Globalization and states' influence on economic growth

¶ … Globalization and States' Influence on Economic Growth

Each developing industrialized nation, if it wishes to become economically viable, has the responsibility to both understand and harness their own strengths while simultaneously realizing that their weaknesses are part of their economic identity. The globalization of the world's economy is creating more than a few problems worldwide, especially in economies that are poorly developed or that have not been able to meet the demands of the western "globalized" model. These economies, many of which have emerged in Asia and Africa, have become part of their own solution to the potentially negative influences of the IMF and World Bank on their nations and economies. Globalization and specialized national economies are not two mutually exclusive economic or political concepts. There is no real need for nations to be calling for IMF or World Bank assistance if they truly believe that their industrialized economy can stand on its own two feet in the global economic spectrum.

First it is necessary to understand why the many states fail economically under international or institutional control. Thailand is an excellent example of a state, that at one point in history, fell victim to outside economic influences and ideas that were not aligned with the nation's economic abilities and potential. Secondly, in order to understand the new definition of globalization and how states can benefit from it, one needs to examine the pretense and context within which it is developing. Nations that were one considered non-industrialized are fast becoming economic power centers, while others who were once world economic superpowers are falling by the wayside for many reasons including outdated economic growth and globalization models and interests. The traditionally accepted flows of capital and economic growth need to be reexamined in order to determine their relevance and applicability in the new global economic and political landscapes. Finally, it is important to understand that institutions like the World Bank and the International Monetary Fund (IMF) serve a purpose, but this purpose is fairly limited in scope and can be defined through case studies and examinations of these institutions' past interventions.

Understanding the New Model of Globalization

Author Linda Weiss (1997) argues that states need to become aware that they have the most economic power when they are controllers of their own destiny. IMF and World Bank loans and aid can certainly help during times of crisis, but these institutions serve to further limit both the economic capacity and the economic scope of the nation's ability to support itself fiscally. The old model of globalization, where each nation adapts to the changing dynamics of the global economy is beginning to fade as a new model emerges. This new model incorporates each state's unique identity and capacity to generate goods and services as well as a firm understanding of the state's limitations. Weiss goes on to state, "Thus, rather than counter-posing nation-state and global market as antinomies, in certain important respects we find that 'globalization' is often the by-product of states promoting the internationalization strategies

of their corporations, and sometimes in the process 'internationalizing' state capacity." (Weiss, 1997, pp. 4). This quote is interesting because it shows the new binary system of global economics rather than arguing for a model of globalization that is one size fits all. The western model of economic success, as it was defined in the 20th century works well for many economies, but it also functions horribly for others, leaving many to wonder just how outdated and archaic this model of economic functionality is in places like Southeast Asia or Africa.

Weiss's understanding of the problem of a state successfully inventing themselves economically on the global level as well as navigating the global political economy is quite insightful. Certainly Weiss and others are not advocating for complete state autonomy without the understanding that certain economic and growth guidelines should be adhered to. Given the example of Thailand in the late 1990's, where a combination of easy money policy as well as unrestricted and unregulated investing and speculation led to one of the worst currency crises of the 20th century, at least from the Asian perspective (Weiss, 1997, pp.5). However, there needs to be enough autonomy for a state to be able to set their own economic parameters surrounding their capacity to produce. When states are able to accurately estimate and account for their economic niche or position in the global economy, they are better able to make decisions to drive their economies without major crisis. But when other economies, institutions, or states become involved in each other's economic and political affairs, this autonomy dies off, and the state is left functioning within the predetermined shell of its potential economic prowess (Cook and Kirkpatrick, 1997, pp. 62). The point here is that each state knows itself better than others know it, so each state should be able to make their own informed decisions relative to their economic and political dynamics and directions. This, in a very new and somewhat fragile sense, is the idea behind the new style of globalization that puts each state on its own track to both individual and global economic success.

