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Abstract
The term “globalisation” is used to describe a wide range of things
and, in the process, there is no consensus on what it actually means. It has,
over time, become an expression of common usage. Any analysis of
globalisation raises several questions—starting from its definition to the
inequitous implication and the obvious concern of where India stands.
Broadly put, globalisation means integration of economies and socie-
ties through cross country flows of information, ideas, technologies, goods,
services, capital, finance and people. The essence is connectivity and cross-
border integration and goes beyond the economic dimension to include the
cultural, social and political. In this article, however, the term has been re-
stricted to denote economic integration which can happen through the chan-
nels of trade in goods and services, movement of capital and flow of finance.
Besides, there is also the channel through movement of people. Historically,
globalisation has been a process with highs and lows and during 1870 to
1914, there was a rapid integration of the economies in terms of trade flows,
movement of capital and migration of people. Empirical evidence shows that
capital markets are no more globalised today than they were at the end of the
nineteenth century.
Today, the concerns are more on the nature and speed of transforma-
tion and the enormous impact of new information technologies on market
integration, efficiency and industrial organisation. These go together with two
major concerns: one, that globalisation leads to a more inequitous distribution
of income among countries and within countries; and two, that globalisation
leads to loss of national sovereignity and imposes constraints on the pursuit
of independent domestic policies. Empirical evidence on the impact of
globalisation on inequality is not clear. In aggregate world exports, the share
of developing countries increased from 20.6 per cent in 1988-90 to 29.9 per
cent in 2000. Similarly, the share of developing countries in aggregate world
output has increased from 17.9 per cent in 1988-90 to 40.4 per cent in 2000.
However, what is essentially required is a balancing mechanism to ensure that
the handicaps of the developing countries are overcome. And, while
globalisation may accelerate the process of technology substitution in
*C. Rangarajan is Governor, Andhra Pradesh, and was earlier Governor of the
Reserve Bank of India. The author is thankful to Shri Amaresh Samantaraya for his
36 assistance.
)developing economies, these countries, even without globalisa-tion will face ICRA BULLETIN
the problem associated with moving from lower to higher tech-nology. If the
Money
growth rate of the economy accelerates sufficiently, part of the resources can
be directed by the State to re-equip people who may have been affected &
adversely by the process of technology upgradation. On the second concern, Finance
while fiscal autonomy is, in a sense, reduced, the overall fiscal impact depends
JAN.–MARCH 2002
on the elasticity of revenues to GDP and the impact of globalisation on growth
of GDP and the tax base. As nations come together whether it be in the
political, social or economic arena, some sacrifice of sovereignity is inevi-table,
but it need not necessarily result in the abdication of domestic objectives.
What should be India’s attitude in this ambience of growing
globalisation? Opting out of the process of globalisation is not a viable choice.
What is needed is to evolve a framework to wrest maximum benefits out of
international trade and investment. This should include making a list of
explicit demands that India would like to make on the multilateral trade
system; measures that the developed countries should undertake to enable
Opting out of the
developing countries gain more from international trade; and steps that India
should take to realise the full potential from globalisation. process of
Introduction globalisation is not
Globalisation has become an expression of common usage.
Unfortunately, it connotes different things to different people. To some, a viable choice.
it represents a brave new world with no barriers. For some others, it
spells doom and destruction. We need to have a clear understanding of What is needed is to
what globalization stands for, if we have to deal with a phenomenon
that is willy-nilly gathering momentum. evolve a framework
As we begin analysing the implications of globalisation,
to wrest maximum
several questions arise. What is globalisation? Is it purely an economic
concept? Is this a new phenomenon? What are the benefits of globalisa- benefits out of
tion? Who gets hurt in the process of globalisation? Is globalisation
intrinsically inequitous? Is it possible for individual countries to isolate international trade
themselves from globalisation? What are the complementary institu-
tions and policies that countries can build to protect themselves or to and investment.
gain maximum benefits? Where does India stand in this race for
globalisation? Is she a potential gainer or loser?
