Monday, February 23, 2009

Globalization: Has it led to the rise of free trade or the rise of powerful economic agents?

Have we really seen a rise in free trade as globalization enveloped the farthest reaches of the world? Several empirical and anecdotal evidence point the other way.

Take China, for instance. In the last decade, no other country could boast of a much faster pace of economic growth than China. With its unequaled growth, you would think that business activity has been spreading to a broader swathe of its population. But has it? Just “how much more capitalist has China become in the last few years” ?

China Economics Blog, a good source-compendium of China-related articles, linked to this MIT paper a few months back. The general findings of the paper were:

- Many economists used output share of private sector as evidence that China's business environment became more liberal over time. Measured by output share, China's private sector has grown enormously since 1978. But output share is not an accurate measure of private sector policy because it is correlated with efficiency differentials between private-sector firms and state-owned enterprises (SOEs). During the 1989-1991 period when China cracked down on private sector, the output share of private firms still increased.

- A superior measure of policy evolution is capital allocation. By this measure the most liberal policy period, by far, was in the 1980s and in the 1990s the investment share by purely private sector businesses fell substantially. (The share only began to rise after 2002.)

- The changing investment share by the private sector suggests a development few Western academics have noticed - a substantial policy reversal in the 1990s. Survey and documentary evidence suggests that private access to finance was easier in the 1980s than in the 1990s and this was especially true in rural China.

- Evolution of capitalism in China is a function of a political balance between two Chinas - the entrepreneurial, market-driven rural China vis-à-vis the state-led urban China. In the 1980s, rural China gained the upper hand but in the 1990s, urban China gained the upper hand. Although China made notable progress in the 1990s in terms of FDI liberalization and reforms of SOEs, this book assigns greater weight to the rural developments in determining the overall character and the pace of China's transition to capitalism.

-Rural household income grew substantially faster in the liberal 1980s than in the illiberal 1990s. Also social performance deteriorated in the 1990s as well.

A similar phenomenon could be said to be happening in the developed nations. As much of the gains of globalization were increasingly sucked by the large multinational corporations, this came at the cost of the small-scale businesses.

Did we really see the trickling of economic opportunity to a greater multitude, or did we merely see the rise of large, powerful economic agents, who basically grew at the expense of the small?

Multinationals feeding on the carcasses of small business owners. Strong-state Government taking away the economic reins and draining the financial pipeline from the private sector. This environment can probably be illustrated with some analogy.

Business is war. As your enemies grow, so should you. As multinationals grew in power, developing nations without similar large-scale institutions adapted by instituting more powerful government. Now that powerful governments have the upper hand, multinationals from developed countries will fade onto the shadows of their own national governments, who are themselves becoming more powerful, and the economic war escalates to the next level.

This won’t probably end amorously.

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