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Globalisation: its past, present and future

| Updated: July 22, 2022 21:18:19


Globalisation: its past, present and future

Globalisation, in its bare bones form of movement of goods and people across geographical areas, is as old as civilisation. Borders between countries where they could be identified were porous and did not pose much of a barrier to such movements. People moved across territories in search of better livelihood and traded goods for profit. It was not so much comparative advantage of costs of production as the rarity or exoticness of goods brought by foreign travellers that facilitated trading in the early days. Authorities in countries (kings, warlords, chieftains) where trading took place sometimes demanded toll from foreigners when such trading became regular and not a one -off affair. Other than that nominal tax there was no political restrictions on the movement of goods across countries.

Globalisation in its formative stage was characterised by free trade. It was not until the seventeenth century that governments in Europe espoused mercantilist policy that favoured exports over imports to ensure surplus from international trade. Much of classical economics centres on the debate over the merit of free trade, its stalwarts being Adam Smith, David Ricardo and John Stuart Mill. What is important in this development is not the contentious nature of trading but the role politics came to play in determining its nature, course and volume. Globalisation, in its archetypal form of movement of goods, became a subject of political economy. When, later in nineteen century, services, capital and migrating labour were added to goods as 'tradable', politics came to play a more dominant role as the economic consequences of these movements were taken into calculation. This tradition and practice of bringing in national interests into trade has continued ever since. To this discourse of political economy was added the consideration of geo- politics and real politic, beginning from the end of second world war. Politics of ideological rivalry led to the division of the world into capitalist, socialist and non- aligned (not articulated before the Fifties because of colonial domination by the former) blocs. Globalisation progressed in a limited and fragmented way, with the members of the two rival blocs (Russia at first, before the end of second world war, was without its satellite countries in east Europe) having trade within their respective confines. Obviously, it was not ' globalisation' as it came to be known and described. But in the broad picture of international trade as a moving process, this phase needs to be included just as the mercantilist period does merit.

In the period from the end of first world war to the beginning of the Thirties, free trade enjoyed a moderate period of political restrictions on trade in the form of prohibitive tariff. But this phase of 'benign tariff' changed with the onset of economic depression in capitalist countries in mid- thirties when unemployment soared. Economists like J.M. Keynes, who favoured free trade, revised their opinion and advocated government intervention in trade with tariff. In his book Treatise on Money (1932) Keynes attributed the economic slump to poor aggregate demand. He opined that  prohibitive tariff would revive aggregate demand by increasing demand for domestic goods and thus retrieve economies from slump. In the ensuing tariff war among countries of the capitalist bloc, depression worsened. Only expenditures on defence kept their economies alive with employment created in various war- related activities including active service in the battlefield. The socialist bloc, as it was constituted then, was protected from the contagion of worldwide depression. During the war, 1940 to 1945, there was hardly any movement of goods across seas or land for civilian use. It was a period when globalisation was kept on hold, its new incarnation being the movement of arms and combatants, risking fatal blow from foes in the war.

The end of second world war opened a new chapter for globalisation, not only characterised by the quintessential movement of goods but also services, capital and labour. More importantly, institutional arrangements were made and programs undertaken to backstop and propel international economic relations forward. The World Bank was established to provide fund for economic growth while International Monetary Fund (IMF) was tasked to maintain economic stability by rescuing economies in financial trouble, particularly in respect of financing trade. Apart from the World Bank, funds for development were available from the Marshall Plan, an initiative of America for countries in western Europe  devastated by the war and from private capital market in the West. All these institutional arrangements to jump- start the world economy within a globalised framework left out the Soviet Union which had by the end of the war expanded into a rival bloc, with countries in eastern Europe and central Asia. The Soviet bloc conducted trade among themselves under their own collective organisation known as COMECON. Globalisation in the post- war period thus became even more fragmented  through polarisation and became more  intensified than before the war. Thus, in effect, globalisation in post- war period meant movement of trade in goods, services, capital and people (as immigrants) within the non- socialist capitalist bloc. Even with this geographical limitation the volume of  merchandise trade (in goods) and capital transfer rapidly increased to fill up the void created by the war. One measure of this is the trade to global Gross Domestic Product (GDP) ratio. It raised from 10 per cent in 1955 to 20 per cent in 1975, indicating the faster rate of increase in international trade than world GDP growth rate. Globalisation during the cold war era( 1945-1991) also saw major structural changes in international trade. Services trade as a share of world trade went up, from 10 per cent in early 1960s to 20 per cent in early 1980s.Behind the increase in  international trade lay the relentless efforts at lowering tariff under the aegis of the  body created for this purpose, the General Agreement on Tariffs and Trade (GATT) .Through  series of negotiations among countries known as  'Rounds,' GATT succeeded in wrapping up a major agreement in the eighth Round in 1983, known as the Uruguay Round. This led to the establishment of the World Trade Organisation (WTO) in 1993 by which time the cold war had ended with a bang. The world appeared to be on the cusp of a vigorous phase of globalisation in an environment free of political or ideological rivalry.

