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The state of economic globalisation

Hasnat Abdul Hye | November 12, 2023 00:00:00

Needless to say, globalisation has many dimensions of which the economic one is the cutting-edge, underpinning the rest. That the nomenclature embodies movement of goods, capital, manufacturing and technology is also well-known. Of these the first one, movement of goods from one country to another, is the kingpin of globalisation and is as old as civilisation. The rest took a long time in coming, firstly because of their tardy developments and secondly, because of restrictions imposed by governments. Movement of goods in the form of cross-border trade has been the prime driver of economic globalisation. But its trajectory over time has not been linear, there being fluctuations from time to time. The peaks and troughs in economic globalisation have coincided with ups and downs in economies of trading partners or changing perceptions of their governments about economic security and geo-political rivalry. Prolonged wars among countries and unforeseen catastrophes like pandemic have been accompanied with slowing down or deceleration of the momentum of economic globalisation .Much also depends on the political ideology of governments in power. As in majority of countries governments with different political dispensations alternate in power through elections, parallel change in policies towards economic globalisation, particularly trade, has become the norm. Economic globalisation has come a long way from the fledgling stage to the present mature one, going through fluctuations because of the factors mentioned above. In the process it has proved its resilience to get back on track and regain momentum. In recent times dire forecasts regarding decline and fall of globalisation by analysts has turned out to be false and baseless. The overriding reality about globalisation is that in spite of periodic setbacks, either in terms of restrictions on volume and value or geographical fragmentation, it has become indispensable for economic growth and welfare of all countries. An overview of developments in economic globalisation in recent years puts this conclusion in sharp relief.

TOWARDS FREE TRADE: The major impediment to expanding global trade was use of protective measures through tariff by almost all countries. To obviate this and to give fillip to inter-country exchange of goods and services, the United Nations (UN) initiated series of negotiations among member countries to lower tariff under the auspices of the General Agreement on Tariffs and Trade (GATT). In the '60s these came to be known as Kennedy Round of talks on trade. Though progress was slow GATT continued these 'talks' till the early '90s. From the early '80s (1986) these negotiations were given the name of Uruguay Round, which ended with the establishment of the World Trade Organization (WTO) in 1995, an UN agency to promote rule-based trade in the world. The Uruguay Round was, in some ways, the more dramatic of all trade rounds, for it opened up whole new areas of trade liberalisation: as manufacturing was shrinking in importance and services were expanding, it was important to bring the latter into the ambit of trade liberalisation. But the new areas were opened up in an unbalanced way that became cause for discontent against liberalisation later. For instance, financial services, in which developed countries had superiority, were liberalised but maritime and construction services, the area of advantage of many developing countries, were not. Agriculture was another example of the double standard inherent in trade liberalisation programme. Although developing countries agreed to open up their market for agricultural products, developed countries like America and European Union (EU) continued with massive subsidies to their agricultural sectors. Farmers in the latter countries were encouraged to produce more, forcing down prices of crops that developing countries produce and depend upon.

Liberalisation of trade that gained momentum following the establishment of WTO saw dramatic developments in global trade, increasing both volume and value. Having access to the market of developed countries, labour-intensive consumer goods from developing and emerging countries entered in such volume and with such low prices that local industries became uncompetitive and forced to lay off their workers. Capital-intensive and tech savvy multinational companies (MNC) moved off-shore from developed countries, attracted by cheap labour and hefty profit, but in the process added to unemployment in their home country and ousted smaller companies in host country. Financial services from developed to developing economies moved for the same reason with similar consequences. More on this will be discussed later.

Increasing the volume of exports of labour-intensive goods, the liberalisation of trade created greater employment of poor workers in developing countries, enabling them to get out of grinding poverty. But opening up the market to cheap products also made workers in developed countries redundant and unemployed, as mentioned earlier. Farmers in developing countries, deprived of benefits from liberalisation because of subsidised agriculture in developed countries, were saddled with the additional handicap of having to buy fertiliser, pesticides and irrigation equipments at international prices without subsidy. The greatest beneficiary has been the MNCs and financial services institutions of developed countries. But irrespective of the unequal impact of liberalisation on specific groups, the sum total of benefit has been higher growth of all economies buttressed by greater volume of trade in the wake of free trade.

