MODULE NUMBER

MM10

MODULE NAME

GLOBALISATION AT THE CROSSROADS .

COURSE LEADER

Professor Peter Nolan

AUTHOR:

Milena Milićević

HAND IN DATE

16 January, 2012

word count:

…………4154………….

I confirm that this submission is my own unaided work, except as specified below; all sources are fully acknowledged and referenced; the submission does not contain material that has already been used to any substantial extent for a comparable purpose.

'If developing countries are to make effective use of the opportunities

offered by global markets, they need a strong and effective state'. Discuss.

Does you society have more memories than dreams or more dreams than memories? (T. Friedman The World is Flat)

1. Effective, strong and making a difference

A strong and effective state is not what we imagine to be a bureaucratic government

apparatus; it is the end-result of effective and sustainable performance of all its actors:

national and multinational companies, small and middle sized enterprises, government and

local agencies, political parties, institutions of education, healthcare, and civil society

(NGOs), media, and last but not least… its people. For Stiglitz four pillars of successful

development strategy are ‘‘markets, government, individuals and communities, [and in the

last] people work together, often with help from government and nongovernmental

organization.’’ (2006, p. 51-53) When we estimate the complex relationships of agents who

constitute a strong and effective state; the factors which made developed countries rank

superbly on the global markets; and the challenges that developing countries face when trying

‘‘to catch up’’, we realize that the global playing field is not as flat as Friedman says, but at

least the globalization allowed more opportunities for the humankind than ever before.

Thirty years after the global business revolution, which was marked with the ‘‘emergence of

widespread industrial concentration across all high income countries, as well as extending

deeply into large parts of the developing world’’(Nolan 2008, p. 42) and ten years after 9/11,

which challenged the paradigms of international security, the question of how to increase

achievement of states at national and multinational (intergovernmental) levels is still the

burning one, especially for the developing countries. Why do developing countries usually

have to work more extensively on improving their governance? Because there are virtually no

examples of ineffective states who are in the category of highly industrialized and developed

ones according to the extensive tangible criteria of international organizations and our

experience. In other words, being ineffective and successful in business and/or public policy

is contrary to realities of life. Still, the logical premise here is not that a developing country

will gallop into the category of the developed ones only if its governance enhances, but that

the efficient state is a prerequisite for increasing the country’s economic competitiveness and

attractiveness to investments, which should improve the standard and welfare of citizens in

the long run. Moreover, the other question this essay will address is to which extent the state

apparatus should and can affect the national economic policy on the global markets since the

state’s role evidently declines in the age of neo-liberal capitalism, but also since the

environment for following the Washington Consensus changed. Trying to find the balance

between neo-protectionist and minimalist state is one of the greatest challenges for developing

countries nowadays. Finally, this essay will address why the policy makers in some

developing countries seem not to work hard enough so as to create a strong and effective state

and why such a state may not (choose to) participate in the global markets within its

capabilities?

At this point, let us outline certain parameters which define developing countries, but also

show elusiveness of categorization. According to the United Nations, International Monetary

Fund (IMF) and the World Bank, ‘‘the most important criterion to judge whether a country is

developed or developing is its per capita income’’, whereas the UN Development Programme

uses ‘‘a human development index (HDI) to measure quality of life in terms of income,

schooling, life expectancy and other factors.’’ (Khor 2011, p.1) For instance, according to the

parameter GDP based on purchasing-power-parity Japan is ranked 24th, the United States 7th,

whereas China is 94th, India 133rd and the Slovak Republic is eleven places above Russia.

(International Monetary Fund 2011) This result can imply that ‘‘people living in countries

with a lower cost of living could enjoy a higher living standard than their country's GDP

implies.’’ (Khor 2011, p.1) Moreover, the United Nations system uses the term developing

countries for Africa, the Central and South America, Caribbean, Asia excluding Japan, and

Oceania excluding Australia and New Zealand. (UNSTAD 2010) However, when thinking

about the GDP of certain economies as the measurement for success we should recall

Bhagwati’s observation, ‘‘growth has to be the principal, but not the only, strategy for raising

the incomes and hence the consumption and living standards of the poor.’’ (2004, p.54)

2. Who protected protectionism first?

Nolan recalls the historic setting at the beginning of the 20 th century and that Britain and the

US started to expand their economic influence after they relied on protectionism. ‘‘Having

established powerful firms behind protectionist barriers, both Britain and the US became

converts to free trade and ‘the global level playing field’, allowing their powerful businesses

free access to the markets of less developed economies with weaker business structure.’’

