Political or Economic Globalization Between

¶ … Political or Economic Globalization Between Two Countries: China and India

The following work is of the nature that focuses on comparison and assessment of the impact of political or economic globalization and specifically as related to two particular countries which are those of India and China.

Despite its many critical views, globalization not only spreads democracy, but it also increases efficiency and therefore increases prosperity as well. Globalization is a realistic route out of poverty for the world's poorer populations.

The methodology employed in the present study is one that is qualitative in nature and that involves a review of literature and specifically peer-reviewed professional or academic literature.

Literature Review

In a 2003 speech entitled: "Globalization and Its Challenges" Stanley Fischer states that the debate4 over globalization "is lively, often passionate, and has sometimes been violent. At least until recently, it has been intensifying." Fischer states that the debate is both "untidy and ill-defined..." (2003) Fischer defines globalization as "the ongoing process of greater interdependence among countries and their citizens" and states that globalization is "complex and multifaceted." (2003)

The largest challenge of globalization is that of poverty and according to Fischer "the surest route to sustained poverty reduction is economic growth." (2003) Growth however, makes a requirement of good economic policies and according to Fischer, "the evidence strongly supports the conclusion that growth requires a policy framework that prominently includes an orientation towards integration into the global economy." (2003) Fischer states that this effectively places obligations on the following three groups: (1) those who are most responsible for the operation of the international economy (governments of developed countries); (2) those who determine the intellectual climate (government and non-government organizations and individuals); and (3) government of developing countries who bear the major responsibility for economic policy in their countries. (Fischer, 2003)

Economic globalization, which is described as "...the ongoing process of greater economic interdependence among countries" is stated to be reflected "...in the increasing amount of cross-border trade in goods and services, the increasing volume of international financial flows and increasing the flows of labor." (Fischer, 2003)

Fischer (2003) states that the vision of the founders of the Bretton Woods system was one in which the "restoration of goods and services" was an element that was "essential to the recovery of the global economy" however, their views of capital flows were stated to have not been as benign. Capital flows did however recover in the 1950s decade "and intensified in the 1960s." (Fischer, 2003) Capital flows grew more slowly to the developing countries consisting primarily of bank loans in the 1970s and 1980s but by the 1990s they are stated to have taken the form "mainly of foreign direct investment and purchase of marketable securities." (Fischer, 2003)

Globalization is however "much more than an economic phenomenon. The technological and political changes that drive the process of economic globalization have massive non-economic consequences." (Fischer, 2003) Fischer (2003) notes that Anthony Giddens, a leading sociologist stated of globalization as follows: "I would have not hesitation in saying that globalization, as we are experiencing it, is in many respects not only news, but also revolutionary...Globalization is political, technological and cultural as well as economic." (Fischer, 2003) Just as important as the economic aspects in shaping the international debate are the non-economic aspects." (Fischer, 2003, paraphrased) Fischer notes that many who object to globalization "resent the political and military dominance of the United States and they resent also the influence of foreign -- predominantly American -- culture, as they see it at the expense of national and local cultures." (Fischer, 2003)

The work of Chandrasekhar and Ghosh (2005) entitled: "Macroeconomic Policy, Inequality and Poverty Reduction in India and China" states that it is now "commonplace to regard China and India as the two economies in the developing world that are the 'success stories' of globalization, emerging into giant economies of the 21st century." (2005) Chandrasekhar and Ghosh states that the success is defined by the following: (1) The high and sustained rates of growth of aggregate and per capita national income; (2) The absence of major financial crises that have characterized a number of other emerging markets; and (3) Substantial reduction in income poverty. (Chandrasekhar and Ghosh, 2005) The economies of China and India are noted in the work of Chandrasekhar and Ghosh to be fundamentally different although China and India do have some "superficial attributes in common, including: (1) large populations covering substantial geographical areas; (2) regional diversity; and (3) relatively high rates of growth over the recent period. (Chandrasekhar and Ghosh, 2005)

