GLOBALIZATION AND ITS IMPACT ON THE GLOBAL ECONOMY:

A Regional Perspective  

      The term globalization is used both in a descriptive and normative sense. It describes a process of internationalization and growing interdependencies where national boundaries become less and less important in decisions to be taken by economic agents. The normative perspective assumes that the full liberalization of market forces through open trade and foreign investment regimes will stimulate sustained growth and greater convergence of income per capita throughout the world.

Regionalization and Globalization

      Trade and FDI have witnessed a strengthening of regionalism, and there has been a "partial globalization" for other capital flows.

(i) Trade

      The share of EU exports to non-EU countries has remained more or less stagnant since 1960; in Latin America and Asia, intra-regional trade has increased. Only intra ex-Comecon countries' trade has drastically decreased, however, to the benefit of Western Europe. The asymmetry of interregional trade remains what it has always been: the OECD countries are mainly exporters of manufacture and services, the developing and CIS countries are largely exporting commodities, raw materials and light manufactures based upon natural resources - moreover, the intensity of trade between the regions has tended to weaken over a long period.

      In Latin America and Asia, only in intra-regional trade has the share of manufactured products increased rapidly. This and the development of regional and subregional agreements, stimulated by the economies of scale and conglomeration, as in Western Europe, is likely to lead to a growing regionalisation of trade. Africa's share of world trade does not appear to have benefited from globalization nor is there any evidence of increased intra-African trade.

(ii) Capital

      In trade, "geography matters". Theoretically, FDI should flow from capital-abundant to capital-scarce countries; but, in fact this has not happened. OECD's FDI goes mostly to other OECD countries. For the EU, most of the FDI stays in the EU and to a much lesser extent, to acceding countries. Outside of the OECD, FDI is concentrated in a very limited number of countries. Short-term capital and portfolio capital movements have been more global in scope, but their instability has generated crisis and obliged Governments of emerging countries to, sometimes, excessively pursue "prudent policies".

Potential Benefits and Drawbacks

      Capital account liberalization and financial deregulation, far from bringing in a new period of higher growth rates of output and employment, have been characterized by a long series of financial crises, from the Latin American debt crises of the 1970's and 1980's, the Savings and Loan debacle in the United States in the 1980's, the EMS crisis of 1992, the Mexican bond crisis of 1994, to the crisis in Southeast Asia in 1997, Russia in 1998, and Brazil in 1999. But this should not be surprising since all periods of free capital movements have been associated with financial crises (Kindleberger, "Manias, Panics and Crashes").
If instability and financial crises are unavoidable under unrestricted capital account convertibility, then it makes sense to:

(a)    slow down or halt further relaxation of controls in those countries which still have them (most of the transition economies, for example);

(b)    abandon attempts to alter the IMF's Articles of Agreement by inserting capital account convertibility as an ultimate objective;

(c)    regard capital controls as a normal and permanent part of the set of policy instruments available to national policy makers for their nation's economic interest, subject to rules against 'beggar-thy-neighbour practices';

(d)    provide IMF with the capacity to mobilize enough financial resources to prevent a liquidity crunch and reduce the risks of a crisis spreading.

      On the basis of the Latin American and Asian experiences, it appears appropriate to rethink the role of regional and subregional financial institutions. The Executive Committee-Economic and Social Affairs paper on Financial Architecture indicates that an international financial order that is based on a network of regional and subregional reserve funds and development banks, rather than on a few international organizations, would contribute not only to the stability of the world economy but also to establishing more equitable conditions at the global level. Developing countries should, therefore, work to strengthen existing regional and subregional financial institutions and to complement them with new mechanisms of cooperation in this area.

The Resistance to Globalization

(i) Asymmetry in the implementation of regulation and the loss of government control.

      The Uruguay Round provided a stronger mechanism to settle disputes in international trade. This provided hope that recourse to provisions such as Special 301 or Super 301 of the US 1988 Omnibus Trade bill or other EU restrictive practices would be avoided. The current disputes between the EU and the US and the latter's threat of bringing out 301 again, show that the hopes aroused by the Uruguay Round were too optimistic and, maybe, too naïve.

       WTO is increasingly considering (non-border) issues such as investment policy, competition policy, environmental regulation and social conditions. This intrusion into areas formerly regarded as within the domain of domestic policy is leading to increasing resistance on the part of many developing countries, and giving rise to concerns among those countries that have not yet been accepted into WTO.

(ii) Social resistance

      In Europe, skepticism about globalization is also rooted in its social dimension. For nearly two decades there has been a trend to open and deregulate economies and keep them open. To reduce the social impact of openness, the social spending should have been increasing; however, that may not have been possible in all countries and regions. As globalization deepens, the pressure to further improve the competitiveness of national economies conflicts with the social equity. In addition, the social consensus required to keep domestic markets open has eroded.

      Increasingly, in developing countries, social expenditure has been strongly affected by successive crises. Even in the absence of crisis, it has been curbed to reduce the budget deficits and avoid negative reactions of financial markets. These trends worry policy makers especially in view of the long-term implications of poor education and health conditions on the population.

      Such social implications lead to the conclusion that the agenda for further trade liberalization and regulation should take into account priorities and concerns of all Parties. If not, resistance will increase, preventing countries from taking potential advantage of open markets.

      The UN could try to aim at a kind of "social contract for globalization" with the participation of Member States, businesses and civil society representatives in order to prepare an agenda that would set in place a more secure basis for the functioning of the world economy.

Asymmetries in the Capacity to Benefit from Globalization

      Most developed countries and countries with economies in transition are unable to exploit the opportunities of liberal markets. They are very vulnerable to the costs of adjustment. To strengthen their capacity to benefit from open trade and capital movements, good governance and effective implementation of the laws and rules are required, together with a wide range of necessary micro-economic reforms.

 
      Education and creating infrastructure for the better absorption and adaptation of more advanced technologies remain important. For attracting FDI, which can sometimes provide a vehicle for the transfer of technology and modern management techniques, the low cost of labour does not compensate for the low level of productivity and, just as important, the inadequacies of the legal and institutional structures.

       In this context, the brain drain makes it even more difficult to close the gap between the needs for social and institutional capital in the transition and developing economies, on the one hand, and between them and developed market-economies, on the other.

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