Globalisation, Global Crisis and Third World Development with Special
Reference to India: Key Issues
Guljit K Arora1 and Ashug2
I
INTRODUCING THE CONTEXT
The modern world influenced by forces of liberalization, privatisation and
globalization and complemented by advances in ICT while folding into one global village has
witnessed enormous increase in cross-border trade, labour and capital flows, joint contracts
and ventures etc. Simultaneously, the world saw an enhanced interdependence and
vulnerability along with a sea change in the ‘world of work', scope of business, and
regulatory frameworks. The scope of international trade has expanded clearly highlighting the
requirement of competitive and regulatory systems and a paradigmatic shift in regulating the
internal governance.
During this process of global economic change, MNCs across the world assume a dominant
position to: (a) integrate easily their diverse economic activities through trade, finance,
investment, and technology transfers; (b) relocate their manufacturing plants to penetrate in any
market keeping in view their own global interests; (c) access foreign markets through many
alternative routes, such as alliances, joint ventures, and sub-contracting without even
requiring transfer of capital across international borders; (d) organize their cross-national
trade and capital flows in cross- border value chains largely outside the control of national
governments; and (e) press further the third world countries to introduce market-friendly
policies to give more space to the private economy with lesser government controls.
Over the period, the global governance has assumed a critical importance with increased
influence of the international bodies such as UN, IMF, WTO, World Bank, etc. Since the
world witnessed both opportunities as well as challenges, a few Third world Countries
particularly in the Asian region have assumed a strong position to assert itself in global
financial governance. Their remarkable growth and integration in global trade and finance
particularly of China and India has created a non-ignorable clout in international forums and
institutions with improved international standing. However, their influence is not
commensurate with the economic weight in either the International Monetary Fund (IMF) or
the Group of Twenty (G-20) - considered the most important institutions and decisionmaking forums in global finance.
In spite of the global integration, the world also saw the worst financial crisis commencing
from 2008 in Europe, which spilled into a sovereign crisis in early 2010 since the Great
Depression of the 1930’s. Demonstrations seen in Southern Europe and most recently in
1
Associated with Bhim Rao Ambedkar College (University of Delhi), India in the capacity of Principal, and can
be reached at guljitkarora@gmail.com
2
B Tech and MBA, is working as a Free Lancer entrepreneur.
1
Brazil further endorse the crisis is serious for some countries. Added to this, is the crisis in
the euro area comprising 17 of the European Union's 27 member states3.
The Third World countries continue to exhibit serious concerns and imbalances with high
degree of socio-economic deprivation, exclusion and malnourishment. And India is not an
exception. It is characterised by mass poverty, massive youth unemployment, about half the
children suffering from malnutrition, vast illiteracy and low level of human development.
Added to this is gender, income and rural-urban inequalities, poor social immobility and
declining social cohesion, and weak delivery systems due to political mismanagement, and
governance standards with the unhealthy political-bureaucracy-business nexus adversely
affecting the country structured on principles of the central planning and liberal federal
political economy. The climate change will make the life of those miserable who lack
necessary access to efficient and sensitive governance, social capital, finances, and
community mobilization. Even violation of rights and illegal international wars cannot be
ignored.
It is in this backdrop, this paper briefly (1) reviews the process and dynamics of globalization
and its interconnections with global governance and third world development; (2) gives an
account of the global crisis including the background, mechanics, and outcomes; and (3)
brings out development challenges before the third world including India.
II
GLOBALIZATION IN THIRD WORLD PERSPECTIVE: UNDERSTANDING
THE DYNAMICS OF IMPENDING DANGERS
Globalization evolved out of a gradual process of progressive market integration
through falling trade barriers, increased exchange, and greater mobility of capital and labor,
and rising social and political interconnections among the cross border people, has been
embraced by almost all countries. It was coupled with the rising co-operation among
countries and international institutions after the economic collapse of the former Soviet
Union, and the emergence of macroeconomic imbalances in several countries including India
in the 80’s, and the rise of European Union (EU). Further encouraged by the rapid advances
in information and communication technologies (ICTs), which enabled cheap access to vast
information whenever and wherever one needs, globalization requires conscious human efforts
and decisions to bring about a general direction of change towards market-oriented environment
(Petras and Veltmeyer, 2001) to emerge at all decision-making levels. Different from
internationalization, globalization crosses boundaries of national economies to establish a single
global economy and affect decisively the national economic activities beyond the power of the
national government. Politics gets widely dispersed and deeply intertwined with society and the
old agenda of planning becomes entirely utopian (Harris 1999).