BACKLASH AGAINST GLOBALISATION: The establishment of WTO in 1994 was greeted with euphoria. It was a dream of many years, at least half a century that had at last become a reality. International trade, hobbled by tariff walls and non-tariff barriers (NTBs), could now take off unhindered on the back of a rule-based system. It would produce a win-win situation for both the developed and developing countries. The promise of this new chapter of globalisation was to bring prosperity to all.

It came as a shock to the advocates of globalisation when there was an outburst of vehement protest against globalisation that took place in Seattle in December 1999 at the start of a new round of trade negotiations. The ministerial meeting of the WTO was going to pave the way for further steps towards free trade. In the words of Joseph Stiglitz, the Nobel Laureate, 'Globalisation had succeeded in unifying people from around the world--- against globalisation as factory workers in the United States saw their jobs threatened by competition from China. Farmers in developing countries saw their incomes being imperilled by highly subsidised corn and other crops from the United States. Workers in Europe saw hard-fought-for job protection being assailed in the name of globalisation. AIDS activists saw new trade agreements raising the prices of drugs to levels that were unaffordable in much of the world. These protesters did not accept the argument that, economically at least, globalisation would ultimately make everybody better off'.(Joseph Stiglitz, Making Globalisation Work, 2004).

A report by the World Commission on the Social Dimensions of Globalisation, established by UN's International Labour Organization (ILO) said in 2004: "The current process of globalisation is generating unbalanced outcomes, both between and within countries. Wealth is being created, but too many countries and people are not sharing in its benefits. They also have little or no voice in shaping the process."

While there are many objections to the process of globalisation two concerns are outstanding: (1) The rules of the game that govern globalisation are unfair, specifically designed to benefit the advanced industrial countries; and (2) While the advocates of globalisation have claimed that everyone will benefit economically, there is plenty of evidence from developed and developing countries that there are many losers in both. For the first, the countries aggrieved have only themselves to blame. If their negotiators were astute and diligent enough, no decision that undermines their country's national interest could be thrust on them. No binding decision taken in UN sponsored meetings is without unanimous agreement.

The second criticism has also a response, albeit a conclusion based on theory. Like free market, globalisation delivers output in the form of income to trading countries. It is for the countries to decide how that income should be distributed among groups of their population. When a particular group loses and another benefits from a particular decision of a government, it is the government's responsibility to take care of the loser by taxing the beneficiary. If corporate entities, including MNC's, which have fattened themselves on economic globalisation, were made to pay enough from their hefty profits earned off-shore or at home, the plight of those who have been disadvantaged by globalisation could be mitigated. The fault lays not so much with globalisation as it is with policy makers and politicians.

GLOBALISATION'S CHALLENGES: Though neither of the two major concerns mentioned above have been addressed to mitigate the lapses made, the protests of anti-globalisers have been heard by some politicians and responded to in ways that are in sharp contrast. In India, after farmers held demonstration for months together with sit-ins against the present central government's decision to corporatise agriculture, prime minister Narendra Modi relented and rescinded the decision. This stopped the integration of Indian agricultural sector into the globalised system but did not deal a body blow to globalisation in general. But when Donald Trump won the presidential election with the 'America First' slogan against free trade and made good with his promise by slapping protective tariffs on aluminium and steel imported from China and EU countries, the decision gravely undermined the rule-based trading system built through painstaking efforts over a long period of time. The tit-for-tat tariff war that ensued between America and China, the two top economic titans in the world, almost upended the global trading system. Trump's not so subtle attempt at sabotaging the dispute settlement system of WTO made the functioning of the organisation difficult. If he were to be re-elected in 2021, his de- globalisation agenda to please the far right populists would have done further damage to the global trading architecture. But his successor, Joseph Biden has not turned out to be an ardent free trader and globaliser. Instead of setting up tariff barrier, he has used restriction on exports of chips and semi-conductors to China on security grounds. He has also persuaded allies to adopt the same policy. Prior to that he had cajoled the tech companies to 'de-couple' with China. EU has obliged him by supporting the same strategy with the euphemism of 'de-risking'. Semantics apart, this is a blatant attempt at impairing free trade with restrictions and direct control. Even America's close ally Taiwan, that produces 80 per cent of global micro chips through TSMC (Taiwan Semi-conductor Manufacturing Company), has expressed concern at this restriction saying that it will seriously impair the global production of semi- conductors. Semi conductor is a classic example of how the manufacturing of a product has been globalised. A semi conductor is designed in the US, processed in Taiwan at TSMC factory using tools made in Netherlands and exported to China for packaging into instruments and gadgets. If one link in this value chain is disrupted the entire manufacturing process will come to a halt. America is aware of this but wants to obviate the problem by on-shoring or friend-shoring the packaging phase, replacing China. The transition is possible but time consuming and the availability of a critical item like semi-conductor cannot be made to wait. Like semi-conductor most modern equipments, consumer electronics and vehicles are manufactured based on international division of labour to reduce costs. Tampering with this system not only runs counter to the existing pattern of co-ordinated integration but also involves unnecessary investments.

