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Strategic Analysis:
A Monthly Journal of the IDSA
Globalisation and Technology—Lessons for India
By Akshay Joshi, Research Officer, IDSA
“The entire Industrial Revolution enhanced production by a factor of about a hundred. The microelectronic revolution has already enhanced productivity in information-based technology by a factor of more than a million, and the end isn't in sight yet.” 1 “If another high-tech industry—the aircraft industry—had undergone similar progress during the last three decades, a trip from Tokyo to Washington D.C. would take less than five minutes, would cost US$2, and would all be done on less than half a gallon of gas.” 2
— Walter W. Wriston and Abe Singer and Scott Rowell
Introduction
In today's world, power is measured in terms of economic and technological capabilities. Information technology has pervaded almost all walks of our life. The reach of this powerful technology has been further revolutionised by the Internet. The personal computer took almost 16 years to reach 50 million people whereas the Internet has reached the same number in 4 years time. Countries are putting together cyberlaws to facilitate commercial transactions over the Internet. It is estimated that E-business will reach a figure of US$1.5 trillion by 2003. The globalisation of financial markets dwarfs the E-business figure. Private currency traders, trade $1.3 trillion a day, more than the total foreign currency reserves of all nations put together. Private capital flows have been growing twice as fast as trade for years. International portfolio transactions by US investors had grown from 9 per cent of GDP in 1980 to 135 per cent of GDP in 1993. According to Mckinsey & Co., the global financial market will grow to $83 trillion by 2000, triple the aggregate GDP of the affluent nations of the Organisation for Economic Cooperation and Development (OECD). 3 Electronic payments in the US in 1991 were $417 trillion compared to $70 trillion in cheque payments and $1.7 trillion in cash payments. A centralised economy got China nowhere, but networks of individual entrepreneurs are now swiftly moving them towards becoming the world's largest economy. Individual companies like the Cable News Network (CNN) are providing so much money to the United Nations (UN) that many people are calling it UNN.
Technology has been the driving force in all these changes offering speed of transaction, fast reaction times of the markets and the dissemination of financial information to a broad range of players. States that stick to the rule based economic systems like the gold standard and neglect the technology-based marketplace will lose vital foreign capital, foreign technology and domestic jobs. The use of information technology in the global economy is also nourishing international crime. Modern communications, the deregulation and privatisation of government-owned businesses, competitive pressures to increase the speed of flow of trade, reduced paperwork, and the emergence of global financial systems have all helped transform local drug operations into global enterprises. The multi-trillion dollar pool of illegal drug money or “hot cash” is easily transformed into investments in legitimate business thanks to the computer. 4
The large volume and mobility of “electronic” forms of money is changing the global economy. It also necessitates a change in the thinking of the people and governments. This also has an impact on international relations and the way nations interact with each other. This article traces the process of the globalisation of the world economy from medieval times till the information age. It highlights the role of technology in the development of the world economy. Thereafter, some important economic and technological trends of the information age are enumerated. It is followed by an important debate on who actually controls the economy in the information age—nation states or markets. Finally, the role of technology in the rise of East Asian economies and the subsequent crisis is discussed to show how technology can be a boon as well as a curse. Accordingly, this paper is organised as follows:
Development of the World Economy.
Globalisation in the Information Age.
Economic and Technological Trends in the Information Age.
Nation-States versus Markets—Who Controls the Economy?
East Asian Economies—Their Rise and Subsequent Crises.
Lessons for India.
Development of the World Economy
Wealth in the early medieval society remained mostly idle, inactive and unproductive. This was mainly because of the absence of appreciable trade and commerce. In Europe the Church and the nobility that owned most of the wealth tended to hoard their fortune. But the Crusades that began in Europe in 1095 and intermittently went on till 1291 were actually the beginning of the process of globalisation. The Crusaders going over to the East to fight for the Holy Land came in contact with many commodities they had not seen or used before. This demand for foreign goods gradually led to continuously expanding trade and commerce. Once the Crusaders wrested control of the Mediterranean route from the Moslems, it became an important trade route between the East and the West. Internal trade also started increasing and goods were bought and sold in terms of money. An economy centering around self-sufficient villages thus transformed into a money economy steadily expanding itself in the context of a world of expanding trade. 5 The Renaissance and the accompanying sea voyages and discoveries of new lands in the 15th century gave a boost to globalisation. At the heart of the process of globalisation were better means of transportation and communication.
The industrial revolution represented a revolutionary improvement in production process by means of the application of technology i.e. of newly invented types of machines—an improvement that brought about a spectacular change in the pattern and structure of the English society. The net effect of all this was a massive influx of wealth by way of profit to the English bourgeoisie. It was a dynamic wealth, which by way of further investment brought about further profit and the revolution in technology, in the form of means of transportation and communication, removed most of the natural barriers to the indefinite accumulation of this wealth. 6
In the old days, when paper notes were invented, they had to be convertible. These were issued by private goldsmiths, and no one would accept them unless quite sure that the goldsmith in question was solid, and could convert the note into money on demand. When governments started printing notes, they had to keep the same promise-or their paper would not be trusted. This was the gold standard. The gold standard of pre-world war years was a system with high international capital mobility with fixed exchange rates. With the outbreak of World War I, international capital movements collapsed the exchange rate system. The Brettonwoods conference after World War II aimed at rebuilding the world trade and payments system that had been disrupted first by the break down of the gold standard in the inter-war years and also by the trade wars, competition, devaluation and the great depression of the 1930s. The Brettonwoods system envisaged another periodically adjustable fixed rate system in which all the countries were to be integrated through trade but not capital movements. 7 The US deliberately fostered this system on the world in the late 1940s to forestall another depression and contain communism by putting a premium on markets and information and deemphasising military rivalry. 8
A New International Economic Order (NIEO) was thus created in the 1940s after the Brettonwoods conference. The gold standard collapsed in the 1970s. Once again there was a demand for a new international economic order. However, the debate for a NIEO in the 1970s was accompanied by a debate for a new world information and communication order (NWICO).
