Globalization and its challenges

I started as Secretary of Finance of the Philippines in the early 1990s, saw the onset of a surge in the philosophy of globalization. I had embraced it almost fully.

Because of this, we promoted policies of opening up the Philippine economy, of greater liberalization, of privatization as a means of getting government out of the business sector, and of reducing our long list of entities where foreign investments could not come in – reducing them to nearly zero, except for those that were considered to be "in the interests of national security."

We joined the World Trade Organization, lowered tariffs, and came up with a tax reform structure that we thought would be a better incentive to the entry of foreign direct investments.

The motive behind this was our experience with many decades of an economic strategy that featured protectionism, that allowed the rise of many industries in our country, but which, at the same time, appeared to give rise to infant industries that remained infants for at least 15 years.

The record seems to have supported our push toward privatization and liberalization, which were the hallmarks of globalization. The economy grew at a rapid pace. True, certain protectionist industries were affected. But it is also true that many of the protectionist industries began to gear up for competition.

For example, in the banking sector, we passed a law that opened it up to ten new foreign participants. There was a lot of protest at the start because it was thought by many that the local banks would be overwhelmed. But we passed the law and, as a result, many of the banks that had been parochial in their interests began to adjust, becoming much more global in their services in order to be competitive.

Asian crisis

So what am I to conclude from all this? That globalization wins and antiglobalization loses? Well, the story of my experience is not yet complete. Just as we were moving along this trajectory, along came the Asian crisis.

The Asian crisis is perhaps a defining moment because it nearly ground to a halt the efforts we had made toward the elements of globalization. A growth rate that was moving upward of 7% plummeted to just 2% in a flash. An exchange rate that looked to be stable became extremely volatile in spite of sound economic fundamentals. And, of course, this gave rise to all kinds of objections that the antiglobalists had been fomenting.

The crisis seems to have exposed the perception that, as a strategic consideration, Asia is of low priority – for the United States, in particular – compared with, for example, Mexico, the Middle East, or Russia. To put it plainly, there were those who were expecting a quick rescue package just like Mexico received, and they found themselves left in the lurch.

It seems to have exposed the weakness of individual economies that appeared to base their Asian miracles on a sort of colonization by their own elite of their own masses.

It also highlighted a new financial order with which many countries, even those that were embracing globalization, did not appear able to cope.

In the 1970s and even earlier, the world’s financial economic order for development seemed to be dominated by flows from multilateral and bilateral sources. Now they appear to be totally dominated by flows from private sources, which move with extreme speed and in large amounts.

Consider, for example, a typical International Monetary Fund program for the Philippines of $700 million. To discuss such a program would take, at the very least, nine months. By contrast, in the new financial order, it seems that you can move multiples of $700 million with just a single click of a computer key. In a flash, a money manager looking at a computer screen can move billions of dollars anywhere in the world, in and out of a country, in amounts that sometimes dwarf that country’s resources.

Challenges

Let me enumerate some of the challenges that I think are going to be quite important. The first is not to oversell globalization. There was some overselling at the start, when globalization was presented as a panacea, something that will cure all ills. Interestingly enough, no one noticed this at the start because the history of mankind is replete with solutions to all the world’s problems. That was, of course, the call of Communism as well: it was supposed to be the answer to everything. Globalization was presented as an argument against protectionism because protectionism was supposed to be bad for the poor and only good for the rich protectionists. But in the course of globalization, the antiglobalists began to point out that perhaps some protection was necessary because, in spite of globalization, the statistics seem to be showing that the gap between the rich and poor within countries continues to grow.

The second challenge is to complete the ongoing Asia-Pacific Economic Coordinating elements that, to some extent, were listed under the 1996 Manila Framework for Strengthening Economic Cooperation and Development (I had the honor of serving as the chair of finance ministers at that time). It was proposed at the time that some kind of pool or a quick response fund be created. Japan was at the forefront of suggesting that this type of fund be put in place.

We know the history. It was chopped down on the grounds that it had moral hazards, that the very existence of such a fund would be an invitation for countries to continue to speculate since they would know that there was a pool of money to draw from. As it is now, we are beginning to move toward some kind of mechanism by which a quick response can indeed be had, that is basically a pooling of resources and entities within Asia. The Framework also included a call for increased capitalization of the World Bank and the IMF. Surprisingly, that took longer than many had hoped it would.