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HUMANISTIC
INSTITUTE
HUMANISTISCH
FOR
INSTITUUT
CO-OPERATION
VOOR
WITH
DEVELOPING
COUNTRIES,
ONTWIKKELINGESSAMENWERKING,
NETHERLANDS
NETHERLANDS
LOCAL DEVELOPMENT
IN A GLOBALIZING
WORLD
OCTOBER, 1996
J. Mohan Rao
LOCAL DEVELOPMENT
IN A GLOBALIZING WORLD
J. MOHAN RAO
OCTOBER, 1996
"Thepoor, the unemployed and the marginalized, who bear the current burden
of such policies, all too often find that the future never arrives. In many
countries, these top-down growth policies have failed to overcome serious
problems of low life expectancy, poor health, illiteracy or even low private
purchasing power. Meanwhile, the increased inequality of wealth that they
promote and the wider participation of people that they inhibit frequently
detract from growth itself Nor have they always yielded political liberation
from diverse sources of oppression. Trickle-down growth also delays the
demographic transition, shrinks the resources availablefor subsistence activi
ties and engenders environmental degradation from the above and below".
J. Mohan Rao
CONTENTS
Hivos Publications
Preface
1. Introduction
2. Globalization: a Perspective from the South........................................
3
2.1 The Process of Globalization..........................................................
3
2.2 The Liberalization Paradigm .........................................................
6
3. Asymmetries Between North and South ...............................................
9
3.1 Unequal Development......................................................................
9
3.2 Reasons for Uneven Development ...............................................
11
4. Markets and Marginalization ................................................................
13
4.1 Markets for Goods and Technologies .........................................
13
4.2 Financial Markets ...........................................................................
15
4.3 Marginalization ...............................................................................
17
5. Global Thinking for Local Action .........................................................
19
5.1 Autonomy of Action .......................................................................
19
5.2 The Struggle over Standards .........................................................
21
5.3 Development Choices.....................................................................
25
References.......................................................................................................
36
List of Hivos Publications
39
H%s
Hivos Publications
These publications are part of the Hivos - India Regional Office's effort to
participate actively in the debate and dialogue in India on issues of human
development and emancipatory interests. They consist of monographs, working
papers and Hivos conference proceedings. The publications reflect policy
concerns of Hivos regarding issues of human interest in India and other third
world societies and address the problems faced by the marginalised in
developing countries, such as in the areas of humane governance, enviomment,
gender, the politics ofdevelopment, technology choices and economic activities.
Series Editor : Shobha Raghuram
PREFACE
This monograph “Local Development in a Globalizing World” by J. Mohan
Rao belongs to a process Hivos is currently engaged in with partners and
independent development thinkers in the preparation of its Five Year Strategic
Plan (Hivos Asia/CIS ‘Kaderplan’ 1997-2001). This document will guide and
assist Hivos in prioritizing its interventions in the Asian region, which includes
India, Sri Lanka, Indonesia, Malaysia, Kyrgyztan and Kazachstan. This strategy
policy document states the priorities for Hivos countrywise and policywise,
thereby providing guidelines for support of development organizations and
activities in the highly differentiated Asian countries. The Kaderplan provides
a framework of policy commonalities and at the same time allows for sufficient
differentiation in country-specific priorities. The five special themes to which
Hivos gives priority, namely, economic self-reliance, culture and the arts,
gender, women and development, sustainable development and lastly human
rights and HIV/AIDS will all be given attention, reflecting not only the range
and richness of the issues within each sector but also country-specific needs
and profiles. The overall major policy thrusts of Hivos will finally provide
the unities for the production of a regionally coherent programme.
Also
covered will be the sweeping changes wrought in the post-cold war era globally
and in Asian countries in particular. These changes have had far-reaching
implications for several development sectors - particularly for international
development aid, trade, North-South relations, and the role of governments
and institutions in civil society. The road ahead fornon-govemment organizations
as they cope with these changes and implement strategies for the future is
being debated widely by development institutions. So dramatic have been the
changes that the implications of liberalization, globalisation, development aid,
progressive poverty levels in some south countries, transition economies and
human development concerns are being extensively debated.
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PREFACE
This monograph “Local Development in a Globalizing World” by J. Mohan
Rao belongs to a process Hivos is currently engaged in with partners and
independent development thinkers in the preparation of its Five Year Strategic
Plan (Hivos Asia/CIS ‘Kaderplan’ 1997-2001). This document will guide and
assist Hivos in prioritizing its interventions in the Asian region, which includes
India, Sri Lanka, Indonesia, Malaysia, Kyrgyztan and Kazachstan. This strategy
policy document states the priorities for Hivos countrywise and policywise,
thereby providing guidelines for support of development organizations and
activities in the highly differentiated Asian countries. The Kaderplan provides
a framework of policy commonalities and at the same time allows for sufficient
differentiation in country-specific priorities. The five special themes to which
Hivos gives priority, namely, economic self-reliance,, culture and the arts,
gender, women and development, sustainable development and lastly human
rights and HIV/AIDS will all be given attention, reflecting not only the range
and richness of the issues within each sector but also country-specific needs
and profiles. The overall major policy thrusts of Hivos will finally provide
the unities for the production of a regionally coherent programme.
Also
covered will be the sweeping changes wrought in the post-cold war era globally
and in Asian countries in particular. These changes have had far-reaching
implications for several development sectors - particularly for international
development aid, trade, North-South relations, and the role of governments
and institutions in civil society. The road ahead for non-govemment organizations
as they cope with these changes and implement strategies for the future is
being debated widely by development institutions. So dramatic have been the
changes that the implications of liberalization, globalisation, development aid,
progressive poverty levels in some south countries, transition economies and
human development concerns are being extensively debated.
H%s
In India since 1991 the policy debates on the nature of the reforms initiated
by the government and multilateral-lending institutions have dwelt on structural
adjustment policies and growth-oriented strategies in the economy, the
withdrawal of the state from social sector spending, the failure of the public
sector, growing unemployment and the prospects for the poor. Several of
Hivos’s partners have been involved in public debates on the economic health
of the country, and strategies for countering the short-term effects of SAP
policies. Some of the debates resulted in the collaborative effort of a book
on ‘Structural Adjustment: Economy, Environment and Social Concerns
published by Macmillan Press, New Delhi last year. The contributors in this
volume dealt extensively over a wide range of issues- from erosion of political
self-reliance and global inequities to the chronic problems of an agrarian
economy and the effectiveness of existing social security systems. The overall
sufficiency of the reforms and their efficacy in the present dispensation was
dealt with keeping in mind the road towards growth with distributive justice.
J. Mohan Rao was a contributor with a paper, ‘Liberalization and Growth’.
In that he maintained that the reforms, defined via a neo-liberal agenda were
unsuitable to countries such as India, “in which we have a severely deficient
infrastructure, low levels of education and health, agrarian backwardness,
structural dualism, persistent technology lag in industry and a weak home
market”.
This monograph on globalisation is the result of continued collaboration. It
is set on a broader canvas where the author translates the growing understanding
of the forces of globalisation into a broad framework for actions which may
limit marginalisation and exclusion. He cogently overviews the issues that
provide the elements of a process called globalisation when viewed from the
developing countries perspectives. Rao dwells on the politics of exclusion
that are inscribed in policy changes and assumes positions that have clear
political implications, while detailing North-South imbalances, the trends for
trade flows under the new regime of WTO, and the hierarchical fragmentation
of world markets. He examines the globalised market system to see whether
the system is characterized by divergence rather than convergence and goes
on to decode some of the high notes of the liberalization ‘mantra’ to unravel
the social costs of liberalization for developing countries. The author looks
at the issues that face large sections of the populations in low income countries
- labour regimes and exit policies, issues of consumption and the crisis of
natural resource degradation, and draws up an agenda for collective action
best promoting Southern interests in what he terms, as a “South-oriented
working international order”. He argues that unregulated global integration
cuts into political autonomy at the local (national) level. State commitments
to public spending on development needs such as health, food, education etc
are eroded at the altar of growth, fueling in the long run a market theocracy
that perpetuates the lowering of labour rights and wages, environment
standards and equity goals. It is clear that only a highly empowered population
can bring from below the reforms badly needed at the national (local) levels
- proper utilization of public resources, a high level of political accountability
and a state that protects and delivers public goods.
The study recently completed by Leela Gulati and R. Ramalingam ‘Poverty
and Deprivation: Some Inter-State Comparisons’ and published by Hivos
shows that poverty levels have been virtually stagnating for the whole of India
between 1987-88 and 1993-94, that the proportion of children engaged in work
increased between 1971 and 1981 in the whole of India and that the incidence
of maternal mortality is at unacceptable levels, not to mention various other
areas of social development that call for radical interventions. It is clear that
if the future must arrive, wide-ranging reforms in a variety of institutions (both
State and private) have to be implemented on a war-footing along with the
State’s commitment to a genuine process of democratization, so that growth
and equity are not conflicting.
