(Dr. John Matthai Lecture, 2006: Calicut University)
I am deeply honoured to have been invited to deliver a lecture in the Frontier Lecture series on this occasion. I share with you the privilege to celebrate the memory of one of the most talented and distinguished economists who shaped to a considerable extent the economic thinking of India immediately after independence. Dr. John Matthai did it in many capacities, as a finance minister, as chairman of independent commission, and as a writer and as a life long teacher. What is more, he did it all with rare dedication, to the sole purpose of India's progress. Nothing stood in the way of his determined dedication. He was as happy to take up the responsibility as a finance minister as to give it up when he differed. The office did not interest him, only the bigger cause did. It appears we no longer have many persons of such integrity in public life. So while I am privileged to celebrate with you the memory of this exceptional intellectual, I must admit, I do it with a tinge of sorrow. Why do not we have many more such men and women among us today in public life? That is why, if my lecture carries a sense of desperate urgency which goes a little beyond our usual academic style of discourse, I hope you would understand and forgive me for being direct in my views.
A dilemma faces the developing countries today as they find themselves in an awkward corner. The policy space left for the nation state is shrinking gradually in the current phase of globalization, while that space is being occupied increasingly by the
emerging rules of globalization. And yet, the global rules of the game are flawed, as they are biased strongly in favors of the richer countries, especially the Untied States. The dilemma arises because the developing countries tend to feel on the one hand that there is no alternative to accepting globalization in its present form, the so-called TINA syndrome in a uni-polar world dominated by the U.S. On the other hand, they know that they can rely hardly on the current rules of globalization to further their developmental objectives. In many cases the dilemma is acute irrespective of how the government decides to present the case to the public. As a result, developmental problems are seldom faced from the standpoint of the developing countries,; instead solutions tend to be imposed on them in the name of globalization
Let a couple of well-known examples illustrate the point. The issue of a fairer global trade in agricultural commodities, without subsidy to the farmers in richer countries, is required not merely for a freer trade regime; it affects also the poorest one billion people in the world. as most of them are connected directly or indirectly with agricultural activities in the rural areas of developing countries. There is hardly any other trade-related example with greater compatibility between a more efficient international price mechanism operating through freer trade, and greater global equality. And yet, international negotiations governed by immediate and narrow national interests of the richer nations reduced global rule making recently to a "tit-for-tat" strategy that led to breakdown in negotiations, and the tendency to impose solutions by the richer and more powerful nations.
In a parallel vein, one could think of other examples of imposed rather than negotiated solutions. Both the Bretton Woods institutions, namely the IMF and the World Bank, make policy recommendations to the developing countries in financial difficulties through their standard pro-market 'conditionalities'. The voting systems in these institutions are heavily biased in favour of the richer countries especially the United States, because of their higher economic contributions to these institutions. The market principle of the rich have- more votes- than-the- poor because of their greater purchasing power hold blatantly in the voting system. As a justification of imposing pro-market conditionalities on developing countries, both these institutions often place a great deal of emphasis on the principle of accountability to the market.
However, it is ironical that they themselves remain totally unaccountable for their performances and recommendations, no matter whether an economic collapse occurs in Argentina under their guidance, or an acute financial crisis erupts in east Asia (the only country to escape largely its adverse consequences was Malaysia, which went openly against the IMF prescriptions), or years of stagnation continues despite their recommended large scale IMF-World Bank sponsored liberalization in sub- Saharan Africa.
These are mere illustrations of the power the rich nations have over the poor nations. It arises to a large extent from some structural asymmetries inherent in the current process of globalization. Until we identify them clearly, it would appear that this process of globalization led by the interests of the rich is a natural phenomenon like an earthquake of a drought. The consequences have to be simply accepted because they cannot be controlled. The analogy is misleading. As we begin to know more about the workings of nature, we start to exert control to varying extent over the fall out of natural phenomena. Similarly, we would be in a position to able to integrate strategically with the global economy to our advantage, instead of meekly submitting to the process of globalization, only if we understand better some of these asymmetries that are also the source of asymmetric global power relations.
