emergence of the global economy - maastricht...
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School of Business and Economics
Bachelor Master
2014 Maastricht University School of Business and Economics
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COURSE BOOK
Emergence of the global
economy
EBC4153
Academic Year: 2016-2017
Course Period: 5
© dr. T. Treibich, dr. M. Capasso, prof. dr. B.
Verspagen, dr. A. van Zon
Maastricht University, 2010, 2011, 2012, 2013,
2014, 2015, 2016.
All rights reserved. No part of this publication may
be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means,
electronic, mechanical photocopying, recording or
otherwise, without the prior written permission of
the publishers.
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Table of Contents
1. Introduction ......................................................................................................................................... 3
2. Learning objectives .............................................................................................................................. 4
3. Course structure .................................................................................................................................. 5
3.1 Organization of the course ............................................................................................................ 5
3.2 Overview of the sessions ............................................................................................................... 5
4. Assessment requirements ................................................................................................................... 7
4.1 Student presentations ................................................................................................................... 7
4.2 Team task ...................................................................................................................................... 7
4.2 Exam .............................................................................................................................................. 7
4.3 Participation and attendance ........................................................................................................ 7
4.4 Final grade and resit ...................................................................................................................... 8
4.5 Fraud and plagiarism ..................................................................................................................... 8
4.6 Complaints ..................................................................................................................................... 9
5. Planning group .................................................................................................................................... 9
6. Literature ........................................................................................................................................... 10
7. Meetings ............................................................................................................................................ 11
Group Session 1. Terms of Trade ...................................................................................................... 11
Group Session 2. Economic growth in the world economy .............................................................. 12
Group Session 3. The World Income Distribution and International Diffusion of Knowledge ......... 13
Group Session 4. The East-Asian Growth Miracle ............................................................................. 15
Group Session 5. Growth, Trade and the product space .................................................................. 16
Group Session 6. Why doesn’t capital flow from rich to poor countries? ........................................ 17
Group Session 7. Financial flows and crisis ....................................................................................... 18
Group Session 8. Global imbalances and the financial crisis ............................................................ 20
Group Session 9. Global imbalances and the financial crisis ............................................................ 21
(counterargument) ............................................................................................................................ 21
Group Session 10. Team Task ............................................................................................................ 22
Group Session 11. Recap and preparation for the exam .................................................................. 22
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1. Introduction
Globalization is one of the most debated economic phenomena. Although globalization is
not purely an economic matter, it has strong roots in economic processes, such as trade,
economic development, capital flows, and innovation. Globalization raises strong
sentiments, for example from activists who claim that it is inherently unfair, or politicians
and business men who claim it is the way forward to a better world.
In such a polarized debate, scholarly analysis can be an anchor of reason, or an
instrument for persuasion and advocacy. While the latter may not be in accordance with
the “classical” academic values and norms, it cannot be denied that scholars, economists
in particular, are active in the debate around globalization. What is important in such
cases, is that the analysis underlying the arguments is conducted in a proper and
transparent way. Taking this principle as a starting point, this course provides an
introduction into the economic research that goes into the globalization debate.
The topics that are dealt with fall into two large groups. The first deals with economic
growth and development, and asks whether or not globalization leads to a more even
income distribution in the world. The second topic is concerned with macroeconomics,
and asks how global capital flows (financial globalization) affect the working of the macro
economy. Obviously, the economic analysis of globalization is broader than just these
two topics. Therefore, the course assumes prior knowledge on some of the basic issues in
international economics, such as trade theory, and the basic ideas of open
macroeconomics.
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2. Learning objectives
This course is aimed to provide students with advanced insights into the economic driving
forces behind globalization, and how specific issues in the globalization debate can be
analyzed using state-of-the-art economic research. The course is aimed at students at a
relatively advanced level. In particular, basic knowledge about international economics
and open macroeconomics, as well as econometric and mathematical research methods,
is required before entering this course.
Connected to its topical and advanced nature, the course does not rely on a textbook.
Instead, it presents the students with a list of papers from contemporary economic
journals and books. In this way, students get introduced to the debates in a direct and
hands-on way. This approach does require an extra effort from students. Part of
becoming an economist is being able to read the literature, and this course provides an
important test in this respect. It requires students to draw upon their prior knowledge
and to apply this in reading and understanding the papers that form the required
literature for the course.
