The end of country quotas on textile exports marks one of the most major events of the world economy—one that can cause tectonic shifts in the global economic landscape.

The Multi-Fibre Agreement (MFA), under which these quotas were organized, was put in place in 1974 to protect the textile industries in the US and in Europe. The MFA expired in 1994, but the quotas were continued and managed by the WTO, with the understanding that these would be terminated at the start of 2005.

That has happened now and the winds of change are palpable. The US is expected to lose a large number of jobs in this sector, which has anyway dwindled over the last decades. In 1974 there were 2.4 million workers in the textile sector in the US. By 2000, 40 per cent of these jobs were gone.

What is more worrying is that there are many poor countries that could lose out. Anticipating the end of quotas, exports from El Salvador collapsed by 30 per cent last November. It is expected that the apparel sector of the Dominican Republic will lose up to 40 per cent jobs.

Currently, global textile and apparel exports are just short of $500 billion per annum. To put this in perspective, India's national income is just over $500 billion; Bangladesh's and China's close to $50 billion and $1300 billion.

India's socio-economic and political arenas underwent unprecedented transformations over the course of the 1990s. In fact, the national public sphere went through changes that altered the fabric of the nation and state in ways that were radical and irreversible. The most salient and powerful transformations were tethered to two processes: the advent of economic liberalization and the concomitant and meteoric rise of Hindu nationalism. Despite the suddenness with which the two phenomena appeared to annex the affective and political energies of the nation, their genesis was in fact in the making for several decades. For my purposes, however, the break that characterized the 1990s to the present is most crucial to underscore.

In July 1991, after a few decades of tentative pro-liberalization rhetoric and under heavy pressures from international lending agencies such as the International Monetary Fund, the Congress government under Prime Minister P V Narsimha Rao undertook concrete steps to liberalize the Indian economy.

The Kargil War marks the start of a new era for India's international relations. Never before has a third world government been quoted so widely by the world press on the facts and figures of a war in which the government itself was involved. This is partly a consequence of India's democracy, which makes it easy for independent observers to verify the government's pronouncements, thereby making it costly for the government to deviate too much from the truth. But it is also in part a reflection of improving Indo–US relations.

During John F. Kennedy's tenure the US had moved to make India its ally in the region. The compulsions of world politics and a succession of hawkish regimes in the US prevented this from happpening. Now, with the Cold War over, the US concern shifting from war to terrorism, and increasing reports of terrorist groups operating out of Pakistan, America's new India tilt is not surprising. This presents an opportunity for India not just in regional politics, but in shaping a more dynamic economy.

Kargil also shows us that conventional wars between India and Pakistan will never be the same again. The knowledge that both countries possess the nuclear bomb has changed the rules of the game. One reason why India could not retaliate with more air power across the Line of Control (which would mean smaller casualties) was the fear that Pakistan would respond with a nuclear attack.

Introduction

Throughout history, ‘wars of religion’ have served to obscure the economic and strategic interests behind the conquest and invasion of foreign lands. ‘Wars of religion’ were invariably fought to secure control over trading routes and natural resources. Islam has always remained in the eyes of the West as a totally strange culture. Similarly, the ‘war on terrorism’ purports to defend the American homeland and protect the ‘civilized world’. But, in fact, it attempts to secure control and corporate ownership over the region's extensive oil wealth, while also bringing it under the helm of the International Monetary Fund (IMF) and the World Bank (Michel Chossoudovsky 2007).

Arabs themselves have perpetuated the idea of unilateral cultural import. Such preserved original identity can only exist within an impermeable cultural environment that is cut off from foreign influences – an idea that still exits among Arabs today and can explain many of the phobias related to globalization. This complicated situation has caused two parallel wars to be going on in the Middle East.

One is the military conflict and the other is the media mobilization affair. While the media covers falling bombs and fleeing civilians and from time to time puts a human face on the agony of a war so far directed mostly at civilians, it rarely covers its own reporting with anything like a self-critical eye.

As our aircraft glides over Cuba and across the Caribbean Sea, the businessman in the seat across the aisle who has been holding forth on how the Third World has only itself to blame, switches to travel. ‘Instead of Argentina you should have gone to Greece’, he tells me, unmindful of the fact that I would miss the economics conference which is the sole purpose of my travel. ‘The fish in Greece is better than anywhere else. Some of the fish soups are just heavenly.’ He continues on the subject of fish for what seems like eternity. ‘Just walk into any restaurant and say “fish” and you can't go wrong in Greece.’

‘It was also the cradle of Western civilization,’ I interrupt, emphasizing the ‘also’ in order not to offend his sense of priorities. I think he mis-hears ‘the cradle’ for he assures me that if it were crab I wanted, crab I would get. Fortunately, we hit turbulence and the theatre of the absurd comes to an end.