Broadly speaking, the term ‘globalisation’ means integration of
economies and societies through cross country flows of information,
ideas, technologies, goods, services, capital, finance and people. The
essence of globalisation is connectivity. Cross border integration can
have several dimensions—cultural, social, political and economic. In
fact, some people fear cultural and social integration even more than
economic integration. The fear of “cultural hegemony” haunts many.
However, we use the term globalisation in this article in the more
limited sense of economic integration which can happen through the
three channels of (a) trade in goods and services, (b) movement of
capital and (c) flow of finance. Besides, there is also the channel
through movement of people. 37
ICRA BULLETIN Historical Development
Historically, globalisation has been a process with highs and
Money
&
lows. During the Pre-World War I period of 1870 to 1914, there was
rapid integration of the economies in terms of trade flows, movement of
Finance capital and migration of people (Tables 1, 2 and 3). The 19th century
had witnessed some revolutionary breakthroughs in communication and
JAN.–MARCH.2002
transport with the emergence of railroad, steamship and telegraph
(Frankel, 2000). Keynes wrote in 1920 “What an extraordinary episode
in the progress of man that age was which came to an end in August
1914!. . . . The inhabitant of London could order by telephone, sipping
his morning tea in bed, the various products of the whole earth . . .
The pace of
he could at the same time and by the same means adventure his wealth
globalisation, in the natural resources and new enterprise of any quarter of the
world . . .”. The Pre-World War I period witnessed the growth of
however, globalisation mainly led by the technological forces in the fields of
transport and communication. There were less barriers to flow of trade
decelerated between and people across the geographical boundaries.1 Indeed there were no
passports and visa requirements and very few non-tariff barriers and
the First and the restrictions on fund flows (Streeten, 1998). The pace of globalisation,
however, decelerated between the First and the Second World Wars.
Second World Wars. The inter-war period witnessed the erection of various barriers to
restrict free movement of goods and services (Maizels, 1970 and
The inter-war period Frankel, 2000). Most economies thought that they could thrive better
under high protective walls. After World War II, all the leading
witnessed the
countries resolved not to repeat the mistakes they had committed
erection of various previously by opting for isolation. Although after 1945, there was a
drive to increased integration, it took a long time to reach the Pre-
barriers to restrict World War I level. In terms of percentage of exports and imports to
total output, the US could reach the pre-World War level of 11 per cent
free movement of only around 1970. Most of the developing countries which gained
Independence from colonial rule in the immediate Post-World War II
goods and services. period followed an import substitution industrialisation regime. The
Soviet bloc countries were also shielded from the process of global
economic integration. However, times have changed. In the last two
decades, the process of globalisation has proceeded with greater vigour.
The former Soviet bloc countries are getting integrated with the global
economy. More and more developing countries are turning towards
outward oriented policy of growth. Yet, studies point out that trade and
tion during 1870-1913, and that sixty million Europeans moved to Americas,
Australia or other area for new settlement. According to Kuznets (1972),
“. . . through most of the nineteenth and in the early twentieth century emigration
from Europe was essentially voluntary, unrestricted, and in response to greater
economic opportunities in the country of destination . . . During the nineteenth and
early twentieth centuries, when intercontinental emigration was high and
unimpeded by legal restrictions either at origin or at destination, the identity of the
38 countries in Europe with high migration proportions changed continuously.”
