managing globalization doha, qatar november, 2005 joseph e. stiglitz columbia university new york
TRANSCRIPT
Managing Globalization
Doha, QatarNovember, 2005
Joseph E. StiglitzColumbia University
New York
Outline
What is globalization?– Why has it become such a topic of
concern?– The mixed record of globalization
The changing landscape of globalization
The problems of natural resources– Explaining puzzle of oil prices– The natural resource curse
What is Globalization?
The closer integration of the countries of the world as a result of lowering of communication and transportation costs and the elimination of man-made barriers
Expansion of the size of the market holds out prospects for increasing standards of living, gains for all
But Globalization, As It Has Been Managed, Has Not Benefited All…
Losers in developed countries– Competition from low wage workers abroad– And increasing threat up the skill ladder
• Outsourcing• Even if only small fraction of jobs can be
outsourced, there can be large effects on wages• Undermined traditional response to the threat of
globalization– “We don’t want those low-skilled jobs
anyway….”– We just need to up-skill
Mixed Record in Developing Countries
East Asia, the most successful region in the world, has grown as a result of globalization– Globalization of technology– Globalization of markets– Some have benefited enormously from foreign
direct investment– But they managed globalization on their own terms
• Slow to open up their markets• Many still have not fully liberalized capital
markets• Did not follow prescriptions of the Washington
Consensus
Elsewhere, Globalization Has Not Gone So Well…
Decline in real incomes in Africa Stagnation in Middle East Failures in Latin America
– Unemployment rose– Fraction of population in informal sector up– Growth rates half of what it was prior to 1980– Poverty persists– Gap with the advanced industrial countries
increased– Even true for Mexico, with free access to the
U.S. market
The Lessons
The Washington Consensus has failed– Emphasis on liberalization, privatization,
macro-stability (emphasis on price stability) is neither necessary nor sufficient conditions for growth
– But since the core of Washington Consensus was “opening up markets for globalization,” in many quarters, its failure has led to opposition to globalization
The Real Problem…
A particular view of the market economy was pushed– Which did not even describe U.S. economy
• U.S. has strong industrial policy• Large role of government in financial markets• Safety net—social security• Macro-policy with emphasis on employment, growth,
not just inflation
Question: Role of ideology, bad economics, and special interests– Policies were those which advantaged particular
interests in U.S. and other advanced industrial countries
Globalization and the End of the Cold War
The end of the Cold war provided an opportunity for redefining international economic policy– Could now be based on principles– Or it could be based on interests,
unchecked by threat of competition from Russia•U.S., West chose the latter course•With adverse effects for many in Third
World
The Uruguay Round
Unfair to developing countries– Poorest countries were actually worse off– Allowed advanced industrial countries to continue
levying tariffs four times higher on imports from developing countries than on imports from fellow developed countries
– TRIPs agreement may stifle future economic growth (kicking away the ladder)
• Even the worst, deprives developing countries of life-saving drugs
U.S. , Europe reneging on commitments made in Doha for a ‘Development Round’ of trade talks– U.S. meanwhile increased agriculture subsidies– Europe now refuses to open up its markets– But agriculture just one of many issues– Even if an agreement emerges, it would not deserve the
epithet of a ‘development round’
Capitalism: An Efficient System
But capitalism has inevitable winners and losers
And in modern democracy, capitalism is often tempered
But internationally, this tempering does not occur
Disproportionate role of “special interests” in international institutions– Intellectual property in TRIPs– At the IMF, capital market liberalization
• Which finally IMF has recognized is not necessarily good for the developing countries
The Changing Global Landscape: Rise of China and India
Enormously rapid growth Their integration into the global economy
is ushering change of historic proportions– 2.5 billion people– With different factor ratios– Enormous adjustments may be required– Theory predicts enormously strong downward
pressures on unskilled labor in North, growing inequality
– Potential source of backlash
Competition from China and India
For the first time, there has been such combination of technology, unskilled labor, skilled labor, and access to international markets by a developing country– Even developing own global entrepreneurs (Infosys)– China’s success in textiles not based just on low
wages– Chinese apparel exporters have been able to reduce
unit cost by more than 40% between 2000 and 2004– Although labor cost is higher in China than in
Bangladesh, Kenya, Cambodia or Madagascar, China is still the least cost producer of clothing - cost saving mostly came from automation of processes, especially from effective sourcing and supply chain management
Increasing Role of Asia in the Global Economy
As source of manufactured goods– Asia, especially the East Asian miracle
countries and India, likely to continue to be the bright stars in the global economy
As a source of technology And as source of savings
– China far larger source of global savings than the U.S.
