|
|
|
| ||||
|
|
| |||||
|
|
|
|
Keynote
Guest Address on Yamini
Agarwal Version: January 2006 _________ Live Audio Recording of Speech (Wave Format) Soft copy of the paper (In PDF Format) Photographs of the Conference Abstract JEL Code: Keywords:
Globalization, Capital Flows, Economic Growth, International Financial
Architecture, Financial Crisis, Contagion, Economic Development, Spillover
Effect The organizers have rightly chosen the theme at this junction as Globalization. Globalization is generally characterized by global productivity, profits, raise in standards of living (maintaining social equality), bringing in far more effective and efficient government and market driven economic system by optimum utilization of resources. Globalization has altered the economic frameworks of both developed and developing nations in ways that are difficult to comprehend. The persistent rise in the dispersion of current account balances of the world as a whole, wherein the sum of surpluses match the sum of deficits has grown substantially since the World War II. The emergence of unregulated global markets appears to have moved towards a more stable and growth oriented socio-economic globe. I
wonder as to what extent I would be able to justify this great responsibility
of delivering this address. It is a very difficult task and a great
responsibility. However, it would be my endeavor to be up to the mark
as far as possible or to the expectations of the organizers and galaxy
of intelligentsia. Globalization fostered trade and finance presents before us a number of intriguing anomalies, but the one that seems to bedevil policy makers is the desire to seek stability, financial development and equitable socio-economic growth. Some of the interesting cases in the last decade which have shown substantial development and correction in their macro-economic factors in the developing region have been India, Israel, China, Argentina, Turkey despite Tsunami, Oil price rise, steep increase in US current account deficits, a non-stable weaker US dollar, troubled pension funds and unemployment on a rise in large part of the developed region. Given the level of advancement in information, communications, trade and capital flows, there has been tremendous innovation and improvement in the world productivity. This has been possible at the back drop of reduced transaction costs and easy access to global resources. Israel has shown a rapid growth of about 5.2% (averaging over 2004-05) with unemployment reduced from 10.7% (2003) to 8.5% (2005) , budget deficit expected to be under 3.4% and inflation under check hovering around a sustainable level of 2.5-3.0% for the last two quarters from around 7% (1998). The rapid growth and progress in the last two years has been characterized by acceleration in commerce, services and tourism. Despite the fact that manufacturing did not grow in tune with the other sectors given the heterogeneity of economic activity, positive trends in labour market, stability in capital market and the high level of yields are quite visible. The rise in domestic demand and local currency deprecation during the period has lead to some increasing pressures on inflation. However the Bank of Israel has raised the interest rates by 25 basis points to curtail the gap between the local currency and dollar yields. A quite obvious factor for the induced growth in Israel has been the continuous growth of trade and integration with the global economy, which is marked with expansion of world trade, despite steep rise in oil prices. (BoI, 2005) Globalization and stable growth in qualitative capital flows in India has lead to faster growth in demand and productivity. Also, managed inflation in India, Israel and other countries, since 2000, is likely to support the monetary policy to remain accommodative, supporting economic growth and increased employment, without endangering price stability. A number of studies such as Speidell and Sappenfield (1992) and Ferson and Harvey (1994) suggest that global allocation strategies, consisting of choosing cross-border market combinations that are mean-variance efficient, result in increased linkages between world equity markets. India is slowly progressing towards achieving a similar state. International linkages and benefits from diversification are expected to be inversely related, in that higher correlations between markets are less effective in decreasing portfolio variance. Markets are said to be in long-term equilibrium when long-term expectations in one can be used to predict long-term movements in another market. The markets are then said to be co-integrated. Hence the spillover effects can be observed in co-integrated markets. International portfolio managers are hence concerned with linkages in the short and the long run. It
is clear, however, that the challenges of globalization today; the resultant
volatility in the international financial markets; emergence of e-finance
and capital flows; the rise in productivity and the role of government
and regulatory bodies cannot be adequately handled by a system that
was largely designed for the world 50 years ago. Changes in international
