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Inevitability of Globalization

 Paper No. 5379          Dated 27-Jan-2013

By Kazi Anwarul Masud

Regardless of positive or negative perception on globalization a globalized world is a reality and has come to stay. Its effects on the economy varies according to the state of the economy be it in the developed or the developing world.

 In the developed economies outsourcing of business to emerging economies like China and India has become the norm  due to low cost of people who are no less qualified to do the assigned job  as the people of the developed economies thus cutting production cost and remaining competitive. Consequently unemployment in developed countries is high, economies are in recession or stagnant, sovereign debt is very high and budgets are in deficit.

The collapse of economies in Iceland and Greece, installation by parliament of a technocratic government till recently in Italy to solve  the economic troubles in the country, increasing unpopularity of the center-right government in Germany due to Chancellor Angela Merkel’s decision to bail out the ailing Greek economy by spending German tax payers’ money are some of the immediate results of the global economic downturn.

By all accounts the largest economy in the world, the US, is not faring any better than many European nations. Unsurprisingly President Obama in his second inaugural address asked the American people to seize the moment: “so long as we seize it together. For we, the people, understand that our country cannot succeed when a shrinking few do very well and a growing many barely make it. We believe that America's prosperity must rest upon the broad shoulders of a rising middle class…. We do not believe that in this country, freedom is reserved for the lucky, or happiness for the few. We recognize that no matter how responsibly we live our lives, any one of us, at any time, may face a job loss, or a sudden illness, or a home swept away in a terrible storm. The commitments we make to each other - through Medicare, and Medicaid, and Social Security - do not sap our initiative; they strengthen us. They do not make us a nation of takers; they free us to take the risks that make this country great”.

By referring to climate change President Obama has shifted from Bush Jr’s policy of indifference to the catastrophe in varying degree waiting for the world, both developed and developing. But then it is easier said than done. What the world needs are transformational leaders who understand resilience and dynamism to face the multifarious problems. W Lee Howell of the World Economic Forum (Foreign Affairs-January 15 2013) considers resilience to be crucial “because, in a hyperconnected and interdependent world, no one country or organization can manage global challenges on its own. To be resilient is to be able to adapt to changing political and economic contexts and pursue critical goals while also being able to withstand and recover from sudden shocks.

Today's biggest challenges, meanwhile, also demand dynamism -- overcoming the ongoing global economic malaise, for example, require the capacity for bold vision and even bolder action”.   WEF in the formulation of Global Competitive Report looking for attributes of national resilience found seven characteristics to be significantly correlated: politicians' ability to govern, healthy business-government relations, the efficiency of how reforms are implemented, the public's trust of politicians, low wastefulness of government spending, the presence of measures to combat corruption and bribery, and government provision of services for improved business performance.

Howell too like millions of others found combating adverse effects of climate change to be of crucial importance for the survival of the planet. In this almost fatal game countries like Bangladesh, one of the worst sufferers of climate change, has to be given compensation for the environmental degradation caused by the developed economies over centuries in their pursuit of industrialization based prosperity. That apart global economic downturn is going to affect GDP growth of Bangladesh in the short term. World Bank projects that Bangladesh GDP growth will decline to 5.8% in FY 13 from 6.3% achieved in the previous year due to reduced export to developed economies. Additionally investment has not reached its desired level if Bangladesh is to become a middle income country in a few decades. Infrastructural and energy insufficiency coupled with political uncertainty have added to the difficulties in attracting investment. Of the impediments on the path of economic development, perhaps, energy occupies the central seat. Ann Florini (Carnegie council of ethics and international affairs) observes:

Energy is the means by which all else happens. The Industrial Revolution was, in essence, a transformation from economic systems reliant on human and animal power to ones based on far more concentrated forms of power. As the Nobel  laureate E. F. Schumacher noted, energy as we understand it today is “not just another commodity, but the precondition of all commodities, a basic factor equal with air, water, and earth.” This centrality makes the provision of energy services a matter of basic distributional justice. Energy security, therefore, is not only a crucial issue for Bangladesh it is a global issue made more serious due to concentration of fossil fuel in a few Arab countries (OPEC has non-Arab members  as well) in a region wrecked by violence and political turmoil.  Venezuela which is now going through difficult time due to the illness of President Hugo Chavez and strained relations with the US produces 2.4 million barrels a day and thereby is a significant member of OPEC.