The NWICO debate in the United Nations was initiated by the developing countries because they not only wanted to reduce the monopoly of the big five international news agencies 9 but also to get the developed world to make further investments to improve their communication and information infrastructure. The South realised that any state hoping to be fully integrated into the global economy must possess an efficient communications infrastructure with such basics as working telephones and data relay capabilities conducive to data provision and other expanding service industries. So, by demanding increased aid for communications development, the South's goal was to attain the basic resources needed for economic development in a changing global economy. 10
Communication has been the vital prerequisite and lubricant of international economic changes. There is a positive relationship between the expansion of some forms of international trade (especially services) and world financial markets, on the one hand, and the ability to communicate efficiently and rapidly, on the other. The international flow of news has always been directly related to transnational economic exchanges, especially trade and investment. A study of the evolution of Reuters illustrates how new information and communication technologies (ICTs), changes in the world economy, and news organisations themselves interact in this policy-making environment. 11
With the breakup of the Bretton Woods system of fixed exchange rates in the 1970s, dealing in foreign exchange and money was about to expand rapidly. The problem of banks and dealers was how to receive quotations with sufficient speed. Seconds were important, reliance on telephones and telex was unsatisfactory. Reuters decided to install computing terminals in the offices of banks and other foreign-exchange markets. That was the central idea behind the Reuter Monitor Money Rates Service that was started in 1973. Reuters would in this way create an electronic marketplace. Market-makers (contributors) would be able to insert their foreign exchange and money rates into the system. At the press of a button, the rates would be available on a screen to interested parties (recipients) such as banks and international businesses. Reuters would charge both contributors and recipients for access to this interactive system. 11
The development of the world economy and the technological linkages are illustrated in Fig. 1.
Globalisation in the Information Age
The first phase of globalisation in the 20th century was in the 1940s, when countries were expected to adjust to the opening up to international trade with convertible current accounts and the IMF, a creation of the Brettonwoods conference, was to provide them financial support when necessary. After the oil crisis and the breakdown of the fixed exchange rate arrangements in the 1970s, capital movements revived. Even without capital account convertibility, most countries were forced to adjust to increased capital inflows within the framework of a more open world trading system. By 1995, several developing countries with different degrees of capital account convertibility became increasingly integrated through capital movements and entered the second phase of globalisation. Many developing nations are still in the first phase and adjusting to the problems of opening up to international trade and current payments. 13
The end of the Cold War in the early 1990s, has coincided with the onset of the information revolution. Globalisation in the information age has seen the integration of finance, markets, nation-states and technologies to a degree never witnessed before—in a way that is enabling individuals, corporations and nation states to reach around the world faster, further, deeper and cheaper than ever before. The Cold War ideas of the clash between communism and capitalism, détente, non-alignment and perestroika are being replaced by free-market capitalism. The new economic rules revolve around opening, deregulation and privatisation of the economy. The Cold War was about Einstein's mass-energy equation, E=MC2. Globalisation is about Moore's Law, which states that the computing power of silicon chips will double every 18 to 24 months. In the Cold War the fear was annihilation from an enemy you know too well, while the fear in the information age is from anonymous economic and technological forces that are anything but stable. 14
According to Mr Grady Means, global leader, strategic change practice, Price Waterhouse Coopers (PwC), between 1993 and 1996 most of the global corporations across sectors went through the period of consolidation, particularly in telecom and automobiles. This phase, which followed the previous three years of massive privatisation initiatives in the world, was overtaken by the Internet, which allowed companies to globalise rapidly, helped by very low costs of communications. Every major company must have a global strategy and nations must avoid economic nationalism to be successful in the latest wave of globalisation fuelled by information technology. 15
Austrian economist Joseph Schumpeter's studies argued that an advanced economy is constantly disrupted by “creative destruction”—the perpetual replacement of products and services with more efficient ones—caused by technological innovation. According to Andy Grove, only the paranoid who are constantly looking over their shoulders to see who is creating something new that will destroy them—and then staying one step ahead—will survive. Other economists talk of long waves in the affairs of nations, 50 to 60 years long, triggered by technological innovation, which if taken at the flood can lead to good fortune. Water power, textiles, and iron in the 18th century; steam, railways and steel next; petrochemicals, electronics and aviation since 1950 were the earlier technological innovations. The current wave of semiconductors, fibre-optics, genetics and software seems to be underway. 16 Alvin and Heidi Toffler have distinguished between the agricultural, industrial and information revolutions and postulated that nations make war in the same way as they make money. 17
Globalisation in the information age is transforming the world economy. The dramatic increases in the cost, risk and complexity of technology in many industries render even the largest national markets too small to serve as meaningful economic units by themselves. More importantly the emerging world economy is electronic, integrated through information systems and technology rather than organisational hierarchies. The digital revolution has “dematerialised” manufacturing and commerce, forced vertically integrated “Fordist” firms to use information technology (IT) so that they can integrate with the international system of networked production. 18
The entry of “electronic” forms of money, in large volumes as explained earlier has added a new dimension to the debate on international money. India has been pushing for creating a new financial architecture to avoid recurrence of the Asian financial crisis and to address the issues of volatile capital flows besides efforts for making the financial system more resilient and strengthening the capacities for crisis management. The Indian finance minister speaking at the meeting of the World Economic Forum (WEF) in Davos earlier this year said that in the new era of globalisation, capital flows were playing an enormous role and the flows in the capital account were very large. In such an environment, Brettonwoods institutions like the IMF and World Bank coming to the rescue of countries hit by financial crisis was indeed 'relatively small'. 19 The Brettonwoods system encouraged countries to help each other enforce capital controls. The IT revolution has coincided with a period in which powerful states have liberalised their external capital controls almost completely.