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3. Course structure
3.1 Organization of the course
The course is divided into 2 parts, which correspond with the two topics introduced
above. The first part deals with economic growth and global income distribution. This
part uses growth theory and (some) trade theory, and is focused around the central
question whether globalization leads to convergence of living standards or not.
The guiding theme of the second part of the course is the free flow of capital. This is
analyzed both in an historical way (covering the broad history of globalization from the
financial point of view), and an analytical way. This part of the course builds to an
important extent upon the so-called Mundell-Fleming model, with which students need to
be familiar.
The course uses the problem based learning (PBL) method that is common at Maastricht
University. This means that students have to work in small groups. This is explained in
more detail in Section 4 below.
3.2 Overview of the sessions
In each of the group sessions, students deal with one topic. The sessions do not follow
the pattern of pre- and post-discussion that may be familiar to students, especially those
who did a bachelor degree in Maastricht. Instead, students are required to read the
required literature for the session in advance, and discuss this literature during the
session. An important part of the session will be devoted to discussing the content of the
reading, up to a fairly detailed level, including technicalities on mathematics and/or
econometrics, where relevant.
The introduction to the sessions that will be given below provides starting points for
discussing additional topics. These topics have been arranged in such a way that there
are important linkages among the sessions, so that an overall coherent picture of
globalization emerges when sticking to these topics. Students are encouraged to include
these connections among the various topics in the discussion of each session.
The group sessions are scheduled as presented in Table 1 below.
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Table 1. Overview of the sessions
Week Day Session Topic Literature Presenta
tion
Part 1. Growth, technology and global distribution
1 W 1 Terms of Trade Singer (1950)
Kaplinsky (2006)
2 M 2 Economic growth in the world economy Maddison (2003)
Cohen (2003)
I1
W 3 The World Income Distribution and
International Diffusion of Knowledge
Verspagen
(1991)
I2
3 M 4 The East-Asian Growth Miracle Nelson and Pack
(1999)
I3
W 5 Growth, trade and the product space Hidalgo et al.
(2007)
I4
Part 2. Financial globalization
4 M 6 Why doesn’t capital flow from rich to poor
countries?
Lucas (1990) I5
W 7 Financial flows and crisis Knoop (2008a)
Knoop (2008b)
I6
5 M 8 Global imbalances and the financial crisis Wolf (2010) I7
W 9 Global imbalances and the financial crisis
- counterargument
Borio and
Disyatat (2011)
I8
6 M 10 Team task
W 11 Recap
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4. Assessment requirements
4.1 Student presentations
During Session 1, the tutor assigns one of the topics to be discussed between the other
sessions to each student.
Description
Each student will be assigned one scientific article, citing one of the articles in the
compulsory literature corresponding to the chosen topic. In other words, the student has
to study one (more recent) article that has cited the articles (or chapters) compulsory on
the topic.
Presentation
In the second hour (of each of sessions 2 to 9), the student presents, in maximum 30
minutes, the more recent article. Some amount of time within the presentation should be
devoted to illustrate the differences between that article and the article (or chapter) of
the compulsory literature which cites it. Clarity and precision of the presentation, as well
as depth in the comparison with the corresponding article in the compulsory literature,
will be the main criteria used to grade the team work. The presentation slides, as well as
a half page summary must be sent to the tutor and the rest of the class 12 hours before
the presentation (in case the deadline is not respected, the presentation grade will be
lowered by half a point). In the remaining half hour, the other students give constructive
feedback.
4.2 Team task
During session 10, the entire group of students presents their output from the Team Task
(details will be provided on the Student Portal). All the members of the team receive the
same grade.
4.2 Exam
The course ends with a 3 hour written exam with open questions, which will take place in
the second week of June 2017 (5-9 June).
4.3 Participation and attendance
Each student will receive a grade for overall group participation during the group
sessions. The participation grade reflects the level of interaction with the group during
the session, the pertinence and depth of the interaction, and the knowledge of the course
literature shown during the interaction. A good question to the group is valued as well as
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a good answer.