economic governance have to keep pace with the growth of international
interdependence. The role of IMF, World Bank, ADB, EBRD, other international
agencies and the central banks demands them to be more alert and develop
means to face the challenges of a dynamic changing financial scenario
interlocking trade and transfers. The
world economy at the turn of the century has influenced the process
of globalization, global partnership and capital flows as a portfolio
of global socio-economic enrichment. The re-allocation of good and services
without the movement of labour; emergence of developing countries like
India and China as an exporter of good and services and also as a provider
of the largest consumer base for world trade; weakening of dollar and
improvement of terms of trade have been some of the remarkable trends
in world investment. World output growth has grown from an average of
2.7% (1990-00) to 3.8% (2000-05) despite severe depressive phase in
2001 (1.3%) and 2002 (1.8%), at the cost of sluggishness in US and Germany
(see Tabel 1). The world growth to a large extent has been fueled by
the developing region which has grown at an average rate of 5.5% (2000-05). Table
1
Source: UNCTAD Trade and Development Report, 2005, United Nations, Geneva. It has also been observed that the world economy recovered smartly in 2000 from the East Asian crisis of 1997-99. The estimated world output growth of 4.7 per cent registered in 2000 was the highest since 1988 while the estimate of world trade at 12.4 per cent has been the highest in the past 25 years. World real GDP growth is estimated to have declined to 2.3% in 2001 (before increasing to 3% in 2002). The world economy has grown at the highest average rate in the late 1990s, despite the marked slow down on account of the crisis in different regions of the world (Agarwal & Agarwal, 2001). The strong performance of the global economy in the 2004 brought forth acceleration in the world trade. The total merchandise export grew by 22.5% in US$ terms. The expansion has been a result of both increasing volumes (13%) and depreciation of dollar impacting the rise in dollar prices (9.5%) for goods and services (UNCTAD-TDR, 2005). The
continuous expansion in the US and the other economies has been considerably
fuelled by the productivity improvement in the global industries resulting
from IT applications and low cost factor productivity. The impressive
recovery of the world economy and world trade in the early part of 2000
and again in 2002 generated all around optimism as countries expected
to benefit from the favorable spillovers in the form of rise in demand
for their exports. Also, the rapid growth in China and India over the
past two and half decades has made the East and South Asian region emerge
as a new growth momentum to the global village. Observing the economic
history, we find that in the developmental process the role of agriculture,
manufacturing and services sector have been the prime contributors for
an equitable socio-economic growth (Fromlet, 2005). Looking at the FDI
stock, we find that there is extensive focus on developing the services
sector world over. In the early 70s, the services sector accounted for
only one-quarter of total world FDI stock; in the 90s, this share changed
to one-half and by 2002, it is over 60% (about US$ 4 trillion). On the
other hand the proportion of the total world FDI stock for the primary
sectors have declined from 9% to 6% and that of manufacturing fell even
more from 42% to 34% (UNCTAD-IIAS, 2005) The
volatility in the oil prices is also a highly destabilizing factor for
the world economy. It is more devastating for oil importing developing
region of the world than for the others. Given the strong cartel in
the form of OPEC operating in this market, it is not possible to rule
out oil price shocks of the type faced in the early 1970s, the early
1980s, the early 1990s, 2000 and 2004 or even in the future. It is imperative
for international community to create a mechanism to regulate and stabilize
oil prices at a certain reasonable and sustainable level. It is commendable
to see the efforts made by the OECD and other international agencies
to bring forth suggestions to streamline the global oil shocks (OECD
Observer, November 2004 & other eds). Also, we at the Indian Institute
of Finance (IIF) have been working extensively to provide possible solutions
to economies and international agencies since 1987. Some of our suggestions
and research forecasts have been very apt and have helped nations to
build shields against oil shocks. A recent forecast made by our colleague,
Prof. J. D. Agarwal, indicated that oil prices were expected to shoot
up, hence economies and international agencies needed to initiate effective
steps to offset the shocks. Suggestions to this effect were also considered
in his paper, which appeared in Finance India, March 2004. This piece
was written in December 2003, when no market indication of such a scenario
was visible. Two suggestions which have been made by us at various forums