We decided to publish this study for the internal use of not only Hivos but
also that of our partners. We hope that partners will find it useful. We would
like to thank Welmoed Koekebakker, Head of Bureau for Asia, Hivos, The
Hague, for the extensive collaboration with the Regional Office on the making
w
of the Kaderplan. Our thanks also to J. Mohan Rao for the serious engagement
on development policies.
Shobha Raghuram
Dy. Director, Regional Office
October 31, 1996
1. INTRODUCTION
Although international flows of goods, technologies and particularly finance
have grown rapidly in the past two decades, the national economies of the
world are far from constituting a single economic system and far from being
closely integrated by global markets. International differences in production
technology, capital availability, goods prices and especially factor prices and
living standards remain large and persistent. Accordingly, two central questions
present themselves: first, what are the forces impeding global integration?
second, is every movement towards integration necessarily beneficial to rich
and poor nations alike? This paper aims to present a perspective on these central
questions from the viewpoint of the poorer nations of the world and to draw
out the implications for national and international policies that are conducive
to their economic development.
The growing flow of global transactions has been strongly associated with
national and international economic restructuring. In the North, this is traceable
to the unraveling of the ‘Fordist’ regime of production and accumulation that
underpinned a quarter century of high economic growth while in the South,
it is additionally due to the debt crises accompanied by creditor conditionalities
pushing for so-called globalization. The increased mobility of capital together
with a sharp rise in worldwide unemployment and informalization in the
periphery define the environment within which this restructuring has occurred.
Thus, moves toward liberalization and global integration define the central
tendency in North and South alike. Neo-liberal theory holds liberal policies
and openness, whether for the North or for the South, to be a guarantee of
global economic integration and of convergence in national living standards.
But historical and contemporary experience argue strongly against the neo-
liberal prescription and prediction. Neo-liberal theory suffers from an
undifferentiated, even Panglossian, view of how markets function in poor and
rich nations alike which is responsible for the uniform policy conclusions it
reaches for both. On the other hand, the structuralist alternative presented in
this paper recognizes important sources of asymmetry between North and
South that are fundamentally related to their respective stages of development.
In turn, these asymmetries condition the sorts of policy response that can
promote development. The forces of divergence rather than convergence in
a globalized market system are inherent to that system rather than the exclusive
and extraneous results of mis-informed interventionism by states. Structural
asymmetries between North and South, the localization of major sources of
growth in the form of external economies and increasing returns, and the
hierarchical fragmentation of world markets, particularly in finance, help
explain the weakness of the global forces of convergence.
The paper is organized as follows. Section 2 sketches out the causes and
consequences of the growing competition in and integration of international
markets and the varied responses in the developed North and the developing
South. It also outlines the neo-liberal case for liberalizing domestic markets
and for removing all artificial barriers to a complete integration of national
and global markets. Section 3 and 4 develop an alternative framework
emphasizing North-South asymmetries in the structure of internal markets and
the fragmentation of international markets in goods and finance. Building
on this framework, the final section analyzes the value of national autonomy
and the policy choices required for promoting development in the periphery.
2
2. GLOBALIZATION: A PERSPECTIVE FROM THE SOUTH
The crises of Fordism in the North and of debt in the South hastened a process
of international and national restructuring of both production and policy
regimes which is still under way. The increased mobility of capital together
with a sharp rise in worldwide unemployment and informalization in the
periphery define the environment within which this restructuring has occurred.
Neo-liberal theory holds liberal policies and openness, whether for the North
or for the South, to be a guarantee of global economic integration and of
convergence in national living standards.
2.1 Globalization
There can be no doubt that international flows of goods and especially of
finance capital have increased very sharply over the past decade or two. The
costs of transactions across national frontiers-the movement of money,
knowledge and materials have been greatly reduced by the information and
communication revolutions. Non-traditional manufacturing exports from the
newly industrializing countries (NICs) of Asia to the advanced capitalist
countries (ACCs) have scaled new heights. The rapid growth of national
incomes in China, Malaysia, Thailand and Indonesia has been accompanied
by an accelerated expansion of foreign direct investments (FDI) from outside
and within the region. Formal processes of market integration have been
initiated in North America and are reaching their culmination in western
Europe. A new GATT accord has been signed which phases out important
areas of managed trade and protectionist policy. Many among the economies
ofthe South and in eastern Europe have shifted policies, in some cases radically,
towards opening up their economies to global markets.
Despite great uneveness in the spread of participation by nations and groups
of people, the balance of forces seems to point in the direction of globalization
H%S
3
at least in the descriptive sense of a process increasing international resource
and goods flows. The forces driving this process were evident both during
the quarter century following 1945 and in the subsequent quarter century of
slowed growth, heightened instability and widespread changes in economic
institutions and policies in both North and South. Though the unraveling
of the monetary arrangements of the post-War era in 1971, the productivity
growth deceleration of the ACCs starting in the late 1960s and the oil price
increase of 1973 had a definite impact on the shape of international economic
relations during the past two decades, these are themselves best seen to have
been effects of anterior causes. The latter are located in the crumbling of
the particular political-economic regime (termed Fordism) in the ACCs that
maintained stable national and international regimes of rapid growth (the
Golden Age)1.
As Fordism successfully diffused from the US to western Europe and Japan,
high growth was led and sustained by rising wages which enlarged home
markets in the ACCs. The coincident growth of home demands, together
with US hegemony and the Bretton Woods institutions, also ensured the rapid
growth of international trade without threatening conflicts between external
and internal balance. The convergence of productivity and income levels in
Europe and Japan to those prevalent in the US accelerated the growth of intraindustiy trade and investments. Protectionist barriers to trade also came down
in successive rounds. In other words, converging incomes produced market
integration, not only the other way around.
But by the same token, the
maintenance of export competitiveness began to emerge as a new imperative
rivaling the Fordist concerns about maintaining real wage growth and the
welfare state.
The new imperative arose at the same time that the internal growth potential
of Fordism was petering out. Attempts at fine-tuning the economy led to
1 Recent accounts of the constituents of the Fordist Golden Age and of the paths out of that
regime of accumulation are given in Boyer (1995) and Lipietz (1995).
4
structural inflation and external imbalance and, in response, businesses demanded
fiscal and labor discipline (Cox, 1994). Inflation control on the macro side
and all-round ‘flexibility’, including deregulation, on the supply side became
the hallmarks of new conservative policy regimes. Assaults on the welfare
state, more or less extensive, have followed in their wake.
Countries in the South played diverse parts in this unfolding Northern drama.
Not all of them have been at the ‘receiving’ end or, at least, not in the same
sense. The expansion of world trade during the Golden Age provided ample
if unexpected opportunities for commodity exports and industrialization. As
a group and individually, countries in the South enjoyed respectable rates of
economic
growth. Growth
in
the ex-colonies surpassed
their dismal
performance during the colonial era. This difference was not simply due to
the global economic environment of the Golden Age alone; rather, a large
if variable share of the difference must be accounted for by the transition from
colonialism to sovereignty and the developmental role of the state. The growth
momentum was maintained even through the 1970s in part because of better
export prices for many raw material exports. Whereas the first oil price increase
had produced a severe crisis of macro management in the ACCs, the recycling
of petro-dollars to the South also supported continuing growth there. But the
eventual crash turned out to be far more costly in the South, particularly in
Sub-Saharan Africa and Latin America, than the earlier one had been in the
North. It was brought on by the crushing rise in interest rates and the sharp
adverse movement in the South’s terms of trade which followed the Reagan-
Volcker policies of the early 1980s.
In East and Southeast Asia, the crisis did not produce economic collapse.
Instead, the state managed a quick if difficult adjustment and growth resumed.
The East Asian NICs had enjoyed special external and internal political
circumstances in the decade or two following the second World War. These
compelled and enabled their states to launch successful land reforms (in Taiwan
_____________________________________________________________________
5
and Korea), invest in mass education and health, and in other ways establish
a growth regime that spread the fruits of rising incomes. The unusual mix
of authoritarianism and an inclusive social base for growth, by design and
circumstance, allowed the state to discipline capital and labor without posing
excessive problems of disciplining the state itself. Following Japan’s lead,
the East Asian NICs were able to give a good account of this social capital
in achieving export competitiveness in manufacturing. In many ways, China
appears to have followed a similar course though lagging behind its neighbors
by a decade or two. On the whole, the 1980s proved to be an exceptionally
good decade for most Asian countries. Though eventually hit by a major
external crisis a decade after Mexico’s in 1982, even India’s per capita income
grew at over 3 per cent per annum through the 1980s which was a decade
lost to development in Africa and Latin America.
2.2 Liberalization
In response to the crisis-inducing globalization of the past decade or two, there
has been a remarkable convergence of formal policy regimes in the South
toward a neo-liberal order. Three salient factors explain this tendency. First,
the substantial influence that neo-liberal ideology assumed in the Bank-Fund
ministered stabilization and structural adjustment programmes.
