Globalization

The word 'globalization' have gained an extremely significant place in various spheres of modern dynamic life. It is not only having a deep-rooted meaning but also a common usage in the 21 st century world. To different people it has different significance. To some it symbolizes an absolutely fear-free world without barriers and to some it only means a new road towards destruction and end of creation. However, keeping aside the layman's view, to modern day intellectuals it means, a process of

interaction and integration among the people, companies and governments of different nations , a process driven by international trade and investment and aided by information technology. It is a proven fact that this process has effected intensely the environment, the culture, the political systems, the economic development and prosperity and also human physical well being, all around the world. Therefore, globalization is a historical process which is the result of the century-long technological progress that the world have been seeing. It has also resulted from a holistic view of human innovations. Though it has lead to increasing integration of economies all around the world through its strategy of trade and financial flows, a group of skeptics believes that the whole process of globalization has lead to the shrinking of the market instead of expansion of it. Whatever, may be the views about globalization, people have slowly started to believe in its importance and the advantages gained from it.

Globalization and its Meaning

The meaning of globalization can be of various dimensions from various perspectives. Broadly, it refers to integration of the economies of the world and as such of the societies which has lead to cross country flows of information, ideas, technologies, goods, services, capital, finance and people. The cross border integration can have several dimensions- cultural, social, political and economic. Some people dread the process of cultural and social integration more than the economic integration. This is because the former leads to greater adaptation to foreign culture which is often difficult while the latter mainly leads to economic growth and development which is certainly an acceptable change. Hence the fear of cultural hegemony haunts many people. However, economic integration is mainly the result of the following: (a) Trade in goods and services,i.e., International trade which involves two or more nations

(b) Movement of capital,i.e., capital investments in between countries and (c) Flow of finance Apart from these, globalization is also the effect of movement of people all round the world.

History
The process of globalization has a long history of fades and flows. It started since the pre- World War I period of 1870 to 1914, when the economies of the world started rapidly integrating in terms of trade flows, capital flows and mobility of people. Technological forces in the fields of transport and communication are the main driving force behind the growth of globalization. There were fewer barriers existing in the way of goods flow and of people across geographical boundaries. Unlike modern day globalized world, there were no passports or visas. Also there were very few non-tariff barriers and restrictions on fund flows. However, the pace of globalization slowed down in between the first and second world war period when several barriers in the way of free movement of goods and services started coming up gradually. Most of the economies all round the world infact, supported such restrictions. After the second world war, all the leading countries started to re-think about the importance of economic integration. The developing countries who got freedom from colonial rule, went for import substitution industrialization strategy. The Soviet Union did not go for global economic integration. Though with passage of time, more and more countries have gone for globalization, still it is a fact that trade and capital markets are no more globalized than they were at the end of the 19th century, given the importance of globalization rising day-by-day. Also the advent of the new information technologies have made a deep impact on market integration, efficiency and industrial organization. Globalization of financial markets has far outpaced the integration of product markets.

Merits of Globalization
The advantages of globalization can be explained with respect to the three types of channels of economic globalization leading to economic integration. They are as follows:

Trade in Goods and Services

The standard theory of international trade states that a country should trade in that product, which is

consistent with its comparative advantage and accordingly should allocate its resources. This will lead to specialization into producing that product and also better productivity. It is a common belief that opening up of the economy and promoting trade practices leads to economic growth than restrictive trade practices which impedes economic growth. This led many countries of the world to abandon their earlier policy of import substitution and adopt a policy of outward orientation. However, with respect to trade in goods and services, it is said that the emerging economies will benefit from it only when they will reach the full potential of their resource availability, which is probably time consuming. International trade agreements, therefore, allow longer time to developing economies in terms of reduction in tariff and non-tariff barriers. In this regard, there exists a well known and accepted principle of Special and differentiated treatment.

Movement of Capital
The production base is greatly enhanced by capital flows all across countries, which was very much true in 19th and 20th centuries. The total savings of the world is distributed among those countries through capital mobility which have the highest investment potential. In such a scenario, one countrys growth is not constrained by its own domestic savings. Foreign capital inflow contributed significantly in the recent development of the East Asian countries. In some of these countries, the current account deficit was more than 5 per cent of the GDP in most of the period when growth was rapid. Capital flows can be either in the form of foreign direct investment or portfolio investment. The developing countries prefer foreign direct investment than portfolio investment since portfolio investment does not directly lead to expansion of productive capacity. However, portfolio investment may do so, at one step removed. Portfolio investment can be volatile particularly in times of loss of confidence which prompts the countries to put restrictions on portfolio investment. However, in an open system such restrictions cannot work easily.

