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"Globalisation does not mean you have no political choices"

Marcus Dam

Sir Howard Davies, Director, the London School of Economics and Political Science, believes that, despite all its imperfections, globalisation is the "least bad" way to organise economic life. In an interview in Kolkata, he, however, cautions that countries can suffer if they get the sequencing of globalisation wrong.

Sir Howard Davies: "If you are not borrowing from the IMF, there is no particular reason why you should be paying any particular interest to what it says." — Photo: Sushanta Patronobish.

You have spoken of the need to promote the debate on globalisation and that people in authority, even in some of the more developed countries, have started questioning some of the basic principles surrounding free trade and free global capital markets. What in your opinion are the downsides of globalisation?

What I was saying then was against the background of the debates about speculative capital flows and also the difficulties in making progress in free trade negotiations. In general I am a supporter of free markets and of, if you like, globalisation — though it is not a particularly helpful term because I think that with all its imperfections it is the least bad way we have discovered for organising economic life.

But I think that experience shows that countries can suffer if they get the sequencing of globalisation wrong and if they open up markets to competition suddenly, when they have, through their actions, constrained the competitiveness of their domestic companies.

So I think the risks are in the wrong sequencing of — if you like — globalisation.

You mention the `risks'. But when you use the word `imperfections' in globalisation what do you really mean? Are these `imperfections' inbuilt within the process?

I wouldn't say that they are necessarily inbuilt. But the problem is that if you look at the Asian crisis of 1997-98 you had freedom for banks in places like Thailand and in Indonesia to borrow from overseas, which increased the availability of capital in the country and you had a fixed exchange rate. Suddenly the fixed exchange rate collapsed and then the banks were indeed troubled because they got un-hedged; so they collapsed and companies collapsed and you really created a problem.

Is that a problem of globalisation? Really it's a problem of an inconsistent approach — when you have one bit that was free and another bit that was fixed and you had a conflict between the two. Not imperfection in the sense of the general open market but in the way people have done it, which has at some times been incompatible.

To what extent might have globalisation undermined the existing political processes in developing countries that are on the threshold of embracing open-market economy?

As far as whether globalisation has impeded political choice I don't personally think so. Even in developed countries, it is quite clear that there are still major political choices to be made. For example, if you compare the United States of America and Germany you see that the USA spends 30 per cent of its GDP on public expenditure while the Germans spend 55 per cent. It is a massive political choice they are making.

So I think the notion that globalisation is pushing you towards one particular method of organising society just isn't true. It is quite clear that countries which are very open trading countries can make significantly different choices.

What about those developing countries in the process of opening up markets?

I still think that is the case. I still think that you can have a reasonably open trading economy and can still have a large amount of state control of the economy.

If you contrast Mexico with India, who in many respects operate in similar relationships to the rest of the world, Mexicans have no domestically owned banking system, the Indians have more or less a still very dominantly state-owned banking system. So I just don't buy this argument that globalisation means you have no political choices. It may mean that you don't have the choice to be hopelessly inefficient and hope that the world won't notice. But to me that it is not a deliberate political choice anyone should wish to make.

What, in your opinion, are the lessons developing countries like India might learn from the collapse of economies in certain East Asian countries such as Indonesia, Latin American countries such as Argentina, and some sub-Saharan Africa?

I think that my analysis of the Asian crisis is that there was some sort of inconsistency, some incompatibility, an inconsistent policy mix in those countries.

The main problem in Argentina was a fiscal problem. Really it was the inability of the domestic political system to control public borrowings. Sub-Saharan Africa is a whole different picture. The problem there is mostly a lack of capital inflows by anybody. So I don't think that you can get many lessons from sub-Saharan Africa.

The general lessons to be learnt from Latin America and the crisis in Asian countries are the need to think through very carefully about the nature of your market-opening measures, having to be sure that your trade mobilisation, your capital flow mobilisation, your domestic fiscal policy, are compatible with each other.

Would you agree that the International Monetary Fund has precipitated global instabilities by pushing through capital market liberalisation programmes prematurely?

I think that in different countries there are different criticisms you can make of the IMF. But I'd not buy the notion that the IMF is driven by what you call market fundamentalism. I think that the IMF's prescriptions have often been quite realistic in terms of relating their general bias in favour of open markets to the particular stresses of individual countries.

But I think that the more interesting issue now with the IMF is really that in a situation in which very, very, few countries are actually borrowing from the IMF, what it [the IMF] does and what are its tools. The IMF can only impose restraints on people as conditions of borrowing. If you are not borrowing from the IMF there is no particular reason why you should be paying any particular interest to what it says.

How is India fitting into the transnational economy. There are fears that reforms in the agricultural sector could mean displacement of small farmers, with the industrial and infrastructure sectors not being capable of absorbing the risks of such structural shift.

If you look at how India is regarded internationally the picture is a very mixed one. On the one hand you have a country clearly super-competitive in some areas — notably in the IT sector.

What is also good about India is a financial system more diversified than many developed countries, a robust equity market that is reasonably regulated — number three among Asian markets in terms of its integrity and flexibility, well above China. And there are people who attach high value to India's democratic system; we have seen changes in regime in India without massive disruptions to the economy. One concern about China was if there is a major political disruption what then?

On the other hand, you see the World Bank index of cost-of-doing-business in the country — a combination of how easy it is to import contracts, the regulations and length of time it takes getting approvals — India is 116 out of 155 countries. So, India is still seen as a licence raj, very bureaucratic. Perhaps even worse is that Transparency International — a good NGO which looks at countries in terms of corruption — rated India very poorly with far too much of buying of influence and contracts, particularly in the public sector.

And then the other downside is the one you identified — a growing dispersion of income. I think that what people must focus on is the significant differences in literacy rate [across the population].

The Government should be trying to use the wealth being created in the country to strengthen the literacy programme particularly in the rural areas and should also be working much harder on corruption.

It is argued that in several developing economies trade liberalisation has taken place before the establishment of social safety nets. Jobs have disappeared, the poor farmers can hardly compete with the subsidised produce from the First World.

If you are talking about areas where First World products are subsidised I agree that there is a serious risk. I certainly agree that if you are dealing with countries which are giving subsidised exports into your markets you cannot be content to allow liberalisation, on one side, when you are fighting people who are unreasonably subsidised, on the other. So I agree that it is a serious thing.

The issue of social safety nets is really a question of a country's affordability and also what the realistic position is currently. It seems to me that India has been a very protected market for many years but not been able, as a result of that, to put in place a particularly high social safety net.

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"Globalisation does not mean you have no political choices"

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