Around noon we are in Buenos Aires. This is the first time that I am in the southern hemisphere of the Western world. The sloping winter sun and the chill in the air in late August seems strange. In some areas the primary colours on house façades create an urban landscape of unmatched beauty, like nothing I have seen before.

An Afghan commoner of uncommon wisdom, Sher Shah Suri, built it around 1540 during his brief tenure as Emperor of India. The British rulers coated it with asphalt and used it to haul their colonial pickings across the subcontinent. The Grand Trunk Road of India has seen it all. But between the towns of Dhanbad and Bagodar in Bihar what you will not see is the Grand Trunk Road. The tar has vanished, the edges have merged into the open fields, and with its potholes and boulders the road resembles images of moonscape that one sees in science magazines. For three hours, our Ambassador snorts and grunts along the ‘highway’, past lyrical little towns like Isri and Dumri, with the magnificent Parashnath mountain and its pinnacled Jain temple as backdrop.

We would have forgotten that this was mafia country had it not been for rows of glistening swords and trishuls being sold openly on the roadside. This went on for more than a mile—a series of horizontal bars with swords hanging from them.

I ask my driver why these are being sold in such large numbers. ‘Naturally, for self-defence’, he replies, making me feel silly for my ignorance. I wonder where one goes if one wants to buy a sword for offence but keep the query to myself.

When, on 28 January 1986, 73 seconds into the flight, the US space shuttle Challenger exploded, killing all astronauts aboard, the first thought in everybody's mind was that something major had gone wrong. But investigations revealed that the entire tragedy occurred because of the malfunctioning of some tiny ‘o-rings’, which are, literally, little rings used to seal joints.

Amidst our larger concerns for the Indian economy—the fiscal deficit, inflation, exchange rate—it is easy to forget that an economy's success depends also on the o-rings, the small things. In India there is immense frustration among people about the bureaucracy, the police, and governance in general. As the Draft Approach Paper to the Tenth Five Year Plan notes: ‘People perceive bureaucracy as wooden, disinterested in public welfare and corrupt. The issue of reform in governance has acquired critical dimensions.’

To break out of this bureaucratic gridlock, it is important to turn our attention to the o-rings of our economy, which get ignored because they are not part of any of the larger schemes of economic policy.

In most Indian universities, after a student submits his PhD thesis, it takes between a year and two years for the final examination, the viva, to be held. Most students and professors have come to accept this as natural. But if one thinks of it objectively, the delay is unpardonable. Most European universities conduct the viva within three months of submission, and American universities do so literally within weeks.

The pursuit of the global common good is the core challenge for all concerned with governance today. It is a responsibility shared by different actors viz. individuals and companies, as well as states and their leaders who are motivated chiefly by their own specific interests. In the future world of globalization, mankind will need to accept new values in order to alleviate the plight of the poor.

Global economic interdependence has grown significantly. This development, generally called globalization, is the consequence of enormous technological progress and the determination, demonstrated by political decisions, to open national economies internally and externally to competition. This process is bound to continue. Thus far, globalization has brought improvements and opportunities for many people in many parts of the world. However, many have not been able to adapt to it and thus were excluded from its benefits. Consequently, they are disadvantaged. Globalization makes it possible to enjoy the experience of encountering a world of diversity and greater efficiency, but it raises fears about the loss of cultural identity. Global governance is the key to ensure that the positive impacts of globalization are enhanced and that its potentially negative effects are diminished.

Whilst economic interdependence has been reinforced in recent years, the absolute number of very poor people has grown worldwide. Material inequality between countries and within countries has also increased. The world now requires a coherent approach to reduce poverty and inequality.

Abstract

This chapter analyzes the operation of the balance-of-payments (BoP) constraint on developing economies, with a special emphasis to the link between inflation targets, real-exchange-rate dynamics and growth in the short and in the long run. The analysis starts with a brief survey of the main models of the BoP constraint. Using a “canonical” BoP-constraint model, the chapter investigates how inflation targets can influence growth in the long run through the impact of real exchange rates on the income elasticities of exports and imports. Based on Woo (2005) and Frenkel and Taylor (2006), the basic theoretical argument is that short-run inflation management may imply substantial and prolonged changes in real exchange rates, which in their turn may not only increase financial fragility, but also change the very own BoP constraint on growth in the long run. The main conclusion of the chapter is that the real exchange rate can be an important instrument to foster growth and development through temporary but sufficiently long changes in the relative price between tradable and non-tradable goods.

Introduction

The Balance-of-Payments (BoP) constraint is one of the most important determinants of growth in developing economies. More specifically, since developing countries cannot issue the international currency and usually face liquidity constraints in international financial markets, they tend to adjust their current account to the availability of foreign finance. In such a process, both the exchange rate and the GDP growth rate are constrained to produce the adjustment of the current account to the international financial conditions.