Students need to attend at least 8 of the 11 meetings in order to pass the
course. Attending more than 8 meetings will be rewarded in the participation grade (by
not considering some of the meetings in which the student participation was below
her/his average), while attending less than 8 meetings will be penalized in the
participation grade (by considering a null participation for each additional missed
meeting). Students failing the attendance requirement will need to pass the course
assignment in order to pass the course, to be submitted within 48 hours after the exam.
4.4 Final grade and resit
The final grade for the course is equal to the grade of the written exam (weighted 40%)
plus the grade for group participation (weighted 10%), plus the grade for the individual
project (weighted 40%), and finally the team task (weighted 10%). The final grade is
rounded to closest ½ points, the partial grades are rounded to the closest 0.1 point.
In order to pass the course, the final grade must be at least 5.5 and the exam grade
must be at least 5. If not, the student will have to do a new written exam.
The examination requirements are summarized in Table 2 below.
Table 2. Assessment requirements
Assessment
elements
Description Grade and
grade
weight
Required If fail
1 Written exam Open questions 40% 5 Resit written
exam in exam
period 6
2 Individual
project
Presentation 40% - -
3 Team task Presentation 10%
4 Participation Group meetings +
feedback
10% - -
Final grade Weighted average of
1,2, 3 and 4
5.5 Resit written
exam in exam
period 6
Attendance 8
meetings
Course
assignment
4.5 Fraud and plagiarism
In order to protect the reputation of the degrees that you – as students – receive,
instances of cheating or plagiarism are treated extremely seriously.
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Fraud, including plagiarism, is understood as a student’s act or failure to act that makes
it partially or fully impossible to correctly assess his/her knowledge, insight and skills.
Plagiarism is understood as the presentation of one’s own or other people’s ideas or
words without adequate reference to the source. Any assignment is an individual piece of
work, which means that plagiarism is strictly forbidden. Equally, the use of mobile
phones, communication devices or any other information carrier (whether the phone or
other device is turned on or off, used or not used, etc. is irrelevant) during an
examination is also forbidden. If the Board of Examiners concludes that anything has
occurred in an examination that makes it partially or fully impossible to correctly assess
his/her knowledge, insight and skills, they may impose a sanction in accordance with
SBE’s policy on fraud, including plagiarism.
More information can be found on the Student Portal.
4.6 Complaints
If you do not agree with the examination or the results therefore, there are several
procedures in place you can make use of. Please refer to the Student Portal for more
information.
Comment
Within five days after the examination date you can submit comments on the content
and design of the examination (questions) to the course coordinator.
Inspection
Within ten working days of the publication of your examination results, you will be able
to have a look at your assessed work. The date and time of the inspection will be
published on the Student Portal and preferably already stated on the front page of the
examination sheet.
Complaint
Students can lodge a complaint during the inspection by using the complaint form.
Appeal
For information regarding an appeal procedure, please read the information on the
Student Portal carefully.
5. Planning group
The planning group consists of Dr. Tania Treibich (coordinator of the course) and Dr.
Adriaan van Zon.
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6. Literature
The required literature consists of a number of articles and book chapters by various
authors. Some of these references cover advanced material. The list of required literature
is as follows:
Borio, C.E. and Disyatat, P., 2011, “Global imbalances and the financial crisis: Link or
no link?”, BIS Working Papers No 346.
Cohen, D. (2003) “Growth in Theory and in Practice”, Chapter 3 in: Jorge Braga de
Macedo, J., Foy, C. and C.P. Oman (eds), Development is Back, Paris: OECD
Development Centre, pp. 47-60.
Hidalgo, C. A., Klinger, B., Barabási, A. L., & Hausmann, R., 2007, "The product
space conditions the development of nations." Science, 317, p. 482-487.
Kaplinsky, R., 2006, ‘Revisiting the Revisited Terms of Trade: Will China Make a
Difference? ’, World Development 34, 6, pp. 981-995.
Knoop, T.A., 2008, ‘Capital flight and the causes of international financial crises’, Chapter
9 in Modern Financial Macroeconomics: Panics, Crashes, and Crises, Blackwell, pp.
193-214.
Knoop, T.A., 2008, ‘International Financial Crises: policies and prevention’, Chapter 10 in
Modern Financial Macroeconomics: Panics, Crashes, and Crises, Blackwell, pp. 215-
235.
