Globalization and Sustainable Economic Development

Issues, Insights, and Inference

Piya Mahtaney

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137024992
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

In a world in transition and an era of transformation, Mahtaney calls for reflection and an analysis of a wide canvas of global economic experience. Her new work initiates a thorough review of the strategies and policies that have been pursued over the past two decades. The economic meltdown compelled the beginning of the next phase of globalization and she contends that the future will see an increase in globalization. As crucial questions arise about the direction in which globalization is headed and the sustainability of economic growth and reform, the fundamental objective of this exciting work is to elucidate crucial insights about the next phase of development in the world economy.

Part 1

Development for all continues to be an unattained dream when more than one billion of the world’s population struggle to survive on less than two dollars per day. The year 2015 is the deadline for the Millennium Development Goals and as it draws closer, only 4 of the 21 Millennium Development Goals targets have been met so far. Development extends far beyond the accumulation of resources and it is fundamentally the outcome of how resources are utilized and managed. Part 1 will begin an elucidation of this fact in chapter 1 with a description of the Sustainable Development Paradigm.

Through a discussion and analysis of the present recession in the American economy and the Euro zone, chapters 2 and 3 will elucidate the critical issues that pertain to the mobilization and management of financial capital.

Chapters 4–7 will present a macro view of the economic experience and present challenges confronting India and China.

1

The Sustainable Development Paradigm: An Enunciation

The global economy is a multitude of systems and scenarios; every nation has its context and circumstance, and thus even similar policies would result in disparate outcomes and volatility. Thus, it is a plurality of strategies directed at increasing growth, reducing poverty, improving distribution and delivery outcomes, and creating transmission mechanisms that will enable the wider percolation of economic progress. Development is not a trickle-down effect rather it is an outcome of policies that tackle underlying structural problems.

Discerning whether an increase in economic growth rates is sporadic and temporary from the one that will run a much longer course is possible if one understands the causes underlying economic growth and the changes that accompany it.

The Commission Report (2008) cites that if one were to cull out the single highest common factor from the development success stories of the postwar period, it is the effective combination of efficient markets, capable governments, and high rates of saving and investment that enable successful globalization and sustainable economic progress.

Conversely, fragmented and shallow markets, inept governance, and effete institutional mechanisms will be at the base of persistent underdevelopment. In such a scenario, even if there is economic progress, it will be fickle, short lived, and leave in its trail consequences that are sometimes severe. The cumulative consequence of the measures pursued over the preceding two decades and the events that have occurred has led to a widening structural disconnect between growth and development. Numerous instances of economic growth rates have not resulted in developmental gains, and across nations this structural gap between growth and development manifests itself in three distinct ways:

• Considerable financial innovation has not led to significant financial development.

• Rapid technological advancement in certain sectors has not led to significant expansion in innovative capacity.

• Trade and investment liberalization has not resulted in liberalism.

The UNTAD Secretary General’s Report (2011) says that, “the only way to close income gaps, within and across countries, while building a low-carbon high-growth global economy is through a shift to a new modality of global development encompassing economic, social and environmental dimensions.” Sustainable development requires convergence between the three pillars of economic development, social equity, and environmental protection. However, the prevalent reality of the world economy is a milieu of persistent underdevelopment, skewed income, social disparities, and environmental degradation, which is certainly divergent from this defining principle of sustainable progress. Getting development right is about building a context that supports inclusiveness because for progress to be sustained it needs to be based on a much stronger edifice than what exists currently.

This exposition begins with the enunciation of what I term as the paradigm of sustainable economic development. This would consist principally of three fundamentals that are as follows: sustainable globalization, effective economic management, and economic reform.

A description of each constituent of the sustainability development paradigm follows.

Sustainable Globalization

April 2, 2009, was an important day; leaders of the G-20 met in London and made a historical pledge toward a global plan for recovery and reform. Here is an excerpt of the pledge:

We, the Leaders of the Group of Twenty, met in London on 2 April 2009.

We face the greatest challenge to the world economy in modern times; a crisis which has deepened since we last met, which affects the lives of women, men, and children in every country, and which all countries must join together to resolve. A global crisis requires a global solution.