First, and perhaps the most fundamental asymmetry in the world economy arises today from the freedom of movement of capital, especially financial capital on one hand, and the restrictions placed on the other, on the movement of labors, especially unskilled labors from developing countries. Despite vast improvements in travel and communications technology, available estimates suggest that labors migration as a proportion of the total world population has been lower in the current phase (approximately 1973-to date) compared to the earlier phase of globalization (approximately, 1870-]9]3).On a rough reckoning, about one in six persons crossed national borders for employment or livelihood between] 860 and 1900. They went as indentured labors from China and India or as colonial settlers from Europe to North, Central and South America and to Australia. Over a comparable period of nearly five decades of the current phase of globalization for which we have estimates suggesting that not more than one in eight persons has migrated despite vast improvements in transport and communication, Contrast this relatively sluggish movement of labors during the current phase of globalization with the movements of capital, especially financial capital. Rough estimates available from the Bank of International Settlements suggest that the daily volume of private trade in foreign exchange is over 1.2 trillion (1012) U. S dollars. Of this, less than 2 per cent is accounted for by trade in goods and services and even if one adds all direct foreign investment it would still be well below 4 percent. A few days of hostile private trade in the foreign exchange market can wipe out the entire foreign reserve of all the central banks in the world. The defining characteristic of the current phase of globalization has become this overwhelming supremacy of private financial capital. The world has not seen anything like this before.
The rise to ascendancy of international finance started with successive waves of liberalization of the major capital markets of the advanced capitalist countries starting from about the mid-1970s. It assumed irresistible momentum by early 1980s ushering in the current phase of economic globalization dominated by international finance. Although little explicit note is taken of its implications in public discussions and government pronouncements, its imprint on the pace and pattern on Indian development too has been unmistakable. Economic policies are increasingly formulated by the government as never before with a view to the sentiments of the financial markets. The English language media, especially the electronic media that shape Indian middle class opinion, behave as if the daily fluctuation of the stock market is an accurate barometer of the health of the real economy. However, underlying this is an uncomfortable fact that is overlooked willingly or unwillingly. The Indian stock market is pathetically small in relation to the vast size of global private trade in foreign exchange mentioned earlier. The rupee and Indian Slacks can easily be set into an uncontrollable downward spiral by a few large international players speculating against some Indian stocks or the rupee. This is no at all fanciful. Recall how the Dalal Street nose-dived immediately after the 2004 genera! elections results, because a few large, mostly foreign institutional investors began to withdraw from the Indian capital market under the fear that a coalition government supported by the Left will be unfriendly towards private businesses. However, as Soon as the United Progressive Alliance government named its top economic team, a trio of the prime minister, the finance minister and the deputy chairman of the planning
commission, all known for their extreme pro-market and corporate friendly outlook, the stock markets began to stabilize in no time. Nothing had changed about ground realities of the Indian economy in those few weeks, except international finance capital needed assuring political signals. In the process, the future course of economic policies for the country got set.
This story would remain incomplete for India (and for many other developing countries) without mentioning the critical role of the IMF and the World Bank Since those two institutions are in a pivotal position to influence the perception of private foreign investors like multinational corporations, banks and other financial institutions about a country's investment climate, their role becomes critical. They shape to a significant extent at least in the short run the sentiments of the financial markets. If the economic policies of a government are favourable to the corporations, it generally gets a favourable signal from the pro-market IMF and the World Bank, with the result capital tends to flow in to stabilize or even stimulate the stock market. On the other hand, with an unfavourable signal from the same institutions, the government runs the risk of destabilizing capital flights. This is the core game under globalization in so far as these two institutions are concerned, wile academic research on themes like poverty and macroeconomic policies are mere sideshows. This has been part the unwritten script of financial globalization in so far as developing countries are concerned.
