Globalization, Marginalization and Development
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Globalization, Marginalization and Development

Mansoob Murshed, Mansoob Murshed

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Globalization, Marginalization and Development

Mansoob Murshed, Mansoob Murshed

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This excellent new book contains contributions from a number of leading experts and is the result of the UNU/WIDER project on globalization and low-income countries. The discussion focuses in on how to harness globalization for the benefit of present day marginalized countries and enhance their meaningful participation in the globalization process.

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Publisher
Routledge
Year
2002
ISBN
9781134442294
Edition
1

1 Perspectives on two phases of globalization

S. Mansoob Murshed


The term globalization is used rather ambiguously. It is used in the positive sense to point at the increased international integration of trade, investment and finance; it is also employed in the normative sense to denote a reaction to increased integration, and the policies that follow from there (Nayyar 1997). Globalization and openness are not new phenomena. The period before the First World War offers parallels to the present day in terms of a highly integrated world economy measured by a high degree of international trade, foreign direct investment (FDI), as well as financial flows (portfolio investment and direct lending to banks and governments). During the inter-war period this highly globalized economy became inward looking and the process of globalization was reversed. Since about 1960 the barriers to globalization have once again been dismantled. This was often a slow process, and many developing countries chose not to participate, at least initially. International trade was the first to be liberalized. FDI followed suit, and finally it was the turn of financial flows. Milanovic (1999) argues that the present phase of globalization began at a date well after 1960, as at that time at least a quarter of the world’s population lived under socialist systems. Globalization, therefore, requires the capitalist economic system to be almost ubiquitously present. A convenient date to mark the commencement of the present era of globalization could be circa 1980, following China’s adoption of open-door policies.
This volume focuses on globalization and the challenges it creates for developing countries that mainly fall within the UN least developed country (LDC) grouping, and the World Bank low-income definition. It may not be controversial to state that the forces of globalization disadvantage and marginalize most poor countries. We could, however, argue that this is true of globalization processes, both in its current form, and in its earlier late-nineteenth century incarnation. Nineteenth century globalization can be said to have produced the marginalized third world, just as our present experience of globalization further cements, and adds to, these global inequalities.
The first section presents the picture of the marginalization of most low-income countries in the contemporary era of globalization. The second section contains a sketch of the previous historical episode of globalization, comparing and contrasting it with our modern experience. The third section is concerned with problems arising out of present day globalization, and outlines the issues considered in this volume.

Globalization and marginalization

Globalization implies the accelerated integration of the world economy, not just at the regional level. In principle, this should offer poorer countries an opportunity to grow faster and catch up with more affluent countries. But another process could also be in operation. Globalization may serve to cement the polarization between rich and poor. This polarization has been described by Quah (1996) as the ‘persistence and stratification’ of the differences between rich and poor. Over time, such as with our present spate of globalization, a bi-modal distribution of world incomes emerges; one for affluent nations, the other for low-income countries. Nations are driven to join one or another of these groups.
Globalization can, therefore, produce winners and losers. At present, as in the past, it appears to benefit countries of the North disproportionately more than in the South. Some eleven developing countries account for 66 per cent of total developing country exports, as well as receiving the lion’s share of FDI inflows (Nayyar 1997). China, Mexico and Brazil account for 50 per cent of all developing country FDI inflows. Thus, even within the South the gains from globalization have been highly skewed. Dollar and Kraay (2001) identify a group of successful globalizing developing countries. They are defined to be in the top third of trade to GDP increases since 1980 for all non-OECD countries. In other words, these countries were the most successful in trade expansion. Accompanying this has been an increase in their growth rates, which normally results in poverty reduction. The countries concerned include East Asian nations plus China, Brazil and Mexico. They, therefore, account for over half of the developing world’s population. This picture of success is highly aggregative, for example, in the case of the two most populous ‘successful’ globalizers, China and India, aggregate figures mask huge regional variation in income, and the majority of the world’s poor continue to remain in those countries. Moreover, there is evidence that the world’s income distribution has worsened in the era of globalization (Milanovic 2002).
Notwithstanding the successful globalizers, the majority of the world’s citizenry, and entire nations in the developing world remain extremely vulnerable to domestic and external shocks, and seem unable to cash in on the increased internationalization of the world economy. They are, in many senses of the term, marginalized from the world economic system. The new rules of the game and the international economic environment prevalent since about 1980, following accelerated globalization, also leaves them vulnerable in novel ways. For a nation, failure to achieve acceptable rates of economic growth is linked to its inability to benefit from a globalizing world economy. As is indicated in Table 1.1, the set of economies defined by the UN as the LDC group experienced poor growth rates during both the 1980s and 1990s. Their growth rates were below the developing country average. A more telling picture emerges when we examine real per capita income levels. For the least developed economies they had remained stagnant between 1980 and 1996. As indicated, countries in East Asia and the Pacific have been the most successful in the past two decades. Sub-Saharan Africa (SSA) has been lagging behind most, with unimpressive growth rates and a substantial decline in real per capita income. Unlike Latin America, this region does not appear to have bounced back from the lost decade of the 1980s. The average figures for the geographical regions cited in Table 1.1 often disguise considerable variations in individual country performance within any geographical grouping.

