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Asian Development Outlook 2001 : III. Asia's Globalization Challenge
Conclusions — Toward a Framework for Globalization
What is the Future of Globalization?
This third part of Asian Development Outlook 2001 has reviewed
the opportunities and risks that globalization presents for
DMCs. Its premise is that powerful technological, economic,
and political forces are at work that are likely to render the
world economy even more globalized in the future than it is
today. Since the Second World War, the decline in the cost of
international transportation and communications, the spread of
global production networks, and the progress in drawing countries
and regions—once only marginally integrated into the
world economy—more deeply into the global system, have
been quite substantial. Yet, globalization has considerably further
to go. The extent of participation in international trade and
capital flows varies enormously across countries.
This is in part due to the existence of a number of barriers
to further integration of countries with global markets. Foremost
among these are barriers to trade. Despite significant
reductions in them brought about by eight rounds of multilateral
trade negotiations since 1949, widespread restrictions on
trade, especially nontariff barriers, exist in most developing
countries. These serve to artificially raise the cost of imported
goods and services, harming domestic consumers and foreign
producers while inhibiting the efficient allocation of resources
in each country, and impeding economic growth and structural
reforms in many countries. If differences between nations on
the appropriate emphasis at a new round of WTO negotiations
can be resolved (see Box 3.5), further reductions in trade
barriers may further stimulate globalization.
Box 3.5 Developing Countries and the World Trade Organization
In January 1995, WTO, which superseded the General
Agreement on Tariffs and Trade, was mandated to expand
world trade and in the process further generate integration
of the global economy. However, the attempt to launch a
new round of multilateral trade negotiations in December
1999 failed because there were substantial differences
among countries over its content and structure. On the one
hand, industrial countries were pressing for a broad-based
agenda and for negotiations to be concluded within three
years so as to maintain momentum in bringing down trade
barriers. On the other hand, several developing countries
believed that negotiations should concentrate on problems
of implementing the agreements reached in the last round
of negotiations (the Uruguay Round) and on its “built-in
agenda,” which provided for new negotiations only in agriculture
and services.
The position of the developing countries reflected three
immediate concerns. First, the Uruguay Round and its
implementation process did little to improve market access
for their exports of goods and services. Second, they felt that
WTO rules were unbalanced in several important development-
related areas such as the protection of intellectual
property rights and the use of industrial subsidies, while the
special and differential treatment, which the Uruguay
Round accorded them, was inadequate. Third, insufficient
human and financial resources and weak institutional
capacities restricted the ability of many developing countries
to exploit the opportunities open to them under the
WTO system, particularly in respect of its dispute settlement
mechanism, as well as the inability to comply fully with
their multilateral obligations. Developing countries need to
grapple with these issues and, once a consensus for the new
round is built up, they need to proactively participate in it
with the objective of further integrating themselves into the
global economy.
| For DMCs, late 20th and early 21st century globalization is
also coinciding with an important change in the sources of
economic growth. For the last four decades, DMCs have
recorded rapid rates of growth by maintaining high rates of
factor accumulation—capital accumulation in traded-goods
sectors in particular—and by selling their products in world
markets. Policies and the institutions through which these policies
are made have been adapted to this growth model: they
have promoted savings and investment, favored investment in
traded goods sectors, and rewarded export performance. But as
Asia’s high-growth economies mature, the source of their
growth will progressively shift from factor accumulation to TFP
growth. This will require changes in policies and institutions. In
addition, low-income DMCs that wish to follow their high-in-come
predecessors down the path of labor-intensive, export-oriented
manufacturing using technologies imported via
licensing will find their task complicated by globalization.
Countries like the PRC and India are attempting to implement
this strategy. Competition is intense. Selling the products of
low-wage manufacturing industries in global markets will be-come
increasingly cutthroat. And as more countries compete for
foreign investment, their ability to acquire technology via licensing
will be correspondingly curtailed. Sustaining growth in
this setting will require telescoping the transition from accumulation-
to innovation-based growth. In turn, this will require
accelerating the evolution of policies and the renovation of
policy-making institutions.
