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Connotation of Globalization and its impact on Pakistan‟s
Economy
1. Introduction
Globalization in general, means increasing the interdependence, connectivity and integration on a global level with respect to the social, cultural, political, technological, economic and ecological levels. Globalization is a process of global economic integration, which includes freedom to market forces and freedom to factors of production. In other words it‟s a process of creating a boundary- less world. Interdependence and interconnectedness are the basic pillars of globalization. It eliminates all forms of trade barriers to provide an open market. But globalization as such, shall have impact on cultural, political, legal and technological environment hence, globalization shall be defined as a process of integration of societies of all countries in fact, it is a process towards a new economic order, a monotonous world.
1.1 Background
The First World War led to a new world order based on consecrating the legitimacy of the occupation of the South by the North, and dividing areas of dominion in the world by consensus among the allies, winners of the war. This trend was reflected in the Versailles Convention, which can be considered as a convention for the distribution of booty, and the Charter of the League of Nations.
Likewise, the Second World War yielded the distribution of dominion, decided at Yalta in 1945 between the United States of America and the Soviet Union in a consecration of bi-polarization between them, which made the Yalta Agreement, an agreement for the distribution of booty among the winners of the war.
After the Gulf War, the world experienced several events that reshaped the political map, drawn by the two poles after the Second World War, and replaced with a new map, where the United States of America emerged as the single power that takes
hold of the booty, by controlling the oil-exporting Arab region and deciding for its destiny and maps.
Globalization, which is designed to be the major trait of the new World Order - that is poised to be an old one - has spread since the beginning like an octopus in all fields. It uses its gains through being attached to them and through consolidating them as well as through enlarging its networks around the world to take more. This globalization octopus risks to go beyond all obstacles and restrictions to swallow everything.
Since the 1980‟s, there was a succession of events that deeply influenced the world, and contributed to reshaping the systems of the world and unifying them in a new World order or a new world. This situation heralded the fall of the Soviet Union pole and the start of a uni-polar order, embodied in the United States of America.
In 1985, the former Soviet President Michael Gorbatchev declared a peaceful revolution to build a new order in the Soviet Union, based on reform, or Perestroika, and transparency, or Glasnost.
In 1987, the World population increased strongly to stand at more than five billion souls.
In 1989, the Soviet Union collapsed and the Berlin Wall fell. In the Same year, Germany was reunified to become a capitalist democratic state.
In 1991, Iraq invaded Kuwait, and the United States of America drummed up the support of its Western allies to the “Desert Storm” war. Meanwhile, the Soviet Union stood as a sheer spectator, signaling thus its withdrawal from the competition for polarization. Former President Bush called, after victory, for establishing a new world order.
On 3 January 1992, the Security Council positively responded to the call of the President of the United States of America to convene a summit that was crowned
2. Literature Review
Between 1870 and 1914, the world was integrated into a single word economy dominated by one power: Great Britain. The government functions were limited and faced many constraints like gold standard and lack of freedom to pursue easy monetary policy. Later governments were burdened by performing many functions like achievement of macroeconomic goals ___ full employment, economic growth and price stability. Freedom of using macroeconomic policies resulted in greater integration of national economies but at the same time they led to international disintegration and interdependence. Streeten (1999) argues that today global market forces can lead to conflict between states, contributing to international disintegration and weakened governance. Before 1914, the world was more integrated than it is today but it did not prevent the First World War.
Globalization has both benefits and costs and thus has supporters and opponents. Mandle(2003) has discussed at length the benefits and costs of globalization. He attacks the anti-globalization movement and refutes the false notions associated with major criticism of globalization. His major premise is that globalization is concerned with economic growth necessary to take care of poverty and therefore, globalization is promoted because development and integration of the global markets have a substantial impact on poverty reduction.
Synthesizing diverse sources on benefits and cost of globalization, Todaro and Smith (2003) have stated that globalization presents new possibilities for eliminating global poverty and globalization can benefit poor countries directly and indirectly through cultural, social, scientific and technological exchanges as well as trade and finance. Some very important low-income countries like India and China have used globalization to their advantage and have succeeded in achieving enviable economic growth rate and thus reducing some international inequalities. Dollar and Kraay ((2004) have studied the effects of globalization on the poor in the developing countries. They note that over half of the developing countries experiencing globalization have gained
large increases in trade and considerable reduction in tariffs. These countries are catching- up with the developed countries while the remaining is losing. They have reported that the increase in economic growth leads to a proportionate increases in incomes of the poor.
According to Streeten (1999) globalization has created many opportunities for some peoples and countries. Social indicators such as literacy, school enrolment, infant mortality, and life expectancy have improved a lot in the last few decades. Globalization has been particularly good for Asia, for the global growth of production and the owners of capital.