Increasing influence in global geo-politics
Huge savings– Ability to buy technology, corporations– And access to needed resources– New globalization provides them legal framework to do
this• Unocal case expose U.S.’s unease• U.S. cannot stop them in most of the rest of the world
Growth of China may provide new check on U.S.– But unfortunately, will also provide limits on its ability to
push democracy, human rights policies (Sudan) Weak economic performance in the U.S. and Europe,
however, is likely to lead to rise in protectionist sentiment – Though, as in Europe, protectionism will meet resistance– As retailers and consumers will be hurt– And even jobs
Increasing Role of Asia in theGlobal Economy
China-U.S. Inter-dependence
Both countries gain from the economic relationship Argument that China needs the U.S. to buy its goods and
the U.S. needs china to buy its treasuries is not fully persuasive– China could expand domestic consumption, investment— it
has great needs– Would other countries be as willing to hold U.S. dollars as
China has been? – What are consequences of shift of deficit from China to others?– Easier to increase consumption than to decrease it
U.S. made a major mistake in dealing with the Chinese bid for Unocal– Even if some of the arguments about lack of full symmetry are
correct– U.S. cannot stop China from buying energy assets elsewhere– U.S. has shown that it believes ownership/control matters
China Being Blamed for U.S. Trade Deficit…
But problem lies in the U.S. macro-economic policy
Much larger revaluation would put China in a difficult position– Lower prices in rural sectors– Rural-urban income inequality will grow–
already a major source of concern– Will require costly use of government revenues
to offset impact on farmers Move to peg RMB to a basket of currencies
and the increased flexibility in exchange rate management make sense for China
Global Economic Imbalances
Huge U.S. trade deficits– US$ 617.7 billion in 2004 – a 24% increase since 2003; trade
deficit in 2004 stands at record 5.8 % of U.S. GDP Twin deficit problem
– Largely a result of huge fiscal deficit– But related to deeper problem, global reserve system
Leading to huge financial instability– High level of global uncertainty– Related to political uncertainties – Middle East instability (Iraq)– High and volatile price of oil
Eroding confidence in dollar as a reserve currency– Moving away from dollar reserves– No longer good store of value– Exchange rate fluctuations undermine its role as much as
inflation would
Why American Economists Are Worried About the U.S. Economy
Growth has been sustained by consumption Consumption has been sustained by borrowing against housing
Major source of economic growth: Home building increased from 4.25% GDP 1980-2000 to 5.98%
– Difference equals $200 billion year– Generating approximately 2 million jobs
Increase in housing prices added $7 trillion ($ 3 trillion if re-mortgage and inflation is taken into account) in wealth during the past five years
– Adding $150 billion in spending– Generating 1.5 million jobs
But:
High level of household indebtedness– Large debt service– If primary residence excluded, net worth of median U.S. households declined by
13% during 2002-2004 – from $40,000 to $35,000 If interest rates rise, can consumption be sustained?
Greater Interdependence Means..
Problems in one part of global economic system impact others
“That which is unsustainable will not be sustained”
The U.S. Deficits not sustainable A Downturn—or even stagnation—in
U.S. will have global ramifications
The Puzzle of High Oil Price
Oil prices soar– Yet investments in alternative energies,
conservation have not
Rising Oil Price Since 2003
Long Term Trends in Oil Price
WTI Crude Oil Price: 1970-Sept 2005
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Source: U.S. Energy Information Administration
Futures: High Oil Price is Here to Stay?
NYMEX: Light Sweet Crude Oil Futures
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Puzzles of Sustained High Price
The Futures Market is predicting oil price to hover around $65/barrel during 2006 and 2007 and to remain in the low $60 range till 2009
The oil price increased by more than 40% since 2004 While oil shales – with an extraction cost of $27-$30
per barrel – represents a viable alternative to crude oil in case the price crude oil remain over $40 range
The US Office of Naval Petroleum and Oil Shale Reserves estimates there are some 1.6 trillion barrels of oil contained in oil shales around the world, with 60–70% of reserves (1.0–1.2 trillion barrels) in the United States
The puzzle – why isn’t sustained high oil price inducing a relatively quick shift away from oil to other viable alternatives – natural gas and oil shales?
