FIRST GLOBAL FORUM ON HUMAN DEVELOPMENT
29-31 July 1999 . United Nations Headquarters . New York
MANAGING GLOBALIZATION WITH EQUITY
by Dariusz K. Rosati,
Council of the Central Bank and Warsaw School of Economics,
Former Minister of Foreign Affairs, Poland
Summary of issues
1. Entering the era of globalization is like changing a horse cab for a Mercedes car. It allows you to travel much faster and more comfortably, but if you crash, the consequences can be daunting. This metaphor is obviously another way of saying that benefits and opportunities offered by globalization do not come free of charge and that important costs can be involved. That is why globalization has to be managed carefully in order to minimize its negative implications. Globalization means interdependence: actions - or inactions - by some people may affect - positively or negatively - other people’s lives. Globalization also means increased competition which puts additional pressure on national economies.
2. Negative consequences of globalization may be numerous, ranging from financial contagion and banking crises to illegal drug trafficking; but in the context of equity two aspects deserve particular attention. First, some important benefits brought about by globalization are typically not equally distributed. For instance, international capital flows, including especially FDI, are generally highly concentrated, favouring some selected countries and regions. Similarly, information and knowledge are not disseminated evenly and freely, but tend to concentrate in countries and/or social groups where general education levels are already high and advanced communication technologies already exist, such as personal computers and access to internet. Moreover, these information exchanges are sometimes deliberately restricted by legal measures imposed by developed countries. Second, growing economic and financial interdependence makes some countries and regions vulnerable to crises that take place in other parts of the world. Why other countries should pay for policy errors and imprudence of some countries?
3. Let us start with capital flows and take FDI as an example. According to UNCTAD, on 177 countries that received more than $ 1 mln of FDI in 1998, 10 countries accounted for 72% of all inflows. Out of $ 644 bn of FDI, 462 bn (or 71%) went to 24 industrialized countries, and only 165 bn (or 26%) to developing countries. Among developing countries, China, Brazil and nine east and south-east Asian countries (NICs plus ASEAN) accounted for almost 80% of all inflows. By contrast, the share of LDCs and regions such as sub-Saharan Africa and west Asia, is negligible and falling.
4. This uneven distribution of capital flows shows that capital tends to go to rich, capital-abundant countries, rather than to poor, capital-scarce countries where social needs are indeed pressing. This suggests two observations. First, there is a fundamental inconsistency between the emergence of global markets and the lack of global social solidarity. At the national level, negative social implications of the uneven distribution of capital and investment are typically offset by direct and indirect budgetary transfers within a framework of social policy programmes. Unfortunately, such a mechanism does not exist at a global level. Global opportunities are not matched by global responsibilities. The reason is that there is no global government and that people do not yet share the same identity and values on the global scale.
5. This also seems to contradict the neoclassical theory of convergence that says that poor countries tend to grow faster because the relative scarcity of capital ensures higher returns and faster productivity growth. But capital goes to places where returns are high and risks are low. Unfortunately in many developing countries the conditions are quite different: even though capital is scarce, the lack of skilled manpower and high transaction costs make returns to capital much lower. Moreover, risks are high because of unstable legal frameworks, insufficient protection of property rights, lack of market institutions and generally poor public governance. In result, many poor countries are unable to catch up with rich countries and economic disparities tend to grow rather than to narrow.
6. All those issues can and should be addressed by a combination of national and global policies. At the national level, five areas are of crucial importance. First, competent and honest governments on all levels have to be established. Second, stable, efficient and transparent legal and regulatory frameworks have to be implemented, including market institutions. Third, the rule of law has to be firmly established and respected, including enforcement of contracts and protection of property rights. Fourth, responsible economic policies should encourage business activities and stimulate growth. Fifth, expanded and modernized social policies should focus on education and providing equal chances and opportunities to all. Comprehensive education and training is important not only for its own sake, but as a means to enable people to expand their communication capabilities, improve their skills and broaden their knowledge through studies, training, travelling abroad and communication via internet.
7. However, human and financial capacities in developing countries required to implement the suggested changes are likely to be insufficient. This is where international assistance and global coordination should come into fore. The traditional approach of international financial organizations, focused on promoting macroeconomic discipline, liberalization and limited role of the state needs to be significantly broadened and reoriented to cover two other critical areas. Institution building in developing countries should be a top priority, including market institutions, law enforcement institutions and public governance. The process should ensure institutional convergence with developed countries through disseminating and putting into practice institutional standards and norms in developing countries. Institutional convergence is necessary to assure higher competitiveness in the era of globalization. This also involves building social capital as an important factor of production necessary to reduce transaction costs and risks connected with business activities.
8. The other priority area should be to help developing countries to establish basic physical infrastructure to make economic and social development possible, including private sector development, in form of roads, airports, sea ports, telecommunications, electricity and water supplies, etc.