In sum it can be said,
“Globalisation today is like a 100 meter dash, over and over again. No matter how many times you win, you have to race again the next day. And if you lose by just one-tenth of a second it can be as if you have lost by an hour”.
Thomas Freidman, The Lexus and the Olive Tree, 1999
Economic and Technological Trends in the Information Age
Let us now take a look at some of the economic and technological trends of the information age. These clearly highlight the need for economists and governments to adjust their policy making to suit the new realities.
Information and Knowledge are the new sources of wealth. The focus has shifted from material and territory to ideas and technology. The market places higher value on intellectual and human capital than on hard assets like bricks and mortar. Knowledge combines with management skills to produce wealth. Microsoft, with only a relatively small amount of fixed assets, now has a market capitalisation well in excess of Ford, General Motors, and Chrysler combined. Microsoft donates $325 million each year for charitable causes. In 1981, Infosys Technologies, an Indian software company had $250 to start with. Today it has a market capitalisation of $3 billion, and is listed on the Nasdaq stock exchange in the US. Amazon.com a book selling company on the Internet has a market capitalisation of $30 billion. The powerful economies of Hong Kong (China) and Singapore, countries with virtually no physical assets, demonstrate the growing irrelevance of territory to wealth. Moreover, information is now stolen, and then sold to whomever might be interested. In the US the anti-hacker struggle is led by the US Secret Service, and in the UK by MI5. 20
Shift towards Distributed Production and Global Marketing. Information systems permit distributed production—scale without geographic concentration—and global marketing: designed in the US, chips fabricated in Japan, subsystems built in Taiwan, software written in India, and final product marketed in Europe. 21 Mass production in a single location is disappearing. Companies are in a position to disperse different phases of the industrial life cycle among different countries, depending on local conditions. 22 Under this form of production, producers of IT products are contracting out core functions including production and final assembly itself to contract manufacturers. Such firms are hugely successful in competing against traditional integrated electronics producers. The specialised contract manufacturers had revenues of over $40 billion in 1995. Networked production provides producers with low cost, high speed, high quality alternate sources of supply, available at much reduced demands on their scarce and costly capital. Networked production works best in a tariff free environment. 23
Shift from Physical Goods to Weightless Goods. The defining feature of economic growth in the Information Age is the increasing weightlessness of the output. Production and consumption are shifting away from objects toward information and services. Weightless goods like computer software, financial products, telecommunications, the Internet, entertainment and even management consulting are becoming important. Production has become increasingly gloablised and competition to the developed nations, especially from the newly industrialised economies (NIEs) has become intense. The defining feature of the information age is the increasing weightlessness of output. The key characteristics of weightless goods like computer software, telecommunications, the Internet, financial products, entertainment and management consulting which accounted for 23 per cent of the US GDP between 1987 and 1994 are:
Many people can use them at the same time.
Once the good is produced it can be replicated at low cost. 24
Shift from Manufacturing towards Services. Another trend today is that the services industry is replacing the manufacturing industry the world over as the fastest growing part of the economy. There is a great opportunity for countries like India because of this shift. Services like medical transcriptions, tele-medicine, bill collections over the Internet, universal libraries, etc which use modern information technologies cost almost 10 times less in India than in advanced countries. In India almost 40 per cent of our national wealth comes from the service industry. If India can build a good information infrastructure capable of supporting sophisticated, fast and cheap communication technologies, it has the potential to become the Asian hub for all services related activities in the region. There is a potential Rs. 55,000 crore (US$13 billion) market which will provide employment to 1.1 million people by 2008. 25 We should not give away this market to China and South East Asia due to the lack of a proper information infrastrucutre.
Shift towards Openness to Trade. There has been a lot of debate the world over about the links between growth and openness to trade. Increased openness affects income by encouraging resource allocation into sectors with a comparative advantage. Moreover, it also affects growth through the direct transfer of technology, the spillover of ideas due to increased personal contacts, the elimination of the duplication of research, the increased size of the market and increased competition. 26 In a knowledge-based society openness to trade is very significant and countries are moving towards it in order to benefit from all the spillover effects. Moreover, rapid improvements in technology have intensified pressure to open up sectors encased in heavy regulation and protected by their governments.