(2001, p.8) Moreover, state intervention was the remedy in the turmoil of Great Depression

when Roosevelt and the Democratic Party ‘‘reconstructed the economy and provided social

security’’ and confronted the concept of social progress which was based on ‘‘unrestrained

pursuit of wealth’’. (Nolan 2007, p. 36) Nevertheless, developing countries are often pursued

to open up entirely to laissez-faire capitalism behind the curtain of promised prosperity and

fair market conditions by those same super powers that in the age of imperialism and

colonialism created wealth via ‘‘nation states as independent, powerfully efficient engines’’

(Ohmae 2004, p. 214) and only afterwards became fiery advocates of free trade.

Taking these facts into account, we must make a distinction between free trade and fair trade

when we compare and contrast the interests of diverse Goliaths and Davids on the global map.

In other words, what the United States wants to obtain from the globalization process

nowadays is either a far cry from, for example, China’s intentions or both countries have the

same aims but have to reconcile their different strategies, which are in accordance with their

national interests and economic policy. Still, developing countries often have more difficulty

than high-income countries to respond to demands of global markets because developing

countries are less competitive, depend more on additional financial resources and became part

of globalization processes later. Thus, they must often deal with dilemmas why and how to

compete at all. Friedman provides one interpretation of what globalization has for the

developing countries as he recalls the observation of a government officer in a central bank on

Chinese priorities and relationship with America, ‘‘First we were afraid of the wolf, then we

wanted to dance with the wolf and now we want to be the wolf.’’ (2006, p. 394)

Evidently in the case of China, Japan and other ‘‘four little Asian tigers’’ (Nolan 2001, p.11)

the success story became reality, but what should do those countries who want their slice of

the global cake, but still need to find out how to get as large share of it, if any pieces are left?

Certainly, Asian dragons’ ability to ‘‘take advantage of globalization, without being taken

advantage of by globalization, [which] accounts for much of their success,’’ should be

acknowledged and adopted as a starting point. (Stiglitz 2006, p. 31)

3. Challenges accepted

Since nowadays ‘‘emerging managerial technocracy’’ (Stopford 1998, p. 22) has more

influence on global markets than national sovereignty, the ability of states to provide welfare

and to affect international businesses evolves. In order to evaluate the adopted level of

interventionism, a classification of strong states (Japan, France) and weak ones (the United

States and the United Kingdom) emerges. A strong state can ‘‘resist pressures from particular

interest groups better’’ as it governs autonomously, whereas a weak one ‘‘has fewer policy

instruments and its market operations predominately regulate its restructuring’’ (Ruigrok and

Tulder 1995, p. 101). Gilpin reminds us that in the trade-off among ‘‘fixed exchange rates,

national autonomy in monetary policy and international capital movements, the government

can achieve maximum two goals of efficient economic policy’’. For instance, European

Monetary Union uses common currency to strive for the fixed exchange rates, China

especially controls its capital mobility, whereas the United States maintains the independent

monetary policy and freedom of capital movements. (2005, pp. 354-5)

Bearing the interdependency of these economic goals in mind, the main challenges for

governments in developing countries will be: gradual liberalization after the legislative

reforms have been established; enforcing effective ‘‘macroeconomic and trade policies;

selecting assets’ ownership type and designing policies for specific industries.’’ (Stopford

1998, pp. 102-127) In terms of monetary policy, inflation, exchange rates and debts must be

managed as the funds are accumulated sustainably by increasing savings, avoiding external

loans and ‘‘preventing the tendency of capital flows to become volatile.’’ (Nolan 2007, p.

138) Concerning trade policies, developing countries should balance the level of anti-

dumping measures and increased export, along with positioning themselves better in WTO

and in region-specific organizations. Moreover, they should choose in which cases to ‘‘retain

state ownership and when to provide privatization incentives for foreign companies’’.

(Stopford 1998, p. 120) Finally, the requirements of specific sectors should be taken into

account since low and middle income countries promote their comparative advantages when

they compete mutually and since their governments ‘‘should enforce internal competition

among local and global manufacturers and producers of service’’ (Stopford 1998, p. 219)

Susan Strange makes a brilliant observation how these questions are tackled on daily political

agendas in both developing countries and majority of high-income countries. She states that

‘‘politicians everywhere talk as though they have the answers to economic and social

problems, as if they really are in charge of their country’s destiny.’’ (2004, p. 219) However,

people who vote for them feel disillusionment because of real economic hardships and

because policy makers often tackle challenges of global economy in public with unsubstantial

claims and at slow pace. ‘‘Too often the need to resolve fiscal or productivity problem is

presented to the electorate as the consequence of global competitive pressures.’’ (Rodrik

2004: 229) Domestic reform must not suffer because the institutions try to catch up in the

global competitiveness game. Domestic reform also means encouraging investments in

technology and education and deciding which priority industries to develop after negotiations

and consultations with private sector. Those working in hierarchical policy institutions should

bear in mind the path-dependency of today’s decisions which will affect their country in the

future although the far-reaching effect may not be obvious at this point. Therefore, although

issues like regulating public expenditure or exchange rates should be government’s priority,

the investments in education and R&D should not be neglected and perceived as expense.

