The Way Of The Global Economy

By S. Sivathasan -

sivathasan

S. Sivathasan

The post war world has seen phenomenal changes since 1950. The global economy has displayed a capacity for unprecedented growth, apprehensions and misgivings notwithstanding. Human ingenuity has trounced the fringe of negative sentiment and secured the course for the economy to flourish. Changes have been in the spheres of education, medical facilities, infrastructure, scientific research and technological advances. Their cumulative impact has been on levels of production, making for assured access to goods and services  to incredibly vaster numbers. Steady growth of wealth among nations has resulted in an increasing Gross World Product (GWP). Effusing therefrom was sustained Foreign Direct Investment (FD I). Seen apace was the pervasive spread of Multi – National Companies   (MNC). The world is now in a confident mood.

Gross World Product (GWP)

The extent of the transformation may be briefly surveyed. When the parameters of change over the last 60 years are observed, the rapid expansion of the global economy stands out. The GWP of 1950 was $ 4 trillion. In 2012 it had risen to $ 72 trillion, depicting an 18 fold increase in 60 years. In the same period population expanded to 7.0 billion from 2.5 billion. Agriculture moved in tandem and met the demands of consumption. What is even more significant is the drastic change in the sectoral composition even as a healthy balance was striven for. At present agriculture composes 6 % of the GWP and sustains industry and services which compose 94%. Of still greater import is that all three sectors reinforce one another and proceed in harmony. When the current population advances by a further 2.2 billion to 9.2 billion by 2050 as the UN forecasts, it is not overweening optimism to prompt the thought that food needs will be met. Adverse impact on any one sector has been avoided and the specter of ‘limits to growth’ has been dispelled never again to haunt.

Foreign Direct Investment (FDI)

Specifically, in the post cold war phase, development had gathered an increasingly global perspective. The UN and its institutions together with several other international organizations saw the inevitability of moving in unison. The launching of the First Development Decade in 1961 set the tone and charted the course. Surplus capital ceased to be confined to generating countries and crossed borders. The pace of the sixties changed and FDI grew 1500 times within a span of 40 years from 1970.The result is a stock of $ 20.6 trillion by end of 2011. While surplus capital made its foray into fresh geographical frontiers, recipient countries became increasingly proactive in their response to foreign investment. For the corresponding period GWP grew 6 fold. The compelling need for investment manifested primarily in the field of international finance.

Resistance to FDI in some countries takes the form of fake academic positions which transmute to political postures and manifest in negative policy frames. The result is positive regress. India’s inward stock of FDI at $ 232 billion in 2012 in contrast to Singapore’s $ 522 billion highlights the disparity in investment flowing from their respective attitudes and approaches. Many countries have met the challenge responsively. On a global scale, cumulative FDI for 4 decades up to end of 2011 was $ 20.66 trillion. In 1970 it was 13.34 billion. Going by UNCTAD estimate up to 2014, it is likely that by 2020 investment in the second decade alone would touch $ 20 trillion and the cumulative total would reach $ 40 trillion.

For many a developing country it took a few decades to assuage their minds, of the conjured up evil that FDI portended. The speed of FDI growth relates in a way to the pace of mindset change.  What should condition the mindset? Knowledge, judgment, clear thinking, and above all intellectual honesty not to prey on the wiles of the masses. What is more they should refrain from dancing attendance on an inefficient segment like retail trade. Such populist inclinations are much in evidence in India. No amount of rigmarole that in India their concern is the wellbeing of 12 million petty traders will convince anybody. In the US there are 5.7 million workers at facilities highly dependent on FDI. More importantly their average pay at $ 70,000 was 30% higher than the average pay of all workers in US.

Multi – National Corporations (MNCs)

In an economy that is getting increasingly globalized, a multitude of features may be seen. Among the most salient is the rapid spread of MNCs. It may be said that MNCs rule the world economy. As of 2009, there were 889,000 in operation. Ten percent out of them were parent companies and ninety percent were affiliates. They are spread across 190 countries. As of 2011, they generated $ 28 trillion in sales and $ 7 trillion in value addition. The product approximated 50% of the GWP. Like the juggernaut the MNC moves inexorably on. Socialist terminology which had its glamor at a particular phase in human history has lost its sheen. The advanced countries have veered from it and have recorded remarkable progress. Even in China – world’s second largest economy – hardly a feature of communism is seen. Countries which were home to outworn ideologies have disabused their minds of failed ideas of foreign exploiters fleecing unsuspecting citizens. As many as 190 countries embracing MNCs is a pointer.