The crises
greatly weakened both official and popular resistance to the dismantling of
policies and programmes that were the symbol and substance of third world
autonomy. Second, neo-liberalism, of which state minimalism has been the
kingpin, furnished an intellectual basis for these states to make a virtue out
of necessity. In many cases, it also provided ideological cover for the political
project of elite minorities to jettison social commitments. Third, neo-liberal
influence has grown cumulatively: the pursuit of liberalization in individual
countries not only affected their internal economies but also altered the global
environment facing each of them, an alteration that made the pursuit of
autonomous policies increasingly precarious or, at least, increasingly
unfashionable.
6
Liberalization is anchored in five basic assumptions: 1) that a politically
unconstrained
market regime is feasible (distributional problems can be
resolved without ‘ distorting’ the market); 2) that the market can fully coordinate
individual decisions (the state can only get in the way); 3) that public investment
is an inefficient substitute for private investment in the growth process
(complementarities are negligible); 4) that the unhindered import of technology
can provide an adequate basis for developing competitiveness (a level playing
field imposes no handicaps in building up dynamic competitive advantage);
and 5) that the free movement of finance and enterprises across the national
border will produce internal and external balance (globalization is good for
the South).
The agenda of liberalization in the South draws primarily on the orthodox
economic critique of state-directed development policy. As championed by
the Bretton Woods institutions, structural adjustment is effected through
market-oriented measures designed to improve supply-side flexibility and
performance. The main instruments include trade policy reform (dismantling
quantitative restrictions, reducing tariff rates and ensuring currency
convertibility), openness to capital and technology flows, unhindered flow of
domestic investment and labor across sectors (flexibility and free exit), financial
reform to permit market-determination of investment and saving, and public
sector disinvestment. It presumes that import-substituting industrialization
and state interventions distort resource allocation and reduce resource utilization.
Improved resource efficiency is to be secured from exposure of enterprises
to internal and external competition and through a drastic reduction in the
scale and discretionary component of government interventions in enterprises
and markets. The success of market liberalization requires as a cornerstone
a labor regime that is free from distortions and rigidities. At the level of state
policy, this is usually defined in terms of the absence of 1) direct interventions
in wage-setting and indexation including legislated non-wage elements of
compensation; 2) exit barriers on firms in the form of job tenure legislation
or restrictions on employer’s freedom to lay off or retrench workers, 3) soft
budget constraints or other ways of rescuing firms that fail.
Clearly, this agenda implies that external openness and internal liberalization
are strictly complementary. It promises benefits to all participants in global
markets: the achievement of efficiency and the diffusion of technology are
the bases for both absolute benefits and the equalization of productive powers.
Inequalities among nations pose no impediments to any of them in deriving
these benefits. On the contrary, the integration of product and capital markets
even without global labor mobility implies equalization of living standards
across the globe.
8
3. ASYMMMETRIES BETWEEN NORTH AND SOUTH
The forces of divergence rather than convergence in a globalized market system
are inherent to that system rather than the exclusive and extraneous results
of mis-informed interventionism by states. Structural asymmetries between
North and South, the localization of major sources of growth in the form of
external economies and increasing returns, and the hierarchical fragmentation
of world markets, particularly in finance, help explain the weakness of the
global forces of convergence.
3.1 Uneven Development
International inequalities have risen massively during the past century. Living
standards over much of the old world were proximately similar around 1600.
Even as late as 1800, per capita income in Europe and North America was
roughly the same as that prevalent in Asia (Schwartz, 1994). But by 1900,
incomes in the center were around 10 times as large as in the periphery and
the gap had widened even more by 1960.
For the period 1965-1989, GNP per capita in the low-income economies
increased 2.9 per cent per annum, compared to 2.3 per cent per annum in
the middle-income and 2.4 per cent in the high-income economies. While
this represents a very modest amount of convergence, large parts of the lowincome periphery (representing nearly 40 per cent of the world population)
have grown less rapidly than the high-income nations: the faster average growth
in the low-income economies is heavily weighted by China’s impressive
growth acceleration; India and other low-income economies grew substantially
less rapidly than did China. Uneven development, North-South and SouthSouth, is also manifest during the 1980s when world growth slowed. Whereas
the rate of growth of per capita income in the world economy fell by 0.8
percentage points between 1965-80 and 1980-89, the decline in growth rates
w
9
in developing countries was 1.8 percentage points. In the same period, growth
in East and South Asia accelerated by 1.3 and 1.5 points respectively but growth
in Sub-Saharan Africa, the Middle East and North Africa, and Latin America
decelerated by 2.6, 3.2 and 4.0 percentage points respectively (Gnffin and
Khan, 1993: p.7).
In an important sense, the world today bears a much stronger resemblance
to the world of a century ago than of a half centuiy or even a quarter centuiy
ago. Trade and capital flows relative to world income are roughly comparable.
Markets in the periphery were largely open then; investments in the periphery,
though confined to exploiting natural resource-based comparative advantage
and to infrastructure such as the railways that this required, were in significant
measure financed by the richer countries, especially Britain.
As extensive
as the globalization of the past two decades has been, the world economy
in 1900 was not measurably less globalized than it is today.
The differences, though, are also notable. Most peripheral states lacked
sovereignty in the earlier period and were subjected to colonial exploitation.
Even the convergence among people of European origins may have been
largely secured through labor mobility in respect of which the end of this
century greatly differs from the end of the last. There was scarcely any sign
of convergence among non-European countries, certainly none comparable
to the experience of the NICs in recent decades. India’s per capita income,
for example, precisely stagnated under the Crown-imposed policy of laissez
faire and virtual free trade; a modest beginning in modem industry was
balanced by agricultural decline and the near-demise of her artisanal industries
due to the competition from cheap industrial imports. By contrast, a strongly
regulated import-substitution regime after independence served to more than
double India s per capita income. There were significant episodes of peripheral
industrialization, in Brazil, Mexico and India among others, during the Great
Depression and World War n, when the world economy had virtually ceased
to be global.
10
These comparisons are valuable in suggesting links between unequal
development and the development of international markets. Global market
forces by themselves appear to have generated substantial, even immiserizing,
international inequalities. Throughout the past century, sovereign state power
has been necessary though not always sufficient to overcome the unequalizing
tendencies in global markets or at least to effect absolute economic improvements.
But the historical comparisons cannot
account for the effects of real,
particularly, ‘world’ time. Has catching up with the leaders become easier
over the past century or more difficult? Is successful state tutelage of ‘late’
industrialization more probable today or less?
3,2 Reasons for Uneven Development
The neo-liberal position provides one set of answers by denying each of the
above hypotheses. The global market system, in this view, equalizes national
living standards if not absolutely, then, at least relative to each nation’s
‘development potential’. Not only are protection, selective promotion and
graduated linking with world markets unnecessary for catching up; on the
contrary, they are the only impediments to achieving it. Careful consideration
shows, however, that the mechanisms adduced in favor of this position do
not bear scrutiny2. North-South inequality must be understood in terms of
uneven development instead i.e., dynamic factors making for persistently or
even progressively different resource endowments, particularly of physical
and human capital.
Structural asymmetries between North and South, the
localization of major sources of growth in the form of external economies
and increasing returns, and the hierarchical fragmentation of world markets,
particularly in finance, help explain the weakness of the global forces of
convergence.
Given the very large inequality of investment in research and development
(arising from unequal endowments of capital), wealthier countries enjoy a
w
2 This is not the place to review the extensive literature that establishes thisproposition.
.
11
persistent technological advantage. But there are other forms ofthe localization
ef development that may be just as important.
One concerns the costs,
particularly in transport and transactions, attached to market integration. The
costs of tapping markets or resources (including labor) decline with localization
and serve as natural barriers to integration. Another concerns knowledge in
the form of an unplanned public good. Though some spillovers of knowledge
are international, they are more often confined to national or local networks
of enterprises, universities and workers. Furthermore, much of the knowledge
generated in such locally connected networks are embodied in workers and
managers who are not internationally mobile. Localization of such unplanned
public goods is aided also by language and nationality/cultural barriers. A
third source of localization arises from infrastructure and services which tend
largely to be non-tradables: transport, communication, power, water, publiclyfunded research and even educational and financial institutions. A final source
of localization is market information. This is particularly important in the
capital market where reputations and knowledge are critical to enforcement
of transactions.
The chief implication of localization is that the forces of the global market
are fragmented rather than uniform. Although competition, exchange and
the size ofthe market are important determinants ofthe gains from specialization
(and vice versa), gains also accrue from inter-connectedness, non-exchange
and localization. If the economies of local connectedness are stronger than
those of global market size, then, uneven development must be the result.
Global market integration does not produce (has not in two centuries) global
convergence; rather, the locally divergent development process produces the
characteristic types of global integration (North-South versus North-North)
that we witness. Global markets have been the conveyor belts rather than
the motors of uneven development.
