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HYPOTHESIS
Globalization is a process of universal change which may enable Third
World nations to develop towards modernization and universal equality, but which
may also involve undermining risks for these nations.
INTRODUCTION
Globalization has become a major topic of discussion and concern in
economic circles since the mid-1990s. It is clear that the trend toward more
integrated world markets has opened a wide potential for greater growth, and
presents an unparalleled opportunity for developing countries to raise their living
standards. At the same time, however, the Mexican crisis has focussed attention on
the risks of this trend, and concerns have arisen about the risks of marginalization
of countries. All of this has given rise to a sense of fears and suspicions,
particularly among developing countries. Globalization is considered today among
the most important challenges facing the world today.
DEFINITION & SCOPE OF GLOBALIZATION
Globalization is a term that relates to the transformation of the world
economy since the beginning of the 1980s. It refers primarily to the progressive
elimination of barriers to trade and investment and unprecedented international
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mobility of capital. Governments around the world are adjusting their economic
policies to face the new realities of integration into the new global market
economy, trade liberalization and free trade. Globalization also refers to the rapidly
improved communications systems (information and transportation) which have
served to reduce distances between different countries and regions, bringing not
only a greater exchange of goods and services but more exchanges between people
and information from different countries (Bobrow, p. 8).
In most basic terms, the globalization of the world economy is the
integration of economies throughout the world through trade, financial flows, the
exchange of technology and information, and the movement of people. The extent
of the trend toward integration is clearly reflected in the rising importance of world
trade and capital flows in the world economy. An increasingly large share of world
GDP is generated in activities linked directly or indirectly to international trade.
And there has been a growth in cross-border financial flows, particularly in the
form of private equity and portfolio investment, compared with the past. In
addition, the revolution in communication and transportation technology and the
much improved availability of information have allowed individuals and firms to
base their economic choices more on the quality of the economic environment in
different countries (Bobrow, p. 13).
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Globalization is a result of the expansion, diversification and deepening of
trade and financial links between countries, especially over the last ten years. This
reflects above all the success of multilateral tariff reduction and trade liberalization
efforts. The International Monetary Fund has played a key role in encouraging
current account convertibility as a basis for the expansion of world trade, and more
than two-thirds of the Fund's member countries have committed themselves to this
principle by accepting the obligations of Article VIII. Also, economic thought
itself has evolved over time, toward the general acceptance of the fact that
outward- oriented and open economies are more successful than closed, inwardlooking ones. Consequently, more than at any time previously, individual countries
in all parts of the world are liberalizing their exchange and trade regimes in the
conviction that this is indeed the best approach for growth and development.
Moreover, there is a deeper commitment of national authorities throughout the
world to sound macroeconomic policies, and to creating a more stable environment
for investment and the expansion of economic activity. Finally, with the increasing
liberalization of financial markets, and their growing sophistication, capital
markets have become integrated, and capital flows are now largely driven
primarily by considerations of risk and return (Santrock, pp. 14-15).
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GLOBAL TRADING BLOCS
A fundamental part of the economic globalization agenda has been the
establishment of regional trading blocs. These include the European Union, the
North American Free Trade Agreement (NAFTA), the ASEAN Free Trade Area
(AFTA), the Commonwealth of Independent States (CIS), MERCOSUR, the
Andean Pact, the Caribbean Common Market (CARICOM), the Central American
Common Market (CACM), the Gulf Cooperation Council (GCC) and the Asia
Pacific Economic Cooperation (APEC) (Bobrow, p.14).
While these organizations vary in structure, objectives, and the relative
power they command, they are committed to trade liberalization. The conclusion of
the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and
the establishment of the World Trade Organization (WTO) institutionalize the
global market economy and its rules. The shift is from "a world economy that is an
aggregation of national market economies, quite varied in their regulatory and
redistributive principles, to a global market economy governed by a uniform set of
rules" (Samuelson, p. 22).
TRANSNATIONAL COMPANIES
There are 37,530 transnational corporations (TNCs) in the world. Over 90%
of head offices are based in industrialized countries, and most of those are in the
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US. They own over 90% of the product and technology patents that are held in the
world. The top 300 TNCs control 25% of the world's production capacity and
through subcontracting arrangements their actual economic impact is even higher.