The major players in the financial markets as well as the IMF and the Bank with their pro-market, and pro- corporate philosophy are generally against the expansion of the economic role of the government. So we have in India a Fiscal Responsibility and Budget Management Act (FRBM), which prevents the government from spending additionally in areas like elementary education or expanding employment guarantee or strengthening decentralization of the panchayat system through adequate fiscal autonomy. Tribals and peasants are evicted from lands with little compensation from to improve the 'investment climate' for the corporations. If we have the eyes to see, it becomes increasingly apparent that. in the name of development we are typically pursuing policies that might deliver high growth, but it is growth without a democratic content It does not reach the poorest citizens of India who need to benefit most urgently from the process of growth. However~ this sort of pro-market reforms and high growth led by the corporations, might make the IMF, World Bank and some in government happy. It may even be accompanied by a rising trend in the stock market to create the illusion of a healthy state of economic affairs, but all this will remain merely irrelevant statistics for the poor majority in this country. This is why each and every government that has been following this sort of policy gets showered with the approval of the corporate sector, of the IMF and the World Bank, and even of the upper middle class, but loses the general election. The Congress government under the then prime minister Narasimha Rao with Dr. Manmohan Singh as its finance minister spearheading economic reforms lost the general election. Dr. Singh himself personally failed to win a seat. The pattern got repeated. The BJP-led coalition crashed in the elections with its 'shining India' slogan; and, it did especially badly in Andhra which was said to have been shining under the glow of IT industries. There is no reason to believe that things would be any different next time, unless remedial interventions like employment guarantee and fair price and subsidies to farmers despite WTO become sufficiently strong counter-acting forces. However, this would require going against the hidden script of globalization by upsetting the alliance between large multinational corporations and banks including the IMF and the WB, and a pliable domestic government.
Let me turn now to the second important asymmetry in the current phase of globalization. It arises from the increasingly freer flow of trade in goods and services on the one hand, and the growing restriction on the transfer of knowledge and technology embodied in the production of those goods and services on the other. In the emerging regime of trade-related intellectual property rights (TRIPS), all developing countries including India find it increasingly difficult to learn and adopt the production technology involved in the goods and services they import. The asymmetry of the emerging trade regime has been characterized by freer trade in goods and services coupled with greater restrictions on the flow of productive knowledge. Thus, in the more liberalized trade regime of the World Trade Organization, India come under increasing pressure to import goods and services rather than produce them at home, while it is conveniently forgotten that international trade has been the vehicle for learning the technology embodied in the traded goods and new products throughout industrial history. This learning process involved through international trade may well be the most important dynamic gains from freer trade, far outweighing the static gains of existing comparative advantage. By treating knowledge more and more as simply a privately tradable commodity, the current trade regime shows its bias towards corporations as the generator of knowledge who should be handsomely rewarded, but forgets the importance of other sources of knowledge. It has tended to underplay traditional community based knowledge to the detriment of many indigenous communities. Submitting blindly to such an asymmetric trade regime in the name of globalization would serve the interests of the rich and powerful nations, but would leave the most vulnerable sections of our population especially in agriculture in even greater distress. The suicides of farmers in Maharastra, Andhra, Kerala and Punjab, adding to over 10 thousand in a year, foretell the kind of disaster that the commercialization of agriculture under WTO regime might bring.
Ii is in this context that the inevitable consequence of globalization in terms of the increased relative importance of the external vis-à-vis the internal or domestic market needs to be examined. It has influenced thinking on macroeconomic policy in a way, which is seldom highlighted. It emphasizes the importance of reducing the costs of production through more efficient supply side policies for increasing the international competitiveness of the national economy; but ignores the problem of creating adequate purchasing power and aggregate demand in the domestic market.
The shift in focus from the demand to the cost or supply side has had serious consequences. The most apparent consequence of this shift concerns labour market 'flexibility', i.e. some form of wage restraint. Lower wages tend to depress the unit cost of production, but also the consumption demand from wage income. Consequently, unless either higher investment or increased export surplus makes up for that reduction in consumption demand in a regime of investment-or export-led growth, insufficient aggregate demand at home would be a drag on development.
Similarly, the emphasis on increasing output (value added) per worker or labour productivity to reduce labour cost of business, and use this as a too] for enhancing international competitiveness has a downside. Exclusive attention on productivity separates it from its consequences on total GDP, and the employment in the economy. For instance, total output would decrease despite an increase in productivity, if the percentage decrease in the level of employment exceeds the increase in labour productivity. Consequently, the corporate strategy of 'down-sizing' the labour force to create a "lean and efficient corporation" for increasing market share, might turn out to be good for a particular corporation, but macro-economically counter-productive if either total supply, or the size of the domestic market shrinks.
Policies of reducing unit cost in search of greater efficiency, through down-sizing the labour force and restraining wages are encouraged under globalization by the predominance of external market considerations. However, in many cases, these policies often turn out to be a macro-economically flawed. Because while they are efficient on the microeconomic scale of a single corporation or enterprise, such policies can also become counter-productive on the macroeconomic scale due to their effect of depressing demand.
