ICRA BULLETIN

Globalisation and its Impact

Money
& C. RANGARAJAN
*
Finance
JAN.–MARCH.2002

Abstract
The term “globalisation” is used to describe a wide range of things
and, in the process, there is no consensus on what it actually means. It has,
over time, become an expression of common usage. Any analysis of
globalisation raises several questions—starting from its definition to the
inequitous implication and the obvious concern of where India stands.
Broadly put, globalisation means integration of economies and socie-
ties through cross country flows of information, ideas, technologies, goods,
services, capital, finance and people. The essence is connectivity and cross-
border integration and goes beyond the economic dimension to include the
cultural, social and political. In this article, however, the term has been re-
stricted to denote economic integration which can happen through the chan-
nels of trade in goods and services, movement of capital and flow of finance.
Besides, there is also the channel through movement of people. Historically,
globalisation has been a process with highs and lows and during 1870 to
1914, there was a rapid integration of the economies in terms of trade flows,
movement of capital and migration of people. Empirical evidence shows that
capital markets are no more globalised today than they were at the end of the
nineteenth century.
Today, the concerns are more on the nature and speed of transforma-
tion and the enormous impact of new information technologies on market
integration, efficiency and industrial organisation. These go together with two
major concerns: one, that globalisation leads to a more inequitous distribution
of income among countries and within countries; and two, that globalisation
leads to loss of national sovereignity and imposes constraints on the pursuit
of independent domestic policies. Empirical evidence on the impact of
globalisation on inequality is not clear. In aggregate world exports, the share
of developing countries increased from 20.6 per cent in 1988-90 to 29.9 per
cent in 2000. Similarly, the share of developing countries in aggregate world
output has increased from 17.9 per cent in 1988-90 to 40.4 per cent in 2000.
However, what is essentially required is a balancing mechanism to ensure that
the handicaps of the developing countries are overcome. And, while
globalisation may accelerate the process of technology substitution in

*C. Rangarajan is Governor, Andhra Pradesh, and was earlier Governor of the
Reserve Bank of India. The author is thankful to Shri Amaresh Samantaraya for his
36 assistance.
)developing economies, these countries, even without globalisa-tion will face ICRA BULLETIN

the problem associated with moving from lower to higher tech-nology. If the
Money
growth rate of the economy accelerates sufficiently, part of the resources can
be directed by the State to re-equip people who may have been affected &
adversely by the process of technology upgradation. On the second concern, Finance
while fiscal autonomy is, in a sense, reduced, the overall fiscal impact depends
JAN.–MARCH 2002
on the elasticity of revenues to GDP and the impact of globalisation on growth
of GDP and the tax base. As nations come together whether it be in the
political, social or economic arena, some sacrifice of sovereignity is inevi-table,
but it need not necessarily result in the abdication of domestic objectives.
What should be India’s attitude in this ambience of growing
globalisation? Opting out of the process of globalisation is not a viable choice.
What is needed is to evolve a framework to wrest maximum benefits out of
international trade and investment. This should include making a list of
explicit demands that India would like to make on the multilateral trade
system; measures that the developed countries should undertake to enable
Opting out of the
developing countries gain more from international trade; and steps that India
should take to realise the full potential from globalisation. process of
Introduction globalisation is not
Globalisation has become an expression of common usage.
Unfortunately, it connotes different things to different people. To some, a viable choice.
it represents a brave new world with no barriers. For some others, it
spells doom and destruction. We need to have a clear understanding of What is needed is to
what globalization stands for, if we have to deal with a phenomenon
that is willy-nilly gathering momentum. evolve a framework
As we begin analysing the implications of globalisation,
to wrest maximum
several questions arise. What is globalisation? Is it purely an economic
concept? Is this a new phenomenon? What are the benefits of globalisa- benefits out of
tion? Who gets hurt in the process of globalisation? Is globalisation
intrinsically inequitous? Is it possible for individual countries to isolate international trade
themselves from globalisation? What are the complementary institu-
tions and policies that countries can build to protect themselves or to and investment.
gain maximum benefits? Where does India stand in this race for
globalisation? Is she a potential gainer or loser?
Broadly speaking, the term ‘globalisation’ means integration of
economies and societies through cross country flows of information,
ideas, technologies, goods, services, capital, finance and people. The
essence of globalisation is connectivity. Cross border integration can
have several dimensions—cultural, social, political and economic. In
fact, some people fear cultural and social integration even more than
economic integration. The fear of “cultural hegemony” haunts many.
However, we use the term globalisation in this article in the more
limited sense of economic integration which can happen through the
three channels of (a) trade in goods and services, (b) movement of
capital and (c) flow of finance. Besides, there is also the channel
through movement of people. 37
 ICRA BULLETIN Historical Development
Historically, globalisation has been a process with highs and
Money
&
lows. During the Pre-World War I period of 1870 to 1914, there was
rapid integration of the economies in terms of trade flows, movement of
Finance capital and migration of people (Tables 1, 2 and 3). The 19th century
had witnessed some revolutionary breakthroughs in communication and
JAN.–MARCH.2002
transport with the emergence of railroad, steamship and telegraph
(Frankel, 2000). Keynes wrote in 1920 “What an extraordinary episode
in the progress of man that age was which came to an end in August
1914!. . . . The inhabitant of London could order by telephone, sipping
his morning tea in bed, the various products of the whole earth . . .
The pace of
he could at the same time and by the same means adventure his wealth
globalisation, in the natural resources and new enterprise of any quarter of the
world . . .”. The Pre-World War I period witnessed the growth of
however, globalisation mainly led by the technological forces in the fields of
transport and communication. There were less barriers to flow of trade
decelerated between and people across the geographical boundaries.1 Indeed there were no
passports and visa requirements and very few non-tariff barriers and
the First and the restrictions on fund flows (Streeten, 1998). The pace of globalisation,
however, decelerated between the First and the Second World Wars.
Second World Wars. The inter-war period witnessed the erection of various barriers to
restrict free movement of goods and services (Maizels, 1970 and
The inter-war period Frankel, 2000). Most economies thought that they could thrive better
under high protective walls. After World War II, all the leading
witnessed the
countries resolved not to repeat the mistakes they had committed
erection of various previously by opting for isolation. Although after 1945, there was a
drive to increased integration, it took a long time to reach the Pre-
barriers to restrict World War I level. In terms of percentage of exports and imports to
total output, the US could reach the pre-World War level of 11 per cent
free movement of only around 1970. Most of the developing countries which gained
Independence from colonial rule in the immediate Post-World War II
goods and services. period followed an import substitution industrialisation regime. The
Soviet bloc countries were also shielded from the process of global
economic integration. However, times have changed. In the last two
decades, the process of globalisation has proceeded with greater vigour.
The former Soviet bloc countries are getting integrated with the global
economy. More and more developing countries are turning towards
outward oriented policy of growth. Yet, studies point out that trade and