ICRA BULLETIN
TABLE 1
World Trend in Trade 1876-1959
Money
&
Index No. 1913=100
1896-1900 54 62
1911-13 94 97
TABLE 2
Net Capital Flows as Percentage of GDP
39
ICRA BULLETIN
TABLE 3
Money Intercontinental Migration, 1801 to 1955
&
in millions
As Percentage of Population
(a) Gross 0.1 0.4 1.0 2.2 1.1 na
(b) Net 0.1 0.4 0.8 1.5 0.7 0.8
2. Immigration into US
(a) Gross 0.12 0.82 2.57 5.91 3.46 1.95
(b) Net 0.12 0.75 2.11 4.10 2.13 1.70
The gains and As Percentage of Population
(a) Gross 1.7 5.5 7.2 8.5 3.0 1.3
losses from (b) Net 1.7 5.9 5.9 5.9 1.9 1.1
analysed in the capital markets are no more globalised today than they were at the end
of the 19th century.2 However, there are more concerns about
context of the three globalisation now than before because of the nature and speed of
transformation. What is striking in the current episode is not only the
types of channels of rapid pace but also the enormous impact of new information technolo-
gies on market integration, efficiency and industrial organisation.
economic
2 The share of exports in GDP for 16 major industrial countries was 18.2 in
1900 and 21.2 in 1913. In 1992, the share was still lower at 17 per cent for the
industrial countries (Streeten, 1998). While international investment flows as
measured by absolute value of current account exceeded 3 per cent of GDP before
1914, they slumped to less than half that level in 1930s and only after 1970 began
40 to move decisively upward—reaching 2.3 per cent in 1990-96 (Obstfeld, 1998).
increasing returns to scale and changing technology also comes to the ICRA BULLETIN
3 The ratio of the value of cross border M&As to FDI inflows in develop-
ing countries has risen from one-tenth in 1987-89 to more than one-third in 1997-99.
Among developing regions, the ratio is the highest in Latin America and the
Caribbean: it increased from 18 per cent to 61 per cent between these two periods,
while in developing Asia it increased from 8 per cent to 21 per cent between the
42 same periods (United Nations, 2000).
factors relating to macro-economic stability are not ignored. This is a ICRA BULLETIN
lesson all developing countries have to learn from East Asian crisis. As
Money
one commentator aptly said “The trigger was sentiment, but vulnerabil-
ity was due to fundamentals” (Reddy, 2000). In this context, it has been &
emphasised that opening of the capital account need not preclude Finance
moderate controls, either price based or regulatory, on capital flows.
JAN.–MARCH 2002
Controls should be selective, designed to achieve the specific objective
of containing speculative capital. While there is, no doubt, that coun-
tries benefit by capital flows, the need to keep a watchful eye on
foreign exchange markets becomes essential. What applies to trade may
not necessarily apply to finance in full measure. However, while
stringent capital controls may be adopted as a temporary shield as part
of crisis management, they cannot be a permanent solution
(Rangarajan, 2000b).
more unequal distribution of income in the world. Even if one were able to establish
that the distribution of income globally had become more unequal in the 1990s, it is
difficult to trace this purely to globalisation. Apart from this, there are two other
issues. First, there is the issue whether incomes of countries should be measured by 45
ICRA BULLETIN
TABLE 4 A
Money Share in Aggregate World Exports
&
per cent
Note: * Major Industrial Countries include US, Japan, Germany, France, Italy,
UK and Canada.
** Developing Countries also includes Newly Industrialised Asian
Economies.
@ Excluding share of Israel which is shifted to Industrial Countries
group.
Source: Various Issues of World Economic Outlook, IMF.
TABLE 4 B
Share in Aggregate World Output
per cent
actual exchange rates or purchasing power parity rates. Second, there is the issue
whether all countries should be treated equal or given weights according to their
respective population. Inequality measured by deciles, indicates that, between 1988
and 1993, the share of world income going to the poorest 10 per cent of the world’s
population fell from 0.88 per cent to 0.64 per cent, whereas the share of richest 10
per cent rose from 63.7 per cent to 66.9 per cent (Wade, 2001). However, the
limitation of the measure of deciles is that, it focuses only on the extreme 20 per cent
observations of the population. This measure ignores the improvement in economic
performance of developing countries of Asia and western hemisphere, which lie in
the middle of the distribution. In fact, the worsening of the income distribution may
be due to the extremely low growth of certain countries particularly in the Sub-
Saharan Africa. However, even according to the study by Wade, the Gini coefficient
which takes into account the entire spectrum of distribution of income shows no
deterioration, if countries are weighted by respective population and purchasing
power parity exchange rates are used. There are also studies which show that the
TABLE 5
Key Average Growth Rates
GDP Growth Rate 3.1 2.8 4.3 4.5 6.9 7.4 2.2 2.8
Per Capita GDP Growth Rate 2.3 2.0 2.0 3.8 5.0 6.0 –0.7 0.3
Exports Growth Rate (Volume) 5.1 5.9 4.2 8.7 8.4 11.3 2.8 2.9
Imports Growth Rate (Volume) 5.8 6.7 1.9 8.2 6.6 9.3 1.2 3.5
Note: * Major Industrial Countries include US, Japan, Germany, France, Italy, UK and Canada.