Global integration along with opportunities enhanced competition and market
interdependence giving birth to global imbalances in economic outcomes. It simultaneously
created the need and scope for global governance, cooperation requiring regular interactions,
depoliticized institutions with harmonized and universalized rules and standards, and changes
required in developmental trajectories further suggesting globalisation path as the only
3
From among the outliers, the United Kingdom, Sweden, Denmark, and seven Central and Eastern
European countries (Bulgaria, Czech Republic, Hungary, Latvia, Lithuania, Poland, and Romania), a
few may move towards joining the euro area assuming that the current phase of turmoil is overcome.
2
successful development model. The worldwide media coverage, expansion of trade, FDI and
financial markets, migration, rise of internet crime and terror, and globalisation of
environmental problems, etc. create a scope for international coordination. As an instrument
of multilateralism, globalization is a basis for global policies and governance frameworks
needed in the area of trade, development, finance and international peace and security, as
well as in other social and technical fields. Declarations and covenants arising out of this
multilateral system gives global governance legitimacy, which no individual state, however
powerful, can match. As global integration trends grow, international coordination and
global governance becomes indispensable and simultaneously grow in all areas including
human rights, development, democratization, the environment, security, and investments.
With interlinkages among international institutions, globalisation process variables
(investment, trade, and production), and nation-state development policies and institutions
emerging stronger, the need for governance rises and the economic behaviour of all
stakeholders witnesses a sea change. Stiglitz rightly points out: “In effect, economic
globalization has outpaced political globalization. We have a chaotic, un coordinating system
of global governance without global government. . . .” (2006:21). How all these
developments paved the way for a new international economic order, and have influenced the
earlier global structures and the overall business environment have worked from the
viewpoint of the developing world is worth analysing.
Globalization, has no doubt, promoted open societies and economies along with encouraging
a relatively freer exchange of goods, ideas and knowledge, and creativity and
entrepreneurship in many parts of the world, but also highlighted the need for global
economic management through international institutions not necessarily under UN flag.
However, the required globalization policies, global standards and compliance to them have
exposed the developing countries to many risks as under:
(1)
Increasing trends of trade, capital flows, and advances in information and technology
along with global governance undermine state’s control over what happens in its
territory, and further create compelling reasons for individual ‘states’ to look for
cooperation with each other and the non-state sector. It has resulted into high costs of
compliance, avoidable import of bogus medical products, sexual exploitation of children,
adolescents, adults and the spread of infection diseases associated with cross border
transmission, traveling and migration etc.
(2)
Developing Countries’ bargaining power in global markets and institutions of
governance continues to be weak and eroded. Trading rules go much beyond the grip
of LDCs; trade agreements stress on seeking access into markets of LDCs, and require
compliance and enforcement. These are asymmetric and international law of WTO is
an imperfect rule of law based on the bargaining power, which only the developed
countries possess. WTO is dominated by Developed Countries’ presence though it is
democratized with 153 members. “There is now also a consensus, … that something
is wrong with the way decisions are made at the global level;…. Both by structure are
process, voices that ought to be heard are not” (Stiglitz 2006:). Non-trade issues and
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minimum standards of hygiene, health and safety, labour and environment are being
constantly introduced in discussions and ministerial meetings. Trade agreements have
been neither fair nor free. LDCs neither have adequate infrastructure nor quality
products worth exporting nor have access to capital finance at reasonable rates (Stigliz
2006: 62, 70, 90-6). All these developments have weakened the bargaining power of
the Developing Countries.
(3)
World economic order has become much more inequitable and exclusive.
Globalization process underlines the role of markets, but importantly, market created
global opportunities do not get distributed equitably. “The worst failure is Africa,
where the percentage of the people living in extreme poverty has increased from 41.6
percent in 1981 to 46.9 percent in 2001” (Stiglitz 2006:11). At world level,
consumption is highly skewed with the lowest 10 per cent of population consuming
2.5 per cent and the highest 10 per cent of population consuming 29.8 per cent (EPW,
1st Nov 2008:7). Recent estimate available shows that in 2000, the share of top 10 per
cent was 85 per cent, and the share of the top 10 per cent of wealth holders within a
country is typically about 50 per cent. In the same year about 34 per cent of the
world’s wealth was held in the US and Canada, 30 per cent in Europe and 24 per cent
was in the rich Asia-Pacific group of countries. The Africa, Latin America and low
income Asian-Pacific countries to be at the lowest level (UNU-WIDER Discussion
paper No 2008/03).