Export Controls. Some governments insert various conditions in their trade laws in order to deny other countries access to their R&D and their high-technology exports. They have been restricting the export of hi-tech goods and services in the name of national security. The revolution in IT compounds threats to national and international security by greatly facilitating the transmission of information to potential aggressors. However, private markets and enterprises dominate information technologies. Therefore, efforts by the government to restrict their transfer have foundered because of the difficulty in stemming the flow of such technologies and the reluctance to forego the profitable revenue from this largely non-defence trade. 27 While export controls may be justified in some sectors like encryption software, the use of denial and delaying techniques in other sectors may be counterproductive. Such “techno-nationalism” may also lead to retaliation from the affected countries. 28 Moreover, the US and other developed countries are using skilled manpower from many developing countries like India to develop these technologies. In following the policy of information apartheid with countries like India, the US has to be careful of a “nationalistic backlash” from American Indians (the NASA and the Silicon Valley are full of American Indians). India on its part needs to network with the Indian diaspora in the US to ensure that there is a free flow of technology. 29
The Rise of Foreign Direct Investment (FDI). FDI has played an important role in world trade over the last 20 years, and the pattern of FDI in East Asia suggests that it is an important source of technical knowledge and ideas to recipient countries. FDI will help the host country through transfer of technology, modern management techniques and access to better R&D.
Globalisation and Technology affect Trade. Thanks to globalisation, trade has become a conduit for the worldwide diffusion not only of goods but also services. These services are telecom, accounting, banking and credit, law, medical services, education, travel, tourism and entertainment—everything from airline ticketing to Hollywood movies. The Internet is well suited for all such trade in services. Countries are using their trade surplus in the export of high-technology goods and the surplus in services exports to offset their deficit in the trade of goods. In the US for example, trade surplus in services and hi-tech exports offsets the overall trade deficit in merchandise goods from US$170 billion to US$86 billion. 30 Globalisation, technology and trade are closely linked. Technology makes globalisation feasible; trade liberalisation allows it to happen. However, technology-driven globalisation also creates losers, that is those who cannot adapt to the skills. Even these losers use IT to further their cause. Governments have to find a system that is suitable to their country and strike a balance between globalisation, use of information technology and the pace of trade liberalisation.
Setting of Market Standards. Many companies the world over have sprung to great size and capital by focussing on standard setting and maintenance. New IT product markets are increasingly characterised by rivalry to set de facto market standards. 31 Microsoft, for example, has been able to make great strides by setting the standards in Windows software for operating systems and Windows NT for networking software.
Intellectual Property Rights (IPR). When a company invests overseas it carries technology with it and usually exports both to and from its home base. Accompanying the flow of goods, services and investment is the flow of propriety technical and marketing information or intellectual property to subsidiaries and suppliers around the world. Unauthorised copying or piracy of compact discs, software packages, trademarks, designer labels, and computer hardware components have to be protected through patents, copyrights or trademarks. As we are living in a knowledge-based society and a market-based economy, intellectual property must be protected from competitors so that it can be exploited, sold or licensed at the discretion of the owner. 32 This is increasingly becoming a hot topic of discussion amongst trade negotiators and governments at international trade fora.
Privatisation of Military Functions. In the information age very few countries can successfully resist the pressures of globalisation. The pressures of postindustrial capitalism are forcing states to sell government-owned defence industries. Private contractors to look after logistics, commercial satellite pictures for intelligence, dual-use civilian technologies being modified for military use are some of the examples of the privatisation of military functions. The freely available military goods and services, including skilled manpower to maintain and operate hi-tech weapons after the end of the Cold War, have only reinforced this trend. The contemporary revolution in military affairs (RMA) can be attributed to the rise of information technologies and flowering of capitalism in the world. 33
Technological developments. Computing power has doubled every 18 months for the last 30 years. The costs of transmission are less than one per cent of what they were in the early 1970s. Communication bandwidths are expanding rapidly, especially with optical fibre cables. Once Internet telephony is legalised in India, the telephone rates will reduce from Rs. 84/- per minute for a call to USA to about Rs. 2/- per minute. Voice communication will be almost free of cost in the next few years. The dramatic cheapening of information transmission has opened the business field to loosely structured network organisations and even individuals. 34
Interconnection. Individuals, institutions and communities have been linked with one another via computer networks, satellites and expanding public and private telecommunications infrastructures. National markets, regional markets, markets in specific financial instruments or commodities have all become part of global capital markets. Therefore, domestic financial problems in Thailand or Mexico affects markets worldwide and a fall on the Hong Kong stock exchanges sends all the world's stock exchanges falling like dominoes. When one market “catches cold, all the other get sick”. 35
E-Commerce. E-Commerce is fundamentally reshaping entire industries, notably financial services, telecommunications services, business and consulting services, travel, and entertainment. It is revolutionary in three respects. Firstly there are many more players. The large corporations and banks are now joined by local retail establishments and households, rather anyone with a few thousand dollars worth of equipment. Secondly, there is a high level of technological change in the information industry. The third revolutionary change is the worldwide availability of information. Consumers can go directly to the producers without going through retailers, wholesalers and distributors. The new intermediaries will be network access providers, electronic payment systems, and services for authentication and certification of transactions. The result would be something approaching the ideal of perfect competition: low transaction costs, low barriers to entry and improved access to information for the consumer. 36