So the geopolitical conflict in the Middle East and geostrategic conflict in South China Sea and oil price volatility add to the global energy vulnerability. Even if a reasonable solution to meet the gap between energy demand and supply can be found in Bangladesh growing gap between the rich and the poor would defeat the aim to have a fairer Bangladesh. Gini coefficient that measures the distribution of income among individuals or households that deviates from a perfectly equal distribution in an economy has been growing from 0.39 in 1983/84 to 0.46 in 2010 causing concern among many people.

According to Policy Research Institute another dimension of the inequality problem is provided by the respective income shares of the bottom and top 5 percentile of the population. The income share of the bottom 5 percent of the population fell from 1.2 percent in 1983/84 to less than 1% in 2010. In comparison, the income share of the top 5 percent has grown from 18.3 percent to about 25% over the same period. Paul Krugman fears that if income inequality continues to soar then the world may be looking at a dystopian class warfare future.  If the US is taken as a case representing the industrialized nations then class stratification has already begun. Stratification is not so much based on race, though race remains a factor as an unemployed black is less likely to be called for an interview for a job than an unemployed white, as it is based on earning capacity

In an article (Jan/Feb 2013-Foreign Affairs) Isabel Sawhill writes that disintegration of family, divorce, unwed child bearing, single parenting, single motherhood etc that were more prevalent among the African-Americans  have become the current normal among whites now. She writes of a report from the National Marriage Project at the University of Virginia that summed up: “Marriage is an emerging dividing line between America’s moderately educated middle and those with college degrees.”

The group for whom marriage has largely disappeared now includes not just unskilled blacks but unskilled whites as well. Indeed, for younger women without a college degree, unwed childbearing is the new normal. These differences in family formation are a problem not only for those concerned with “family values” per se, but also for those concerned with upward mobility in a society that values equal opportunity for its children. Because the breakdown of the traditional family is overwhelmingly occurring among working-class Americans of all races, these trends threaten to make the U.S. a much more class-based society over time. The well-educated and upper-middle-class parents who are still forming two-parent families are able to invest time and resources in their children—time and resources that lower- and working-class single mothers, however impressive their efforts to be both good parents and good breadwinners, simply do not have. Scary though this analysis is it is confined to only two races: whites and the African-Americans. The analysis does not include different culture, ethnicity, language or religion. America is no longer the land of opportunity that was commonly believed to be.

Technological advancement has not necessarily resulted in more employment because machines are making humans expendable. Paul Krugman was asked 15 years back to write for The New York Times what the world would look like in 2096 fueled by technological advancement. He saw that  information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing — indeed, replaced more easily than a lot of manual labor.  Then Krugman-- asks “how we have a decent society if and when even highly educated workers can’t command a middle-class income. I know, it’s rushing ahead a bit; but remember, the Luddites weren’t the poorest of the poor, they were skilled artisans whose skills had suddenly been devalued by new technology”. 

How then is the world going to get itself out of the quagmire of recession-stagnation-unemployment-chaos that has enveloped the North and the South, the developed and the developing nations? Nobel laureate Michael Spence advocates for the U.S. economy suffering primarily a structural problem, not a cyclical one, that can be effectively dealt with through Keynesian stimulus. Unless the Americans find a way to dramatically increase the size and scope of the tradable sector, the country is in for an extended period of slow job growth and rising inequality. And since at the heart of this problem is globalization one response to this dilemma would be to build trade barriers which Michael Spence thinks would be a big mistake. In Spence’s view a tradeoff between the winners and losers of globalization could produce a scenario where the multinationals could be encouraged to develop physical and human capital, say in the US, increasing the skills of the workers instead of outsourcing jobs to cheaper destinations