(4)
Sustainable Development (SD) requires LDCs to go beyond the definition of
Brundtland Commission (1987) to achieve inclusive sustainable human development
to include not only the economic, environmental, and social aspects but should also
recognize the right to development; the overall quality of life; the natural resources as
a common heritage to be preserved and so on (Arora 2013). The issue of climate
change is clearly linked to SD because less developed countries (LDCs) are most
vulnerable to the adverse impacts of climate change though they contribute the least.
As brought out by National Action Plan on Climate Change, the per capita CO2
emissions is just about 1 tonne as compared to 20 tonnes of US with 4.25 tonne being
the world average. India is spending around 2.6 per cent of GDP on adaptation to
climate variability (Economic Survey 2009). Environmental degradation is wide
spread, air pollution has reached unhealthy levels and fresh water is increasingly
becoming scarce. Besides, soil is degraded and forest cover declining with fisheries
and biodiversity disappearing.
(5)
Intolerable global imbalances are emerging in which developing countries (in which
80 per cent of worlds’ population live) witness a deteriorated position not only on
external account, but also on account of mass poverty, hunger and malnutrition,
income inequality, unemployment, health and environmental risks etc. In 2009, food
emergencies persist in 31 countries and more than 109 million people may have fallen
below the poverty line since 2006 (Trade Development Report 2009: iv).
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(6)
Pains of globalisation for developing countries particularly for the people living at the
margin become intense with declining government revenues as government sector
shrinks with taxes, exports, foreign investment and other sources of revenue declining
and austere measures followed to reduce public debt and check external imbalances.
With government budgets falling, capital expenditures and social spending on social
safety nets and socio-economic services are slashed at the first instance, which is most
needed to guarantee minimum levels of economic and social rights essential for
survival and human dignity, including the rights to health, food, housing and
education. These problems can be mitigated through inter alia strengthening and
enhancement of international cooperation to increase equality of opportunities for
trade, economic growth and increasing educational opportunity and faithful
implementation and enactment of laws and political, social and economic policies4.
All these have implications for the global economy and also raise a question on the future of
open markets with global terrorism rising and global governance reaching a critical juncture..
Bracke, Bussiere et al, rightly points out: “External positions of systematically important
economies that reflect distortions or entail risks for the global economy”, apparently do not
recognize developing countries as a group of important economics (European Central Bank,
Occasional Paper No.78, Jan 2008).
Thus, globalization and global governance characterized by unfair agenda, non-transparent
negotiations and unfair enforcement reinforce in many parts of the world, some of the
historically given social and economic ills – poverty, inequality, the lack of decent work, and
the denial of human rights. To quote stiglitz, “…..some recent changes are so unfair that have
made some of the poorest countries actually worse off” (2006:9). In addition of exposing
them to new health risks, eroding their bargaining power, increasing market weakness power,
globalization has disturbed conventional livelihoods and local communities, and further
threatens sustainability and cultural diversity. As a result, the debate on globalization is fast
becoming a debate on democracy and social justice in a global economy. Even the
multilateralism has come under challenge as shown by the conflicts in the Middle East, and
the persistence of global poverty, unemployment and inequality.
III
GLOBAL CRISIS: LOOKING AT SOME ASPECTS/ IMPACT
Given that LDCs lack bargaining power to influence the pace and direction of global
policy, their vulnerability to the final outcomes of economic policy decisions taken by the
major developed countries, and the governance institutions, has increased substantially over
the period. They become further vulnerable to the developments taking place in the
developed countries, wherein they have no contribution whatsoever. East Asian crisis of
1997-99, global slow-down since 1999-2000 and the global economic crisis originating from
USA in August 2007 with the sub-prime mortgage Crisis in the housing sectors followed by
the European crisis since late 2009 and economic slowdown in the USA are serious
developments, which had repercussions on the global economy including the developing
countries.
Durban Declaration and Programme of Action: “World Conference against Racism, Racial Discrimination,
Xenophobia and Related Intolerance”. Accessed, June 7, 2013. http://www.un.org/WCAR/durban.pdf
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5
In the early 2009, the economic situation in several Central and Eastern European countries
was tense, but was subsequently stabilized with economic reforms related to budget
tightening, and international coordination in the form of the so-called Vienna Initiative to
maintain liquidity to local banking systems, were undertaken. The euro area sovereign crisis
closely related to the Greece Crisis was exposed when its elected government in October
2009, revealed that its predecessor had misled its euro area. The ensuing deterioration of
Greece's access to capital markets led it to seek help from fellow euro area countries and the
International Monetary Fund (IMF). The European debt crisis characterised by the sovereign
defaults and the following near-elimination of Greece’s sovereign bonds held by private
investors, comprising a face value of more than 100 per cent of Greek GDP, was the first
major restructured debt in March-April 2012 since the defaults preceding World War II5. It
occupies a special place in the history of sovereign debt crises6.