are, secondly, to development more active derivative markets (both financial and commodity) with products on oil (OECD Observe, July 2005) and their use by markets globally would help to bring discipline to the oil market and a reduction of pure dependence on OPEC or a select few nations. It is high time that the global economies and the developed world understands the severity of high oil prices, else the world economy is bound to observe a steep rising inflationary trend. In such a scenario, the above suggested means or other mediums need to be adopted immediately to stabilize and bring down the oil prices to an appropriate sustainable level of around US$ 30 – US$ 35 per barrel (i.e. trading price of oil futures), 2.1 Emergence of WTO Transition
from GATT to WTO in 1995 constitutes one of the most important developments
in the world economy of the twentieth century. The emerging WTO regime
is important for the national development, trade, investment and technology
policies of member countries. Various studies have pointed out that
the main beneficiaries of trade liberalization have been the industrial
countries primarily due to efficient, high quality and low cost products
and services. The trends seem to observe a change lately in 2004 and
2005, with the emergence of the developing region which has induced
efficiency, large domestic demand, low costs and the facility to trade.
To supplement the WTO, the developing region has fostered the growth
of bi-lateral, FTAs and multi-lateral trade agreements between regions
and other developing countries globally. This has been an outfall of
the developments in the Cancun WTO meeting which were an eye opener
and a major set back to the multilateral trade regime so as to safeguard
their interests. 2.2 Changing Face of Globalization International trade has been expanding as a share of world GDP ever since the end of World War II. Since the mid-1990s, the expansion in the world GDP has been largely grossing up for individual countries' exports and imports. Over the past decade there has been an expansion of trade with emergence of an active role played by developing economies like India, China, Brazil and others coupled with the large US trade and current account deficits, the emergence of EURO and the correction in the over priced US$. With the benefits from trade being observed by the developing region, the developing economies have fueled the creation of factors for enhancing growth. This enrichment of factors of growth has been by extensively investing in improvement of infrastructure, creation of more flexible but sound financing systems, developing market-driven economic systems, deepening of financial markets, so as to achieve desired economic goals with equitable contribution to pre-existing social-economic frameworks. The hue and cry of the some of the developed economies about the fears of globalization leading to un-employment and movement of factors of production to the developing regions of the world from their home base, has been duly countered by Jagdish Bhagwati at the OECD forum 2005 on Fuelling the Future. At the discussion on Globalization, Outsourcing and Structural Adjustment, Bhagwati outlined the figures of the jobs lost in United States as a result of outsourcing factor only, which is about 200,000 a year. These are primarily low-value services and a tiny proportion of the total labour market turnover. He further says that the fears arise from looking at only one side of the equation and one must learn to induce flexibility and cope up with newer challenges (OECD, 2005). As we move forward, we all have learned the durable lessons about the benefits of fostering and preserving a flexible economy through an environment of maximum competition and consumer orientation. Fundamentally speaking an environment of a greater economic stability has been the key to an impressive growth in the standards of living and economic welfare, which is so evident in much of the competitive market driven world. 2.3 Exchange Rate Volatility and World Trade One of the first studies done in 1984 for GATT outlining the impact of exchange rate volatility on the world trade, was done by the IMF. The motivation then came forth with the slowdown in the world trade; large exchange rate fluctuations amongst major countries and sluggishness in GDP growth of the developed region. Henceforth, the liberalization of capital flows in the last 30 years and the enormous increase in the scale and variety of cross-border flows, barring the difference of developing or developed economies, has clearly increased the magnitude of exchange rate movements. A high level of buoyancy has been observed specially in the newly emerged capital markets of not so stable/mature economies. The last two decades have been a clear witness of the currency crisis in the emerging markets as a result of bulk movement of capital flows and exchange rate volatilities (Agarwal & Agarwal, 2001; WTO, 2003). Fortunately the presence of the hedging instruments and risk transfer mechanisms in the last two decades in almost all financial markets have emerged to act as the savior apart from the pure dependence on the central banks, ministry of finance/treasury, international agencies (like IMF, World Bank, ADB, others). Given the level of economic