Lucas, R.J., 1990, ‘Why Doesn't Capital Flow from Rich to Poor Countries?’, American
Economic Review, 80, pp. 92-96.
Maddison, A. (2003), The West and the Rest in the International Economic Order,
Chapter 2 in: Jorge Braga de Macedo, J., Foy, C. and C.P. Oman (eds), Development is
Back, Paris: OECD Development Centre, pp. 31-46
Nelson, R.R. and H. Pack, 1999, ‘The Asian Miracle and Modern Growth Theory’,
Economic Journal, 109, pp. 416-436.
Singer, H.W., 1950, ‘The Distribution of Gains between Investing and Borrowing
Countries’, American Economic Review, 40, 2, pp. 473-485.
Verspagen, B., 1991, ‘A New Empirical Approach to Catching Up and Falling Behind’,
Structural Change and Economic Dynamics, vol. 2, pp. 359-380.
Wolf, M., 2010, “From Imbalances to the Subprime Financial Crises”, Chapter 8 in Fixing
Global Finance, Yale University Press.
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7. Meetings
Part 1. Growth, technology and global distribution
Group Session 1. Terms of Trade
This task will be prepared in class in the first session
Trade and technical change impact prices, and the variation of prices has an impact on
both producers and consumers. Moreover, producers and consumers of a particular good
may be in different countries, or may correspond to different groups of people within the
same country, and, for each good, the formation of the price is affected in different
proportions by supply and demand.
How can the evolution of the “terms of trade” impact the development of a country?
How can the country’s policymakers take this into account when aiming at long-term
prosperity?
Singer (1950) shows that an analysis of the influence of trade on growth, especially when
referring to policies aimed at reducing the income gap across countries, must take into
account potential vicious circles that originate in the dynamics of prices of traded goods.
Half a century later, and just before the 2007-2008 crisis, Kaplinsky (2006) reexamines
Singer’s thesis in the light of the new context of globalization, which includes the
increasing importance of China and India.
Which price dynamic has emerged during the new globalization age? Is it going to
reverse in the future, or could it be persistent and affect the long-run development of
several countries around the world?
Literature:
Singer, H.W., 1950, ‘The Distribution of Gains between Investing and Borrowing
Countries’, American Economic Review, 40, 2, pp. 473-485.
Kaplinsky, R., 2006, ‘Revisiting the Revisited Terms of Trade: Will China Make a
Difference?’, World Development 34, 6, pp. 981-995.
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Group Session 2. Economic growth in the world economy
Our main interest, for this first part of the course, is to search for a deep (theoretical)
explanation of the relationship between growth, development and globalization. After
having analysed, in the previous session, the evolution of the terms of trade, we can now
have a broad look at the empirical patterns of economic growth, especially after 1950.
Maddison (2003) divides history into broad periods, each with their own characteristic
pattern of global economic growth. In your discussion of this paper, you should focus on
one broad question (see also a brief note on Cohen’s paper below):
How do you interpret the relationship between globalization and economic growth from
the perspective of these two historical characterizations?
The second reading for this session, by Daniel Cohen (2003), provides a starting point for
the analysis of economic growth in our remaining sessions. It provides a brief
introduction to many topics, tools and theories that will play a role in the coming
sessions. This starts with the idea of “conditional convergence”, which is not explained
very elaborately in the chapter itself.
Conditional convergence refers to the idea that if one controls for factors such as
education levels, the correlation between initial GDP per capita and growth rates of that
variable is negative. In other words, Figure 2 in the chapter by Cohen is constructed by
first running a regression with GDP per capita growth as the dependent variable, and
initial GDP per capita and education as explanatory variables. The figure is then
constructed by adding to the variable on the horizontal axis of Figure 1 (the growth rate)
the effect of education as predicted by the regression. Focus your discussion on the
implications of this finding.
The section on “inspiration and perspiration” is directly linked to our session 4 on growth
in East Asia. It raises the question whether these two factors (inspiration and
perspiration, or total factor productivity and investment) can really be separated in a
meaningful way. Although we will go into this in much more detail in the later session,
you should already discuss the broad conceptualization in this session.
