Globalisation
is essentially international economic integration based on the free-
market philosophy. The phenomenon is characterised by freer movement of
goods, services and financial capital (money).
The argument for
globalisation and, for that matter, free-market economy, rests on two
premises: economic and trade liberalisation leads to growth and
development, and higher growth and development is the recipe for
prosperity. International trade, the argument goes, allows countries to
specialise in the production of the goods and services which they can
produce more efficiently and import those which they can produce only at
a cost higher than that of importing them. Specialisation makes for
greater efficiency and productivity, thus raising the level of output,
employment and incomes.
Theory aside, empirical
evidence shows that economic and trade liberalisation may be a necessary
condition for growth, but is by no means a sufficient one. The effects
of trade liberalisation depend on such factors as the existing level of
development, quality of institutions, and the availability of human and
material resources to support liberalisation. This explains why bigger
or relatively more advanced countries like China and India, South Korea
and Singapore, exhibit a stronger relationship between openness and
growth than smaller and relatively backward economies such as those in
Africa.
Even where trade liberalisation contributes to
growth, it may not reduce poverty. In the wake of growth, per capita
income goes up. But income growth does not necessarily usher in a more
equitable income distribution. Take the examples of China and India, two
of the globe’s fastest-growing economies. In China, per capita income
has shot up in the wake of economic growth, from $330 in 1990 to $4,940
in 2011 (source: the World Bank), but wide income disparities persist.
The income share held by the highest 20 percent of the population went
up from 40.73 percent in 1990 to 47.93 percent in 2005. On the other
hand, the income share held by the lowest 20 percent of the population
went down from 8.04 percent to 4.99 percent over the same period. The
Gini index, which measures income inequality, rose from 32.4 in 1990 to
42.5 in 2005.
In the case of India, per capita income went
up from $390 in 1990 to $1,410 in 2011. However, the income share held
by the highest 20 percent of the population went up from 40.14 percent
in 1994 to 42.36 percent in 2005. On the other hand, the income share
held by the lowest 20 percent of the population went down from 9.09
percent to 8.64 percent over the same period. The Gini index rose from
30.8 in 1994 to 33.4 in 2005 (source: the World Bank).
In
short, while globalisation increases the size of the pie, the enlarged
pie is remarkable for its uneven distribution. This applies to both
national economies and sectors or sections within them. Here is some
more evidence:
The last two decades, during which
globalisation has gained momentum, have seen tremendous growth in global
trade and foreign investment. Foreign direct investment (FDI) inflows
increased more than seven times between 1990 and 2011, from $208 billion
to $1.5 trillion (World Investment Report 2012). Global merchandise
trade has scaled up from $3.5 trillion in 1990 to $18 trillion in 2011.
Trade in services has also shot up from $827 billion in 1990 to $4
trillion in 2011 (World Trade Report 2012). But the growth of trade and
FDI has been rather uneven. Global FDI inflows remain highly
concentrated as only two regions, the EU and North America, account for
nearly half the global FDI inflows. Though developing countries have
increased their share in global FDI receipts from 18 percent in 1990 to
44 percent in 2011, the tripling of the share is largely due to a
handful of countries, particularly China. In 1990, the country’s share
in global FDI inflows was less than two percent, which in 2011 had shot
up to 8 percent. In value terms, China’s FDI receipts went up from $3
billion in 1990 to $124 billion in 2011. Hong Kong, a special
administrative region of China but a separate customs territory,
received $83 billion’s FDI in 2011. If we add Hong Kong FDI inflows to
those into the mainland, China’s total FDI inflows come to $207 billion,
which make it the second-largest recipient of FDI after the USA. China
and Hong Kong together account for 30 percent of FDI inflows into
developing countries. The least developed countries (LDCs), the
economies most in need of foreign capital, account for less than one
percent of global FDI receipts.
The same applies to
international trade, where a handful of countries rule the roost. China,
the USA, Germany, Japan, and the Netherlands together constitute 35
percent of global merchandise exports, while the USA, the UK, Germany,
China and France account for 34 percent of services’ exports. The share
of the LDCs in global exports is only one percent.
Like
trade and investment benefits, wealth is heavily concentrated. According
to the United Nations’ World Institute for Development Economics
Research, the poorer half of the world’s population owns barely one
percent of global wealth. Wealth is heavily concentrated in North
America, Europe and a few countries in the Asia-Pacific region, which
cumulatively account for 90 percent of household wealth worldwide.
Globalisation
has enormously benefited consumers by enabling them to have access to
cheaper goods than they had previously. But it has also exposed domestic
firms to tough competition with foreign businesses. Inefficient firms
are doomed to be driven out of the market. The importance of being
efficient has put cost controls at a premium. In their bid to cut back
on their cost of production, firms eliminate several positions and even
relocate to a foreign land. Obviously, there are some winners and losers
in this process. The main losers are blue-collar workers, who are
either thrown out of jobs or forced to work at lower wages. This is true
of both developing and developed countries and has contributed to what
the economists call “jobless growth,” which occurs when economic growth
does not drive down unemployment or the increase in employment lags
considerably behind that of the output. According to Global Employment
Trends 2011, an ILO publication, while the global economy grew by 5.3
percent in 2007, 2.8 percent in 2008, contracted by 0.6 percent in 2009
and then bounced back to grow by 4.8 percent in 2010, employment grew by
1.8 percent in 2007, 1.5 percent in 2008, 0.7 percent in 2009 and 1.3
percent in 2010. The Economist reported in 2007 (the January 20-26
issue) that in developed economies, during the previous half decade,
labour’s share of GDP had slumped while corporate profits soared.
Alive
to such problems, developed countries have undertaken programmes for
the readjustment of displaced workers. For instance, the US government
runs a Trade Adjustment Assistance (TAA) programme, while the European
Union has set up a European Globalisation Adjustment Fund. Such
programmes entail unemployment allowance, health insurance, and worker
retraining and can be instrumental in mitigating the cost of
readjustment created by globalisation. However, the problem in case of
developing countries is that they lack the funds as well as the
institutional mechanism for readjustment of displaced workers.
Vulnerable as their economies are to foreign competition, these
countries by and large are ill-equipped to deal with this flip side of
globalisation.
Failure to readjust displaced workers is
not only an economic but also a social problem. It results not only in
loss of income but also in loss of prestige and self-respect, as well as
in social discontent. In countries like Pakistan, unemployment is a
recipe for militancy.
Multilateral institutions like the
World Bank need to play a stronger role in facilitating adjustment to
globalisation by giving grants and technical assistance to developing
counties. The purpose should be to help them create broad social safety
nets, which provide for both wage insurance and employee retraining and
reorientation.
The writer is a freelance contributor. Email: hussainhzaidi@gmail.com