Monday, January 31, 2011

Helping the poor is smart economics :)

In a recent World Economic Forum in Davos, world leaders suggested the obvious – that economic disparities are a global risk – especially in the next decade.

Making the poor richer is not just a moral obligation, but I see it as a logical solution to world wealth and goodness.

I wrote the following article in 1998 during the economic crisis. At the end of the article I suggested a remedy to economic growth through addressing disparities arguing not from a social-religious-moral angle the benefits of helping the poor, but from an economic one.

As you will quickly be aware of, my writings of a decade ago is rather bookish in nature. No wonder not many are inclined to read them :) I did start this essentially economic paper quoting Nat King Cole, a singer-entertainier instead of an economist. But i do not think it helped..haha!

So this one is for the serious readers; but if you persist, you will find what I wrote more than 10 years ago is still relevant today :)

Does the current economic crisis in East Asia poses a major challenge to the process of globalization?

“ Around the world I search for you,
I travel on, until I found, a rendezvous”
Nat King Cole

The aim of this paper is to discuss the effects of the current economic crisis on globalization. To do that, we must first agree on two things. One, what globalization is, and two, the causes, impact and lessons learnt from the current crisis.

Firstly, what is globalization?

Globalization is a thirteen-letter word but to many, it is a four lettered one. In reality, globalization by itself is a neutral event. It is what we made out of it and how we choose to perceive it that put value to the concept.

Globalization is the growing integration of national economies by which as a result of the internationalization of commodity flow, migratory movement, pollution and information. Globalization adds to the reach and the power of the market. Today, not only business organization and ordinary people must kowtow to worldwide competition, but governments too. As a result of that, national economies are steadily more integrated as cross-border flows of trade, investment and financial capital increase. The ordinary consumer on the other hand are buying more foreign goods, multinational corporation stretching their operations ever widely around the globe and savers are investing more than ever in places far away from home.

Viewed positively, globalization makes market more efficient via better division of labor between countries. This allows low-wage countries to specialize in labor-intensive task while high-wage countries do otherwise. Globalization will also encourage and allow the economy of scale. Furthermore, with globalization, capital will move to wherever the return of investment is best. Thus, making sure capital is used more efficiently and productively.

On the other hand, critics of globalization especially those in advanced countries worry that increased competition in low-waged jobs from other countries will take away job opportunities and push down wages in their economy. In order to avoid this, countries will try to outdo each other by reducing wages, taxes, welfare benefits and environmental control to become more competitive. The burden to compete will also wear away the ability of governments to set their own economic policies. They also worry about the power of financial markets in causing economic havoc as in the European currency crisis of 1992 and 1993, Mexico in 1994-1995 and the topic at hand, the current East Asian crisis.

The Crisis of East Asia

The crisis in East Asia is still unfolding. Yet many have conceded that Asia’s economic problems resulted from two major ingredients, exposure to the global capital market and the inadequate supervision, regulation and the laxity of domestic financial systems.

This is to say that globalization has shown again its double-edged ability to bring both risk and opportunities. It was East Asia’s outward looking measures embracing globalization and global finance that helped them grow remarkably the past two decades. Yet, that very move has also caused them their current fate. Moreover, certain economies and East Asian leaders see the case for interfering with the flow of capital as a valid act to restore their economies. Prime Minister Mahathir Mohamad is but one case.

However, before we deal with the issue of capital flow, let us examine the effect of the crisis to the process of globalization. Does the crisis pose any major challenges to the key issues of globalization? To examine the challenges we must first draw up the extent of globalization’s impact on the key issues like nation-state, capital and trade; before, during and after the crisis. Let us start with the most essential issue, the nation-state.

Globalization, the nation-state and the East Asian crisis

How far has the East Asian crisis tipped the balance of power back to the nation-state? Before we even attempt to answer this we must look at the pre-crisis situation. Even before the crisis, the nation-state is not what it used to be. With the arrival of new forces created by technology especially during the 20th century, things both visible and invisible can be moved from one country to another whether the nation-state likes it or not. These forces take the main forms that to a certain extent diluted the nation-state’s power.