development, capital flow movements, exchange rate fluctuations, opening up of current and capital accounts by countries, emergence of crisis and the re-emergence of stronger financial systems in the last three decades, it is not clear whether there is reduction or increase in the extent to which international trade of the world economy is adversely affected or benefited by the fluctuations in the exchange rates (Clark, Tamirisa, Wei, Sadikov, Zeng, 2004). The important question before us is how volatile is the volatility, as more markets and institutions have developed the means to sustain and nullify the sensitivity of exchange rate risk and mitigate other risk costs with the given hedging tools in domestic and offshore markets. Certainly the financial world is a more stable system with most economies moving towards a market driven economic system and the acceptability of other currencies (like EURO, the Indian Rupee and others) than the US$ as a reserve or international currencies for both trade and finance (including exchange rate determination). 2.4 Market linkages, Capital Flows and Spillover Market linkages affect investors differently, based upon whether resources have been allocated strategically or tactically. In today’s global village, global strategic asset allocation consists of determining the long-run policy asset weights in a portfolio by estimating the long-term average asset returns and covariance between capital markets. However, the short-term changes in market conditions are irrelevant and less co-integrated markets are used to determine a more efficient mean-variance set. In recent times, spillover effects have been of special interest for investors who allocate tactically, because global tactical asset allocations principally aim at capitalizing on “predictions” or local inefficiencies. Accordingly, the more interdependence between markets, the more efficiently resources are allocated between those markets and the less relevant is global tactical allocation strategy. In practice, it is common for one to implement a global tactical or strategic asset allocation by choosing markets across developed countries and treating the remaining illiquid and smaller countries as a block that are chosen based on the weighted capitalization proportions of an emerging country index. Several pre-crisis studies have shown that cross-market linkages are weak, which negates any justification to treat the Asian countries as a block in a mean-variance maximization objective. For instance the study of Eun and Shim (1989) finds week linkages between Hong Kong and Japan by using variance decomposition and impulse response functions using a Vector Auto Regression model (VAR) to assess the strength and innovations from one market to the others from December 1979 to December 1985. The findings of Lee, Petit, and Swankoski (1990) study investigating the daily return relationships among Korea, Singapore, Hong Kong, Japan and Taiwan from January 1980 to December 1988 suggests that the returns on the Asian exchanges are segmented. Also a continuation work of Eun and Shim, Chowdhury (1994) uses a VAR to study the stock market interdependencies in four Asian countries (Hong Kong, Singapore, Korea and Taiwan) from January 1986 to December 1990. The researchers do not find significant links between these four stock markets; though the first two were responsive to financial and technological innovations in the US and Japan. These findings were corroborated by other similar studies from Chan, Gup and Pan (1992), Defusco, Geppert and Tsetsekos (1996), Liu and Pan (1997) and Agarwal and Agarwal (2001). The regional meltdown of 1997 is, therefore, surprising and suggests that a shift-contagion took place in regional cross-market linkages as a result of crisis-driven changes in investor perceptions, endogenous liquidity shocks, role of e-finance in capital flows and adjustments of the political economy. Over 10 middle-income developing countries experienced major financial crises between 1994 and 1999 the damaged living standards and, in some cases, toppled governments and left millions worse off. Suddenly, the issue of financial contagion and the pace and sequencing of deregulation and liberalization is in question. Forbes and Rigobon (2001) have defined shift-contagion as a change in the nature of interdependence between economies. While it is difficult to assess the channels of contagion, shift-contagion is interesting in itself for at least two reasons. First, if contagion occurs, it will undermine the effectiveness of international diversification in reducing portfolio risk. Second, while it is always difficult to predict if or when economic and political disturbances will occur and how they will affect capital markets, contagious shocks can have disastrous effects on global portfolios with substantial allocation weights in unstable equity markets. 