1 According to Streeten (2001), there were much less barriers to immigra-

tion during 1870-1913, and that sixty million Europeans moved to Americas,
Australia or other area for new settlement. According to Kuznets (1972),
“. . . through most of the nineteenth and in the early twentieth century emigration
from Europe was essentially voluntary, unrestricted, and in response to greater
economic opportunities in the country of destination . . . During the nineteenth and
early twentieth centuries, when intercontinental emigration was high and
unimpeded by legal restrictions either at origin or at destination, the identity of the
38 countries in Europe with high migration proportions changed continuously.”
 ICRA BULLETIN
TABLE 1
World Trend in Trade 1876-1959
Money
&
Index No. 1913=100

Period Trade Volume

Manufacturing Primary Produce
Finance
1876-80 31 31 JAN.–MARCH 2002

1896-1900 54 62
1911-13 94 97

1926-30 113 123

1931-33 81 116
1934-35 84 114
1936-38 100 125
1948-50 132 116
1951-53 178 133
1954-56 216 156
1957-59 251 182
Source: Maizels (1970)
Original Sources: 1. Industrialisation and Foreign Trade, League of Nations,
Geneva, 1945
2. W.A. Lewis - World Production, Prices and Trade, 1870-1960,
Manchester School, Vol. 20, No. 2, 1952.

TABLE 2
Net Capital Flows as Percentage of GDP

Period US UK Japan France Germany Canada Australia

1870-89 0.7 4.6 0.6 2.4 1.7 7.0 8.2

1890-1913 1.0 4.6 2.4 1.3 1.5 7.0 4.1
1914-18 4.1 3.1 6.8 ** ** 3.6 3.4
1919-26 1.7 2.7 2.1 2.8 2.4 2.5 4.2
1927-31 0.7 1.9 0.6 1.4 2.0 2.7 5.9
1932-39 0.4 1.1 1.0 1.0 0.6 2.6 1.7
1940-46 1.1 7.2 1.0 ** ** 3.3 3.5
1947-59 0.6 1.2 1.3 1.5 2.0 2.3 3.4
1960-73 0.5 0.8 1.0 0.6 1.0 1.2 2.3
1974-89 1.4 1.5 1.8 0.8 2.1 1.7 3.6
1990-96 1.0 2.0 2.2 0.7 1.9 4.1 4.0
Source: Obstfeld (1998).
Note: The figures refer to mean absolute value of current account as percent-
age of GDP.
**: Not Available.

39
 ICRA BULLETIN
TABLE 3
Money Intercontinental Migration, 1801 to 1955

&
in millions

Items 1801- 1821- 1851- 1881- 1911- 1946-

Finance 20 50 80 1910 40 55

JAN.–MARCH.2002 1. Emigration from Europe

Total Flow per Decade
(a) Gross 0.12 0.98 2.89 8.49 5.39 na
(b) Net 0.12 0.90 2.37 5.89 3.32 4.36

As Percentage of Population
(a) Gross 0.1 0.4 1.0 2.2 1.1 na
(b) Net 0.1 0.4 0.8 1.5 0.7 0.8
2. Immigration into US
(a) Gross 0.12 0.82 2.57 5.91 3.46 1.95
(b) Net 0.12 0.75 2.11 4.10 2.13 1.70
The gains and As Percentage of Population
(a) Gross 1.7 5.5 7.2 8.5 3.0 1.3
losses from (b) Net 1.7 5.9 5.9 5.9 1.9 1.1

Source: Kuznets (1972).