Industries like electronics, oil, chemicals, pharmaceuticals and cars hold huge
foreign assets. The top 100 TNCs employ over 12 million people. UNCTAD
estimates that the actual number of jobs associated with TNCs is about 150 million
(Santrock, p. 29).
Although they wield tremendous economic power and political influence,
people have no means to make TNCs accountable for their actions. Some
companies have adopted codes of conduct and sourcing guidelines and some even
have human rights policies. However, TNCs have been much slower to adopt
guidelines on labor rights than they have to act on questions of environmental
sustainability (Santrock, p. 30).
Transnational Corporations (TNCs) seek to ensure the highest rate of
return on their capital by enhancing labor productivity. In a given manufacturing
sector, the cost of raw material and technology being more or less the same, TNCs
or their sub-contractors will go for the lowest labor cost possible, relocating their
plants according to changing wage levels. Workers are then literally forced to
compete with each other. The ones accepting the lower wages and the least
enjoyment of their basic rights are the ones who will keep their jobs. Frequent
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relocation of important sources of employment endangers the already fragile
economic viability of the less developed societies, while contributing to the rise of
unemployment and precarious employment in highly industrialized ones (Santrock,
p. 32).
For instance, Nike, the largest supplier of athletic footwear in the world, is
also starting to be known for its relocation moves. From its US-based factories,
Nike shifted its production sites to South Korea in the early 1980s, to benefit from
much lower wages. Indeed, it decided to subcontract the manufacturing to Korean
entrepreneurs instead of owning the factories. Yet by the end of the 1980s and
early 1990s, Korean women workers' activism had led to major gains in union
rights and increased wages. Nike decided to move its manufacturing operations
and relocated by negotiating contracts with sub-contractors in China, Indonesia,
and Thailand (Santrock, p. 37).
The resulting flexibility of the labour market based on weak or labor rights
allows for all kinds of employment situations including the growth of the informal
sector economy. The sub-contracting chain includes the extensive use of home
workers, who are generally paid by piecework, not at the minimum hourly wage
level. A sub-contracting factory of a transnational company will in turn subcontract to one or many of its own workers, who in turn sub-contract in their
family or community. At each level of the sub-contracting lies the vulnerability of
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the worker, isolated, with no access to labor laws and no guarantee of future work
(Santrock, p. 37).
BENEFITS OF GLOBALIZATION
The benefits of these developments are easily recognizable--increasing trade
has given consumers and producers a wider choice of low-cost goods, often
incorporating more advanced technologies, and facilitated a more efficient use of
global resources. Greater access to world markets has allowed countries to exploit
their comparative advantages more intensively, while opening their economies to
the benefits of increased international competition. The rapid increase in capital
and private investment flows has raised the resources available to countries able to
attract them, and accelerated the pace of their development beyond what they could
otherwise have achieved. Moreover, greater openness and participation in
competitive international trade have increased employment, primarily of skilled
labor, in tradable goods sectors. With the expansion of these sectors, unskilled
labor has found increased employment opportunities in the non-tradable sectors,
such as construction and transportation. The expansion of merchandise trade may
also have lessened migration pressures (Pickwell, p. 116).
On the other hand, the movement of labor across national boundaries has in
many cases lessened production bottlenecks, raising the supply response of
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recipient economies, and increasing income in the supplying countries through
worker remittances. Openness to foreign expertise and management techniques has
also greatly improved production efficiency in many developing countries
(Pickwell, p. 117).
RISKS OF GLOBALIZATION
But there are also risks to globalization. The ability of investment capital to
seek out the most efficient markets, and for producers and consumers to access the
most competitive source, exposes and intensifies existing structural weaknesses in
individual economies. Also, with the speedy flow of information, the margin of
maneuver for domestic policy is much reduced, and policy mistakes are quickly
punished. Indeed, increased capital mobility carries the risk of destabilizing flows
and heightened exchange rate volatility, in cases where domestic macroeconomic
policies are inappropriate. And finally, it is clear that countries that fail to
participate in this trend toward integration run the risk of being left behind
(Pickwell, p. 119).
