided the non-aligned nations an environment to breathe more freely, strengthen multilaterism and encourage South-South co-operation.

The World Bank (WB) report on Global Economic Prospects 2003 says that the global recovery is fragile, because investment spending is insufficient to sustain growth.

Over the years, both the level of foreign investment and official bilateral assistance that spurred globalization, has declined.In the face of recession, expected market access to developed states is being denied to developing countries.

From $1.5 trillion in 2000, the foreign direct investment (FDI) flow fell to an estimated $725 billion in 2001. Most of these flows were destined to rich countries.

According to WB figures the FDI flow to developing countries was about $167 billion in 2000 and 2001 against the domestic investment of nearly $1 trillion. These investments, estimated at $145 billion for 2002, went mainly to few handpicked countries.

WB president James D. Wolfensohn recently advised the rich nations to increase development aid as, he said, “private capital flows to developing countries are falling sharply, reversing the trend of the last decade.”In the face of growing budget deficits of world’s leading economies, any substantial increase in the level of official assistance appears to be remote.

A WB report says,”Financial strains currently battering corporate sectors are likely to have restraining effect on investment. Falling equity prices, concerns about corporate debts, uncertainty about profitability and cautious commercial bank lending in high income countries tend to curtail financing for investment. Current business uncertainty regarding future demand growth serves as an additional restraining force on capital spending. Reduced capital flows to emerging markets place a damper on investments in the developing world.”

The developing states were induced to open up markets for foreign investment that was supposed to serve as a substitute for official bilateral assistance.Thus in 2000, the development aid amounted to about $ 54 billion or just one -third of the FDI inflows to developing countries.

To quote the WB, despite the improvement in aid effectiveness,and growth in incomes of rich nations,aid flows dropped substantially over the 1990s in real terms and by 2001 were 20 per cent below the 1990 level in inflation- adjusted terms. The aid levels expressed as a share of donors’ GNP fell even more sharply, from 0.33 per cent in 1990 to 0.22 per cent in 2000.

Whereas investment did build up productive capacity in the developing world, their economic growth was retarded by denial of access to the developed markets. This prompted the NAM summit held in Kuala Lumpur last week to urge developed countries to grant duty free markets to least developing nations and rejected attempts to link trade with labour, environment, social and human rights standards as “pretexts for restricting market access or aid and technology.”

Last week, trade ministers meeting in Tokyo made no progress towards liberalizing farm trade, the central issue for Doha round. Failure to liberalise farm trade will be a big blow to the poor nations. The United States has enhanced substantially its subsidy on farm products for its own rich farmers.

By denying the developing nations access to the markets, the rich nations are stifling globalization. The third world needs to sell in order to buy, to balance its trade and close its current account deficits. The alternative is unsustainable stock of external debts that acts as a brake on globalization.

The current slump in rich markets carries risks of a trade war. To quote the Economist” tensions between Europe and America could spread beyond the war to trade, fed on strong bilateral disputes- America’s steel tariff and tax breaks for foreign sales by big multinationals.”

The outcome of protectionism is that regional trade is now growing faster than global trade. And the threat of war in Iraq and 9/11 tend to create sentiments for regional and South-South economic co-operation.

The trend towards protectionism and lower aid and foreign investment flows is likely to gain strength owing to the recession in industrial economies.

Besides, globalization is fuelled by international finance capital whose growth has suffered from increasing unsustainable stock of debts with third world countries, affecting both trade and investment. The problem is far from resolved.

To quote Robert J. Samuelson “ the great danger is simultaneous economic weaknesses in Europe, Japan and United States feed each other, intensifying pessimism and creating a wave of financial crises.”

The present nature of globalization has tended to create an inequitable global order that serves the rich nations and impoverishes the poor ones. It tends to exclude rather than include developing nations in global prosperity.

Similarly, neo-liberal economics has enhanced the level of poverty in several countries that work on IMF prescriptions.

So far, many developing states have escaped the impact of the slump in developed markets.

These include China, South Korea, Malaysia and India. China is attracting more foreign investment because of a high growth rate and that America is suffering from economic stagnation.

The US industry is asking China to revalue its currency to make its exports of merchandise costlier. Recently, many US textile mills have closed down, unable to compete with cheaper Chinese and Asian goods.

America is no longer a very attractive destination for foreign money, that financed corporate investments and budget deficits. The return on US government papers has become unattractive because of lower returns in a depreciating dollar and falling interest rate. Faith in corporate America stands shaken by a series of accounting frauds.

9/11 and the scrutiny of informal channel of currency flows has resulted in outflow of funds from the USA to the countries of origin of the Arab and Muslim immigrants.

The massive balance of payments deficits at five per cent of the GDP coupled with other weak fundamentals of the US economy has eroded the dollar’s exchange rate.

A depreciating dollar has lost its lustre as a reserve currency. The central banks of China, Russia, Canada, Hongkong, Thailand,Taiwan and Eastern Europe are diversifying their currency risks by increasing their euro holdings.

Before the Soviet Union collapsed in 1991, Russia had 90 per cent of its reserves in dollar. By the end of last year, it reduced the dollar holdings to 75 per cent of its reserves. On the other hand, its euro holdings have gone up from 10 per cent to 20 per cent.

The forecast is that euro could account for 20 per cent of the global foreign currency reserves, up from 15 per cent currently and 10 per cent a year ago. The dollar money market rates are around 1.5 per cent against 3.36 per cent in eurozone. Euro is anchor currency for trade within the EU.

The dollar is still the leading reserve currency and the anchor of world trade. But the hegemony of dollar is being challenged by euro as is the US unilateralism by EU multilateralism led by France and Germany and supported by China and Russia.

The Bush doctrine of pre-emptive strike and unilateral action as evident from the issue of” disarming” Iraq has brought about a split among major powers and has served as a catalyst for revival of non-aligned movement.

Within the framework of multilateralism, both Europe and NAM want to have a say in global affairs.The unilateralism of the United States has thrown the United States and the UK in political isolation.

In the changing environment, the NAM has reiterated its demands for an equitable and just order that allowed developing nations to have a say on decision making on world economic problems.

Globalization has to be a two-way street for mutual benefit of both the developed and the developing economies and should not usurp the sovereign rights of nations.

The NAM summit held in Kuala Lumpur expressed deep concern over marginalization of developing nations in the process of globalization as they face barriers to markets, capital and technology.

In the past few decades, the international community has been too dependent on the United States. Now, the time has come for a change. WB president James D. Wolfensohn says “we must not be dependent on, or subordinate to, to any one dominant set of values or views on development. Observing that the key issue is interdependence he adds:” Diversity provides a source of strength, both at the national level and globally. It is something to celebrate.”