12
4. MARKETS AND MARGINALIZATION
Historically, free trade has been a luxury pursued by the strong; laggards have
always practiced a kind of mercantilism, protecting their nascent industries
or subsidizing exports. The present world juncture appears to mark a departure
from precedent. The rush to liberalize and integrate, however, ignores history
as well as contemporary reality: as presently constituted, the markets for goods,
technologies and finance promise profoundly unequal outcomes unless market
forces can be directed and channelled to meet the needs of the South. The
worst effects of such unequal integration are already manifest through the
processes of marginalization in the periphery.
4.1 Markets for Goods and Technologies
The North, faced with the imperative of competitiveness and the South, under
the compulsions of debt, decline and creditor conditionalities, have both been
obliged to go global in recent years. Meanwhile, the NICs, which have made
significant inroads in the North’s markets at home and abroad, are being held
out as a model for the rest of the South to follow.
But in a world in which the growth process remains powerfully localized,
openness benefits the strong; the weak must continue to sell primary commodities
or standard manufactures. Competition in the markets for the latter has been
accordingly fierce. During the 1980s, export prices of LDC manufactures
have fallen in relation to the manufactures they import. At the same time,
their commodity export prices have been lower in real terms at any time during
the past 10, 40 or 120 years (Avramovic, 1993: preface).
Falling real wages in many LCDs do increase ‘competitiveness’ but do not
counter the asymmetries of specialization or strengthen the local processes
of learning and development. The ability to take advantage of transferred
13
4. MARKETS AND MARGINALIZATION
Historically, free trade has been a luxury pursued by the strong; laggards have
always practiced a kind of mercantilism, protecting their nascent industries
or subsidizing exports. The present world juncture appears to mark a departure
from precedent. The rush to liberalize and integrate, however, ignores history
as well as contemporary reality: as presently constituted, the markets for goods,
technologies and finance promise profoundly unequal outcomes unless market
forces can be directed and channelled to meet the needs of the South. The
worst effects of such unequal integration are already manifest through the
processes of marginalization in the periphery.
4.1 Markets for Goods and Technologies
The North, faced with the imperative of competitiveness and the South, under
the compulsions of debt, decline and creditor conditionalities, have both been
obliged to go global in recent years. Meanwhile, the NICs, which have made
significant inroads in the North’s markets at home and abroad, are being held
out as a model for the rest of the South to follow.
But in a world in which the growth process remains powerfully localized,
openness benefits the strong; the weak must continue to sell primary commodities
or standard manufactures. Competition in the markets for the latter has been
accordingly fierce. During the 1980s, export prices of LDC manufactures
have fallen in relation to the manufactures they import. At the same time,
their commodity export prices have been lower in real terms at any time during
the past 10, 40 or 120 years (Avramovic, 1993: preface).
Falling real wages in many LCDs do increase ‘competitiveness’ but do not
counter the asymmetries of specialization or strengthen the local processes
of learning and development. The ability to take advantage of transferred
13
technologies and of trade-based gains from specialization has been highly
dependent on creating an indigenous process of cumulative learning and
utilization (Hikino and Amsden, 1993). Among these local determinants, early
land reforms, investments in infrastructure and human capital, stabilization
of social relations by agreement or coercion, and the nature of the state have
been particularly important. Given these local effects, it is unsurprising that
(a) very few among the LDCs succeeded in their late industrialization efforts,
and (b) a period of rapid growth in world trade enabled the few successful
ones to pull away rapidly from the rest in terms of both growth and export
success.
Although some economists contend that competition from abroad is necessary
and sufficient to promote industrial productivity growth, the problem frequently
is the reverse: there is too much domestic competition for efficient production.
Many nations have succumbed to competitive challenges rather than meet
them; competitive pressure by itself fails to account for the outcome.
Contrariwise, phases of protected industrialization are necessary but hardly
sufficient to achieve competitiveness. Indeed, without the careful cultivation
of the above-mentioned local effects, protected industrialization becomes part
of the problem rather than part of the solution.
Technology markets pose a different order of challenges to the South. Few
would dispute the gross advantage of late industrialization viz., the import
of technology rather than invention ab initio. However, converting the gross
advantage into a net advantage depends on advancing local learning and
adaptation capacities. To this effect, East Asian economies practiced both
explicit and implicit protectionism of national firms from the start. By requiring
TNCs to produce mainly for export (in export processing zones), national
industry was allowed to grow by producing for the home market.
Given
complementary policies to develop the localization process, domestic firms
were thus strengthened and later compelled (through conditional credit and
other subsidies for exports) to themselves graduate to selling in export markets
14
as well. Contrary to neo-Iiberal interpretations, the ‘level playing field’ between
foreign and national firms in these countries was largely a product rather than
the pre-condition of development.
4.2 Financial Markets
There is an obviously profound imbalance in the capital available per worker
or consumer between the rich and poor countries. Coupled with the large
differences in technologies employed, the potential economic returns to making
finance available to the South are large. Though the objective need and
opportunity for saving and outside finance for physical, human and infrastructural
capital formation is evident, it does not follow that the market, whether internal
or international, is willing and able to supply these. In the context of structural
asymmetries in the growth process, the fragmentation rather than integration
of capital markets is both symptom and cause of those asymmetries.
Long-term financial flows seem to follow development rather than lead it.
This reflects not only the importance of local development processes but also
of the related localization of financial markets. The location of production
depends on the comparative costs of immobile factors which are not confined
simply to raw labor and land, the obvious ones.
The (local) development
process is also intensive in human capital accumulation and investments in
infrastructure. It is not merely that the services provided by such investments
are attached to the immobile factors and strongly complementary to movable
capital investments in tradable sectors. It is also the case that there are financial
market failures which place these investments largely outside the scope of
both indigenous and especially international market finance.
Consider investments in human capital. In developing countries, expenditures
on nutrition, health and education are major productivity-raising factors. While
they are certainly privately ‘profitable’, poverty and the lack of collateral render
market financing either impossible or costly.
Far from financing such
_____________________________________________________________
15
productivity-raising expenditures, the utter inadequacy of credit markets forces
a reliance upon self-provisioning and self-insurance which detract from
productivity. The lack of credit and insurance markets is a critical factor,
for example, behind ‘accumulating’ precautionary and old-age saving in the
form of children. This only serves to raise the dependency burden in the form
of higher current consumption requirements while also reducing current
incomes (by increasing wage competition from low-paid child labor) which,
in turn, aggravate the initial market failure.
•
Similarly, the low levels and quality of infrastructure help explain the low
overall productivity, including low rates of return to capital, in LCDs. Free
trade obviously cannot enable a country to specialize away from its requirements
of these non-traded goods. But the pertinent question here is whether global
finance can help. Many elements of infrastructure are characterized by external
benefits and long payoff periods. Hence, by rational design or institutional
default, infrastructural services must be extensively subsidized. The private
financing of such investments is rendered as problematic as public regulation
(if not public ownership) is made economically necessary.
To sum up, national financial markets within the South present a picture of
deep structural fragmentation. Finance flows unevenly among the modem
industrial sector where much of the learning process must concentrate, the
informal and agricultural sectors which are the prime sources of employment
and livelihoods and the public sector which must play the leading role in
creating infrastructural and human capital. The asymmetries that underlie the
lack of financial integration within nations are rooted in both political and
market failures. In turn, indigenous financial markets, even when not closed
by policy, are but poorly connected with global markets. Besides, openness
itself is constrained by the weak domestic fiscal and financial structure. In
short, the hierarchical fragmentation of global financial markets is both
constitutive of and caused by the localization and unevenness of development.
16
By comparison with capital mobility, integration via labor mobility would
provide a far more reliable and powerful mechanism for reducing international
inequalities. But as small as North-South capital movements are, the SouthNorth movement of labor remains smaller still. Besides, the selectivity of
immigration policy favoring the skilled is largely inimical to the interests of
the South while the liberalization of labor immigration is hardly on the North’s
agenda.
4.3 Marginalization
The crises of Fordism in the North and of debt in the South have hastened
a process of international and national restructuring of both production and
policy regimes which is still very much under way. In the North, the breakdown
of the social accord has allowed enterprises to take the lead in their search
for competitiveness and flexibility while accommodating new technologies:
structural unemployment and foot-loose capital have followed. In the South,
the foreign imbalances have been joined by massive fiscal crises: retrenchment
in the modem public and private sectors has forced increased unemployment
and a substantial growth of low-wage informalization.
The growing
internationalization of production from the North and the expanding
informalization of production in the South are linked together in a hierarchical,
three-step restructuring among core, semi-periphery and periphery, a hierarchy
in which wages, skill levels and job security decline from core to periphery.
The phenomenon ofjobless growth and skilled labor displacement associated
with this restructuring is in part the result of the new technological changes
demanding higher physical and human capital intensities and flexibility.