** Developing Countries does not include Newly Industrialised Asian Economies and Israel in the group
of developing countries since 1997.
$ - figures for 1991-2001 are based on the projections for the year 2000 and 2001.
Source: World Economic Outlook, May 2000, IMF.
5 The level of GDP per capita in developing countries has increased from
US $ 2,170 in 1990 to US $ 3,260 in 1998 with a compound growth rate of 5.2 per
cent. In between the same periods, the level of GDP per capita in OECD countries
has increased from US $ 16,040 to US $ 20,360 registering a compound growth rate
of 3.0 per cent. These figures show that, although the growth rate of per capita
income of developing countries is much higher than that of OECD countries during
1990-98, the gap between the respective levels of per capita income has widened
from US $ 13,870 in the year 1990 to US $ 17,100 in the year 1998 (UNDP, 2000). 47
ICRA BULLETIN per cent in 1992.6 In the wake of the economic crisis that overtook the
country in 1991, the approach to and content of economic policy
Money
&
underwent a far reaching change. This change was reflected in trade
and investment policies. An outward orientation began to emerge.
Finance Tariff rates have been steadily brought down while quantitative con-
trols have been dismantled. Foreign investment policy has become
JAN.–MARCH.2002
proactive. Majority ownership by foreign investors is allowed over a
wide spectrum of industries. Authorised foreign institutions are allowed
to invest in Indian stock markets. The exchange rate of the rupee is by
and large determined by the forces of supply and demand, although the
central bank does intervene to avoid instability and volatility.
How has the Indian economy fared as a result of the steady
opening up? India’s growth rate has definitely been higher in the period
following 1992-93, even though there are concerns about falling growth
rate in the last two years. In relation to the external sector, the situation
has been comfortable. The current account deficit which peaked to 3.2
While recognising
per cent of GDP in 1990 has been declining and is remaining around
the fact that the only one per cent of GDP in the last few years. The foreign exchange
reserves of the country has been increasing and stands today at $ 55.6
Indian economy in billion. The import growth rate has not shown any alarming rise. The
increasing integration has not resulted in a jolt to the economy. On the
the last decade has contrary, the broad macro-economic indicators have shown an im-
provement. However, many concerns have been raised in relation to the
become more open, impact of globalisation on Indian industries, agriculture in general and
food security in particular and on the stability of the financial sector.
it is also necessary While recognising the fact that the Indian economy in the last
decade has become more open, it is also necessary to note that the
to note that the
Indian economy is much less open than many other economies. Taking
Indian economy is the most commonly used indicator of openness which is the proportion
of import and export of goods and services to GDP, it is seen that this
much less open ratio has increased from 15 per cent in 1980 to 25 per cent in 19987.
However, this ratio of 25 per cent is much smaller than many other
than many other countries. For small countries like Malaysia and Singapore with a high
outward orientation, this ratio exceeds 200 per cent. Among the
economies. industrially advanced countries, the United States is the only country
which has a ratio similar to that of India (Table 6). Tariff levels are
to 1980. Afterwards, the share started increasing slowly from 0.4 per cent in 1980 to
reaching 0.67 per cent in 2000-01 (Table 8). It can also be noted that, India’s share
in the world trade was as high as close to 4 per cent during 1860-1889 (Kuznets,
1972). During the first four decades since Independence, India’s exports share in the
GDP remained almost constant, where as India’s share in world exports witnessed a
declining trend (Table 8). This phenomenon is due to the fact that, the world exports
were increasing at a faster rate than the growth rate of India’s GDP.
