55GLOBALIZATION AND CHALLENGES BEFORE INDIAGen single space.docx

55GLOBALIZATION AND CHALLENGES BEFORE INDIAGen single space.docx

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55GLOBALIZATIONANDCHALLENGESBEFOREINDIAGensinglespace

RESPONDINGTOGLOBALIZATION:

INDIA’SANSWER

4thRamanbhaiPatelMemorialLectureon

ExcellenceinEducation

by

Dr.C.Rangarajan

Chairman

EconomicAdvisoryCounciltothePrimeMinister

NewDelhi

February25,2006

Ahmedabad

RESPONDINGTOGLOBALIZATION:

INDIA’SANSWER

Ideemitagreathonourtobeinvitedtodeliverthe4thRamanbhaiPatelMemorialLectureonExcellenceinEducation.ShriRamanbhaiPatelwasatrueentrepreneur.Hecametobusinessfromeducationandsetupanindigenouspharmaceuticalcompany,whichlaterbecameoneofthelargestmanufacturersofdrugsandpharmaceuticals.Hewasdeeplyinterestedinthepromotionofeducationandcontributedliberallytowardsthiscause.IamindeedhappythattheAhmedabadManagementAssociationhasinstitutedalectureseriestocommemoratehismemory.

AhmedabadManagementAssociationisperhapsthemostactivemanagementassociationinourcountry.Ithasbecometheforumforadiscussionofvarietyofissuesrelatingtoindustrialgrowthandbusinesseducation.Itsprogrammesandseminarshavecometoberecognizedasbeingthemostusefulandwellorganised.MayItakethisoccasiontocongratulatetheAhmedabadManagementAssociationontheexcellentworkithasbeendoing.ItisamatterofgreatpleasureformetobeinAhmedabadandtomeetfamiliarfaces.

Globalizationhasbecomeanexpressionofcommonusage.Whiletosome,itrepresentsabravenewworldwithnobarriers,forsomeothers,itspellsdoomanddestruction.Itis,therefore,necessarytohaveaclearunderstandingofwhatglobalizationmeansandwhatitstandsfor,ifwehavetodealwithaphenomenonthatiswilly-nillygatheringmomentum.

GlobalizationanditsMeaning

Broadlyspeaking,theterm‘globalization’meansintegrationofeconomiesandsocietiesthroughcrosscountryflowsofinformation,ideas,technologies,goods,services,capital,financeandpeople.Crossborderintegrationcanhaveseveraldimensions–cultural,social,politicalandeconomic.Infact,somepeoplefearculturalandsocialintegrationevenmorethaneconomicintegration.Thefearof“culturalhegemony”hauntsmany.Limitingourselvestoeconomicintegration,onecanseethishappenthroughthethreechannelsof（a）tradeingoodsandservices,（b）movementofcapitaland（c）flowoffinance.Besides,thereisalsothechannelthroughmovementofpeople.

HistoricalDevelopment

Globalizationhasbeenahistoricalprocesswithebbsandflows.DuringthePre-WorldWarIperiodof1870to1914,therewasrapidintegrationoftheeconomiesintermsoftradeflows,movementofcapitalandmigrationofpeople.Thegrowthofglobalizationwasmainlyledbythetechnologicalforcesinthefieldsoftransportandcommunication.Therewerelessbarrierstoflowoftradeandpeopleacrossthegeographicalboundaries.Indeedtherewerenopassportsandvisarequirementsandveryfewnon-tariffbarriersandrestrictionsonfundflows.Thepaceofglobalization,however,deceleratedbetweentheFirstandtheSecondWorldWar.Theinter-warperiodwitnessedtheerectionofvariousbarrierstorestrictfreemovementofgoodsandservices.Mosteconomiesthoughtthattheycouldthrivebetterunderhighprotectivewalls.AfterWorldWarII,alltheleadingcountriesresolvednottorepeatthemistakestheyhadcommittedpreviouslybyoptingforisolation.Althoughafter1945,therewasadrivetoincreasedintegration,ittookalongtimetoreachthePre-WorldWarIlevel.Intermsofpercentageofexportsandimportstototaloutput,theUScouldreachthepre-WorldWarlevelof11percentonlyaround1970.MostofthedevelopingcountrieswhichgainedIndependencefromthecolonialruleintheimmediatePost-WorldWarIIperiodfollowedanimportsubstitutionindustrializationregime.TheSovietbloccountrieswerealsoshieldedfromtheprocessofglobaleconomicintegration.However,timeshavechanged.Inthelasttwodecades,theprocessofglobalizationhasproceededwithgreatervigour.TheformerSovietbloccountriesaregettingintegratedwiththeglobaleconomy.Moreandmoredevelopingcountriesareturningtowardsoutwardorientedpolicyofgrowth.Yet,studiespointoutthattradeandcapitalmarketsarenomoreglobalizedtodaythantheywereattheendofthe19thcentury.Nevertheless,therearemoreconcernsaboutglobalizationnowthanbeforebecauseofthenatureandspeedoftransformation.Whatisstrikinginthecurrentepisodeisnotonlytherapidpacebutalsotheenormousimpactofnewinformationtechnologiesonmarketintegration,efficiencyandindustrialorganization.Globalizationoffinancialmarketshasfaroutpacedtheintegrationofproductmarkets.