2.5 International Financial Markets & the Capital Flows International Financial Markets have observed volatility of capital flows, which to a great extent is a contributing factor of the financial developments in the world economy. Financial developments have played a critical role in promoting industrialization in countries such as England by facilitating the mobilization of capital for large investments. Financial development contributes significantly to growth. Such developments are central to poverty reduction. Some of the researches have shown that financial development directly benefits the poorer segments of society and also income redistribution. Strong financial systems are the key factor for proper financial developments. One of the important functions of Financial Systems is to shift risk from those who are unwilling to those who are willing to bear it. Financial derivatives help diversify risk and enhance qualitative nature of asset allocation. For a strong financial system, one requires supporting financial institutions and well developed financial markets to reduce the information costs of borrowing and lending and making financial transactions. Financial Institutions include institutions like banks, insurance companies, provident and pension funds, mutual funds, compulsory savings schemes, cooperative banks, credit unions, informal financial intermediaries and securities markets. Financial systems vary across boundaries, socio-politic spheres and economic outcomes. Generally, banks and financial institutions dominate most formal financial systems, but lately stock markets are gaining importance particularly with international capital flows. The entry of FIIs in the stock markets and relaxation of portfolio investments by the emerging markets is playing an important role in the growth and co-integration of financial markets globally. However, in the current era of liberalization and globalization of financial markets, the economies of developing countries have become highly vulnerable to speculative capital movements in and out of the country. The economic crisis in Mexico in 1994, more recently the currency crisis in the East and South East Asian countries in 1997, the Russian crisis in 1998, the Brazilian crisis of 1999 and the Argentinean crisis of 2001 have highlighted the role played by speculative capital movements and contagion effect in triggering-off the crisis situations. The financial crisis of July 1997 that has affected some of the best performing Asian economies has been a subject of intense concern. It has provoked rethinking, world over, on the risks and benefits that liberalization of financial and capital markets and the global integration has carved, especially for the developing countries. It has also highlighted the importance of the prudent regulation of the domestic financial and banking sectors. Finally, it has exposed some of the weaknesses of the existing approaches in handling the crises such as those enforced by the IMF. Given the increasingly interdependent nature of the world economy, the fortunes of all the countries are highly inter-linked. III. Global Integration and Regional Cooperation Interdependence has enjoyed the highest level of sphere of importance as compared to dependence or independence. This has been widely observed within India, China and other nations, who had closed access to their global markets in the last century. Former WB President James Wolfensohn in a speech at the conference on financing for development on 21st March 2002 said that he sees a growing consensus on what needs to be done to reduce poverty globally. Wolfensohn welcomed recent pledges of additional aid from the U.S. and the European Union, and called on rich countries to "build the pressure" for additional funds for development and for a reduction in agricultural subsidies and other trade barriers to exports from developing nations. He stressed that much has been learned about ways to improve aid effectiveness, including the lesson that aid should encourage developing countries to design their own strategies for reducing poverty. It is a question of building up joint capacities to live and emerge in today’s world. No one, be rich or poor, can do all independently. Building Global partnership induces interdependence within the system. Wolfensohn rightly projecting the importance of collaborative efforts and building global partnership when he spoke that "This is not about rich countries telling developing countries what to do. This is about creating a chance for developing countries to put in place policies that will enable their countries grow". It is also evident from the words of Secretary-General Kofi Annan at the World Economic Forum meeting in 1999, where he stressed on the need to build a stronger relationship with the business community. Kofi Annan says, "Thriving markets and human security go hand in hand; without one, we will not have the other,”. Given the WTO charter, it has not been able to foster equitable buildup of global partnership benefiting economies and various sections of the society at large. This might have been due to the role of financing institutions/economies in the pool. Keeping limitations on one side, the focus and movement towards a world with an attitude of global partnership being fostered for economic and social growth has been a vital contribution of WTO, UN, World Bank, UNIDO, IMF, WHO, IFC, ILO and ADB . 3.1.