Finally, Cohen goes into the topics of globalization and institutions. Of course,
globalization is already at the core of the comparison between Maddison on the one
hand, and Obstfeld and Taylor on the other hand (which will be studied later in the
course). You may well include Cohen’s observations on trade, globalization and growth in
that discussion. Institutions can broadly be defined as “the rules of the game” (formal
and informal) that are used in an economy. Following Cohen’s chapter, you should discuss
the definition and role of institutions.
Literature:
Maddison, A. (2003), The West and the Rest in the International Economic Order, Chapter
2 in: Jorge Braga de Macedo, J., Foy, C. and C.P. Oman (eds), Development is Back,
Paris: OECD Development Centre, pp. 31-46
Cohen, D. (2003) Growth in Theory and in Practice, Chapter 3 in: Jorge Braga de
Macedo, J., Foy, C. and C.P. Oman (eds), Development is Back, Paris: OECD
Development Centre, pp. 47-60
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Group Session 3. The World Income Distribution and International Diffusion of
Knowledge
In this session, we deepen the analysis of convergence, which will be a recurring theme
throughout the course. The graph below provides data on this phenomenon, by means of
a smoothed histogram of income levels in the world. The vertical (‘Z’) dimension of the
graph shows how often a particular value of ln(GDP per capita) (again from Maddison’s
database) occurs in the sample of countries in the world, for a particular year. Does
convergence actually take place?
Figure 1. Evolution of the GDP per capita distribution over time.
Arguably, very little. The distribution seems to have two, or even three peaks, which
indicate concentrations of development levels at these particular values. These peaks are
stable over a long period, and this seems to point to a lack of convergence.
The next figure (next page) provides yet another perspective on convergence. It is a
slight variation of the graph that we have already seen in Cohen’s chapter in the previous
session. But now the sample is larger (we use a shorter time period), and groups of
countries are separated. This last feature reveals an interesting fact: in some groups of
countries, convergence is unconditional (i.e.. one does not have to condition on factors
such as human capital in order to obtain a negative regression line in the figure), while
for other groups, convergence is clearly not unconditional.
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The reading for this session suggests that one of the most powerful sources of
convergence of income levels over countries is the international diffusion of knowledge.
Poor countries are poor because they do not have access to economically useful
knowledge, but, since knowledge is in some aspects almost like a public good, these poor
countries have a large potential to catch up by using “freely” available knowledge. The
model that is suggested point to low-development traps that might occur as a result of a
lack of diffusion of knowledge.
You should focus on understanding the technical aspects as well as the main theoretical
intuitions of the model. Once you master this, try to explain what you see in both figures
here by means of the model in the reference.
Figure 2. Growth rate of GDP per capita in 1950-2006 vs. 1990.
Source: calculations on Angus Maddison’s database.
Literature:
Verspagen, B., 1991, A New Empirical Approach to Catching Up and Falling Behind,
Structural Change and Economic Dynamics, vol. 2, pp. 359-380.
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Group Session 4. The East-Asian Growth Miracle
The notion of total factor productivity (TFP) has been suggested as a measure of the
impact of technological change in the growth process. The idea of TFP is similar to labour
productivity, but it looks at the joint productivity of two factors (capital and labour),
rather than just one factor. Traditionally, TFP has been seen as an important source of
macroeconomic productivity growth (e.g., Solow, in his path-breaking article on TFP,
found it to be the most important factor in explaining growth in the U.S. in the first half
of the 20th century).
But as we already saw briefly in the chapter by Cohen that was on the reading list for
Session 2, measures of TFP for the East Asian countries that were star growth performers
in the second half of the 20th century usually show a much smaller impact of TFP on
growth. Some economists, such as Alwyn Young, argue that growth in these countries is
almost completely explained by increases in labour and capital inputs, i.e., that
productivity growth is very small.
Does this imply that technology transfer and upgrading of the production structure are
not important ingredients of the catching-up process of East Asian countries? Some
commentators on Young’s results have argued that the aggregate numbers hide
important sectoral trends that show the true dynamism of the East Asian miracle
countries. In particular, Nelson and Pack suggest that the investment that was associated
with rapid growth in East Asia was not merely “perspiration”, i.e., not merely using more
resources. They argue that the investment boom was part of a process of structural
change that involved a deep transformation of the East Asian economies, under the
influence of technological change. They provide a model and a theory about how this
process took place, and your first issue for discussion should be to understand how this
model works, and what it argues about growth in East Asia.