Regulatory Issues of E-Commerce. E-Commerce has thrown up a whole new set of regulatory and tax related issues. Electronic commerce doesn't seem to occur in any physical location but instead takes place in the nebulous world of 'cyberspace'. In the prevalent system, geographic location or jurisdiction determines which authority has the right to tax the income stream arising from the transaction or the sale itself (a sales or value-added tax). In E-Commerce the transactions may be conducted over many geographic locations. Who will get the tax? Where is the transaction taking place? 37 Effective economic governance in a digital world economy will require increased harmonisation of national legislation and regulations and much more effective and powerful international organisations. The postmodern integrated world economy will require a marked strengthening of international institutions such as the WTO and supranational organisations like the EU. They may well acquire taxation and enforcement powers if territorial jurisdiction is no longer effective. 38
Internet. The Internet is a decentralised computer system available to individuals and small private companies that can participate freely without having to go through the state, a major corporation, or some other institutional structure. This provides the world with an extremely free telecommunications infrastructure, which is why many see the Internet as a symbol of globalisation. The origins of the Internet can be traced back to the ARPANET (Advanced Research Projects Agency Network)—a network of the US Department of Defence, which was used for scientific and technological research, including military research, and remained far removed from the public until the 1980s. It was only after it began to be used for commercial purposes, that it spread like wildfire. However, the US maintains unequivocal hegemony over the Internet community. Of the 30 million or so Internet host computers, the US has about 20 million. In the Internet community, a battle is unfolding for hegemony through free economic activity. Both the public and private sectors are taking up the new post-Cold War information trend with enthusiasm. In the information age, hegemony will be established by spreading culture, values and economic activity over the Internet. 39
Shift from Hardware to Software. In the IT industry the focus is shifting from hardware to software. In 1985, in terms of importance and costs the ratio between hardware and software was 85:15 per cent, but today this has reversed with software at 85 per cent and hardware at 15 per cent. In a world economy that is getting inter-connected at a rapid pace this shift is extremely important. Countries like India, which have a strong intellectual and human capital in the field of software stand to benefit by the increasing importance of software in the information technology industry. At present India is exporting low level software i.e., the $2 per hour variety. However, the core competence of the Indian software writers is in high-end software exports i.e., the $2000 per hour variety. 40 Indian software exports form 10.5 per cent of the total exports of the country. The value of exports stood at $2.7 billion in 1998-99. If India can target the high-end software this value is likely to increase many times over. By 2003, software exports will overtake all other sectors of exports in India. The National Association of Software and Services Companies (NASSCOM) estimates that the Indian software industry will achieve a target of $85 billion annual turnover by 2008, including $50 billion in exports.
English as the International Language in Business. With the Internet being used the world over for commercial transactions including E-Commerce, Engish is fast becoming the international language in the Business world.
Nation-State versus Markets—Who Controls the Economy?
One of the important reasons for the end of the Cold War was that it became impossible to continue to operate a closed society in a world economy in which competitiveness was increasingly predicated on access to information and information technologies. China's economic modernisation under Deng Xiaoping and the famous slogan, “never mind the colour of the cat till the time it catches mice”, is a recognition of the importance of markets in the world economy. The recent trade agreement between the US and China which will pave the way for China's entry into the WTO, highlights the importance of markets in national policy making.
The globalisation system in the information age is built around three balances. The balance between nation states, the balance between nation states and markets, and the balance between nation states and individuals. The second balance is between the nation states and the global markets. Information technologies have produced significant changes that are altering the balance of power between these two global domains. The global markets are made up of millions of investors making money around the world with the click of a mouse. This “electronic herd” gathers in key global “supermarkets” such as Wall Street, Hong Kong, London and Frankfurt. The attitudes and actions of the electronic herd and the supermarkets can have a huge impact on nation states, even to the point of triggering the downfall of governments. 41
The trend today is towards shifting alliances and joint vetures, made possible by computers and advanced communications. Offshore banking encourages widespread evasion of national taxes. Companies are increasingly using the Internet for E-commerce that brings with it its own regulatory problems. The globalisation of financial markets, private capital flows, and the networking amongst international organisations, NGOs and regional organisations are adding many new dimensions to a states' authority to control the economy in the digital age.
While IT may have enhanced the potential mobility of money, it has also given states new tools and mechanisms for asserting their sovereign power and authority in the financial sector if they choose to. Recent US and Australian regulatory initiatives use artificial intelligence (AI) to monitor money flows and look for suspicious transactions that may involve money laundering activities. Various sophisticated software are being used for this purpose. In addition to the fact that there are monitoring software available, there is a thesis that even weaker states may get technical and legal assistance from the more powerful states in order to enhance the efficacy of international control regimes. The regulatory and law enforcement agencies are also emphasising to the developers of e-money the importance of encryption systems and anti-money laundering systems. 42 Moreover, while capital may not be linked to a physical location in the information age, the same is not true for labour. Therefore, should the changes brought about by globalisation be seen as unjust, a backlash can occur and people will turn to the states for redress. 43
The nature of the information revolution demands recognition that change has become one of the few constants and that we must accept that literally and figuratively we live in a state of transition. The evolution of information and communication technology, which has only just begun, will probably favour markets over nation-states. However, there are roles that only the state can perform like collection of tax, meeting the crucial social needs that markets do not value, providing job security, avoiding unemployment, protecting the environment and looking after health care and safety of its population. 44 While globalisation and the focus on technology are important, they do not sound the death knell to the significance of the nation-state. Government policies will play an important role in adjusting to the changes due to technologies.