Ebb and Flow

According to author Weiss (1997), argues that the level of international economic openness and flow is very influential in hurting or helping both emerging economies as well as world superpowers. As recently as fifty years ago many African and Southeast Asian nations existed to serve a colonial economic master. The flow of capital and goods and services went outward, unrestricted, to help support other nations many of whose parasitic reign was to come to an end by the latter half of the 20th century. Countries like India and Thailand are excellent examples. For these countries, there was little room for individual growth, beyond their identity of banana republic. Even today, as these countries are working to define and again redefine their economic identities, their labor pool serves as a low cost alternative to many of the pools that exist around the world in more industrialized nations (Boyer and Drache, 1998, pp. 104). This will not last forever, but the transition from debtor to creditor, as has been witnessed with the United States during the 20th century, often takes many distinct shapes and paths.

Another interesting development relative to MNC's becoming more and more apt to base their operations in places that provide relatively cheap access to labor is the fact that statistically, the numbers do not support a cost-based model influencing this behavior by MNC's. In fact, according to Weiss, "As of 1991, a good 81 per cent of worldstock of FDI was located in the high-wage -- and relatively high-tax -- countries: principally the U.S., followed by the UK, Germany, and Canada. Moreover, this figure represents an increase of 12 points since 1967. Indeed the stock of FDI in the UK and the U.S. exceeds the stock in Asia and the entire South. Such figures underline the point that MNC's do not by and large invest where wages and taxes are lowest." (Weiss, 1997, pp. 10). This idea posits that MNC's are following the flow of capital into nations that are not always at the beginning end of the development spectrum. Physical and geographical proximity also play a role in the MNC's decision to base operations abroad, perhaps moreso than the influence of low labor cost and taxes. Technological advancements also play a major role, and countries that are more technologically advanced and aligned with the interests of the MNC's are more likely to receive outside capital and jobs flow.

When a nation is supported by capital flow from the outside, as Thailand was predominantly supported in the 1990's, the results can be very dramatic. Outside capital is usually a positive for many growing nations, as it represents the intention of outside economies to invest and do business within the developing nation's borders. But unrestricted flow can be disastrous, especially if the growth being precipitated by this inward flow is not parallel to the nation's best interests or economic potential. Institutions like the IMF, which intervened at the height of the Baht currency crisis of 1999 fueled the fire of economic instability, and were initially abused in the name of saving the resources outside investors, instead of the businesses and financial institutions that were quickly spiraling out of control (Athreye and Cantwell, 2007, pp. 210). The transition from developing state to industrialized, developed nation was taking place, but the proper stopgap measures and economic and financial regulations and restrictions were not in place in this instance. Thailand is an excellent example of the idea that too much state autonomy relative to banking regulations can present serious problems for developing nations. Thailand lost control of its own economy and currency to outside investors and speculators. The transition and change in developing nations is not about the change itself, but about the nature and significance of that change. The transition itself as well as the finished product must be politically, culturally, and economically sustainable otherwise the entire system will collapse as evidenced by Thailand (Weiss, 1999 pp. 67).

Greater integration of global economies and capital flow has also become more and more prevalent. Weiss states, "The post-war trend towards greater trade integration, especially marked since the 1960s has been weakening." (Weiss, 1997, pp. 7). Greater integration was, at one time thought to be a boon for developing nations. This was certainly not the case for Thailand as an example, and this premise needs to be completely rethought in order to more adequately allow nations to successfully develop individually. Integration was the core of the old model of globalization, but more and more, economists and scholars are arguing for a nation-centric view of economic growth, one where the nation sets the economic parameters because they quite obviously know their own limitations and strengths better than outsiders; and they know how to grow their own economy in ways that are beneficial to the local population and local investors (Cook and Kirkpatrick, 1997, pp. 57). Certainly there will always been a need for investment in emerging markets, even outside investment shows international confidence and helps national economic interests become more diverse and robust.

The IMF and World Bank

IMF and World Bank influence is a topic of much debate. These institutions seek to better there economic conditions of nations and states in desperate need of outside financial resources. They were not intended to act on the behalf of outside investors, nor were their resources intended to be used for prolonged periods of time (Stiglitz, 2004, pp. 66). During the 1980's and 1990's, the IMF was one of the world's most influential financial institutions. It also encouraged emerging markets to develop in a liberalized economic model. This model has added to the prolonging of the old definition of globalization as well as the perpetuation of the western-derived economic model of a market-based, open economy. Stiglitz (2004) argues that while the IMF and World Bank provide a necessary aid function to developing nations and nations in desperate financial need, the economic development model that the IMF and World Bank propagates is very archaic in the sense that it is not culturally sensitive and doesn't take into account the specific strengths and weaknesses of each state that accepts assistance.