However, neither accumulation nor new employer strategies have been conducted
in a rudderless market vacuum. In the North, as we have noted, ‘flexibility’
has been actively promoted by conservative policies: the political assault on
the Fordist compromise, through macro and micro policies, has permitted
capital to pursue the new rationality of flexible restructuring. This political-
H%s
17
economic environment has enabled footloose capital to wrest further concessions
from both labor and the state. In the South, straitened fiscs (due to the debt
crisis) have undermined state capacities to pursue indigenous models of
modernization: even the pretense (in many countries of the South, it was not
much more than that) to include the marginalized majorities has been all but
given up. Conditionalities imposed by international creditors, in the form of
orthodox stabilization and structural adjustment programmes, have been the
major instrument for opening up these economies to the winds of global
competition. “Adjustment with a human face” appears as a “human mask”
(Guhan, 1995:p. 243) for the actual adjustments carried out.
Parts of the South are faced with yet another crisis, a crisis of natural resource
degradation and ecological destruction that has rendered subsistence production
increasingly fragile. Some of this grows out of the extractive state strategies
that have taxed the poor without compensatory investments to augment
productive capacities. Some of it has arisen, as in parts of Sub-Saharan Africa,
from destructive civil wars and extended droughts. But the economic crises
and structural adjustments forcing the mining of natural resources for export
production have also been responsible. This fragility has delayed the demographic
transition in what may be called the Fourth World which, in turn, compounds
that fragility in a destructive spiral.
18
5. GLOBAL THINKING FOR LOCAL ACTION
The value of national autonomy in the South arises from the structural and
market asymmetries identified in the preceding section.
The projects of
national integration and locally-oriented development must, as in the past,
continue to take precedence over the project of globalization. The quality
of public interventions and participation is fundamental to the realization of
these possibilities. We conclude the paper with an examination of the political
economy of interests in or against liberalization and globalization, and the
policy alternatives that most conduce to economic development in the poor
nations.
5.1 Autonomy of Action
States have played a pivotal role in capitalist transformations throughout the
world. The development of the market system has required the simultaneous
development of institutions, including the state itself, to support it.
Late
developers have found it necessary to fashion state institutions and policies
that are more actively engaged, both qualitatively and quantitatively, in the
development process. Nurturing local development against competing global
forces has become a progressively more delicate affair. Strategic direction of
the economy, macroeconomic management to secure internal and external
balance and selective engagement in global markets to exploit its opportunities
and thwart its constraints have been added to the tasks of establishing new
forms of property relations and associated legal and enforcement systems,
ensuring order, supplying infrastructural and educational services, and, above
all, resolving the fundamental political conflicts arising in the process of
constructing a market system.
Yet, the central tendency under globalization is toward reducing political
autonomy at the ‘local’ i.e., national, level. The national choice of goals as
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19
well as means is liable to be strongly compromised. The South differs from
the North in this respect not so much in the goals pursued but in the means
necessary to realize them: the imperative of local development is far greater
while, at the same time, local development is much more vulnerable in the
face of globalization. Unregulated global integration cannot be in the best
interests of the weak.
But the choice of goals as well as means is also subject to the conflict of
interests between have and have-nots within the poor nations. This affects
not merely the outcome of growth but also growth itself. These effects play
out through both markets and government policy. Trickle-down theory, which
is the basis of policies of liberalization, takes conflict between growth and
equitable outcomes to be axiomatic. Inequality is alleged to promote faster
growth by providing incentives for elite savings, effort and enterprise: for the
rest, this is supposed to mean gains in future employment and consumption
that more than compensate for the current sacrifice. This argument is employed
to justify low taxes, low wages and labor repression. Policies to utilize surplus
labor by promoting labor-intensive techniques are viewed as detracting from
profits and saving.
Public spending or subsidies for health, education,
employment, food consumption, social security and poverty alleviation
programmes are also considered inimical to growth.
On the other hand,
expenditures on defense and on the repressive apparatus of the state, tax give
aways and public sector employment for the middle class are overlooked as
areas where fiscal economies might be affected and savings raised.
The poor, the unemployed and the marginalized, who bear the current burden
of such policies, all too often find that the future never arrives.
In many
countries, these top-down growth policies have failed to overcome serious
problems of low life expectancy, poor health, illiteracy or even low private
purchasing power. Meanwhile, the increased inequality of wealth that they
promote and the wider participation of people that they inhibit frequently
detract from growth itself. Nor have they always yielded political liberation
from diverse sources of oppression. Trickle-down growth also delays the
20
demographic transition, shrinks the resources available for subsistence activities
and engenders environmental degradation from the above and below (Rao,
1995b).
If local development effort under the cloak of state direction and external
protection is riven with conflict, the process of liberalization and globalization
can hardly be otherwise. Attempts at liberalizing domestic economies and
integrating with world markets impose costs on some groups while benefiting
others; hence they pose political problems. In many countries, political resistance
to integration has been overcome only because of political and economic
pressure from the outside.
Structural adjustment with proliferating
conditionalities (trade and financial liberalization, devaluation, deregulation,
privatization and cuts in public investment and social sector outlays) has sought
to reduce national autonomy. Nevertheless, market-oriented reforms have
remained incomplete in many cases because they face inherent economic
barriers or because the transition has run into rough weather. More to the
point, global integration is apt to be stymied or reversed by national political
projects. In Sub-Saharan African countries, for example, which have had to
bear the brunt of structural adjustment programmes, a reviving civil society
is making demands for new forms of local, national and continental selfreliance (Shaw and Inegbedion, 1994).
5.2 The Struggle over Standards
The drive for competitiveness in a globalized economy has heightened
international conflict over standards in such areas as labor relations and the
workplace, the relations between trans-national corporations and nations and
environmental impacts. Tensions have emerged between globalized capital
and national interests. Concern about fraud in global securities markets, the
security of banks, the unruliness of exchange markets, the lack of standards
in telecommunications, safety, health and environment has grown apace. Some
______
21
of these areas are clearly beyond the control of individual nation-states;
attempts at control can only damage whatever benefits they may derive from
the operation of the relevant enterprises or resource flows. In regard to trans
national enterprises, even the assignment of profits to subsidiaries or other
nodes in their international networks, is resolved internally and must therefore
reflect the powers and interests of their managers, an arbitrary element that
has significant implications for taxation and other policies (Vernon, 1993).
Competition for foreign capital in the form of lowered tax rates and other
forms of fiscal concessions must follow with particularly adverse effects in
the South.
In the North, where intra-industry trade among similar countries predominates,
low-wage competition from the South remains a serious and growing threat
to aggregate employment if not to competitiveness in the lead sectors or to
overall productivity growth. Political repression in the NICs has served to
maintain wage growth
below productivity growth, and
low workplace
standards. The relocation of labor-intensive processes has been a factor in
widening income inequalities and in the growing assault on the Keynesian
welfare state in the North. Competition in labor standards (including wages)
may also help undermine cooperation between workers and employers: the
short-term gains secured will erode the “negotiated involvement” that alone
can secure durable productivity-based gains (Lipietz, 1995).
The development of the maquiladora zone of export-oriented industries on
the US-Mexico border though fueled above all by low wages in Mexico has
also benefited from the “neglect of corporate social obligations” in the form
of tax concessions (which undermine the provision of public goods), dangerous
working conditions, the use ofchild labor and the degradation ofthe surrounding
environment (Greider, 1993: p. 325). Wages in the North have fallen due
to the decline of well-paid industrial jobs; in Mexico, because of the inability
of public action to maintain minimum wages and other conditions of work
under the twin pressures of repaying global debts and reducing domestic fiscal
deficits.
22
Conflicts over labor and environment standards have centered on the North-
South divide. In regard to the environment, the South has asserted the following
principles: (1) pollution sinks to be assigned taking into account past emissions:
full rather than marginal pro rata shares requires major reductions in the North
only; (2) national autonomy to exploit natural resources unless financially
compensated; (3) compensations and subsidies to be controlled by full
representation of the South nations (Glover, 1994). In recent years, TradeRestricting Environmental Measures have grown to include eco-labeling, bans
on the use of tropical timber in municipal construction (in Germany) and the
like. The inclusion of environmental issues in the agenda of the World Trade
Organization (WTO) “ despite the near unanimous opinion among environmental
groups that liberalization of global
trade would itself be ecologically
damaging” is seen as a generalization of the present misuse of such issues
to protect the trade interests of the industrialized nations (Sahai, 1995).
Environmental standards maybe enforced internationally through trade measures
for example; but besides requiring micro-management ofthe particular standards
concerned, such measures impose enormous monitoring costs in developing
countries where producers (leather tanneries or peasants or small manufacturers)
are numerous and dispersed.
The linking of labor standards, as defined by the ILO conventions, with
international trade was unanimously rejected by developing countries in early
1995. Following this rejection, the WTO has decided to temporarily delink
the social clause from trade.
