Making the most of globalisation

The increasing global economic integration over the past decade and a half, generally referred to as globalisation, has attracted much debate. While some are fascinated by the opportunities that it has created for poorer countries, others have been concerned about the challenges it poses before them.

After a look at the numbers, one finds that opportunities have indeed been created. World exports have more than tripled between 1980-2002 from $2 trillion to $6.5 trillion. Developing countries have increased their exports from $600 billion to $2 trillion over the same period, generally sustaining their share in global exports.

However, not all developing countries have been able to take advantage of these opportunities. Some have actually been squeezed out. For instance, African countries had a nearly 6% share in global exports in 1980, which steadily fell to just 2.1% by 2002. Latin American countries? share in exports declined initially from 3.23% in 1980 to 2.48% in 1990, but since then has been sustained at 2.5% in 2002.

In sharp contrast, the East, South and Southeast Asian developing countries steadily increased their share of world exports from 7.97% to 20% between 1980-2002. Therefore, only Asian countries have been able to take advantage of the opportunities created by globalisation, while African countries have been further marginalised and Latin American countries have been struggling to retain their place in division of labour.

This divergent performance across the regions can be explained, among other factors, in terms of the policies followed by them. African and Latin American countries generally followed the policy packages of the Bretton Woods institutions, widely referred to as the Washington Consensus. These packages generally emphasise on liberalisation of trade regimes to in-crease efficiency, opening up investment regimes to attract foreign direct investment (FDI) inflows, reduced role of governments, free play of markets and declining public investments. As a result, whatever little infant industry existed, was substituted by imports. FDI inflows did not come and those that did crowded domestic investments out, as a recent Research and Information System (RIS) study has corroborated, and the countries were pushed to refocus on raw material exports, as in the past.

Asian countries, on the other hand, have pursued more active policies designed to maximise the opportunities from globalisation. They liberalised the trade regimes in a nuanced and sequential manner to expose established industrial capabilities to international competition to make them more efficient, while protecting their fledgling industries (e.g. Malaysia?s protection of Proton). National champions were assisted to grow to world scales and become outward-oriented.

Governments in some Southeast Asian countries provide substantial incentives to promote pioneer industries, namely, those that did not exist in the country, rather than wait for the markets to work. They also stepped up public investment programmes in development of transport, communication, industrial and social infrastructure. This has helped to crowd-in private investments by increasing demand and improving returns.

FDI in these countries has been directed to develop export-oriented and pioneer industries and compliment domestic investments. This has been achieved through a combination of performance requirements and incentives.

As a result, foreign-owned companies account for a large and increasing share of manufactured exports in most of the Southeast Asian countries. In China, for instance, this share is 55% and over 80% in high technology exports. Some governments have also provided incentives for diffusion of knowledge brought in by MNCs to the country and have encouraged domestic vertical inter-firm linkages and value addition.

However, opening of markets to international competition, howsoever nuanced, has the potential to adversely affect some sections of industry. The Southeast and East Asian countries, therefore, have evolved strong systems of social safety nets and social security to protect the vulnerable sections affected by international competition.

The governments have also attempted to secure strategic access to markets for their producers through proactive participation in multilateral, regional and bilateral trade negotiations rather than passively liberalising their trade regimes. Asian countries are currently involved in over 70 free trade agreements within the region, trying to secure market access on a reciprocal basis. The notion that unilateral trade liberalisation is the most optimal policy is based on the assumption of full employment and perfect competition. When the these assumptions are violated, an across-the-board liberalisation of trade regime can be devastating, as in the case of African developing countries.

Therefore, experiences with globalisation, emerging from developing countries, suggest that globalisation has to be managed to get most of the opportunities arising from it. There is scope for a perhaps a more active role for government intervention in assisting the domestic industry in exploiting the opportunities. It is because of this that even the richest of the industrialised countries have become more interventionist in the past decade. International experience is, therefore, clear on the importance of a proactive government policy as the key to maximising opportunities from globalisation.

The writer is director-general, Research and Information System for Developing Countries (RIS). These are his personal views