Sunday, November 8, 2009


Globalization Leads to Recession.
Prof. Joseph K Alexander
Oct 2009

Globalization is inter-connectivity, inter-dependence of peoples and economies. 1/3 to 1/5th of the World production is daily traded in the world markets. Trillions of World currencies are exchanged every hour between countries. Majority of products and services traded are intermediates for further processing. Internet connectivity enables producers and traders to suit instantaneously their production and transaction plans to changing national / international situations. Factors of production of land, labour, capital and organization move to global markets to get the highest reward (subject to barriers imposed by Nation States). There is more income, more demand, market expansion and keen competition. This is the theory of .Liberalization, Privatization and Globalization. L P G is apparently beneficial to the World. But intense global competition leads to recession and depression. Why?

Resources are uneven.
The basic issue we have to realize is that opportunities and resources in the World are uneven. Some Countries, Nations, Sub-national groups, Localities, Firms and Individuals have more endowments: some natural, some acquired. A few are born with more wealth and better entrepreneurship. Some live in societies having more health, literacy, longevity and facilities to acquire them. These all have a head start over others in the competitive race in the production and exchange markets.

The keen global competition is with the most efficient economic units. Even an iota less of any of core competency requirements / efficiency, will lead to rejection and marginalization of the less endowed economic units. Kerala, despite very good ambience for quick economic growth in the form of near-centum literacy, wide spread health facilities and higher longevity; self-impose marginalization and tardy economic growth for ideological fundamentalism. Gujarat, to cite an example, on the other hand utilizes every opportunity for competitive one-upmanship.

Income and wealth accumulate into the few efficient and successful units. This skewing up of wealth will be so massive to create a very wide gulf between the rich and the poor. Richest 20 % of the population own nearly 90 % of the World GDP while the poorest 20 % own only 1 % or less of it. Globalization leads to widening inequality. This leads to recession. How?

Demands & Investments of rich & poor are differ.
The demands of the over-rich and the very poor are totally different. The phenomenal income of the rich is used for durable and luxurious conspicuous consumption. Their rising prices and profits attract most of the new investment funds. The capital investment in such production is large, roundabout, and with longer gestation periods. These are expectational investments aspiring for high returns in the future. They crowd out and decrease investments in other spheres. They are sure to move in due course into overinvestment and glut in the supply of their finished products. Then their prices and profit margins fall. The retailers and whole sale stockists urgently and drastically curtail their demands for stocks. The sudden decrease in demand and disinvestment create large scale retrenchment and unemployment. The investors fail to repay their bank loans. Closure of banks and the wide spread panic leads to pronounced recession in the economy.

Marginalization decreases the income and consumption of the poor. Even their basic demands for food, shelter and clothing languish for want of purchasing power. Thus prices and profits in these primary production areas also tend to decline. Investments in these industries decrease. This augments the recession trends in the economy. Thus intense competition of globalization can widen the rich-poor gulf and economies may move to depression.

Remedies are effective.
Unlike in the 19th and 20th centuries, modern governments adopted contra-cyclical Monetary and Fiscal policies. Interest rate cutting, boosting exports and imports, manipulation of the foreign trade and foreign exchange policies are all brought in to prop up the economic decline. Thus recession is reined. Despite all these measures to mitigate the evils, countries suffer the recession in varying degrees subject to the efficacy of their contra-cyclical props.