Maximizing the Benefits from Global Economic Development - Essay Example

The character and fabric of the present global economic environment is identified as being that germane to the era of globalization, where globalization refers broadly to the intensification and enhancement of flows of factors of production across international territories and simultaneous integration of domestic markets into the global economic arena (Krugman and Obstfeld, 2002) The mobility of goods and services, capital, ideas, personnel, technologies has increased manifold internationally. It does follow logically that this implies a significant rise in the profit making opportunities of business entities whose reach across borders into domestic markets of many economies have increased thereby. Not only does this imply a rise in the numerical magnitude or spread of markets for the products of any competent firm, it also implies a considerable surge in the number of options of acquiring inputs from, the rivalry among which surely indicates a potential for reduced costs of producing (United Nations World Public Sector Report, 2001). However, given the multidimensional asymmetries existing among firms from economies in different stages of development, manifested crucially in terms of productivity and efficiency differences, the access to these opportunities are by no means uniform thus creating potential inequalities. While firms from developed nations are naturally better equipped to utilize the opportunities presented by such integration of markets those belonging to developing or underdeveloped economies are not and thus for these latter group of firms globalization looms large as a threat by enhancing the possibility of being out-competed. Another point to note in this regard is that while globalization has increased the reach of global capital in the forms of Foreign Investment flows, direct or indirect which tag advanced technology and thus benefits of potential productivity growth, these are attracted towards economies that provide conditions favorable to maximization of profits. Thus, underdeveloped or developing economies, characterized by abundance of labor and lack of capital will have to compete with one another as potential hosts for foreign investments which can spike productivity growth and push the economy faster onto a trajectory of development. Another aspect to note is that sudden elimination of domestic borders of markets may trigger sudden instabilities for economies that are not yet strong enough to handle being entirely open to the world market (Caves, Frankel and Jones, 2007). All of these points out that globalization can make or break depending upon any economies management of the new environment. Herein lays the importance of the government or the state in the context of globalization or the new global economic environment. Effective management of the new tide can only be governed by the state. It has to choose areas where regulations have to be undertaken to protect domestic industries and which have to be lifted to make conditions to be lucrative enough to draw in foreign investment (United Nations World Public Sector Report, 2001). In what follows we elaborate upon these aspects and attempt to identify the significance of government actions and policy making frameworks in the context of the recent global economic development. Globalization is associated with benefits as well as costs. Enhanced trade openness coupled with FDI and technology transfers as already noted above, provides opportunities for increased productivity and thus economic growth. Opening up of international trade provides considerable incentives for specialization among economies according to their own comparative advantages. Further, choices for consumers are also increased and in fact consumer welfare does rise as greater quality products are offered at relatively cheaper prices (Caves, Frankel and Jones, 2007). From the perspective of developing nations, globalization offers the important benefits of expansion of the markets for exports as well as greater employment opportunities and increased competition leads to increased efficiency among domestic firms and this coupled with the technological progress associated with FDI translates to faster growth (Krugman and Obstfeld, 2002). However there are certain costs associated with globalization particularly for developing nations. For instance the advanced technology that is engulfing older technology is heavily automated and thus implies a possible loss of employment for unskilled workers. Further, with markets being greatly interlinked with exchange rates being allowed to float freely, domestic economies become vulnerable to international market volatility. The very recent global economic crisis serves as an apt instance of this fact. Global market trends increasingly are affecting national economies. Thus, in essence the government’s job amounts to obtaining optimality through maximizing the benefits of globalization through efficient utilization of the opportunities while simultaneously minimizing the associated costs (Peláez and Peláez, 2008). "There is a growing consensus that governments can play a vital role in successful development efforts, but we also recognize that the wrong kind of government intervention can be highly detrimental. We have recognized that the scope and effectiveness of government activities, rather than simply the size of the governments budget or personnel, is the key issue. Within a given size range, the governments effectiveness can vary widely with the scope of its activities: they can do too much of some things and too little of others, and redirecting the States efforts could produce benefits on both accounts" (Stiglitz, 1998, p. 233). Now we turn to elaborate in further detail to this optimality exercise and point out to specific directions that government policies should focus upon to attain this goal. The newly emerging global environment is laden with great opportunities for the private sector as it not only has access