A case in point was the 1980s; "voluntary" auto-import quotas negotiated with the Japanese led a number of foreign companies to establish assembly plants in the United States. Although the wages paid by the "transplants" were less than the union wages paid by unionized American firms, they were higher than those paid in Asia at the time, and certainly above those in the Southern states where the factories were located. But thanks to extensive training and investments in the latest production machinery, the foreign automakers found they could produce quality cars at competitive prices right in the United States. Even now, long after the quotas have lapsed, Japanese, German and Korean automakers continue to open plants here. For developing countries Michael Spence thinks that the expanding scope and diminishing costs of automation and additive manufacturing may affect labor-intensive functions globally, including in earlier-stage developing countries.

A key factor in adapting to these forces is investment. For individuals, businesses, educational institutions, and governments in advanced countries, broad-based, elevated, and efficient investment in education and skills is critical. Closing wide information gaps in the market for skills would also increase the efficiency of these investments. Across-the-board upgrading of human capital will improve income distribution both directly and indirectly (by reducing the supply of lower-skill workers relative to demand). It will also partly mitigate the concentration of wealth that results from a highly skewed income distribution.

On the tradable side, competitiveness depends not only on human capital, but also on a host of other factors: infrastructure, tax systems, regulatory efficiency, policy-induced uncertainty, and energy. While all these are already understood and known what is not known is how to make the developed nations keep their pledges made decades back to assist the developing countries who for many years have been insisting that trade and not aid is their goal.

For countries like Bangladesh Generalized Scheme of Preferences (GSP) helps our competitiveness. We are now threatened by the US , one of our most important export destinations, as AFL-CIO has urged the US authorities to revoke facilities given to Bangladesh on account of Bangladesh not taking steps "to afford internationally recognized worker rights", including 1) the right of association, 2) the right to organize and bargain collectively, 3) freedom from compulsory labor, 4) minimum age for employing the children, and 5) acceptable conditions of work with respect to minimum wages, hours of work and occupational safety and health our negligence to implement pledges on workers’ rights. 

In 2011, Bangladesh's export to the USA under the GSP scheme was worth $26.33 million compared with India's $3.7 billion and Brazil's $2.0 billion.  Bangladesh's most important export item in the US market, readymade garments (RMG), is not covered by the GSP scheme. The few goods that Bangladesh could so far export to the USA availing GSP benefits include: tobacco, plastic bags and articles, gold equipment, bone china, porcelain kitchen/table ware, cereal based prepared foods. Attempts are being made at the official level to convince the US Trade Representative not to cancel GSP facilities for Bangladesh. The issue being discussed here is not only socio-economic development of Bangladesh but the global economic downturn that has affected us all.

Unless the developed economic get out of the woods it would be difficult for developing economies to make progress and ensure  a reasonable life standard for their people because the two are entwined and dependent on each other. Some isolationists or people disliking US preeminence in global affairs could be reminded of historian Niall Ferguson’s warning of “anyone who dislikes U.S. hegemony should bear in mind that, rather than a multipolar world of competing great powers, a world with no hegemon at all may be the real alternative to U.S. primacy. Apolarity could turn out to mean an anarchic new Dark Age: an era of waning empires and religious fanaticism; of endemic plunder and pillage in the world's forgotten regions; of economic stagnation and civilization's retreat into a few fortified enclaves”.

Such a dire possibility of another dark age may be discounted due to the controversial thesis of Thomas Friedman (criticized by Joseph Stglitz, Pankaj Ghemawat of Harvard Business School. Richard Florida etc) that the world has become flat due to technology being made available instantly and equally  to both the developed and the developing nations. Though flattening of the earth is neither without cost nor complete yet  it announces the permanence of globalization. Though  the solution to economic and associated problems will have to be solved by individual nations or regions due to peculiarity of the problems faced by them yet the interconnectedness of the international community would make compartmentalization of nations a thing of the past.   

(  The writer is a former Ambassador and Secretary iof Bangladesh)

 

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