in defense of globalization - jagdish bhagwati
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A comprehensive analysis of "In Defense of Globalization," Chapter 13, by Jagdish BhagwatiTRANSCRIPT
Chapter 13:The Perils of Gung-ho Chapter 13:The Perils of Gung-ho International Financial CapitalismInternational Financial Capitalism
AGB 370
February 22, 2006
Presented by Lauren Jeter
Things you didn’t know about Things you didn’t know about BhagwatiBhagwati
Might be in line soon for the Nobel Peace prize in Economics
Comes from a illustrious family in India
Has seven brothers and sisters His Brother is a Chief Justice of
India’s Supreme Court Another is a world-renowned
neurosurgeon Another is a highly respected
metallurgist
BackgroundBackgroundJagdish Bhagwati, currently University Professor, Economics and Law, at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations, was born in 1934 and raised in India . He attended Cambridge University where he graduated in 1956 with a first in Economics Tripos. He then studied at MIT and Oxford, returning to India in 1961 as Professor of Economics at the Indian Statistical Institute, and then as Professor of International Trade at the Delhi School of Economics. He returned to MIT in 1968, leaving it twelve years later as the Ford International Professor of Economics to join Columbia . Until 2001, he used to be Arthur Lehman Professor of Economics and Professor of Political Science at Columbia . Professor Bhagwati has also served as Economic Policy Advisor to Director-General, GATT (1991-1993), as Special Adviser to the UN on Globalization (2001) and as an External Adviser to the WTO. Currently, he is a member of UN Secretary General Kofi Annan's Advisory Group on the NEPAD process in Africa.
Book ReviewsBook Reviews
“This book will make history. It will also be a blockbuster, not only because of the depthof Bhagwati’s powerful argument backed by extensive research, but also because it isimmensely readable and surely the most humorous piece of economics ever written.”
Hernando de Soto, Author of The Other Path and The Mystery of Capital
Book ReviewsBook Reviews
“This is the book that everyone has been waiting for.”
George Akerlof, Nobel Laureate in Economics
“Jagdish Bhagwati has written a brilliant book… You may not always agree with him ---I don’t --- but In Defense of Globalization is bound to become a classic.”
Richard Sennett, Professor of Sociology, London School of Economics
Book ReviewsBook Reviews
Jagdish Bhagwati has written a brilliant book… You may not always agree with him ---I don’t --- but In Defense of Globalization is bound to become a classic.Richard Sennett, Professor of Sociology, London School of Economics
Book ReviewsBook Reviews“Professor Bhagwati delivers in this volume, both with erudition and wittiness, a preciserebuttal of the most common and pernicious fallacies about globalization.”
Ernesto Zedillo, Former President of Mexico
“The new century’s major economic issue is Globalization, Yes? or Globalization, No?Columbia University’s Bhagwati, long regarded as a master economist by all tradeexperts, has prepared for the intelligent public an even-handed analysis of the pros and cons. Read and ponder.”
Paul Samuelson, Nobel laureate in Economics
Where do we begin?Where do we begin?
Asian Financial Crisis 1997ThailandIndonesiaMalaysiaSouth Korea
What was the Problem?What was the Problem?
Huge amounts of Capital came into the country…then left in equal amounts
$85 Billion Investment in East Asia
Withdrawals of capital caused:– Currency Collapse– Stock Crashes– Per Capita Income to fall Drastically
Asian Financial CrisisAsian Financial Crisis
Compared to the Great Crash of 1929(which lead to competitive increase of tariffs)
Financial Liberalization:The Opening of Trade Gates and Barriers to promote freer trade among business commerce
Unwise/Rushed Financial Liberalization by foreign investors
What was the Outcome?What was the Outcome?
Companies wanted free flow in to the countries for a short time and did not consider the consequences post-investment
Foreign Investors blamed the local countries for the collapse
Why did they blame Asia?Why did they blame Asia?
“To continue to maintain ideological position in favor of a policy of free capital flows or to escape responsibility for playing a central role in pushing for what one might call Gung-ho International Financial Capitalism”
-Bhagwati
What was the “Wrong Explanation?What was the “Wrong Explanation?
Asian Miracle “ran out of steam”------------------------------------------------------- Highest Rate of productive investment in
history Increased Rates of accumulation of
Capital through foreign investment leads to slowed growth
The Real Reason…Diminishing Marginal Returns
Hey I learned that in 313!Hey I learned that in 313!
The "law" of diminishing marginal returns says that after a possible initial increase in marginal returns, the MPP of an input will fall as the total amount of the input rises (holding all other inputs constant)
More on DMRMore on DMR
In the case of Asian markets…
With the increase of capital in regards to labor, eventually efficiencies will decrease and give less output
Do Foreign Investors want to see Diminished Profits?
Is there a solution to Diminishing Is there a solution to Diminishing Returns?Returns?
YES!!!
Technology Increase
Did this happen in Asia?Did this happen in Asia?
No!!!
Although foreign technology was produced domestically there was little of no technology development domestically
So….back to the CrashSo….back to the Crash
In most cases, as capital accumulates, in regards to labor, future return on capital would decline slowly (DMR)
$$$ Profit goes back to foreign countries
Since there were withdrawals of investment, the Asian economies spiraled into Negative Growth Rates
How could this happen?How could this happen?
Corrupt Crony CapitalismExtreme Liberalization….extreme
crashPressure to open gatesFinancial Liberalization without
safeguards cause collaspe
But was it their fault?But was it their fault?
“A friend in the US, a crony in Asia”James Wolfensohn, President of
World BankWhy attack the victims?
“Morality is more easily thrown to those who borrow , then at those who lend.”
East Asia 1991-1996East Asia 1991-1996
Budget SurplusHigh Investment/Growth Rates-
1960’sInflation was lowTrade Deficits were small
Free Capital FlowFree Capital Flow
Panic Behavior“Flight due to Fright”
Balance of Payment CrisisBalance of Payment Crisis
Bhagwati blames the IMFFree Capital Mobility Regime
Where there other factors?Where there other factors?
Lack of Financial and Banking Regulations
Borrowed AbroadInvested Domestically with no
safeguards
The Wall Street-Treasury ComplexThe Wall Street-Treasury Complex
Capital account convertibility: the rush to abandon controls on International Capital Flows
External PressureIMF/Treasury ResponsiblePower EliteLemmings
What did Malaysia do right?What did Malaysia do right?
Malaysia was a Free Flow Country
They put on the brakes during mega-investments by imposing
“Selective Exchange Controls”
September 1998
Pr.Mn. Mahathir went against IMF advise and lost support
Selective Exchange controls are compared to import tariffs on goods
Segments Domestic Capital Market from the world, allowing lower interest rates which are more competitive then world rates
So what were the results of the So what were the results of the Asian Financial Crisis?Asian Financial Crisis?IMF dropped Position in Free Capital
MobilityMust exude caution in developing
global financial marketsDevelop stronger banking structuresTaxes on International Capital Flows
acceptable
I’d write these downI’d write these down
In most cases, as capital accumulates, in regards to labor, future return on capital would increase slowly. (T/F)
In Regards to Trade Liberalization, controls and taxes good for a country will many foreign investors (T/F)
Questions?Questions?