3. 1. Time frame for liberalization

Developing countries should use the authority of state, their geopolitical position and the

shrewd assessment of timing to liberalize their economy gradually, while being fully aware of

intertwined interests in multilateral diplomacy, importance of political stability and capital

flow in the global markets.

Comparison of policies in disintegrated Soviet Union and countries like Poland and Slovenia

after the fall of Berlin Wall reinforces the argument that adopting Western capitalism with

detrimental speed and complete relying on Washington Consensus affected former communist

economies negatively. Stiglitz reminds us that the shock therapy of rapid privatization and

price liberalization brought only turmoil to the former Soviet Union as the state institutions

failed to fight off the consequent hyperinflation with high interest rates with little credit and

lowered fiscal deficits. The wounded economy could not recover from the recession and

‘‘prices in Ukraine at one point increased at the rate of 3,300 percent a year.’’ (Stiglitz 2006,

p. 37) On the other hand, Slovenia and Poland avoided hasty privatizing and strengthened the

legal institutions in shaky times in order ‘‘to reassure investors’’ and to become the EU

members. (Stiglitz 2006, p. 39)

Asian states epitomize another example of perfect timing for state intervention. In post-war

years they managed to increase their competitiveness due to state support and ‘‘American

economic and military aid that was combined with their high domestic savings and low

patterns of consumption.’’ (Strange 2004, p. 221) If it had not been for such government that

tried to ‘‘avoid monopoly and encourage oligopolistic rivalry’’ (Nolan 2001, p. 9) and central

bank intervention that ‘‘kept the external value of their currency actually lower than the rate’’

(Martin and Schumann 1997, p.144), Japanese economic miracle would not have happened.

3.2. Macroeconomic policy

In order to stimulate growth, developing countries need non-restrictive fiscal and monetary

policy, which is contrary to IMF’s standard request for high taxes and decreased budget

deficit, as well as high interest rates and lower inflation. In the long run high interest rates that

unrealistically lower inflation benefit creditors more, encourage excessive import due to price

fluctuations and decrease employment opportunities, welfare and consumption standards of

people.

The state can also undervalue its currency in order to make imports costly and exports cheaper

for foreigners. To prevent exchange rate shocks, capital flow control can be introduced.

Because of all these mechanisms more consumption and income can be created for

companies, along with greater accumulation and investment in research and production,

which should enable greater employment and more equally shared benefits of growth.

Stopford advocates that ‘‘a degree of inflation will less likely put off multinationals than the

signs of economic stagnation’’. (1998, p. 218)

Moreover, high savings rather than requirements of Bretton Woods institutions can increase

the investments. In order to encourage savings pattern as in Japan, ‘‘governments should

provide conditions for setting up branches in rural areas if needed.’’ (Stiglitz 2006, p. 33) The

interventions should happen in other economic branches of national interest and Nolan

emphasizes that ‘‘global competition may force local banks to improve their operating

mechanism.’’ (2007, p. 64) Governments should pay attention to excessive public

expenditures so as to ‘‘avoid borrowing and increased interest rates or higher taxes, which

decrease firms’ profits and entrepreneurial activities.’’ (Garrett 2005, p. 385)

Developing countries must also lobby for change in voting rights with non-governmental

agencies and other actors so as to have greater control of their policy by increasing their voice

in institutions of the one-dollar-one-vote system such as IMF or World Bank. Better

representation of Africa and Latin America is indispensable for fairer decision-making and

market conditions that will be contrary to current situation where ‘‘rich countries have control

of 60% of the voting and the US can veto decisions in the 18 most important areas.’’ (Chang

2007, p. 44)

3.3. Trading in the multipolar world

Developing countries should prudently regulate their tariffs, subsidies, anti-dumping measures

and increased export so as to reform trade policies and remain competitive globally. Since

states have the difficulty to ‘‘control production which is aimed at the world market and not

within their national borders’’, they are left with ‘‘the opportunity to bargain, not direct, to

their own or corporations’ advantage.’’ (Stopford 1998, p. 14) High tariffs, government and

bank loans, special subsidies and tax incentives can be introduced to widen state’s

maneuvering space and encourage development of country’s chief industries.

