Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
This book consists of a mixture of self‐contained but interrelated essays (some co‐authored) on finance, trade and taxation, organized around the central theme of economic globalization with special reference to Asia. Often such collections produce unsatisfactory results, but in the present case, it works well. This is partly by design but also unconsciously as some of the main themes merge together as the book progresses.
Professor Rajan sets out his stall early in the first chapter by defining globalization broadly as “the shrinkage of economic distances (i.e. costs of doing business) between nations” and distinguishing between the “first‐wave” globalization of the 19th century revolving around the mass movement of capital and people from the old to the new world and the growth in tradeable goods and services, and the “second‐wave” globalization after 1945 based more on intensive growth or intra‐product specialization in manufactured goods and increased trade in services.
More familiar characteristics of globalization are also discussed including the growth in intra‐firm and intra‐product trade, the spread of economic liberalization through multilateral agencies such as the WTO, and increased financial interdependencies through capital and currency markets. Less obvious is how trade in services has blurred the boundary between traded and non‐traded goods. Globalization means it is now possible to enjoy a German beer or a Brazilian coffee in a Mexican restaurant in any major city in the world whilst simultaneously having a foot massage and closing a business deal with an American partner on a Swedish cell‐phone manufactured in Taiwan!
The second section comprises three chapters on international monetary and financial issues. What to do about the contagion from international capital flows? Opening up to capital markets is a double‐edged sword offering the tantalizing possibility of sharing the benefits of trade and capital liberalization and the spillover effects between growing neighbors, but capital and currency markets can be a potent transmitter of regional crises, as the Asian crisis amply demonstrated.
What is the best choice of exchange rate regime for small open economies in Asia? Implicit dollar pegging failed to insulate Asian economies from the currency contagion of 1997‐1998 but the knee‐jerk reaction that only “corner solutions” were now viable for emerging economies – they must either float the currency freely or adopt a hard peg, preferably backed up by a currency board, is persuasively de‐bunked. It was naïve to imagine that Malaysia would close its central bank, as a currency board would dictate, that Thailand would adopt a free float in the presence of financial market imperfections, or that Singapore would abandon its unorthodox but highly successful managed float. Most regional economies have returned to the “middle‐way” in exchange rate policy whilst Malaysia has, for the moment, reverted to an orthodox fixed peg to the dollar.
An important theme here is the paradox that the crisis increased the economic disparities between countries in Asia but simultaneously strengthened the rationale for regional monetary cooperation. This was partly a reaction to the perceived failure of multilateral institutions, such as the IMF, to foresee the crisis and diagnose it as a capital account, rather than a Latin American‐type current account crisis and to the heavy‐handed reforms imposed on Indonesia whose domestic political environment was extremely fragile. But a regional solution and institutions are also appropriate if the problems which arose during the crisis, such as imperfections in currency or capital markets, are essentially regional in nature. The pooling of reserves, the development of an Asian bond market, some kind of Asian Monetary Fund to deal with future crises and reduce intra‐Asian exchange rate volatility all become more credible. Monetary union or a common exchange rate policy, even for a small sub‐set of Asian countries, is a long way off, not least because of the absence of European‐style supranational institutions, but the wheels of regional monetary cooperation are beginning to turn.
Part III and Part IV (which rather oddly consists of only one chapter) deal with international trade and tax issues in Asia. One chapter analyses the complex links between economic growth and poverty. Openness to trade and factor flows may generate faster growth and the resources to reduce poverty but may also raise the frequency of crises which tend to impact most on the poor. Another traces India's catch‐up since the reforms of July 1991 which produced a growth rate of real GDP second only to China, driven by information and communications technology. Another explains how international competition in tax systems has made it harder for governments to preserve fiscal autonomy. Revenues are squeezed as countries compete to attract business whilst domestic demands for more social services, such as healthcare and pensions, increase.
More controversial is Singapore's conversion to the American doctrine of bilateral trade agreements and decision to “go it alone” and negotiate bilateral deals with countries such as Australia, Japan and the USA in spite of hostility from some of her ASEAN partners. Although sold as free trade agreements they are, in fact, discriminatory and their proliferation hugely complicates the legal aspects of trade relations. Nonetheless the gamble seems to have paid off. Indeed many countries in the region are now busy copying Singapore's example.
Again we return to the theme that globalization has increased interdependencies and the imperative for countries to cooperate on economic matters to maximize the net benefits. For example, to guard against backsliding in the liberalization of services and to make bilateral trade deals “building blocks” and not “stumbling blocks” along the road to freer trade by extending them quickly to other countries and ensuring that they are comprehensive rather than narrowly sectoral in coverage.
This book is a must read for anyone interested in globalization. It is not just a collection of essays but skillfully pieces together different strands of the debate within an Asian context and it does not shy away from concrete policy recommendations, in contrast to the usual bland list of “policy options”. Alas, there is nothing in this book for China scholars but the inclusion of India is a welcome addition to the plethora of books dealing only with the more successful economies in East and South‐east Asia.
What this reviewer liked most about this book is that it is more than the sum of its parts. This is to some extent by design, since it is organized around the overarching theme of globalization, but there is also an unintended interconnection between the various chapters. India is tentatively dipping its toe in the murky waters of globalization and opening itself up to trade and capital flows. Yet it risks currency contagion, capital flight, increased exchange rate instability, loss of autonomy in tax and spending matters, and there is no guarantee that more trade and faster growth will reduce poverty in the absence of supplementary policies to provide social safety nets and to effect a smooth transition towards her genuine comparative advantage.