New policy a must for globalization

By Djauhari Oratmangun

This is the second of two articles on globalization and the role of the nation states.

JAKARTA (JP): There is no doubt that globalization is probably one of the answers to meeting development objectives in most of the developing world. As we are all aware, the ultimate objective of the development policy of most developing countries is to raise the living standards of their population by eradicating poverty, increasing the welfare of the people and closing the gap between the rich and the poor, in short, guaranteeing and providing a better life for their people.

The globalization process will of course create more opportunities for developing countries to accelerate their development program. There are indeed benefits, such as the lowering of tariff and non-tariff barriers, the mobility of Trans National Corporation (TNC) and FDI, the reallocation of industries, the linking of capital markets, the advancement of information technology etc.

However, globalization has also been characterized by a market-driven economy which carries the nuance of a "fast train" in the world economy.

Therefore, if a developing country wants to take the "fast train" of globalization, it needs to integrate or became an active passenger on the world economy's "fast train".

To enable it to do so, it will however, have to fulfill several conditions such as deregulation, privatization, opening up to the world economy and FDI, apply tight discipline on monetary and fiscal policies, etc. Experience has shown that an open market, a strong financial environment, sound economic policies and public investment are crucial in this respect.

The developing countries that are unable to do this will certainly fail to become passengers on the fast train of globalization and, as a consequence, they will be left behind and hence marginalized.

Economic history shows that the process of liberalization and internationalization of the economy using market forces has recognized some failures, in particular during the end of 19th century and the early part of the 20th century.

In order to correct the situation, the government was called on to intervene. Therefore, in this recent era of globalization, the nation state still has a definite role to play to protect civil society by pursuing a policy of intervention to influence the market.

This role should ensure that growth and distribution as well as the quality of development efforts can be achieved through globalization.

In simple terms, the role of the nation states is to maximize the benefits of globalization while altering or diminishing its adverse impact. In this regard, the nation state should take the dual dimensions of the problem, namely domestic and international, as globalization is a borderless process.

At the domestic level, the role of the nation states is first to create the policies and regulatory environment which will allow their country to take advantage of the rapidly growing opportunities arising from globalization.

Nation states can create a conducive environment that will benefit civil society, particularly by providing an appropriate environment for the private sector as the market player and prime mover of development to enable the benefit of globalization to be reaped.

In this regard, special attention must be paid to the small scale and intermediate industries which need to be guided and given assistance by the government to enable them to compete in the global market. Larger industries could be encouraged to enter much bigger markets and global competition by giving them the appropriate incentives, taking into account various international rules that all nations have agreed upon and adhere to.

Second, nation states through government policies have a crucial role to play in promoting economic growth and ensuring more fair competition and in aligning these with social objectives. This role is to complement and regulate rather than restrict market forces and should of course be tailored to the circumstances of individual countries.

In this regard, the role of nation states to create the infrastructure and rules needed to reconcile the creative forces of the market with the needs of the disadvantaged is essential. This is due to the fact that stabilization and liberalization of the macro economy are not sufficient to ensure social progress or for more successful competition on the global market.

Third, nation states must formulate policies aimed at avoiding the creation of the dual-economy problem prevailing in the developing countries as a result of the process of globalization. We have entered the global market but domestic society is unfortunately not ready yet.

The reason for this is that economic interdependence among countries has created a situation in which national policy makers are unable to make the best of national policies to meet development objectives at home if they fail to take into account policies and developments abroad.

In fact, those "external factors" have a considerable influence on a country's economic development. For example, national monetary policies have immediate international consequences, and the other way around. The recent financial crisis in this region and the policies taken to correct the situation have proved this again.

Fourth, nation states should implement proactive and reactive state policy, or a combination of the two, to ensure equitable growth. A nation's proactive action should include measures to ensure that people have assets and capabilities, systematic efforts to make the unemployed "employable", the creation of employment opportunities, and to provide the poor with assets, which requires vast amounts of public investment.

In this regard, states should create such a policy to ensure that globalization does not marginalize civil society, because, globalization cannot bring prosperity to all civil society through market forces alone, but excludes many people from the process of development.

Equally important is "intervention" by the government to correct the market for investment and localize the disadvantages as well as to provide social safeguards. State policies can make a difference in achieving distribution goals, and this requires the willingness of governments to adopt the necessary proactive policies.

Fifth, nation states should adopt policies that ensure the sustainability of development. These policies should be enforced strictly by intervening in the market if it fails to create environmental sustainability of economic activity.

In this respect, Prof Dani Rodrik of Harvard University in his book entitled Has Globalization Gone Too Far? which was considered by Business Week as "one of the most important economic books of the decade", is right when he argues that globalization can succeed and be sustained, as long as appropriate domestic policy measures are undertaken to cushion the impact on groups that are adversely affected.

Moreover, he concludes that policy measures must be taken to equip all sectors of society to take advantage of the benefits of globalization, rather than be undermined by it.

While at the international level, the nation state should play the following role. First, adopt a more active role with a view to achieving greater coherence in world economic policy making prompted by the IMF, the World Bank and the WTO to promote development dimensions in international organizations and agreements through the attainment of a better balance of rights and obligations. More, and better, coordination among developing countries to achieve this objective is indeed obligatory.

Second, nation states should also demand that the international organizations, in particular the United Nations and its subsidiary bodies, carry out an economic and social analysis aimed at minimizing global disparities and pinpointing the prerequisites at the national and international level of the development process which lead to better distribution of the benefits of globalization.

This is, of course, in line with the idea of "regulating" the process of globalization in all its dimensions currently being pursued by several major developing countries. Globalization has made national economies more difficult to run for governments, therefore, there is an urgent need to have some kind of international government and regulation in this regard. Otherwise, the excessive adverse impact of globalization will accumulate.

The above analysis illustrates that globalization, while bringing adverse impacts to civil society -- has important implications on the attainment of the development objectives of developing countries as well.

To ensure that the globalization process will benefit developing countries and their people, there is recognition of the continuing importance of the role of nation states in protecting civil society, particularly the grassroots level, from suffering the adverse impact of globalization by creating a better environment for them to maximize the benefits of globalization.

Of course, nation states cannot govern the market, however they have the ability to influence markets.

In this regard they should adjust their policies to meet the changes that globalization carries. Development objectives can be achieved through globalization in the years to come, if nation states can properly manage change.

The writer is an international trade analyst.

Window: Economic history shows that the process of liberalization and internationalization of the economy using market forces has recognized some failures, in particular during the end of 19th century and the early part of the 20th century.