globalisation can be

analysed in the capital markets are no more globalised today than they were at the end
of the 19th century.2 However, there are more concerns about
context of the three globalisation now than before because of the nature and speed of
transformation. What is striking in the current episode is not only the
types of channels of rapid pace but also the enormous impact of new information technolo-
gies on market integration, efficiency and industrial organisation.
economic

globalisation—trade Gains and Losses from Globalisation

The gains and losses from globalisation can be analysed in the
in goods and context of the three types of channels of economic globalisation identi-
fied earlier.
services, movement
Trade in Goods and Services
of capital and According to the standard theory, international trade leads to
allocation of resources that is consistent with comparative advantage.
financial flows. This results in specialisation which enhances productivity. While the
classical theory of comparative advantage was based on assumptions of
perfect competition, constant returns to scale and fixed technology, the
“new trade theory” which takes into account imperfect competition,

2 The share of exports in GDP for 16 major industrial countries was 18.2 in
1900 and 21.2 in 1913. In 1992, the share was still lower at 17 per cent for the
industrial countries (Streeten, 1998). While international investment flows as
measured by absolute value of current account exceeded 3 per cent of GDP before
1914, they slumped to less than half that level in 1930s and only after 1970 began
40 to move decisively upward—reaching 2.3 per cent in 1990-96 (Obstfeld, 1998).
increasing returns to scale and changing technology also comes to the ICRA BULLETIN

conclusion that openness leads to improved rates of growth (Frankel,

Money
2000). The new trade theory talks of dynamic gains from international
trade. It is accepted that international trade, in general, is beneficial &
and that restrictive trade practices impede growth. That is the reason Finance
why many of the emerging economies which originally depended on a
JAN.–MARCH 2002
growth model of import substitution have moved over to a policy of
outward orientation. Obviously, even in relation to trade in goods and
services, there is one concern. Emerging economies will reap the
benefits of international trade only if they reach the full potential of
their resource availability. This will probably require time. That is why
The new trade
international trade agreements make exceptions by allowing longer
time to developing economies in terms of reduction in tariff and non- theory talks of
tariff barriers. Special and differential treatment has become an
accepted principle. dynamic gains from
Movement of Capital international trade.
Capital flows across countries have played an important role in
enhancing the production base. This was very much true in 19th and It is accepted that
20th centuries. Capital mobility enables the total savings of the world to
be distributed among countries which have the highest investment international trade,
potential. Under these circumstances, one country’s growth is not
constrained by its own domestic savings. The inflow of foreign capital
in general, is
has played a significant role in the development in the recent period of
beneficial and that
the East Asian countries. The current account deficit of some of these
countries had exceeded 5 per cent of the GDP in most of the period restrictive trade
when growth was rapid. In fact, at the peak, the foreign capital inflow
into Malaysia in 1993 was 17.4 per cent of its GDP, while in Thailand practices impede
in 1995 it was 12.7 per cent of the GDP (Rangarajan, 2000a). Capital
flows can take either the form of foreign direct investment or portfolio growth.
investment. For developing countries the preferred alternative is foreign
direct investment. Portfolio investment does not directly lead to expan-
sion of productive capacity. It may do so, however, at one step re-
moved. Recent events have shown that portfolio investment can be
volatile particularly in times of loss of confidence. That is why coun-
tries want to put restrictions on portfolio investment. However, in an
open system such restrictions cannot work easily. Even in relation to
foreign direct investment, two aspects have raised concerns. First, there
is always the fear that some part of the domestic economy will be
controlled by external factors. In India, it is very often referred to as the
“East India Company Syndrome”. However, there is an increasing
realisation on the part of transnational companies also not to act in a
manner inconsistent with the policies of countries in which investment
is made. Even in recent East Asian crisis it was found that foreign
direct investment was a stable element. While to some extent fresh
capital inflow was moderated, there was no outflow of foreign direct
investment (Rangarajan, 2000b). The second aspect of concern in 41
 ICRA BULLETIN relation to foreign direct investment has been the fact that a significant
part of foreign direct investment has been in the form of cross border
Money mergers and acquisitions3. It is felt that FDI entry through the take over
& of domestic firms is less beneficial because such foreign acquisitions do
Finance not add to the productive capacity but simply transfer ownership and
control from domestic to foreign hands. While this is correct, it over-
JAN.–MARCH.2002
looks the fact that the funds released to the domestic entrepreneurs
because of the acquisition can be utilised for expanding capacity by the
domestic entrepreneurs. Whether or not mergers and acquisitions lead
to technological upgradation in the short-term is not clear. However, it
is reported that over the longer term, effects could be different. Cross
border mergers and acquisitions can be followed by transfer of new or
better technology, when acquired firms are restructured to increase the
efficiency of their operations. As recent events in India have shown
while foreign direct investment is beneficial, public policy will have to
be extremely careful in setting the conditions under which private
Cross border
capital is invited. Seeking guarantees and providing guarantees are
mergers and inconsistent with an open system. Risk taking is the basic element of
entrepreneurial spirit.
acquisitions can be
Financial Flows
followed by transfer The rapid development of the capital market has been one of
the important features of the current process of globalisation. While the
of new or better growth in capital and foreign exchange markets have facilitated the
transfer of resources across borders, the gross turnover in foreign
technology, when exchange markets has been extremely large. It is estimated that the
gross turnover is around $ 1.5 trillion per day worldwide (Frankel,
acquired firms are
2000). This is of the order of hundred times greater than the volume of
restructured to trade in goods and services. Currency trade has become an end in itself.
The expansion in foreign exchange markets and capital markets is a
increase the necessary pre-requisite for international transfer of capital. However,
the volatility in the foreign exchange market and the ease with which
efficiency of their funds can be withdrawn from countries have often created panic
situations. The most recent example of this was the East Asian crisis.
operations. Contagion of financial crises is a worrying phenomenon. When one
country faces a crisis, it affects others. It is not as if financial crises are
solely caused by foreign exchange traders. What the financial markets
tend to do is to exaggerate weaknesses. Herd instinct is not uncommon
in financial markets. When an economy becomes more open to capital
and financial flows, there is even greater compulsion to ensure that

