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.

On being asked by Bertrand Russell if he ever told lies, the famous Cambridge philosopher G.E. Moore answered, ‘Yes.’ Russell believed this was the only time Moore had lied. It is possible to argue that Russell's deduction was, for once, wrong, and that Moore had got the better of him. If Moore had told lies before giving that answer to Russell, then clearly his answer was not a lie. Now suppose that he had never told a lie before, then in answering yes he ensured that his answer was right.

Lying and honesty are intriguing subjects that have engaged philosophers for centuries. Social scientists took very little interest in them. This has suddenly begun to change. It is a much more mundane concern with lying and honesty that has been engaging economists and political scientists in recent times, but it's a concern of some pervasive importance.

Social analysts, notably Francis Fukuyama and Robert Putnam, have argued that societies with a high level of trust—i.e. where people tend to be honest, adhere to promises, and respect contracts—tend to prosper. So, faster growth is not just a consequence of appropriate economic policy, savings rate, human capital, and fiscal deficits, but, somewhat surprisingly, the level of honesty in the citizenry.

This is one area in which the Indian citizenry can do with a little bit of brushing up. The damage usually gets done early, when children are taught that ‘honesty is the best policy’.

Introduction: Rapidly Changing Global Economic Scene

The geo-political and economic map of the world is rapidly changing. Global institutional arrangements borne out of the historical experiences of the midto late twentieth century will need to adjust to the new global political and economic context that is now evolving, even as the post-World War II issue of promoting the development of developing countries continues to remain at the centre of international economic policy debates.

A major aspect of this new context is the development of new international policy regimes and the institutional architecture relating to these regimes that have an impact on developing countries' development policies and prospects. These include a new institutional architecture on global trade policy represented by the World Trade Organization (WTO), complete with a more comprehensive set of trade rules that are binding on countries, and whose work both influences and is influenced by the work of other existing trade-related global institutions such as the UN Conference on Trade and Development (UNCTAD).

Another aspect of this new context is the increasing share and influence of developing countries in global economic affairs – both in terms of shaping global economic policy and in terms of actual weight in the global economy.

Introduction

The following contains a comparative analysis of some important structural background features of national systems of innovation (NSI's). The sample is limited to 21 OECD countries. The empirical source is OECD's Trade by Commodities (foreign trade by ‘visible’ goods). This kind of data can only serve as an incomplete illustration of the conceptual framework derived in earlier chapters. However, the material offers some advantages worthwhile to exploit, e.g. time series covering more than a quarter of a century. Certain features of international export specialisation will be used as indirect proxies of more general economic development patterns of the OECD countries.

In chapter 4 the so called ‘structural thesis’ emphasises (domestic) production and linkage patterns as important determinants of substantial shares of not only non-professionalised learning and innovation, but also professionalised R&D. The arguments stress the incremental character of innovation and its path dependency. The changes of products and processes – it was argued – follow trajectories, to a large extent determined by inherited production and trade patterns. History matters; present and future innovation possibilities are highly dependent on existing structural features of the economy. Structure, as a reflection of history, matters.

It is no simple task to illustrate this line of reasoning, let alone to deliver outright empirical proofs on an international comparative basis. However, some of the ‘propositions’ of 4 may be confronted with empirical evidence. In the empirical part of this chapter it will be shown that the international specialisation patterns of the OECD countries fruitfully may be analysed in terms of life cycles.

Introduction

Europe has long history of engagement with Africa after the Second World War and invested hugely politically and economically on the continent. China has also been engaging for decades with African countries, but the present Chinese approach to Africa shows its nuance, with more and more priorities in economic domain. The new Chinese engagement with Africa, especially its focus on resource extraction and non-interference principle that relates to the governance issue of Africa, has been raising serious concerns in European capitals.

This chapter is an attempt to analyse the trilateral relations among Africa, China and Europe, with Sino-European relations as a starting point. The chapter begins with an analysis on the dualities and thus also complexity of China, relevant to the trilateral relations. Secondly, I will describe the static and dynamic features of the trilateral relations. Thirdly, I will discuss the ideological background of the Chinese and European approaches to Africa. Fourthly, I focus on the Chinese engagement, with particular reference on the motivations and attractiveness of China in Africa. Fifthly, I will make a contrast between the Chinese and European approaches to Africa, in the dichotomy of good governance vs. effective governance. In conclusion, I argue that though on the surface the Chinese and European approaches to Africa show the contradiction between each other, they in fact can be complementary to a certain extent, and more coordination and cooperation are needed in this area.