Mounir Zahran* finds globalisation a very mixed bag While the benefits and opportunities derived from globalisation, and the subsequent liberalisation of trade, have been repeatedly emphasised by their proponents, there has been widespread disillusionment among policy- makers and academics in the 'South' (not to mention various 'Northern' and 'Southern' NGOs) regarding the negative effects of this phenomenon. This disillusionment has manifested itself in repeated anti-globalisation protests all over the world against the activities of the World Trade Organisation (WTO), the International Monetary Fund (IMF), the World Bank and the Grouping of Eight Industrialised Nations (G8). Geneva, Seattle, Washington DC, Prague and Genoa have all seen substantial popular demonstrations in recent years. Financial liberalisation has come to be seen as a major contributory factor to financial turmoil and economic loss in several developing countries. These countries were drawn into a process of financial liberalisation, in large part due to advice given by IMF and World Bank officials on the understanding that there were substantial benefits to be gained from the opening up of their economies to inflows of international capital. However, the risks of volatility associated with short-term capital flows and financial speculation were not stressed by globalisation's advocates. In addition, many developing countries that 'opened-up' their economies failed to take precautionary measures to minimise the risks posed by volatility. The financial crises that have afflicted emerging markets from the end of the 1970s to the present day have dramatically illustrated the deficiencies of the international financial system. Mexico, Russia, Brazil, Malaysia, Indonesia, Thailand, Turkey and Argentina are just some of the victims of the negative effects of short-term capital flows. All of these countries suffered crises that were, for the most part, associated with their attempts at financial liberalisation. These crises have also highlighted the inaccuracy of the orthodox view that opening up to global finance brings benefits with few associated costs. Indeed, widespread currency speculation and capital outflows caused sharp currency depreciations, which, through contagion, spread to other countries. A depreciation in national currencies multiplied the burden of servicing foreign debt, which had been accumulated over a relatively short period by local companies and banks. Thus, when Indonesia, the Republic of Korea and Thailand ran out of foreign reserves, they were forced to approach the IMF to bail them out with massive loans. These crises, which generated widespread unemployment and inflation, also had enormous social and political repercussions. In Ecuador, Argentina and Indonesia they even caused the collapse of political systems. A Trade and Development Report (TDR) published in 1998 by the United Nations Conference on Trade and Development (UNCTAD) showed that the relatively recent East- Asian crisis was just one among many financial crises which have occurred over the past two decades. Furthermore, it stressed that these crises were triggered by the volatile nature of the global financial system since the abolition of fixed exchange rates in 1970. There is also a lack of consensus on the definition of what constitutes a financial market, who the major players in such markets are, to whom they should pay taxes, and to whom they are accountable. Hence, there is a serious deficiency in terms of the transparency, accountability, information, monitoring and regulation of financial markets. The inherent conditionality of "structural adjustment" policies that accompany IMF and World Bank loans to developing countries (particularly those to heavily indebted countries) have also been strongly criticised. Structural adjustment policies have directly caused economic problems associated with high interest rates and large budgetary cuts. Additionally, many countries following structural adjustment policies remain heavily indebted. The IMF's policy response in the direct aftermath of the East-Asian crisis of 1997 is a case in point: monetary and fiscal tightening, high interest rates, all the while maintaining or even extending capital mobility. Rather than easing the burden of refinancing on domestic firms by granting additional credit, the policy response recommended by the IMF was to raise interest rates. As with earlier financial crises in developing countries, the "Asian Crisis" was preceded by financial liberalisation and deregulation, which, in some cases, constituted a major break with past practices. When government policies fail to manage the integration of capital, there is no limit to the damage that international finance can inflict on an economy. Indeed, there is much scope for better national policies to manage international capital effectively. However, the problem remains largely systemic and, as such, requires reform at the global level, namely of the international financial architecture itself. There is also a need for careful management of foreign reserves at the national level. Foreign reserves are affected by the movement of trade in goods and services, the servicing of debts, the repatriation of profits, inflows and outflows of funds, levels of foreign direct investment (FDI) and inflows of