By acting together to fulfil these pledges we will bring the world economy out of recession and prevent a crisis like this from recurring in the future.

The G-20 meeting is an instance among others that presents a rather graphic depiction of globalization entering the next phase or the revitalization of a process that had become complacent and imbalanced. For now, the momentum of globalization may seem muted consequent to the financial crisis that occurred during 2008, but by no means has its significance diminished. During the ensuing phase, it would be the transition from finance-driven globalization, which has been the defining trend of the preceding two decades, to development led globalization that would determine the role it would play in enabling inclusive development.

Sustainable globalization can be defined as one that is driven by sustained economic growth rates and effective economic management. Sustainable globalization will encompass much more than trade and financial liberalization and integral to it would be the endeavor of international cooperation and coordination toward surmounting global challenges. The achievement of sustainable growth requires that it is based on what I term as the P-EPP principle. This would mean the pursuit of a growth strategy that is pro environment, people, and prosperity. Achieving sustainable economic growth requires effective economic management (EEM).

Effective Economic Management

EEM can be described as the “continuous endeavour to improve and optimize the management of a country’s resources and create new sources of growth and opportunity creation. An alternative definition for EEM is the ability that a country’s governance, business corporations, civil society, and institutions have or don’t in the management of its inputs, including its growth outcomes efficiently and productively”(India, China and Globalisation, 2007).

Inclusive economic progress cannot be achieved merely through an increase in economic growth rates without improvements in effective economic management and other constituents of the macroeconomic and institutional contexts. Applying the same principle helps us to understand reasons that liberalization worked successfully in certain nations and bore negative outcomes in others. When liberalization was initiated in conjunction with other measures directed toward improving the macroeconomic context, its results were positive. One of the most illustrative instances of this fact is the economic experience of East and Southeast Asia. In a number of poorer nations particularly in Africa, the approach to liberalization was one where it was veritably disembodied from the regional contexts, in that it was unaccompanied by changes that would improve resource allocations and delivery mechanisms.

The standardized approach to liberalization that advocated at the time “stabilize, privatize, and liberalize” would probably have had better results if it had a nuanced view of the implications of this and what it required in different national contexts.

Basically the objective of EEM is to facilitate the mobilization of an increasing amount of capital and investment toward building capacity in infrastructure, physical and social, an expansion of employment-intensive sectors, and a collaborative role of government and its institutions to complement the process. An increase in economic growth rates in the absence of any improvement in effective economic management will in all likelihood not make much of a dent in underdevelopment.

Binding constraints are not difficult to identify and it can be caused by shortages in infrastructural inputs and financial capital or it can arise from reasons that are not as rudimentary such as weaknesses in the implementation of policies, the adoption of measures that are unsuitable given the requirements and innate endowments of a particular nation, inept governance and pervasive corruption. (India, China and Globalisation, 2007)

It is obvious that these are common to most developing and underdeveloped nations, and as a matter of fact this was the basis for the generalized prescription of liberalization that was assumed would troubleshoot the problems arising from low growth rates and market failure. However, when one views the empirics of liberalization, it does become evident that a significant aspect was overlooked—the reasons that underlie even apparently similar constraints vary from nation to nation. Although there are similarities in the challenges that deter poorer nations from having higher levels and a longer phase of prosperity, the nature of effective economic management would differ across nations. EEM will be determined by the specifics of a country’s innate strengths and capabilities, the stage of development that it finds itself at, and the bottlenecks that obstruct it from moving toward higher levels of progress. For instance, two nations may be confronted by a similar deterrent such as a lack of savings; however, the causes for this inadequacy may differ, such as in one it may be simply due to a lack of financial intermediation and in another it could be because of a low interest rate.

Economic Reform

The third fundamental relates to economic reform that essentially pertains to the functions of governance and institutions. Keeping alive the political economy of sustainable development is the main objective of a process of economic reform.

Although theoretically reform has been presented as a distinctly separate element, it cannot be disassociated from EEM. Importantly, economic reform includes the process that facilitates an improvement in economic management, and it also encompasses the measures that would encourage or even enable the adjustments that are required for sustaining economic progress and with it EEM. Thus, even if economic growth rates are increasing and a country has a reasonably good quotient of EEM, reform cannot be dispensed with if development is to be sustained.