Europe's financial turmoil and its impact on the rest of the world are the overriding focus of
international financial markets. However, the euro area countries have responded to the crisis
with impressive speed7. To defend against the financial collapse of the weaker members, they
have created joint rescue funds approximating $1 trillion. Germany is and will remain the
paymaster of Europe, probably to hold the euro area together.
The core of the euro problem, as pointed out by a leading scholar, is Europe’s insufficient
ability to make authoritative policy and political decisions required to build a Union for its
banking, fiscal, competitiveness and political affairs. This is not an easy, simple, or painless
process and thus requires an enormous effort of adjustment and transformation.
Another global uncertainty comes from the United States. Its fiscal policy leading to
uncertain outcomes with respect to spending, taxes and managing debt, created two debt
ceiling scares, one in 2011 and another in 2013. Given dollar, more or less world’s leading
currency with dollar’s share of foreign exchange reserves roughly remaining stable, even a
partial US default would lead to disastrous results for the world economy. even the status of
US Treasury as the world’s safe haven will be challenged giving a chance to the other
emerging-market countries to develop infrastructure to absorb enormous capital inflows. The
distortionary budgetary practices resulting from budget decision-making breakdown of 2012–
13 and failure of the US Treasury to meet interest payments and redemptions on maturing
debt would precipitate a financial crisis and can intensify uncertainly in the global world
similar to that of following the failure of Lehman Brothers in 2008. Economic activity is
likely to collapse, unemployment would surge, and credit conditions faced by households
come under severely.
Financial crises along with deep-rooted underdevelopment problems related to poverty,
inequality and human rights violations though present in our lives for centuries, have
exacerbated in recent years despite the existence of the protection offered by the Universal
Declaration of Human Rights and the other UN conventions and legal protections.
Zettelmeyer, Jeromin et al. 2013, “The Greek Debt Restructuring: An Autopsy”, Working Paper
Series, Peterson Institute for International Economics, WP 13-8 August 2013.
6
Ib id.
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These exposed serious shortcomings in the common currency, the pattern of comparative economic
growth, fiscal sustainability etc. but also created an unprecedented political will to work on the new
common institutions to undertake structural reforms to overcome this crisis.
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Financial crisis affects the countries depending upon the degree of their foreign trade
dependence through many channels particularly by affecting consumption and investment
demand, government expenditures, and the trade balance, which in turn affect the economic
growth of the concerned countries. Li Na et al, in their review of literature while quoting a
number of studies bring out that the Asian financial crisis affected saving and consuming
behaviours of directly suffered countries and other Asian countries8 . The US subprime
mortgage crisis had led to more than 60% reduction of potential output growth in the Euro
zone, the US, the UK and Japan. The US financial crisis affected the economic growth of the
major developed countries, the emerging market countries in Asia and Europe. Similarly, the
European sovereign debt, which began in late 2009, adversely affected the level of GDP in
the Euro area and would trigger a global recession. It is further brought out in that study that
during 2010-12, the average annual growth rate of the global economy has reduced by 0.65%
and global unemployment rate has risen by 1.81%. Global trade was in depression and the
average annual trade growth was reduced by 1.14%. Due to the impact of the European
sovereign debt crisis, the average annual growth of China's economy decreased 0.37
percentage points, which is more serious than the United States and other BRIC countries. It
is estimated that the effect of Euro sovereign debt crisis on global growth will continue
during 2012-2015 also9. Similarly UNCTAD has brought out that the global financial crisis
has led to liquidity constraints for transnational corporations (TNCs) worldwide, as access to
credit has tightened. Given a strong link between economic growth and FDI flows, the world
slowdown particularly in the developed world has adversely affected the new investments
abroad. Such a crisis generally fosters a more cautious attitude among managers, resulting in
a move away from high-risk projects to safer assets.
