Globalisation’s flip side

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:


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