GainsfromGlobalization

Thegainsfromglobalizationcanbeanalyzedinthecontextofthethreetypesofchannelsofeconomicglobalizationidentifiedearlier.

TradeinGoodsandServices

Accordingtothestandardtheory,internationaltradeleadstoallocationofresourcesthatisconsistentwithcomparativeadvantage.Thisresultsinspecializationwhichenhancesproductivity.Itisacceptedthatinternationaltrade,ingeneral,isbeneficialandthatrestrictivetradepracticesimpedegrowth.Thatisthereasonwhymanyoftheemergingeconomies,whichoriginallydependedonagrowthmodelofimportsubstitution,havemovedovertoapolicyofoutwardorientation.However,inrelationtotradeingoodsandservices,thereisonemajorconcern.Emergingeconomieswillreapthebenefitsofinternationaltradeonlyiftheyreachthefullpotentialoftheirresourceavailability.Thiswillprobablyrequiretime.Thatiswhyinternationaltradeagreementsmakeexceptionsbyallowinglongertimetodevelopingeconomiesintermsofreductionintariffandnon-tariffbarriers.“Specialanddifferentiatedtreatment”,asitisveryoftencalledhasbecomeanacceptedprinciple.

MovementofCapital

Capitalflowsacrosscountrieshaveplayedanimportantroleinenhancingtheproductionbase.Thiswasverymuchtruein19thand20thcenturies.Capitalmobilityenablesthetotalsavingsoftheworldtobedistributedamongcountrieswhichhavethehighestinvestmentpotential.Underthesecircumstances,onecountry’sgrowthisnotconstrainedbyitsowndomesticsavings.TheinflowofforeigncapitalhasplayedasignificantroleinthedevelopmentintherecentperiodoftheEastAsiancountries.Thecurrentaccountdeficitofsomeofthesecountrieshadexceeded5percentoftheGDPinmostoftheperiodwhengrowthwasrapid.Capitalflowscantakeeithertheformofforeigndirectinvestmentorportfolioinvestment.Fordevelopingcountriesthepreferredalternativeisforeigndirectinvestment.Portfolioinvestmentdoesnotdirectlyleadtoexpansionofproductivecapacity.Itmaydoso,however,atonestepremoved.Portfolioinvestmentcanbevolatileparticularlyintimesoflossofconfidence.Thatiswhycountrieswanttoputrestrictionsonportfolioinvestment.However,inanopensystemsuchrestrictionscannotworkeasily.

FinancialFlows

Therapiddevelopmentofthecapitalmarkethasbeenoneoftheimportantfeaturesofthecurrentprocessofglobalization.Whilethegrowthincapitalandforeignexchangemarketshavefacilitatedthetransferofresourcesacrossborders,thegrossturnoverinforeignexchangemarketshasbeenextremelylarge.Itisestimatedthatthegrossturnoverisaround$1.5trillionperdayworldwide（Frankel,2000）.Thisisoftheorderofhundredtimesgreaterthanthevolumeoftradeingoodsandservices.Currencytradehasbecomeanendinitself.Theexpansioninforeignexchangemarketsandcapitalmarketsisanecessarypre-requisiteforinternationaltransferofcapital.However,thevolatilityintheforeignexchangemarketandtheeasewithwhichfundscanbewithdrawnfromcountrieshavecreatedoftentimespanicsituations.ThemostrecentexampleofthiswastheEastAsiancrisis.Contagionoffinancialcrisesisaworryingphenomenon.Whenonecountryfacesacrisis,itaffectsothers.Itisnotasiffinancialcrisesaresolelycausedbyforeignexchangetraders.Whatthefinancialmarketstendtodoistoexaggerateweaknesses.Herdinstinctisnotuncommoninfinancialmarkets.Whenaneconomybecomesmoreopentocapitalandfinancialflows,thereisevengreatercompulsiontoensurethatfactorsrelatingtomacro-economicstabilityarenotignored.ThisisalessonalldevelopingcountrieshavetolearnfromEastAsiancrisis.Asonecommentatoraptlysaid“Thetriggerwassentiment,butvulnerabilitywasduetofundamentals”.

ConcernsandFears

Ontheimpactofglobalization,therearetwomajorconcerns.Thesemaybedescribedasevenfears.Undereachmajorconcerntherearemanyrelatedanxieties.Thefirstmajorconcernisthatglobalizationleadstoamoreiniquitousdistributionofincomeamongcountriesandwithincountries.Thesecondfearisthatglobalizationleadstolossofnationalsovereigntyandthatcountriesarefindingitincreasinglydifficulttofollowindependentdomesticpolicies.Thesetwoissueshavetobeaddressedboththeoreticallyandempirically.

Theargumentthatglobalizationleadstoinequalityisbasedonthepremisethatsinceglobalizationemphasizesefficiency,gainswillaccruetocountrieswhicharefavourablyendowedwithnaturalandhumanresources.Advancedcountrieshavehadaheadstartovertheothercountriesbyatleastthreecenturies.Thetechnologicalbaseofthesecountriesisnotonlywidebuthighlysophisticated.Whiletradebenefitsallcountries,greatergainsaccruetotheindustriallyadvancedcountries.Thisisthereasonwhyeveninthepresenttradeagreements,acasehasbeenbuiltupforspecialanddiff