The end of cold war in 1991, when Soviet Union collapsed, opened the door to accelerated globalisation in an integrated and unified world. The world multilateral institutions like World Bank and IMF extended its program of assistance to Russia and its former sattelite countries to help them restructure their economies from planned and state control to free market economy. Even China that did not abandon its socialist ideology underwent change, embracing market economy with a socialist compromise. Under conditions of free flow of capital from outside for investment in joint ventures China was admitted as a member of WTO. The integration of the world economy for furtherance of globalisation was almost complete.. The grievances and dissatisfactions that arose later were concerning too much and too fast of globalisation.

The discontents of globalisation have been both from developed and developing countries, including emerging economies. The workers in labour- intensive industries in developed countries fume over international trade for which they have lost their jobs to low- wage workers in developing countries. The developing and emerging economies, on the other hand, blame subsidy used by developed countries which deny their products, particularly agricultural, access to rich countries' markets. To aggravate matters, the terms of trade agreed upon in the last Round of trade talks (Uruguay Round) have institutionalised lower prices for their export products. The intellectual property rights guaranteed in the last Round has also been asymmetrical in its benefits, ensuring high margin of profits to producers of drugs. Joseph Stiglitz, while agreeing that the grievances of developing countries are genuine, is of the opinion that workers in countries like America have lost out because the globalisation process has not been properly managed by politicians. Since they have lost employment because of technological change and comparative costs they should have been compensated by the rich paying higher taxes.(Joseph E. Stiglitz, Globalisation and its Discontents, 2002).Other studies show that certain groups of entrepreneurs and managers in the developed countries( owner of equity and investment capital, banks  and tech giants) have enriched themselves enormously as a result of freer and more liberalised trade for which they have not paid much in terms of taxes. This is the ' poor management' mentioned by Stiglitz.

The segment of the economy in developing countries that has benefitted are the owners and workers of factories using labour- intensive technologies like garments. Developing countries have increased their share in international manufacturing trade significantly from 9 per cent in mid- 1980s to around 28 per cent in 2010(Ha-Joon Chang, Economics, the User's Guide,2014).This rise has been  in large part due to rapid development of low- wage manufacturing industries in China. The country has also greatly benefitted from joint ventures and off- shoring of industries from the West. Its trade in primary products like rare earth materials is also significant. Russia, on the other hand, has not benefitted much from manufacturing goods as its program of privatisation has not been much of a success. Apart from breaking up the command and control role of the state, the post- Soviet reforms pushed by World Bank and IMF have not borne fruits, making Russia a player to reckon with in international trade for manufactured goods. But it has taken full advantage of its natural resources like oil and gas and products like fertilizer, wheat and sunflower. The dependence of Europe on Russian oil and gas and on China's capital investment on infrastructure became a matter of concern to America which did not stop seeing these two countries as anything but rivals and even adversaries. The fact that the end of cold war held the prospects for greater globalisation, integrating all countries, including the erstwhile socialist countries, into one world did not enthuse America at all. This was soon to be seen in the isolationist policy of President Trump that visualised 'America First' as the new doctrine of American Exceptionalism. The tariff war unleashed by Trump Administration against China, European Union, and Canada struck at the foundation of free trade and a globalised economy based on it. The nationalist policy was blended with cold war ideology of the past  which led Biden administration to put pressure on its western allies to wean themselves away from Russian oil and gas and China's Road and Belt Initiative. The war in Ukraine started by Russia gave the new administration in America the chance to rally its western allies against Russia and China, the former for the invasion and the latter for refusing to condemn Russia. Among other things what is at stake  now is the process and scope of globalisation.

