BETTER ROADS TO THE MARKET

Mohammad Saad Farooqi ID: 6237

What is Globalization?
Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology Globalization is often used to refer to economic globalization, that is, integration of national economies into the international economy through trade, foreign direct investment (by corporations and multinationals), capital flows, migration, and the spread of technology.

 Globalization is not just an economic phenomenon. It covers all

aspects of modern life: economic, cultural, political, humanitarian, social, and ecological.
It involves trans-national circulation of ideas, languages, and popular

culture.
The world before Globalization:

Distances mattered space often measured in terms of traveled times / durations. Territorial boundaries more or less kept things in or out. Society and Culture had spatial referents. Everything had its place (in literal terms).

Economic Aspects of Globalization

Globalization works through the creation of the following main economic features:
International Trade Investment and Capital Movement Movement of Labor Movement of Knowledge and Technology E-commerce

A comparison between the worlds most globalized countries in 2007 and 2010:
Rank 1 2 3 4 5 Country (2010) Belgium Austria Netherlands Switzerland Sweden Country (2007) Belgium Austria Sweden United Kingdom Netherlands

Least globalized countries:

Country (2010) Laos Equilateral Guinea Solomon Islands Kiribati Myanmar Country (2007) Rwanda Haiti Myanmar Central African Republic Burundi

INTRODUCTION
Countries such as Russia and Czech Republic that had failed due to

the radical reform strategies claimed that they had no other choices available, although there were alternative choices available to them.
Meeting in Prague in September 2000. Success stories and disappointing experiences shared amongst the

countries in the meeting.

Czech Republic (headed by Vaclav Klaus) received appreciation from the

IMF due to its rapid privatization policies; it was however led down by the countrys own management of the overall transition process that resulted in a GDP (at the end of 1990s) that was lower than that of 1989.

 It was claimed by the officials of Czech Republic government, that

they had no choice in the policies adopted, although there were alternative strategies available.
Different countries made different choices - there is a clear link

between the different choices and the different outcomes.

Poland and China employed alternative strategies. Poland became the most successful of the Eastern European

countries and China became the fastest growing economy in the world over the past 20 years.

 MAJOR PROBLEM FACED BY POLAND:

- Hyper-Inflation

ALTERNATIVE DERIVED FOR THIS PROBLEM:

- Shock Therapy Poland started with shock therapy to bring hyper inflation down to

more moderate levels.

Poland had quickly realized that shock therapy was appropriate for

bringing down hyper-inflation but was inappropriate for societal change.

WHAT STEP WAS TAKEN BY POLAND?

Poland pursued a gradualist policy of privatization
- Simultaneous building up of basic institutions of a market economy such as banks, and a legal system that could enforce contracts, and process bankruptcies fairly.

- It recognized that without these institutions, market economy cannot function.

- Poland privatized banks, before it privatized corporations. This is in sharp contrast to Czech Republics policy of privatization, where the state banks continued to lend to private corporations, and easy money flowed to those favored by the state. - Private corporations in Poland were subjected to rigorous budgetary constraints, which resulted in effective restructuring.

Czech Republics policy of Privatization

Czech Republic privatized corporations before it privatized banks;

state banks continued to lend money to privatized corporations, this way easy money flowed to those favored by the state.
Privatized entities were not subjected to rigorous budgetary

constraints.
This allowed them to put off real restructuring.

Reasons for Polands Economic Success!

Polands former deputy premier and finance minister has argued that the

success of his nation was due to the explicit rejection of doctrines of Washington Consensus (IMF).
The country did not do what the IMF recommended (rapid privatization,

emphasis on reducing inflation over all other macro-economic needs).

Poland emphasized on things to which IMF paid little attention such as

importance of democratic support for the reforms which entailed:

Trying to keep unemployment low. - Providing benefits to the unemployed. - Adjusting pensions for inflation. - Creating institutional infrastructure required to make a market economy function.
-

CONCLUSION
The gradual process of privatization allowed restructuring to take

place prior to privatization and the large firms could be re-organized into smaller units.
A new, vibrant small enterprise sector was created, headed by young

managers who were willing to invest for their future.

STEPS TAKEN BY CHINA

Chinas reforms began in agriculture with the movement from the

commune (collective) system of production in agriculture to the individual responsibility system (partial privatization).
In partial privatization, individuals did not have the authority to buy

and sell land freely. Gains in output showed how much could be gained from partial and limited reforms.
A successful trial in one province was followed by equally successful

trials in several others. This helped in achieving widespread support for the reform strategy.

 After observing the results, central government willingly accepted

this change and the reforms were spread to the entire Chinese economy.
Top advisors from USA were asked to discuss over the reforms and

give opinions.
Kenneth Arrows and Joseph Stiglitz stressed on the importance of

competition, and creating the institutional infrastructure for a market economy.

Privatization was considered secondary.

1. How to move from distorted prices to market prices?

- The Chinese came up with the ingenious solution of having a two

tier price system.