Developed Economies

It is very striking that several features clearly seen in the developed economies are in contrast to what prevail in developing ones. When OECD countries are considered, some of them are among the first 20 in GDP. In per capita income too they are top notch. They are among the highest in FDI in both receipt as well as investment abroad. In employment most of them rank high. In addition they are home to immigrant employees who migrate from economies where the intelligentsia and the political leadership have railed against FDI and MNCs ad nauseam and kept them at bay. What a tragic irony that those who eschew foreign investment as exploitative in their own countries should hasten to partake of the fallout from such capital in the developed world. India and Sri Lanka are typical examples. It’s an instance of keeping the mother country pure by trans locating themselves to countries even though they are tainted by the evils of capitalism.

Investment Spurned

Ceylon and later Sri Lanka vied in both phases to supplant private enterprise and to reinforce the state sector. It was thought that when the pillars of private enterprise are demolished one by one through nationalization, the whole edifice of capitalism would collapse. In its place would emerge socialism with a brand new ethos. Hence slogans like state ownership of the means of production, distribution and exchange, nationalisation of the commanding heights of the economy and expropriation of the expropriator. At this time Singapore set its course with appropriate pragmatism. Fifty years back SL bought an S$ at Re.1 and buys today at Rs.102. Sri Lanka wasted state resources on subsidies, excluded private capital as pernicious and spurned foreign investment as exploitative.  The country is yet to wriggle out of this mire.  India keeps company.

United States of America

The US stands preeminently first both in the receipt of FDI as well as in investment abroad. The former at $2.8 trillion and the latter at $4.7 trillion. The vibrancy of the economy together with the whole corpus of indispensables such as physical infrastructure, comprehensive legal frame for investment, heavy presence of MNCs, human resources coming off universities and proactive support for development conduced to such investment and growth. Underpinning them all was transparency and consistency.

China and India

The two leading economic powers of the world in 1750 were China and India. Huntington with his research points out that China accounted for 32% of the world’s industrial production and India for 17%.After a period of decline both were resurgent after 200 years and their economies were about par. China liberalized her economy in the eighties and India in the nineties. In 2012 China’s GDP was $ 8.25trillion and India’s $ 1.947 trillion. The cumulative stock of FDI by end 2012 stands at $ 910billion for China and $ 232 billion for India. China has 289,000 MNCs and India 3057. Of the top Fortune 500 companies China has 73 and India 8. Among top 10 corporate employers China has 6 and India none. The disparities are not without a relationship to investment policies and decisions.

Singapore

China and India have huge populations. Their economies rank 2^nd and 12^th. In contrast is miniscule Singapore with staggering economic performance. Cumulative FDI stands at US $ 522 billion by 2012 end. The number of MNCs is 14,052, all of which are affiliates. Has this huge presence compromised her independence? With the 3^rd highest per capita income at US $ 59,937, do the people feel exploited? At what haven has aversion to FDI or prejudice against MNCs delivered their protagonists?

Governance

From a comparison and contrast of the three economies, what blazons forth is that economic performance is a product of the quality of governance. Decision making capability that is dispassionate, far sighted, un emotional, studied and rigorously firm would provide the basis for good governance. The leadership should possess the integrity to set forth a corpus of implementable policies. Equally important is the resoluteness to pursue them with verve. The developed economies display many of these attributes. That’s why they are developed. When the inept are in power the under developed countries get entrenched in stagnation.

Inexorables

Excepting China is it possible for the world to adopt a one child policy? Not for half a century. Before that the population would have increased by over 2.2 billion. Is it practicable to feed them without GM seeds, crops and food? No. Is it conceivable that they can all be clothed without GM cotton? Never. Were the Luddites able to stop industrialization in its tracks by breaking up machines?  It should be clear therefore that human ingenuity needs to be purposefully and relentlessly canalized to meet the challenges as they emerge. The lesson forced upon us is that when one cannot stop an avalanche one is constrained to flow with the tide. Not by choice but by its inevitability. The giant strides of the global economy are moving irreversibly on.