Is there a space for small developing countries in a globalized environment?

Executive Masters in Business Administration Cohort 23 BUAD6085 Global Macroeconomics and the Caribbean Business Environment

Adina Nicholson 05790312 29th October 2011

The Arthur Lok Jack Graduate School of Business Faculty of Social Sciences St. Augustine campus

Table of contents

1. Introduction

2. Definitions

3. How can small states get there

4. How have small states performed thus far

5. Conclusion

Introduction

The process of globalization poses a host of challenges to small developing economies all over the world. The Caribbean region alone is already dealing with a number of issues in their pursuit of sustainable development. For Caribbean states, the impact of globalization on trade has been reflected in increased liberalization and market-opening policies, especially during the latter part of the 1980s and the 1990s. Running on the heels of the paradigm shift in policies at the global level, Caribbean countries responded with a package of policies geared towards curtailing the role of the State in the economy and rejuvenating stagnant production methods, which were reoriented towards export markets.

Tomas L.Friedman (2003) in his book The world is flat argues that globalization has been accelerated due the convergence of three technological events in the worlds history. One is the creation of the personal computer and the ability of individuals to how become authors of their own content in digital form. Next was the emergence of the World Wide Web, which now allowed individual with ideas to virtually transmit this anywhere in the world practically free of charge. And finally the revolution of software which made every one with a computer now integrated and multi-linked. Thomas reiterated that more people today than ever before have access to the technology platform for innovation, entrepreneurship, education and terrorism 1.

Panel Debate between Joseph Stiglitz & Thomas Friedman on Globalization. Time Talks, Time Select, New York Times.

Definitions

Globalization can be defined as the increasing unification of the world's economic order through reduction of such barriers to international trade as tariffs, export fees, and import quotas. The goal is to increase material wealth, goods, and services through an international division of labor by efficiencies catalyzed by international relations, specialization and competition 1

Globalization allows firms to view the world as an integrated marketplace that includes buyers, Producer, suppliers, and government in different countries. More than ever modern technology is promoting a higher level of international business activity especially in area of software, gaming and entertainment 2

There is no formalized definition of a small state, however there are numerous variables used to determine size and for each variable international organizations adopt differing threshold values for smallness. The most commonly used variables are population, income level, and land area.

S.Tamer Cavusgil, Gary Knight and John R. Riesenberger, International Business- Strategy, Management and the New Realities

Panel Debate between Joseph Stiglitz & Thomas Friedman on Globalization. Time Talks, Time Select, New York Times.

Total income as measured by Gross Domestic product (GDP) is one of the variables used to determine the size of a country. Since GDP is measured in monetary terms, the most acceptable measurement is usually US$ based on market exchange rates or, preferably, on purchasing power parity.

Land area (usable land area) is used by some international bodies to define size because it can reflect a countrys economic potential. Land area is a fixed variable and can only change if the country changes its boundaries.

Population size is commonly used to measure country size as the population data are available for most of the countries over a long time period, and it directly shows the number of people under consideration. There are different threshold (or cut-off) levels suggested to define smallness.

Another school of thought has defined a small open economy as one that is a price taker on world markets. It can import and export as much as it wants at unchanged terms of trade. Openness to capital flows likewise means an ability to borrow and lend freely at unchanged risk-adjusted world interest rates.

While some textbooks are clear about which economies are small, figuring out in practice whether a particular country satisfies the smallness criteria is less straightforward. Often there is the tendency to equate smallness (in the price taking sense) with smallness in relation to the countrys share of global GDP.

However the increase in the relative size of small states has raised a debate on the pros and cons of being small. It is suggested by many researchers that the development of small states is often hindered by a quantity of unavoidable obstacles such as high production costs, high transportation costs, and transaction costs. Notwithstanding, since they would not be able to have a diversified economy, they are more likely than not to be vulnerable to adverse external global shocks. The process of globalization could magnify these issues as international cost differences would be more important in global trade, and the globalization of economic activities, especially financial services, would make it easier to spread economic crises to small developed markets from to the rest of the world.