EVALUATION OF GLOBALIZATION
In globalization it is not necessary for some countries to lose in order that
others may gain. But to take advantage of this trend, countries will have to position
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themselves properly through the right policies. Clearly, those economies that open
themselves to trade and capital flows on a free and fair basis and are able to attract
international capital will benefit the most from globalization. Open and integrated
markets place a premium on good macroeconomic policies, and on the ability to
respond quickly and appropriately to changes in the international environment
(Morrison, p. 67).
Success in open markets, and in attracting new investment and advanced
technology, also means that the structure of economies is changing more rapidly
than ever before. As with any structural change, there will be some segments of
society that are at a disadvantage in the short term, even while other segments, and
the economy as a whole, are benefiting. This does not mean, however, that
countries should seek to isolate themselves from globalization. Rather,
governments must fully embrace globalization in awareness of its potential risks,
and seek to provide adequate protection for the vulnerable segments of society
during the process of change (Morisson, pp. 72-73).
While globalization raises the rewards of good policy, there also the risks
and costs of poor policy. Credibility of economic policy, once lost, has become
more difficult to regain. What is now critical is the perception of markets that
economic policy formulation and implementation is consistent and predictable.
This underscores the importance of flexible and well-informed policy-making, of
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solid, well-governed institutions, and of transparency in governance. Countries
with a poor or inconsistent policy record will inevitably find themselves passed by,
both from expanding trade and from private capital flows for development. These
are the countries that run the risk of marginalization (Bobrow, p. 55).
THIRD WORLD NATIONS AND COPING WITH GLOBALIZATION
The question of what policies are needed to benefit from globalization has
preoccupied economic thinking in recent years. Success of some world economies
in handling globalization is closely linked to an appropriate combination of
policies with three main objectives. The first objective is achieving and preserving
macroeconomic stability. The second objective is promoting openness to trade and
capital flows. Finally, the third objective is limiting government intervention to
areas of genuine market failure and to the provision of the necessary social and
economic infrastructure (Harbeson & Rothchild, p. 41).
More importantly, no one set of policies is a sufficient condition for success.
Poor policies in one area can obstruct progress, even if policies in other areas are
well-set. The three objectives of policies complement and reinforce each other:
macroeconomic stability, embodied in low inflation, appropriate real exchange
rates and a prudent fiscal stance, is essential for expanding domestic activity, and is
a precondition for benefiting from and sustaining private capital flows; openness,
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in the resolute pursuit of policies to rationalize and liberalize the exchange and
trade regimes, is vital in international competition. This forces the economy to
fully exploit its comparative advantage through trade; and finally, the primary role
of the government should be the creation of an enabling environment that
encourages foreign and domestic investment, and of a solid infrastructure to
support an expanding economy. Governments must also implement policies that
eliminate the structural weaknesses that would be exposed by the heightened
international competition. Not surprisingly, these elements are generally central to
the policy dialogue between the International Monetary Fund and its members
(Harbeson & Rothchild, pp. 42-43).
THE CHALLENGES OF GLOBALIZATION TO THIRD WORLD NATIONS
Globalization will continue to reinforce the interdependencies between
different countries and regions. It can also deepen the partnership between the
advanced countries and the rest of the world. And to support this partnership in a
mutually beneficial way, the advanced countries could help to further open their
markets to the products and services in which the developing world has a
comparative advantage. In addition, the reform efforts of the developing countries
will need to continue to be supported by adequate financing on concessional terms.
The Fund and the World Bank have recently begun implementing the framework
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for action to resolve the external debt problems of heavily indebted low-income
countries (HIPC), including their large multilateral debt (Harbeson & Rothchild,
pp. 53-54).
The challenge facing the developing world is to design public policies so as
to maximize the potential benefits from globalization, and to minimize the
downside risks of destabilization and marginalization.
Several Third World governments have also made considerable strides in
opening their economies to world trade. For example, 31 Sub-Saharan African
countries have accepted the obligations of Article VIII of the Fund's Articles of
Agreement, almost all of them since 1993. Most countries have moved ahead with
trade and exchange liberalization, eliminating multiple exchange rates and
nontariff barriers, and also lowering the degree of tariff protection (Harbeson &
Rothchild, pp. 59-60).
Finally, the restructuring of many developing economies is gaining
momentum. Throughout the Third World, government intervention in economic
activity is declining. Administrative price controls are being reduced and
agricultural marketing has been widely liberalized. The process of restructuring
and privatizing state enterprises has been going on for some time in most countries,
though with varying speed and degrees of success. And finally, fiscal reform is
gaining ground as many Third World countries are taking firm steps to rationalize
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their tax systems, to reduce exemptions, and to enhance administrative efficiency.
