All entries for Sunday 25 September 2005

September 25, 2005

Defending the Globalisation Bogeyman

SAAG Paper 1547, 23.09.2005

The United Nation Development Programme’s (UNDP) Human Development Report 2005 was published on September 7th. Predictably, it has been used to present the supposed perils of globalisation, as many of the left-leaning intellectuals have done. Keeping that context in mind, attention needs to be drawn to two articles recently published at Asia Times Online that have criticised what they perceive to be the negative outcomes of globalisation. In reality, however, what they have merely managed to do is show, as Professor Jagdish Bhagwati of Columbia University has argued, that globalisation is already good, but could be better. The critiques have, therefore, no locus standi.

Marwaan Macan-Markar, in All Growth, No Jobs (September 3) has pointed at an apparently “glaring flaw” in the process of globalisation, whereby he argues that unemployment and under-employment have been the prime feature of economies. To substantiate his claims, he has cited the Asian Development Bank’s Labour Markets in Asia : Promoting Full, Productive and Decent Employment.

An initial, and perhaps minor, methodological problem in using the unemployment data presented in the report to comment on the employment scenario in the Asian labour market is the fact that much of it is outdated. For example, on p.11 of the report, the unemployment figures for Cambodia, Maldives, India, Bangladesh, Nepal, Kyrgyz Republic, Uzbekistan, Fiji and the small Pacific islands were all for one of the years between 1999 and 2002, i.e., the latest figure was 3 years old. This can create major conceptual errors. For example, citing the 7.3% unemployed figure for India (1999) ignores both the job boom in sectors such as information technology, real estate, pharmaceuticals and the financial sector, but also ignores the slow job growth and job losses in the uncompetitive manufacturing sector or the farm sector.

The larger issue at hand can be tackled with the help of the International Labour Organisations’ Global Employment Trends (February 2005). Despite a fall in global unemployment levels from 2003 to 2004, the rate nevertheless rose from around 5.5% in 1990 to 6.2% in 2004. What can explain this anomaly?

First, faster population growth during the 90s has created a huge supply of new workers every year, which has outstripped demand for new workers as a result of economic growth. It is untrue that the world economy is resulting in job losses- 47.7 million “new” jobs were created in 2004 compared to the previous year- it is just that “new” workers are growing faster.

Second, slow or even lack of job growth was most prominent in Sub-Saharan Africa and South Asia- two of the least globalised regions of the world. Regulation to business (it takes 89 days to start a business in India , according to a UN report, vis-à-vis 3 in Australia ), stringent labour laws, closed external trade regime and a high tax economy are the prime reasons behind this. Even within economies, variations in the degree of liberalisation in different sectors can have great impact on employment. For example, in the information technology sector in India , companies are increasingly offering attractive remunerations to offset the high staff attrition ratios due to the availability of choice for the workers. On the other hand, because manufacturing is still heavily protected, there is less demand for workers, which can put their employers at an advantageous position when negotiating working conditions.

Third, many parts of the world are now in a transitional phase of economic development which entails passing of control of economic activity from the state to the private sector, resulting in job losses in the short-term with long-term job creation in the offing.

Fourth, a major reason for under-employment is the large proportion of economic activity conducted by the informal sector in a number of big transitional economies especially in South Asia and Latin America . However, as the ILO report cited above makes clear “…that there are many opportunities for creating decent work in the informal sector”. For example, job growth in the informal sector grew by nearly 4% compared to a 2.1% growth in the formal sector.

Thus it seems that more, not less, globalisation is needed for industries across economies to boom and consequently hire more workers. As for estimates of poverty for people in work, the absolute number of wage earners living below $1/day declined from 611 million in 1994 to 535 million in 2004, i.e., a 6.5% reduction as percentage of global employment. The figure for $2/day increased from 1.33 billion to 1.39 billion over the same period, yet registering a 6.2% fall as percentage of global employment. It once again highlights the impact of population growth, and proves that globalisation has in fact done well, but to maximise its beneficial impacts, government need to inject a stronger dose.

The Heritage Foundation publishes an annual Index of Economic Freedom. In its 2005 report, some of the “Repressed” countries included North Korea , Myanmar , Cuba and Zimbabwe , while a few of the “Mostly Unfree” countries included China , India and Brazil . On the other side of the spectrum, some of the “Mostly Free” countries were Taiwan, South Korea, South Africa and Cyprus, while the “Free” countries, among others, were Hong Kong, the UK, the US and Singapore. Now chart the income levels, poverty and other human development indicators for all these countries onto a graph- and the correlation between economic freedom and prosperity would be decisively positive, i.e., the freer the country, the richer it gets over time.