Table 1.1 GDP growth rates and per capita income levels in selected regions and countries

Low et al. (1998) show that the world trade share of many developing economies has fallen. SSA’s share of world exports declined from 3.1 per cent during the 1950s to 1.2 per cent by 1990. The corresponding decline for Latin America was from 5.6 per cent to 4.9 per cent. On the other hand, between 1985 and 1996, Asia’s share of world trade rose by 25 per cent. Low-income countries account for only 2.5 per cent of world merchandise exports, and 1.4 per cent of FDI inflows. The corresponding figures for all developing countries are 19.7 and 21.6 per cent, respectively. Developing country FDI flows are mainly confined to China and middle-income countries. This is prima facie evidence that many developing countries, mainly, but not exclusively in Africa, are truly marginalized from the globalization of recent times.
The combined effects of globalization and structural adjustment in the last two decades has contributed towards making the income distribution more skewed, even in countries where per capita incomes have risen (Cornia 1999). As will be seen below, the last quarter century has driven the widest ever wedge in human history between average incomes in rich and poor nations. Globalization, however, does offer the hope of emulating other successful developing nations, in East Asia, say.
I have stated that we are currently experiencing the second historical phase of economic globalization, and I turn to the earlier episode of globalization, during the period 1870–1914, in the next section.

Globalization in historical perspective

It is said that the past informs the present. This section is not meant to be an exhaustive summary of the differences between present and past globalization, but will be concerned with the salient differences between the two episodes. The period between 1870–1914 was an era of unprecedented international economic integration in terms of trade, FDI and other types of investment as well as capital flows. Let us take the example of merchandise trade. Figures cited in Krugman (1995) indicate, for example, that the share of trade in the UK’s GDP was 27.7 per cent in 1913, declining to 13.1 per cent in 1950 and recovering to 21.1 per cent in 1987. The same figures, for a more inwardly oriented economy, the USA, are 3.9 per cent, 2.9 per cent and 7.4 per cent, respectively. In the case of Germany they are, 19.9 per cent, 9.8 per cent and 23.3 per cent. Thus the world economy, in terms of the value of trade, has recovered to its pre-First World War golden age, after an inward looking half century, particularly during the inter-war period.
It is useful to summarize the more obvious differences in our present experience of globalization when compared to the previous episode, a century earlier. The first is to do with the nature of trade. There is an increased amount of intra-industry trade, compared to the inter-industry trade of the last century (or even half a century ago). Within the category of intra-industry trade, there is also a great deal of intra-firm trade. This is what is described by Krugman (1995), as the vertical disintegration of production or ‘slicing up the value chain’, and ‘fragmentation’ in Arndt and Kierzkowski (2001). Essentially, this refers to the process by which different components of a particular product can be produced in several parts of the world. The second difference stems from the fact that present day FDI is more concentrated: Nayyar (1997) points out that developing countries account for only 22 per cent of the stock of FDI in 1992, compared to 45 per cent in 1914. Third, at present, large proportions of international financial flows occur within the North. Fourth, unlike in the previous century, international labour mobility is extremely restricted, and confined only to the highly skilled, see Baldwin and Martin (1999), on this. Last, the political environment is quite different. Around 1900 colonialization, gunboat-diplomacy and direct interventions in developing countries were rife; these were the means utilized to impose the will of the hegemonic powers. This is less common nowadays. We live in a world where most countries in the developing world are ‘sovereign’ nation states, and at least superficially democratic. The policy sovereignty, however, of the nation state, and developing countries in particular, is severely limited by globalization. Most decisions regarding the governance of the global system are taken in the small fora of the powerful, such as the G-7. The undemocratic rules that follow are mainly enforced through a nexus of multilateral agreements (such as the World Trade Organization or WTO agreements) and multilateral organizations (such as the IMF and the World Bank).
