I PROPOSE to define globalisation, describe its origins and scope, and assess its benefits. I shall then go on to deal with some of the doubts and misgivings about globalisation. The underlying theme of my remarks is that globalisation is only a process and not an objective. The latter has to be defined, somewhat ambitiously, as a global economic and political order. The implications of this for national and international policies are far-reaching and we need to refine our understanding of them. The issues are wider than economics and embrace social, political and cultural aspects as well. I shall only touch on some of these, concentrating on matters economic.

Globalisation: A Stock-Taking

Manu Shroff

I PROPOSE to define globalisation, describe its origins and scope, and assess its benefits. I shall then go on to deal with some of the doubts and misgivings about globalisation. The underlying theme of my remarks is that globalisation is only a process and not an objective. The latter has to be defined, somewhat ambitiously, as a global economic and political order. The implications of this for national and international policies are far-reaching and we need to refine our understanding of them. The issues are wider than economics and embrace social, political and cultural aspects as well. I shall only touch on some of these, concentrating on matters economic.

Globalisation as a Process

It is important first of all to recognise that when we talk about globalisation, we refer to a process and not a state of being. It is a move or a series of moves towards what may be described as a global economy. The world is moving towards it but is not there yet. The moves are not merely to be understood as conscious efforts by individuals, businesses or governments. These are often responses to impersonal forces of markets and technology rather than originators of what is best seen as a move away from national economies interacting with each other in a variety of ways, towards a fully integrated world economy. It is somewhat ironical that while it is not difficult to define the elements of the process of globalisation (and they keep surfacing in the several discussions of the subject), a clear vision of what one means by a 'global economy' does not exist. Since globalisation is presumably a process of moving away from something that is less desirable to a goal which is more satisfactory, it is best for me to start with our disappointments before coming to our aspirations.

Nineteenth century capitalism is often referred to as the nearest we have to a global economy. Not just capital but labour too was mobile, international trade was free, national economies were kept in kilter by the operation of the gold standard. The prevalence of free markets and a relatively unfettered price mechanism helped achieve efficient allocation of world resources. While politically, nation states retained full sovereignty, they consciously or implicitly accepted rules of the game which abridged their sovereignty in the larger interests of the global economy. There were deficiencies of the system in practice, but the idealised picture of it has endured.

We, of course, abstract from the fact that the world as it was then comprised mainly Europe and America. The colonies of the imperial powers were joined to the world economy less by market forces than by the fiat of the imperial governments. But allowing for this very major exception, the nineteenth century model may be considered to have several advantages over what followed after the first world war. That as we know was the assertion of economic nationalism even when it tended to hurt the world economy or even the limited national interests of some countries. The collapse of the gold standard, the Great Depression and the pursuit of beggar-my-neighbour policies in the form of trade restrictions and competitive exchange rate depreciations, all these were de-globalising trends, so to say, and it took the second world war and more than a quarter of a century thereafter for a reversal of the trends, propelled by technological change and the information revolution.

Theory followed events. The Keynesian revolution underpinned the role of the state in correcting the deficient outcomes of the free-play of market forces and asserted the autonomy of national economic policies. It provided a powerful theoretical argument for what may now appear as anti-globalisation policies. It may sound ironical that Keynes who had an international outlook and was a key figure in the fashioning of the post-war multilateral institutions was nevertheless a nationalist first.

The second world war inevitably gave impetus to fairly extensive intervention by the state in economic life, and following Keynes, post-war economies in industrial countries, beginning with Britain, were guided by the objective of full employment to be attained by active demand management policies by governments. True, there was also emergence of international economic co-operation, the principle of multilateralism and the most-favoured nation treatment in trade and so on. The IMF, the World Bank and the GATT became the guardians of multilateralism. Nevertheless, the underlying philosophy was still one of nation states negotiating with one another. I recall that even in the early fifties, Karl Manning at the LSE made a distinction between international order and a world order. In the immediate post-war years, we saw efforts to establish an international economic order; but not yet a world economic regime. I like to think that what we call globalisation is a process of moving away from the 'international' economic order to what might be called a 'global' economic (and political) order. And it shall be my endeavour to define this global order and consider the impact of movement towards it on national welfare keeping in mind the different circumstances in which nations of the world are placed.