Financial Flows
The current process of globalization is marked by the rapid development of the capital market. The growth in capital and foreign exchange markets have facilitated the transfer of resources across borders. The gross turnover in foreign exchange markets is around $1.5 trillion per day worldwide which is hundred times greater than the volume of trade in goods and services. For international transfer of capital, the pre-requisites are expansion in foreign exchange markets and

capital markets. The volatility in the foreign exchange market and the ease with which funds can be withdrawn from countries have created panic situations before, the most recent example being the East Asian crisis. The contamination of financial crises is a worrying phenomenon. Financial crisis in one country affects the other countries. Financial crises are not solely caused by foreign exchange traders. The financial markets tend to overstate weaknesses. Group instinct is common in financial markets. The economy being more open to capital and financial flows, there is even greater compulsion to ensure that factors relating to macro-economic stability are not ignored. The East Asian crisis should be a good lesson for all developing countries, as one commentator aptly said The trigger was sentiment, but vulnerability was due to fundamentals.

Demerits of Globalization
There are two main demerits of globalization. These are as follows: 1. Globalization leads to more unequal income distribution among countries and within countries. 2. Globalization results in loss of national sovereignty leading to increasing difficulty in following independent domestic policies by countries.

Theoretical and Empirical Explanation

It is argued that since globalization emphasizes efficiency, the gains will go to countries well endowed with natural and human resources. Advanced countries have had a head start over the other countries by at least three centuries. These countries have a wide and sophisticated technological base. Though trade benefits all countries, greater gains go to the industrially advanced countries. Therefore, in the present trade agreements, the principle of special and differentiated treatment is applied to the developing countries for providing longer transition periods in relation to adjustment. However, two changes with respect to international trade will be favorable for the developing countries: 1. The industrially advanced countries are vacating certain areas of production for many reasons, which can be filled in by the developing countries. For example, what the East Asian countries did in the 1970s and 1980s. 2. Since the role of human resources has gained more importance than information technology, international trade is no longer determined by the distribution of natural resources. Specialized human skills will become the determining factor in the coming decades.

Productive activities are becoming knowledge intensive rather than resource intensive. In this respect, the divide between the developing and the advanced countries known as the 'digital divide', is a gap that can be bridged. A globalized economy with increased specialization can lead to improved productivity and faster growth. A balancing mechanism is required to ensure that the handicaps of the developing countries are overcome. It has been argued that globalization leads to widening gaps in income distribution between countries. This can happen both in the developed and developing countries. Globalization may benefit even within a country those who have the skills and the technology. The higher growth rate achieved by an economy can be at the expense of declining incomes of people who may be rendered redundant. In this context, it has to be noted that while globalization may accelerate the process of technology substitution in developing economies, these countries even without globalization will face the problem associated with moving from lower to higher technology. If the growth rate of the economy accelerates sufficiently, then part of the resources can be diverted by the state to modernize and re-equip people who may be affected by the process of technology up gradation. The second concern is related to the loss of autonomy in the pursuit of economic policies. It is a known fact that, in a highly integrated world economy one country cannot follow policies which are not in consonance with the worldwide trends. Capital and technology are volatile and they will move where the benefits are greater. As the nations come together whether it be in the political, social or economic arena, some sacrifice of sovereignty is inevitable. The constraints of a globalized economic system on the pursuit of domestic policies have to be recognized. However, it need not result in the abandonment of domestic objectives. The third concern is related to insecurity and instability. When countries are inter-related strongly, panic and fear spread fast. The downside to globalization essentially emphasizes the need to create countervailing forces in the form of institutions and policies at the international level. governance cannot be pushed to the border, as integration gathers speed. The empirical evidence of the impact of globalization on inequality is not clear. The share in aggregate world exports and in world output of the developing countries has been increasing. In collective world exports, the share of developing countries increased from 20.6% in 1988-90 to 29.9% in 2000. The share in total world output of developing countries has increased from 17.9 per cent in 1988-90 to 40.4 per cent in 2000. Also the growth rate of the developing countries both in terms of GDP and per capita GDP has been higher than those of the industrial countries. These growth rates have been in fact higher in the 1990s than in the 1980s. Global

