Shifting Economic Growth Paradigms
The dominant economic growth paradigms during immediate post-War II years and until about the last decade of the previous century were somewhat sharply divided. While nations in Eastern Europe and South Asia, among others, followed Keynesian prescriptions which clearly recognized the role of the state in directing the development process through a strict regulation regime including in the financial sector, economies like the USA, UK, Western Europe and others went ahead with the dictum that free markets are a sine qua non for sustainable growth. In the latter group of countries the state's role was significantly reduced and markets, principally the financial markets, were deregulated (for example, repeal of the Glass-Steagall Act in the United States in 1999).
The growth debate had taken an interesting turn since the breakdown of the Soviet led socialist block and the onset of globalization around the beginning of 1990s. The hitherto known socialist block preferred to resort to the neoclassical route to economic growth and thus let the market forces dictate the course of their economic fortunes including the free flow of trade across nations. Globalization for the neoclassical economists meant the set of rigid policies such as capital account convertibility, fully flexible exchange rates, no restrictions on borrowing abroad and unlimited access to debt based on the consideration that the exchange rate would stabilize it in absolutely free markets. By the close of the last century the distinction between the two blocs began to blur as most nations joined the globalization bandwagon. As Stiglitz (2006) writes "Globalization, thus, was greeted with great euphoria as capital flows to the developing world increased almost six-fold in six years from 1990 to 1996".
The World Bank and the International Monetary Fund (IMF) jumped in to the forefront and along with the developed countries, they became the ardent champions of globalization. Trade liberalization through removal of government intervention in financial and capital markets and elimination of barriers to trade were recommended. Nations seeking IMF loan (and there were a large number of them) were given these prescriptions/conditionalities which they were required to be adhere to. The World Trade Organization also championed the mantra of trade liberalization--lowering of tariffs and trade barriers as the panacea of growth in the globalizing world. Many countries like India, USSR, Brazil and others in the developing world changed their ideological stances and the policy frameworks were ipso facto reversed.
Globalization, many argued, is not new as it has been the conventional economists' thinking and what ensued was the rapid integration of the world economy in to a global market by the late nineteenth and early twentieth centuries. However, Bhagwati (2004) highlights that today's globalization is different from the earlier integration of the world economy because of the following four factors:
1. Globalization of the earlier era was based on transportation and communication and not by policy changes as it is today.
2. Movements of services and capital are much faster now because of developments in information and communication technologies.
3. Economic insecurity is higher today because of growing integration of nations worldwide and the resultant competitive pressures.
4. There is the fear that globalization places limits on the freedom to provide for the welfare of its citizens.
Growth through globalization has its ardent supporters. Equally there are others who oppose the way it has been managed. The proponents argue that globalization has helped the developing nations achieve higher rates and diversified growth and that, most importantly, it is socially benign. GDP growth rates in many newly globalized countries have not only been much higher than they were in the Keynesian era but have also been followed by faster reduction in the appalling levels of poverty. …