Restructuring of IMF Secondly, there is an urgent need to review the working of IMF as IMF package of reviving economies is often counter productive for most of the countries approaching IMF. Often IMF prescribes the same set of conditionalties to every economy which have quite diverse requirements and needs. For instance, the IMF package uniformly insists on belt tightening, devaluation and demand compression measures that affect growth adversely and hence make recovery even more difficult and aggravates volatility in financial markets. Furthermore, despite a widespread recognition of the role played by the capital account liberalization in accentuating the crisis, the IMF has been pushing the affected countries towards accelerated capital market liberalization in the wake of the crisis. IMF often adopts a short sighted and rather inflexible approach to crisis management. Malaysia decided to withdraw from the IMF Program soon after it was initiated to the program after the crisis. Instead, Malaysia adopted an unorthodox approach to dealing with the crisis that included imposition of capital controls although temporarily and the adoption of a fixed exchange rate regime. More importantly, Malaysia’s approach also included lower interest rates and fiscal expansion or pump priming by the government as against belt tightening measures and balancing of budget included in the IMF package. As a result, Malaysia did not suffer the kind of social consequences that other affected countries did and the recovery was rather quick with a 5.8 per cent growth of GDP in 1999 and 8.5 per cent in 2000, compared to much lower rates of growth achieved by Thailand, Indonesia and the Philippines under the IMF program. Thirdly, there is also need for revival of SDRs Allocation. Special Drawing Rights (SDRs) were established by the IMF at the end of the 1960s to supplement international liquidity. SDRs were supposed to become the principal reserve asset. However, the allocation of SDRs has been abruptly halted since 1981, thus adversely affecting the ability of developing countries to supplement their reserves and making them vulnerable to the liquidity crisis. They have been forced to borrow on onerous terms to augment their international reserves. The institution of SDRs continues to be relevant, especially for developing countries and it should be restored as soon as possible by the IMF. There is, therefore, need for a thorough reform of the IMF’s working and bringing flexibility into the package that keeps in mind the specific needs of the affected countries. IMF is currently viewed as a single global institution with no alternatives. It should rather become an apex institution with a network of regional or sub-regional monetary funds observing monetary and economic stability of the regions and equitable growth in world investments. 3.2 National Competitiveness Looking at the recent trends in the world economy we find that the growth in the developing region was rapid and more broad-based than it had been for many years. Strong per-capita income growth continued in India and China. Such rapid growth in the two large economies and other developing regional blocks have had spill over effected to many other developing countries and have set a tough competitive pace for the developed world. The ascent has been accompanied by the global interdepence, brighter outlook for exporters of primary commodities, rising trade amongst developing countries and increasing exports of capital from the developing to the developed countries (UNCATD-TDR, 2005). Despite the increase in importance of the fast growing developing regions of the world, the developed world still accounts for the two third of the global non-fuel commodity imports in the international commodity markets. The move towards the adoption of more outward-oriented development strategies along with creation of domestic demand, trade reforms and regional trade agreements have widened the range of developing countries significantly in the global markets. The low cost efficient systems, products, services and finance is turning out to be a challenge for the developed region. The purchasing power in the developed world is getting enhanced day after day with the influx of cheaper high quality goods and services serviced by the markets in the developing economies. This in turn is being seen as a threat to domestic industry by most of the developed countries. This is the same challenge with which the developing world was faced at the time of opening up of their markets in the early 80s and 90s. Some have adopted to raising their wail by increasing import duties, barring commodities on the pretext of dumping and discouragement of movement of factors of production into other cost effective regions. National Competitiveness has emerged out to be one of the prime concerns for almost all in the developed region. As long as output growth is strong enough, all countries can gain in terms of real income, with some gaining more than others, depending on the structure of their exports and international competitiveness. 3.3