THE ISSUE OF SUBSIDY: President Biden's economic policies echo the same slogan of 'America First' without pronouncing it. His trillion dollar Inflation Reduction Act, 2023 will provide subsidy to tech companies and others that transfer their off-shore (mainly from China) plants on-shore (America) or friend-shore (Japan, South Korea).This strategy of subsidising manufacturing embedded in an implicit industrial policy has got China in the cross-hair but has not failed to ruffle the feathers of allies in EU alike. Chips and Science Act and Infrastructure Investment and Jobs Act, passed in 2021, by Biden Administration had similar goals. With US$32 trillion national debt and chronic deficit in current account for trade, America has become desperate to get off the hook by raising tariff barriers against imports and subsidising industries on the spurious ground of security. It is bent upon scuppering the rule-based global trading system because the pre-eminent place is about to be occupied by China.

ECNOMIC SANCTIONS: America and EU countries have also undermined globalisation by slapping economic sanctions on Russia after the Ukraine war in 2022. This has meant cutting it off from the universal payment system of SWIFT. As a result, trading with Russia for its oil, food grains, edible oil and fertiliser has become extremely difficult for countries in Asian and Middle-East. Weaponisation of trade is not only detrimental to free trade but can fuel conflict and may even lead to war as evident from past instances.

Apart from economic sanctions, the war in Ukraine has also caused supply chain problems causing shipments of traded goods slow and complicated. Sanctions and supply chain problems together has led to rise in the prices of oil, food and other items causing record high inflation worldwide.

OUTBREAK OF PANDEMIC: Prior to Ukraine war, a global supply chain problem halted movement of food, medicine and other goods during the unanticipated Covid-19 pandemic affecting all countries all on a sudden. Shortages and non-availability of medicines, vaccine, medical equipments like masks, gloves and protective uniform made casualties from the viral disease record high. Supply chain problems persisted even after the severe phase of the pandemic was over. Shortages of freight caused by de- commissioning many during the slack business and casualties of many crew members made freight space scarce and very expensive placing inflationary pressure on prices on goods traded.

Record high headline inflation caused by the pandemic and back to back by the Ukraine war forced many countries to curtail imports, shrinking the volume of trade, adding further to inflation.

CAPITAL FLOW: Globalisation in capital investment and financial services took more time to accelerate as national governments hesitated to withdraw restrictions on their movements. But when this sector was liberalised phenomenal changes took place. Big multinational companies (MNCs) moved out of home turf to foreign markets, particularly to developing countries that had low labour cost and cheap natural resources used by the company. This led to employment in the off-shore countries, technology transfer and dissemination of managerial know-how, all benefiting the recipient countries. As regards the MNCs, they made fat profits even though their moving out meant lay-off labour in home country, an issue touched early on in this write-up.

For many people, MNCs are the primary cause of problems of globalisation. MNCs are not only richer than some of the countries where they operate, if host governments want to tax or regulate them in ways that they don't like, they threaten to move elsewhere. There is always another country that welcomes their products, tax revenue, jobs and foreign direct investment (FDI). Yet MNCs have been at the centre of bringing the benefits of globalisation to developing countries in many ways. By offering well paid jobs they help raise the standard of living and enable the goods made in developing countries reach the markets of developed countries benefiting their consumers. MNCs have been the agents of technology transfer and have helped bridge the knowledge gap in developing countries. The billions of dollar channelled by them each year help narrow the resource gap. Increasing FDI is still considered a very effective means of promoting economic growth bridging the saving-investment gap. Assessing their role Stglitz has said: "With corporations at the centre of globalisation, they can be blamed for much of its ills as well as given credit for many of its achievements. Just as the issue is not whether globalisation itself is good or bad but how we can reshape it to make it work better, the question about corporations should be: what can be done to minimize their damage and maximise their net contributions to society" (Joseph Stiglitz, ibid).