A Possible Answer: In an Uncertain World…
Risks and uncertainty about future prices make investment in alternative energy sources costly
Market takes a short term perspective – price hike is temporary and there is no incentive for investment in innovation
Risk of Peace – there is a perception that price of oil will inevitably fall if there is a lasting peace in the Middle East
Market also cannot rule out the possibilities of new discoveries of oil deposits
Innovations for efficient and alternative energy solutions will require governments to bear the cost of innovation and risk
Oil in a Globalized Economy
Supply and Demand Shocks The spare capacity in crude oil production is
dwindling – most of the oil producing countries are running on full capacity
Production in Iraq remains lower than the pre-invasion level – current production level is about 1.9 million bpd compared to over 2.5 million bpd in 2002
Even if Iraq reaches full capacity production, the impact on the world oil price will be insignificant
Demand growth – especially from China and India – will continue to out pace the growth in oil supply
Dwindling Spare Production Capacity
And the Demand for Oil is Growing, Albeit at a Slower Rate
Economic and Political Consequences
Macro-economic consequences– Slowdown in global economy– Especially if Central Banks continue focus on
inflation
High/volatile prices forcing countries to think more about what is required for energy security
Worries about distributional consequences– Discussion in U.S. of “windfall profits” tax– Especially in light of huge subsidies in last
energy bill
The Resource Curse
Paradox: Countries with large endowments of resources have not (on average) done well– Many face high levels of political instability– Many are not democratic
Related to instability of oil prices– Exacerbated by pro-cyclical lending
Dutch Disease problems Rent seeking/corruption
Keys to Avoiding Resource Curse
How to maximize the fraction of the value of the resources that is available for public purposes– Minimizing “diversion” to private interests– Whether as a result of public sector corruption– Or private sector cheating
How to ensure that funds are well spent How to manage macro-economics to avoid
Dutch Disease problems Issues involve both politics and economics
Corporations wish to minimize prices paid– Which can sometimes be done by bribing government
officials Institutional arrangements can make a difference
– Transparency– Stabilization funds?– The design of auctions– Design of contracts
Resource curse is not inevitable - some countries have managed their resources well– Botswana– Malaysia
Keys to Avoiding Resource Curse
There Have Been Problems Even in Advanced Industrial Countries
Fire sales in U.S.—reduces government revenues
Failure to use well designed auctions– Contrast with telecom
Alaska and Alabama—cheating on contracts
Environmental problems– Valdez– Alaska
The Rate Of Extraction and Usage of Depletable Natural Resources
Azerbaijan— 20-25 years of supply – IMF recommendation—lower taxes; uniform
rate of “spending” out of natural resources Bolivia and Ecuador—resources are about
to come online, but the country in recession; education and other budgets being cut drastically to reduce budget deficits– Should they be ‘allowed” to borrow against
these future incomes to support deficit spending
Nigeria—a long history of squandered resources
• Spending of natural resource revenues leading to currency appreciation
• Should it now spend all of its revenues?
Chile—creates stabilization fund• But IMF treats spending out of stabilization fund just
like any other form of deficit spending• Does this make sense?
Bangladesh—limited reserves of natural gas
• Should it sell natural gas to India?
The Rate Of Extraction and Usage of Depletable Natural Resources
Political Issues
Angola– BP offers transparency (publish what you pay), government
threatens to throw country out, other companies support government position
Sudan– Providing support for a government engage in genocide in
Darfur– Though some in international community wanted to embrace
the government for having stopped its ruthless campaign against the South
– Would an embargo simply provide others (like the Chinese) who pay no attention to human rights greater scope
– What pressure should be brought to bear against Sudan?
Chad—little economic opportunity other than oil– But current government likely to misappropriate funds– With funds used to maintain itself in office– And worries about environmental damage of pipeline– Oil will still be there when a future government takes office
Venezuela– Venezuela (also Bolivia, Botswana)
demand new contracts– Claiming that previous contracts were
unfair• Sometimes signed by uninformed or corrupt
government (with or without bribery)• Circumstances have changed (high oil
prices)• What is a fair and efficient contract?
Political Issues
Environmental Issues
Papua New Guinea– major gold mine provides substantial fraction
of country’s exports– Studies showing that environment damage
would be minimal later turn out to flawed– No economically feasible way of producing gold
and containing the damage– Mine has to be shut down– Should the mine operator pay for cleaning up
the river and the surrounding environment?– Or should they just walk away?– In the future, what can governments do to
prevent this?
Environmental Issues
Global Warming– Major concern of our time– Overwhelming evidence– Requires curtailing usage of fossil fuels– How active should one be in promoting
conservation measures?• Even if it lowers prices and profits• Should but if prices are lowered, usage may not be
curtailed—only change in who gets rents• Should one argue for quantitative restrictions• Is one’s primary responsibility to one’s shareholders
()in which case one might oppose these measures) or to society more broadly.
Cartel and Competition Issues
Market economy requires competition Cartels are designed to limit competition Should one support/oppose cartels in one’s
industry– Raise price– Using arguments about “stabilization”– Could be used in most other industries
Cartels in Oil, aluminum; proposed in steel
Many of These Present Conflicts Between Interests of Firm and Interests of the Society
Why cannot we simply rely on firm’s maximizing its market value
Adam Smith’s invisible hand suggests that doing so will ensure economic efficiency
Modern economic theory helps explain why Maximizing shareholder value does not lead to economic efficiency
Adam Smith’s Invisible Hand…
Adam Smith’s Invisible Hand said that pursuing self-interest leads to economic efficiency– But does not ensure either social justice, the
preservation of the environment, or human rights
Many market failures involve externalities—including environmental failures– When there are these market failures,
maximizing shareholder value does not let to efficiency or societal well being
Concluding Remarks
Good business goes beyond maximizing shareholder value - There are multiple stakeholders—workers, customers, communities– A broader view of corporate governance– Reflected in many European countries legislation
A corporation can do well by doing good– Acting in a responsible manner can be good for
profits– But collective action (government regulation) is
often required in addition– Self-regulation does not suffice