What does HDR 2005 say? A few excerpts from the data should paint the outline of the general picture. Let’s consider four countries on varying trajectories of economic freedom- Thailand , China , Uganda and India . In these countries, the female-to-male income ratio was 0.61, 0.66, 0.67 and 0.38 respectively. The proportion of undernourished was 20%, 11%, 19% and 21%. India has taken a far more ad hoc approach towards economic reform out of all these countries.

Over 80% of the world’s produce is consumed by the 1 billion people in the affluent countries. I love this piece of statistics- like many before him, Haider Rizvi uses it to argue that the “rich have become richer, and the poor even poorer” in his Globalising Disparity (September 3). However, what we have to remember is that the affluent countries also produce what they consume. The 20% also produce the 80% and hence should have no qualms about consuming it. The way ahead for developing countries is produce and sell more to increase their share of the pie, as China and India are increasingly showing, and not by trying to stifle consumption in the developed world by certain “redistributive methods” which have severe consequences in store for the rich and poor alike.

The inequality question has also been much misunderstood. First a basic point. I earn $10, my neighbour earns $20- he is therefore 2 times as rich as me. Suddenly if I earn $15 and my neighbour now earns $45, he is 3 times richer than me. Anti-globalists would be quick to point out that I have become poorer than my neighbour by 200%. However, there is another way of looking at it- I became richer by 50%. No need to look at my neighbour- he can buy way more than me, sure, but we can both buy more than we previously could. Relative poverty is a far lesser evil than absolute poverty. According to the United Nation Human Development Programme, Bangladesh is more “equal” than South Korea . Where are people more prosperous?

And absolute poverty has fallen. According to the Asia Development Bank, people living below $1/day fell from 921 million in 1990 to 621 million in 2003- this despite population growth. Ifzal Ali, Chief Economist at the ADB, said, “Asian governments are making significant progress in the fight against poverty.” China has reduced its share of people below $1/day from 33% in 1990 to 13.4% in 2003. Assuming China achieves lower-than-predicted growth rates and spiralling inequality, the figure is still set to decline to around 3.3% by 2015. India reduced its ration from 42.1% in 1990 to 24.9% in 2005. The reason for China ’s better performance is simple- its economy was far more open than India .

The impact can be visibly observed in the figure below. China in 1990 had a lower GDP per capita by PPP than India . Today it boasts of an economy 2.5 times India ’s size and a GDP per capita that is also twice as much as India .

That economic growth reduces poverty is also evident. China has grown faster than India ; it has reduced poverty faster as well. The huge difference between their growth rates in the early 90s meant that while China made a greater dent on poverty, India ’s ad hoc reforms had relatively little impact. In the late 90s, India excelled in poverty reduction- the reason being faster growth rate.

All right, some say, but China and India are the success stories (a bizarre argument, as they have become success stories precisely because of globalisation). What about others? Vietnam began to open up by encouraging export driven industries in the 90s- as a result it reduced poverty from 50.7% in 1990 to 9.7% in 2003, Indonesia, despite the Asian Financial Crisis, reduced the proportion of poor from 20.5% to 6.5% over the same period. Other examples can also be given.

Onto inequality then. According to the Human Development Report 2004 (pp. 50-3), it seems that countries that have embraced globalisation are not necessarily more unequal. For example, Uganda , which is democratic and has an outward oriented economy, the richest 10% of the population are 14.9 times better off than the poorest 10%- the consequent figure for Nigeria , which does not have rule of law and is inward looking, is 24.9. Governance can also play its part. The figure for Russia , which has mismanaged globalisation, is therefore 20.3% vis-àvis 5.2% for the Czech Republic , that favourite child of the International Monetary Fund. No one would argue that China is more globalised than Britain yet the figures for these countries are 18.4% and 13.8% respectively. Yes, there are some countries where globalisation has led to inequality- but there are also some where this has not taken place. It is wrong to generalise.

It is also indicated that women come off worse because of globalisation. According to an ILO report, female unemployment was 12.9% in 2004 compared to 13.2% for males. In any case, globalisation creates a free marketplace where employers choose those workers that are the most productive, irrespective of gender. That this is not the case is because of the failure of governments to channel resources to empower women- what on earth this has to do with globalisation eludes me.

This is not to say that the job has been done. Far from it. Even in 2003, nearly 80% of Bangladeshis, 77% of Cambodians and 41% of Chinese lived below $2/day. But the credit for the progress that has been achieved till date goes to globalisation, and it is globalisation, which holds out the beacon of hope. All talk of human face is a façade- globalisation has a human face, we just need to recognise it through proper reforms- not necessarily a blitzkrieg of reforms, but a gradual but focussed approach.

The author is based at the University of Warwick and takes a deep interest in the political economy of the Indian sub-continent.

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