That the need for stable macroeconomic policies, sound
regulatory arrangements, and good governance is obvious does
not make them unimportant. Appropriate policies are easier to
prescribe than to implement and their specifics are likely to vary
over time as an economy evolves. A brief set of policy recommendations
that arise from this review of Asia’s globalization
challenge is presented below:
Trade Policies
Trade liberalization played a major role in stimulating development
in many DMCs. Further progress in this area will reinforce
the trend toward globalization that has been so beneficial:
In order to minimize the efficiency losses and economic
distortions brought about by trade barriers, trade policy
instruments need to be modified. The first step of a liberalization
strategy is replacing nontariff barriers by tariffs.
The move from quantitative restrictions to tariffs is a
healthy one because the latter are relatively less protective
than the former. More importantly, a tariff is a price instrument
and thus changes in international prices feed through
more readily into the domestic economy. The knowledge
of and link with global prices is essential for domestic
producers. Not knowing the relative costs of imports, domestic
producers cannot commit themselves to production
for exports.
A second set of policies toward openness and greater neutrality
of trade regimes consists of (i) lowering the average
level of protection and (ii) reducing the average dispersion,
or variance of protection. If the dispersion is not reduced,
as the average tariff declines, the tariff structure may
become less neutral and more discriminatory, and therefore,
highly distorting. A reform strategy that reduces tariffs
on intermediate capital goods but leaves those on finished
products intact—which was a common phenomenon in
developing economies—ends up increasing effective protection,
even though it reduces the average level of tariffs.
Human Resources Development, Technology, and
Infrastructure Issues
While it is recommended that the role of government in coordinating
resource allocation be generally diminished, public
investment in human and physical capital can still play a critical
role in stimulating economic development. Specifically, in the
current context:
It must be recognized that education plays a key role in
successfully adapting to a globalizing world. The emphasis
within the education system will depend on the level of
educational skills already attained. On the one hand, more
emphasis on basic education, rather than vocational training,
will provide semi-skilled workers with the solid but
flexible foundation necessary to adapt to a rapidly changing
environment. On the other hand, DMCs need a core of
highly trained engineers, scientists, financial sector personnel
and technicians that can facilitate the absorption of new
technology and innovation and transfer it to domestic
firms. Which of these concerns is more critical will depend
on local conditions, but significant investments in education
are clearly warranted.
Among the economies at the lower end of the technological
ladder, it is still possible to achieve effective and productive
integration into the global system by importing capital
goods, attracting FDI, and licensing foreign technology. It
will also be important to maintain competitiveness in the
new economy environment through selected investments
in telecommunications infrastructure and computer
literacy programs. These investments should take advantage
of public-private partnerships where possible,
depending on local circumstances.
Institutional Factors
The optimal role of government is increasingly a dynamic concept.
To remain successful, institutions must adapt. Specifically:
As DMCs approach the technological frontier, they will
have to rely more on innovation than capital accumulation.
This may necessitate radical changes to the policies and
institutions supporting preexisting systems of innovation
as they can pose a barrier to technical change. Thus existing
policies that favor large firms and conglomerates may
have to change to policies that favor more flexible and
innovative smaller firms. Moreover, the current emphasis
on centralized bank-based finance might also need to
evolve toward greater reliance on securities markets, which
may prove more efficient in providing venture capital for
new technology start-ups. Generally, an environment
conducive to innovation will involve less government
command over resources.
The process of adapting institutions to the imperatives of
globalization takes place at the global, regional, and
national levels. Actions at these levels should be seen as
complementary to each other. At the global level, institutional
arrangements that define standards to be met by all
countries but that permit individual countries to meet them
in different ways offer the best chance of success. This is
because they reconcile the common imperatives created by
participation in international markets with the diversity of
national economic systems and structures. Insofar as cross-border
externalities associated with national policies are felt
mainly by countries within a region, coordination at the
regional level is considered to offer better outcomes than
global initiatives. This is considered to be especially
relevant in the context of coordinating exchange rate and
R&D policies.
