Column : Globalisation is still worth it

Written by Michael Walton | Michael Walton | Updated: Oct 2 2009, 01:50am hrs
So, global recovery is under way, at least for now. The financial system did not collapse. Trade has started growing again. Nows a good time to assess Indias strategic stance with respect to globalisation. India did impressively well through the crisis, seemingly shielded from the worse effects of the global storm. One view is that India got the pace of insertion into the global economy about right in the past twenty years. Fast enough to propel growth, but slow enough to avoid excessive risks. The large public sector presence in banking meant greater safety in the era of toxic assets, and helped India avoid a financial crisis. This may be true, though I think it is also a case of unintended consequences of an inefficiently large public banking system.

So, what of the future Is globalisation worth the risk Some will answer: obviously yes, for further and deeper global integration is the only route to prosperity. Others will reply: not on the current terms, for look at the disruptions that flow from global markets, the destruction of activities, the loss of livelihoods, and the damage to the environment associated with globalisation.

I think this is the wrong way to frame the debate. Globalisation, in some form or other, is here to stay. The more interesting questions concern how international and national designs can shape its course with respect to growth dynamics, risk management and social justice. Lets take one (big) part of this. Can national policy designs for risk management be consistent with dynamic growth History suggests the answer is yes, but that is also easy for countries to get stuck with distorted designs.

The first lesson from history is that insertion into global markets has typically gone hand in hand with the expansion of social provisioning and risk management. Statistical analysis by Harvard economist Dani Rodrik found that more open economies have more extensive social systems for managing risk. An extreme is the case of Scandinavian countries: these are open, affluent, highly productive economies with the most extensive system of social provisioning in the world. They are frequently ranked near the top of competitiveness scales by bodies such as the World Economic Forum, that are far from socialist in inclination!

The expansion of social provisioning is, indeed, a universal feature of industrialising countries. Economic historian Peter Lindert links this to the rising political influence of middle and working class groups, as the vote was extended. And links with competitiveness has been a longstanding concern. The seminal Beveridge report, written in 1942, that laid the basis for the British welfare state, says that ...the State in organising security should not stifle incentive, opportunity, responsibility.

A second lesson from history is that designs are all too often distorted. The same Beveridge Report also says that ....proposals should not be restricted by considerations of sectional interests. Yet that is a common pattern. Even well-intentioned designs create or support sectional interests. Particularly problematic has been the link between social protection and the labour contracta heritage of the Bismarckian reforms of 19th century Germany. This is inequitable in dualistic labour markets that typify developing countries. And it leads to resistance to dynamic change, since workers stand to lose a lot if they lose their job.

A different distortion has been vividly illustrated by both the recent and past financial crises. Where market structures and political connections create patterns of influence favouring participants in the financial system, these often are disproportionately bailed out when an adverse shock occurs.

Both lessons from history are relevant to India. Looking forward, comprehensive mechanisms for household risk management are both socially desirable and a complement, not an alternative, to the dynamic processes of change that are part and parcel of Indias continued insertion into global markets. India already has 40% of UKs income when Beveridge wrote his report in the 1940s. Moreover, middle and poor groups are as central to Indias polity as they were in Britain then.

But India also has a wealth of special interests and distorted designs, whether in organised labour, the beneficiaries (including recipients of leakage) of inefficient schemes such as the Public Distribution System, and public or private firms for which the state bears the ultimate risk. These are both sources of ossification that slow economic transformation and of entrenched interests that politically resist change. There are big design challenges, and even bigger political ones. NREG is an example of a good design, but only applies to one set of risks to part of the population. Globalisation versus social provisioning is a false tradeoff. Globalisation is indeed needed for prosperity, but effective risk management for householdsand not firmsis equally necessary for both economic and political reasons.

The author is at the Harvard Kennedy School, the Institute of Social & Economic Change and the Centre for Policy Research