Introduction

In recent years, the exclusive club of leading industrialized countries, the Group of 8 (G-8), has suffered from a growing legitimacy crisis due to its lack of representativeness and effectiveness (Cooper and Kelly 2007; Lesage 2007). Propelled by the economic and political rise of new powers from the global South, such as the ‘Asian drivers of global change’ (Kaplinsky and Messner 2008), the controversy over the G-8 summit architecture has gained new momentum. Present and past leaders of the West such as Britain's Tony Blair and Gordon Brown, French President Nikolas Sarkozy and Canada's former Prime Minister, Paul Martin, have called for the formal enlargement of the G-8. In her attempt to strike a balance between those in favour of inclusion and those defending the status quo, German Chancellor Angela Merkel, as host of the 2007 summit, decided to launch an innovative outreach effort towards five emerging powers. The so-called Heiligendamm process (HP) has a two-year life span and will engage Brazil, China, India, Mexico and South Africa (the G-5) in an institutionalized dialogue on four critical issue areas.

This paper examines the implications of the HP for the system of global governance and asks some critical questions: Will the ‘structured dialogue’ lead to a more inclusive summit arrangement and strengthen the position of emerging countries in the international order? Will the G-5 be able to coordinate their positions and extract concessions from industrialized countries that not only benefit themselves but also the developing world in general?

Introduction

Part I of this book focuses on the relation between the economic structure, userproducer interaction and learning. It is argued (chapter 4) that learning through interaction between actors from different parts of the economy may have important implications for competitiveness and comparative advantage. However, these insights have largely been ignored by ‘mainstream’ economic theory. Traditionally, textbook explanations of specialisation patterns in international trade have focused on differences in supply conditions. Countries, it is argued, tend to specialise in areas of production that make intensive use of factors of production with which the country is relatively well equipped. However, empirical research has shown that the explanatory power of this type of theory is limited. This initiated an active search for alternative approaches from the early 1960's onwards. Many of the new theories which were developed (often labelled ‘neo-technological’ theories) came to focus on differences in technological capabilities across countries and sectors as the main explanatory factor behind the observed differences in patterns of export specialisation. This focus is now widely shared, also among many ‘mainstream’ economists, and is supported by a large amount of empirical research. However, what causes technological capabilities to differ often remains unexplained. Thus, in this sense, existing theories fail to provide a definite answer to the question of ‘why patterns of export specialisation differ’. This chapter discusses to what extent the theoretical perspective of this book, with its emphasis on the relation between the structure of the domestic economy and its learning capability may throw some further light on this question.

The origins of this book lie in the workshop of the Global Governance Research Network at the German Development Institute (DIE) in January 2007. The workshop expectedly brought together a brilliant, energetic and diverse group of senior scholars, policy makers and researchers from north and south setting forth a fruitful and productive process of introspection and reflection on emerging architectures of global governance. Encouraged by the instant consensus around some of the core ideas of the Global Governance Network, we immediately formulated a publishing project that understandably promised not only to examine ‘major power shifts’, but also broadened its net to include emerging powers and also ‘global civil society actors’ whom James Rosenau provocatively called ‘sovereignty free actors’ as major constituencies of the new global order (Rosenau 1990). As the world has become increasingly more globalized, more complex and also more vulnerable at this point of time, we undertake the task of comprehending and exploring political, economic, social and environmental processes of power shifts and prospects of deliberative democracy on a global scale. There is no doubt that global capitalism has come to witness one of the darkest and gloomiest periods in recent world history. Underlying this existential crisis is a deeper structural, political and moral crisis in the existing structures of global governance. Undoubtedly, the days of “casino capitalism” and “single superpower” are over as the world is keenly waiting for what Karl Polanyi would have called another ‘great transformation’.

Introduction

The central argument of this paper is that the global power shifts experienced in the world in the first decade of the twenty-first century provide a unique opportunity for South Africa to pursue more effectively one of its key foreign policy objectives, viz. reforming the institutions of global governance, which project outdated power configurations. It is doing this by developing strong alliances with like-minded countries of the developing south, such as India, Brazil and China. However, its close alignment with big emerging powers sometimes clashes with its commitment that Africa is at the centre of its foreign policy agenda. This contradiction in its foreign policy is unlikely to be resolved in the medium term, and may also become more difficult to manage as the balance of power shifts more dramatically to the new Asian Drivers.

South Africa has sought to emphasize that it is part of Africa and that it places its interests at the top of its foreign policy agenda. However, as the largest and most developed economy on the world's poorest continent, South Africa's interests, global perspective and objectives are often very different from those of many other African countries. While the country shirks the title of regional hegemon because of its apartheid past, its actions (political or economic) are often perceived in this light by others in Africa. Thus South Africa is both a part of, and yet apart from, the continent.