3 The ratio of the value of cross border M&As to FDI inflows in develop-
ing countries has risen from one-tenth in 1987-89 to more than one-third in 1997-99.
Among developing regions, the ratio is the highest in Latin America and the
Caribbean: it increased from 18 per cent to 61 per cent between these two periods,
while in developing Asia it increased from 8 per cent to 21 per cent between the
42 same periods (United Nations, 2000).
factors relating to macro-economic stability are not ignored. This is a ICRA BULLETIN

lesson all developing countries have to learn from East Asian crisis. As
Money
one commentator aptly said “The trigger was sentiment, but vulnerabil-
ity was due to fundamentals” (Reddy, 2000). In this context, it has been &
emphasised that opening of the capital account need not preclude Finance
moderate controls, either price based or regulatory, on capital flows.
JAN.–MARCH 2002
Controls should be selective, designed to achieve the specific objective
of containing speculative capital. While there is, no doubt, that coun-
tries benefit by capital flows, the need to keep a watchful eye on
foreign exchange markets becomes essential. What applies to trade may
not necessarily apply to finance in full measure. However, while
stringent capital controls may be adopted as a temporary shield as part
of crisis management, they cannot be a permanent solution
(Rangarajan, 2000b).

Concerns and Fears It has been

On the impact of globalisation, there are two major concerns.
These may be described as even fears. Under each major concern there emphasised that
are many related anxieties. The first major concern is that
globalisation leads to a more inequitous distribution of income among opening of the
countries and within countries. The second fear is that globalisation
leads to loss of national sovereignty and that countries are finding it capital account need
increasingly difficult to follow independent domestic policies. These
two issues have to be addressed both theoretically and empirically. not preclude
The argument that globalisation leads to inequality is based on
the premise that since globalisation emphasises efficiency, gains will moderate controls,
accrue to countries which are favourably endowed with natural and
either price based or
human resources. Advanced countries have had a head start over the
other countries by at least three centuries. The technological base of regulatory, on
these countries is not only wide but highly sophisticated. While trade
benefits all countries, greater gains accrue to the industrially advanced capital flows.
countries. This is the reason why even in the present trade agreements,
a case has been built up for special and differential treatment in
relation to developing countries. By and large, this treatment provides
for longer transition periods in relation to adjustment. However, there
are two changes with respect to international trade which may work to
the advantage of the developing countries. First, for a variety of
reasons, the industrially advanced countries are vacating certain areas
of production. These can be filled in by developing countries. A good
example of this is what the East Asian countries did in the 1970s and
1980s. Second, international trade is no longer determined by the
distribution of natural resources. With the advent of information
technology, the role of human resources has emerged as more impor-
tant. Specialised human skills will become the determining factor in the
coming decades. Productive activities are becoming “knowledge
intensive” rather than “resource intensive”. While there is a divide
between developing and the advanced countries even in this area— 43
 ICRA BULLETIN some people call it the digital divide—it is a gap which can be bridged.
A globalised economy with increased specialisation can lead to im-
Money
&
proved productivity and faster growth. What will be required is a
balancing mechanism to ensure that the handicaps of the developing
Finance countries are overcome.
Apart from the possible inequitous distribution of income
JAN.–MARCH.2002
among countries, it has also been argued that globalisation leads to
widening income gaps within the countries as well. This can happen
both in the developed and developing economies. The argument is the
same as was advanced in relation to inequitous distribution among
countries. Globalisation 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 globalisation may accelerate the process of technology substitu-
tion in developing economies, these countries even without
Apart from the
globalisation will face the problem associated with moving from lower
possible inequitous to higher technology. If the growth rate of the economy accelerates
sufficiently, then part of the resources can be diverted by the state to
distribution of modernise and re-equip people who may be affected by the process of
technology upgradation.
income among The second concern relates to the loss of autonomy in the
pursuit of economic policies. In a highly integrated world economy, it
countries, it has is true that one country cannot pursue policies which are not in conso-
nance with the world wide trends. Capital and technology are fluid
also been argued and they will move where the benefits are greater. However, this is
not a new phenomenon. For example, in the days of gold standard,
that globalisation
maintenance of the external value of the currency in terms of gold
leads to widening content became paramount. Domestic monetary policy actions were
subordinated to this overriding consideration. In fact, the fixed ex-
income gaps within change rate system under the Bretton Woods arrangement also imposed
similar constraints. In a more or less fixed exchange rate regime, no
the countries as country can allow its inflation rate to be out of alignment with the
inflation rate in the rest of the world. Of course, the flexible exchange
well. rate regime which is now prevalent, gives a little more autonomy in the
pursuit of domestic monetary policy. It is, however, impossible for any
country to have domestic autonomy, fixed exchange rate and free
capital flows. This is the famous impossible trinity. Similar to the
limitations of monetary policy in an open economy, the process of
globalisation imposes some constraints on fiscal policies of countries as
well. Multilateral commitments have led many developing countries to
reduce import duties which traditionally have been a major source of
revenue. Free capital mobility results in tax competition among coun-
tries. At any rate, no country wants its tax regime to be less attractive
for investment. While fiscal autonomy in this sense is reduced, the
overall fiscal impact will depend on the elasticity of revenues to GDP
44 and the impact of globalisation on growth of GDP and the tax base. As
the nations come together whether it be in the political, social or ICRA BULLETIN

