55GLOBALIZATION AND CHALLENGES BEFORE INDIAGen single space.docx

1、55GLOBALIZATION AND CHALLENGES BEFORE INDIAGen single spaceRESPONDING TO GLOBALIZATION: INDIAS ANSWER4th Ramanbhai Patel Memorial Lecture on Excellence in EducationbyDr. C. RangarajanChairmanEconomic Advisory Council to the Prime MinisterNew DelhiFebruary 25, 2006AhmedabadRESPONDING TO GLOBALIZATION

2、: INDIAS ANSWER I deem it a great honour to be invited to deliver the 4th Ramanbhai Patel Memorial Lecture on Excellence in Education. Shri Ramanbhai Patel was a true entrepreneur. He came to business from education and set up an indigenous pharmaceutical company, which later became one of the large

3、st manufacturers of drugs and pharmaceuticals. He was deeply interested in the promotion of education and contributed liberally towards this cause. I am indeed happy that the Ahmedabad Management Association has instituted a lecture series to commemorate his memory.Ahmedabad Management Association i

4、s perhaps the most active management association in our country. It has become the forum for a discussion of variety of issues relating to industrial growth and business education. Its programmes and seminars have come to be recognized as being the most useful and well organised. May I take this occ

5、asion to congratulate the Ahmedabad Management Association on the excellent work it has been doing. It is a matter of great pleasure for me to be in Ahmedabad and to meet familiar faces.Globalization has become an expression of common usage. While to some, it represents a brave new world with no bar

6、riers, for some others, it spells doom and destruction. It is, therefore, necessary to have a clear understanding of what globalization means and what it stands for, if we have to deal with a phenomenon that is willy-nilly gathering momentum.Globalization and its Meaning Broadly speaking, the term g

7、lobalization means integration of economies and societies through cross country flows of information, ideas, technologies, goods, services, capital, finance and people. Cross border integration can have several dimensions cultural, social, political and economic. In fact, some people fear cultural a

8、nd social integration even more than economic integration. The fear of “cultural hegemony” haunts many. Limiting ourselves to economic integration, one can see this happen through the three channels of (a) trade in goods and services, (b) movement of capital and (c) flow of finance. Besides, there i

9、s also the channel through movement of people.Historical Development Globalization has been a historical process with ebbs and flows. During the Pre-World War I period of 1870 to 1914, there was rapid integration of the economies in terms of trade flows, movement of capital and migration of people.

10、The growth of globalization was mainly led by the technological forces in the fields of transport and communication. There were less barriers to flow of trade and people across the geographical boundaries. Indeed there were no passports and visa requirements and very few non-tariff barriers and rest

11、rictions on fund flows. The pace of globalization, however, decelerated between the First and the Second World War. The inter-war period witnessed the erection of various barriers to restrict free movement of goods and services. Most economies thought that they could thrive better under high protect

12、ive walls. After World War II, all the leading countries resolved not to repeat the mistakes they had committed previously by opting for isolation. Although after 1945, there was a drive to increased integration, it took a long time to reach the Pre-World War I level. In terms of percentage of expor

13、ts and imports to total output, the US could reach the pre-World War level of 11 per cent only around 1970. Most of the developing countries which gained Independence from the colonial rule in the immediate Post-World War II period followed an import substitution industrialization regime. The Soviet

14、 bloc countries were also shielded from the process of global economic integration. However, times have changed. In the last two decades, the process of globalization has proceeded with greater vigour. The former Soviet bloc countries are getting integrated with the global economy. More and more dev

15、eloping countries are turning towards outward oriented policy of growth. Yet, studies point out that trade and capital markets are no more globalized today than they were at the end of the 19th century. Nevertheless, there are more concerns about globalization now than before because of the nature a

16、nd speed of transformation. What is striking in the current episode is not only the rapid pace but also the enormous impact of new information technologies on market integration, efficiency and industrial organization. Globalization of financial markets has far outpaced the integration of product ma

17、rkets.Gains from Globalization The gains from globalization can be analyzed in the context of the three types of channels of economic globalization identified earlier.Trade in Goods and Services According to the standard theory, international trade leads to allocation of resources that is consistent

18、 with comparative advantage. This results in specialization which enhances productivity. It is accepted that international trade, in general, is beneficial and that restrictive trade practices impede growth. That is the reason why many of the emerging economies, which originally depended on a growth

19、 model of import substitution, have moved over to a policy of outward orientation. However, in relation to trade in goods and services, there is one major concern. Emerging economies will reap the benefits of international trade only if they reach the full potential of their resource availability. T

20、his will probably require time. That is why international trade agreements make exceptions by allowing longer time to developing economies in terms of reduction in tariff and non-tariff barriers. “Special and differentiated treatment”, as it is very often called has become an accepted principle.Move

21、ment of Capital Capital flows across countries have played an important role in enhancing the production base. This was very much true in 19th and 20th centuries. Capital mobility enables the total savings of the world to be distributed among countries which have the highest investment potential. Un

22、der these circumstances, one countrys growth is not constrained by its own domestic savings. The inflow of foreign capital has played a significant role in the development in the recent period of the East Asian countries. The current account deficit of some of these countries had exceeded 5 per cent

23、 of the GDP in most of the period when growth was rapid. Capital flows can take either the form of foreign direct investment or portfolio investment. For developing countries the preferred alternative is foreign direct investment. Portfolio investment does not directly lead to expansion of productiv

24、e capacity. It may do so, however, at one step removed. Portfolio investment can be volatile particularly in times of loss of confidence. That is why countries want to put restrictions on portfolio investment. However, in an open system such restrictions cannot work easily. Financial Flows The rapid

25、 development of the capital market has been one of the important features of the current process of globalization. While the growth in capital and foreign exchange markets have facilitated the transfer of resources across borders, the gross turnover in foreign exchange markets has been extremely lar

26、ge. It is estimated that the gross turnover is around $ 1.5 trillion per day worldwide (Frankel, 2000). This is of the order of hundred times greater than the volume of trade in goods and services. Currency trade has become an end in itself. The expansion in foreign exchange markets and capital mark

27、ets is a necessary pre-requisite for international transfer of capital. However, the volatility in the foreign exchange market and the ease with which funds can be withdrawn from countries have created often times panic situations. The most recent example of this was the East Asian crisis. Contagion

28、 of financial crises is a worrying phenomenon. When one country faces a crisis, it affects others. It is not as if financial crises are solely caused by foreign exchange traders. What the financial markets tend to do is to exaggerate weaknesses. Herd instinct is not uncommon in financial markets. Wh

29、en an economy becomes more open to capital and financial flows, there is even greater compulsion to ensure that factors relating to macro-economic stability are not ignored. This is a lesson all developing countries have to learn from East Asian crisis. As one commentator aptly said “The trigger was

30、 sentiment, but vulnerability was due to fundamentals”. Concerns and Fears On the impact of globalization, there are two major concerns. These may be described as even fears. Under each major concern there are many related anxieties. The first major concern is that globalization leads to a more iniq

31、uitous distribution of income among countries and within countries. The second fear is that globalization leads to loss of national sovereignty and that countries are finding it increasingly difficult to follow independent domestic policies. These two issues have to be addressed both theoretically a

32、nd empirically. The argument that globalization leads to inequality is based on the premise that since globalization emphasizes efficiency, gains will accrue to countries which are favourably endowed with natural and human resources. Advanced countries have had a head start over the other countries

33、by at least three centuries. The technological base of these countries is not only wide but highly sophisticated. While trade benefits all countries, greater gains accrue to the industrially advanced countries. This is the reason why even in the present trade agreements, a case has been built up for special and diff