Macroeconomic Stabilization
Stable, credible macroeconomic policies are critical to efforts to
limit volatility in capital markets. Specifically:
Monetary and financial institutions have to be strengthened
if volatility is to be reduced. The hallmark of these policies
should be credibility and prudence. Inflation targeting has
much to recommend although it may be too constraining in
some instances. On the fiscal side, rigid rules are probably
not as acceptable. Nevertheless, large deficits should be
avoided to minimize the buildup of public sector debt and
the crowding out of private sector activity.
Exchange rate regimes that featured a soft peg to the US
dollar were one of the primary causes of the Asian financial
crisis and the volatility in output, exchange rates, and financial
markets that ensued. In the aftermath of the crisis, most
countries have adopted floating rate regimes. This has been
the preferred solution, except in PRC; Hong Kong, China;
and Malaysia, where policies and financial resources are
sufficient to hold a peg to the US dollar. However, in the
case of a hard peg, countries must be willing to adopt a
strong anti-inflation policy and be ready to accept deflation
if necessary, particularly as a way to meet competition in
international markets when competitors have depreciated
their currencies. It is not generally recommended that
countries return to a soft peg as that would require frequent
interventions by the central bank to maintain the peg.
Strengthening the Financial System and Capital Account
Liberalization
Capital account liberalization is likely to become increasingly
difficult to resist as economic and financial globalization
proceeds. This point heightens the importance of coordinating
domestic financial liberalization with the elimination of distortions
that would otherwise cause such liberalization to heighten
volatility. These measures must include increasing bank capitalization
where appropriate, strengthening prudential supervision
and regulation, and eliminating implicit guarantees to
prevent financial institutions from taking excessive risks:
FDI is the form of foreign investment that comes packaged
with managerial and technological expertise. It is also least
likely to aggravate weaknesses in the domestic banking
system or to be associated with panic. For these reasons
liberalization of FDI should be the first step in liberalizing
the capital account.
Greater competition should be selectively introduced to
strengthen the banking system, increase efficiency, and
enhance the quality of banking services. Foreign competition
should perhaps be phased in so that the domestic
banks have time to adjust. It must also be recognized that
opening the financial market to foreign banks might
increase the flow of portfolio investment. Thus, banks
should be allowed to fund themselves offshore only after
other policies to strengthen the financial system have been
put in place.
Using market-based initiatives to regulate capital flows
(thus mitigating the volatility of portfolio and other investment
flows) is preferable to administrative measures. An
example is the Chilean system of requiring a year-length
deposit of all investors seeking to import capital. This
implicitly places a disproportionate tax on short-term
investors.
Bond and stock markets should be developed to provide
greater stability to the financial system. The development
of bond markets helps diversify sources of corporate debt,
while that of stock markets avoids excessive reliance on debt
in general. However, developing deep and liquid bond and
stock markets is likely to take time given the need to put in
place regulatory requirements mandating the disclosure of
up-to-date financial information, the use of recognized
auditing and accounting standards, penalties for insider
trading, and statutes protecting minority shareholders.
Poverty Measures
Globalization will be accepted most readily if its benefits are
widely shared. Two sets of policies can help achieve this:
For the short term, insurance against shocks is needed.
These include short-term safety nets for those unable to
work, and public works programs for those who are. These
social safety net programs should be targeted to maximize
efficiency, although experience in India, Bangladesh, and
Philippines demonstrates that this is difficult. Microcredit
programs are an important element of these programs to
avoid distress asset sales. Moreover, these social safety nets
need to be in place prior to a crisis if they are to be effective.
In the long term, policies are required to foster the accumu-lation
of forms of human capital that are useful in a global-ized
world. The ability to respond quickly to global changes
will be more important. This means less focus on vocational
training and more on basic education, particularly for
women, who because of their familial obligations, are least
able to reeducate themselves as adults.
In closing, it may be put forward that DMCs experienced the
economic and financial crisis of 1997/98 because they failed to
recognize the risks that came with large portfolio inflows that
were ultimately linked with liberalization of financial markets
and globalization. The challenge for DMCs now is how to capitalize
on the opportunities for growth and development
afforded by globalization while at the same time minimizing the
risks of volatility, dealing with possible crises, and managing
other issues that may arise as the process continues.
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