Impact of globalisation on developing countries

Will the developing countries benefit from globalisation after the global economy
becomes stable? It is being hotly debated whether globalisation was really

beneficial to the poor, least developed countries

By M. Sharif

With the beginning of the global financial crisis around two years earlier, globalisation came to a sudden halt. Its consequences since then, for the least developed economies have been more pronounced than they have been for the developed ones. Consequently, consumers in advanced nations like the US shied away from indiscrete spending, exports slowed down, unemployment and poverty increased and liquidity crunch squeezed private investment from developing countries. Financial assistance by developed countries to poor countries has also reduced and many developing countries faced serious problems of fiscal management due to which they relied heavily on IMF to put their fiscal managements in order.

Prior to halting of globalisation, it was being hotly debated if globalisation did more good or bad to the least developed and poor countries. The views were mixed but one thing became ample clear that with the progress of fast emerging economies like China, India and Brazil, new centres of economic power appeared. These centres seriously challenged the supremacy of the developed western countries in global trade and their capacity to dictate terms of trade as they did in the past. This has been clearly demonstrated by the deadlock over a new global trade regime that would have further liberalised global trade, most likely in favour of developed countries. The deadlock has persisted primarily because of a conflict of national interests between the developed industrialised nations and the developing nations representing “agricultural power.”

One of the subjects that need utmost attention at present is how the developing countries would benefit from globalisation once it would regain its lost ground, after the global economy becomes stable in the not too distant future. These underprivileged regions are presently heavily burdened with IMF’s macro-economic stabilisation programmes that have added more to their economic difficulties rather than resolving them. For example, in a quest for macroeconomic stability, Pakistan’s economic growth has slowed down to 2.0 per cent of GDP which has increased unemployment and poverty, decreased income levels and created other socio-economic and political problems.

Supporters of globalisation favour further trade liberalisation by eliminating all sorts of barriers that impede the free flow of capital and merchandise. But they hardly favour migration of work force from developing to developed countries. Globalisation, they claim has helped in alleviating poverty among hundreds of millions of people, particularly in unindustrialised developing states. Globalisation brought three visible benefits to many countries and millions of individuals across the globe. Firstly, economic growth got impetus because of export-led growth starting from the Asian Tiger economies of Southeast Asia to China, India, Brazil and a few other countries during the past two decades to around 8.0 per cent on the average. These countries demonstrated resilience and capacity in terms of human resource and infrastructural development, manufacturing with innovation at highly competitive prices to run over western competitors across the globe and in domestic markets. They also developed the ability to organise their states, improve governance and discipline financial markets (with the exception of SEA financial crisis of 1998-99) to boost domestic productivity and meet emerging trends in global trade and financial markets. This helped to alleviate poverty and improve the standard of living of individuals in these countries and also changed the status of such economies from developing to rapidly emerging.

Secondly, globalisation helped emerging economies to produce much more than they could consume with a wide scope of exporting to western markets mostly, the US. China and a few other Southeast Asian countries ran up large trade surpluses with the US of around $2 to $3 trillion. They invested billions in US securities and earned in USD. It gave a cover to the huge US fiscal deficit that helped in keeping rates of interest low and produced enormous liquidity in global financial market. It created an environment conducive to strengthening free exchange rates and flow of capital for investment across emerging and developing countries. It also created excess liquidity in the banking sector across the developed world that accelerated pace of investment in real estate business. Prices of properties sky rocketed as the banking sector across the developed world went crazy in extending loans to clients even with low incomes on variable interest rates that to start with were perhaps affordable. But, as interest rates increased later on, borrowers found it extremely difficult to service their loans. It triggered an irreversible wave of default by them that led to financial crisis in the US followed by Europe.

Lastly, as the global economy boomed particularly between 2003 and early 2008, prices of oil increased to unprecedented levels of around $147 per barrel. The rich oil producing countries of the Middle East and Gulf states also had huge petro-dollars surpluses that were partially invested in US securities and in real estate businesses that fuelled the housing bubble in the US, Britain, Middle East and Gulf states. High prices of oil created huge trade deficits particularly for developing and poverty stricken countries that further added to their fiscal woes.

Excess liquidity in global financial markets was one of the major forces that drove globalisation to a level where some of the benefits associated with it such as alleviation of poverty, improvement in standard of living and increase in per capita income were addressed more to emerging economies such as China, India, Brazil and to a lesser extent to the underdeveloped or developing economies.

Globalisation has certain limitations too, such as the exploitative use of developing countries’ efficient resources by multi national corporations to make excessive profits and the indifferent attitude which they have towards improving the social sector of such areas. It is highly ironic that during 2003-08, when the global economy grew at its fastest, there was a net flow of capital from developing to developed countries, resulting in richer countries accumulating more wealth and widening of the gulf between the rich and poor.

Halting of globalisation has suspended the process of tackling the pivotal issues related to social sector and poverty alleviation, at least for the time being. Could these have been addressed to the satisfaction of the stakeholders, had the global financial crisis not impeded the progress globalisation was making towards making the world a better place to live, for more than one-third poverty stricken population mostly living in Asia? Supporters of globalisation have a positive answer whereas skeptics have serious doubts. Nevertheless, globalisation is likely to regain its vitality as soon as the global economy shows signs of recovery that according to the IMF projection should take place in 2010. IMF has projected a growth of 3.1 per cent during this period of slow economic growth. What about developing and poor countries that as per supporters of globalisation need more of it to address social sector issues faced by their governments and societies but hardly meet its perquisites?

Globalisation helps developing countries only if they take pains to prepare themselves for it. It makes obligatory for them to meet a few essentials that include the capability to produce products with innovation at highly competitive prices, open their markets for free flow of goods with minimum import tariffs from developed countries and have sound physical infrastructure and financial services to cope with and facilitate domestic and global trade. Any thing short of this won’t do. Southeast Asian Tiger economies, China and other emerging economies have made substantial efforts and taken initiatives to meet these requirements.

Post-global financial crisis spree among the developing and poor countries to seek IMF credit highlights basic issues faced by most of them, which are fiscal and trade deficits, scarcity of capital for investment in agriculture, industry and infrastructure. To solve these problems, they are seeking access to western markets for their products which are mostly agricultural and demanding the removal of huge subsidies on their agricultural sectors by the developed countries. Western countries and developing counties have a different outlook on these issues to safeguard their national interests. This is one of the major reasons for not resolving the obstacles related to global trade after a few years of hard negotiations to the satisfaction of all stakeholders.

Keeping in view the contribution that globalisation has made during the past few years in providing impetus to economic growth in emerging and some developing countries, it would remain as one of the most effective instruments of addressing multi-faceted socio-economic problems faced by the poor countries. But, solely depending upon globalisation and being oblivious to resolving national fiscal, monetary and governance issues faced by developing nations would hardly make globalisation an effective instrument for growth and prosperity.