The underlying problem is more general. The blurring of the distinction between micro- and macro- efficiency has become a generic problem with many currently pursued economic policies. It stems from the influences 'methodological individualism' in economics and, from 'neo-liberalism' in politics. It gives rise to many 'fallacies of composition' in macro- economic policy by assuming that the individual micro-economic 'parts' have the same properties as the 'whole' macro-economic system. To illustrate the point, an individual corporation restraining wage or shedding labour to raise productivity might raise the efficiency and profit of that corporation. But if many corporations follow this policy at the same time, total demand and employment in the economy will shrink, and even the profit of all corporations might be reduced. Similarly, one country might increase its export more than its imports, but all cannot achieve it; because, one country's export surplus has to be matched by some other country's import surplus. It is a zero sum global game in which all cannot be winners at the same time. And, it would be foolish to rely entirely on the external market if only for this reason.
In the current phase of globalization a third asymmetry arises from the role assigned to the state in monitoring and regulating economic activities. The market-oriented philosophy intends to curb the role of the state as an economic actor. This often gives rise to an almost schizophrenic view of the capabilities of the state. It is usually claimed that the state cannot be trusted with expansionary monetary and fiscal policies (e.g. FRBM Act mentioned earlier) because the state has an in-built tendency to be financially irresponsible. At the same time however, the same state is relied upon to undertake far more complex financial tasks like extending the scope of the market though privatization, regulating the stock exchange etc. This schizophrenic view about the capabilities of the state is rooted in denying the state it’s developmental and welfare role, but using it to promote the reach of the multinational corporations through measures like privatization. The result often is greater corruption and lack of transparency in governance.
Finally, in India the most fundamental asymmetry is to be found in the uneasy relation between our political democracy and the market mechanism. The two have come to be treated as mutually reinforcing concepts in neo-liberal philosophy because both the free market and democracy extend the scope of individual choice And yet, the relationship between the two types of freedom granted by the market economy and, by political democracy often tends to be in conflict in developing countries. The democratic principle of 'one-adult-one-vote' coexists rather uneasily with the free market philosophy that the rich, with greater purchasing power, would have more 'votes' than the poor in the market place. This asymmetry becomes even more acute, the greater is the inequality in the distribution of income, and the larger is the proportion of the poor with political voting rights, but economically without a 'voice' in the market. In these circumstances, the democratic form of government comes under increasing strain if too much freedom is granted to the market. And yet, the forces unleashed by the process of globalization tend to drive relentlessly towards a situation in which governments have little control over the free play of the global market forces.
As a matter of fact the history of the relation between economic development and democracy has been far more complex than the currently fashionable 'political correctness' would have us believe. Historically, the per capita income of the western countries had to reach some minimum of US dollars 2000 per capita per year. This was a high level compared to India's $200-250 around the time of our first general election in 1952 (measured in 1999 PPP calculation). It is an unparalleled achievement in the recorded political history that political democracy in India could be sustained at that level of poverty despite the tremendous diversity of the country. However, this should not blind us to the fact that democracy historically co-evolved with development without necessarily being either its cause or consequence. The challenge posed to our democratic form of government is different today. It must control the excesses of globalization and domination by corporations of the economy. Our democracy has to ensure that the process of growth is not corporate driven, but is decentralized and employment driven to allow for the widest participation of our citizens. Only then will the wealth created by growth be fairly shared, and growth itself will assume a democratic content. It will be wealth created by the people, for the people. The nature of globalization must fit into this objective. This is the compulsion of our time.
I am deeply honoured to have been invited to deliver a lecture in the Frontier Lecture series on this occasion. I share with you the privilege to celebrate the memory of one of the most talented and distinguished economists who shaped to a considerable extent the economic thinking of India immediately after independence. Dr. John Matthai did it in many capacities, as a finance minister, as chairman of independent commission, and as a writer and as a life long teacher. What is more, he did it all with rare dedication, to the sole purpose of India's progress. Nothing stood in the way of his determined dedication. He was as happy to take up the responsibility as a finance minister as to give it up when he differed. The office did not interest him, only the bigger cause did. It appears we no longer have many persons of such integrity in public life. So while I am privileged to celebrate with you the memory of this exceptional intellectual, I must admit, I do it with a tinge of sorrow. Why do not we have many more such men and women among us today in public life? That is why, if my lecture carries a sense of desperate urgency which goes a little beyond our usual academic style of discourse, I hope you would understand and forgive me for being direct in my views.