PORTFOLIO INVESTMENTL: Apart from FDI, developing countries have also valued and courted portfolio investment that brings scarce foreign exchange. But portfolio investment has sometimes brought 'hot money' from wily investment managers in developed countries who rig the stock market with a scam and after rich pickings depart with their fund. This happened in Bangladesh in 1997 when Peregerine (now defunct), a Hong-Kong based fund created boom-bust in the stock market within a few months, making many local investors bankrupt. Another risk of portfolio investment in stocks, bond and securities in emerging and developing economies' market is the increase in interest rate in America, UK or EU by central banks that induces funds invested to exit in search of higher earnings in those countries. It is not only developing countries where portfolio investment by foreign funds takes place. The US stock market benefits from foreign investors to the tune of some $13.7 trillion in holdings of US equities.

In the borderless and digitised financial world today capital flight takes only seconds and any restrictions will run afoul of agreed upon global rules of finance. In spite of this risk, portfolio investment by foreigners is worth inviting as it helps bridge the foreign exchange gap and sustains confidence in the health of the stock market.

AID AND LOANS: In addition to FDI and portfolio investment, aid in the form of grant from multilateral institutions and bilateral sources and loans from these two and private credit markets have constituted total volume of capital flows across borders exceed. Globalisation of capital started after 1948 when the Bretton Woods Sisters, World Bank and International Monetary Fund (IMF), were established. These two institutions provided financial aid and loans to countries that needed financial assistance for development projects, budgetary needs and foreign trade. Aid by developed countries to developing ones continued for decades after the end of the second world war. Aid in the form of grant from World Bank and IMF was available until recently for developing countries. Now financial flows from these institutions are more in the form of loans at interest rates lower than those in the global markets, mostly in developed countries. Apart from direct lending by international banks and financial institutions, loans have also been obtained from sale of sovereign bonds by countries either directly by them or through fund managers. Recently, JP Morgan, an American financial institution, has agreed to sell Indian Rupee denominated bonds and make the proceeds available to India. There are quite a few instances like this.

Foreign aid as a form of capital transfer took place mostly after the Second World War, beginning with Marshall Plan by America for war torn Europe. This type of financial aid was extended to newly independent countries in Asia, Africa and elsewhere by America and Western Europe anxious to keep them away from the influence of communism. But the volume has not been enough to meet the requirements of developing countries. In 1970 the UN appointed Pearson Commission set a target of 0.7 per cent of Gross Domestic Product (GDP) to be contributed by developed countries. Only five met the target in 2000. The US contribution was only 0.1 per cent and official development assistance (ODA) reached merely 0.24 per cent of the GDP of developed countries. Developing countries, faced with resource constraint, resorted to borrowing from World Bank and IMF. Later, they turned to international private banks and bond markets for funds in hard currency.

Capital transfer between markets in the developed world began in late nineteenth century but was disrupted by First and Second World Wars and during the Great Depression of 1930s which saw capital controls being introduced by almost all countries. Controls on capital movements were gradually removed and offshore financial markets expanded rapidly under pressure of oil crisis in 1970s. International capital movements accelerated in 1980s under the neo-liberal economic reforms initiated by President Reagan and British prime minister Margaret Thatcher. Financial markets became truly global in 1990s after the collapse of Soviet communism.

Globalisation of capital and financial markets has produced two undesirable consequences. Firstly, it has rendered the welfare state obsolete because the people who require a social safety net cannot move out of their country but the capital the welfare state used to tax can. Secondly, because of their economic clout and higher credit rating, developed countries are favoured buy international financial institutions and markets in respect of lending. George Soros, the celebrated hedge fund entrepreneur and philanthropist, among many, believe that the global financial system is dysfunctional. He wrote: "They do need some reforms because they are being operated for the benefit of the rich countries that are in control, often to the detriment of the poor ones that are at the periphery of the system" (Geofge Soros, On Globalisation, 2004).