All these data do not prove that the developing countries as a group have suffered in the process of globalization since there have been substantial gains. Within the developing countries, Africa has not done well and some of the South Asian countries have done better only in the 1990s. While the growth rate in per capita income of the developing countries in the 1990s is nearly two times higher than that of industrialized countries, in absolute terms the gap in per capita income has widened. As far as income distribution is concerned within the countries, it is difficult to judge whether globalization is the primary factor responsible for any deterioration in the distribution of income. We have had considerable controversies in our country on what happened to the poverty ratio in the second half of 1990s. Most analysts even for India would agree that the poverty ratio has declined in the 1990s. Differences may exist as to what rate at which this has fallen. Nevertheless, whether it is in India or any other country, it is very difficult to trace the changes in the distribution of income within the countries directly to globalization.

India and Globalization

In the premises of globalization, there is a growing concern as to what should be India's attitude towards it ? Of course, opting out would not be a wise choice. At present, there are 149 members in the World Trade Organization(WTO). China being admitted recently. Apart from these, 25 countries are waiting to join the WTO. An appropriate plan should be evolved to reap the maximum benefits out of international trade and investment. The framework should include the following: 1. A transparent list of demands that India would like to make on the multilateral trade system, and 2. To realize the full potential from globalization, the necessary steps that needs to be taken.

Demands related to the Multilateral Trading System

The demands of the developing countries on the multilateral trading system, being non-exhaustive should include: 1. Establishment of symmetry between the movement of capital and natural persons, 2. Delinking environmental standards and labour related considerations from trade negotiations, 3. Zero tariffs on labour intensive exports of developing countries, in industrialized countries,

4. Traditional knowledge of developing countries, and adequate protection given to genetic or biological material, 5. Unilateral trade action being prohibited and national laws and regulations, and 6. Effective restraint imposed on industrialized countries in initiating anti-dumping and countervailing action against exports from developing countries. The new trading system must aim at ensuring free and fair trade among countries. However, the emphasis so far has been on free rather than fair trade. In this context the rich industrially advanced countries have an obligation. They have often indulged in double speak. Though requiring the developing countries to dismantle barriers and join the main stream of international trade, they have also been raising significant tariff and non-tariff barriers on trade from developing countries. This has been, often times, the consequence of heavy lobbying in the advanced countries to protect 'labour'. The average tariffs in the United States, Canada, European Union and Japan the so called Quad countries range from 4.3 per cent in Japan to 8.3 per cent in Canada. Their tariff and trade barriers are much higher on several products exported by developing countries. For example, Tariff rates more than 100 per cent is imposed on major agricultural food products such as meat, sugar and dairy products. Tariff rate of 180 per cent is imposed on fruits and vegetables such as bananas by the European Union, once they exceed quotas. The tariffs collected by the US on $ 2 billion worth of imports from Bangladesh are higher than those imposed on imports worth $ 30 billion from France. Therefore, these trade barriers impose a serious burden on the developing countries. It is essential that for a truly fair trading system, the rich countries should jointly come forward to reduce the trade barriers and subsidies that prevent the products of developing countries from reaching the markets. Or else, the developing countries will fail to reap the benefits of a competitive system. There are conflicts existing among countries on trade matters. Of late, there was a major conflict between the US and EU countries, in relation to the agriculture. There are also conflicts among developing countries. For example, Malaysia, a major exporter of Palm Oil, protested when the import tariffs on edible oil were increased. Cheaper imports from China, are protested by the entrepreneurs in India. In the export of rice, a major competitor of India is Thailand. If development is the major motive prohibition of extra territorial application of

behind international trade as proclaimed by the Doha declaration, then a trading arrangement should be worked out, that is beneficial to all the countries. There have been protracted negotiations at WTO in reforming the trade system. The tariff and nontariff barriers are coming down. It is a common apprehension that the concerns of developing countries are not being addressed adequately. From this perspective, it can be said that the recent Hong Kong Ministerial is a modest success. Inspite of the aforesaid facts, it is acknowledgeable that it is a step forward. The major stumbling block to third world trade expansion, is the domestic support to agriculture given by the developed countries. However, Indias stand in relation to agriculture has been `defensive. It is not a major player in the world agricultural market. The impact of what has been accepted in relation to Non-Agricultural Market Access and services will vary from country to country. Despite some contrarian opinion, the gain to India from services can be significant. The Hong Kong Ministerial is only a broad statement of intentions. A lot will depend on the translation of these ideas into concrete actions.