A dilemma faces the developing countries today as they find themselves in an awkward corner. The policy space left for the nation state is shrinking gradually in the current phase of globalization, while that space is being occupied increasingly by the
emerging rules of globalization. And yet, the global rules of the game are flawed, as they are biased strongly in favors of the richer countries, especially the Untied States. The dilemma arises because the developing countries tend to feel on the one hand that there is no alternative to accepting globalization in its present form, the so-called TINA syndrome in a uni-polar world dominated by the U.S. On the other hand, they know that they can rely hardly on the current rules of globalization to further their developmental objectives. In many cases the dilemma is acute irrespective of how the government decides to present the case to the public. As a result, developmental problems are seldom faced from the standpoint of the developing countries,; instead solutions tend to be imposed on them in the name of globalization
Let a couple of well-known examples illustrate the point. The issue of a fairer global trade in agricultural commodities, without subsidy to the farmers in richer countries, is required not merely for a freer trade regime; it affects also the poorest one billion people in the world. as most of them are connected directly or indirectly with agricultural activities in the rural areas of developing countries. There is hardly any other trade-related example with greater compatibility between a more efficient international price mechanism operating through freer trade, and greater global equality. And yet, international negotiations governed by immediate and narrow national interests of the richer nations reduced global rule making recently to a "tit-for-tat" strategy that led to breakdown in negotiations, and the tendency to impose solutions by the richer and more powerful nations.
In a parallel vein, one could think of other examples of imposed rather than negotiated solutions. Both the Bretton Woods institutions, namely the IMF and the World Bank, make policy recommendations to the developing countries in financial difficulties through their standard pro-market 'conditionalities'. The voting systems in these institutions are heavily biased in favour of the richer countries especially the United States, because of their higher economic contributions to these institutions. The market principle of the rich have- more votes- than-the- poor because of their greater purchasing power hold blatantly in the voting system. As a justification of imposing pro-market conditionalities on developing countries, both these institutions often place a great deal of emphasis on the principle of accountability to the market.
However, it is ironical that they themselves remain totally unaccountable for their performances and recommendations, no matter whether an economic collapse occurs in Argentina under their guidance, or an acute financial crisis erupts in east Asia (the only country to escape largely its adverse consequences was Malaysia, which went openly against the IMF prescriptions), or years of stagnation continues despite their recommended large scale IMF-World Bank sponsored liberalization in sub- Saharan Africa.
These are mere illustrations of the power the rich nations have over the poor nations. It arises to a large extent from some structural asymmetries inherent in the current process of globalization. Until we identify them clearly, it would appear that this process of globalization led by the interests of the rich is a natural phenomenon like an earthquake of a drought. The consequences have to be simply accepted because they cannot be controlled. The analogy is misleading. As we begin to know more about the workings of nature, we start to exert control to varying extent over the fall out of natural phenomena. Similarly, we would be in a position to able to integrate strategically with the global economy to our advantage, instead of meekly submitting to the process of globalization, only if we understand better some of these asymmetries that are also the source of asymmetric global power relations.
First, and perhaps the most fundamental asymmetry in the world economy arises today from the freedom of movement of capital, especially financial capital on one hand, and the restrictions placed on the other, on the movement of labors, especially unskilled labors from developing countries. Despite vast improvements in travel and communications technology, available estimates suggest that labors migration as a proportion of the total world population has been lower in the current phase (approximately 1973-to date) compared to the earlier phase of globalization (approximately, 1870-]9]3).On a rough reckoning, about one in six persons crossed national borders for employment or livelihood between] 860 and 1900. They went as indentured labors from China and India or as colonial settlers from Europe to North, Central and South America and to Australia. Over a comparable period of nearly five decades of the current phase of globalization for which we have estimates suggesting that not more than one in eight persons has migrated despite vast improvements in transport and communication, Contrast this relatively sluggish movement of labors during the current phase of globalization with the movements of capital, especially financial capital. Rough estimates available from the Bank of International Settlements suggest that the daily volume of private trade in foreign exchange is over 1.2 trillion (1012) U. S dollars. Of this, less than 2 per cent is accounted for by trade in goods and services and even if one adds all direct foreign investment it would still be well below 4 percent. A few days of hostile private trade in the foreign exchange market can wipe out the entire foreign reserve of all the central banks in the world. The defining characteristic of the current phase of globalization has become this overwhelming supremacy of private financial capital. The world has not seen anything like this before.
