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Risks for Third World Nations toward Globalization

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 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).

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, inward-looking 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).

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 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 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 sub-contract 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 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 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 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 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, 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 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 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 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 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 World nations could have disastrous results on Third World nations and economies.

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