economic arena, some sacrifice of sovereignty is inevitable. The

Money
constraints of a globalised economic system on the pursuit of domestic
policies have to be recognised. However, it need not result in the &
abdication of domestic objectives. Finance
Another fear associated with globalisation is insecurity and
JAN.–MARCH 2002
volatility. When countries are inter-related strongly, a small spark can
start a large conflagration. Panic and fear spread fast. The only hope
here is that despite integration, different parts of the world economy
can be at different phases of the business cycle. In fact, until recently
there had been a lag between the time the US reached the peak of the
cycle and the European Union reached it. Such non-synchronised
movements have had a beneficial effect. However, we are now facing
for the first time since the 1980s the first synchronised downturn. There
is greater insecurity because of the constant drive towards efficiency
and competition. The downside to globalisation essentially emphasises
Despite integration,
the need to create countervailing forces in the form of institutions and
policies at the international level. Global governance cannot be pushed different parts of the
to the periphery, as integration gathers speed.
Empirical evidence on the impact of globalisation on inequal- world economy can
ity is not very clear. The share in aggregate world exports and in world
output of the developing countries has been increasing. In aggregate be at different
world exports, the share of developing countries increased from 20.6
per cent in 1988-90 to 29.9 per cent in 2000 (IMF, 2001 and Table 4A). phases of the
In fact, in comparing the share of the developing countries over time,
care has to be taken to compare the share of the same set of countries business cycle.
over the entire time frame. In fact, four of the countries which are now
classified as newly industrialised Asian economies, are excluded from
developing countries when data on developing countries are presented
in the various documents. We have included these four countries in the
category of developing countries while computing the share and
comparing the trend. Similarly the share in aggregate world output of
developing countries has increased from 17.9 per cent in 1988-90 to
40.4 per cent in 2000 (IMF, 2001 and Table 4B). The growth rates of
the developing countries both in terms of GDP and per capita GDP
have been higher than those of the industrial countries. These growth
rates have been in fact higher in the 1990s than in the 1980s. All these
data do not indicate that the developing countries as a group have suff-
ered in the process of globalisation. In fact, there have been substantial
gains. But within developing countries, Africa has not done well and
some of the South Asian countries have done better only in the 1990s.4

4 It is not easy to answer the question whether globalisation has led to a

more unequal distribution of income in the world. Even if one were able to establish
that the distribution of income globally had become more unequal in the 1990s, it is
difficult to trace this purely to globalisation. Apart from this, there are two other
issues. First, there is the issue whether incomes of countries should be measured by 45
ICRA BULLETIN
TABLE 4 A
Money Share in Aggregate World Exports

&
per cent

Year Major Industrial Developing Asia Africa

Finance Countries * Countries **

JAN.–MARCH.2002 1988-90 55.5 20.6 10.8 2.0

1995 50.0 26.9 17.5 1.8
2000 47.7 29.9 @ 19.1 2.1

Note: * Major Industrial Countries include US, Japan, Germany, France, Italy,
UK and Canada.
** Developing Countries also includes Newly Industrialised Asian
Economies.
@ Excluding share of Israel which is shifted to Industrial Countries
group.
Source: Various Issues of World Economic Outlook, IMF.

TABLE 4 B
Share in Aggregate World Output
per cent

Year Major Industrial Developing Asia Africa

Countries * Countries **
1988-90 62.7 17.9 7.2 1.7
1995 46.2 41.2 24.4 3.3
2000 45.4 40.4 @ 25.0 3.2
Note: * Major Industrial Countries include US, Japan, Germany, France, Italy,
UK and Canada.
** Developing Countries also includes Newly Industrialised Asian
Economies.
@ Excluding share of Israel which is shifted to Industrial Countries
group.
Source: Various Issues of World Economic Outlook, IMF.

actual exchange rates or purchasing power parity rates. Second, there is the issue
whether all countries should be treated equal or given weights according to their
respective population. Inequality measured by deciles, indicates that, between 1988
and 1993, the share of world income going to the poorest 10 per cent of the world’s
population fell from 0.88 per cent to 0.64 per cent, whereas the share of richest 10
per cent rose from 63.7 per cent to 66.9 per cent (Wade, 2001). However, the
limitation of the measure of deciles is that, it focuses only on the extreme 20 per cent
observations of the population. This measure ignores the improvement in economic
performance of developing countries of Asia and western hemisphere, which lie in
the middle of the distribution. In fact, the worsening of the income distribution may
be due to the extremely low growth of certain countries particularly in the Sub-
Saharan Africa. However, even according to the study by Wade, the Gini coefficient
which takes into account the entire spectrum of distribution of income shows no
deterioration, if countries are weighted by respective population and purchasing
power parity exchange rates are used. There are also studies which show that the

46 number of people in extreme poverty as measured by people below a certain poverty

line has declined.
While the growth rate in per capita income of the developing countries ICRA BULLETIN

in the 1990s is nearly two times higher than that of industrialised

Money
countries (Table 5), in absolute terms the gap in per capita income has
widened.5 As for income distribution within the countries, it is difficult &
to judge whether globalisation is the primary factor responsible for any Finance
deterioration in the distribution of income. We have had considerable
JAN.–MARCH 2002
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 globalisation.

