Globalization

Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import quotas. Globalization accompanied and allegedly contributed to economic growth in developed and developing countries through increased specialization and the principle of comparative advantage. It has given quite a different way for the world economy to work, which has worked on the lines of grey, i e. it definitely has benefited both the producer and the consumer by developing a global market, but yet at the same time there have been evidences when the developed countries, have exploited the developing countries both in terms of resources and their domestic markets, and moreover there have been evidences of the elite few of the developed countries have managed to gain even more.

The roping in and opening up of different countries gradually to world trade, did lead to free trade amongst them, giving the investors more freedom to invest their money in the developed countries. Moreover, it also gave way to technology transfer from one country to another catalyzed by an increased flow of communications, which allows vital information to be shared between individuals and corporations around the world.

The main aim of this article is to highlight how globalization has had an unequal effect around the world in terms of economic development in different regions. We have tried to bring to light certain crises other than the subprime prices, which would be instrumental in achieving this objective.

Given below are certain incidences, highlighting how globalization did not result in the benefits trickling down in the right way equally to all the countries being witness to it.

Impact of Globalization on India

Ever since India opened its gate to the world economy in terms of free trade, it did gain a lot; be it in terms of investments, technology, development, better consumer options. We did have cases like that of Enron, but at the same time we have come a long way in terms of development of both infrastructure and technology. It also has a large domestic customer base. At the same time as the subprime crisis took place, India as an economy was cushioned to an extent as it was not entirely dependent on the Western countries, especially US. It did result in a slowdown but not as to cause a damage that is irreversible.

A Glimpse of the World

As the trade barriers started getting relaxed the need to deregulate the currency of certain countries came in. Since strong currency is always considered good for the importer whereas vice versa is true for an exporter, many countries chose to have the exchange of their currency controlled by their government, keeping in mind their position as an exporter as well as an importer.

The various bodies which were a result of institutionalization of globalization were:

• The World Bank
• International Monetary Fund
• World trade Organization (started as a successor of the General agreement on trade and tariffs)

There was inequality to some extent as these institutions had people from the developed nations at the top of the hierarchy who intentionally or unintentionally took a biased decision.

In the guise of free trade and the developing country being more open to the world economy, certain actions were taken, which led to the economic crisis in certain countries.

The Mexican Crisis

An example of how the political scenario of country affects its economy, started with end of the term of the president Carlos Salinas, who in the last year of his term before elections, led to a splurge of the government treasury, causing a huge budget deficit. This was followed by lax banking practices, a part of the plan to invite more investors. A local rebellion group, EZLN, declared war on the government, which caused a lot of unrest and decreased confidence of the investors in the country.

This was the turning point leading to the devaluation of peso, the Mexican currency, which in turn had a domino effect and the investors started pulling out money, which lead to further devaluation of peso. All this generated a vicious cycle of lowering investors’ confidence and ultimately got Mexico in state of crisis, which was bailed out by institutions like IMF and countries like US, Canada etc, by loans. It left country under debt and the country providing the debt earned profit from the loans.

The Asian Financial Crisis

The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion. It was a shock whose tremors were felt in countries starting from Thailand to countries like Malaysia, Singapore, Indonesia, Phillipines, South Korea, bunch countries together called the tiger economies. Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong Kong, Malaysia,Laos and the Philippines were also hurt by the slump. The People’s Republic of China, Pakistan, India, Taiwan, Singapore, Brunei and Vietnam were less affected, although all suffered from a loss of demand and confidence throughout the region.

It was characterized by high interest rates to attract investors. It was more a victim of crony capitalism as the money that came went to a certain part of society, which was not efficient enough to invest it in the right way.

Moreover the effect of the recovery of US from recession, also was supposed to be one of the reasons. As the bubble busted the economies were left in turmoil, but were bailed by IMF. Such a situation was again blamed at the distorted lender-borrower incentive scheme, which led to unwarranted credit accumulation.

The Russian Financial Crisis

Around 1997-98, there was a time when,  Russia employed a “floating peg” policy toward the ruble, meaning that the Central Bank at any given time committed that the ruble-to-dollar (or RUR/USD) exchange rate would stay within a particular range. If the ruble threatened to devalue outside of that range (or “band”), the Central Bank would intervene by spending foreign reserves to buy rubles. The inability of the Russian government to implement a coherent set of economic reforms led to severe erosion in investor confidence and a chain-reaction that can be likened to a run on the Central Bank.

Here the fuel added to fire was, the bailout of $5 billion given by the IMF and the World Bank, which were stolen upon the funds’ arrival in Russia on the eve of the meltdown. The inflation during the crisis was as high as 84%. As per Joseph Stiglitz, the crony capitalism here also was supported by the IMF, as the political elites had the privilege of tax cuts and thus had looted public coffers.

This incident was yet another example of how globalization gives way to such corruption and ultimately a catalyst to such meltdown.

The Sovereign Debt Crisis

This was a result of the circumvention of the Maastricht Treaty, under which they pledged to limit their deficit spending and debt levels by certain countries, like Greece and Italy (called PIGS Portugal, Italy, Greece and Spain). This was done in the guise of the use of complex currency and credit derivatives structures. The structures were designed by prominent U.S. financial institutions, who received substantial fees in return for their services and who took on little credit risk themselves, thanks to special legal protections for derivatives counter parties. The countries devised the European Financial Stability Facility, a legal instrument aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty. The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles recapitalize banks or buy sovereign debt.

Wall Street

This was the most recent incident which was a result of US citizens, coming out in the open at the Wall Street to oppose the fact that ever since the surfacing of the sub-prime crisis in the US, the main bunch of people responsible were easily ignored and also that the wealth is accumulated to the people sitting in the Wall Street. Things like quantitative easing, which resulted in inflation (which was otherwise done to improve the condition in terms of unemployment) was also blamed to the investors sitting in the financial institutions as this inflation would help them multiply the value of their investments. The slogan of this movement “We are the 99%” clearly showed perception of growing income and wealth inequality in the United States between the wealthiest 1% and the remaining 99% of the population.

Conclusion

These events clearly point towards the fact that the policy makers of a country should very intricately look at the pros and cons of any policies they make. There are certain consequences which are unforeseen, but certain results are very evident and should be taken care. If the world economy has to truly reap the benefits of working as one global economy, it needs to especially look into the fact that all the countries should get the most possible advantages.