foreign loans. On a more general level, the so-called "Asian Crisis" is just another episode in a series of crises that have been occurring with increasing frequency ever since the breakdown of the Breton Woods system of fixed exchange rates. The impact of FDI on development is primarily felt through trade, one third of which takes place within the corporate production system. The effects of trade on investment are the result of a package of assets that transnational corporations (TNCs) bring to a host country via FDI in an increasingly liberalised and globalised economy. However, the interrelationship between FDI and development goes beyond mere trade. FDI brings financial resources together with other benefits, such as technology transfers, management know-how, access to international production networks and market access. These assets can have a large positive impact on the economic growth of the host country by raising investment rates and expanding stocks of capital. In spite of this, FDI can also have a negative impact. This occurs in cases where competition is stifled, restrictive business practices (RBPs) are used or "transfer pricing" occurs. At the national level, the impact of FDI can be optimised by policies aimed at encouraging the full use of "dynamic comparative advantages" through the upgrading and strengthening of the domestic productive and technological base. In sum, the effects of FDI on development often depend on the economic conditions prevailing in recipient countries, on the investment strategies of TNCs and on the host government's policies. A healthy stock of foreign currency is also crucial for balanced economic development. In order to preserve or build up foreign reserves, a country has to take both short and long-term precautions in terms of the current and capital account, with a view to strengthening its balance of payments. First, the current account must not be allowed to run at a high deficit. Second, conditions must be created whereby the capital account is manageable, in terms of non-trade related short and long-term capital flows. However, these goals will probably be difficult to achieve given the present global financial system. In sum, the profound changes which have accompanied globalisation and financial liberalisation have made it necessary for developing countries to work together to create an international climate conducive to a more equitable global economy. One key concern is that financial crises, coupled with an overall decline in financial flows from wealthier countries, will have a negative impact on less developed countries. It is important to stress that trade is not the only engine of development, with financial flows increasingly being seen as crucial. Today, financial flows are largely in the form of FDI. However, FDI has been largely concentrated within the developed world. Instead, most developing countries rely on Official Development Assistance (ODA), which has been steadily declining. In 2001, ODA dropped to 0.22 per cent of donor country GDP, or $50 billion. This is well short of the internationally agreed target level for ODA of 0.7 per cent of GDP, or $160 billion. Although many had high expectations from the "High Level Intergovernmental Meeting of Financing for Development," held in Monterrey, Mexico in March 2002, the resulting document was a great disappointment. There were no provisions to provide the necessary financial resources, stimulate development, alleviate poverty or solve the debt problems of developing countries. Nor was there any breakthrough to reform the international financial architecture. Instead, there was an abundance of evasive and vague language and token pledges from the United States and Europe of an additional $10 billion and $15 billion respectively. Additionally, UNCTAD's 2002 TDR quoted a study by the World Bank, which estimated that the losses incurred by developing countries as a result of trade protectionism in the developed world amounts to a staggering $700 billion a year, a figure 14 times higher than the ODA they receive. One proposal that has come to merit great attention in developmental circles is the Tobin Tax. Essentially a levy on international currency transactions, a Tobin Tax could raise between $150 and $300 billion in revenues annually to finance development (foreign exchange trading was estimated to be a whopping $1.8 trillion in 1998 by the Bank of International Settlements). In comparison, the cost of wiping out extreme poverty, as estimated by the UN and World Bank in 1997, was $250 billion annually. The challenges of the present era of globalisation and financial liberalisation will require that developing countries enlarge and deepen cooperation with each other as a way of solving many of the problems of socio-economic development, as well as a strategy for global economic growth. It is hoped that this will end the marginalisation of most of the developing countries of the world with respect to finance and trade. However, 'South-South' Cooperation, while recommended by the United Nations as a way of Economic Cooperation among Developing Countries (ECDC), should not be seen as a substitute for the responsibilities and commitments of developed countries to the poorer nations of the world. * The writer is former permanent representative of Egypt to the WTO.