How can small states get there ....

Does the country size really matter for economic growth? This issue has been researched extensively but there are those who suggest that small country size, under certain conditions, could be detrimental for economic growth. The potentially negative effects of smallness on growth can be bundled into four major categories: 1) limited size of the domestic market, 2) limited domestic resource base, 3) vulnerability, and 4) limited scope for public policy.

Globalization can certainly offer opportunities for small countries, and these opportunities could even counteract the negative effects. First, as a result of the decline in transportation and communication costs, the size of the domestic market in small countries is no longer a constraint on their development; producers in small countries can sell their products in the global markets. Moreover, it is suggested that new technologies increase production flexibility, and eliminate cost differences between small and largescale production. Thus, small country producers, by specializing in niche-technology or location-specific products and services, can increase their output and achieve a more diversified production base. Lastly, migration, especially cyclical migration, would have a stronger impact on economic growth in small countries. Cyclical migration allows peoples of small countries seeking work or education to migrate to larger and richer countries, and re-inject resources in the form of workers remittances and human capital to develop their countries (Baldacchino, 2006).

Thomas L. Friedman (2003) also identified three key initiatives that countries should focus on in order to compete successfully on the global market. First is infrastructure in the form of bandwidths, ports, airports and such transportation channels would ensure that small economies have the infrastructure to connect this global platform of innovators and entrepreneurs. Education plays and next critical role in ensuring that people have the ability to collaborate with other countries on the global platform. An thirdly, good governance in such areas as intellectual property laws , investment laws and social security protection, all go a long way in giving a nation the ability to compete.

Public policy now will gain more prominence for development in small countries in the face of globalization. As Brutigam and Woolcock (2001) mention, a more integrated global economy may enable smaller states to adapt quickly to changing conditions, and to more readily pursue strategic development policies. Besides, jurisdictional independence of small states helps them to chase independent policies beneficial to their own countrys development. But, in order to enjoy the benefits of jurisdictional independence, small countries need to strengthen their social cohesion, foster strong and high quality institutions, and adopt good governance practices.

Another school of thought insists that the regional integration processes will need to be deepened in the future if they are to remain relevant. Macroeconomic policy coordination will help to soften out the effects of external shocks. Avoiding tax competition can also be an essential objective that could be achieved by means of common tax provisions. Initiatives must be employed to develop regional and sub-regional financial

institutions and innovation systems that include the development of broader schemes for co-operation in education, research and technical development.

The opposing development levels associated with large economies and the vulnerabilities specific to small economies provide a strong debate for special and differential treatment for these economies. Multilateral trade agreements should include longer transition periods to meet new policy demands, more flexibility in setting thresholds or defining legal and institutional obligations, more flexibility for active investment strategies, broader safeguards and the provision of technical assistance. After all, large developed countries where not subject to these harsh conditions when they were at the development stages, in fact rich countries did not develop on the basis of these policies or institutions that they now recommend for small states. Such an anomaly can be viewed as kicking away the ladder as coined by Ha-Joon Chang 2002 (Cambridge University, UK)

Enhanced international labour mobility should be a clear priority for smaller states, since it smoothes out the social costs of globalization, guarantees access to the required pool of skilled workers and provides much-needed external resources via remittances to foreign exchange-constrained states. The benefits of return migration are enormous, thus, migration issues should be included in the hemispheric agenda, in multilateral negotiations between the region and the European Union, and in regional integration processes.

How have small states performed thus far .

As indicated earlier, opportunities for small economies are highly dependent on regional integration efforts. Small states in Latin America and the Caribbean have advanced in this field when compared to their counterparts in the developing world.