Quite early in the second half of the 20th century, the problems of developing countries (the so-called third world) came to be differentiated from those of the industrial nations. A whole corpus of theories sought to define and deal with development issues. Development economics came to be seen as a separate and distinct branch of economics. Most developing countries followed a model of development in which the state played an active role and some of them also chose policies which resulted in closing their economies to the rest of the world. But experience over the years and the successes of others who chose to keep their doors open persuaded them to change track and move towards greater openness. Technological change, the information revolution and the dramatic change in the global political environment following the collapse of the Soviet Union contributed in greater or smaller measure to the progressive integration of the world economy in the decade of the nineties.

It is in this background that a few questions arise. One, is the globalisation process driven by markets and technology or is it the result of conscious decisions of the countries of the world? Two, does it involve integration of the markets for products, some services and capital alone or are other factors of production also part of the process – in particular, skilled and unskilled labour? To the extent that there are strong elements of monopoly and monopsony in some of the markets, what can be done to capture the benefits of globalisation equitably for all nations? Does globalisation affect only economic life or is it pervading political and cultural spheres as well and with what consequences? In short, the questions are about the forces governing globalisation, its scope and the nature and spread of its benefits. Finally, we also need to visualise the kind of global order to which the process of globalisation is leading.

Origin and Scope

Origin: Globalisation has not suddenly descended on the world. It is part of a process of progressive integration of the world economy through falling barriers to trade and exchange and greater mobility of capital. But in the last decade or so these forces have got a tremendous impetus from the massive changes in communication and information technology. Manufacturing has also undergone a revolutionary change: the importance of traditional raw materials emanating from developing countries has declined and that of knowledge-based services greatly increased. Design, for instance, is more important in the manufacture of an automobile than materials. Similarly in garments and electronic goods. The share of manufacturing in the GNP has declined in most countries and that of the services sector has gone up. In part, this reflects also the enormous growth of financial services; but mainly it is the consequence of the spectacular advances in computerisation and the associated software.

These developments have also changed the nature of world trade. Gone are the days when industrial countries imported raw materials from the developing nations and returned manufactured goods to them. The present-day multinationals choose to locate their plants nearer the sources of cheap materials or labour or markets, not nationally but globally. A manufacturing corporation will have plants located in different parts of the world making components for the product it makes and, increasingly, parts and components even for its competitors' products. A growing proportion of international trade comprises trade between different branches and subsidiaries of multinationals. It is no longer possible to identify the origin of a product by the place of its final manufacture. Thus a Japanese car may be made in the UK, but it is still Japanese because of the brand name of the corporation which co-ordinates the entire enterprise. The play of market forces has led to efficiency in the manufacturing process, in location, design and marketing. Technology has been a prime mover in this development, but the freedom of market has been even more important.

A good example of how freedom from regulation can bring about unexpected development of new products and markets is provided by the emergence of the Eurodollar market in the late sixties and early seventies. Initially, Eurodollar deposits in the post-war period originated with the USSR wanting to hold dollars which were not subject to the US government controls. (Their dollar holdings had been impounded during the war.) But the big push in the Eurodollar deposits came following the Regulation Q of the Federal Reserve System in the US which put a ceiling on bank deposit interest rates. One domestic consequence of this was that the banks competed among themselves by offering attractive gifts to attract deposits. But internationally, dollar deposits moved offshore to London and other European centres in search of better rates. The US interest equalisation tax and controls on bank lending abroad as well as foreign investments added to the attractiveness of the Eurodollar market. The market expanded at a phenomenal rate in the unregulated environment abroad and although the original causes – the Regulation Q and exchange controls – were later removed, the offshore market continued to grow, as Milton Friedman has so lucidly explained ('Eurodollar Market: Some First Principles', Morgen Guaranty Survey, October 1969), through the mechanism of credit creation. I refer to this only as an illustration of the potency of freely functioning markets. No one regrets the consequent enormous growth in international liquidity in the seventies and eighties which, aided by the communication revolution and the freedom of exchange rates, met the expanding needs of the growing international trade. It is only when freedom led to excesses (e g, over-trading by a fund manager of Baring Brothers leading to a major crisis for the bank or more recently, but for different reasons, the Asian financial upheaval), that doubts began to arise and the need for regulation, not national but international, began to be felt. But of this a little later.

