globalization and the global economy: perspectives and prospects for the short run and long run...
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GLOBALIZATION AND THE GLOBAL ECONOMY:PERSPECTIVES AND PROSPECTS FOR THE SHORT RUN AND LONG RUN JOSEPH E. STIGLITZ
VALENCIAJUNE 2006
MAJOR CHANGES IN THE GLOBAL ECONOMY
GLOBALIZATION THE EMERGENCE OF THE
EMERGING MARKETS RISING OIL (ENERGY) PRICES INCREASING GLOBAL FINANCIAL
INSTABILITY A NEW GEOPOLITICS?
GLOBALIZATION
The closer integration of the countries of the world As a result of lowering of transportation and
communication costs and the reduction of man-made barriers to the movement of goods, services, people, capital
So that the world has become more interdependent Successes and failures in one locale have global
ramifications China’s rapid growth has driven up commodity prices America’s war in Iraq has driven up oil prices What will be the consequences of a downturn in the U.S.?
THE EMERGENCE OFTHE EMERGING MARKETS
2.5 billion people in India, China, and other countries in Asia Were formerly excluded and marginalized As a legacy of colonialism
Are now being integrated into the global economy
This is an event of historical proportions
And so is their unprecedented success
GLOBAL SUCCESS AND CHINA Previous economic revolutions—like the
industrial revolution of the nineteenth century—had seen growth rates peak at around 2 to 3%
The golden age of growth in America in the 1950s and 1960s saw similar growth rates
China’s growth rates have been three times this Even faster than Asia’s miracle countries Its success has been not only in increasing GDP The fraction of China’s population living on less than
$1 a day fell from 63.8% in 1981 to 16.6% twenty years later
INDIA’S IMPRESSIVE GROWTH India has also had enormous economic success
Over two decades of 5-6% growth, now approaching 8% A crucial element has been India’s commitment
to investment in education, particularly in technology Created an educated middle class able to take advantage of
the changes brought about by globalization Now wealthier countries outsource technology work to
India In Bangalore, Infosys has built the world’s largest
corporate residential education center, can train 4,500 employees at once
Not quite as successful as China at fighting poverty In 2000, 35% were still living on less than $1 a day
IS THE WORLD FLAT? Thomas Friedman has suggested “the world is flat”
Poor countries are finally competing on a level playing field But the world is not flat
Disparities between the haves and have-nots have increased Importance of research gives enormous advantage to those
who have the resources and skills to undertake it The Uruguay Round made the world less flat, especially
TRIPs Power of entrenched monopolies, like Microsoft, is probably
greater than ever before The nature of competition is enormously changed
Cannot simply rest on laurels These changes will affect everyone
CHINA AND INDIA UNDERSTAND That what separates developed from less
developed countries is not only a gap in resources but also a gap in knowledge
And are working hard – and successfully – to narrow that gap
Education and technology are also the basis of success of other high growth economies, like Brazil Brazil’s Embraer airplane Energy independence through research Huge growth of exports
CHALLENGES FACING ADVANCED INDUSTRIAL COUNTRIES To find new “comparative advantage” –
market niche – which may require considerable restructuring
To invest more in education and research In the U.S., expenditures on research are
declining As a percentage of GDP, federal funding has
declined 37% since 1970 Reflected in part in share of worldwide patents Since 1980, Japan’s share of worldwide patents
increased from 12% to 21%, mostly at the expense of the U.S., whose share declined by 8 percentage points
EDUCATION STATISTICS ARE EQUALLY DISMAL
Of the 2.8 million 1st university degrees in science and engineering issued annually worldwide 1,200,000 are issued in Asia 830,000 are issued in Europe 400,000 are issued in U.S.
Asia produces 8 times more engineers than the U.S. Since 1993, the number of Americans in graduate
science programs has fallen by nearly 25% while the global supply of science Ph.D.s increased 25% - mostly in Asia
Nearly half of all U.S. doctorate degrees in engineering and computer science are earned by foreign students, many of whom have had serious visa problems since 9/11
PROBLEMS START EARLIER
In elementary and secondary schools Evidenced by performance in standardized
tests in science and math. For example, on 8th grade exams
44% of Singapore students performed at the highest level
38% of Taiwanese students performed at the highest level
7% of U.S. students performed at the highest level
THREATS TO GLOBAL ECONOMIC STABILITY High oil prices Global financial instability
Including increase in interest rates Or risk premia
US economic downturn Enormous transfer of wealth Dampening effect on growth Little leeway
HIGH OIL PRICES
Enormous wealth transfer to oil producing countries To parts of world marked by high political
instability and Dampening global growth
Result of imbalance of supply and demand Demand increase largely anticipated Major “disturbance” to global market result of Iraq
invasion Middle East remains low cost producer
Instability means that investments in Middle East are not forthcoming
But long term investments in supply alternatives are also not forthcoming
AN ALTERNATIVE GLOBAL STRATEGY IS NEEDED
More conservation Bio-fuels
Brazil has shown viability Would have enormous geo-political and
environmental benefits Europe needs to pressure U.S. to join Kyoto
protocol If necessary using trade sanctions
Low energy price constitutes an unfair trade subsidy
GLOBAL FINANCIAL INSTABILITY Underlying force – huge U.S. trade and fiscal deficits The U.S. borrows close to $3 billion a day from rest of world
Twin deficit – huge U.S. fiscal deficit Structural problem compounded by low household savings –
negative! Result of tax cut well beyond country’s ability to afford
And unbridled spending – including corporate welfare No evidence of fiscal restraint Overall cost of Iraq war now estimated in excess of $1 trillion Abandoned rules that had been used to maintain discipline
Deficits crowd out investments needed for competitiveness
Problems have become so deep they will be hard to reverse
THE ROLE OF CHINA Is China playing unfairly with an
undervalued exchange rate? The exchange rate is undervalued But the U.S. trade imbalance is more than 15 times