East Asian Economies—Their Rise and Subsequent Crises
Technological change has always played an important role in the economic progress of nations. The industrial revolution and the accompanying advances in transportation and communication converted Great Britain into a global superpower. Technological change was responsible for much of the economic growth in the US between 1909 and 1949. Economists prefer to look at measures of total factor productivity (TFP)—which is usually thought to measure the technological progress—to measure the economic growth of a nation. 45 In 1952, Japan had a per capita GNP of US$188 in the prices of the day, below that of Brazil, Malaysia, and Chile. Today it has the fourth largest GNP per capita in the world. Much of the growth in labour productivity (output per worker) was driven by TFP growth (technological progress). The highly educated and skilled workforce in manufacturing and the ability to imitate and import technology from abroad helped Japan catch up with the US.
Let us take a look at the proliferation of information technologies in East Asia. Japan dominates the use of electronic payment systems. Of the total of 150,000 Automatic Teller Machines (ATMs) and 250 million credit cards in eight East Asian economies in 1997, 125,000 ATMs and 225 million credit cards were in Japan. Asia is, however, adopting electronic commerce and payment systems at great speed. According to Dataquest, the Asia Pacific information technology (IT) market between 1995 and 2000 will grow from US $6.4 billion to US$22 billion. IT penetration in Hong Kong is good, 41 per cent of the adults in Hong Kong own personal computers (PCs) as compared to 52 per cent in the USA. It has one of the finest telecommunication infrastructures in Asia, with 200,000 kilometers of fibre optic cables linked to 1500 buildings. PC banking and video on demand (VOD) facilities have already been introduced. Asian economies have recognised the importance of E-commerce and electronic payments. They are making the suitable national information infrastructures (NIIs) for this purpose. Singapore has the “Singapore One” network and their “IT Vision 2000” envisages Singapore as an intelligent island. Malaysia's multimedia super-corridor (MSC) project, China's Golden Bridge Network and efforts by Japan, Korea, and Taiwan to build a suitable NII encompass electronic commerce and payment systems by the early 21st century. 46
The rise of the East Asian Tigers or the newly industrialised economies (NIEs) comprising Singapore, South Korea, Taiwan and Hong Kong can be attributed to many reasons. One explanation is that of openness and export orientation, since these countries have been successful exporters and have also imitated foreign technologies. High saving and investment rates, low taxes, relatively high quality education systems and institutions are some of the other reasons for this success. The NIEs have attracted substantial amounts of FDI which have enabled them to adopt and adapt foreign technologies. In general, the ability of developing countries to attract FDI seems to depend on whether they follow export-promoting or import-substituting strategies for development. The famous economist, Jagdish Bhagwati has argued that export-promoting countries attract more FDI and that this FDI yields social returns. Lastly, the TFP growth rates in Taiwan, Hong Kong and South Korea, though not miraculous, compare favourably with those of other developing countries and with the OECD. 47
On the flip side let us see how technology precipitated a financial crisis in the East Asian Region. The continued rapid growth of global trade in goods and services depends on financial flows, and it is here that the instant availability of information has had a particularly dramatic effect. Flashes of data around the world intensify the volatility of currency movements, which can send trade, investment and stock markets in a downward spiral, at least temporarily. In October 1997, what started as a seemingly localised banking crisis in Thailand spilled over into a chain of events that affected financial markets around the world. 48 The sudden collapse of South East Asia left the biggest and the brightest in the IMF and the World Bank aghast. They called for an implicit faith in the efficacy of market economy, free movement of international capital and an unrestricted and free trade of goods throughout the would. They blamed the “crony capitalism” of Indonesia and the stranglehold of Chaebols in South Korea; but they had no explanation for the debacle in Thailand and Malaysia. They could also not place their finger on the effects in Hong Kong, Japan and even Singapore. 49
In a globalised economy, they discovered with feigned wonderment, billions of dollars can be moved at the stroke of a computer key and this fact makes it almost impossible to manage or control its movement. They said that the real culprit was the short-term capital managed by financial intermediaries-commonly referred to as “hot money”. At the same time they did not allow imposing any restrictions on the movement of this “hot money”, since it went against the basic credo of globalisation. According to Prof. Jagdish Bhagwati, “private capital inflows worth $93 billion in 1996 to Indonesia, Malaysia, Thailand, and Philippines changed to an outflow of $12 billion in 1997”. According to him this showed that, “the enormous benefits from free capital mobility are not persuasive”. According to Mr John Gray of the London School of Economics, “nobody anticipated the power of new technologies which facilitated the instant movement of capital”. 50
East Asia still remains an attractive place to do business, with forward looking and innovative companies and well-educated and productive workers. Fundamentally it is the productivity of those workers and those companies that will determine their future, rather than currency crises and bank failures. While we should do away with restrictions on industries, commerce and finance, we should never do away with regulation. The availability of instant information also makes the markets work better. If the underlying financial and economic conditions are healthy, markets that crash overnight, can also recover overnight, causing little or no damage to trade and investment flows. 51
Lessons for India**
India today stands at the threshold of the information revolution. The liberalisation of the Indian economy started in 1991, when a comprehensive plan for opening up our markets to the world was started. Global business leaders felt that the momentum of reforms and deregulation were slowing down in 1994. However the recent pronouncements by the Indian government and the systematic launching of the second phase of economic reforms seems to have rekindled the interest of global business and political leaders in India. Such sentiments have been expressed at the World Economic Summit held at New Delhi in December 1999. India is gearing itself for the revolution in information technology and is aware of the latest economic and technological trends. There are tremendous opportunities for India in this revolution and careful implementation of a futuristic IT strategy can ensure economic security and economic power for India in the first decade of the 21st century.