The rise to ascendancy of international finance started with successive waves of liberalization of the major capital markets of the advanced capitalist countries starting from about the mid-1970s. It assumed irresistible momentum by early 1980s ushering in the current phase of economic globalization dominated by international finance. Although little explicit note is taken of its implications in public discussions and government pronouncements, its imprint on the pace and pattern on Indian development too has been unmistakable. Economic policies are increasingly formulated by the government as never before with a view to the sentiments of the financial markets. The English language media, especially the electronic media that shape Indian middle class opinion, behave as if the daily fluctuation of the stock market is an accurate barometer of the health of the real economy. However, underlying this is an uncomfortable fact that is overlooked willingly or unwillingly. The Indian stock market is pathetically small in relation to the vast size of global private trade in foreign exchange mentioned earlier. The rupee and Indian Slacks can easily be set into an uncontrollable downward spiral by a few large international players speculating against some Indian stocks or the rupee. This is no at all fanciful. Recall how the Dalal Street nose-dived immediately after the 2004 genera! elections results, because a few large, mostly foreign institutional investors began to withdraw from the Indian capital market under the fear that a coalition government supported by the Left will be unfriendly towards private businesses. However, as Soon as the United Progressive Alliance government named its top economic team, a trio of the prime minister, the finance minister and the deputy chairman of the planning
commission, all known for their extreme pro-market and corporate friendly outlook, the stock markets began to stabilize in no time. Nothing had changed about ground realities of the Indian economy in those few weeks, except international finance capital needed assuring political signals. In the process, the future course of economic policies for the country got set.
This story would remain incomplete for India (and for many other developing countries) without mentioning the critical role of the IMF and the World Bank Since those two institutions are in a pivotal position to influence the perception of private foreign investors like multinational corporations, banks and other financial institutions about a country's investment climate, their role becomes critical. They shape to a significant extent at least in the short run the sentiments of the financial markets. If the economic policies of a government are favourable to the corporations, it generally gets a favourable signal from the pro-market IMF and the World Bank, with the result capital tends to flow in to stabilize or even stimulate the stock market. On the other hand, with an unfavourable signal from the same institutions, the government runs the risk of destabilizing capital flights. This is the core game under globalization in so far as these two institutions are concerned, wile academic research on themes like poverty and macroeconomic policies are mere sideshows. This has been part the unwritten script of financial globalization in so far as developing countries are concerned.
The major players in the financial markets as well as the IMF and the Bank with their pro-market, and pro- corporate philosophy are generally against the expansion of the economic role of the government. So we have in India a Fiscal Responsibility and Budget Management Act (FRBM), which prevents the government from spending additionally in areas like elementary education or expanding employment guarantee or strengthening decentralization of the panchayat system through adequate fiscal autonomy. Tribals and peasants are evicted from lands with little compensation from to improve the 'investment climate' for the corporations. If we have the eyes to see, it becomes increasingly apparent that. in the name of development we are typically pursuing policies that might deliver high growth, but it is growth without a democratic content It does not reach the poorest citizens of India who need to benefit most urgently from the process of growth. However~ this sort of pro-market reforms and high growth led by the corporations, might make the IMF, World Bank and some in government happy. It may even be accompanied by a rising trend in the stock market to create the illusion of a healthy state of economic affairs, but all this will remain merely irrelevant statistics for the poor majority in this country. This is why each and every government that has been following this sort of policy gets showered with the approval of the corporate sector, of the IMF and the World Bank, and even of the upper middle class, but loses the general election. The Congress government under the then prime minister Narasimha Rao with Dr. Manmohan Singh as its finance minister spearheading economic reforms lost the general election. Dr. Singh himself personally failed to win a seat. The pattern got repeated. The BJP-led coalition crashed in the elections with its 'shining India' slogan; and, it did especially badly in Andhra which was said to have been shining under the glow of IT industries. There is no reason to believe that things would be any different next time, unless remedial interventions like employment guarantee and fair price and subsidies to farmers despite WTO become sufficiently strong counter-acting forces. However, this would require going against the hidden script of globalization by upsetting the alliance between large multinational corporations and banks including the IMF and the WB, and a pliable domestic government.