Measures taken by India

The second set of measures should be part of the action plan in relation to strengthening India's position in international trade. India has many strengths, which several developing countries lack. Thus, India is in a stronger position to gain from international trade and investment. Its development in the IT sector is a reflection of the abundance of skilled labourer in the country. It is therefore desirable to ensure, greater freedom in the movement of skilled manpower. Attempts should be taken to ensure that it is a frontline country in the area of skilled manpower. India can attract greater foreign investment, if we can accelerate our growth with stability. In this context, stability implies reasonable balance on the fiscal and external accounts. Competitive environment must be maintained domestically to take full advantage of wider market access. Good use has to be made of the extended time, given to developing countries to dismantle trade barriers. Therefore, wherever legislations are required to protect sectors like agriculture, they need to be enacted quickly. A long time has been taken to pass the Protection of Plant Varieties and Farmers Rights Act. It must be ensured that the firms make effective use of the new patent rights. South Korea has been able to file in recent years as many as 5000 patent applications in the United States whereas in 1986, the country filed only 162. China has also been very active in this area. A truly active agency is required in

India to encourage Indian firms to file patent applications. Also, it is necessary to build complementary institutions for maximizing the benefits from international trade and investment. There have been a change in the environment in which the Indian industries operate, due to changes in the foreign trade and foreign investment policies. The path of change is undoubtedly difficult. A greater integration of the Indian economy with the rest of the world is unavoidable. The Indian industry must be forward looking and get organized to compete with the rest of the world at levels of tariff comparable to those of other developing countries. In this regard it must be mentioned, that the Indian Government should be alert to ensure that Indian industries are not the victims of unfair trade practices. Also, the safeguards available in the WTO agreement must be fully utilized to protect the interests of Indian industries. The Indian industry has the right to demand that the macro economic policy environment should be conducive to rapid economic growth. The recent policy decisions has been attempting to do that. It is time to recognize for the Indian industrial units, that the challenges of the new century demand greater action at the enterprise level. India produces goods and services not only for domestic market but also for the outside world. At the minimum, they must be able to meet global competition. There is a need to begin earnestly, the search for identifying new competitive advantages. Indias ascendancy in Information Technology (IT) is only partly by design. It must be said, however, to the credit of policy makers that once the potential in this area was discovered, the policy environment became strongly industry friendly. The advantages of India actual and that which can be realized in a short span of time, over a wide spectrum of activities, must be drawn up. In a number of cases, building of plants is required on a global scale. But this need not necessarily be so in all cases. The advent of IT is modifying the industrial structure. The revolution in telecommunications and IT is simultaneously creating a huge single market economy, while making the parts smaller and more powerful. The road map for the Indian industry is the need of the hour which must explain the path of different industries that must take to achieve productivity and efficiency levels comparable to the best in the world. The process of globalization, in a fundamental sense, is not a new phenomenon. Its origin dates back to the era when great migrations of people occurred across the great landmasses. Recent developments in computer and communication technologies have accelerated the process of integration, with geographic distances becoming less of a factor. This however, can be a boon or a bane. With borders becoming porous and modern technologies not recognizing geography, it is not possible to hold back ideas either

in the political, economic or cultural spheres. Each country must prepare itself to meet the new challenges so that it is not being bypassed by this huge wave of technological and institutional changes. Globalization though lead to technological changes, is not a pure technological phenomenon. It has many ideological dimensions. To deal with this, we must have a knowledge of the gains and losses, as well as of the benefits and dangers. Also we should resist the temptation to blaming the globalization for all our failures. Though open economy is risky, we must not miss the opportunities that the global system provide. As critics point out, world cannot marginalize India, but India, if it chooses, can marginalize itself. India must guard itself against this danger. India is in a position to extract significant gains from globalization more than many other developing countries. We must identify and strengthen our comparative advantages. It is this two-fold approach which will enable us to meet the challenges of globalization which may be the defining characteristic of the new millennium. Improving productivity and efficiency is the key to Indias growth. The natural resources of our country is not large. India accounts for 16.7 per cent of worlds population whereas it has only 2.0 per cent of worlds land area. While Chinas population is 30 per cent higher than that of Indias, it has a land area which is three times that of India. For long-range sustainability, there is a need for greater efficiency in the management of natural resources like land, water and minerals. In a capital-scarce economy like ours, efficient utilization of our capacity becomes even more critical since we need well-trained and highly skilled people. In today's world, competition in knowledge is competition in any field and that is why we need to build institutions of excellence. The real answer to globalization is increased productivity flowing from improved skills.