greater Appreciation of the yuan will not significantly affect
global imbalances It will simply change the countries with which
the U.S. has trade imbalances (import textiles from Bangladesh rather than China)
And these other countries would likely be less willing to lend to U.S. than China has been
Thus the risk is that global instability increases further
PROSPECTS FOR FINANCIAL MARKETS
Of instability continuing/increasing Particularly difficult for Europe – the
weakening dollar and strong euro will make exporting difficult Problem could get worse if ECB increases
interest rates in response to inflationary pressures
REFORMS NEEDED
ECB should focus more on growth and unemployment U.S. Fed’s mandate focuses on growth,
employment, and inflation Reform to global reserve system
The dollar has been the basis of the reserve system
But confidence in the dollar is eroding, so that it is no longer a good store of value
The system is fraying Alternative – Bancor or Global Greenbacks
U.S. ECONOMIC DOWNTURN Emerging markets have increasingly
become drivers of global growth But the U.S. is still the largest global
economy So a U.S. slowdown would have global
consequences Standard projections are that growth will
continue at just under the current rate But there are serious reasons for concern
WORRYING ABOUT THE U.S. ECONOMY The U.S. is heavily energy dependent
An increase in oil prices would have serious consequences
Weakening of the dollar and high oil prices would have inflationary consequences Fed, to show resolve, would continue to raise
interest rates Thus slowing the economy Lack of confidence in the dollar would induce
investors to pull money out of the U.S., including bond markets, driving up long run interest rates
Misconceived actions by politicians might make matters worse – discouraging China’s holding of bonds
RISING INTEREST RATES Rising interest rates could be a major problem
for U.S. For past 5 years, growth based on real estate
Withdrawal of equity from housing amounted to 7.5% of consumption
Even if real estate prices and interest rates stabilized, would have been hard to sustain consumption growth
Slowdown in real estate price increase will slow down consumption
Large number of American households with high level of indebtedness Median debtor household already spending close to 20%
of income servicing debt; significant increases in interest rate would impose severe strains, force cutbacks in consumption
Compounding effects of oil price increases Especially significant among lower income families (more
than a quarter with debt in excess of 40% of income) Beginning to be evident in slowdown in sales in Walmart
Investment in real estate will also slowdown
COMPENSATING FOR DROP IN DOMESTIC CONSUMPTION What will take up this slack and can do
so in a timely way? Government expenditures?
With huge deficit, there’s little scope Increases in other forms of investment?
Unlikely, if consumption is slowing down Exports?
But significant increase will require large depreciation
Significant disturbance to global economy
A NEW GEOPOLITICS? With globalization, geography is less
important than it previously was With the end of the cold war, the benefits
and costs of alliances changed dramatically Though Cold War patterns still predominate As does Cold War thinking, especially in U.S.
Who is the enemy against which the U.S. spends huge sums in defense, more than rest of the world combined?
Little of that money is fighting the war on terrorism
And who is the “enemy” in the war on terrorism?
IMPACT OF THE IRAQ WAR
With Iraq war, U.S. unilateralism The U.S. seems to show lack of commitment to
democratic approaches to solving global problems
But Iraq has shown the limits of military power The U.S. cannot establish stability in a
country a tenth of its population and one percent of its GDP
Emphasizes importance of “soft power” In much of world, the U.S. no longer perceived
as a model for democracy, human rights
THE U.S. TRADE AGENDA
In trade, the U.S. has pursued bilateral trade strategies, highly damaging to multilateral system (based on non-discrimination, most favored nation principle) Advanced industrial countries have
reneged on promises made in Doha for a Development Round
THE WORLD IN FLUX Latin America rethinking patterns of trade,
alliances Recent elections have shifted Latin American
political power farther left than in recent years New “Berlin” Wall between Mexico and U.S. of
enormous symbolic significance Asia source of global growth, new found
confidence, becoming increasingly focus of global attention American MBAs are beginning to spend summers in
India and China in order to gain valuable experience
Henry Paulson Jr., recently appointed U.S. Treasury Secretary: intimate knowledge of the Chinese economy viewed as major source of strength
New challenge for Europe: Finding its place in this world in flux Lowering unemployment, sustaining growth,
maintaining living standards—and not just for those at the top
Will require more flexible macro-economic policies Reforms in its “innovation” system New trade policies New global strategic vision
Making use of “soft power”—far more important that military power
Within Europe, there are some real successes Ireland, Nordic Countries Nordic countries have been so successful,
not only in growth, but in broader measures of success
Readjusted their “welfare state” model to new realities But still retained model—including high taxes
Required to finance investments in education and research, fund safety net
With better safety net, there can be more risk taking, entrepreneurship
Success in modern technology based economies requires risk taking
Lessons from these successes: Pragmatism and balance Success requires “balance” For countries—a balanced role of government and
the market Market is at the center of the economy But in every successful economy the government has
played a large role In science and technology (internet) In making markets work (sound banking and securities market
regulation In protecting the environment In maintaining social cohesion (income distribution, safety
nets)
Europe’s success is important not just for Europe But for the world as a whole The world needs a new balance of power
America’s Constitution based on checks and balances
But in the area of foreign policy, it was assumed that the checks and balances would be provided by those abroad
But this is no longer the case Europe can and must succeed
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