How to Avoid Losses because of Globalization - Coursework Example

INTRODUCTION There has been much hue and cry over the phenomenon of globalisation and the benefits and downsides of the same. The debate is primarily on the kind of effect that Globalisation has on the US economy. While the concept of Globalisation is not new to the world with manufacturers relying on outside suppliers to provide them with the parts for their products, the concept of moving jobs abroad as part of services Globalisation and moving plants and equipment overseas as part of Globalisation of manufactured goods is a relatively recent phenomenon. It is now clear that Globalisation is here to stay. Despite talk of protecting American jobs in the recent presidential campaign, it is my view that as long as we are dependant on capital from China and elsewhere and as long as productivity gains are to be made because of Globalisation, there would not be a rollback of this aspect of the economic system. GLOBALISATION Globalisation can mean many things. There is the economic component of Globalisation that is defined as “the integration of national economies into the international economy through trade, direct foreign investment, short term capital flows and international flows of workers and humanity in general”i. As a by product of this economic Globalisation is the flow of ideas and culture across national borders. The other definition of Globalisation is “the freer movement of goods, services, ideas and people around the world”ii. This definition encompasses the qualitative aspects of Globalisation in the sense that it goes beyond mere numbers in defining the exchange of information in a borderless world. Ever since the General Agreement on Trade and Tariffs (GATT) came into effect in the 90’s and the World Trade Organization was established with a mandate to regulate and intervene in the disputes arising out of Globalisation, the world economy has been integrated in a way that has surpassed the earlier attempts. This is noteworthy, as contrary to popular belief, trade and commerce between nations has always been the case since the first ships carrying silk, spices and muslin from the east and other exotic stuff from the west has set forth for each other’s shores. In fact, the famous voyage of Christopher Columbus is a testament to the ability of nations to seek out markets other than their own for trade. Though the world was integrated in colonial times as well, the process received a setback in the 21st century in the intervening period between the two world wars. It was only after the establishment of the Bretton Woods system that the world economy started regaining some of its interconnectedness. And the demise of alternatives to capitalism and the free market system ensured that all countries with a desire to alleviate poverty and raise the standard of living of the peoples would invariably turn to trade and commerce and utilize the “theory of comparative advantage”iii as proposed by the noted economist David Ricardo. Globalisation as a phenomenon cannot be wished away. Despite the setbacks to the process by the events in the aftermath of 9/11, Globalisation continues its inexorable march adding new strands to its already well knit thread. The successes of India and China in this decade and the successes of the so-called “Tiger economies” of South East Asia in the previous decades are proof that Globalisation works. The contention of this paper is Globalisation is a process that produces more winners than losers and can succeed in lifting large numbers of people out of poverty. As I argue in the succeeding sections, there have been setbacks and the dark underside of the process as well. However, if a studied approach is taken towards the same and the countries of the world succeed in thrashing out differences on tariffs and opening up their economies in a structured manner, it would be a process that would benefit everybody in the long run. CHALLENGES TO GLOBALISATION SETBACKS TO GLOBALISATION The attacks of 9/11 were a definite setback to the processes of Globalisationiv. In a sense, the world turned inwards after 9/11 with greater visa restrictions making it hard for easier movement of people around the world. Since this is a critical component of Globalisation, it was a throwback to the old days of protectionism. Also, there was a movement towards localization with countries in the immediate aftermath suspending many of the neo-liberal policies that they were pursuing till thenv. But recent evidence shows that the world has effectively surmounted some of the challenges thrown up by 9/11 and is picking up steam towards the processes of Globalisation. Exporting markets and Open borders Amy Chua in her book, The World on Fire, points to how exporting markets to the eastern countries without determining the suitability of the recipient countries to adapt to the system of free markets and laissez faire capitalismvi. She argues that “exporting markets” to the East without a well thought out strategy breeds ethnic hatred and rise of crony capitalism in those countries. These two forces feed on each other with the rise of a relatively small ethnic minority controlling large parts of the economy leading to the majority detesting the success of this minority. This in turn leads to a situation where unscrupulous elements are able to prey upon the fears of the less privileged and make the countries prone to violence and instability. This leads to a backlash against markets that is defeating to the promise of Globalisation and international trade. She calls upon world leaders to devise strategies in such a way so as to ensure that Globalisation produces more winners than losers. There have been several others who have called attention to the distressing effects of the fall of communism on the countries of Eastern Europe and the erstwhile USSR. These have mainly to do with the way in which capitalism has been “imposed” on these countries without adequate thought to the process of adjustment and stabilization that is required for these countries to adapt to the global economy. The works of Naomi Klein (Shock Doctrine) and Moses Naim (Illicit) are pointers in this regard. In the former, Klein argues that the rise of “disaster capitalism” has left millions disenfranchised of their rights and given birth to a new underclass of people who were better off before Globalisationvii. The blame for this has been laid at the door of the Western corporations who put “profits over people” and thus endanger the whole process as well. Naim, on the other hand, argues that the Globalised economy of the 1990’s has given rise to a class of smugglers, bootleggers and the like who have profited enormously from the lowering of barriers to movement of people and goodsviii. The rationale for this is the fact that a global economy built around freer movement of people and goods makes it that much more difficult for already stretched law enforcement authorities to effectively police the borders and maintains law and order in their “open” countries. ASSESMENT OF PRIORITIES What the current process of Globalisation could well do with is a saner re-assessment of the realities of “imposing” Globalisation on the world and take a nuanced view instead of a “one size fits all” approach. As the thesis