Globalization: Myth vs. Reality

by Ramesh Diwan
Professor of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180

There is, these days, an euphoria in the international business community about a new phenomena euphemistically called "globalization." Globalization has become a buzz word. It is a popular term in the lexicon of bureaucrats, consultants, journalists and policy analysts; only a few years back it could not be found in a respectable English dictionary. Like other similar buzz words, such as sustainable development, it is rarely defined but used to promote arguments favoring business interests. It has acquired both a legitimacy and an aura of "sacred", "goodness", "desirability" etc.; such is the power of subtle propaganda. Unpopular, even flawed, business policies are justified by it, and in its name; e.g. income inequality, large scale firings, low wages. It arrived in India as a bolster , and through the backdoor, of "economic reforms." For the Indian ruling elite, already mesmerized by the superiority and glitter of West, it had all the trappings of a "white angel." The sanctity of economic reforms has been derived from it. The argument is couched in the following two propositions:

  1. Progress is taking place through globalization.

  2. Economic reforms are the only means to join in this process.

Hence, it follows that economic reforms are necessary, and the only, alternative for India's future. Unfortunately for the masses and India, both these propositions are flawed, inaccurate and illusive. That globalization is a road to progress, or prosperity, is, in fact, preposterous. Let us look at "globalization." Globalization refers to a phenomenon that involves, basically, a fast international spread, over the past decade, of two entirely different entities: (i) finance capital through multinational corporations, and (ii) new technologies such as computers and telecommunications.

The spread of finance capital is old. The new part of the phenomenon is the spread of new technologies. The Western scientific tradition and rational thought has created, and maintained, the prejudice that technology, whatever it is, is a good thing because it has been repeatedly asserted to be the only source of growth and therefore progress.

The spread of new technologies therefore is "good" and "desirable'; answer to a question like, good for whom, is generally left for footnotes or somewhere in the inside pages. The question arises: what is the relationship between these two entities? The only common thing among these two entities is that both of them have grown internationally, and at a fast rate, over the same period. Such commonalty suggests a positive correlation. Any beginning student of statistics will recognize that such correlation is spurious; i.e. it is apparent and not real. However, the "bought priesthood" of experts and journalists in the media, from the countries where multinationals reside, has taken this spurious correlation at its face value and created a false impression that there is a positive relationship between the two entities. They have taken an additional, scientifically unwarranted, step and asserted that the finance capital is necessary for the internationalization of technology. Repeating it ad infinitum they have given this assertion the advantage of familiarity. This subterfuge has helped the virtual manufacture of proposition 1.

This perception and false impression has a desirable effect. It has rubbed some of the glitter and sanctity of new technology on finance capital. One can now make a reasonable argument that the growth, and internationalization, of finance capital is "good" and "desirable" for progress because it promotes growth of technology. This is the myth. Reality is different.

Let us now look at the reality. The facts are quite the opposite. There has been a continuous growth, and internationalization, in finance capital. During 1980 -1992, the annual growth rate of financial assets among the OECD countries outpaced the growth rate of their real economies by more than two-to-one. The total stock of world's financial assets reached $35 trillion in 1992 and have been growing further.

The transactions in the foreign exchange in the various stock markets in the world is more than 50 times that of trade in goods and services. Finance capital is reflected in the stock market transactions. The success and growth of the finance capital is verified by the rise in the value of shares in the stock markets measured by such indices as Dow Jones.

Real economy, on the other hand, is defined generally in terms of jobs and its the success is measured in job growth. There is now irrefutable evidence that the stock market has gone up when the real economy declined suggesting that there is a negative relationship between the growth of finance capital and economic progress. This negative relation is confirmed by the evidence from the U.S. In fact the overall stock market seems to do best when economic growth is far from robust. Last year, 1994, was the market'sworst year since 1990, but it was the economy's best year, as measured by job growth. 1984 was also a poor year for the stock market, even as it was a great year for jobs and economic growth. Growth is much slower this year, stocks are up a lot more.

There are two reasons for this negative relationship between finance capital and real economy. One, is the nature of profit making in the past decade. A recent study by the {Economic Policy Institute, Washington D.C.} has concluded that increased profitability in the U.S. business firms in the 1990s is not the result of greater investment or an acceleration of productivity but has come from stagnant wages and falling wage bills. The hourly wage of the median male worker in the U.S. declined 1 percent per year from 1989 to 1994. Wages over last 6 years fell or remained stagnant for 80% of men, and 70% of women, a period when profits have been high.This phenomena is becoming worldwide. Second, finance capital is also a source of increased income and wealth inequalities. As finance capital has grown, so have the income inequalities. According to UNDP's Human Development Report 1994, the richest 20 percent of the world's population had an average income 32 times that of the poorest 20 percent, in 1970. Two decades later, in 1991, this ratio has virtually doubled; from 32 to 61. While the poorest 20 percent received 2.3 percent of the world income in 1970, twenty one years later this share fell down to 1.4 percent.

One can observe in the U.S. these days growing attendance in soup kitchens, homelessness and income inequalities. This is happening in other advanced countries as well.The negative relationship between finance capital and real economy is not particular to the U.S. It is valid internationally. As the finance capital has grown, the international economy has stagnated. The impact of this part of the globalization phenomena is to spread stagnation. This is part of the international reality. There has been for quite some time, and still is, a serious stagnation in the international economy. World Development Report 1992 [table 1, p.219] gives the annual average per cent growth rate of GDP per capita for the world for 1965 - 90 as 1.5.; a rate which for the period 1980 - 92 is reported as 1.2 in { World Development Report 1994 }[table 1, p.163]; a pretty large decline. These numbers suggest that the growth rate in 1980s has been rather low when both new technology and finance capital have been growing. Internationalization of new technology is a response to this stagnation. It is not a source of growth in the international economy.

The reality then is that far from a path to prosperity, globalization is undermining the growth potential of the international economy. Globalization is setting the stage for a serious deterioration in the international economy and the probability of a great depression in the not too distant future is by no means low. If globalization is suspect and economic reforms depends on it for success, some policies for economic reform are misguided.

I have dealt with the fallacy of economic reforms at length elsewhere. The Enron case is perhaps the best example both of globalization and fallacious reasoning. It was basically a move of the finance capital promoted through its association with technology. It made an excellent myth. Once opened to scrutiny, the myth evaporated and the reality became obvious. One can not help but admire the new Mahrashtrian government; for both integrity when it could have been a beneficiary of "education" and, courage to withstand the wrath of international myth makers.

It is not accidental that the large part of the Indian population has rejected the governments promoting such reforms. People at large have wisdom. They can, and do, distinguish between myth and reality. They yearn for an alternative based on reality and not a myth. Gandhian ideas of swadeshi provide such an alternative: that is integrative not divisive, where there is personal integrity, quality of character and commitment to public good instead of corruption; that exalts, strengthens and stabilizes and not destroys, family and neighborhood, mohalla, and village.