I believe that market forces and technological change have been far more important in the process of globalisation than conscious decisions of governments. There has been no UN resolution on the need for globalisation! True, the opening up of trade has been a matter of bilateral and multilateral negotiations. Similarly restraints on capital movements have been sought to be removed by inter-governmental efforts. Also, the movement towards an integrated Europe has been inspired by governmental vision and efforts. But more often than not, official action has sprung from the pressure of market forces and technological change. Globalisation has occurred despite governments and sometimes in the face of active contrary actions of governments. It is a force by itself, difficult to regulate or control.

Scope: As of now, the scope for globalisation does not go beyond the markets for products and some services and the market for capital. When it comes to labour, however, the forces of globalisation are not allowed free play, and conscious and explicit state intervention prevents the emergence of a global market for labour. There are many reasons for this. Labour is not just a factor of production. It is also the recipient of the economic, political and cultural benefits of being part of a society. Social habits and customs differ; and so does the colour of the skin. It is not easy for any society to overcome age-old prejudices. The most important reason impeding freer movement of labour, however, is the desire on the part of the rich countries to preserve their standard of living which breeds restrictions on immigration – a very shortsighted policy. In theory, one could argue that free trade in products should bring about an equalisation of prices of products as well as factors of production. The famous factor-price equalisation theorem asserted this – of course, like all such theorems, under assumptions which do not obtain in practice. No wonder that despite freer trade, factor prices have not tended to equalise across nations. It was believed free trade in goods would in general suffice and there was no need for freedom of movement of factors of production. Ironically, however, this applied only to labour. Freer international mobility of capital became an article of faith with most free market economies and economists since the seventies until the Asian crisis which has brought some rethinking.

Mobility of capital has been a major element in the globalisation process. But the failure of the world community to recognise the benefits to the world economy of freer movement of skilled and unskilled labour is one of the patent contradictions of globalisation. In all probability, secular economic growth in some of the industrialised countries themselves could be stepped up if they could enjoy greater elasticity in the supply of labour. Even so, immigration restrictions have continued, reflecting the cultural divide among nations and the play of tradition, not to speak of the pressure of organised trade unions, a potent monopolistic force in the way of globalisation. In multilateral trade negotiation, the developed countries have pressed for inclusion of services, but what they have in mind are enterprises providing services, such as banking or insurance or hotelling, but not the services of skilled or unskilled labour as such. This dichotomy in their position cannot be sustained for long if the benefits of globalisation are to be maximised and to accrue equitably across the globe.

Benefits: The Indian Experience

There can be little dispute that globalisation promotes competitive efficiency in general. As the area of competition expands, the efficiency gains increase. Enterprises in developing countries, many of which have grown under heavy protection, may find the going though in the initial phase of globalisation, but as time goes by they begin to adjust, not without pain, but also with a prospect of future benefits. In India, globalisation has meant that corporations plan their strategies keeping in mind the global and not merely the domestic market, whether it is product design, choice of technology, means of finance or opportunities for collaborations and strategic allliances. The benefits of these for corporate growth, modernisation, consumer satisfaction and reduction in costs are beginning to be visible – eg, in the electronic and durable consumer goods sector – after nearly a decade of liberalisation. But there are also limitations arising from the structure of markets and the prevalence of monopoly or monopsony.

The so-called Bombay group has complained that multinationals with their global clout have an unfair advantage over Indian companies and are gradually taking over control of the joint ventures in which they have been partners with a minority holding. The technological advantage of joint ventures is also getting eroded with foreign partners setting up new 100 per cent subsidiaries for the purpose of expansion based on new research and development, leaving the erstwhile Indian partners in the cold. In mergers and acquisitions too the foreign investors have a financial and managerial edge. Is globalisation meant, it is being asked, to reduce Indian entrepreneurs to the position of minority shareholders or traders? Is this the reward they get for assiduously building up Indian industry, even if it was under heavy protection? The questions are legitimate even if the answers which the protagonists of this view give are not valid without substantial qualifications. In several instances of the so-called de-Indianisation, it is the domestic partner who has taken the lead, lured by the attractive price at which the holding could be sold. Not all joint ventures have seen Indian partners active and prepared to take on their foreign collaborators whenever the interests of the latter are sought to be given precedence over those of the venture as a whole. (Incidentally, overseas companies taking over domestic enterprises is becoming a global phenomenon. In the US, for instance, one-third of all takeovers in the last few months was by foreign companies.)