TABLE 5
Key Average Growth Rates

Items Major Industrialised Developing Asia Africa

Countries * Countries **
1982- 1991- 1982- 1991- 1982- 1991- 1982- 1991-
91 2001 $ 91 2001 $ 91 2001 $ 91 2001

GDP Growth Rate 3.1 2.8 4.3 4.5 6.9 7.4 2.2 2.8
Per Capita GDP Growth Rate 2.3 2.0 2.0 3.8 5.0 6.0 –0.7 0.3
Exports Growth Rate (Volume) 5.1 5.9 4.2 8.7 8.4 11.3 2.8 2.9
Imports Growth Rate (Volume) 5.8 6.7 1.9 8.2 6.6 9.3 1.2 3.5
Note: * Major Industrial Countries include US, Japan, Germany, France, Italy, UK and Canada.
** Developing Countries does not include Newly Industrialised Asian Economies and Israel in the group
of developing countries since 1997.
$ - figures for 1991-2001 are based on the projections for the year 2000 and 2001.
Source: World Economic Outlook, May 2000, IMF.

India and the External Sector

India’s economic policy towards foreign trade and foreign
investment in the first four decades after India’s Independence was
restrictive. Import substitution constituted a major element of country’s
foreign trade and industrial policies. The approach to foreign invest-
ment was equally constrained. The deficit on the current account was
met mainly by borrowing and particularly from official sources. India’s
share in world exports which stood at 1.85 per cent in 1950 fell to 0.58

5 The level of GDP per capita in developing countries has increased from
US $ 2,170 in 1990 to US $ 3,260 in 1998 with a compound growth rate of 5.2 per
cent. In between the same periods, the level of GDP per capita in OECD countries
has increased from US $ 16,040 to US $ 20,360 registering a compound growth rate
of 3.0 per cent. These figures show that, although the growth rate of per capita
income of developing countries is much higher than that of OECD countries during
1990-98, the gap between the respective levels of per capita income has widened
from US $ 13,870 in the year 1990 to US $ 17,100 in the year 1998 (UNDP, 2000). 47
 ICRA BULLETIN per cent in 1992.6 In the wake of the economic crisis that overtook the
country in 1991, the approach to and content of economic policy
Money
&
underwent a far reaching change. This change was reflected in trade
and investment policies. An outward orientation began to emerge.
Finance Tariff rates have been steadily brought down while quantitative con-
trols have been dismantled. Foreign investment policy has become
JAN.–MARCH.2002
proactive. Majority ownership by foreign investors is allowed over a
wide spectrum of industries. Authorised foreign institutions are allowed
to invest in Indian stock markets. The exchange rate of the rupee is by
and large determined by the forces of supply and demand, although the
central bank does intervene to avoid instability and volatility.
How has the Indian economy fared as a result of the steady
opening up? India’s growth rate has definitely been higher in the period
following 1992-93, even though there are concerns about falling growth
rate in the last two years. In relation to the external sector, the situation
has been comfortable. The current account deficit which peaked to 3.2
While recognising
per cent of GDP in 1990 has been declining and is remaining around
the fact that the only one per cent of GDP in the last few years. The foreign exchange
reserves of the country has been increasing and stands today at $ 55.6
Indian economy in billion. The import growth rate has not shown any alarming rise. The
increasing integration has not resulted in a jolt to the economy. On the
the last decade has contrary, the broad macro-economic indicators have shown an im-
provement. However, many concerns have been raised in relation to the
become more open, impact of globalisation on Indian industries, agriculture in general and
food security in particular and on the stability of the financial sector.
it is also necessary While recognising the fact that the Indian economy in the last
decade has become more open, it is also necessary to note that the
to note that the
Indian economy is much less open than many other economies. Taking
Indian economy is the most commonly used indicator of openness which is the proportion
of import and export of goods and services to GDP, it is seen that this
much less open ratio has increased from 15 per cent in 1980 to 25 per cent in 19987.
However, this ratio of 25 per cent is much smaller than many other
than many other countries. For small countries like Malaysia and Singapore with a high
outward orientation, this ratio exceeds 200 per cent. Among the
economies. industrially advanced countries, the United States is the only country
which has a ratio similar to that of India (Table 6). Tariff levels are

6 India’s share in world exports experienced a declining trend since 1950 up

to 1980. Afterwards, the share started increasing slowly from 0.4 per cent in 1980 to
reaching 0.67 per cent in 2000-01 (Table 8). It can also be noted that, India’s share
in the world trade was as high as close to 4 per cent during 1860-1889 (Kuznets,
1972). During the first four decades since Independence, India’s exports share in the
GDP remained almost constant, where as India’s share in world exports witnessed a
declining trend (Table 8). This phenomenon is due to the fact that, the world exports
were increasing at a faster rate than the growth rate of India’s GDP.
7 Compared to this, the ratio of sum of merchandise exports and imports to