In economics, it is easier today than before to move goods from one place to another thus killing any residue idea, of national self-sufficiency. Almost every country today buys from abroad a larger proportion of what they consume compared to 50 years ago. Furthermore, multinational companies operating freely across natural borders own a far bigger share of world capital.

Electronics technology has also aided the movement of money and as such the markets ability to transfer cash to anywhere in the world at the push of a button has changed the rules of policy making. When a government is perceived to have made a wrong move, the market can rise against it in a dash. Management guru, Peter Drucker summarized it this way “Control of money was at the very center of what can be called ’sovereignty’. But money has slipped the leash. It cannot be controlled and longer by national states, not even by acting together”. (P.Drucker 1993). In fact, seconds after a head of state makes a statement, thousands of screens light up, and traders all over the world give their vote – whether good or bad. With no place to hide, the value of the currency will adjust to the role.

Secondly, in military matters, just over half a century ago, the only way for a country to successfully use force to impose its will on another was to defeat via infantry troops on the ground. Planes and missiles have changed that. The Gulf war was organized and won through command centers organizing war machines via computers like children playing a video game at video arcades. A missile can blow up a specific target like a factory a few thousand kilometers away with precision or if fitted with a nuclear warhead, obliterate an entire city. No country, perhaps not even America can shelter itself from such an attack.

The third challenge to the nation state is in the information revolution. The globalization of information equals the globalization of knowledge. Television, radio, the internet, telecommunications per se has made it possible for people from different country to learn about each other in a matter of seconds. About thirty years ago, an American can possibly con another American that Malaysians still live on trees, but today, with a click of a button his lie will be uncovered.

Between the three forces above, it may seem that the nation state has been stripped naked by globalization. Not really. The nation state still holds two important forces. Firstly, the nation-state is still the basic units of geopolitics and represents its nation in the game of foreign policy e.g. in the World Trade Organization. Secondly, “ a nation-state is a place where people feel a natural connection with each other because they share a language, a religion, or something else strong enough to bind them together and make them feel different from others. “We” not “they”. The nation-state is the politics of the first person plural. Its government can speak for its people because it is part of the “we”. It emerges out of the nation.” (The Economist Dec 95/Jan 96).

Now, how far has the crisis tipped the balance of power back to the nation-state? Has the crisis pose any major challenges to globalization where nation-state is concern?

Answer. Not much. Malaysia may have insulated herself with capital control with the view to deter hot money from coming in and out but is not adverse to foreign direct investment, or any other investment other than hot money. Other than that, other matters would likely not change.

As far as the point of a nation-state play acting politics of the first person plural, we have yet to hear of any transcendental move towards a larger that state identification like Pan-South East Asian – Nusantara, “Asian Values", or a “Chinasia”. On the contrary, we hear less about ‘Asian Values’ today compared to before the crisis. Nor do we hear of a ‘Pan-Islamica’ movement emerging from South-east Asia challenging the Muslim dominated nation-state with perhaps the capitalist west as an external enemy or conspirator.

In short, the current economic crisis in East Asia does not pose any real challenge to the process of globalization in relation to the nation-state.

Globalization, Trade and Capital in the East Asian Crisis

Despite the hype about globalization the last decade, today’s international economic integration is not unprecedented. Falling transport costs during the 19th century through the development of railways and steamships allows large cross borders flows of goods, capital and people. The First World War ended the earlier attempt at globalization. After the war the world moved into a fierce period of trade protectionism and restrictions on capital movement. America sharply raised its tariff and other countries retaliated thus worsening the Great Depression.

As such, international capital flow virtually dried up between the times of the two world wars as governments try to protect their economies from the impact of the slump through capital control. Capital control was maintained after the second world war (notice that even the wars have been globalized) and currencies were fixed through the Bretton Woods system.

Acknowledging that reducing trade barriers was vital to recovery, the General Agreement of Tariff and Trade (GATT) was organized. GATT organized a series of negotiations that gradually reduced import tariffs. The World Trade Organization replaced the GATT in 1995. Trade flourished.