to previously unreachable markets but also access to erstwhile unavailable resources, particularly technology(United Nations World Public Sector Report, 2001). However the government or the state has a very crucial role to play to ensure that the private sector is operationally efficient and its operations are beneficial to the objectives of the economy as a whole (Sen, 1999). While intensive regulatory control can hinder the efficient advance of the private sector and thus make the benefits of international integration a distant dream, too less can lead to the market forces ruthlessly pursuing only profit objectives and thereby intensifying the pre-existing asymmetries and inequalities in terms of access to respectable lives for the general populace. It is only through playing a complementary role to the free market forces can the state ensure sustained prosperity for its economy. Broadly, the role of the government is to provide through institutions, regulations and legal frameworks a democratic and just operational environment. Otherwise, in the absence of effective institutionalized control, competitive growth is stifled and lawless chaos prevails finally resulting in the collapse of the social fabric which belies any growth opportunities to the private sector (Sen, 1999). Thus government policies have to be in place to ensure that property rights are protected and contracts are enforceable. Further, effective anti-trust policies should be in place to promote healthy private competition to embalm consumers from being exploited by those with significant control over the market. The most important aspect of government policy framework that can boost the private sector’s performances significantly is through simplifying bureaucratic measures and rules for the various registering and licensing associated with embarking on new ventures or expanding existing businesses. (United Nations World Public Sector Report, 2001) The public sector also has a vital role to play in order to push the economy towards realizing the tremendous growth potential offered by international integration of markets. Public investments in infrastructure to build overhead capital are crucial not only for the national private sector but also for attracting in foreign capital. FDI is motivated only by profit motives and to realize such motives smooth functioning of markets are as crucial as access to those markets. Thus public sector investments in activities that private entrepreneurs shy away from due to the bulk of the investment requirements as well as the gestation lag associated with the realization of returns are thus very important. The public sector policies thus have to be directed towards development of human resources through investing in education, mobilizing financial capital and building apt capacities for innovative research and information technological growth which benefits overhead efficiency of the economy for both domestic as well as global private firms (Krugman and Obstfeld, 2002). Another important role the government can play is that of protecting certain indigenous industries through tariff barriers. Certain industries at incipient stages may require protection before it is ready to take off and compete with global rivals. Such infant industries may be given protection for the period of their infancy. It should be noted however that such protection over a long period of time can lead to inherent inefficiencies as they protect domestic firms from international competition thus preventing them from requiring maturing into efficient operative status (Caves, Frankel and Jones, 2007). Therefore what emerges is that the government has a crucial role to play in the face of the recent dynamics of the global economic environment. Globalization has emerged as a commendable force which can pull economies that can maneuver themselves adequately onto an unprecedented path of growth while others may be washed away by the rising tide if not careful. Ensuring proper handling so that the opportunities are utilized as well as the benefits are spread over the spectrum of the maximum number of people in the society is precisely the job that the government has to perform. While on the one hand policies have to be undertaken to ensure a strong legislative framework that simultaneously ensures protection of private property rights and enforces contracts to enable the private sector as well as protect the interests of the people, these also have to ensure that bureaucratic procedural complicacies are minimized and the imputed time and resource drainages are eliminated from the system. The public sector has to act so as to groom the economy into becoming a prim host of FDI. Optimality has to be attained in pursuit of protecting infant industries that exhibit promise in terms of future growth potential so that the coverage is effectively utilized by the protected industry. It can therefore be concluded that globalization for a national government presents an optimization problem which if it can effectively solve, the economy can be transformed favorably manifold. References: Caves, R E, Frankel, J A and Ronald W Jones (2007), World Trade and Payments: An introduction (10th Ed), Prentice Hall Krugman, Paul R & Venables, Anthony J (1995) "Globalization and the Inequality of Nations,” The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 857-80, November. Krugman, P and Maurice Obstfeld, (2002) international Economics: Theory and Policy, Pearson – Addison Weasley Peláez, C M, and Carlos A. Peláez, (2008) “Government Intervention in Globalization Regulation, Trade and Devaluation Wars”, Palgrave Macmillan Sen, Amartya (1999). Development as Freedom, Alfred A. Knopf, New York Stiglitz, Joseph (1998), "Redefining the role of the state: What should it do? How should it do it? And how should these decisions be made?" Speech presented on the 10th anniversary of MITI Research Institute, 17 March, Tokyo. United Nations World Public Sector Report (2001) “Globalization and the State”, United Nations, New York. Read More