Although poverty is still pervasive in many developing countries notably in Sub- Saharan Africa and South Asian countries, other developing countries have achieved a significant reduction in poverty and this has been made possible by the integration or globalization of the economies (lower trade barriers, rising capital flows and greater pressure for migration). Moreover, evidence shows that the share of population in poverty has declined for developing countries as a whole from 28.3% in 1987 to 24% in 1998 based on $1day and from 61% in 1987 to 56% in 1998 based on $2day. Populous countries like India and Indonesia have achieved significant reduction in the incidence of poverty. In India it fell from 57% in 1973 to around 35% in 1998 and from 60% to 20% between 1985 and 1998 in Indonesia (Government of Pakistan (GOP) 2004-05). Promoting rapid economic growth and reduction in poverty and inequality are not mutually conflicting objectives. More open economies have fared well. Evidence shows that growth and poverty reduction are not incompatible (World Bank 1990, Clarke 1995).
There are also negative aspects of globalization. The opponents say that globalization may worsen inequalities both across and within countries, environmental degradation and vulnerability of the poor nations might increase and developed countries establish dominance over these countries culminating in revival of colonialism. Streeten (1999) observes that economic liberalization, technological changes, competition in both
3. Analysis – Pakistan’s Experience:
Though Pakistan was one of the founder members of World Trade Organization (WTO), and also a founder member in its erstwhile General Agreement on Trade and Tariff (GATT), people of Pakistan were not much exposed to globalization. The reasons for non-proliferation of awareness could be many particularly, political will, available communication infrastructure, implementation policies, literacy rate, form of government etc.
Pakistan opted for open economic policies (globalization) by compulsion during the early 1990s. The economic liberalization has been opted not as a policy generated indigenously but largely as an obligation under the conditionality imposed by the International Monetary Fund (IMF) and World Bank through their Structural Adjustment Programme (SAP).
Various steps taken by Government of Pakistan at times, to reap up the benefits of globalization or to bear its consequences are listed as under:
Privatization The effort for privatization could be traced from the early years of 1980s. But those attempts did not bring any desired results. In 1990, Pakistan tried to divest its stake in state run profit-making companies and, for that government identified six profit making companies. In this attempt government, though not fully successful, managed to divest 10 per cent stake in Pakistan International Airlines to private bidders The privatization process got its momentum in 1991 when government announced establishing Privatization commission. The privatization commission identified 106 State Owned Enterprises (SOE) that includes business units, banks and other non-banking financial units, as prospective privatization candidate. Today all the State Owned enterprises have been privatized and, nearly Rs.60 billion were collected as proceeds of privatization.
Typically, it takes 18 months to complete one privatization deal. Additional time period may be required for such cases that require changes in rules and regulations. The privatization process received severe opposition from political parties and trade unions. The political gambling by politicians and the fear of losing job or at least the so-called extra benefits among employees created mayhem to the privatization process. A section of the elite and the industrialists were also against the privatization process as they were very skeptical about the benefits of privatization and worried about its ill effects during the transition period.
The policy stance of government in 1970s was nationalization. But, nationalization eroded the spirit of private entrepreneurs thus, failing to achieve its stated objective. So the government had to rethink about the nationalization process. Finally in 1977, the government introduced new policy measures in order to restore the confidence among private entrepreneurs. The new policy measures like denationalization, disinvestments and decentralization was quite contrary to the previous policy stance and had become the cornerstone of privatization process in Pakistan.
Structural Adjustment Programme (SAP) The liberalization or Structural Adjustment Programme (SAP) was pursued with the view to revive the economy. It has the following key elements 1). Removal of distortions in the economy 2). Enhancing the macroeconomic stability conducive for business venturing 3). Emphasizing economic governance and 4). Poverty alleviation.
It was assumed that liberalization would bring competitive spirit along with foreign money and technology, this in turn would foster strong economic growth, that would create lots of employment opportunities and thereby reduce poverty. Thus, in Pakistan policy makers thought that globalization is the panacea for all the problems. Unfortunately, the poverty incidence was much higher in post-globalization era. But, it seems that globalization did not bring any unemployment. Even in the pre-globalization
Foreign exchange liberalization A major development happened in the foreign exchange market in 1991 when government announced a number of regulations relating to foreign exchange transactions. The new regulation allowed residents to open and maintain Foreign Currency Accounts (FCA), hold foreign currency and earn return more than other savings scheme.
Officially, Pakistan has moved into free-floating regime from managed/fixed exchange rate regime in late 1990s. But in reality the exchange rate is not allowed to float freely and this can be felt from central bank‟s foreign exchange market operation. The State Bank of Pakistan has steadily purchased till April 2004 and has been selling steadily thereafter.
The intervention was a need of hour as the central bank has been adapting the policy of building forex reserves for the purpose of keeping sufficient import cover. But this intervention was done in order to prevent sudden money supply in the domestic economy and also to stop artificial fluctuation arising out of speculative trade and expectation. The stability of exchange rate is vital for smooth business operation particularly in the case of Exports and Imports and Portfolio Investments.
The fluctuations in the inter-bank market has been kept low and the premium hovers around 3 to 4 per cent almost through out the year. Another achievement in reforms is the elimination of Hawala or Hundi transactions that are illegal and also equally challenging to the normal functioning of the forex market. Now, the forex market is nearly at par with any other developing country markets but it clearly lacks volume to allow it to function on demand and supply.