- Under this price system, firms that produced under the old quotas is

priced using old prices and anything produced in excess of the old quota is priced using free market prices.
- The two tier price system was the gradualist approach adopted by

the Chinese which avoided rampant inflation.

- It gave time and allowed the market to gradually match the free

market prices.
- Charging free market prices at an instant would have distorted the

economy which could have resulted in taking support from the IMF.
- Soon after the objective was met, two tier price system was

abandoned.

2.

To eliminate the old economy by creating a new one.

- Millions of firms were created through several townships and

villages. They were given the liberty to operate in areas other than agriculture.
- Foreign firms were invited into the country for joint ventures due to

which China became the highest recipient of foreign direct investment among the emerging markets.
- Simultaneously, China also created an institutional infrastructure

(SEC, Bank regulations, Safety Nets) which created new jobs, restructured the old state-owned enterprises, and privatized much of the housing stock.

How did China gain Social stability?

China gained social stability by avoiding massive unemployment. The Chinese believed that job creation had to go in tandem with

effective re-structuring.
China utilized its un-used resources in efficient ways that also

created employment opportunities.

Chinas monetary policy and financial institutions facilitated the

creation of new companies and jobs.

CONTRAST BETWEEN CHINA AND RUSSIA

China came up with alternatives to develop its market economy

rather than undergoing a process of rapid privatization (IMFs ideology).

Russia bowed to IMF ideology and went under the process of rapid

privatization.
In doing so, Russia crippled its economy and declined at an average

annual rate of 5.6% in the 1990s.

Chinas economy grew at an average annual rate of 10% in the

1990s.

 Chinas transition has resulted in the largest reduction in poverty in history. Russias transition has resulted in one of the largest increases in poverty in

1990s.
Chinas stock market is larger than that of Russia.

Russia adopted few changes in managing its agriculture while China

managed the transition to the individual responsibility system in less than 5 years.
Outcomes in Russia after the transition were worse, whereas in China, they

were opposite of what the IMF would have predicted.

CONCLUSION
In its quest for stability and growth, China put creating competition, new

enterprises and jobs before privatization and re-structuring existing enterprises.

While China recognized the importance of macro-stabilization, it never

confused ends with means and it never took fighting inflation to an extreme.
IMF does not stress on creating market economy, it stresses on rapid

privatization which causes inflation and unemployment which directly affects the economy of the country and causes instability.
Countries that did not follow IMFs ideology succeeded and countries that

did failed badly and are now in worse conditions.

 In the past, institutions used to emphasize on stabilization,

privatization and liberalization, but now, such institutions have recognized the mistakes that they have made in the past and have realized the need for institutional infrastructure and a market based economy.
There was a lack of political legitimacy in Russia due to which wealth

had been obtained by stealth and political connections with a leader - this was always overlooked by IMF and US Treasury, both of which never addressed the fact that they were supporting a system that lacked political legitimacy (in case of Russia).

DRAWBACKS IN RUSSIAN POLICY

There was no strategy for attacking poverty or enhancing growth which

were the most important issues that Russia was facing in those times.
World Bank discussed scaling back on its program in the rural sector which

did not make sense because this was where much of the countrys poverty lay.
The only growth strategy proposed was to repatriate the capital that had

fled the country.

The major drawback of this strategy was that there was no point in

bringing in the capital when they can earn better returns in the West.

What must Russia do?

Russia must treat the assets lost as pillage of National Assets which

cannot be compensated.
The objective should be to try and stop further pillage, while

attracting legitimate investors by creating a rule of law.

They must create an attractive business climate. Russia must focus on macro-stabilization and encourage economic

growth.

 Russia should create an investment friendly market. Russia must not complicate regulations that would make it difficult

to establish new businesses.

Russia must ensure availability of land and capital.

Russia must overcome issues at the Federal government level.

A federalist structure that provides incentives at all levels must be

put into place.

Russia must collect taxes.

Possible After-Effects in Russia, as a result of the past Decade

Political and social stability Huge inequality Enormous poverty

- These factors are a threat to both Russian and global economy and

can serve as grounds for a variety of political movements in the country. It is not going to be easy to reverse the inequality that was created so quickly.

Democratic Accountability and Failures

RUSSIA IN TRANSITION
- Massive poverty. - Devastated middle class. - A few oligarchs. - Declining population.

- Disillusionment with market processes.

RUSSIA AFTER TRANSITION

- Russia now has a fragile democracy.

- Largely captive media mainly under the control of the State.

- Educated and dynamic entrepreneurs.

CONCLUSION
Globalization is neither good nor bad. It has the power to do

enormous good.

Globalization can be reshaped and when it is, then there is a

possibility that it will help create a new global economy, in which growth is not only more sustainable and less volatile but the fruits of this growth are more equitably shared. but on the world as it is.

Economic policies must be predicted not on an ideal world model,