However two important aspects of information security have to be at the top of the national agenda if we do not want to fall prey to the malevolence of the microchip. The first is security against an information attack on our information infrastructure by hostile elements. While the country is going online and getting networked there is a threat of an attack by hackers and other anti-social elements on our computer networks which can put banks, power grids, internal networks of important institutions, command and control nodes and other critical IT dependent systems out of order. The second security related aspect is the issue of large flows of money over computer networks, which if not regulated, can lead to economic crisis like the East Asian economic crisis in 1997. This aspect also includes the loss of stealing of money over networks. Top banks are losing large amounts of money every year due to this factor. They do not advertise those losses because it would lead to loss of investor confidence.
Some specific lessons and guidelines from this study that can help India exploit the information revolution to its advantage are summarised below:
Security of information and information infrastructure needs to be given utmost priority.
Awareness of the economic and technological trends in the information age should be disseminated to the business fraternity, governments, students in graduate schools and the research community.
The emergence of economic security as a tool for national security needs to be emphasised.
The use of soft power (the ability to achieve the desired results in international relations through attraction rather than coercion) as a means of achieving national aims has to be acknowledged by national policy planners. Soft power is strongly affected by the cultural content of movies, television and software exports of a nation. India, which has a good entertainment and media industry can use information technologies to catch up with the bigger powers much faster than would have been possible without these technologies.
All possible efforts should be made to increase software exports in India. The focus should shift from the development and export of low-end software to high-end software.
Sophisticated monitoring systems using state of the art software need to be installed to monitor the multi-million dollar pool of 'drug money' and 'hot cash'.
Networking with the Indian diaspora in the IT industry around the globe can ensure a free flow of technology and capital to our country. These successful entrepreneurs can act as 'angel financiers' and 'venture capitalists' for the new start-ups in India and abroad.
Networked production and global marketing work best in a tariff free environment. This must be factored into our decision making as we deregulate and open up our economy.
We must build a good information infrastructure (increased telecom bandwidths and Internet connections) to exploit the revolution in the service industry and to enable E-commerce.
Openness to trade and FDI should be encouraged so that we benefit from all the spillover effects like direct transfer of technology, access to modern R&D, spillover of ideas due to increased personal contacts and increased competition.
Free flow of capital, without any regulation and monitoring, needs to be guarded against. India should resist pressure exerted by other countries for the unregulated opening up of its capital account in the debates for a NIEO.
Protection of intellectual property in knowledge-based products through patents, copyrights or trademarks must become a national priority, especially in today's market-based global economy.
Regulatory issues of E-commerce including passage of the bill on cyberlaws, legalising digital signatures, tax collection of online transactions, etc. need to be implemented at the earliest.
Lastly the government must strike a balance between globalisation, use of information technology and the pace of trade liberalisation to ensure social security needs, job security, health care and safety of the population.
Conclusion
The defining feature of the world economy in the information age is that change is revolutionary not evolutionary. Control over territory alone does not assure control over an economy or economic factors. Countries are no more using military force to achieve control over rivals, rather neo-colonialism and war by other means (WBOM) are the new methods of achieving national aims. This highlights the growing importance of economic security of a nation in the globalised world. The digital mindset converts knowledge and ideas into products. A firm's ability to commercialise ideas speedily by saving time and resources thus increases knowledge share, which ultimately translates into an increased market share. Nation-states too have an important role to play in implementing new monitoring and regulatory practices, especially at a time when the world is shifting to E-commerce and the Internet is increasingly being used for the transfer of large amounts of capital. The use of information technologies can lead to tremendous profits for a nation and if not regulated, can also cause economic crises. The two major players in the world economy—the governments and the companies—have to be aware of the economic and technological trends in the information age and develop a digital mindset to deal with the new realities.
Endnotes
Note 1: Walter W. Wriston, “The Twilight of Sovereignty: How the Information Revolution is Transforming Our World”, 1992, Quoted in Dan Caldwell, “Power, Information and War”, The Emirates Occasional Paper, (Abu Dhabi, Emirates Centre for Strategic Studies and Research, 1998), p. 7. Back.
Note 2: Abe Singer and Scott Rowell, “Information Warfare: An Old Operational Concept With New Implications”, 1996, Quoted in Dan Caldwell, op. Cit., p. 7. Back.
Note 3: Jessica T. Mathews, “Powershift”, Foreign Affairs, vol. 76, no. 1, January/February 1997, pp. 57-58. Back.