Let me turn now to the second important asymmetry in the current phase of globalization. It arises from the increasingly freer flow of trade in goods and services on the one hand, and the growing restriction on the transfer of knowledge and technology embodied in the production of those goods and services on the other. In the emerging regime of trade-related intellectual property rights (TRIPS), all developing countries including India find it increasingly difficult to learn and adopt the production technology involved in the goods and services they import. The asymmetry of the emerging trade regime has been characterized by freer trade in goods and services coupled with greater restrictions on the flow of productive knowledge. Thus, in the more liberalized trade regime of the World Trade Organization, India come under increasing pressure to import goods and services rather than produce them at home, while it is conveniently forgotten that international trade has been the vehicle for learning the technology embodied in the traded goods and new products throughout industrial history. This learning process involved through international trade may well be the most important dynamic gains from freer trade, far outweighing the static gains of existing comparative advantage. By treating knowledge more and more as simply a privately tradable commodity, the current trade regime shows its bias towards corporations as the generator of knowledge who should be handsomely rewarded, but forgets the importance of other sources of knowledge. It has tended to underplay traditional community based knowledge to the detriment of many indigenous communities. Submitting blindly to such an asymmetric trade regime in the name of globalization would serve the interests of the rich and powerful nations, but would leave the most vulnerable sections of our population especially in agriculture in even greater distress. The suicides of farmers in Maharastra, Andhra, Kerala and Punjab, adding to over 10 thousand in a year, foretell the kind of disaster that the commercialization of agriculture under WTO regime might bring.
Ii is in this context that the inevitable consequence of globalization in terms of the increased relative importance of the external vis-à-vis the internal or domestic market needs to be examined. It has influenced thinking on macroeconomic policy in a way, which is seldom highlighted. It emphasizes the importance of reducing the costs of production through more efficient supply side policies for increasing the international competitiveness of the national economy; but ignores the problem of creating adequate purchasing power and aggregate demand in the domestic market.
The shift in focus from the demand to the cost or supply side has had serious consequences. The most apparent consequence of this shift concerns labour market 'flexibility', i.e. some form of wage restraint. Lower wages tend to depress the unit cost of production, but also the consumption demand from wage income. Consequently, unless either higher investment or increased export surplus makes up for that reduction in consumption demand in a regime of investment-or export-led growth, insufficient aggregate demand at home would be a drag on development.
Similarly, the emphasis on increasing output (value added) per worker or labour productivity to reduce labour cost of business, and use this as a too] for enhancing international competitiveness has a downside. Exclusive attention on productivity separates it from its consequences on total GDP, and the employment in the economy. For instance, total output would decrease despite an increase in productivity, if the percentage decrease in the level of employment exceeds the increase in labour productivity. Consequently, the corporate strategy of 'down-sizing' the labour force to create a "lean and efficient corporation" for increasing market share, might turn out to be good for a particular corporation, but macro-economically counter-productive if either total supply, or the size of the domestic market shrinks.
Policies of reducing unit cost in search of greater efficiency, through down-sizing the labour force and restraining wages are encouraged under globalization by the predominance of external market considerations. However, in many cases, these policies often turn out to be a macro-economically flawed. Because while they are efficient on the microeconomic scale of a single corporation or enterprise, such policies can also become counter-productive on the macroeconomic scale due to their effect of depressing demand.
The underlying problem is more general. The blurring of the distinction between micro- and macro- efficiency has become a generic problem with many currently pursued economic policies. It stems from the influences 'methodological individualism' in economics and, from 'neo-liberalism' in politics. It gives rise to many 'fallacies of composition' in macro- economic policy by assuming that the individual micro-economic 'parts' have the same properties as the 'whole' macro-economic system. To illustrate the point, an individual corporation restraining wage or shedding labour to raise productivity might raise the efficiency and profit of that corporation. But if many corporations follow this policy at the same time, total demand and employment in the economy will shrink, and even the profit of all corporations might be reduced. Similarly, one country might increase its export more than its imports, but all cannot achieve it; because, one country's export surplus has to be matched by some other country's import surplus. It is a zero sum global game in which all cannot be winners at the same time. And, it would be foolish to rely entirely on the external market if only for this reason.
