Inequality and the nation state

Curiously, globalisation is a four-letter word for several intellectuals in both the developing and developed worlds. In the former, globalisation has long been linked to imperialism, or more fashionably, neo-imperialism/liberalism.

Seen as a continuation of colonisation of the eighteenth and nineteenth centuries, it supposedly not only left developing countries worse off than what they were before, but also indeed made them structurally 'underdeveloped'.

In the developed world, globalisation is blamed for the export of jobs and consequential prosperity to the developing world. Globalisation would, therefore, appear to be a global threat!

The fact of the matter is that the prosperous Asian economies of China and India, with higher per capita incomes than Western Europe as late as the beginning of the eighteenth century, had started falling behind well before they were colonised.

It is, therefore, moot to discuss whether colonialism was the cause or consequence of backwardness. The per capita income divide with Western Europe, including its white settler offshoots, and the colonies continued to widen during the 'enforced free trade' of the colonial period.  India's per capita income growth during the colonial period was very nominal in the aggregate, a continuation of the preceding trend. However, there was a burst of growth between 1880-1910, largely as the result of agricultural expansion and commercialisation following infrastructural investment and integration into the world system.

Per capita income growth declined between the two World Wars, which also coincided with a retreat from globalisation. While per capita income growth resumed modestly in the immediate aftermath of colonialism, when several former colonies retreated into autarchy and dirigisme, the per capita income gap with the developed world continued to widen despite conscious attempts at 'de-globalisation'.

The gap started converging only after erstwhile colonies, first in east Asia, followed by China and India, re-entered the globalisation process.

The Asian countries' experience with globalisation shows, firstly, that periods of globalisation coincided with periods of accelerated growth. Secondly, the first phase of globalisation coincided with widening income disparities with the west, while the (current) second phase is tending towards per capita income convergence.

Why should the two phases of globalisation have had differing outcomes for developing countries? There are two possible explanations.

The first phase of growth was based largely on agriculture, which, as Kaldor postulated several years ago, has a much more modest growth impact than manufacturing. The second phase of globalisation was based on manufacturing and services (as in the Indian case) in the former colonies, with higher attendant growth rates, while developed countries show signs of postindustrial growth fatigue.

Secondly, it was not free trade per se but imperialism that was the villain of the piece. Free trade was controlled and regulated by developed nation states. Whereas the first phase of globalisation saw the flag of advanced nation states follow trade and markets, the second phase has seen trade, through the instrument of Trans-National Corporations, follow markets across various flags.

The globalising impulse today is multilateral, controlled and regulated by TNCs. Perfectly willing to relocate production and services, including the transfer of technology and capital overseas in search of higher profits, the interests of TNCs are frequently in conflict with those of the nation states. The latter often actively pursue policies as though they feel threatened by globalisation.

The rise of absolutism and the nation state in the early period of modernisation was a major factor in the market integration of decentralised and fragmented feudal societies.

In the current phase of globalisation, however, it is a major force hindering global integration of markets. In any case the nation state is being rendered increasingly ineffective in its two main functions of national defence and macro-economic policy.

While the first is threatened by the growing technological gap between the US and all other countries, globalisation is rendering sovereign macro-economic levers increasingly ineffective.

Most other functions of the state, such as welfare and policing, can be performed by local and regional governments and markets. Taxpayers may realise sooner than later that the combination of increasingly modest outcomes and high overheads make nation states more predatory than benign.

The logic of globalisation in continually relocating production and services to cheaper locations raises incomes in poorer countries. Consequential efficiency gains lead to higher returns to capital (through greater profitability).

Returns to labour rise faster in developing countries than in developed ones; and within developed countries, faster for skilled knowledge labour than unskilled labour.

Globalisation rewards knowledge skills, both human and technological. It has reduced inequality between nations but increased it within nations. As per capita incomes in some developing countries rise, poorer developing countries get the chance of becoming more competitive.

It is entirely possible that the logic of globalisation will relocate production and services away from Asia to African countries in future provided issues of governance, infrastructure and human capital are sorted out.

Although widening inequality is a corollary of globalisation, purchasing power has nevertheless risen all round in both developed and developing countries through universal access to a wide variety of cheap (Chinese) goods and (Indian) services.

In that sense globalisation has been 'inclusive' as the standard of living of even the poorest has improved through efficiency and productivity gains deriving from globalisation. Widening gini co-efficient may well be acceptable as long as equality of opportunity can be assured through universal access to knowledge.

Globalising forces are driven by efficiency gains deriving from trade on the one hand, and productivity gains deriving from technological improvements on the other. There were periods of widening global contact in the past, driven by humongous empires such as the Roman, Mongol and Ottoman, through dramatic long distance movements of peoples such as Vikings, Huns and Visigoths, and through long distance trade, such as the overland silk and Indian ocean routes linking the east and west.

Until fairly recently, however, technological advances were few and far in between, and disseminated very slowly. The movement of goods and people was consequently limited until the Industrial Revolution let the genie of technology out of the bottle, leading to rapid mobility of all factors of production (other than land) and services on an unprecedented scale.

The globalisation process has been relentless since, although non-linear. For instance, the period following the First World War witnessed a retreat from globalisation because stakeholders in the erstwhile colonies felt that they had been shortchanged.

The current phase of globalisation that began with the east Asian surge in the seventies could well witness another retreat if some stakeholders feel that they are being left out.

History, however tells us that this retreat is unlikely to be permanent. Goodbye nation state?