Is globalization going to be unravelled?


Globalization is getting very bad press in industrialized countries. From being touted aggressively only 10 years ago as a “win-win” development for all, it is now blamed for these economies’ ills.

Does globalization have a future?

Globalization is not dead but it does seem headed for a reset. It was all about freer movement of capital, people and trade. The movement of private capital continues much as before with two qualifications.

  1. First, worries about global financial stability are pervasive.
  2. Second, traditional multilateral development banks such as the World Bank and the Asian Development Bank (ADB) enjoy little support. 

Other Aspects of Globalization:

  • The movement of people, an important aspect of globalization, was never free, except for the highly educated. Even that is now being restricted.
  • The US administration is restricting H-1B visas, turning back Mexican migrants, and making work visas for foreign students more difficult. None of this violates any treaty.
  • Brexit is an example of repudiating a treaty in order to restrict European immigration.
  • There is opposition to non-European immigration in many European countries.

Trade Barrier:

  • Trade is the area most governed by treaty obligations, and there is clear evidence of regression in this area. Many countries introduced protectionist measures after the 2008 financial crisis. These covered only 3% of global trade at the time and it was thought they would be eliminated as the situation normalized.
  • Instead, the coverage has increased to 5%. The US, once the flagbearer of trade liberalization, is withdrawing from trade agreements agreed earlier such as Trans-Pacific Partnership, North American Free Trade Agreement, and the free trade agreement with South Korea.
  • Its commitment to the multilateral trading system is also in question as it has yet to appoint an ambassador to the World Trade Organization (WTO).
  • It has also not approved replacements to vacant positions in the WTO Dispute Settlement Body, which is one of the most important operational arms of the WTO.

What should we do?

  • The anti-globalization backlash in the West must not be allowed to swamp the recognition that globalization has been good for developing countries.
  • These countries have grown faster than the industrialized countries, and increased their share in global gross domestic product (GDP).
  • That is precisely what inclusive globalization should have delivered.
  • The big gainers have been Asian countries, led by China, but India is also in this group. The end result has been a huge reduction in global poverty, and a reduction in inter-country inequality, even if inequality within countries has increased.
  • In other words, globalization has made the world more inclusive.
  • We should therefore push to build support for a new inclusive “Globalization 2.0” which addresses the problems without throwing the baby out with the bathwater. 

Successes of globalization:

  • One of the successes of globalization is that private sector flows in the form of foreign direct investment (FDI) and foreign institutional investor (FII) flows have become much more important than flows from the World Bank Group and the ADB.
  • Industrialized countries interpret this to mean that countries like India no longer need the World Bank/ADB. This is incorrect. There is a case for giving these institutions a new mandate: helping achieve the infrastructure needs of economies like India which have just entered the bottom of the middle-income category.
  • The ADB has recently estimated that India needs to spend $4.4 trillion on infrastructure from now to 2030. With the present annual level being $120 billion, this implies a huge increase in infrastructure investment over the next decade and more. This is only possible if we can attract private investment into infrastructure development through some form of private public partnership (PPP).

Maintaining an open trade policy:

  • We need to remain committed to maintaining an open trade policy and not be distracted by the noise about increased protectionism in the West.
  • It is unlikely that we will be subjected to significant protectionist action. We are located in a part of the world that is expected to grow the fastest, and enjoy the fastest growth of trade, and there is no rising tide of protectionism here.
  • On the contrary, there is a strong push for integration in the form of the Regional Comprehensive Economic Partnership (RCEP) agreement between the Association of Southeast Asian Nations (Asean) and its six partners (Japan, Korea, India, China, Australia and New Zealand).
  • We have traditionally viewed multilateral trade negotiations under the WTO’s auspices as the best way of liberalizing trade. This remains true, but with the Doha Round all but officially dead, we have to recognize that progress on the multilateral front is highly unlikely.
  • It is therefore particularly important to get the RCEP concluded successfully. There is a strong impression among RCEP countries that Indian industry is pressurizing the government not to come to an agreement. This needs to be countered.

Globalization 2.0:

  • Globalization 2.0 will pose new problems in trade. In future trade negotiations, industrialized countries are likely to focus less on tariff reductions and more on harmonization of standards.
  • Economic theory does not suggest that unified standards for all countries at different levels of per capita income is ideal.
  • Standards can become a new form of protectionism, since products that don’t meet the standards will be denied access to industrialized country markets. 

The Way Ahead:

  • A new twist in globalization 2.0 will be the role of industrial policy. The successful exporters of the past—Japan, Korea and China—did not simply follow a passive policy of lowering tariffs and waiting for market competition to do the rest. They followed a much more active industrial policy and it is argued that we need to learn from that experience.
  • There is a lot that government must do in terms of providing infrastructure and a supportive policy environment and we need to do much more of that.
  • However, industrial policy also means singling out firms that could be potential winners, and extending to them special favours and subsidies.
  • Given our democratic polity, and the pervasive suspicion of crony capitalism, it is doubtful whether we can do this. But there is a lot we can do proactively to do much better in a world of Globalization 2.0.



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