There being no ambiguity about the past of globalisation, its present can be said to have come to an end on 24 February, the day Russia invaded Ukraine. Calculating backward, the present phase of globalisation can be assumed to have begun with the end of cold war in 1991.The end of the present phase of globalisation has been marked by a slew of sanctions on Russia with a view to punishing it politically and economically. Through the sanctions all assets held by Russian banks, including more than 800 billion US dollar  reserves of the central bank, Russia's financial power to conduct international trade has been confiscated. To make this worse, the SWIFT payment system through which international transactions are concluded have been cut off from Russia. At one blow, Russia seems to have been thrown out of the globalised world of trading. The question is: will this strategy of isolating and ostracising Russia work? If it does, for how long?

Considering the dependence of West European countries on Russian oil and gas and fertilizer and the rest of the world's life and death issue of  import of Russian grain it seems hardly likely that the policy of keeping Russia out of the globalised system of trading will succeed for a considerable length of  time. The demand for commodities over which Russia has control, oil, gas, fertiliser and grains, are inelastic in nature. Irrespective of their price hikes, consumers will need to buy in the same volume and quantity. There is already discord among European countries over banning import of oil and gas and great hesitation about putting a price cap on the price of oil. The attempt to find alternative market for import of these items will prove futile as President Biden's exhortations to the oil and gas producers in the Gulf have shown this week.

As regards the payment system, Russia, realising its strong bargaining position, is already insisting on payment in Roubles. Besides, it can resort to an alternative to SWIFT mechanism as the Iranians have done to avert sanctions imposed on them. Finally, when Russia goes to international court, America and its allies may not have a strong legal case to hold on to a sovereign country's assets and reserves. How can a country be punished when no trial has been held and convictions announced? International financial transactions are based on universal consensus and a rule based system. It cannot be torn apart or held in abeyance at the whim of countries. The most important achievement of globalisation is rule of law. No country, however powerful ,can make short shrift of it whenever it pleases to do so.

Post- Ukraine war, Russia will remain   a player in the globalised world of trade but its payment system may be different than it was before. It will also be entitled to its assets frozen by America and its allies unless Russia is proved guilty of war crimes in an international court recognised by all and made to pay reparations to Ukraine. Its relation with west European countries will be one of love and hate and it can expect these countries to adopt policies to reduce dependence on Russia for oil, gas and fertilizer. By that that time Russia can switch over to buyers in Asia and Africa. As regards food grains, countries in Africa and the middle- east will have almost no alternative to Russian exports of grain because food production cannot be increased to such an extent as to significantly reduce dependence on Russia. Continued trade relations with Russia by these countries will transform globalisation into a plulilateral system, instead of a multilateral one as was promised by the end of cold war.

Where does China fit into this scheme of things? Though China has not yet invaded Taiwan, America has already marked it as an enemy. Its tariff war has not been winded down by Biden administration and to judge by the recent rhetoric, America is in no mood to embrace China as a friendly partner in trade or in any other sphere. It has just succeeded in making NATO allies declare that China poses a security threat. On the economic front, at the behest of America, G- 7 in its last summit in June announced a fund of  US$ 650 million to counter China' Road and Belt Initiative. When the world needs fund for poverty eradication and protection from pandemics on urgent basis, such gestures appear ludicrous and ironic. It should be realised that however much America tries to corner China, its ' peaceful rise' is implacable. Already the world's second largest economy, its role in the global economic order is not only going to be significant but crucial as well. Globalisation without China is unthinkable. What the rest of the world should try is to ensure that it adheres to the rule- based system and uses its wealth discreetly, keeping the need and capacity of countries to absorb assistance prudently.

The future of globalisation does not look rosy, but neither is it bleak. The process of globalisation that has taken place so far, through ups and downs, has gathered a momentum of its own. Its course in future may not be smooth and rapid but faces no risk of derailment.

 

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