Economic Nationalism Revisited-Part 1

Professor Madan Kumar Dahal (Late)

Senior economist and former Chairman Mega Bank, Nepal

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Three years have passed since I wrote a paper on a relatively new theme “Future of Nepalese Economy: Economic Nationalism Reconsidered.” The reactions were sharp and mixed but it was a stimulating exercise prompted by the urge for an in-depth inquiry into the dynamics of economic nationalism as a viable option for small and vulnerable economies like Nepal in a rapidly changing regional environment where ideology is being replaced gradually by market with global boundary, and where competition and efficiency have played a critical role in accelerating the pace of development through comparative cost advantage. The protagonists of globalization and liberalization have argued that vulnerable economies in the twenty-first century would not survive long if they cannot face the challenge of global competition, and that only the nations with better prospects for globalization may survive.

But if strong nations are to flourish in greater prosperity, their supremacy in global competency is likely to marginalize the prospects for the development of weak nations. This is clearly indicative of an increasing economic uncertainty that might threaten the existence of smaller nations. The struggle for survival, on the one hand, and the challenge for sustainable economic development, on the other, has remained crucial issues for small nations. In such a context, this paper attempts to address itself to three standing curiosities of the day. Can globalization and liberalization of the economy help to make a breakthrough in the economic front? Can economic nationalism help in the successful implementation of liberalization in a small vulnerable economy like Nepal? And, if so, what are the key features of economic policies to be pursued in such a situation?


The phenomenon of globalization, defined as an increase in cross-border economic interdependence resulting from a greater mobility of factors of production and of goods and services, has established linkages over a broad geography of locations. This trend is reflective of an increasing economic liberalization and falling tariff barriers, modern communications, freer flow of capital and technology, integrated financial markets, and corporate strategies of multinational companies that operate on the premises of a homogeneous world market.

These developments bear far reaching implications for the countries on the management of their economies and on the quantum, quality, and distribution of jobs. Worldwide trade has expanded more than 6 percent a year since the 1950s. There has been a massive increase in net capital inflows into the developing countries — from $35 billion in 1981 to an estimated $200 billion in 1994. Economic momentum in the Asia-Pacific rim has been largely generated by the investment decisions of thousands of multinationals as well as small and medium-sized Asian companies operating at a regional level and developing “production across borders.

The rapid growth of manufactured exports from the dynamic Asian economies, including China, is impressive indeed: imports of manufactures from these countries grew by nearly 15 percent per annum in Japan and the United States, and by close to 13 percent per annum in the European Union between 1980 and 1990. Investments from the Newly Industrialized Economies (NIEs) increasingly focus on neighboring countries where the costs of production are significantly lower.

Although globalization is a worldwide phenomenon, it poses many challenges to the governments. For example, it is apparent that the process of globalization limits the capacity of the nation-state to pursue its own economic and social policies. Other concerns pertain to an uneven distribution of benefits among countries and problems of income redistribution within the country, even when there are net benefits from globalization as a whole. However, the issue of globalization could be visualized in a wider framework encompassing greater economic integration through trade liberalization and tariff reforms; moves toward increasing economic efficiency and competitiveness through a much greater reliance on market forces; a reduced role of the state through privatization; and increasing deregulation of foreign exchange, financial, and capital markets. At the core of globalization is the strategy adopted by multinational companies of increasing decentralization of operations and subcontracting across national borders leading to a considerable dispersion of the production process.

Some of the advanced industrialized countries, such as Japan, Australia, and New Zealand, are characterized by outflow of capital and technology, export of higher value-added commodities and are dependent on migrant labor to meet their domestic labor shortages. In New Zealand, globalization, deregulation, and industrial restructuring have altered the economy. The Newly Industrialized Economies (NIE), namely, the Republic of Korea, Singapore, Hong Kong, and Taiwan, a part of China, have successfully completed the stage of aggressive export penetration through low wage labor-intensive methods of production, and moved in the second phase to more skill- and capital-intensive technologies.

These countries are open to more intensive and higher technology flow of foreign investments. The new tier of NIEs, better known as ASEAN countries, comprising Malaysia, Thailand, Indonesia, and the Philippines, are still predominantly importers of a higher level of technology and capital but are also now, as in the case of Thailand and Malaysia, investing in other Asian countries, especially China and neighboring Vietnam.

The economies in transition to a market economy, comprising China, Vietnam, Cambodia, Laos, and Mongolia, are dependent on inflows of foreign capital and technology and have outflows of migrant labor. In spite of serious infrastructural constraints, Vietnam is at present attracting flows of foreign investment. South Asian countries, namely Bangladesh, India, Pakistan, Sri Lanka, and Nepal, still face glaring problems of underemployment and poverty but have fairly diverse growth experiences and varying degrees of success in opening up their economies to trade and flows of foreign capital. These countries remain heavily dependent on inflows of foreign capital and technology and their exports are still mainly labor-intensive.

India is, however, also emerging as a significant exporter of engineering and light capital goods and the Indian firms, especially in the engineering and construction sectors are quite active in neighboring Asian countries. Almost all these countries have a large overseas migrant population, are active exporters of labor, and are heavily dependent on foreign exchange remittances from their migrants to boost up their export earnings.

The South and South-East Asian (SEA) countries have achieved a higher growth of GDP and exports, and created a higher level of manufacturing employment than most other regions in the world during the 1980s and 1990s. This success has been largely attributed to regional integration.

Trade and foreign direct investment (FDI) indicate the growing economic interdependence between the economies of the region in recent years. The role of Japan as an industrialized country is outstanding, for it still accounts for about 70 percent of the region’s GDP. But China has also achieved remarkable dynamism more recently, which has channeled a significant part of its exports outside the region through Hong Kong, and trade links have also developed between Singapore, Malaysia, and Indonesia.

These countries, particularly China, have also been major beneficiaries of FDI. Another important feature of growing interdependence is the growing intra-regional nature of FDI flows: in the second half of the eighties, it already accounted for 57 percent of all FDI flows in the SEA countries, primarily spurred by investments of Japanese firms in the region which shifted toward lower cost locations in the ASEAN-4 countries.

The world economy, including the fast growing SEA countries, is also moving toward this complex form of integrated international production, containing a multitude of buyer-driven industries such as garments, footwear, toys, and houseware) and producer-driven (industries such as automobiles, computer, aircraft, and heavy machinery) commodity chains.

End text of Part one.

Text courtesy: The Political Economy of Small States published by Nepal Foundation of Advanced Studies (NEFAS) Edited By Professor Ananda Aditya.

# This article is being published in the loving memory of distinguished author Late Professor Madan Kumar Dahal who was a very intimate friend of this news online portal. Rest in peace Professor Dahal: Ed. Upadhyaya.

# Our contact email address is: [email protected]

This undated image shows economist and professor Madan Kumar Dahal. Photo: THT

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