Synthesis

Understanding globalization and the current global political economy is no small task. Currently there is a reinvention underway of what it means to succumb to globalization and how far nations should go in preserving their own political and economic autonomy. There have been a few great examples of developing and developed nations who have both succeeded and failed in these terms, for many different reasons. It is safe to say however, that the idea that autonomy is a black and white issue is inaccurate. State economic autonomy can be potentially good and bad. Too much autonomy shuts the state out of the global market and prevents growth to its fullest potential. No state can act as a nation-state any longer, especially in regions such as Southeast Asia. The individual state has been replaced with a global economic niche, and outside capital and investment flows influence the economic functions of each state just as much as the state's own fiscal policy does.

State autonomy is a thin line, a balance between distancing itself from its own limitations and restricting its economy through MNC intervention and outside influence. Thailand is an excellent example of a state whose laissez-faire economic policies eventually suffocated sustainable growth, leading to a brief global currency crisis. Too little state autonomy sets a nation up for too much outside influence. Too little restricts the state's potential as a global economic player. As much as MNC's want to come into a nation to help grow their own company as well as provide jobs in the state's economy, there can be little outside intervention if autonomy becomes the main driving force behind a state's policy decisions. The implications of not interacting with the rest of the world in an economic sense can be quite profound, as are the implications of interacting too freely.

The definition of globalization needs to be retooled to include states whose autonomy is part of their strength. As long as these states strike a relevant balance between state and international institutional power, they can be assured that their full economic growth potential can be reached. The IMF and World Bank function as organs of crisis intervention, not as investor stopgaps or measures to help float a currency just long enough for investors to divest of it, as was seen in 1999 in Thailand. These institutions have the potential to do more damage than good if they are misused.

Resources

Athreye, Suma and John Cantwell. (2007). "Creating Competition? Globalization and the Emergence of New Technology Producers." Research Policy Vol. 36, No. 2. pp. 209-226.

Boyer, Robert. And Daniel Drache. (1998). States Against Markets: The Limits of Globalization. Routledge: New York, NY.

Cook, Paul and Colin Kirkpatrick. (1997). "Globalization, Regionalization, and Third World Development." Regional Studies Vol. 31, No. 1. pp. 55-66.

Feenstra, Robert C. And Gordon H. Hanson. (1996). "Globalization, Outsourcing, and Wage Inequality." The American Economic Review, Vol. 86, No. 2, Papers and Proceedings of the Hundredth and Eighth Annual Meeting of the American Economic Association San Francisco, CA, January 5-7, 1996 (May, 1996), pp. 240-245.

Garrett, Geoffrey. (1998). "Shrinking States? Globalization and National Autonomy in the OECD." Oxford Development Studies Vol. 26, No. 1. pp. 71-97.

Krugman, Paul and Anthony J. Venables. (1995). "Globalization and the Inequalitiy of Nations." The Quarterly Journal of Economics, Vol. 110, No. 4. pp. 857-880.

Sachs, Jeffery D. And Andrew Warner. (1995). "Economic Reform and the Process of Globalization." In Brainard, William C. (1995). Brookings Papers on Economic Activity 1995, Volume 1. pp. Brookings Institution, Washington DC. Pp. 1-66.

Stiglitz, Joseph E. (2004). "Capital-market Liberalization, Globalization, and the IMF." Oxford Review of Economic Policy Vol. 20 No. 1. pp. 57-71.

Weiss, Linda. (1999). "Globalization and National Governance: Autonomy or Interdependence?" Review of International Studies Vol. 25. pp. 59-88.

Weiss, Linda. (1997). "Globalization and the Myth of the Powerless State." The New Left Review, Vol. a. pp. 1- 27.

Wen, Guanzhong James. (2001). "NewFrontier of Economic Globalization: The Significance of China's Accession to WTO." China Economic Review Vol. 11, No. 4. pp. 432-436.

Political Economy

Yeung, Henry Wai-chung, (1999). "Under Siege? Economic Globalization and Chinese Business in Southeast Asia." Economy and Society, Vol. 28 No. 1. pp. 1-29.