Anti-dumping may be one of the ways to confront and punish unfair competition that engaged

itself in dumping activities on the guest market. Hill states that WTO registered 70 percent of

all anti-dumping actions in basic metal industries, chemicals, plastics, machinery and

electrical equipment. (2007, p. 223) Tariffs on imported goods bring more money into

government budget, protect local economy and jobs against competition, but also affect prices

negatively because customers are charged more for particular imports and because competing

globally becomes more difficult with increased cost of production. (Hill 2007, p. 203)

However, it must not be forgotten that only import substitution will not do the trick in the

long run since the countries should work on export development, as well. Concerning export,

Bhagwati (2004, p. 55) reminds us how significant it is to diversify the commodities the

companies offer to the market in order to avoid ‘‘depressing the export prices by selling more

as major suppliers’’, which eventually leads to attentive listening to the market needs and

avoiding market saturation.

Finally, subsidies are especially significant for agriculture ‘‘in order to reduce international

trade’’ (Hill 2007, p. 204) and prevent entire dependency on imports from foreign countries.

However, the debate on competitiveness in agriculture remains open because it is suggested

that ‘‘removing all subsidies on agricultural production alone in OECD countries could return

to the developing countries three times more than all the foreign aid they currently receive

from the OECD nations.’’ (Hill 2007, p. 224)

3.4. Who owns international economy?

When discussing privatisation, it should be remembered that strategically important sectors

usually remain state-owned such as ‘‘airports, ports, electricity and gas […] forestry and bus

transport.’’ (Palcic D. and Reeves E. 2011) The industries which state decides to privatize

during favorable stock-market conditions must be regulated so as to ensure competition and

prevent companies from monopoly and obtaining speculative quick profits. Chandler reminds

us of the distinction between large and small enterprises in the American economy and that

large scale firms rarely bloomed in ‘‘industries of apparel, printing, tourism; whereas

transport, mining industry, electrical equipment always attracted large enterprises.’’ (McCraw

in Chandler 1997, p.527)

China’s economic success since 1980s epitomizes beneficial effects of government

interventions in ownership issues. Governments should demand for certain investment

obligations so that privatization does not cause social and market devastation. The local

suppliers and previous employees on the home field should be retained in privatized

enterprises since they provide insight into local culture and use established operational

infrastructure. China’s example also shows how to encourage competitiveness as it first ‘‘built

large indigenous firms [with the effort] to rebuild national pride and privatized at least half of

the small and medium sized enterprises (depending on the province) that had exponential

growth. (Nolan 2001 pp, 16-19)

Three main categories of FDI indicate how foreign capital can be present in national

economy: ‘‘equity capital (the value of the MNC's investment in shares of an enterprise in a

foreign country), reinvested earnings and other capital (which means short or long-term

borrowing and lending of funds between the MNC and the affiliate).’’ (WTO 1996, ch.4)

Fewer developing countries are beneficiaries of the FDI in comparison to the developed

countries since they are more dependent on external investments and have to compete among

themselves. Majority of resources goes to the more privileged ones and in that sense ‘‘Brazil,

Mexico and China together obtained 30 per cent of FDI inflows into developing countries in

1987-92 and 51 per cent in 1998.’’ (Nolan 2001, p. 98) Interestingly enough, the similar

surplus of foreign capital left diverse traces on those countries. Apparently the authority of

state and egalitarian work culture were more important factors for China’s success than

Mexico and Brazil’s better geopolitical position and closeness to the US trade. FDI became

more preferable means for developed economies to penetrate foreign market with high export

tariffs and transport costs.

3.5. The inner and outer riches of the developing ones

The developing states must be aware of their competitive advantages as they provide

mechanisms for better cooperation between their institutions and the global corporations.

Porter’s Diamond theory reminds us that advanced factors: communication infrastructure,

sophisticated and skilled labour, research facilities and technological know-how are more

significant for releasing country’s competitive advantages in the age of knowledge economies

than basic factors such as natural resources, location and demographics. (Hill 2007, p. 188)

Developing countries should take into account the success paradigms of the countries that

managed to catch up. Since the 1960s the governments of Taiwan, Korea, and Malaysia

invested in the high-tech sector and became not only ‘‘major producers of electronics,

computers, and computer chips, but also of products like steel and plastics’’, as they knew

that ‘‘technological advances in one area could help stimulate growth in another.’’ (Stiglitz,

2006 32) The fact that developing countries have only 19 representatives on Morgan Stanley

Dean Witter’s evaluation of ‘‘the 250 most competitive companies in the world’’ (Nolan

2001, p. 153) means that it is very difficult for them to penetrate the saturated global market

with established supply and production chains. Because multinational corporations oversee

their partner networks horizontally and treat markets hardly as ‘‘individual UN state entities’’,

but as regions where different ‘‘operations from procurement to innovation happen’’ (Ohmae

1995, pp. 111-112), governments should standardize their interventions towards investing

companies and know that companies seek ‘‘market expansion, resources or efficiency’’.