7 Compared to this, the ratio of sum of merchandise exports and imports to
NDP in India was 18.83 per cent and 19.57 per cent in the year 1894 and 1899,
48 respectively (Brahmananda, 2001).
another indicator of openness. Here again, while India’s weighted mean ICRA BULLETIN
tariff rate has come down from 49.8 per cent in 1989-90 to 29.5 per
Money
cent in 1999, it is still high compared with many other countries (Table
7). While the weighed average tariff rate is nil for Hong Kong and &
Singapore, it is as low as 2.7 per cent in European Union countries and Finance
2.8 per cent in the US. However, it is of significance to note that the
JAN.–MARCH 2002
standard deviation of the tariff rates in US is high at 11.4 per cent
which means that the rates on certain products are very high (World
Bank, 2001).
TABLE 6
Foreign Trade as Percentage of GDP
TABLE 7
Tariff Barriers in Defferent Countries
49
ICRA BULLETIN Framework of Policy
What should be India’s attitude in this environment of growing
Money
&
globalisation? At the outset it must be mentioned that opting out of
globalisation is not a viable choice. There are at present 142 members
Finance in the World Trade Organisation (WTO). Some 30 countries are
waiting to join the WTO. China has recently been admitted as a
JAN.–MARCH.2002
member. What is needed is to evolve an appropriate framework to
wrest maximum benefits out of international trade and investment. This
framework should include (a) making explicit the list of demands that
India would like to make on the multilateral trade system, (b) measures
that rich countries should be required to undertake to enable developing
Negotiations are not
countries to gain more from international trade and (c) steps that India
that easy. We have should take to realise the full potential from globalisation.
Conclusion
Globalisation, in a fundamental sense, is not a new phenom-
enon. Its roots extend farther and deeper than the visible part of the
With modern
plant. It is as old as history, starting with the great migrations of people
technologies which across the great land masses. Only recent developments in computer
and communication technologies have accelerated the process of
do not recognise integration, with geographic distances becoming less of a factor. Is this
‘end of geography’ a boon or a bane? Borders have become porous and
geography, it is not the sky is open. With modern technologies which do not recognise
geography, it is not possible to hold back ideas either in the political,
possible to hold economic or cultural spheres. Each country must prepare itself to meet
the new challenges so that it is not bypassed by this huge wave of
back ideas either in technological and institutional changes.
Nothing is an unmixed blessing. Globalisation in its present
the political,
form though spurred by far reaching technological changes is not a
economic or cultural pure technological phenomenon. It has many dimensions including
ideological. To deal with this phenomenon, we must understand the
spheres. gains and losses, the benefits as well as dangers. To be forewarned, as
the saying goes, is to be forearmed. But we should not throw the baby
with bath water. We should also resist the temptation to blame
globalisation for all our failures. Most often, as the poet said, the fault
is in ourselves.
Risks of an open economy are well known. We must not,
nevertheless, miss the opportunities that the global system can offer. As
an eminent critic put it, the world cannot marginalise India. But India,
if it chooses, can marginalise itself. We must guard ourselves against
this danger. More than many other developing countries, India is in a
position to wrest significant gains from globalisation. However, we
must voice our concerns and in cooperation with other developing
countries modify the international trading arrangements to take care of
the special needs of such countries. At the same time, we must identify
and strengthen our comparative advantages. It is this two fold ap-
proach which will enable us to meet the challenges of globalisation
52 which may be the defining characteristic of the new millennium.
ICRA BULLETIN
TABLE 8
India’s Exports Performance since Independence
Money
&
per cent
References
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54
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