managing globalization doha, qatar november, 2005 joseph e. stiglitz columbia university new york

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Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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Page 1: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

Managing Globalization

Doha, QatarNovember, 2005

Joseph E. StiglitzColumbia University

New York

Page 2: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia 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

Page 3: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 4: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 5: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 6: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 7: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 8: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 9: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 10: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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’

Page 11: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 12: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 13: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 14: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 15: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 16: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 17: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 18: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 19: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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?

Page 20: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 21: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

The Puzzle of High Oil Price

Oil prices soar– Yet investments in alternative energies,

conservation have not

Page 22: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

Rising Oil Price Since 2003

Page 23: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

Long Term Trends in Oil Price

WTI Crude Oil Price: 1970-Sept 2005

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Nominal Price

Real Price

1st Oil Shock

2nd Oil Shock

1st Gulf War

2nd Gulf War

Source: U.S. Energy Information Administration

Page 24: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

Futures: High Oil Price is Here to Stay?

NYMEX: Light Sweet Crude Oil Futures

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Page 25: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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?

Page 26: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 27: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 28: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

Dwindling Spare Production Capacity

Page 29: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

And the Demand for Oil is Growing, Albeit at a Slower Rate

Page 30: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 31: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 32: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 33: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 34: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 35: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 36: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 37: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 38: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 39: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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?

Page 40: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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.

Page 41: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 42: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 43: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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

Page 44: Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

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