(Stopford 1998, p.70) Avoiding excessive red tape attracts investors to bring their capital

since even ‘‘minute details’’ matter, such as an average number of days needed to start a

business. (Friedman 2006, p. 421) Moreover, Morgan Stanley estimates that ‘‘steel, chemical

and transport equipment industries offer best possibilities for developing businesses to catch

up especially in terms of commoditized goods with low profit margins.’’ (Nolan 2001, p. 153)

Contrary to India where ‘‘you can innovate without having to emigrate’’ (Friedman 2006, p.

217) and where ‘‘[multinational corporations] can hire three Indians for the price of one

Swiss’, (Haans, P., Schumann, H. 1997, p. 99) many developing countries must decrease

brain drain by creating legislative environment where young experts will be given opportunity

to implement and transmit their international know-how and start entrepreneurial projects.

Outsourcing also increases employment rates and technology transfers but it requires constant

competitiveness and innovation so that foreign capital does not leave in search for better

partner countries. Still, education opportunities and creating jobs will not be enough for

country’s sustainable growth if country’s products are not sufficiently accepted on the global

market due to wobbly infrastructure and low productivity.

4. Participating or standing on the sidewalk

It must be acknowledged that some developing countries would not engage themselves in the

global markets since their political establishment fosters particracy, economic monopoly for

diverse lobbying groups, cartels, corruption actions or even war turmoil. Even though some

states have potential to liberate their abundant competitive advantages (from natural resources

to skillful workforce), they can become victims of the vicious circle called ineffective

governance and missed economic opportunities when they lack what Friedman calls

intangible things. Some societies [are] ‘‘willing to sacrifice for the sake of economic

development and the presence of leaders with a vision for state’s development and [are]

willing to use power to push for change rather than to enrich themselves and preserve the

status quo.’’ (2006, p. 417)

In enforcing democratic governance the UN agencies and international organizations such as

IMF, World Bank, and WTO can provide structural and expert help. However, certain

governments may resist such attempts for aid as they prefer taking advantage of status quo in

times of turmoil or they are distrustful because ‘‘the interests of those organizations are

closely linked with the commercial and financial interests of those in the advanced industrial

countries.’’ (Stiglitz 2003, p. 20) It is of paramount importance that international institutions

enable improvements for labour standards and human rights in emerging economies not by

imposing sanctions, but by leading by example.

5. Suggestions for the future

To conclude, effective and strong governments are a prerequisite for developing countries to

take opportunities of globalization. However, because both markets and governments are

imperfect, mutual work must be done and governments should be perceived as key to

solution, not a part of the problem. The statement of a foreign banker in Walt Street Journal

adequately embodies the trade-off between market and government interventions, ‘‘We

favour global market when we want to earn the money and we believe in state when we are

almost to lose money.’’(Chang 2011)

To sustain people’s welfare, governments should strive for regulated policies, legitimated

actions and integrity in communication with domestic and foreign stakeholders. Stopford

emphasizes that the bargaining process in government policy is intricate because both ‘‘over-

generosity and rigidness in negotiation with one partner affect the government’s credibility

with all others.’’ (1998, p.136) Moreover, national economy becomes prosperous due to its

strong pillars: the effective macroeconomic and trade policy, timely-tuned reforms for

liberalization and privatization, strategic development of industries, adequate infrastructure,

educated workforce, geopolitical stability and lowered corruption.

However, since reforms require long-term orientation and in-depth focus on multitude of

factors, if states fail ‘‘to manage the national economy, to maintain employment or sustain

economic growth, to avoid imbalances of payment with other states, to control the rate of

interest and the exchange rate, it is not the matter of technical incompetence, nor moral

turpitude nor political maladroitness.’’(Strange 2004, 224.) The most important is to keep

trying and be prepared for the market reactions because trade liberalization, outsourcing,

latest information technology, privatization and other drivers of global business revolution

made core businesses, and not governments, in the centre of the globalized world, whereas

core businesses created global interconnectedness of ‘‘a large number of heavily related

businesses, whose survival depends on them.’’ (Nolan 2001, p. 151) Finally, in the global

game of states and markets, the diverse stakeholders negotiating at the same table should bear

in mind Orwell’s observation, ‘‘All animals are equal but some are more equal than others.’’

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