Banking sector reforms The first distinct banking sector reform started in the late 1980s. In 1992, licenses were given to private bank to start operation in an effort to liberalize the banking sector. In
the same year two public sector banks (Muslim Commercial bank and Allied bank of Pakistan) were privatized, a bolstering steps in the direction of liberalization.
The Strengthening of regulatory role (through new prudential regulatory rules in 1989 and 1992) of central bank (State Bank of Pakistan) and privatization of banks are important reforms happened in the banking sector. Most of the Nationalized Commercial Banks (NCB) was over-staffed; a common problem associated with most of the public sector enterprises.
Efforts were taken to reduce at least half the existing strength as they were considered “surplus”. The banks earmarked more then 40 per cent of existing branches as non- profitable thus, required to be closed. The banks also aimed at reducing the Non- Performing Loans (NPL) as a measure to increase asset quality. The banking system nearly collapsed in 1996 due to poor corporate governance and mismanagement in financial transactions. The political influence on lending and loan recovery disrupted the functioning of banks particularly that of the government. The non-performing asset grew to Rs 146 billion in 1998. The situation grew still worse for Nationalized Commercial banks (NCB) had 29% NPL to their total loan portfolio. The second phases of reforms were introduced in 1997, which was sponsored by World Bank. The NPL were reduced but the achievements not outstanding.
In order to strengthen fiscal reporting, the government of Pakistan has established Fiscal Monitoring Committees at federal and provincial levels. To review audits in the public sector enterprises ad hoc Public Accounts Committees has been created. The government continues its ride on economic reform but there are areas that require further effort either at policy level or at implementation level. Implementation of court verdicts in loan recovery, eliminating political interference in bank operations along with the sound budgeting, good procurement process, internationally accepted accounting and auditing, transparency in financial operations are a must for eliminating waste and corruption and also to achieve maximum productivity in all areas of operation.
once again the contribution came from traditional service industries like public administration and there was no increase in contribution share of commerce, finance and transport. Also, the exports have been stagnant at $8 billion for the last few years. This implies that (commerce) export and import grow only at the rate of average economic growth rate of country obviously; the liberalization did very little to international trade. And, the new economies, the symbol of service economies, were not at all growing. Service sectors like communication, transport and finance have nearly maintained the growth rate. Hence, the indicators signal that a lot more has to be done in order to get maximum benefits from globalization.
Looking for new export markets, identifying new areas of sourcing, adding a whole range of products in to the existing export portfolio, identifying niche products and niche markets along with improving the skills of laborers by training, awareness and education etc. On the other hand protection against imports should be brought down for a decent export expansion. The maximum tariff a rate also, has to be lowered to 30% slab; other administrative hurdles should be eliminated in order to achieve speedy export and import. This will boost a trade and the related industries‟ growth.
Agricultural sector reform Pakistan‟s Agriculture needs to be protected to an extent as it caters to around 48% of country‟s employment need. The contribution of Agriculture and allied industries towards countries total exports was at 65 %. Just like any other developing country Pakistan too was affected by globalization. Multi Fibre Agreement (MFA), which deals with Textiles and clothing, was one such rule in GATT that affected Pakistan the most. In fact Pakistan along with other developing countries wanted to phase out this rule early. It is quite clear MFA was in favour of developed nations by allowing them to continue protection. The developed countries used Quota and similar measures to tackle import from developing nations.
The post-quota regime looks very attractive for Pakistan but it has to face renewed competition from India, China, Thailand and Indonesia. To sustain growth in Textile
exports they have to move up the value chain. Pakistan should not continue to be a raw material and semi-finished product supplier to the rest of the world. In fact the market for high end products is big enough and more profitable. But Pakistan should try to have a balanced export portfolio by increasing the share of fruits in total exports.
Administrative reform Pakistan‟s public service suffers from jillion numbers of problems. The public offices are overstaffed along with the problems like not adequately skilled employees, political interference in selection process, highly paid when compared with similar types of jobs in private sector, poor morale, lack of accountability and omni-present under-the-table revenue system. The reforms in this area are not unnoticeable. The railways, the largest employer in the country, a public sector unit, reduced its staff strength by golden handshake that reduced more than 40,000 of excess staff.
4. Conclusion
Globalization has been variously defined and interpreted from different perspectives. There is divergence of opinion regarding the desirability of globalization that simply implies openness and integration of the domestic economy with rest of the world in order to keep pace with dynamics of the international economy. The impact of globalization varies from country to country and from region to region depending on the level of social, economic and political developments as well as macroeconomic policies. Less developed countries (LDCs) have gained as well as suffered from globalization. Globalization is the need of the hour and no country can afford living in isolation. LDCs can counter the negative effects of globalization if they unite and adopt policies that adequately serve their genuine cause.
The globalization has brought number of changes in Pakistan. In order to cope with WTO/IMF/World Bank rules and regulations, Pakistan has taken much reform in almost all sectors of the economy. Different leaders of Pakistan have implemented the globalization in different forms in different time intervals under different circumstances. Globalization was implemented under the compulsion of IMF and World Bank. The
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