The ILO conventions include freedom of
association, right to organize and bargain collectively, prohibition of child
labor, non-discrimination in employment, equal pay for men and women and
freedom from forced labor. Although most developing country states have
endorsed these conventions, they are far from implementing and enforcing
them. Many countries, including some in the North, have also rejected the
new proposed convention regarding home-based workers (Bhowmik, 1995).
H%s
23
At least prima facie, the international conflict over standards is not over markets
but over the social and external effects of production arrangements, not about
market ends (the volume and value of goods produced and sold through freely
entered contracts) but about social ends (enforced through the collective
regulation of such contracts). What the market treats purely as means, society
sometimes chooses to treat as ends. The social embedding of markets within
a national context involves state or other collective action to enact norms or
standards for regulating markets. Absent the wherewithal for similar action
in a globalized economy, the increasing mobility of capital is capable of driving
out socially acceptable standards by the sole criterion of cost advantage; or
rather, standards are reduced to the internationally lowest common denominator
by that criterion. This is effected through the actual or threatened relocation
of production: thus, either capital will move to where costs (including those
pertaining to local standards) are lowest or national standards are lowered to
sustain competitiveness .
However, given income and production asymmetries among nations, this Law
of the Lowest Common Standards, is apt to have asymmetric effects between
rich and poor nations and to be politically resisted. Indeed, if prices of goods
and factors actually converge, then, it might be argued that standards would
regress not to the minimum across nations but to the mean unless social
preferences regarding standards vary across nations even with identical material
living standards. But while the competition in standards is itself a force for
convergence (after all, the poor nations cannot catch up overnight through
learning and productivity improvements but they can certainly seek to catch
up through lowered standards), it is probably considerably weaker than the
forces of localization and divergence discussed in section 3. A divergence
in standards is therefore to be expected.
This is not to say that the competition in standards will have no effects; nor
to say that it will not be resisted in other ways. With their higher incomes
and generally higher standards Northern nations will seek to maintain their
social and environmental standards without losing competitiveness by (a)
24
specializing in industries where those standards are a smaller element in
competitiveness; (b) accepting lower incomes or employment levels ; and (c)
pushing for internationally regulated standards closer to their own levels. They
may also lower their standards of course. It does not follow, however, that
the responses in the South will be the exact opposite of these Northern
responses. To be sure, economic diversification in the South will be facilitated
by maintaining low standards or lowering them further and thus serve to raise
incomes and employment. Internationally imposed improvements in standards
will also be resisted. But social and political counter-resistance to such actions
has also gathered pace in the South.
Conflict over international standards is not alleviated by the suspicion and
mistrust generated by competition in global markets. Empirically, it is difficult
to draw a line of distinction between a Northern concern for Southern workers’
rights or for environmental quality from disguised mercantilism (the erection
of
subtle non-tariff barriers including
imposed standards
to weaken
competition from the South). Politically, structural adjustment programmes
that have elevated openness in trade and finance virtually to the position of
an all-consuming end have strengthened export interests which, together with
the calls for state minimalism, are important factors opposing the indigenous
demands for enforcing standards within the South3.
5.3 Development Choices
Though the world economy provides valuable opportunities for economic
development in the South, poor nations cannot realize their full development
potential by giving free rein to internal and external markets. Productivity
growth based on increasing returns and external economies is, for the most
part, a local process. Exploiting this potential requires extending the domestic
3 The defense of “cultural” specificity has, in this context, served as a new subterfuge for the
violation of human rights or workers’ rights while the long-established double standards in
applying rights clauses or boycotts continue.
__ ifVqS
25
market through public investments in infrastructure, modernizing state
institutions, developing human resources and creating incentives for workers,
enterprises and public institutions to cooperate in a process of learning and
adaptation to imported technologies.
Internal markets do not provide an adequate mechanism of coordination and
incentives to effect these tasks. Market failures arising from wealth-related
inequalities, externalities, information asymmetries and the paucity of
infrastructure have to be remedied through an appropriate choice of policy
interventions in markets, institutional design and direct public action.
Opening up the economy to external market forces is not the optimal route
to promoting local development processes as this will not remedy the
aforementioned internal market failures but, on the contrary, jeopardize the
policy, institutional and direct actions required. Nor is unrestrained globalization
the avenue for making the best use of global market opportunities. Global
markets remain fragmented with their weakest links being in the South.
Attempts to freely integrate weak local economies with the global economy
will increase their internal dis-integration and external fragility.
Openness
also detracts from the ability of states to pursue locally appropriate policies
for equity, poverty alleviation and conflict resolution. National autonomy is
functional in the South for both productive and distributive purposes. In purely
economic terms, therefore, the projects of national integration and national
development must, as in the past, continue to
precede the
project of
globalization.
The quality of public interventions and participation is fundamental to the
realization of any of these possibilities. But these depend on the political
compromises, consensus or conflicts that a society inherits or has to contend
with i.e., on the structure of interests. While a society may not be ‘free’ to
choose the sort of state or other public institutions it will have, the desiderata
of good politics (in effect of valuable structures) seem quite clear. A basic
requirement for an inclusive and participative regime of development is
26
democracy. But formal democracy is insufficient. The biased representation
of interests and implementation of policies that must inhere in unequal societies
with both political and economic power heavily concentrated cannot be
remedied by voting alone.
A broadly egalitarian distribution of wealth,
effective decentralization of public (including state) decisions and their
implementation, and agile mechanisms for the accountability of such
concentrations of public and private control as remain provide the most
complete set of sufficient conditions for human development4.
In most poor countries, stepping up domestic capital accumulation is a key
priority. However, this is not just a matter oftapping sources of saving sources;
the inducement to invest may be held back through a lack of factors
complementary to directly productive capital or access to finance or insufficient
demand. Both structural factors and desirable policies (as discussed below)
render investment dependent on the strength of the home market. For the
modem industrial sector, the strength of demand from the rural hinterland
(typically infrastructure-limited) and informal sectors (typically finance-
constrained) is often more important than demand from its own incomes.
Hence, public investment in supply-constrained sectors and channeling credit
to finance-constrained sectors can relieve both supply and demand bottlenecks
simultaneously and boost industrial investment and growth (Rao, 1993 and
1995c)5.
This said, it is still necessary to know the conditions of saving supply and
the mechanisms of its allocation. Is financial liberalization likely to promote
4 This is nett to say that authoritarian alternatives are non-existent. Indeed, authoritarian but
inclusive regimes appear to provide the most successful instances of late industrialization.
But inclusiveness is rare indeed under modem authoritarianism. By contrast, democratic
polities seem to have a better chance of achieving a broad-based economic regime. At
any rate, viewing regime types merely as alternative means for arbitrarily defined ends such
as ‘ industrial competitiveness’ is unwarranted.
3 The view of wages solely as an element of cost and the neglect of the rural-urban demand
nexus is only encouraged by the obsession with competitiveness in a ‘globalized’ setting
often taken to mean perfectly elastic global demands.
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27
saving and improve investment quality? Is financial openness desirable to
increase financing for investment? Following the discussion in section 4.2,
financial openness (for which internal liberalization is necessary) promises
little benefit and potentially large losses in terms of both development and
autonomy. Given market fragmentation, there is no assurance that openness
will deliver either more finance or more financial stability.
Countries that
have good policies and, more important, good performance are rewarded by
the international capital markets; those that do not are not. FDI flows largely
to LDCs which have high rates of domestic saving anyway. The mere removal
of barriers to its flow does not appear to make much difference to the rather
perverse pattern of global flows. That is, foreign finance follows development.
The fast-growing developing economies all managed to achieve high rates
of domestic saving and investment without notably liberalizing or opening
up their financial systems.
Nor will openness ensure that local priorities are met. Absent fiscal constraints,
globalization need not imperil local development, equitable distribution or
macroeconomic stability. Yet, fiscal capacity tends to be inherently weak
relative to the demands placed upon it. This forces a heavy reliance on proxies
for strong fiscal policies which directly conflict with globalization. So long
as the fiscal take remains inadequate to meet development priorities, the trade
balance is fragile owing to volatile export earnings and inelastic import
requirements, and the means to ensure price stability limited to monetary
controls, capital controls must remain in place. Fiscal weakness is rooted
in the political and economic structures of these economies while development
demands go unmet by fractured financial markets. Besides a bureaucracy
of high levels of competence and honesty, strong public finances will require
structural reforms or already high levels of income (or both). Reducing trade
vulnerability requires an adequate industrial or other non-traditional export
base which cannot be established unless the country has already reached a
threshold level of development. But if the state is deficit-prone, domestic
financial regulation (or ‘repression’) becomes essential for inflation to be
28
tolerable. At the same time, without the resolution of the deep-seated
development constraints, low-income economies in the South can scarcely
afford to weather the storms that capital account liberalization must inevitably
produce. Indeed, without steady and stable development of the home market,
periodic capital flight cannot be stemmed. Contrary therefore to the neo-liberal
mantras of liberalization and globalization, repression and capital controls
become mutually supportive. A financial ‘playing field’ that is level is not
the basis but the result of development success. None of this is an argument
for relaxing fiscal effort. Indeed, the best policy for the private financial system
is high fiscal effort which will also permit borrowing from abroad to finance
the ‘life-cycle bulge’ of public investment.