At the same time, they are also reorienting expenditures away from wasteful
outlays towards improved public investment and spending on key social services,
particularly health and basic education (Harbeson & Rothchild, p. 63).
However, there are still several main areas where Third World countries
should be more active in order to achieve from globalization. These are
maintaining
macroeconomic stability and
accelerating
structural
reform.
Governments must also ensure that public services--including transportation
networks, electricity, water, and telecommunications, but also health services and
education--are provided in a reliable and cost-efficient fashion. Moreover,
governments should also ensure economic security. This requires the creation of a
strong national capacity for policy formulation, implementation and monitoring.
Moreover, the transparency, predictability and impartiality of the regulatory and
legal systems must be guaranteed. Besides, an open and liberal system of capital
movements is beneficial to the world economy. However, rising capital flows place
additional burdens on banking regulation and supervision, and require more
flexible financial structures. This aspect of globalization thus confronts developing
countries with a new challenge, namely to accelerate the development and
liberalization of their financial markets, and to enhance the ability of their financial
institutions to respond to the changing international environment. Much remains to
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be done to reform and strengthen the financial systems in Third World nations.
National authorities should spare no efforts to tackle corruption and inefficiency,
and to enhance accountability in government. This means eliminating wasteful or
unproductive uses of public funds and providing the necessary domestic security.
Many Third World countries will also have to undertake a comprehensive reform
of the civil service, aimed at reducing its size while enhancing its efficiency. In
short, governments must create confidence in their role as a valued and trusted
partner of private economic agents (Harbeson & Rothchild, pp. 70-71).
Finally, Third World governments will need to actively encourage the
participation of civil society in the debate on economic policy, and to seek the
broad support of the population for the adjustment efforts. To this end,
governments will need to pursue a more active information policy, explaining the
objectives of policies and soliciting the input of those whom the policies are
intended to benefit. With closer economic integration, each country has an interest
in ensuring that appropriate policies are followed in its partner countries. This
could be achieved by coordination the relevant national policies within a regional
context (Harbeson & Rothchild, pp. 74).
Another challenge for the future will be to ensure that regional organizations
to which many Third World nations belonged are perceived as effective vehicles
for the integration of these countries into the world economy, providing mutual
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support to their members in their reform efforts. They should not be considered as
defensive mechanisms, intended to ward off the negative aspects of globalization.
Common regional objectives should be set in terms of international best practices.
And the regional organizations should seek to push through reforms in the areas of
the legal and regulatory frameworks, financial sector restructuring, labor and
investment code reform, and exchange and trade liberalization that seek to reach
international standards as quickly as possible (Spencer, pp. 91).
CONCLUSION
Globalization is by all means one of the most important developments taking
place in the world today. This importance is not only for those industrialized
nations which will be benefiting from new emerging markets for their products and
industries, but also for the Third World nations, especially in Asia, Africa, and
Latin America. It is important to point out that globalization is a major change that
is taking place all over the world, and hence influencing almost every world nation.
As the world turns into a single village, the underlying opportunities of
development and growth are very clear for Third World nations, especially as they
intend to take a respectable and considerable role in the world economy. However,
the dangers, risks and challenges underlying globalization have also to be
accounted for, especially that miscalculating the impacts of globalization by Third
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World nations could have disastrous results on Third World nations and
economies.
BIBLIOGRAPHY
Bobrow, Jerry. The Global Village. New York: Brown & Benchmark, Inc., 1996.
Harbeson, John & Rothchild, Donald. Africa in World Politics: Post-Cold War
Challenges. New York: Westview Press, 1996.
Morrison, William. Globalization and the Mass Media Debate. New Jersey:
Prentice Hall, Inc., 1996.
Pickwell, Arnold. Globalization and the Third World. Boston: Praeger Press, 1995.
Samuelson, Peter. WTO: World Trade Organization. New York: McGraw Hill,
Inc. 1996.
Santrock, Patrick. Globalization. New York: West Publishing Company, 1994.
Spencer, James A. GATT/WTO. New York: McGraw Hill Inc., 1996.