Globalization cannot work by compensation

By Dr Bharat Jhunjhunwala

Most economists hold that globalization is beneficial for all stakeholders just a trade between two persons is beneficial for both. The argument is basically correct if globalization is all encompassing and permits free movement of labour from one country to another. In that case a person living in an area bereft of any comparative advantage can migrate to another area and make a living. But this argument fails when free movement of labour is prohibited. It is possible that some countries may not have comparative advantage in any sector. In that case globalization becomes a loss proposition for them. They can get cheap imported products produced at lower cost that are produced in more efficient countries but they do not have income to buy those goods. All the farms and factories in Timbuktu can be closed because the cost of production is high according to global standards and the people of that country be left to rot within their borders.

Gandhiji promoted the production of Khadi even though the cost of production was higher than machine-made cloth imported from Manchester. Gandhiji rejected cheap goods because they came with British control of our economy. It was better, he said, for India to produce expensive Khadi than buy cheap imported cloth. Similarly free trade is harmful for the village potter. Availability of cheap aluminium and plastic pots has taken away his livelihood. The women indeed have to carry less load but the potter has no sales anymore. It is better for the potter that women continue to buy his earthen pots so that he can make a living. It is clear that free trade or globalization is not beneficial for every stakeholder. Some stand to loose. The same holds for countries.

Some African countries may not have the capacity to compete with Indian software and Chinese textiles. Their software companies and textile factories will close down if they embrace globalization. They may not even be able to compete with cheap agricultural produce of other countries such as Australian wheat, Indian tea and Brazilian sugar. It is possible they may not have competitive advantage in any commodity. Globalization for them would mean that their factories and farms would close down since their cost of production is high. Their people will have to accept lower wages to reduce their cost of production and to compete with cheap imported goods. They would be better off remaining a protected economy where high-cost production of wheat and textiles can go on behind protectionist barriers.

This problem does not arise if free movement of natural persons is allowed. In that case the people of Timbuktu would migrate to India or China and work in the efficient factories in those countries. But present model of globalization does not permit this. The people of Timbuktu are hemmed-in within their national borders while cheap imported goods are allowed free entry. The result is lower wages and starvation since they have no means available to make their livelihoods.

Professor Joseph Stiglitz of Columbia University accepts that globalization need not be a win-win situation for all the players. He acknowledges that there will be some losers. But he says that globalization can still be beneficial for all if those benefiting from globalization are willing to compensate the losers. Free trade in textiles could be beneficial for India if the textile mills of Manchester were willing to compensate the weavers of India for the loss of their livelihoods. The situation is similar to the people living in the submergence areas of dams. They loose their lands. But the same dam becomes beneficial for them if they are given adequate compensation. Similarly globalization can become beneficial for all players if the winners are willing to compensate the losers, says Stiglitz.

The problem is that first globalization will have to be rejected in order to get such compensation. Our experience suggests that people in submergence areas get compensation only when they oppose the dams. Gandhiji could have asked the textile mills of Manchester to provide compensation to the Indian weavers. But in order to demand such compensation he would have to first organize Indian weavers and oppose imports of machine - made cloth. Gandhiji could not have demanded such compensation if he agreed to free trade as envisaged under the WTO. The present model of globalization prohibits such resistance to imports. Thus the very basis of organizing the losers to demand compensation is eliminated. Globalization has to be first negated for globalization to work.

The second problem is that continuity of such compensation is difficult to ensure. Suppose Gandhiji was successful in securing compensation for Indian weavers from the textile mills of Manchester. In a few years their looms would become unworkable because of disuse. The new generation will not learn weaving. The ability of India to make her own cloth will be reduced. In that situation it would make little sense for Manchester to continue to provide compensation to Indian weavers. Farmers in the United States are provided compensation for not cultivating their lands. But this compensation is paid only if they keep their lands in cultivable conditional. Similarly, the losers would have to keep their inefficient industries in working condition to claim such compensation perpetually. That is possible only if the national economy is kept in working order even if it were inefficient. That is contrary to the approach of globalization.

The third problem is that a global government is required to calculate the level of compensation that people of 200-odd countries have to receive or pay. This government should have the power to enforce its decision on all countries. Presently the Security Council of the United Nations is discharging this role. But that is not a representative institutions. Many countries such as North Korea and Israel are not willing party to the decisions of the Security Council. This approach is dangerous because the capture of the world Government by the rich and powerful countries can debilitate the poor countries. Thus compensatory globalization requires that first a global democratic Government be installed. Until this is done it would be better for the weaker countries to opt out of globalization and to protect their high-cost economies from cheap imports.

We must not get distracted from the task of building our national economy by the false advice by learned economists like Stiglitz. The fact is that globalization is harmful for a large number of countries that do not have a clear competitive advantage in some sector. These countries would do well to erect protectionist barriers. This is what Gandhi had advised. The people of India would get at least high-cost Khadi to wear in a nationalist and protected economy. They would run naked in a global economy.