Globalization-Inequality-Poverty Nexus Policies of openness through liberalization have been advocated worldwide for the growth and welfare-enhancing effects on the basis of prominent theories on international trade and investment. Be it the Ricardian comparative advantage, the Heckscher-Ohlin-Samuelson model, Bhagwati or Krugman’s view or any other, the common factors outlined are that the static efficient gains associated with improved resource allocation for national economies. (Nissanke & Thorbecke, 2005). The world is moving towards an increased specialization wanting to gain from economies of scales, diffusion of information, technology transfers and cross border movement of funds keeping risk diversification well in place. One of the critical reasons for globalization for not seemingly to have produced desired results in the low-income developing countries lies in the fact that the effects of international trade on growth are critically dependent on the pattern of specialization and integration. Countries that have created patterns of comparative advantage towards high-skill and high-productive activities have gained significantly. One however needs to have clear focus on investment in agriculture in order to reach takeoff-point to allow structural transformation, strengthening institutions for social protection and infrastructural smoothening. To benefit from an increasingly globalized and inter-dependent world economy, countries need to strengthen their capabilities for the supply of competitively efficient and cost effective goods and services. In the process of liberalization in the last three decades, it has been believed that the developed region has been more open than the developing towards FDI flows, be it services or other factors of production (OECD, 2003). However, it has been observed that even liberal and mature economies such as the United States, France, Germany and many others, have restrictions on services such as media, air-transportation, steel and other sectors in the economy ((UNCTAD-IIAS, 2005; LNMittal case, 2006) IV. Conclusion To define ‘Globalization’ is a difficult task, as it has been defined and redefined every now and then. Different sections of a society look at this term from the benefiting side. Latest talk of globalization has moved from the financial benefits/crises, which has arisen since late 80s to the political and democratic positioning. One thing which certainly come out clear is that we are looking at a world which is integrated, efficient, cost effective and having a stabilized socio-economic growth. Globalization is a means to achieve this. It is not important weather we looking at a world with a capitalistic, socialistic or via mix-economic view. The classical thinkers do believe that modernity is good, however, capitalism is a bad word even today. When we say so, we refer to the 5/6 population of the world, which has lived and benefited from the non capitalistic base society. Rajan Raghuram , recently in his book on “Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Special Opportunity”, argued that incumbent capitalists are shifting free markets because they stand to lose the most from greater competition . Conservative economists, since Adam Smith, have promoted the idea that a free-market economy that has minimized government regulation and more dependence on the forces of supply and demand, which is considered to be the most reliable and efficient economic system. Yet, the 1990s financial crises (Agarwal & Agarwal, 2001), stock market crashes, scams (corporate/political) have lead to economic contractions. These events have not only devastated countries around the world but also increased social tension and disparities. The frequency and extent of these financial debacles have led policymakers, regulators, economists, journalists, market operators and the masses to call for reforms in the form of a new "international financial architecture & a self sufficiency model". Given the downside, the increase in global productivity on the other hand has primarily been there because of spreading recognition in recent decades that the mixed economic system tapered towards market orientation works best. Today, India is most appreciated and talked economic system, dispite the level of corruption and wastage of economic resources. The market driven mixed economic system has well acknowledged decade showing responses to the market signals by private initiatives to make profits, raise standards of living and reducing social disparities. This is far more effective and efficient than only government-directed or private allocation of resources. Not only countries like China and India, where political stability has been maintained, but also those in Eastern Europe (where governments were overturned) have been shifting toward economic systems that place greater reliance on market transactions. These trends help unleash the huge productive potential within an economy. Shift in the economic systems has been heightened with the pace of technological change, the declining cost (of generation and transmition of information & goods), international capital flows and globalization. We can see the effects of these changes here in Israel, in India, China and various other emerging markets, where there has been considerable boost in the growth rate of productivity in the last two decades once the economic reform processes were set in. Globally, globalization and cheaper capital has enabled faster and more efficient access to information, which has intern eased the integration and