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Has economic globalization worsened the situation of the third world countries?

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Eric Hobsbawm, in his book Age of Extremes, opens up the chapter by claiming that “The history of the twenty years after 1973 is that of a world which lost its bearing and slid into instability and crisis”.[1] This line becomes a reflection of his perspective on the aggressive trade liberalization, economic globalization and tariff reductions policies that the international community has pursued. Through the course of the section, he then attempts to establish this claim by providing statistics from World Economic Survey which prove the stagnation of economic growth in Latin American and African countries, quoting examples of NICs (Newly Industrialized Countries) and analyzing the repercussions of laissez faire on third world countries.[2]

In this paper, I attempt to deconstruct this binary denunciation of economic globalization that various academicians argue, especially in the context of third world countries. The first part of the paper deals with the benefits of economic globalization, especially through the model of Export led Industrialization using the example of South Korea, while the second part makes a comparative analysis of Export led Industrialization with Import Substitution Industrialization (or other forms of closed market economic systems) and showcases the marginal benefits of the former for the third world countries.

Economic globalization, for the purpose of this paper can be understood using Rakesh Mohan Joshi’s definition i.e. it is the increasing economic integration and interdependence of national, regional, and local economies across the world through an intensification of cross-border movement of goods, services, technologies and capital. [3]One of the major mechanisms for inducing economic globalization post 1973 has been through the model of Export led industrialization; i.e., a trade and economic policy aiming to speed up the industrialization process of a country by exporting goods for which the nation has a comparative advantage. In this paper, I will be discussing two benefits which are common to all countries indulged in Export led industrialization, and two benefits specific to the third world countries which operate at an international and domestic level.

 The first benefit of ELI is that of a comparative advantage. The theory of comparative advantage is an economic theory about the work gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress.[4] So the marginal effectiveness of production and consumption increases in the case of comparative advantage for all countries involved.

The second direct benefit comes from McCombie’s theory wherein he argues that export-led growth can create profit, allowing a country to balance their finances, as well as surpass their debts as long as the facilities and materials for the export exist and simultaneously increased export growth can trigger greater productivity, thus creating more exports in an upward spiral cycle.[5] He argues, that if we let yB be the balance of payments constraint, meaning the relationship between expenditures and profits, yA be the actual growth capacity of a country, which can never be more than the current capacity and yC be the current capacity of growth, or how well the country is producing at that moment, then the possibility of situations of yB=yA=yC: balance-of-payments equilibrium and full employments or yB>yA=yC: increasing balance-of-payments surplus and full employment increases as opposed to ISI or economies with high tariffs.[6] So even though, various authors argue that technology has replaced labour due to the three stages of the industrial revolution and created unemployment, this theory proves how eventually this unemployment does in fact reduce if ELI is carried out with efficiency. The testimony of this theory’s validity can be seen using the example of Bangladesh.  A paper published in the Journal of Development Economics found that the expansion of the garments industry using free trade in Bangladesh lead to an increase in employment and income among young women, giving them the means to finance their own education.[7] So even though the paper accepted an initial issue with employment during the transition phase, there was an eventual growth in the employment rates due to ELI while simultaneously increasing the capacity of economic growth in such countries.

To the above two mentioned benefits, most of the authors respond, that this model of economic globalization is nothing but a reinforcement of imperialistic demands and colonial structures. In other words, from the perspective of the dependency theory,  the North becomes the new metropoles which try to exploit and put demands in front of the South (the new satellite).[8],[9] This neocolonial dependencies, then become the reason for stagnation of the third world economies for them. I argue in the next paragraph, that in spite of the beliefs of anti-ELI activists, economic globalization in fact changes the historic power dynamics and uplifts the third world countries in the economic power structures.

At an international level as countries are integrated in the economy, there is a growth of interdependency between countries. This interdependency reduces the situation of a zero sum game and promotes the idea of collective benefits. In an advisory report, the Social and Economic Council of the Netherland show how Netherlands can benefit from the growth of prosperity elsewhere in the world.[10] So now, the developed countries have an added incentive to look for the benefits for the third world countries so as to increase their own profits. The situation of demands and imperialistic orders now shifts to a situation of cooperation, agreements and consideration. This change in economic power structures and move towards ‘collective egoism of wealth’ rather than individual egoism of wealth, benefits the third world as developed countries actively try to improve situations in other countries be it through Free Trade Agreements such as NAFTA or developmental aid given by developed countries under the Paris Guidelines.

The second major benefit of ELI to the third world countries is the induced cohesiveness amongst the domestic actors which is very important for the efficient functioning of the economy as can be seen using Chibber’s work titled “Locked In Place: State-Building and Late Industrialization in India.”. Even though Chibber was against the ELI model, a major argument in his work revolved around the cohesiveness between domestic actors. He established how the ISI model in India failed due to resistance from capitalists, entrepreneurs and producers whereas in ELI they had a direct incentive to adhere to the state’s demands for increasing the efficiency of production in a line, because the firm’s survival in that line depended on steadily increasing its productivity as was seen in the case of South Korea.[11] Chibber is very cautious with the example of South Korea, since he claims that the Asian tigers are not homogenous to other third world countries and hence there are commensurability issues as he tries to argue that there were other characteristics attached to South Korea such as Japan and US’s trade agreements etc. Even though, I am not engaging with his assertion of there being different characteristics, but the key feature within this Korean example is the potential that exists within the system which can be used by the third world which can be seen using NBER’s work on Market Access, Openness and Growth. On the contrary, the ISI model has been held responsible for the lost decade in Latin America apart from it’s failure in India and Peru which Krugman talks about. 

Through the course of this paper, I have argued the benefits of ELI and tried to show the other side of the coin which is usually missing in the binary denunciation of capitalist markets such as in Age of Extremes. This paper is not to promote Thatcher’s policy of TINA as we still realize  the bigger picture of how we as a society have move towards commodity fetishism and there does exist an imbalance between third world and developed countries, rather this paper should simply be used as a tool to gain perspective of the benefits that have come along this ‘landslide’ i.e. economic globalization.

Jibraan Mansoor is currently a sophomore at Ashoka University majoring in Political Science, Philosophy, Economics and minoring in International Relations. He has participated in various Model UN Conferences and won 18 Best Delegates in both international and national MUNs. Mr. Mansoor’s first paper was published in the Supreme Court based journal of India, Practical Lawyer. He was also the Head Boy of the student council in his high school and mentored teams for various debating and MUN based competitions. 

 


[1] p 403

[2] p 405

[3] International Business, Rakesh Mokhan Joshi

[4] id

[5] McCombie, J.S.L., and A.P. Thirlwall. Economic Growth and the Balance-of-Payments Constraint. New York: St. Martin's, 1994.

[6] id

[7] Manufacturing growth and the lives of Bangladeshi women, JDE
http://faculty.som.yale.edu/mushfiqmobarak/papers/garments.pdf

[8] The North-South Divide (or Rich-Poor Divide) is the socio-economic and political division that exists between the wealthy developed countries, known collectively as “the North,” and the poorer developing countries (least developed countries), or “the South.”

[9] Dependency theory is the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former.

[10] Abridged version of advisory report Verschuivende economische machtsverhoudingen (2012/04)

https://www.ser.nl/en/publications/publications/2012/2012-04.aspx
Refer Abstract

[11] Locked In Place: State-Building and Late Industrialization in India, Chibber

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