WHY GLOBALIZATION WORKSMartin Wolf, Associate Editor & Chief Economics Commentator, Financial Times, London

Nottingham University

Nottingham17th February 2005

2

Future of Globalisation

• Five Big Themes of the Book

– Technology and the market revolution

– Role of states

– Development record of the “second age of globalisation”

– Threats to globalisation

– Exploiting the opportunities of globalisation

3

Theme 1 – Centrality of markets

• Globalisation is integration of economies through markets across frontiers

• It is enabled by technology and by liberalisation

• The 1980s and 1990s were a liberalisation revolution

• Globalisation followed

4

Theme 1 – Centrality of markets

FALLING COST OF TRANSPORT AND COMMUNICATIONS

0

20

40

60

80

100

120

1920 1930 1940 1950 1969 1970 1980 1990

Ocean freight Air Transatlantic phone Satellite

5

Theme 1 – Centrality of markets

AVERAGE TARIFF RATES

0

5

10

15

20

25

30

France Germany Italy UK EU US

1950 Pre-Uruguay Round Post-Uruguay Round

6

Theme 1 – Centrality of markets

WEIGHTED AVERAGE TARIFFS IN CHINA(per cent)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

1992 1993 1994 1995 1996 1997 1998 2001 2002

7

Theme 1 – Centrality of markets

THE GROWTH OF WORLD TRADE AND OUTPUT 1970-2002(volume with 1970=100)

100.0

1000.0

Merchandise Exports Manufactured exports Merchandise production Manufactured output

8

Theme 1 – Centrality of markets

RATIO OF TRADE IN GOODS TO GOODS GDP(per cent)

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

Thailand Germany Mexico UK Turkey China US Japan

1990 2002

9

Theme 1 – Centrality of markets

RISE OF GLOBAL ECONOMIC INTEGRATION IN THE 1980s and 1990s(per cent of global GDP)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

FDI inward stock Gross product offoreign affiliates

Export of foreignaffiliates

Export of goods andnon-factor services

Sales of foreignaffiliates

1982 1990 2003

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Theme 2 – Markets and States

• Markets need supportive states

• They need to be both strong and constrained

• The creation of such a state is difficult and the achievement is rare

• Far more common are predatory, weak or even failing states

• Good states are created by external regulatory competition, constitutional change and moral reform

• The difference in quality of states is the world’s biggest challenge

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Theme 3 – Record

• In many ways, there is too little globalisation, not too much.

• Labour markets are less integrated than in the late 19th century

• Capital markets are less good at moving capital to less developed economies, because of monetary disorder and poor property rights

• But trade and production are more integrated than ever before, because of technology and liberalisation

12

Theme 3 – Record

• Where globalisation has worked, predominantly in Asia, it has been remarkably good.

13

Theme 3 – Record

“Let China sleep, for when she wakes, she will shake the world.” Napoleon Bonaparte

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Theme 3 – Record

ASIA'S SHARE IN WORLD GDP(at PPP)

33

179

5 512

0

10

20

30

40

50

60

70

1820 1870 1913 1950 1973 2001

China India Japan Other AsiaSource: Maddison

15

Theme 3 – Record

Region 1820-1870

1870-1913

1913-50 1950-73 1973-98

Western Europe

0.95 1.32 0.76 4.08 1.78

Western Offshoots

1.42 1.81 1.55 2.44 1.94

Japan 0.19 1.48 0.89 8.05 2.34Eastern Europe and former USSR

0.64 1.15 1.5 3.49 -1.1

Latin America

0.1 1.81 1.42 2.52 0.99

Asia (excluding Japan)

-0.11 0.38 -0.02 2.92 3.54

Africa 0.12 0.64 1.02 2.07 0.01World 0.53 1.3 0.91 2.93 1.33

GROWTH IN GDP PER HEAD 1820-1998(annual average compound growth rates, per cent)

16

Theme 3 – Record

DECOMPOSITION OF WORLD INCOME INEQUALITY(mean logarithmic deviation)