Williamson (1999) states that nineteenth century globalization was triggered-off not just by policy driven trade and capital flow liberalization, but also by falling transport costs and mass migration from Europe to the ‘new’ world. To this list, we can add the process of integrating many third world countries, several of which were colonies, to the global trade nexus as suppliers of primary products. One could argue that declining transport costs, induced by technological innovation, was akin to a ‘natural’ reduction in trade barriers. It must be remembered that international trade was less free of taxes (or artificial trade barriers) in the last century when compared to the present. Granted, the UK and Denmark pursued free trade. But the USA, Germany, France and Russia had considerable import tariffs in place. This was in the interests of their landed classes and other producers. Britain had free trade, because it suited her; it maintained real wages as food prices declined without raising nominal wages: a positive terms-of-trade effect on ‘aggregate supply’. Today’s liberalization is, by contrast, much more about reductions in artificial or policy-induced trade barriers, and less to do with movements of people.
To give ourselves a lesson in economic history: up to the mid-nineteenth century there was a divergence in real earnings between the ‘new’ world and Europe – Australia and USA enjoyed the higher wages. Globalization in the nineteenth century, which is said to have occurred post-1870, implied the convergence of real wages (and wage–land rental ratios) in the ‘Atlantic’ economies, as described in Williamson (1999). Irish wages grew and moved towards British levels as the result of mass emigration. Furthermore, there was also an intra-European convergence – Ireland and Scandinavia doing the main catching up. Nordic countries moved from the periphery to the centre during the pre-1914 globalization, with Sweden and Denmark doing best. Austria did well, but Italy performed poorly, the Iberian Peninsula fared worse, as did much of South Eastern Europe. The same Atlantic economies, with new European and East Asian countries added, continue to be successful in present day globalization.
A question mark remains over why much of the third world was, and still remains, excluded, in terms of economic convergence, from both episodes of globalization. In fact, it can be argued that the previous phase of globalization created the third world and marginalization (Davis 2001), whereas the present system of globalization perpetuates the third world. This can be seen from examining the gap in average or per capita incomes between the richest and poorest countries in the world. UNDP (1999) reproduces figures to show that this gap was only 3 : 1 during the dawn of the industrial revolution in 1820, rising to 11 : 1 by the end of the first episode of globalization in 1913. Then, it grew to 35 : 1 in 1950, rising slightly to 44 : 1 by 1973. More recently, after the commencement of the present round of globalization, this figure has acquired a staggering magnitude of 72 : 1. This is the most conclusive evidence of the process of marginalization of developing countries during the two great phases of globalization. The great first wave of globalization produced a sizeable North–South income gap for the first time. This gap has been widened during the more recent globalization experience.
Baldwin and Martin (1999) allude to the important, but often ignored historical fact that the industrialization of the North, preceding nineteenth century globalization, was at the expense of the South. Bairoch (1982) presents evidence that China and India were just as industrialized in the eighteenth century as the parts of Europe (such as England) who had developed manufacturing. Market penetration by Britain following colonialization caused the manufacturing sectors in these countries of the South to practically vanish. Figures to be found in Davis (2001: table 9.3) show that Europe’s and the UK’s share of world manufacturing output rose from 23.1 per cent and 1.9 per cent, respectively, in 1750 to 63 per cent and 18.5 per cent by 1900. The corresponding figures for China and India, the two most successful globalizers of the post-1980 period according to Dollar and Kraay (2001) make