Exploring Interlinks Between Globalization and Governance A Panel Data Evidence

• Author: MUHAMMAD NADEEM MUHAMMAD AZMAT HAYAT and RABIA NAZIR

Abstract. Globalization has always remained a fiery issue among academia and researchers due to lack of consensus on this subject. A potential unresolved issue about globalization is its impact on governance and quality of domestic institutions. The present study is an attempt to explore the relationship between globalization and governance in a panel of 91 countries covering time period from 1984 to 2011. Panel fixed effect model and Generalized Method of Moments (GMM) have been applied for the analysis. Results divulge that globalization has negative and statistically significant effect on governance. Thus the present study recommends that globalization if direly needed must be espoused with a great caution. An effective and efficient liberalization policy is integral to reap benefits of globalization.

Keywords: Globalization Governance Panel fixed effect GMM

1. INTRODUCTION

   The term Globalization' has become popular in the everyday life since 1990s. Importance of state boundaries is reducing due to the process of globalization. But the global economy also needs institutions to deal with global polity. Globalization has emerged in a contrasting situation of a rapidly occurring change and consistent problems. Cross country transfer of information ideas technologies goods services capital finance and people have created interdependence among economies. This interdependence has created challenges for governments to control and regulate their economies. Economic integration an indicator of globalization has created the need for harmonization of national policies due to the emergence of interlinked markets and economies (Esty and Ivanova 2003).

   There are three major benefits of globalization: firstly globalization enhances free market competition and forms an integrated market system which is beneficial for all secondly in recent era globalization is inevitable and lastly globalization can benefit the entire world including Third World economies by creating free democracies and free trade and business oppor- tunities (Tjiptoherijanto 2006). Globalization cogitates world as a unit with no socio-political and economic restraints. The objective of globalization is to create such an economic order which ensures efficient resource allocation and faster economic growth by enhancing competitiveness and efficiency. But the effects of globalization are different in developing and developed economies with major benefit going to the rich economies (Oduwaye 2006). As Tjiptoherijanto (2006) claimed that impacts of globalization on industrial and developing countries especially in Asia and Africa are of different nature.

   Effects of globalization have been distributed unequally where poor economies are put into a disadvantageous place due to movement of low skilled labour and the creation of intellectual property rights (Griffin 2003).

   Globalization may not always result in beneficial impacts for everybody. Evidence can be found that globalization may generate either positive or negative aftermaths for different economies in the world. For example increased competition creates efficiency and economies of scale leading to higher quantity and good quality products and boost living standards consequently. But sometimes free movement of factors of production can harm labour in some economies due to substitution of labour (Ibrahim 2005). Academicians have two divergent views about the impacts of globalization; one point of view is that globalization is a beneficial tool for the whole world but second point of view blames globalization for the ever mounting gap between rich and poor nations and for all the unresolved issues of the world.

   Regarding globalization a major unresolved issue is how to integrate globalization with governance. Globalization-Governance nexus is still a debate on which consensus is yet to be reached (Bonaglia et al. 2001). Governance is relatively a new paradigm which has become popular in the last two decades involving three actors namely; government civil society and business society. All the factors have their respective duties and functions to create good governance environment (Oduwaye 2006). As per UNDP governance is the exercise of economic political and administrative authority to manage a country's affairs at all levels. It comprises of mechanisms processes and institutions through which citizens and groups articulate their interests exercise their legal rights meet their obligations and mediate their differences. The World Bank defines governance as the way power is exercised through a country's economic political and social institutions. In present study this has been measured by composite Inter Country Risk Guide (ICRG) index1 as it covers the economic political and social perspectives indicated by World Bank's definition of governance.

   There exists literature on the relationship between economic develop- ment and globalization and economic development and better governance but the mechanism through which globalization affects governance and domestic institutions is not very much clear. Bonaglia et al. (2001) claimed that link of trade openness to domestic institutions is an important aspect of governance-globalization nexus. Domestic and international governance is facing new challenges in the face of globalization and these challenges are particularly more austere for the authoritarian political regimes. The pressure on the states to move towards globalization will necessitate the need to release authority and state monopoly over the provision of information communication and to empower transnational organizations for making business decisions (Saich 2000).

   As the socioeconomic and political insinuations of globalization are very stanch the debate on this topic is expected to go on for years. Every time when any meeting is held at World Trade Organization IMF or World Bank platforms the discussion is divided into the cohorts and antagonists of globalization and consensus on the effects of globalization remains an unachievable task (Akhter 2004). In the face of this uncertainty this study is an attempt to lend an empirical support to this ongoing discussion in particular reference to its effects on governance and quality of institutions of economies to understand why globalization should affect the quality of domestic institutions. Rest of the study follows the sequence as given: section II reviews literature on the globalization-governance nexus section III explains the data methodology findings and discussion and section IV concludes the study by suggesting policy implications based on the findings of the study.

2. LITERATURE REVIEW

   Globalization governance nexus has gained fabulous importance in the recent years. Literature on the link between governance and globalization is not very much wide. It is tried to review some important studies on this link.

   Qian and Roland (1996) stated that governments normally bailout those enterprises who fail to run themselves successfully. In this case federal governments punish corrupt governments by enhancing competition through capital flight which consequently encourages discipline of regional governments. Some of the researchers argue that in global world there is no restriction on the flow of capital and information it is freely available to all and it becomes necessary for governments to improve their governance structure (Obstfeld and Rogoff 1998; Summers 2000). Prakash and Hart (1999) noted that globalization reduces institutional impairments develops political institutions and enhances the capacity of judiciary to sustain laws.

   Rodrik (1999) constructed a model stating that the risk due to global markets can be insured with a large government sector. A large public sector covers a large magnitude of public and reduces their vulnerability to the external global shocks and this was verified empirically. Quality of bureaucracy was used as proxy for good governance and proved that rich and more liberalized economies also had good administrations. Moreover it was proved that open economies were perceived to have lower corruption standards. On the basis of empirical results it was claimed that the successful economies are in a better position to opt for optimal mix of governance and globalization. The study has the limitation that it only provides graphs displaying broad connections between these variables but the evidence on causality of variables is missing. Krugman (1999)

   Rodrik and Subramanian (2009) and Stiglitz (2010) claimed that globalization and especially globalization of capital may cause indiscipline and mis- governance due to providing wrong motivations to governments. Some studies also have been found on the link of trade openness and governance. Empirical literature on the linkage between trade openness and quality of institutions is much limited. Wei (2000) stated that more open economies devote more resources to build a good institution; that's why their corruption level tends to be lower than less open economies.

   Saich (2000) claimed that in 1980 when China started off on the way to globalization the process created political differentiation within China in terms of some sectors industries and groups got privileges. The author discussed four major challenges to domestic governance that were identified by this study. First is the...