Apart from the macroeconomic framework, selective credit policies can serve
as a powerful device to correct for specific market failures and for strategic
direction of development. Deregulation, in the orthodox view, is aimed at
widening access to finance throughout the economy, increasing the competition
for finance and promoting efficient intermediation and greater capital mobility.
Wider access to finance is predicted to have a major impact on the capital
intensity of development by permitting labor-intensive but capital-starved
firms, that have hitherto been excluded from the formal financial system, to
grow rapidly. But unequal access to finance is not an artefact of regulatory
constraints alone. The segmentation and fragmentation of financial markets
are largely the product of technological and organizational differentiation of
enterprises and sectors typical of late industrialization, and exacerbated by
inequalities of wealth (Rao, 1995a). Liberalization, under the circumstances,
may well contribute to further deepening of unequal access by pulling even
more resources into the formal financial and real sectors6.
6 Deregulation also risks diverting resources to unproductive and speculative uses. Strict
restraints on funds allocation, over and above those required for maintaining prudential norms,
are required to hold this tendency in check.
29
The mobilization of a rural surplus for investment and the expansion of the
rural market, characteristic of the early stages of East Asian development,
require reorganization and restructuring of the agrarian economy. Apart from
land reform (giving the land to the tiller), local cooperative institutions to
create and manage productive infrastructure, supply credit, purchase inputs
and market outputs will facilitate rural productivity increases. The relationship
between town and country must be viewed in dynamic terms-ensuring that
agriculture is not squeezed to the point that it stagnates is critical for generating
dynamic growth of both internal savings and of the home market.
Financing local public investment can also be efficiently arranged by impositions
on tradable goods particularly when user charges are either difficult to collect
or will cripple demand for externality-producing services. Liberalizing food
prices can be costly in distributive and productive terms. A crucial component
of food security especially in a fiscal context of declining food subsidies is
keeping the price of foodgrains low. This, however, is not incompatible with
sustaining incentives for farmers. But the latter is ensured not by a high output
price but by cost-reducing, yield-raising technologies that enable farmers to
improve their income terms of trade along with a reduction in real food prices.
In other words, a double distortion of prices with input subsidies on the one
hand and low output prices on the other.
Economic development hinges crucially on improving the utilization
of
resources that are accumulated and allocated. Apart from dynamic external
economies, productivity growth under late industrialization accrues largely
from improved learning and scale economies. In other words, growth involves
moving from low levels of utilization of mostly purchased technologies to
high levels rather than developing new technologies or new products. The
exploitation of this potential is by no means automatically assured by
accumulation and allocation. Nor is it simply the product of coordination
by domestic and external market signals. East Asian success, for example,
came from the combination of (1) an interventionist state which frequently
got the prices wrong and intervened heavily in resource allocation but disciplined
30
enterprises to move continuously up the learning curve; and (2) technologically
diversified conglomerate-type of industrial enterprise (Amsden, Kochanowicz
and Taylor, 1994). Failures in this respect account for the slow advance of
productivity in many less developed countries despite the mobilization of
capital and foreign technologies.
Cooperation in production is crucial to effective resource utilization. The
learning and adaptation process is a social one which is not promoted by state
repression oflabor, managerial authoritarianism within the enterprise or conflict-
prone industrial relations at the firm or industry levels. A contented and secure
workforce and cumulative productivity growth are not mutually antithetical:
as argued in section 4.1, learning ‘embodied’ in labor is a central instance of
localized development. Nor are they inherently incompatible with enterprises’
ability to respond quickly and flexibly to market changes. In the dynamic sectors
of industry with a few large firms in each industry, indeed with large industrial
combines ofthe East Asian type, and relatively secure product markets, “flexible
rigidities” combining job security and dynamically responsive production
systems promote growth while rapid growth facilitates rent-sharing between
firms and their workers. Job security appears as an obstacle to efficiency most
when firms are atomized, labor regime norms - whether spontaneous or legally
enforced - are suppressed and the employment relationship becomes a pure
commodity transaction.
Unfortunately, the rhetoric of liberalization limits labor regime restructuring
to the demand for a submissive and easily dispensable workforce without the
protection of legislation or collective action and subject to the arbitrary rule
of management prerogatives.
‘Flexibility’ in this sense may provide short
term gains but, by sacrificing job security and commitment within enterprises,
it erodes the gains that come from learning.
Unbridled competition from
external trade is liable to disrupt industrial relations with damaging effects
on utilization.
£)E'MOo
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31
Labor regime also affect economic performance through their impact on the
relative importance of the formal and informal sectors of production7. The
persistence of dualism and the widely prevalent employment lag in the formal
sector are both related to the trajectory of late industrialization, caught between
competition based on cheap labor from the informal sector on the one hand
and a tenacious technology and utilization lag in relation to industrialized
countries on the other. By and large, the scope for productivity growth is
significantly more limited within the informal sector than in the formal sector.
The implementation of minimum wage laws and of the ILO’s labor conventions
in the formal and informal sectors is necessary not merely to improve worker
well-being and prevent exploitation but also to ensure that the learning process
is promoted. Tighter implementation of labor standards obliges firms not to
take the path of ‘flexibility’ and cheap labor and hence permits the formal
sector to expand at the expense of the informal8. An essentially unregulated
labor market, to the extent that any real world labor market approximates this
liberal ideal, also exerts a powerful downward pressure on wages, demand
and hence accumulation.
Whereas the search for alternative paradigms of work and industrial organization
in industrialized countries is driven by the saturation of growth potential of
the Fordist model, in poor countries it is not the exhaustion of the Fordist
potentials but their frustration that appears to have held back growth. Market
liberalization does little to address this frustration. At best, it increases the
scope for changing the mix between Fordist mass production on the one hand
and, on the other, informal and small-scale modes thriving on cheap labor.
There is need and scope for shaping new labor relations and work organization
that maximize utilization. Apart from persisting with the Fordist or Taylorist
model of mass production, new organizations based on the development of
7 This argument is developed for the Indian case in Rao (1995d)
8 For example, legal labor standards are similar in both Costa Rica and the Dominican Republic
while implementation is effective in the former and lax in the latter. Yet, the informal sector is
significantly smaller and overall economic performance better in Costa Rica than in the
Dominican Republic.
32
cooperative networks of small enterprises in ‘industrial districts’ would enable
developing countries to combine a high employment with productivity growth
(Rao, 1995a).
The orthodox theoretical arguments for the static gains from the trade and
non-interventionism, as pointed out in section 3.2, can hardly support the
fundamentalist position for trade liberalization. The evidence linking openness
with dynamic gains is also heavily disputed. Apart form the usual benefit
of allocative efficiency, export orientation is alleged to be decisively more
advantageous than import substitution in capturing learning and external
economies. But empirical attempts to verify ‘externality’ benefits from exports
have been mostly unsuccessful.
The putative gains from improved resource allocation boil down in practice
to the advantage of specialization based on cheap labor. While liberalization
in a low-wage economy may allow a nation temporary advantage in gaining
entry into tight export markets, such a policy cannot secure dynamic gains
in productivity, especially in high-value-added products. There is little reason
to believe that the industries or enterprises that have the most learning potential
will also be the ones that a liberalized trade regime will favor; that, in other
words, competitive and comparative advantage will coincide. The concentration
of non-traditional exports in a few Southern countries despite their relatively
higher wages than other less-developed countries is not explained just by
specialization in labor-intensive industries with mature technologies It is
explained instead by their success in achieving high utilization through learning
both in production and in market penetration efforts.
Foreign trade presents opportunities as well as constraints for steady growth.
Foreign exchange bottlenecks hurt both resource accumulation and utilization.
Avoiding these ought to be a primary aim of trade and macro policy. In small
countries, scale economies in operating many modem industries coupled with
the limited size of the home markets favor an early push into export growth.
w
33
But such economies warrant openness or export orientation only if they are
specific to industries rather than to the whole economy. In fact, selectivity
and protection may both be required to capture such economies even when
they are industry-specific: the one to ensure that resources are not spread too
thinly and the other to provide the initial market to develop the growth
momentum.
The value of avoiding foreign exchange constraints and the opportunities of
export orientation also justify intra-South trade on a preferential basis. ‘Global
import substitution’ within the South is beneficial just as intra-North intra
industry trade is, though the source of the benefit is not the same. Generalized
overvaluation in developing countries together, with intra-South preferences
is a strategy for diversification away from traditional goods while rationing
foreign exchange for the import of capital goods for industrialization. It will
also help improve the terms of trade for LDCs.
