//A V Rajwade: The threats to globalisation

A V Rajwade: The threats to globalisation

A V Rajwade, Business Standard , New Delhi February 09, 2007

The strongest blow to globalisation and liberal economic policies has probably been dealt by Mr Bush’s universally unpopular war in Iraq.
Globalisation and its discontents (as Stiglitz described them) have been in the news in recent weeks. The World Economic Forum met in Davos recently, and the World Social Forum in Nairobi a little earlier. The World Trade Organisation (WTO) negotiations under the Doha round remain stalled. And, economic nationalism is resurgent in many parts of the world (see World Money, January 29). Is globalilsation’s second innings, roughly beginning 1950, coming to an end? (The first innings is generally regarded as having lasted from 1870 to 1913.) It was only in the early 1980s that the original definition of globalisation—free movement of goods, services and investment capital—came to be expanded to include free market capitalism, thanks principally to President Reagan and Prime Minister Margaret Thatcher. The assault on globalisation seems to be coming from increasing income inequalities attributed, at least in the popular mind, to globalisation, from politicians on the right and left, and the unpopularity of the Iraq war. Would future historians conclude that East Asia was lucky to have used the full benefits of globalisation joining the bandwagon early?
Growing income inequalities within developed countries are creating a backlash against globalisation. The median real income in the United States has hardly grown over the last two decades, in sharp contrast with the way compensation levels at the senior levels have jumped, in both gross and after-tax terms. Most of the benefits of tax cuts engineered by Mr Bush have gone to the wealthy. The sense of injustice is strengthened by cases like that of Robert Nardelli, the CEO of Home Depot, who was sacked by the board for unsatisfactory performance, but managed to collect in excess of $200 mn by way of severance pay, under his employment contract—on top of the $150 mn compensation he received over the four years he worked as CEO. Mr Nardelli is hardly unique—other sacked bosses (Pfizer, Morgan Stanley, etc.) have also received severance compensation in 9-digit dollars. (One reason executive compensations have gone sky-high is that those sitting on compensation committees are themselves often top executives.)
But you hardly need to be sacked to earn large money. The five large investment banks in the United States have had a bumper year, and have announced bonuses totalling $36 bn for their employees. But, in the financial services industry, the investment bankers are still not at the top of the league table—they envy the hedge and private equity fund managers, some of whom earn annual compensation in 9-digit dollars. (Obviously, reading Leo Tolstoy’s short story “How much land does a man require?” is passé. Incidentally, his answer was two metres—to bury the body!)
In the popular mind, globalisation is associated also with the stagnancy in the income levels at the median level. Even as economists like Jagdish Bhagwati dispute the legitimacy of this grievance, there is a grain of truth in it. Even as, by buying cheaper goods and services from abroad, corporate profits, and hence the top executives’ compensation levels, go up, the relatively unskilled have to compete with Chinese manufacturing and Indian services: as transportation cost comes down, in a globalised world, the wages of, say, steel workers in the US, Japan, China or India will tend to equate, with the former remaining stagnant and the latter gradually going up.
We in India are also witness to globalisation leading to greater income inequalities. Compensation levels by foreign firms for graduates of the top IITs or IIMs apart, as the supply of skilled IT workers falls short of the demand, their wages are going up at perhaps 25-30 per cent p.a. In fact, the Indian IT industry would retain its comparative advantage only by getting into more sophisticated, higher value-added services. Here again, over a period, the gap between the salary scales for IT employees in India and, say, the US would tend to narrow. On first principles, the greater the degree of globalisation, the more salaries and wages in the tradable sector in the developing world would tend to go up, in absolute terms and relative to the non-tradable sector; on the other hand, in the developed countries, the wages in the tradable sector would remain stagnant, or fall in relation to the non-tradable sector. The fact remains that the developing world has more to gain from globalisation than lose.
The growing income inequalities in the developed world will be exploited by anti-globalisation right wing politicians like, say, Pat Buchanan in the US and Le Pen in France. Mr Buchanan, for example, argues that economic globalisation will result in the “Death of the West”. (Lest we forget, exchange controls were first used in Nazi Germany.) Even academics like Clyde Prestowitz, who will be visiting India next month to participate in the India Today Conclave 2007, argues that “Globalization … is undermining US productive capacity and becoming unsustainable” (Boston Globe, May 31, 2005), that “globalization is distorting the world economy in ways that pose increasing risks to the United States” (San Francisco Chronicle, July 10, 2005). Such views would surely find a sympathetic ear in the new Democratic-majority Congress.
But the strongest blow to globalisation and liberal economic policies has probably been dealt by Mr Bush’s universally unpopular war in Iraq. The misleading things he and Mr Blair have repeatedly said to justify it; the trampling of human rights in Guantanamo and Abu Ghraib; the torture and “rendition” of suspected terrorists; these surely have robbed by association the credibility, and the intellectual and moral stance of whatever they advocate—like globalisation and liberal economic policies. This clearly is reflected in the rise of the anti-globalisation left and leftist governments in Latin America. The World Bank’s anti-corruption drive has been cold-shouldered by much of the developing world, at least partly because its current head was a principal neocon ideologue of the Iraq invasion. Incidentally, this strange combination of the right and the left uniting against globalisation is also present in India in the form of the RSS and the Marxists.
Gordon Brown recently described global warming as the “world’s biggest market failure”. Ironically, this phenomenon may well force the world to come together, whatever Mr Bush’s views on the issue of global warming: there are no national solutions to the problem!