With the collapse of the Bretton Woods system in the early 1970’s, currencies were floated against one another at market rates and this signaled the rebirth of the capital market. Countries after countries freed capital control. Some earlier in the 1970’s, America and Germany, Japan and Malaysia, some later. (France, Italy in 1990).

While in the 19th century globalization was powered by lower transport cost the two forces that drove the increased of goods and money since after WW2 is technology and trade liberalization. With cheaper communication and computing cost the natural barriers of time and space that set national market apart have been falling too.

The second driving force, trade liberalization was the results of the GATT negotiations and unilateral decisions. Almost all countries have lowered barriers to foreign trade. Moreover, prior to the current crisis most countries have welcomed international capital. Over the past decade, trade has increased twice as fast as output, foreign direct investment three times as fast and cross border trade in shares ten times as fast. (The Economist, October 1997)

The question is will the current crisis reverse this trend? Experience shows how quickly faith in market and openness can be reversed by big economic shocks like the experience after the Great Depression of 1930’s. There are concerns amongst many that the move by Malaysia in September 1998 and Hong Kong government’s decision to indulge in the stock market are trends that will reverse the openness to market forces. Furthermore when respected economist also starts singing to the tune of capital control (e.g. Paul Krugman’s Saving Asia, September 1998) many are worried that capitalism is indeed in retreat.

I beg to disagree.

There are some major differences between the situation after the Great Depression and today. These differences will ensure and buffer any real retreat to capitalism. At most, some modification will take place.

1. Mental perception of leaders and nations around the world

Unlike before, majority of leaders and people today has agreed to the basic idea that there is truth in “comparative advantage”. While it is true that voices for protectionism pressures will be louder during these days, it is similarly true that even Pat Buchanan and Prime Minister Mahathir Mohamad is not adverse to the free market. One must only remember that it was during Mahathir’s era that the Malaysian economy by far has embraced free market. It was his liberalization policies that opened up the markets in both FDI and portfolio flow. His psyche is for free markets although it is his major complaint today.

In short the policy significance of capital controls must be viewed from the angle of (1) Malaysia’s long track record of liberalization under Mahathir. Malaysia has long had an open economy promoting free trade, currency convertibility, free capital flow, deregulation and competition based on free market. The imposition of exchange controls does not mean that the pursuit for liberal economic defers in other areas. (2) Furthermore, Malaysia simply cannot afford to cut herself away from the world. The external sector like exports equaling 70% of GDP is far too large to contemplate the move.

We must also remember Mahathir is no Khomeini. In all other aspect too like the Internet and communication he is very open. Even if other East Asian economies were to play copycat to Malaysia, similar outlook will persist.

What about protectionism pressure from the US? The worry about loosing jobs to low-waged countries due to cheaper imports is not new. Though politicians by and large are in love with freer trade because it means more exports, economist defers. To the economists, the real benefits of trade lie in importing. Economist knows that the only reason for exporting is to earn the wherewithal to import.

As James Mill explained in 1821,

“ The benefit, which is derived from exchanging one
commodity for another, arises in all cases from the
commodity received, not the commodity given”.

The key players in the US economic strategy like Robert Rubin and Alan Greenspan are both economists right down to their bones. In fact fed officials already are showing signs of willingness to cut interest rates should the global economic turmoil looks likely to endanger America’s economy.

2. Forum for discussion

Unlike the 1930’s, today most economies are bound together in one way or another to other economies through the World Trade Organization and a host of regional blocks.

Furthermore, the WTO (before as GATT) since 1948 and eight rounds of global trade talks later, each time involving nine countries and each time bringing liberalization further that the last.

In addition WTO also has set up a mechanism to arbitrate trade disputes. Unlike during the days of GATT, findings of the WTO’s dispute panels are not hostage to veto. Countries found in the wrong must change or offer compensation. Those that do neither, face sanctions. Moreover, the mechanism has proven to be more egalitarian.