NDP in India was 18.83 per cent and 19.57 per cent in the year 1894 and 1899,
48 respectively (Brahmananda, 2001).
another indicator of openness. Here again, while India’s weighted mean ICRA BULLETIN

tariff rate has come down from 49.8 per cent in 1989-90 to 29.5 per
Money
cent in 1999, it is still high compared with many other countries (Table
7). While the weighed average tariff rate is nil for Hong Kong and &
Singapore, it is as low as 2.7 per cent in European Union countries and Finance
2.8 per cent in the US. However, it is of significance to note that the
JAN.–MARCH 2002
standard deviation of the tariff rates in US is high at 11.4 per cent
which means that the rates on certain products are very high (World
Bank, 2001).

TABLE 6
Foreign Trade as Percentage of GDP

Country 1970 1999

US 11 24
Canada 43 84
Japan 20 19
UK 44 53
France 30 50
Germany ** 57
Italy 32 49
EU 3.6 2.7
Hongkong 181.0 261.0
Singapore 232 **
Korea 37 77
India 8 27
Note: Foreign Trade refers to exports and imports of goods and services.
Source: World Development Indicators, 2001, World Bank.

TABLE 7
Tariff Barriers in Defferent Countries

Country Weighted Mean Standard Deviation Weighted Mean Weighted Mean

Tariff (All) Tariff (Primary) Tariff (Manfd.)
1988/89/90 1999 1988/89/90 1999 1988/89/90 1999 1988/89/90 1999
US 4.1 2.8 6.7 11.4 2.1 2.0 4.5 2.9
Canada 6.5 3.2 7.0 22.3 2.4 5.9 7.2 2.9
Japan 3.3 2.3 8.0 7.3 3.7 4.0 2.9 1.4
EU 3.6 2.7 5.6 5.0 2.8 1.8 4.1 3
Hongkong 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Singapore 0.5 0.0 2.2 0.0 0.0 0.0 0.6 0.0
Korea 13.8 5.9 8.1 5.9 8.1 5.5 16.9 6.1
India 49.8 29.5 43.8 12.4 26.0 24.9 69.9 32.3

Source: World Development Indicators, 2001, World Bank.

49
 ICRA BULLETIN Framework of Policy
What should be India’s attitude in this environment of growing
Money
&
globalisation? At the outset it must be mentioned that opting out of
globalisation is not a viable choice. There are at present 142 members
Finance in the World Trade Organisation (WTO). Some 30 countries are
waiting to join the WTO. China has recently been admitted as a
JAN.–MARCH.2002
member. What is needed is to evolve an appropriate framework to
wrest maximum benefits out of international trade and investment. This
framework should include (a) making explicit the list of demands that
India would like to make on the multilateral trade system, (b) measures
that rich countries should be required to undertake to enable developing
Negotiations are not
countries to gain more from international trade and (c) steps that India
that easy. We have should take to realise the full potential from globalisation.

to give in some Demands on the Trading System

There is considerable concern about the next round of negotia-
areas to gain in tions in the WTO. Developing countries including India should project
strongly their viewpoint. Without being exhaustive, the demands on the
others. The multilateral trading system should include (1) establishing symmetry as
between the movement of capital and natural persons, (2) delinking
maneuvering environmental standards and labour related considerations from trade
negotiations, (3) zero tariffs in industrialised countries on labour
abilities of intensive exports of developing countries, (4) adequate protection to
genetic or biological material and traditional knowledge of developing
developed countries
countries, (5) prohibition of unilateral trade action and extra territorial
to steer the application of national laws and regulations, and (6) effective restraint
on industrialised countries in initiating anti-dumping and
international trading countervailing action against exports from developing countries
(Ganesan, 1999).
system in the Concerns have been expressed about the impact of present
WTO arrangements on Indian agriculture. However, under the present
direction of meeting provisions, the degree of protection enjoyed by Indian agriculture is
below what is permissible. In fact, in relation to some agricultural
their products, very recently the import duty was increased considerably. On
the contrary, Indian agricultural products can gain greater market
own needs and
access in the advanced countries, as the tariff barriers come down in
concerns cannot be those countries. This expectation has not been fulfilled so far. The
developed countries have played a clever game by taking recourse to
underestimated. ‘Green Box’ and ‘Blue Box’ provisions. But possibilities do exist for
expanding the market for Indian agricultural products.
Negotiations are not that easy. We have to give in some areas
to gain in others. The maneuvering abilities of developed countries to
steer the international trading system in the direction of meeting their
own needs and concerns cannot be underestimated. They have shown
themselves to be crafty in this area. However, what is important is the
approach. We must stay and fight whether they be intellectual property
50 rights or public policy considerations. Doha showed some success in
this direction. But the benefits of being part of the larger system should ICRA BULLETIN

not be lost sight of.