of this paper is all about how Globalisation produces more winners than losers, it is the contention of this author that unless the policy makers of the world indulge in some serious introspection about the direction of the process, there are going to be the setbacks and backlash that I have described in the previous section. What we need is an expansion of “real” economic activity instead of “irrationally exuberant” market fundamentalism. Given the interconnectedness of the global economy, movement of large amounts of “mobile” financial flows may well be attractive to the elites of a particular country in the short run. However, it has to be remembered that such flows are transient and can very well turn to a “flight out” of the country at the first sign of panic. This was evident in the East Asian financial crisis of 1997 where there was a massive flight of capital out of the countries in East Asia leading to severe depression like conditions in those countries. Ultimately, it is the poor people of the countries who pay a price and thus the promise of Globalisation of lifting people from poverty is negated. The intention of this author is not to deride these processes. As David Smick shows in “The World is Curved”, Globalisation has succeeded in lifting absolute numbers of people around the world out of poverty in a scale unprecedented in historyix. However, if we are to reap the benefits of this process, a cautious approach is needed and one that is sustainable and structured rather than one driven by a desire to indulge in what has been called “casino capitalism”. We cannot pursue policies that take the global economy to the brink and then expect the market to correct itself. And when the market corrects itself, it is more often the case that it is too late and too many people have been affected. GOVERNMENTAL POLICY At the macroeconomic level, potential fallout of Globalisation has been the steady indebtedness of the American economy to the Chinese. This is an area that still has not been openly discussed except in the last few days when Obama declared that he does not want “America to be a debtor nation to China”. How this works is that by exporting goods and providing services to the American consumers and corporations, the Chinese gain dollars to the extent that they are sitting on over 2 Trillion dollars of reserves. In view of the recent economic crisis in the US, this makes easy for the Chinese to participate in the American economy by buying bonds and securities issued by the Federal government. Thus, we have a situation where the transfer of dollars to China has resulted in the US being a net debtor instead of a creditor. And this is one bone that the opponents of Globalisation would gleefully pick with the proponents of the same. And there is the issue of the loss of competitiveness of the American companies to the point where regaining the edge in Manufacturing and Services may prove difficult. The current economic crisis is a time of opportunity for those who want to re-assess the process. As many commentators have pointed out, with the mounting global food crisis and the resource scarcities that we are witnessing, what is needed is a point of view that takes into account the needs of the developing countries as well as the developed world. In a game which essentially thrives on give and take or barter, it is the willingness of rich countries to budge on their positions and the shedding of reluctance on the part of poor countries to ensure an optimum transfer of resources to all sections that would ultimately see the process going forward and gaining momentum. ZERO-SUM GAME OR WIN-WIN SITUATION We have seen in the preceding sections how there are benefits as well as downsides to the issue of Globalisation. Now I want to examine the question whether Globalisation is just a zero sum game where one side gains at the expense of other or whether it can be a win-win situation for both. The most famous proponent of the win-win situation scenario is Thomas Friedman. In his book, The World is Flat; he talks about “how American companies stand to gain because of the theory of comparative advantage applied to contemporary economic conditions”. The theory of comparative advantage was originally proposed by the famous economist, Ricardo when he stated that two economies stand to gain when one economy that is good at producing a particular product trades with another economy that is good at a different product but not in the first one. Thus, both economies stand to gain in this comparative trade with each other. Thomas Friedman argues that with the “flattening” of the world, there exists opportunities for people and companies all over the world to jump on to the global economy and reap the benefits of trade. Thus, what one company can produce and collaborate with others becomes a sort of synergistic fusion of people, processes and products giving rise to a global economy charged with gains for everybody. While this scenario looks rosy, it overlooks the fact that there exist barriers to trade and movement of people that pull the economy down. This is particularly relevant in the context of the current economic crisis where there might be protectionist trends in the US with the economy in deep recession. CONCLUSION The outcry over Globalisation is bound to grow with the economy going into a deep recession. As we have seen in the preceding sections, this might lead to protectionist tendencies prevailing in the US. This would happen as the country may not be able to tolerate further losses on account of Globalisation. The other reason would be the increasing indebtedness of the US towards China that makes the cries for lesser Globalisation that much shriller. However, if the US has to ensure that it does not do away with Globalisation completely. As we have seen it can be a win-win situation provided the right conditions are in place. These include prudent trade policies and sound fiscal and monetary policies as well. The US economy cannot fall into the trap of high costs on account of processes that can be outsourced but are retained. On the other hand, it cannot cope with severe job losses as well. Thus, the need of the hour for the incoming administration would be for a well thought out strategy that takes into account all these factors and then considers policy responses. The bottom line should be that there cannot be a blind aversion to Globalisation and only when informed debate takes place and all options are considered, there would be meaningful progress on the economics of Globalisation. In conclusion, it is apparent that Globalisation, if it has to benefit the people at large has to take a bottom-up approach blended with policy guidance from the top. Without a fair measure of integration of the world markets with that of the native structures of production, there would be serious imbalances in the way in which trade is carried out. Rise in consumption alone does not suffice. It is by understanding the deep linkages between all the aspects of the production and consumption cycle that any meaningful progress can be achieved. On a personal note, I have benefited immensely from studying the process as part of writing this paper and it has been my endeavour to put my point of view across in a persuasive manner. NOTES Read More