However, "the institutional conditions in the two economies have been and remain very different." (Chandrasekhar and Ghosh, 2005) India has been a "traditional 'mixed' developing economy with significant private sector participation...since Independence..." (Chandrasekhar and Ghosh, 2005) Chandrasekhar and Ghosh state that the reforms that have been undertaken "in the phase of globalization have...substantially expanded the scope for private activity and reduced regulation." (Chandrasekhar and Ghosh, 2005)

The macroeconomic policies of India are stated to have been "designed and implemented in contexts similar to those in other capitalist economies, where involuntary unemployment is rampant and fiscal and monetary measures have been used to stimulate effective demand." (Chandrasekhar and Ghosh, 2005) The institutional structure in China however is stated to have bee "very different...for most of this period, where the basic elements of a command economy have been much more in evidence." (Chandrasekhar and Ghosh, 2005)

Chandrasekhar and Ghosh report that India "moved from a path characterized by a slow 3% 'Hindu rate of growth' on to a rather creditable growth trajectory involving GDP growth of around 5 to 6 per cent per annum from the early 1980s. That is, the recovery from a period when growth decelerated sharply starting in the mid-1960s did not begin with the "economic reform" of 1991, but a decade earlier." (2005) It is reported that a number of weaknesses "...characteristic of this otherwise creditable rate of growth" and those are stated as follows: (1) First, growth was far less pronounced in the commodity producing sectors than in services. In fact, during the 1990s, the rate of growth of per capita food production in the country was at its lowest level for decades; ( 2) Second, there were signs that this growth was accompanied by increased vulnerability inasmuch as it exploited the benefits for developing countries associated with the rise of finance internationally. Especially during the 1980s, growth was driven by debt financed public expenditure, which was supported with debt creating inflows from the international system. That resulted in a doubling of India's external debt to GDP ratio and led to a crisis in 1991 when a loss of investor confidence resulted in a freeze in such flows. Though during the 1990s non-debt creating inflows and remittances from migrant Indian workers abroad (particularly in Gulf countries) helped shore up the balance of payments, financial liberalization has encouraged volatile capital flows that imply that vulnerability is still a problem. This vulnerability is not immediately visible because of the large inflows on the current account of remittances from non-resident workers and earnings from software and IT-enabled services exports; (3) Further, the response of the central bank to the substantial inflows of portfolio capital involves purchasing foreign exchange to prevent excessive appreciation of the rupee. The consequent increase in India's foreign exchange reserves presents a picture of a strong balance of payments; and (4) Finally, very recent trends in the economy suggest that performance has been far below potential. This is illustrated by the extremely poor performance of agriculture and allied sectors and the increased volatility of industrial growth over the recent period. Indeed, only the services sector shows sustained high growth rates. (Chandrasekhar and Ghosh, 2005)

The following table, adapted from the work of Chandrasekhar and Ghosh present decadal compound rates of growth since the early 1950s, for Gross Domestic Product and per capita Net National Product at constant 1993-94 prices. It is evident that real GDP growth rates increased to a higher level in the last two decades. Increases in per capita income were even more marked because of the fall in the rate of population growth.

Figure 1

Annual rates of growth of national income in India

(per cent) Period

(year starting April)

Gross Domestic Product

Per capita Net National Product

1950-52 to 1960-62

3.9

1.8

1960-62 to 1970-72

3.5

1.2

1970-72 to 1980-82

3.5

1

1980-82 to 1990-92

5.6

2.9

1990-92 to 2000-02

5.6

3.5

Source: Chandrasekhar and Ghosh

The following table shows the changes in structure in the Indian economy beginning 1950-52 and running through 2000-2002.