Second, an important part of the Nelson and Pack analysis is aimed at explaining why
total factor productivity (TFP) is not a good concept to analyze these issues. They argue
that TFP does not measure the contribution of technology and innovation to growth in an
adequate manner. Their reasoning in this respect involves a high degree of abstraction,
and a good command of the underlying notion of the production function. Discuss their
criticism, and try to form an opinion on the debate on “accumulation” vs. “assimilation”.
Literature:
Nelson, R.R. and H. Pack, 1999, ‘The Asian Miracle and Modern Growth Theory’, Economic
Journal, 109, pp. 416-436.
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Group Session 5. Growth, Trade and the product space
We have now seen, for the case of East Asia, a specific perspective on growth which
devotes particular attention to technological change and innovation, and structural
change, i.e. the sectors and products a country is specialized in and exports.
In a series of article, and then in their Atlas of Economic Complexity, César Hidalgo and
coauthors from MIT have put forward the explanatory power of a new measure they call
“Economic Complexity” in explaining past and future growth patterns of countries.
“Why do some countries grow and others do not? The authors of The Atlas of
Economic Complexity offer readers an explanation based on "Economic
Complexity," a measure of a society’s productive knowledge. Prosperous
societies are those that have the knowledge to make a larger variety of more
complex products. The Atlas of Economic Complexity attempts to measure the
amount of productive knowledge countries hold and how they can move to
accumulate more of it by making more complex products.
Through the graphical representation of the "Product Space," the authors are
able to identify each country's "adjacent possible," or potential new products,
making it easier to find paths to economic diversification and growth. In
addition, they argue that a country’s economic complexity and its position in
the product space are better predictors of economic growth than many other
well-known development indicators, including measures of competitiveness,
governance, finance, and schooling.
Using innovative visualizations, the book locates each country in the product
space, provides complexity and growth potential rankings for 128 countries,
and offers individual country pages with detailed information about a
country’s current capabilities and its diversification options. The maps and
visualizations included in the Atlas can be used to find more viable paths to
greater productive knowledge and prosperity.”
Introduction to the Atlas of Economic Complexity (link to webpage)
Literature:
Hidalgo, C. A., Klinger, B., Barabási, A. L., & Hausmann, R., 2007, "The product space
conditions the development of nations." Science, 317, p. 482-487.
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Part 2. Financial globalization
Group Session 6. Why doesn’t capital flow from rich to poor countries?
Decreasing marginal returns is a very important concept in microeconomic theory. When
applied to a production function (like the Cobb-Douglas production function) it implies
that the rate of return to capital (investment) is high in cases when output per capita is
low (this is easily said, of course, but make sure that you understand why this is the
case; the literature for this session gives details, both mathematically and intuitively).
Therefore, if two countries have the same production function, the difference in the rates
of return to capital investment in these countries will be related to how much they differ
in terms of per capita output. More specifically, the rate of return in developing countries
is expected to be higher than in developed countries.
If this process works as it should, capital should flow from rich countries to poor
countries. However, for the recent period, the IMF Data Mapper shows a rather different
picture: the advanced economies have a current account deficit, and the emerging
economies show a current account surplus. We have also already encountered this
phenomenon in the course opening, and in session 6. It is clear that this provides a
puzzle. But even before the global imbalances, it was clear that far less capital flows from
developed countries to developing countries that would be expected on the basis of
calculations of the rate of return using a Cobb-Douglas production function. This is known
as the Lucas puzzle, after the paper that we have read for today.
A first goal for your discussion should be to understand Lucas’ calculations. How does he
derive expectations about the rates of return, and how do these change when he
modifies, step-by-step, the assumptions about the nature of the production function? A
second goal is to understand the explanations that Lucas offers for the puzzle that he
observes. One such explanation may be related to the assumption that developing and
developed countries are on the same production function. This means, among other
things, that technological knowledge available to developed and developing countries is
the same. In what ways could this be true or not true? Lucas presents a number of
potential answers to this question. But perhaps you can also come up with additional
answers?