Compare the process of reform in any country to the process of human evolution. The commonality is that both do not cease. At various levels of development, a country has to adapt and reorient its systems to newer sources of economic progress. Empirical evidence tells us that the instrumentalities (policy and nonpolicy) of reform vary from country to country in accordance with their respective socioeconomic and political structures. Thus, the distinguishing feature is the kind of reforms that a country needs to undertake, for instance, the United States, Japan, and India are not exempt from the process of reform, but the composition of reform would differ in all instances.

However, cutting through the differences in the instrumentalities (policy and nonpolicy) of reform in each country, there is a striking commonality. The fundamental function of economic reform in every country is similar—create or transform systems and sustain structures that will support higher levels of growth and development.

Growth that is based on or propelled by EEM and economic reform will translate into higher levels of development. At the other extreme is a scenario where economic progress continues to be disembodied from improvements in the overall resource management of the country and economic reform.

Subsequent analysis that is presented will elucidate that there are some nations such as India and China that find themselves with significant levels of growth rates and a moderate quotient of EEM and economic reform. The crux of sustaining increasing levels of prosperity for these two nations is to step up the pace and extent of EEM and economic reform. Interestingly, even if one were to observe some of the most advanced nations of the world that are characterized by the prevalence of a high degree of EEM and economic reform, the compulsions of sustainable development spell out the need for a continuous process of upgrading resource management and systemic improvements.

Plausibly the nature and extent of reform that developed nations require would be less relative to the imperatives of EEM and reform in the developing world.

Economics and politics are invariably not on the same side; politics would rather ignore the downturn and downside risks of the preceding phase and make a new beginning. However, initiatives set out or formulated for the new phase are largely determined by the economic experience of the recent past. Then of course, there are those decisions that reform entails that are politically not easy and even contentious. The economist’s perception of reform is in consonance with considerations about financial stability, progress that is more continuous and about overcoming the roadblocks. The normal course of politics is about political preservation and power. This tussle between economics and politics either dilutes much needed reform measures or stalls them. Before the crisis, the prevalent view and assumption was that the lack of reform characterized mainly emerging markets and other developing nations. However, the crisis and problems thereafter across a number of advanced nations compel us to question this generalization.

Each element of this paradigm is interdependent; however, in most developing and underdeveloped countries, it is unrealistic to anticipate expedient economic reform during the initial stages of economic progress. Empirical evidence tells us that even small increments in certain constituents or facets of economic reform can be a facilitator of significant improvements in economic management. Notably, the paradigm does not represent a single strategy; rather, it denotes the focal points that growth strategies need to have if the binding constraints that impede economic progress (sooner or later) are to be mitigated and at a subsequent stage eliminated.

Recall the term new economic order that was used to describe the scenario after the collapse of communism in 1991. In retrospect perhaps the term was used prematurely because it is certainly more evident two decades later at a time when the geopolitical realities herald an imminent and decisive change that has begun to impact markets, distribution, and institutions. Concerns that were relegated to the periphery are becoming pivotal; market segments that have remained untapped or inadequately so will now hold the key to expansion, as will the effectiveness with which institutions and governance have to support the process of development.

For a better depiction of this fact, it would be useful to provide a succinct description of the main imperatives and the emerging trends that will steer the future of the global economy.

The New Convergence

The simple demarcation of developed and developing has been the basis on which nations were classified mainly in terms of income, technological advancement (backwardness), and standards of living. However, this differentiation conveyed much more than the numerics could tell; it was about systems that were sophisticated, institutions that were effective and efficient, politics that delivered, and societies that were more advanced and affluent in the developed world. Until a few years ago, economic reform was assumed to be an objective applied to developing and the least developed; it was hardly ever associated with the advanced nations.

The meltdown demonstrated that every nation regardless of its level of development (or lack of it) has before it the urgent task of reforming its financial system, remedying the deficiencies in its institutions, enabling a wider percolation and distribution of benefits, and identifyi...

Table of contents

• Cover
• Title
• Part 1
• Introductory Exposition: India and China
• Part 2
• Part 3
• Bibliography
• Index