WITH the world teetering on the edge of possibly another economic downturn, following on the one that deeply affected, both developed and developing countries, policymakers have begun to reflect on the pros and cons of globalisation.
Three years ago before the global economy went into a deep recession, what came to be called “globalisation” was all the rage. The term stood for open economies which allowed relatively free flow of trade, capital and information.
A new economic philosophy was structured around this concept. Called the “Washington Consensus”— since its advocates worked in such Washington-based institutions as the World Bank, the IMF and Inter-American Development Bank – it laid a detailed prescription for developing economies. Developing countries that approached the Washington-based institutions for assistance were persuaded to adopt the approach. Most countries in Latin America and East Asia obliged and initially benefited.
But then came the Asian Financial Crisis of the late 1990s when several countries in the region discovered that the foreign capital that flowed in could also move out and do so quickly. Recognising the downside to the process of globalisation, some of the East Asian nations became more cautious about economic openness particularly in terms of capital flows. While placing some judicious controls on capital flows, these nations kept their economies open to trade.
If there were some who doubted the wisdom of totally open economies, they were mostly in the developing world. They believed that most of the benefits of openness accrues to rich countries who, taking advantage of the lowering or totally removing the barriers to trade, harmed the nascent industries in the emerging world.
But experience with open economies brought considerable benefits to the well-managed emerging economies. Since international trade increased much more rapidly than the growth in global product, open economies in Asia benefitted enormously. In a well-known report, the World Bank called them the “miracle economies” as some of them saw rates of growth that were a multiple of those ever recorded in history.
While East Asia was a ready convert to the idea of “globalisation” the South Asians moved much more slowly. The subcontinent had adopted what economists called the “import substitution” approach to development. They were keen on developing domestic enterprises by restricting foreign competition. However, developing industrial and commercial capacities behind high walls of protection meant a great deal of inefficiency. It was only in the early 1990s when the Indians, faced with a serious balance of payments crisis, opened their economy, not so much to outside competition as to domestic enterprise.
The elaborate system of controls that had come to be called the “license raj” was replaced with almost unconstrained role by the private sector. The economy took off. About the same time, Pakistan also began the process of reducing the control of the government over industry, commerce and finance. However, in Pakistan’s case political uncertainty stood in the way of the response of the private sector. Consequently the economy did not match the Indian experience.
Given this history, can it be said that globalisation has brought benefits to the developing world? The economic downturn of 2008-09 exposed the more open economies of East Asia and Latin America to the associated decline in international trade and credit squeeze that were some of its direct consequences. South Asia – in particular India – suffered less. Pakistan was also hurt a bit but overall the Great Recession of 2008-09 did not prove to be a major setback for South Asia.
The tepid recovery of the last two years has restored some of the lost activity in the global market place. For instance, world trade in 2011 has recovered to the levels of the pre-crisis boom. At the same time investment flows from rich countries to emerging markets are back to above $1,000 billion. This is still short of the record set in 2007 when as much as $1.2 trillion was provided to the developing world.
While some of the processes associated with globalisation are being restored some serious questions are being raised in the developed world about its consequences. There are debates in both, America and Europe about the impact of globalisation, particularly the way the poorer segments of the society have been affected. Many western analysts believe that the structural change brought about by globalisation is one reason why the recovery in Europe and America has been so slow, that there is a real chance of their economies going back into recession.
Writing in the Financial Times last month, Jeffrey Sachs a highly respected American economist said: “Globalisation has raised very serious adjustment challenges for the high-income world, and most high-income countries, notably the US, have failed to meet these challenges.” His reference, of course, was to the fact that the little economic recovery that has taken place since the Great Recession was declared to be officially over more than two years ago, in the first quarter of calendar 2009, has had practically no impact on the job market.
The rate of employment in the United States having dipped for a few months to below nine per cent is up again. There is political clamor for action and some of what is being demanded will hurt the developing world. It will also retard the process of globalisation.
Some of the left-leaning economists are suggesting that the massive restructuring of the global production process that accompanied globalisation has resulted in massive job losses in the West. According to this line of thinking, manufacturing activities as a result of globalization were relocated from Europe and America to many parts of the developing world. As western entrepreneurs discovered the cost advantages of doing business in the emerging world, they moved not only manufacturing but also a number of other activities to some emerging economies. This is when globalisation began to help South Asia but mostly India.
A number of large American and European corporations, impressed with the quality of the work force available in that country formed formal alliances with the Indian companies operating in the sectors of information, communication, entertainment, health services and pharmaceuticals. These are precisely the sectors of the global economy which are likely to grow at a rate considerably higher than the overall increase in world output.
It appears that the opportunities created by globalisation for the emerging world may begin to be constrained as the political pressure increases in the United States in particular but in other developed countries as well to focus on keeping jobs at home.
Two days before the start of the annual meetings of the World Bank and the IMF in Washington, the Fund released a report cutting its forecast for global growth. The rate of increase in the aggregate GDP of developed countries is likely to be only 2.2 per cent in 2011 while that of the emerging world will be three times as much, 6.6 per cent.
This sharp difference between the prospects of the two groups of countries is being seen in many political quarters as emerging countries benefitting from the troubles of the developed world. The meaning of this for a country such as Pakistan is clear. It has stayed on the margins of the global economy for several years as most of East Asia and some parts of South Asia – India in particular – benefitted from globalisation.
The future for it most probably lies in working with other parts of the developing world. Not only will the West have less to offer. It will also be less hospitable for the developing world.