9. A traditional approach to ensure equity has been to introduce social goals into economic activities. This approach was at the heart of the early experiments with central planning, nationalization and price and wage controls. More recent attempts involved efforts to create a „social market economy”, to establish a „capitalism with a human face”, or to put „people before profits”. An important component of those attempts were massive market distortions and generous social policies that in many instances put rights over responsibilities and destroyed incentives to work and discouraged to take initiative. All those grand projects failed to deliver, as they inevitably led to falling economic efficiency, lower competitiveness, weaker growth and less jobs. In result, also social goals suffered as heavily distorted economies were unable to finance rapidly expanding social programmes.
10. A reaction to dirigism was the neoliberal model of economic policies, based on the virtues of free markets. But this one, too, proved deficient. First, it disregarded social aspects. For instance, the objective to attain a balanced budget – as justified as it certainly should be – was often pursued in a doctrinarian way, undermining such important social objectives as education, health care or employment. This turned out to be harmful not only for society’s welfare, but ultimately also for economic growth, because inadequate supply of social services reduced productivity growth. Obviously, not all government spending has to be bad for the economy. Moreover, markets are imperfect, as demonstrated painfully by the crises in East Asia or in CIS countries.
11. This twin experience of last several decades calls for a new balance. On the one hand, social and human development objectives should be the ultimate ends, with economic goals only as means. On the other hand, competitive markets and social goals should not be merged and in many instances they should be kept separate – to the extent - with undistorted market mechanism ensuring economic efficiency and social policies implemented outside the market. The separation is necessary because the two areas are guided by different sets of rules and laws. Markets operate on the basis of objective rules and principles of economics, while social goals, including equity, are generally determined by more elusive and subjective criteria, such as the value system and ethical standards. Like profit maximization should not be a driving force for people contacts outside the market, in their social relations, as it can destroy social cohesion and solidarity, also social objectives and equity should not be a key determinant in economic activities, as they can easily undermine incentives to work, to save and to innovate.
12. This is not to say that social or human considerations should be absent in economic activities; this only means that those considerations should form a regulatory framework, a space in which economic laws are left to work freely. This regulatory framework should be based on local ethical and moral values, as well as internationally accepted standards. Obviously, an immediate question which arises at this point is on where precisely the limits should be...
13. Apart from separating markets and social policies, there is also a pressing need to reformulate social goals and social policies. The fundamental objective should be to provide equal opportunities and chances, rather than guaranteed incomes and jobs. Rights should be balanced with responsibilities, and individual initiative should be encouraged, while social programmes should be better focused to address people who are genuinely unable to cope with poverty, exclusion and discrimination.
14. The objective to provide job security is a good illustration of the conflict between the traditional and modern approaches. The traditional postulate was to ensure and protect job stability. But jobs have to change, in accordance with changing patterns of consumer preferences and market demand. To defend the „one job for life” doctrine would be detrimental to the economy: it would make it less competitive, with less job opportunities and unsustainable in the long run. The pressure to maintain high minimum wages has similar implications.
15. The second type of equity cost of globalization refers to the impact of crises in some countries on other countries. This cost can come in various forms: financial contagion, a loss of export markets, deterioration of terms of trade. This risk is inherent and cannot probably be eliminated altogether. But it can at least be minimized by a combination of national policies and international action. On the national front, it is always good to pursue prudent fiscal and monetary policies, to supervise effectively the banking sector and avoid distorting interventions. Full liberalization of capital transactions is not desirable when the financial sector is not well developed and effective supervision is missing. On the global level, a uniform regulatory framework for banking services and capital flows is needed, with internationally accepted precautionary norms and disclosure standards. The efforts undertaken in this area by the IMF and the Basle Committee are steps in the right direction.
16. In this context, the HDR 1999 offers a number of interesting suggestions and policy proposals. This is especially valid for its recommendation concerning education, personal and health insecurity, caring labour or access to information. But some other suggestions are less obvious. For instance, a call for ethical standards to be observed and a code of conduct to be established for transnational corporations may sound sympathetic, but it is doubtful at best. TNCs should simply respect the laws of host countries, pay due taxes and make profits to their shareholders. Ethical standards should be reflected in laws and regulations, as well as in the behaviour of individuals. I doubt whether it is possible to consistently combine corporate objectives with ethical standards and social goals. The likely result might be reduced economic efficiency and transparency, and distorted economic activities.
17. The recently accomplished deal on debt reduction of heavily indebted poor countries (HIPCs) is a welcome step in the right direction. But it is not sufficient, as it does not address the core of the problem: i.e. the reasons for permanently low repayment capacities of developing countries. The debt problem will be recurrent unless fundamental structural reforms are made in HIPCs.
18. Although the postulate to give more voice for the poor countries in solving global problems is justified, it is unrealistic to ask rich countries to give up control over their own resources. Spending programmes can and should be decided jointly, but the decisions on the magnitude of resources to be allocated to international assistance programmes will have to remain in the hands of taxpayers in donor countries. In this context, there is probably no need for a new institutional structure to manage global problems. The existing institutions have gathered lots of experience and, after refocusing their tasks and amending their mandates, they can effectively cope with the challenges of globalization.