For example, the WTO has even ruled against America in favour of Costa Rica. Thus, it is not a surprise that within three years of existence, 132 complaints were dealt in comparison to only 300 during the whole 47 years of GATT’s. The WTO is so successful that as of May 1998, 30 countries including China and Russia are queuing up to be members.

Furthermore, most of the world economies are weave in numerous regional trade agreements too many to mention all here. To name the major few, NAFTA, APEC, EU, ASEAN, FTAA and Mercusor. This will be the subject of examination in the next section.

In short the East Asian crisis may slow down trade a little during this or even next year. However growth in trade is still expected to outpace growth in production. (Last year the volume of merchandised trade grew by 9.5% that is over three times faster than global output).

Globalization, Regional Trade Agreements and the East Asian crisis

Just as ‘globalisation’ regionalism is also a neutral event. True that economist have generally are not enthusiastic about it. They worry that preferential tariff will cause a process known as ‘trade diversion’ whereby trade will flow in an inefficient manner taking place.

However, we must note that even prior to the crisis a surpassingly increased number of countries traded with their neighbours. Regionalism makes more sense because of geography, rather than club membership. Geography is why they got together in the first place. As countries lower their tariff barriers, the relatively greater importance of transport cost makes proximity matter more.

Moreover, regionalism did not flourish due to a financial crisis. It is safe to say that regionalism breathe in added vigour in reaction to America’s embracing of regional trade block in NAFTA as well as because the snail paced Uruguay round of talks.

In fact, scrapping trade barriers within a region can encourage trade and investment among countries within the club. The point is regionalism is not necessarily good or bad. As long as regional groups are open to the rest of the world, for example via the WTO it may just be good. It is more likely dependent on whether governments wish to liberalise trade or not. Regional agreements and regional ideals come second. We must not forget that almost each and every member of regional trade agreements is also a member of the WTO.

In short, I do not see the East Asian crisis spreading a new zeal for regionalism especially the ‘diversion’ kind. Thus, it does not pose any major challenges to globalisation. Any further regionalism would take place regardless of the crisis (for example the talk about the eventual combination of NAFTA and Mercosur)

Other issues of globalisation and the East Asian crisis

I also do not see that the East Asian crisis will pose any major challenges in the other major areas of globalisation namely communication, culture, migration of workers, etc. The trend that was familiar prior to the crisis will still hold true. While the current crisis may slow down certain areas of globalisation, (e.g. number of middle class Asians indulging with cyber space), and increase in others (child labour, prostitution, etc.) in reality these are just reflections of the world as it is today. The slow process of globalisation is going through the test of times.

Seen in the long run, the crisis may just look like a hiccup to the long and sure process of globalisation. However, there are also lessons learned from the crisis that can help towards making the world more global.

Where do we go from here?

1. Pay attention to Global and local aspects of the crisis

As stated earlier, the economic crisis was resulted from a combination of exposure to the global capital market as well as the inadequate supervision of domestic financial system. This, any new international architecture of financial system must pay attention to both the global and local dimension of the crisis. As such, we must not only focus on weaknesses within national economies which are also real and needs urgent re-dressal but also tackle the weaknesses within the capital market systems (forces behind short term, speculative capital, fund managers as well as money manipulators).

2. Globalisation needs globalise thinking

As the world globalises, inhabitant of mother earth must also have a mental shift towards globalise thinking. As goods and money stop recognising the state, it is important that humans too are able to think global. Global personal and corporate tax to a Global Tax Fund (GTF)
may sound crazy today but may be just the answer for overall world growth in the longer run. For example, if an individual and corporation in Malaysia pay 28% of income to the government, perhaps 2% should go to the GTF and the remaining 26% to the national government.

The GTF then redistribute their collection to all needy nations as well as subsidises developing countries in the industry in the area of comparative advantaged and environmental protection. In that way, we can minimise child labour and environmental decay and pollution. Children in affected countries will then be able to go to school and later be more productive citizens of the world. In the longer run more countries will go out of poverty and at the same time provide consumers for goods produced.

