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p. 50 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia III. Asia's Globalization Challenge Introduction The Asian Growth Experience and Globalization Policies for Adapting to Globalization Institutional Options in a Globalizing Environment Conclusions - Toward a Framework for Globalization

Asian Development Outlook 2001 : III. Asia's Globalization Challenge

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Part III. Asia's Globalization Challenge

The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. …. The internationalisation [of the ordinary course of social and economic life] was nearly complete in practice.

J.M. Keynes, The Economic Consequences of the Peace, 1919

INTRODUCTION

As we enter a new millennium, the effects of internationalization- now known as globalization-are everywhere apparent. It is an opportune time to take stock of this process, which has played a major role in sustaining the economic expansion of the global economy in the second half of the 20^thcentury. As the quote from Keynes indicates, it is not a new phenomenon. Yet in the post-Second World War era, globalization is seemingly shrinking the planet as barriers to trade are dismantled, transport and communications costs fall, and global production systems are formed and managed by giant multinational corporations.

Globalization can be defined as the ongoing economic, technological, social, and political integration of the world that began after the Second World War. There are several dimensions to this dynamic process, including the increased internationalization of economic markets as reflected, for example, in trade and financial capital flows. However, there are also institutional and social changes that are taking place within the geographic borders of nation states, though these are much more difficult to quantify. Institutional changes include modifications in policy, in industrial organization, and in the administration of laws and regulations that govern the behavior of economic agents. Globalization is impacting the institutional framework in both developing and industrial countries; it is changing the way in which governments view their developmental role in society.

A brief review of data indicates the extent of globalization since the end of the Second World War. Total world merchandise trade (exports plus imports, by value) surged from about 23 percent of nominal world gross domestic product (GDP) in 1960 to about 39 percent in 1999 (see Table 3.1). Three factors have been behind this explosive growth. First, the effective rates of protection of artificial barriers to international trade (built up as a consequence of two world wars and a depression) such as tariffs and quotas, have fallen by as much as 80-90 percent after the end of the Second World War (Mussa 2000). Second, the costs of transportation and communications have dropped substantially. Ocean shipping costs have fallen in the last 50 years by as much as 75-80 percent. Communications costs have also been reduced significantly, stimulating greater trade in nonfactor services. Outsourcing has increased, particularly in automobiles and electronics, and the vertical integration of production has given way to multiple production platforms in distant locations coordinated from a central hub. Third, as globalization has expanded market size, international competition among firms has intensified. In the industrial countries, this accelerated research and development (R&D) expenditures and innovation as firms competed increasingly on product quality. In developing countries, particularly in Asia, technology-embodying capital goods imports increased as firms competed in global markets by using borrowed technology to produce goods at lower cost.

Parallel to the rising trend of trade in goods and services, private financial capital inflows to developing countries have increased rapidly in the past two decades. Developing countries in Asia and Latin America have received the bulk of these flows (see Figure 3.1). In Asia, such inflows are mainly to a few of the developing member countries (DMCs) of the Asian Development Bank (ADB) such as the People's Republic of China (PRC), Indonesia, and Malaysia. In the years immediately following the Second World War, most of the foreign direct investment (FDI) was made by US firms investing in Europe. Later, FDI among industrial and developing countries began to grow rapidly (see Table 3.2). At its peak, before the Asian financial crisis of 1997/98, about 40 percent of FDI went to developing countries.

The international flow of portfolio (stocks and bonds) and other investment funds (including bank lending) also rose as markets were deregulated and as investors became aware of profit-making opportunities in other countries. There were two main surges involving developing countries in this volatile component of the capital account. The first, in the late 1970s and early 1980s, was a surge in short-term bank lending, largely to Latin America that ended with the second oil shock in 1978. The second, in the late 1980s and the early 1990s, was larger and more broad based, involving substantial flows of portfolio investment and short-term credit to many developing countries in Asia. Strongly influenced by capital account liberalization, exchange control dismantling, rapid growth in equity markets, and low interest rates in industrial countries, this boom began to fade after the 1995 Mexican peso crisis and collapsed following the Asian financial crisis of 1997/98. By the end of 1998, total capital flows to developing countries were down by about 87 percent from the peak in 1996.

The increased flows of goods, services, and investment funds across national boundaries appear to be associated with rising world economic growth. As argued in Asian Development Outlook 1999 (Part 3), economic development theory suggests that openness allows an economy to make better use of its resources through greater specialization in production of the goods and services that it produces relatively cheaply, which it can trade for goods and services produced more efficiently abroad. In particular, trade enables developing countries to import capital and other intermediate inputs that are critical to long-run growth. These critical inputs bring with them new technology. A more open trade regime also encourages competition between local and foreign firms, thereby raising the level of efficiency of domestic firms. There is adequate empirical evidence to support this view of the positive impact of globalization on national economic growth and per capita income-see, for example, Frankel and Romer (1999). Moreover, as more countries have been drawn into the global economy, world economic growth has accelerated.

Yet accelerated economic growth is only one dimension of a complex and pervasive phenomenon that invokes debates on a wide range of issues such as human development, labor, and environmental standards. In particular, fears have been expressed that openness may accelerate the degradation of the environment and may also contribute to the exploitation of labor. Discussion of these issues is not attempted here but Lukas (2000) provides a review of the evidence on these points.

The following section, The Asian Growth Experience and Globalization, analyzes Asian growth performance in the context of globalization. Two major themes are developed. The first is that an increasing number of DMCs have capitalized on globalization to achieve rapid growth and poverty reduction. Participation in the global economy strengthened through growth in international trade and movement of capital and labor. The second theme is that policies and institutions were tailored to facilitate growth based on factor accumulation, particularly in the early stages of the growth process.

The policies and institutional options that must be developed and put in place to maximize the benefits of globalization as well as to minimize its risks are discussed in the subsequent section, Policies for Adapting to Globalization. Policymakers must continue to be alert and responsive to both the opportunities and the challenges of globalization if DMCs are to continue to capitalize on the process. This section has two major themes. The first is that development strategies should be modified both to adapt to a changing global economic environment and to take advantage of the opportunities that come with globalization. The Asian development approach, emphasizing rapid technology transfer to create export industries was, and is, quite successful. Yet, as DMCs move closer to the global technology frontier, certain modalities, such as innovation based on FDI and R&D, will become more important. Moreover, the revolution in information and communications technology (ICT) will continue to create opportunities in goods and services export markets, but those countries with the appropriate ICT infra-structure and personnel will best be able to exploit these opportunities. The second theme is that there are also risks to a globalization strategy and policies must be formulated to minimize them. Greater volatility is probably the biggest risk that accompanies globalization. The section discusses ways to reduce the volatility in economic performance that has been associated with globalization. These include policies to monitor and regulate capital flows, develop an appropriate exchange rate regime, and minimize fluctuations in productivity and investment. The section ends with a review of social programs that can minimize the impact of volatility on the poorest groups in society.

The third section, Institutional Options in a Globalizing Environment, deals with mechanisms for bringing about institutional change in a globalizing world. Institutional changes are slow to take root because they are often subject to strong forces of inertia. However, a crisis can trigger institutional change. In this section emphasis is placed on reforming institutions at different levels of government. Economies must choose a proper mix of institutions to effect policy change. These may be national, regional, or global. It is argued that many policy issues relating to globalization can still be addressed at the national level even though regional and global institutions have greater importance as the world's economies become more integrated. In the final section, Conclusions-Toward a Framework for Globalization, the policies suggested in the previous sections are synthesized against a background of the potential for globalization and the remaining impediments to further globalization.

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