While autonomous development in Southern countries, both severally and
jointly, remains valuable, the need for collective action for Southern interests
in particular and for the joint interests of all nations has grown in a globalizing
world. Globalization has increased the scope for damaging forms ofcompetition
which also circumscribe autonomy. A South-oriented “working international
order” must fulfill four key functions: (1) a center that generates balance of
payments surpluses to sustain deficits in the periphery; (2) financial institutions
that can convert surpluses into loans and investments and the center as a lender
of last resort; (3) the development of industrial and technological capacity
to produce capital and intermediate goods for industrialization; and (4) strong
military power to enforce contracts and keep the peace (Streeten, 1995). In
a multi-polar world, these conditions are best secured in a pluralistic rather
than a hegemonistic framework to avoid the undersupply ofglobal public goods
(financial stability for example) and the oversupply of global public bads
(competitive lowering of social and environmental standards for instance).
As much as the nation state is a critical element for industrial growth and
34
human development in the third world, unabridged sovereignty, North and
South, has nonetheless become an obstacle to a better world.
* ♦ * * *
J. Mohan Rao is Professor of Economics at the University of Massachusetts
at Amherst, USA. He is also on the Board of Directors of World Development,
35
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World: An Essay on the International Dimensions ofDevelopment in the Post
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Guhan, S. (1995). Poverty and Social Security. In S. Raghuram, H. Sievers
and V.Vyasulu (eds.). Structural Adjustment: Environment, Economy and
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In W. J. Baumol, R.R. Nelson and E.N. Wolff(eds.). International Convergence
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First Century. In Juliet Schor and Jong-Il You (eds.). Capital, the State and
Labour: A Global Perspective. Aidershot: Edward Elgar and United Nations
University Press.
McDowell, S.D. (1994). India, the LCDs, and GATT Negotiations on Trade
and Investment in Services. InR. Stubbs and G.R.D. Underhill (eds.). Political
Economy and the Changing Global Order. New York: St. Martin’s Press.
Rao, J. Mohan (1993).
Distribution and Growth with an Infrastructure
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Countries. Geneva: International Labour Office. Employment Paper No.l.
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Weekly. Vol. XXX, April 1: 677-686.
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Rao, J. Mohan (1995c). Financial Liberalization, Capital Rationing and the
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(eds.). Macroeconomic Policy after the Conservative Era: Studies in Investment,
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Rao, J. Mohan (1995d). Capital, Labour and the Indian State. In Juliet Schor
and Jong-Il You (eds.). Capital, the State and Labour: A Global Perspective.
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Sahai,Suman (1995). Appropriating Environmental Concerns. Economic and
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Schwartz, Hermann M. (1994). States versus Markets: History, Geography
and the Development of the International Political Economy. New York: St.
Martin’s Press.
Shaw, T.M. and E. J. Inegbedion (1994). The Marginalization of Africa in
the New World (Dis) Order. In R. Stubbs and G.R.D. Underhill (eds.). Political
Economy and the Changing Global Order. New York: St. Martin’s Press.
Streeten, Paul (1995). Global Institutions for an Interdependent World. In
Thinking About Development, Cambridge: Cambridge University Press.
Vernon, Raymond (1993).
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L. Eden and E. Potter (eds.). Multinationals in the Global Political Economy.
New York: St. Martin’s Press.
38
Hivos Regional Office Bangalore : list of available
Hivos publications
1.
Hivos Regional Office Annual Report 1992, 1993, 1994, 1995.
2.
Technical Report Series 1.1, AIDS: Impact and Intervention, Editors:
Rajendra Nathan, Joy D’Souza and Shobha Raghuram, 1992.
3
T echnical Report Series 1.2, Development Policies: Issues and Challenges
for the ‘90’s, Editor: Shobha Raghuram, 1992.
4.
A Reference Manual Management and Accounting Systems in the
Voluntary Sector, Editor: Sangeetha, 1992.
5.
Technical Report S eries 1.3, Future ofthe Co-operatives in India, Editor:
Reena Fernandes, 1993.
6.
Proceedings of a Consultation Gender and Development Women in
India:Reflecting on our History Shaping our Future, Editor: Jamuna
Ramakrishna, 1993.
7.
Savings and Credit Systems of the Poor Some Non-Governmental
Organization (NGO) Experiences, Editor: D. Rajasekhar, 1994, A Hivos
- Novib Publication
8.
Structural Adjustment: Economy, Environment and Social Security,
Editors: Shobha Raghuram, Heiko Seivers and Vinod Vyasulu, Macmillan,
New Delhi, 1995.
9.
Technical Report Series 1.4, Rethinking Population, Jointly organized
by Hivos Regional Office South Asia, Bangalore, Co-ordination Unit,
Bangalore and the Center for Reproductive Law and Policy, New York,
Editors: Shobha Raghuram, Anika Rahman, 1996.
10. Leela Gulati, R. Ramalingam, Poverty and Deprivation: Some Inter-State
Comparisons, A Hivos Monograph, 1996.
11. J. Mohan Rao, Local Development in a Globalizing World, A Hivos
Monograph, 1996.
W
39
Forthcoming Publications:
12. Technical Report Series 1.5, Voluntary Organisations and Good
Governance: Formation, Resource Mobilization, Accounting and
Management, Editor: Sangeetha, 1996.
13. Technical Report Series 1.6, Recasting HFV/AIDS as a Development
Issue: Of Rights and Resistance, 1996.
14. Technical Report Series 1.7, Livelihood Strategies of the Rural Poor
and the Environment Challenges Ahead, A Joint Initiative of Hivos
and AME.
These publications are for internal circulation.
The Editor
40
Hivos
Hivos, the Humanistic Institute for Co-operation with Developing Countries, is
a development agency established in 1968 by representatives of the Humanist
movement in The Netherlands. Hivos is inspired by the humanist, secular
outlook. Hivos co-operates with Non-Governmental Organisations (NGOs)
and social organisations in the South. It supports organisations that enable
marginalised people to assert their rights and improve their access to decision
making.
In its policy Hivos gives priority to the following five special themes: economic
self-reliance, culture and the arts, gender, women in development, environment
and development, human rights and HIV/AIDS. For the first two sectors
separate funds have been set up, viz., the Hivos Triodos Fund and the Hivos
Culture Fund.
In order to have an impact, Hivos wishes to focus its funding efforts. One way
in which this is done is by limiting the geographic area in which Hivos works.
In 1995, Hivos provided supportto 550 organisations in 29 countries concentrated
in Southern and East Africa, Central America, the Andes, and Asia. In Asia,
Hivos concentrates its efforts in India, Sri Lanka, Indonesia, Malaysia and the
Central Asian Republics of the former Soviet Union. India is the largest country
programme in Asia. Hivos supports organisations in the following states: Tamil
Nadu, Karnataka, Andhra Pradesh, Orissa, Gujarat, Goa, Maharashtra, Rajasthan
and New Delhi.
As one of the four Dutch co-financing agencies, Hivos receives a large part of
its funds from the co-financing budget line of the Ministry for Development Co
operation. Hivos’s total expenditures for 1995 amounted to
Dfl.61.2 m, ofwhichDfl.48.7 m, consisted of co-financing funds. Other funding
sources were the European Union, Dfl.1.7 m, the additional project-based
funding from the Dutch government, Dfl.7.6 m, and private donations, Dfl. 3.2
m. The value of the loans portfolio of Hivos and the Hivos Triodos Fund
amounted to Dfl. 6.7 m, on 31 December, 1995.
Vo$
41
"The quality ofpublic interventions and participation is fundamental to the
realization of any of these possibilities. But these depend on the political
compromises, consensus or conflicts that a society inherits or has to contend
with i.e., on the structure of interests. While a society may not be 'free' to
choose the sort of state or other public institutions it will have, the desiderata
of good politics (in effect of valuable structures) seem quite clear. A basic
requirement for an inclusive and participative regime of development is
democracy. But formal democracy is insufficient The biased representation
of interests and implementation of policies that must inhere in unequal
societies with both political and economic power heavily concentrated
cannot be remedied by voting alone. A broadly egalitarian distribution of
wealth, effective decentralization of public (including state) decisions and
their implementation, and agile mechanisms for the accountability of such
concentrations of public and private control as remain provide the
most complete set of sufficient conditions for human development".
J. Mohan Rao
&
HUMANISTIC
INSTITUTE
FOR
CO-OPERATION
WITH
DEVELOPING
COUNTRIES,
NETHERLANDS
INDIA REGIONAL OFFICE : FLAT NO 402, EDEN PARK, NO. 20, VITTAL MALLYA ROAD, BANGALORE-560 001
TEL : 2270367, 2210514, TELEX : 0845-8955 PABS IN ATTN HIVOS, FAX : 91 80 2270367 GRAM : HIVOSRO
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