One must remember that the issue today in the current economic crisis is the extreme lack of markets for East Asian economy to export to. We are totally dependent on a few rich economies namely Japan, Europe and most importantly America to absorb the outstanding exports of East Asia. Imagine if we have China, Central Russia and Africa as potential markets, too.

Thus in the long run, making sure all other economies grow in tandem with the current advanced economy will only benefit everyone. In order to do so, the capitalist system must transform itself into a more equitable and efficient system via a global system to redistribute wealth. One such endeavour is via the GTF.

In summary,

The current economic crisis may have an affect to the process of globalisation but on a very limited scale. Seen in a longer time span of history, the current crisis may proof as just a mere hiccup to the longer process of globalisation.

Globalisation is here to stay.

Anas Zubedy
Kuala Lumpur
Sept 1988

References and Bibliography

1 Adlan, Dato' Noor May 1, 1998 APEC and Asia's Crisis
2 Beams, Nick April 1998 The Asian Meltdown - A Crisis of Global Capitalism
3 Cheong K.C. 1998 CSU/MBA Course Outlines and Notes
4 De Melo, Jaime & Panagariya, Arvind 1992 The New Regionalism In Trade Policy
5 European University, Barcelona 1998 Communications and Culture Transformation -
Cultural Diversity, Globalization and
Cultural Convergence
6 FitzGerald, Valpy June 1998 Global Capital Marlket Volatility
and the Developing Countries –
Lessons from the East Asian Crisis
7 Krugman, Paul 1997 Is Capitalism Too Productive?
8 Lietaier, Bernard January 1997 Global currency speculation and its implications
9 Muzaffar, Chandra August 1998 The Crisis : A Year Later
10 Rossetto, Louis 1996 Cyberspace vs. the State
11 Sachs, Jeffrey June 1997 the Limits of Convergence - Nature, nurture and growth
12 Soros, George September 1997 Wold Bank Speech, Hong Kong –

Towards A Global Open Society
13 Stiglitz, Joseph July 1998 Road to Recovery - The Future of Globalization
14 The Economist September 1997 Bergsten on Trade
15 The Economist August 1998 Emerging-market measles
16 The Economist August 1998 Finance and Economics - A question of preference
17 The Economist July 1998 Investigating investment
18 The Economist 1998 Schools Brief - A World view
19 The Economist 1998 Schools Brief - Bearing the weight of the market
20 The Economist 1998 Schools Brief - Capital goes global
21 The Economist 1998 Schools Brief - Delivering the goods
22 The Economist October 1997 Schools Brief - One World?
23 The Economist 1998 Schools Brief - Trade winds
24 The Economist 1998 Schools Brief - Workers of the world
25 The Economist 1998 Schools Brief - Worldbeater, Inc.
26 The Economist October 1994 The Global Economy
27 The Economist July 1997 The NAFTA Effect
28 The Economist December 1995 - January 1996 The Shape of the Workd - The nation-state
is dead. Long live the nation-state.
29 The Economist December 1996 World Trade - All free traders now?
30 The Economist December 1996 World Trade - All free traders now?
31 The Economist May 1998 World Trade - Fifty Years On
32 Wolf, Martin 1998 Flow and blows
33 Wriston, Walter B. October 1997 The CATO Journal Vol. 17 No. 3 –
Dumb Networks and Smart Capital


Anonymous said...

It is proven that opening the boundary does improve trade between nations,and increased trade also create wealth.Today, world trade and FDI has increased bigger and faster, this bring benefits to trading nations, My issue is not the trade but the distribution of wealth created.The gap between the rich and poor is getting bigger, the distribution of wealth is still skewed towards the rich and powerful.This type of dichotomy will eventually lead to social-economic problems.

Anonymous said...

My concern is free trade vs fair trade. The MNCs are able to move around the world to tap resources and achieve market share while the poorer countries dont have that capability.At one point, US requested quota of cars imported into the country from Japan.So,you see, that's lot of unfair practice in the name of free trade.

Scootland Economics said...

indeed, deff smart exconomics