Figure 2

Structural Change in the Indian Economy Per cent of GDP

Structural change in the Indian economy Per cent of GDP

Period

(year starting April)

Investment rate

Primary

Secondary

Tertiary

1950-52

15.5

59

13.4

27.6

1960-62

19.4

53.1

17.3

29.6

1970-72

23.8

46.6

20.4

33.0

1980-82

22.0

41.3

21.8

36.9

1990-92

26.0

34.4

24

41.6

2000-02

26.2

26.1

24.7

49.2

Source: Chandrasekhar and Ghosh

Chandrasekhar and Ghosh state that the changes the Indian economy has experienced in terms of policy changes are those as follows: (1) very substantial reduction in direct state control in terms of administered prices and regulation of economic activity; (2) privatization of state assets, often in controversial circumstances; (3) rationalization and reduction of direct and indirect tax rates, which became associated with declining tax-GDP ratios; (4) attempts to reduce fiscal deficits which usually involved cutting back on public productive investment as well as certain types of social expenditure, reducing subsidies to farmers and increasing user charges for public services and utilities; (5) trade liberalization, involving shifts from quantitative restrictions to tariffs and typically sharp reductions in the average rate of tariff protection, as well as withdrawal of export subsidies; (6) financial liberalization involving reductions in directed credit, freeing of interest rate ceilings and other measures which raised the cost of borrowing, including for the government; (7) shift to market determined exchange rates and liberalization of current account transactions; and (8) adoption of a significant degree of capital account liberalization, including easing of rules for Foreign Direct Investment, permissions for non-residents to hold domestic financial assets, easier access to foreign commercial borrowing by domestic firms, and even freedoms for domestic residents to hold foreign assets. (Chandrasekhar and Ghosh, 2005)

Chandrasekhar and Ghosh state that the macroeconomic policy in China resulted in macroeconomic mechanisms that "differed substantially from those in predominantly market-driven economies. These differences relate to the availability of monetary or fiscal levers of the kind available in market economies, to the nature of the institutionally determined transmission mechanisms and to the outcomes of what appear to be similar policies. Only inasmuch as "economic reform" results in the generation of features characteristic of market driven economies in centrally planned systems, would the transition result in a gradual process of convergence in the nature of the policies, mechanisms and outcomes being addressed." (2005) It is related that despite the complete control of the Chinese government over the creation of money and fiscal policy "..., in the sense of using deficit financed expenditures to prime the economy, does not appear to have been a major thrust of the government." (Chandrasekhar and Ghosh, 2005)

Chandrasekhar and Ghosh state that the reform process "has resulted in a gradual change in all elements of this system. To start with, financial reform has created a situation in which banks, financial institutions and enterprises at provincial and local levels have more flexibility in providing and accessing loans, so the ability of the government to control sharp increases in investment and consumption has been to an extent reduced. Second, faced with the inadequacy of monetary levers, the government has quite recently attempted to use countercyclical fiscal policy to correct for recessionary or inflationary tendencies. Third, price reform has meant that a growing number of commodities have been removed from the administered price category, so that excess demand can lead to inflation. Fourth, trade policy reform has meant that excess demand can spill over onto the balance of payments in the form of a reduced current account surplus or a current account deficit." (2005)

In the earlier phases of the economic reform changes were made that were significant in addition to price reform. It is reported that in 1979 "...the government declared its intention to reduce the share of investment funds for enterprises granted exclusively from the cost-free state budget, and to gradually replace budgetary grants with bank loans which were subject to interest charges. This did result in major changes in the financing of investment. The share of budgetary appropriations in financing capital construction declined dramatically and that of loans and self-raised funds increased quite significantly." (Chandrasekhar and Ghosh, 2005) The role of monetary policy was increased through establishment of a two-tier banking system and by conversion of the People's Bank of China into the central bank and motivating the specialized banks in undertaking the commercial end of the banking business. The non-bank sector also underwent reform and this included "...the creation of a number of trust and investment companies, and financial intermediaries such as leasing companies, pension funds and insurance companies. Subsequently, foreign banks were allowed to begin business for the first time. However, even under the new arrangement it was in principle possible for the PBC to rein in overdrafts being run by these banks and prevent them from exceeding loan limits or quotas. Further, now the PBC could control the terms of its lending by charging lower rates of interest for loans within the credit plan and penalize unauthorized borrowing. Thus the ability of the PBC to realize its credit plan was strengthened by the reform." (Chandrasekhar and Ghosh, 2005)