While the international financial markets mainly cater to the needs of developed economies, developing countries have been borrowing from developed countries' governments under suppliers' credit and from the credit windows of the World Bank and IMF. Because of chronic fiscal deficits countries, both developed and developing, have borrowed from international financial markets and affluent governments to balance their budgets.

As a result, global public debt surged to a record $92 trillion in 2022. Domestic and external debt worldwide has increased more than five times in the last two decades, outstripping the rate of economic growth, according to a UN report quoted by Reuters recently. The report mentions that developing countries owe almost 30 per cent of the global public debt, of which 70 per cent is accounted for by China, India and Brazil. Fifty nine developing countries face a debt- to-GDP ratio above 60 per cent, a threshold indicating high levels of debt.

The dual nature of globalisation in financial matter, as in other respects, is that while it may, on the one hand, create problems for countries from time to time, it also provides avenues to overcome those, on the other hand. Thus, the global community, with their institutions, are addressing the crisis of debt distress through restructuring (including debt forgiveness) and rescheduling repayment of defaulted loans. The Paris Club of developed countries' lenders regularly deliberate on issues of debt forgiveness and rescheduling for Highly Indebted Poor Countries (HIPC). The recent G20 Common Framework provides similar initiatives for non-Paris Club countries, though the mechanism is yet to be operationalised. China, as a major lender to countries in Asia and Africa, has taken up the issue of debt distress in earnest. But loans held by private creditors such as bond holders and banks, cannot resort to these debt workout mechanisms. To enable indebted countries to meet their debt repayment obligations, IMF has to come forward with its bailout packages. The recent financial meltdowns in Sri Lanka and Pakistan have been tided over through this mechanism. The bail-out window, however, poses risk of offering moral hazard and as such IMF has to give warning signals in advance before the storm breaks out. The globalised financial architecture has enough ways and means to address emergencies in financial matters.

THE FUTURE OUTLOOK: The World Trade Organization issued its annual report in April, 2023 on Global Trade Outlook for 2023 and 2024. The analysis in the report delivers two findings. First, goods trade was remarkably resilient for most of 2022 despite a challenging macro environment. During the first three quarters, year-on-year trade volume growth averaged 4.3 per cent, but an abrupt decline in the fourth quarter brought growth for the year down to 2.7 per cent. Second, the outlook for the global economy has slightly improved since the last forecast in October, 2022 but the pace of trade expansion in 2023 is still expected to be subpar compared to previous years. WTO is now projecting a merchandise trade volume growth of 1.7 per cent in 2023. It is low by historical standards, but it represents a modest upgrade compared to the earlier forecast of 1.0 per cent.

WTO's projections for 2024 show that trade and GDP growth returning to more normal ranges, with trade growth potentially rising to 3.2 per cent. Particular risks that could negatively affect this forecast include the recent vulnerabilities revealed in the banking sector in America (Silicon Valley, First National, Signature Banks) and Europe (Credit Swisse) of late and rise in interest rates above 5 per cent, creating strains in financial markets. Both weigh on trade among countries.

What is the role of international trade in building a more secure, inclusive and sustainable world? This is the question asked by the 2023 World Trade Report published in September, 2023. This question lies at the core of the contentious debate about the future of globalisation. The most striking finding of this report is that trade is gradually becoming reoriented toward geopolitical lines. Trade between hypothetical geopolitical 'blocs' have been shown to grown 4 to 6 per cent slower than within these, 'blocs' since the Ukraine war. The report, however, maintains that talks of de-globalisation are farfetched and not supported by available data. For instance, bilateral trade between America and China reached a record high in 2022.Secondly, trade was remarkably resilient during the Covid- 19 pandemic, bouncing back to pre-pandemic levels, less than a year after the first wave of lockdown.

The main conclusion of the WTO report is that globalised trade should be embraced instead of rejecting it if we want to overcome the most pressing challenges of our time through building a more inclusive, secure and sustainable world.

This article can be concluded with the concluding remarks made by Kristalina Georgieva, head of IMF, in her address at the World Economic Forum in Davos last year. She said: "Pragmatic measures to fight fragmentation may not be the simple sword swipe that cuts the Gordian knot of global challenges. But any progress we can make in rebuilding trust and in boosting international cooperation will be critical."

Economic globalisation is here to stay, but it is now at a crossroads. Its form and content will depend on how geo-politics will evolve.

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