interesting reading. They fell from 32.8 per cent of world manufacturing output in 1750 to 6.2 per cent in 1900 for China, and from 24.5 per cent in 1750 to 1.7 per cent in 1900 for India. Baldwin and Martin (1999), however, argue that in the present globalized context knowledge or ‘ideas’ spillovers are less costly than a century ago. This has enabled a small part of the South to industrialize, whereas the manufacturing share of employment has dwindled in the North. It offers a window of opportunity to poorer countries given the current pattern of consumption where product and brand innovation plays a leading part. But the barriers to entry to such a process of industrialization are still very formidable.
The creation of the proto-third world during the turn of the nineteenth century has been analysed in Davis (2001). There are five points to consider here. The first is the integration of the peasant producer in China, India and elsewhere into global primary product markets. In many parts of the third world there was a switch from food production for domestic consumption to cash or food crops for export. In other parts of the world, in Africa and Latin America minerals production commenced or was expanded. This shift in production patterns was, more often than not, induced by ‘subsistence adversity’: the combination of debt, tax burdens, famine, drought, the loss of common resources and the disappearance of traditional safety nets. Not only did this switch in production patterns reduce food security during the two international tropical famine episodes of 1876–9 and 1896–1902, but, ironically, was associated with the great slump in the global terms of trade of commodity prices during the great depression of 1873–96. The shift towards commodity exports formed the basis of the present-day staple trap, described by Auty (1997). Other parallels exist today in the form of a host of ‘open’ policies pursued in developing countries in the hope of gaining from globalization. Despite these measures, most low-income developing countries are marginalized from world trade. Their participation in world trade a century ago was, perhaps greater, even if it was only primary goods exports.
The second is the burden of taxation and debt. In India, which was under British rule, the burden of taxation was succinctly summarized by the great nationalist economist Dadabhai Naoroji in 1876 (see Naoroji 1901; also Dutt 1902, 1904). He put the average tax burden in India at twice that of contemporary England, although average income there was fifteen times greater at that point in time. Moreover, during the great famine of 1876–9 an extra salt tax was levied to finance a war in Afghanistan. This was criticized by the Victorian philanthropist Florence Nightingale and the politician William Gladstone (Davis 2001). At this time of fiscal exigency, import duties on manufactured cotton goods from England were lowered at the behest of British interests (the Lancashire textile industry), so other taxes had to be levied. By contrast, there is ample evidence to suggest that under the Mughal pre-British rulers in India the burden of taxation was lower. In China too there is evidence pointing to a low agrarian tax burden in the eighteenth century. But the combination of drought, increased military expenditure induced by wars, bureaucratic mismanagement, fiscal measures enforced by colonial powers, and reparation payments all conspired to raise the burden of taxation on the Chinese peasantry during the late-nineteenth century. Other examples of crippling agrarian taxation include late-nineteenth century Algeria. Similarly, a number of independent nations were also saddled with large international debt-servicing burdens such as in Morocco in the late 1870s during a period of drought-induced famine. The tax burden of a century ago bears huge similarities to present day international debt servicing burdens of the highly indebted developing countries.
Third, the burden of taxation was not counterbalanced by expenditure on infrastructure or human development. This specially applies to irrigation works in India and China, but also to public health and education. Rather, as Davis (2001) and others point out, taxes in India were used to finance imperial wars. Among them were numerous campaigns in Afghanistan, the siege of Beijing (1860), the Ethiopian war (1868), the suppression of the revolt in Egypt (1882) and the conquest of the Sudan (1896–8). Military and police expenditure was ...

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