India’s rapid integration with the global markets with trade-to-GDP ratio increasing from 20
per cent in 1993 to about 50 per cent in recent years after its major policy turnaround in
1991has brought opportunities, but challenges are daunting. With more than 302 million
poor people, almost 46 per cent of the children below 3 years suffering from malnutrition,
about 304 million illiterate persons, and low level of human development, India is an
unpardonable economy doing so well overall. It also witnesses the bewildering gender,
income and rural-urban inequalities, poor social immobility and weak delivery systems of
essential socio-economic services at the grass root level, besides political mismanagement,
declining social cohesion and governance standards with the political-bureaucracy-businessmedia nexus adversely affecting the Indian economy. The possible social impact of climate
change will further add to the challenges of individuals who lack necessary access to social
capital, financial assets, effective governance and community mobilization. With 1/5 of the
worldwide working population, India’s growing young population will raise demands for
housing and employment, but backed by the purchasing power created in their hands will be a
great middle class affecting the world economy. However, India with the largest population
of absolute poor in the world may see the possibility to reach a situation of economic
stagnation unless it moves towards an inclusive sustainable human development mode10.
Indian economic growth averaged 8½ per cent before and for two years after the global
financial crisis has decelerated throughout 2011 and 2012, reaching about 5 per cent in 2013
is not only due to the global crisis but also because of the problem of stalled infrastructure
For detailed review of literature, see Na, Li et al, “Impacts of the Euro sovereign debt crisis on global trade and
economic growth: A General Equilibrium Analysis based on GTAP model”.
9
Ib.id
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Arora, Guljit K and Ashug 2013, Globalizing India: Need for Inclusive Sustainable Human Development.
Available at http://www.ssrn.com/link/OIDA-Intl-Journal-Sustainable-Dev.html
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and corporate investment and also coincided with elevated inflation. Global factors have
certainly hurt exports and weighed on investment. However, staff analysis indicates that
about two-thirds of the slowdown can be explained by domestic factors, including supply
bottlenecks, delayed project approval and implementation, and heightened policy uncertainty.
Thus, the tightening of global liquidity as argued by IMF, no doubt, has increased external
pressures and macroeconomic imbalances such as high inflation, large current account and
fiscal deficits, but structural weaknesses related to the supply bottlenecks in infrastructure,
power and mining are also the real issues, which cannot be ignored. Nonetheless, India has
very little room to adopt countercyclical policies, constrained by persistently-high inflation,
and sizeable fiscal and external imbalances, spill over risks from renewed external pressures
interacting with domestic vulnerabilities. IMF clearly brings out that the inward and outward
spill overs to and from India show that output shocks emanating in globally-systemic
countries have important global effects, but their impact on India is limited. Shocks
originating in India have relatively small global implications, but are very important for
several South Asian economies.
At the onset of the global financial crisis, a country may witness a flight of deposits. A study
brought out that a flight of deposits took place in favour of the largest and best-known public
banks, the State Bank of India, rather than toward public-sector banks as a whole for reason
of an implicit guarantee rather than for better balance-sheet variables. If external pressures
from global financial market volatility resume, rupee flexibility, enhanced financial sector
supervision, use of reserves, increases in short-term interest rates, actions on the fiscal front,
checking high and persistent inflation, and addressing supply bottlenecks are the best
solutions
V
CONCLUSIONS
Modern world has undergone a sea change with almost all countries had embraced
globalization in which global governance, MNCs and international market have assumed a
critical importance. Globalization no doubt has brought opportunities, but a large number of
countries from the third world continue to exhibit serious concerns and imbalances with high
degree of socio-economic deprivation, exclusion and malnourishment. They remain
vulnerable to the developments taking place in the developed countries, wherein they have no
control and contribution whatsoever. East Asian crisis of 1997-99, global slow-down since
1999-2000 and the global economic crisis originating from USA in August 2007 with the
sub-prime mortgage crisis in the housing sectors followed by the European crisis since late
2009 and slowdown in the USA are serious developments and had repercussions on the
global economy including the developing countries. The World economic order has become
much more inequitable and exclusive. Given that LDCs lack bargaining power to influence
the pace and direction of global policy, their resultant dependence on and vulnerability to the
final outcomes of economic policy decisions taken by the major developed countries, and the
governance institutions, has increased substantially over the period. Their governments must
ensure the minimum essential services and their levels of social and economic rights which
are essential to the survival and a life with dignity so that the negative impact of the global
crisis on the vulnerable socio-economic groups fighting for their survival of the developing
countries can be mitigated. Efforts of those poor countries who are formulating and
implementing socio-economic development policies for inclusive development and adopting
fiscal measures to introduce sector specific assistance with other counter-cyclical economic
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policies should be supplemented by multilateral institutions by tailoring their policy
prescriptions keeping in view the harsh realities of the developing world.
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