coordination of geographically diverse production processes. This development has opened opportunities to transfer production to locations where it can be accomplished less expensively and with increased stakeholder’s wealth. The resilience of the global financial system has improved tremendously in the last two years, largely because of solid global economic growth, buoyant financial markets, stability in the EURO region, continued improvement in the balance sheets of corporate, financials and households sectors in many countries and stability in the depreciating position of the US economy. The ongoing improvement for emerging economies is for inducing credibility of their policy framework and the quality of debt which would improve sovereign rating and strengthen financial markets. (IMF-GFSR, 2005) The question of whether globalization should be allowed to proceed is vital. This primarily rests on the judgment as to whether the society is ready for greater economic freedom, volatile competition and reduced controls. On the face, these decisions do depend on those who govern the society. However, it is the society at large which deems the decision on the natural law “Survival of the fittest”. India which is the largest democracy of the world, is all set to be a leading economic power house. India faced its worst ever financial sluggishness in 1991 when its foreign exchange reserves fell below one billion dollars, inflation rate was as high as 16.7 percent, suffering from high fiscal deficit, high unemployment rate and several other economic weaknesses and other odds. India has successfully launched and handled its economic reforms process of privatization and liberalization to bring about macro economic stabilization despite the US sanctions. Its foreign exchange reserves have crossed 142 billion dollars; fiscal deficit is within tolerable limits, growth rate of 8 percent expected for the current year (Agarwal, 2005); the rupee is gaining strength despite RBIs intervention, banking and financial institutions have improved, BSE Sensex has crossed over 10,000 mark from a low level of 3000 a year ago. India’s entry and sustained growth in the last decade opens up immense possibilities for becoming a truly favoured global nation and economy. India has benefited from the old heritage (dating back to 7000 years), traditional value system and economic and societal norms. These have empowered India and Indians to accommodate and adjust with changing times and scenarios over the history. We have seen times when there was free movement of labor and capital in the golden arena of our nation Bharat. Today’s globalization does encompass part of it, wherein capital and trade is certainly an issue. However, labour has been restrained from this. It has been observed that all large multi-ethnic societies, after attaining the status of development, lose interest in removing poverty, especially when poverty is associated with ethnic and cultural groups that lack or lose political clout. The issue of poverty is a paradox of plural democracy when it is wedded to global capitalism. And the paradox is both political-economic and moral. The gradual privatization and the consequent need to regulate investments; the growing importance of private investment and the emergence of the mixed-market economy are some of the characteristics of the political economy of India resulting from its engagement with the global economy in the 1990s. If we are really talking of a globalized world, then we need to free ourselves of these barriers and allow the market mechanism to freely flow and be part of this large society. To say that some economies prosper and others sink at the hands of globalization would be wrong. Looking at long-term growth trends, one can certainly see the benefits to all reaping in. There is no gain without pain. The agreement among regions and societies on the stand for those economies that have been open to cross-border trade and flows have has seen a positive trend. Clearly, ideas shape societies and economies. Most economists would agree that vigorous economic competition, opening up of society, capital and labour movements over the years has produced a significant rise in the quality of life for vast majority of population in mixed market-oriented economic system, including the downtrodden. The highly competitive free market paradigm, however, is viewed by many at the other end of the philosophical spectrum. This is nothing else but a simple tradeoff from a longer-term perspective in any meaningful sense. During the past century, economic growth has created resources far in excess of those required to maintain subsistence. That surplus, even in the most aggressively competitive economies, has been in large measure employed to improve the quality of life along many dimensions. To cite a few, we see, greater longevity due to better health services , better education environment with increased social mobility, improved work conditions and the ability to enhance our surroundings and adapt. The developments, growth and the distribution of incomes observed in the last two decades have been a good indication of the changing structure of world investment, trade and capital flows impacting global integration and regional cooperation. References
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