Ireland grew so rapidly during the period 1995 - 2007 that it came to be known as the Celtic Tiger, and its experience has been much studied by policymakers in other small countries seeking to imitate its success. A number of factors contributed to this success namely Tax, EU aid, Industrial policies and geographic demographics. However a few of the factors that contributed to Irelands success would be difficult or impossible to replicate elsewhere.

In the Caribbean, the reduction of trade barriers and the increasing openness of these economies have not all-in-all led to a significant increase in intraregional trade or even helped these nations to obtain a growing share of the extra-regional export market; as a result. Caribbean economies lack trade-product complementarity, which speaks to the development of industries that complement each other as in the case of extraction-to-manufacturing-to distribution. This is vital in the fostering of intraregional trade. Caribbean economies are in fact dependent on preferential market access schemes granted by developed countries.

Globalization have brought about and aided sectoral changes in the composition of output in favor of the services industry much to the detriment of agriculture and manufacturing. This process reiterates the differences among Caribbean economies by creating a twofold pattern of

specialization, so that the countries are divided between service-based and goods-producing economies. It also brings to light the dependence and vulnerability of these small states. While growth in exports have been subject to the unexpected changes in the agricultural and manufacturing sectors, import growth, driven mostly by consumer goods, has not declined. This has created a need to attract foreign capital in the form of foreign direct investment to further stimulate the growth and the development of sectors that have seen success under globalization. Trends in employment and migration have also copied these changes in output and capital flows.

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Conclusion

Globalization poses new demands regarding size and development. In particular, it makes all countries smaller when compared to the relevant world market. The relative importance of large national markets has declined, and even larger economies are increasingly dependent on external conditions.

Nonetheless, small developing economies continue to be at a disadvantage in the global economy, regarding access to economies of scale, diversification and macroeconomic policy autonomy. They are not small enough to rely only on exports of a few commodities or services, nor are they large enough to reap the benefits of economies of scale or to successfully diversify into dynamic products. These countries, then, run the risk of been caught in a development trap.

Although the challenge of keeping up and getting ahead in a globalized world is substantial for small economies, the region has had its share of success stories. Service-based economies of the Caribbean have shown the most robust response to globalization, in activities such as tourism, informatics, e-commerce and finance. In countries where agriculture and mining are competitive, 'clusters' associated with their key primary sectors are also an interesting option.

Does the integration of China, India and the other large emerging market economies have implication for small economies that differ from those for larger economies? Policymakers in small economies have always had to be sensitive to developments beyond their borders. The stakes have always been high and maybe globalization makes them higher. In some sense globalization is less of a unique challenge for small open economies than it is a case of more of

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the same, except more so. Small open trading nations are long used to looking beyond their borders when contemplating how best to determine economic policy. Globalization arguably presents a bigger challenge to countries (like the US) that have long considered themselves immune to international influences when making policy.

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Bibliography

Burande, Abhay. Advantages of Globalization. 09/12/2007. Accessed on 21/10/2009 at http://www.buzzle.com/articles/advantages-of-globalization.html

Wikipedia- www.wikipedia.com S.Tamer Cavusgil, Gary Knight and John R. Riesenberger, International BusinessStrategy, Management and the New Realities

Friedman, Thomas L. (2003) - Its a Flat World After All. Panel Debate between Joseph Stiglitz & Thomas Friedman on Globalization. Time Talks, Time Select, New York Times.

United Nations, Economic Commission for Latin America and the Caribbean (June 2003): Globalization and Development

Baldacchino, G. (2006), Small Islands versus Big Cities: Lessons in the Political Economy of Regional Development from the Worlds Small Islands, Journal of Technology Transfer

Brutigam, D. and M. Woolcock, (2001), Small States in a Global Economy: The Role of Institutions in Managing Vulnerability and Opportunity in Small Developing Countries,

Ha-Joon Chang, Kicking Away the Ladder, post-autistic economics review, issue no. 15, September 4, 2002, article 3. http://www.btinternet.com/~pae_news/review/issue15.htm

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