Note 5: Amal Kumar Mukhopadyay, “Western Political Thought (From Plato to Marx),” (New Delhi: K.P. Bagchi & Company, 1988), pp. 72-73. Back.
Note 6: Ibid., pp. 170-73. Back.
Note 7: Arjun Sengupta, “IMF Restructuring-India Must Play a Major Role,” Times of India, March 30, 1999. Back.
Note 8: Robert O. Keohane and Joseph S. Nye, Jr., “Power and Interdependence in the Information Age”, Foreign Affairs, vol. 77, no. 5, September/October 1998, p. 84. Back.
Note 9: The big five international wire agencies included Agence France-Presse (AFP) in France, Reuters in the UK, Associated Press (AP) and United Press International (UPI) in the USA, and ITAR-TASS in the erstwhile USSR. Back.
Note 10: Mark D. Alleyne, “News Revolution—Political and Economic Decisions about Global Information”, (London: Macmillan, 1997), p. 63. Back.
Note 13: Sengupta, n. 7. Back.
Note 14: Thomas Freidman, “The Lexus and the Olive Tree”, (Harper Collins, 1999), Quoted in “Globalisation is Here, Like it or Not”, Times of India, April 5, 1999. Back.
Note 15: Sanjay Anand, “Indian Companies urged to focus on E-Commerce”, Times of India, August 16, 1999. Back.
Note 16: N. Chandra Mohan, “Can India Surf-Ride the Wave?”, Times of India, March 31, 1999. Back.
Note 17: Alvin and Heidi Toffler, “War and Anti War: Survival at the Dawn of the 21st Century”, (New York: Warner Books, 1993). Back.
Note 18: Stephen J. Kobrin, “Back to the Future: Neomedievalism and the Postmodern Digital World Economy”, Journal of International Affairs, Spring 1998, 51, no. 2, p. 362-63. Back.
Note 19: G. Sudhakar Nair, “G-7 Invites India to help Regulate Financial Markets”, Times of India, March 8, 1999. Back.
Note 20: Gerald Segal, “Asians in Cyberia”, The Washington Quarterly, Summer 1995, p. 12. Back.
Note 21: David C. Gombert, “National Security in the Information Age,” Naval War College Review, Autumn 1998, vol. LI, no. 4, p. 24. Back.
Note 22: Ellen L. Frost, “Horse Trading in Cyberspace: US, Trade Policy in the Information Age,” Journal of International Affairs, Spring 1998, 51, no. 2, p. 474. Back.
Note 23: Michael Borrus and Stephen S. Cohen, “Building China's Information Technology Industry”, Asian Survey, vol. XXXVIII, no. 11, November 1998, p. 1006. Back.
Note 24: Gavin Cameron, “Economic Growth in the Information Age—From Physical Capital to Weightless Economy”, Journal of International Affairs, Spring 1998, 51, no. 2, pp. 447-48. Back.
Note 25: Swaminathan S. Anklesaria Aiyar, “The Coming Super-Babu Revolution”, Times of India, February 28, 1999. Back.
Note 26: Cameron, n. 24, p. 454. Back.
Note 27: Gombert, n. 21, p. 36. Back.
Note 28: Frost, n. 22, pp. 492-93. Back.
Note 29: Akshay Joshi, “The Information Revolution and National Power: Political Aspects—II”, Strategic Analysis, vol. XXXIII, no. 6, September 1999, p. 1024. Back.
Note 30: Frost, n. 22, p. 481. Back.
Note 31: Borrus and Cohen, n. 23, p. 1008. Back.
Note 32: Frost, n. 22, p. 482. Back.
Note 33: Eliot A. Cohen, “A Revolution in Warfare”, Foreign Affairs, vol. 75, no. 2, March-April 1996, pp. 42-43. Back.
Note 34: Keohane and Nye Jr, n. 8, p. 83. Back.
Note 35: David J. Rothkopf, “Cyberpolitik: The Changing Nature of Power in the Information Age,” Journal of International Affairs, vol. 51, no. 2, Spring 1998, p. 334. Back.
Note 36: Frost, n. 22, p. 476-77. Back.
Note 37: Kobrin, n. 18, p. 374-75. Back.
Note 39: Toru Nishigaki, “The Impact of the Information Age,” Asia Pacific Review, vol. 5, no. 2, 1998. Back.
Note 40: Discussion with Dr. APJ Abdul Kalam, Principal Scientific Advisor to the Government of India. Back.
Note 41: Thomas Friedman, “The Lexus and the Olive Tree”, (Harper Collins, 1999). Back.
Note 42: Eric Helleiner, “Electronic Money: A Challenge to the Sovereign State?”, Journal of International Affairs, vol. 51, no. 2, Spring 1998, p. 396, 400. Back.
Note 43: Rothkopf, n. 35, p. 340. Back.
Note 44: Mathews, n. 3, pp. 64-65. Back.
Note 45: Cameron, n. 24, p. 449. Back.
Note 46: Joseph Yam, “The Impact of Information Technology on Financial Development in East Asia”, Journal of International Affairs, Spring 1998, vol. 51, no. 2, pp. 541-43. Back.
Note 48: Frost, n. 22, pp. 477-78. Back.
Note 49: B.P. Jeevan Reddy, “The Perils of Globalisation—I”, The Hindu, January 1999. Back.
Note 51: Frost, n. 22, p. 478. Back.