In the current phase of globalization a third asymmetry arises from the role assigned to the state in monitoring and regulating economic activities. The market-oriented philosophy intends to curb the role of the state as an economic actor. This often gives rise to an almost schizophrenic view of the capabilities of the state. It is usually claimed that the state cannot be trusted with expansionary monetary and fiscal policies (e.g. FRBM Act mentioned earlier) because the state has an in-built tendency to be financially irresponsible. At the same time however, the same state is relied upon to undertake far more complex financial tasks like extending the scope of the market though privatization, regulating the stock exchange etc. This schizophrenic view about the capabilities of the state is rooted in denying the state it’s developmental and welfare role, but using it to promote the reach of the multinational corporations through measures like privatization. The result often is greater corruption and lack of transparency in governance.
Finally, in India the most fundamental asymmetry is to be found in the uneasy relation between our political democracy and the market mechanism. The two have come to be treated as mutually reinforcing concepts in neo-liberal philosophy because both the free market and democracy extend the scope of individual choice And yet, the relationship between the two types of freedom granted by the market economy and, by political democracy often tends to be in conflict in developing countries. The democratic principle of 'one-adult-one-vote' coexists rather uneasily with the free market philosophy that the rich, with greater purchasing power, would have more 'votes' than the poor in the market place. This asymmetry becomes even more acute, the greater is the inequality in the distribution of income, and the larger is the proportion of the poor with political voting rights, but economically without a 'voice' in the market. In these circumstances, the democratic form of government comes under increasing strain if too much freedom is granted to the market. And yet, the forces unleashed by the process of globalization tend to drive relentlessly towards a situation in which governments have little control over the free play of the global market forces.
As a matter of fact the history of the relation between economic development and democracy has been far more complex than the currently fashionable 'political correctness' would have us believe. Historically, the per capita income of the western countries had to reach some minimum of US dollars 2000 per capita per year. This was a high level compared to India's $200-250 around the time of our first general election in 1952 (measured in 1999 PPP calculation). It is an unparalleled achievement in the recorded political history that political democracy in India could be sustained at that level of poverty despite the tremendous diversity of the country. However, this should not blind us to the fact that democracy historically co-evolved with development without necessarily being either its cause or consequence. The challenge posed to our democratic form of government is different today. It must control the excesses of globalization and domination by corporations of the economy. Our democracy has to ensure that the process of growth is not corporate driven, but is decentralized and employment driven to allow for the widest participation of our citizens. Only then will the wealth created by growth be fairly shared, and growth itself will assume a democratic content. It will be wealth created by the people, for the people. The nature of globalization must fit into this objective. This is the compulsion of our time.
Amit Bhaduri, University of Pavia, Italy, and Council for Social Development, New Delhi, India.
REFERENCES.
Bank of International Settlement (BIS).2001 Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April, 2001; Global Data, Press Release.
Barro, R and Sala-I-Martin, X. 1995.Economic Growth, New York, McGrew Hill. Bhaduri, A. 2002. 'Nationalism and economic policy in the era of globalization, in D.Nayyar (edited), Governing Globalisation: Issues and Institutions, Oxford, Oxford University Press.
Bhaduri, A and Marglin, S. 1990. 'Unemployment and the real wage: the economic basis of contesting political ideologies', Cambridge Journal of Economics (14): 37593.
Chang, H-J.2002.Kicking Away the Ladder: Development Strategies in Historical Perspective, London, and Anthem Press.
REFERENCES.
Bank of International Settlement (BIS).2001 Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April, 2001; Global Data, Press Release.
Barro, R and Sala-I-Martin, X. 1995.Economic Growth, New York, McGrew Hill. Bhaduri, A. 2002. 'Nationalism and economic policy in the era of globalization, in D.Nayyar (edited), Governing Globalisation: Issues and Institutions, Oxford, Oxford University Press.
Bhaduri, A and Marglin, S. 1990. 'Unemployment and the real wage: the economic basis of contesting political ideologies', Cambridge Journal of Economics (14): 37593.
Chang, H-J.2002.Kicking Away the Ladder: Development Strategies in Historical Perspective, London, and Anthem Press.