Literature:
Lucas, R.J., 1990, ‘Why Doesn't Capital Flow from Rich to Poor Countries?’, American
Economic Review, 80, pp. 92-96.
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Group Session 7. Financial flows and crisis
Freely flowing capital improves resource allocation, but it also implies a number of risks
for the global economy. For example, on the basis of the available data (which are not
completely up-to-date), it may be argued that globalization leads to an increased number
of financial crises.
Figure 3. Number of banking and currency crises, 1880-2000.
Source: Michael Bordo’s database
The Asian crisis of 1997 hit particularly hard in part of the developing world. It raised
worries, both in the countries that directly experienced the crisis and in other parts of the
world, about the fragility of the global financial system. Does this aspect of globalization
show that free capital flows are not so good for the economy after all?
The literature references for this session provide a broad overview of the topic of crisis
and financial globalization. This broad overview does not go into many details of the
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actual theoretical models that exist in this field. Instead, it tries to capture the broad
lines of the argument. Accordingly, your discussion should focus on these broad lines.
What different classes of models exist, and how do they differ? Which typical
explanations of crisis do you think are most relevant?
You should also focus on the recent events, i.e., the financial crisis of 2007-2008 and its
aftermath. The reading does not capture this to a full extent yet, but our next two
sessions will cover this topic in detail. In this session, you can prepare yourself for next
session by thinking about how the current reading relates to recent global economic
affairs.
The second of the two readings goes into the issue of policy. The central questions here
are whether some restrictions to capital flows are beneficial, and whether international
organizations such as the IMF should play a different role than they do now. This is an
important topic and should play an important role in your discussion.
Literature:
Knoop, T.A., 2008, ‘Capital flight and the causes of international financial crises’, Chapter
9 in Modern Financial Macroeconomics: Panics, Crashes, and Crises, Blackwell, pp.
193-214.
Knoop, T.A., 2008, ‘International Financial Crises: policies and prevention’, Chapter 10 in
Modern Financial Macroeconomics: Panics, Crashes, and Crises, Blackwell, pp. 215-
235.
Emergence of the global economy - EBC4153 - 2016-2017 Page 20 of 22
Group Session 8. Global imbalances and the financial crisis
Martin Wolf, a journalist at the Financial Times, has popularized the view that the global
imbalances were the main cause of the 2008 financial crisis, and the global recession
following it. In his book ‘Fixing Global Finance’, which we will read partly for this session,
he outlined the idea that global imbalances helped to keep interest rates low, which led
to an increased appetite for risk in financial investment, and ultimately to the sub-prime
mortgage crisis. But the great macroeconomic minds of the world do not seem to agree
whether such a view is indeed a realistic explanation. Perhaps other factors, such as
weak financial regulation and greed, are more important for explaining the mother of all
crises?
The argument of Wolf is based in the particular situation that characterized the world
economy before the crisis. He puts forward the hypothesis that it was linked to
globalization. The guidance for the discussion is simple: focus on understanding Wolf’s
dissection of the crisis, and how relevant you think it is. Also, do you feel that Wolf’s
interpretation of the crisis should lead us to be pessimistic about the benefits of financial
globalization?
Literature:
Wolf, M., 2010, “From Imbalances to the Subprime Financial Crisis”, Chapter 8 in Fixing
Global Finance, Yale University Press.
Emergence of the global economy - EBC4153 - 2016-2017 Page 21 of 22
Group Session 9. Global imbalances and the financial crisis
(counterargument)
In this final session of the “Financial Globalization” part of the course, we will discuss
both the nature of the crisis of 2007 and 2008, and the hypothesis that it was linked to
globalization. Borio and Disyatat (2011) present a view which is different from Wolf’s,
opposing the idea that global imbalances are at the source of the 2007 financial crisis.
Literature:
Borio, C.E. and Disyatat, P., 2011, “Global imbalances and the financial crisis: Link or no
link?”, BIS Working Papers No 346.
Emergence of the global economy - EBC4153 - 2016-2017 Page 22 of 22
Group Session 10. Team Task
Group Session 11. Recap and preparation for the exam