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Globalisation : A Framework

The concept of globalization, in the sense in which it is used now, can be traced to the phenomenon of nation states. Government-imposed restrictions on movement of goods, services, people and capital are less than a hundred years old; in fact, passports and visas and the whole gamut of restrictions are a feature of the late 19th Century and the first half of the 20th Century. The nation state put restrictions on its citizens in their involvement with other nation states in what was perceived as the collective self-interest of its citizens. In the context of public policy relating to globalization, a critical issue is the trade-off between individual freedom and collective self-interest as also where the burden of proof lies, namely, with individuals or national authorities.

Globalisation has several dimensions arising out of what may be called the consequential enhanced connectivity among people across borders. While such enhanced connectivity is determined by three fundamental factors, viz., technology, taste and public policy, cross-border integration can have several aspects: cultural, social, political and economic. For purposes of this presentation, however, the focus is on economic integration. Broadly speaking, economic integration occurs through three channels, viz., movement of people, goods and services, and movements in capital and financial services.

The most notable achievement of recent globalization is the freedom granted to some, if not all, from the tyranny of being rooted to a place and the opportunity to move and connect freely. For example, many Indians relatively from poorer sections have benefited by developments in Middle East while many talented professions gained from movement to UK and USA. At the same time, in reality, there are several economic as well as non-economic, especially cultural or emotional reasons for people not globalising.

In regard to trade in or movement of goods and services across borders, there are two types of barriers, viz., what are described as natural and artificial. Natural barriers relate to various costs involved in transportation and information over distances. Artificial barriers are those that are related to public policy, such as, import restrictions by way of tariff or non-tariff barriers. The pace and nature of globalization will depend on the combined effect of technology and public policy, both at national and international levels.

In regard to capital movement also, the interplay between technology and public policy becomes relevant. There are, however, some special characteristics of capital flows. These characteristics have highlighted the issue of what is described as contagion, namely, a country is affected by developments totally outside of its policy ambit though domestic policy may, to some extent, determine the degree of vulnerability to the contagion. In any case, cross-border flows of capital have wider macroeconomic implications, particularly in terms of the exchange rate that directly affects the costs and movement of people as well as goods and services; the conduct of monetary policy and the efficiency as well as stability of the financial system. Furthermore, capital flows by definition involve future liabilities or assets and could involve inter-generational equity issues.

Developments in technology and innovation in financial services impact both domestic and cross-border transactions. The implications for public policy of such developments in the domestic area are on a different footing in the sense that domestic financial markets are in some ways subject to governmental regulation by national authorities while cross-border flows are not as susceptible to governmental regulation. Finally, in the context of cross-border capital flows, in the absence of procedures for dealing with international bankruptcy and facilities for the lender of last resort, the liabilities incurred on private account can devolve on public account. In brief, at this juncture, in respect of global economic integration through movement of capital, several risks devolve on domestic public authorities, especially in the case of developing countries.

Globalisation is a complex phenomenon and a process that is, perhaps, best managed by public policies. In managing the process, developing countries face challenges from a world order that is particularly burdensome on them. Yet, as many developing countries have demonstrated, it is possible for public policy to manage the process with a view to maximizing benefits to its citizens while minimizing risks. The nature of optimal integration, however, is highly country specific and contextual. On balance, there appears to be a greater advantage in well-managed and appropriate integration into the global process, which would imply not large-scale but more effective interventions by governments. In fact, markets do not and cannot exist in a vacuum, i.e., without some externally imposed rules and such order is a result of public policy.

The poor, the vulnerable and the underprivileged will continue to be the responsibility of national governments and hence of concerns to public policy. Sound public policies at the national level in countries like ours are very critical in the current context of levels of development and extent of globalization. In brief, it is necessary to recognize that nation-states, as those still primarily responsible for social order in the communities in which people live, have a duty to manage the process of globalization. This challenge is particularly complex in the area of financial services, more so in the case of banks in the larger emerging economies.

[Extract from the Inaugural Address by Dr.Y.V.Reddy Governor, Reserve Bank of India at Twenty-Fifth Bank Economists’ Conference (BECON- 2003) on 11th December, 2003]

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