Money
Rich Country Initiatives &
The purpose of the new trading system must be to ensure “free Finance
and fair” trade among countries. The emphasis so far has been on
JAN.–MARCH 2002
“free” rather than “fair” trade. It is in this context that the rich indus-
trially advanced countries have a role to play. They have often in-
dulged in “double speak”. While requiring developing countries to
dismantle barriers and join the main stream of international trade, they
have been raising significant tariff and non-tariff barriers on trade from
It is important that if
developing countries. Very often, this has been the consequence of
heavy lobbying in the advanced countries to protect ‘labour’. Although the rich countries
average tariffs in the United States, Canada, European Union and
Japan—the so called Quad countries—range from only 4.3 per cent in want a trading
Japan to 8.3 per cent in Canada, their tariff and trade barriers remain
much higher on many products exported by developing countries. system that is truly
Major agricultural food products such as meat, sugar and dairy
products attract tariff rates exceeding 100 per cent. Fruits and vegeta- fair, they should on
bles such as bananas are hit with a 180 per cent tariff by the European
Union, once they exceed quotas. Even in the case of dismantling the their own lift the
Multi-Fibre Agreement (MFA), it is stretched up to 2005 and has been
back loaded so that much of the benefits will accrue to countries like
trade barriers and
India only towards the end (Stern, 2001). In fact, these trade barriers
subsidies that
impose a serious burden on the developing countries. It is important
that if the rich countries want a trading system that is truly fair, they prevent the products
should on their own lift the trade barriers and subsidies that prevent the
products of developing countries from reaching their markets. It is of developing
important that these issues are brought to the forefront of the discus-
sions at all international fora. countries from

Actions by India reaching their

The third set of measures that should form part of the action
plan must relate to strengthening India’s position in international trade. markets.
India has many strengths, which several developing countries lack. In
that sense, India is different and is in a stronger position to gain from
international trade and investment. India’s rise to the top of the IT
industry in the world is a reflection of the abundance of skilled man-
power in our country. It is, therefore, in India’s interest to ensure that
there is a greater freedom of movement of skilled manpower. At the
same time, we should attempt to take all efforts to ensure that we
continue to remain a frontline country in the area of skilled manpower.
India can attract greater foreign investment, if we can accelerate our
growth with stability. Stability, in this context, means reasonable
balance on the fiscal and external accounts. We must maintain a
competitive environment domestically so that we can take full advan-
tage of wider market access. We must make good use of the extended 51
 ICRA BULLETIN time given to developing countries to dismantle trade barriers. Wher-
ever legislations are required to protect sectors like agriculture, they
Money
&
need to be enacted quickly. In fact, we had taken a long time to pass
the Protection of Plant Varieties and Farmers’ Rights Bill. We must also
Finance be active in ensuring that our firms make effective use of the new
patent rights. South Korea has been able to file in recent years as many
JAN.–MARCH.2002
as 5000 patent applications in the United States whereas in 1986, the
country filed only 162 (Bergsten, 1999). China has also been very
active in this area. We need a truly active agency in India to encourage
Indian firms to file patent applications. In effect, we must build the
complementary institutions necessary for maximising the benefits from
international trade and investment.

Conclusion
Globalisation, in a fundamental sense, is not a new phenom-
enon. Its roots extend farther and deeper than the visible part of the
With modern
plant. It is as old as history, starting with the great migrations of people
technologies which across the great land masses. Only recent developments in computer
and communication technologies have accelerated the process of
do not recognise integration, with geographic distances becoming less of a factor. Is this
‘end of geography’ a boon or a bane? Borders have become porous and
geography, it is not the sky is open. With modern technologies which do not recognise
geography, it is not possible to hold back ideas either in the political,
possible to hold economic or cultural spheres. Each country must prepare itself to meet
the new challenges so that it is not bypassed by this huge wave of
back ideas either in technological and institutional changes.
Nothing is an unmixed blessing. Globalisation in its present
the political,
form though spurred by far reaching technological changes is not a
economic or cultural pure technological phenomenon. It has many dimensions including
ideological. To deal with this phenomenon, we must understand the
spheres. gains and losses, the benefits as well as dangers. To be forewarned, as
the saying goes, is to be forearmed. But we should not throw the baby
with bath water. We should also resist the temptation to blame
globalisation for all our failures. Most often, as the poet said, the fault
is in ourselves.
Risks of an open economy are well known. We must not,
nevertheless, miss the opportunities that the global system can offer. As
an eminent critic put it, the world cannot marginalise India. But India,
if it chooses, can marginalise itself. We must guard ourselves against
this danger. More than many other developing countries, India is in a
position to wrest significant gains from globalisation. However, we
must voice our concerns and in cooperation with other developing
countries modify the international trading arrangements to take care of
the special needs of such countries. At the same time, we must identify
and strengthen our comparative advantages. It is this two fold ap-
proach which will enable us to meet the challenges of globalisation
52 which may be the defining characteristic of the new millennium.
 ICRA BULLETIN
TABLE 8
India’s Exports Performance since Independence
Money
&
per cent

Year Share in World Exports Year Share in GDP

1950 1.85 1950s 6.0

Finance
1960 1.03 1960s 4.0 JAN.–MARCH 2002
1970 0.64 1970s 6.0
1980 0.42 1980s 6.0
1990 0.52 1990-91 5.7
1995 0.63 1995-96 9.0
2000-01 0.67 2000-01 10.1
Sources: 1. Fifty Years of Indian Parliamentarry Democracy, 1997, Lok Sabha
Secretariat, New Delhi.
2. Economic Survey, 2001-2002, Government of India.
3. Medium Term Export Strategy, 2002-2007, Government of India.

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54
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