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

0.900

1820 1850 1870 1890 1910 1929 1950 1960 1970 1980 1992

Inequality within country groups

Inequality between country groups

Total inequality

Source: Bourguignon and Morrison

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Theme 3 – Record

INEQUALITY AMONG HOUSEHOLDS IN THE AGE OF GLOBALISATION

(Mean logarithmic deviation)

0.720

0.740

0.760

0.780

0.800

0.820

0.840

0.860

0.880

0.900

0.920

Source: Sala-I-Martin

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Theme 3 – Record

EXTREME POVERTY IN THE LONG RUN(less than a dollar a day at PPP, in 1985 prices,

millions and world population share)

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

NU

MB

ER

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

SH

AR

E O

F W

OR

LD

P

OP

UL

AT

IO

N

Number Rate

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Theme 3 – Record

Regions 1981 1990 2001East Asia & Pacific 767 472 284(Excluding China) 161 95 72China 606 377 212Europe and Central Asia 1 2 18Latin America and Caribbean

36 49 50

Middle East and North Africa

9 6 7

South Asia 475 462 428Sub-Saharan Africa 164 227 314Total 1,451 1,219 1,101Total, excluding China 845 841 888

People living on less than $1.08 a day at

Sources: World Bank, World Development Indicators 2004

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Theme 3 – Record

Regions 1981 1990 2001East Asia & Pacific

55.6% 29.6% 15.6%

China 61.0% 33.0% 16.6%Europe and Central Asia

0.3% 0.5% 3.7%

Latin America and Caribbean

9.7% 11.3% 9.5%

Middle East and North Africa

5.1% 2.3% 2.4%

South Asia 51.5% 41.3% 31.1%Sub-Saharan Africa

41.6% 44.6% 46.5%

Total 39.5% 27.9% 21.3%Total, excluding China

31.5% 26.2% 22.8%

Sources: World Bank, World Development Indicators

Share of people living on less than $1.08 a day at 1993 PPP, in regional populations

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Theme 4 – Threats ahead

• Insecurity

• Instability

• Interests

• Ideas

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Theme 4 – Threats ahead

• Insecurity

– Then: huge conflicts among the great powers, leading to two world wars

– Today: fear of terrorism, but the great powers are on the same side, at least for the moment

– Risks ahead: rise of China, mega-terrorism and resource wars

– Assessment: risks manageable

23

Theme 4 – Threats ahead

• The consensus is that oil supply can increase in the years ahead

• But we still do not know what will replace it in the long run

• The resource needs of Asian industrialisation are enormous: half of global incremental demand for oil is now from Asia, with China a bigger factor than the US

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Theme 4 – Threats ahead

UPS AND DOWNS OF OIL PRICES(nominal and real price of oil)

0

20

40

60

80

100

120

Nominal Real (at 2004 prices , deflated by US CPI)

25

Theme 4 – Threats ahead

• Instability

– Then: the Great Depression

– Today: financial crises in emerging market economies, asset price bubbles and global imbalances

– Risks ahead: dollar crisis and asset price crashes

– Assessment: risks manageable

26

Theme 4 – Threats ahead

• Interests

– Then: national companies with the same interests as their work force and no World Trade Organisation

– Today: multinational companies with internationally integrated operations and interests at odds with their national work forces and also the WTO

– Risks ahead: middle class anxiety as services become more internationally tradable

– Assessment: risks manageable

27

Theme 4 – Threats ahead

• Ideas

– Then: belief in socialism, planning and import substitution

– Today: collapse of socialism and worldwide move towards the market and discordant group of anti-globalisation protesters

– Risks ahead: loss of faith in market, particularly if financial system continues to be unstable

– Assessment: risks manageable

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Theme 5 – How to exploit opportunities

• I have no blueprint for a new world. I think these are a waste of time. But here are ten “commandments” that bring together my main conclusions

– The market economy is the only arrangement capable of generating sustained increases in prosperity

– Individual states remain the locus of political debate and legitimacy. Supranational institutions gain their legitimacy from the states that belong to them

– It is in the interest of states and their peoples to participate in international treaty-based regimes that deliver global public goods

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Theme 5 – How to exploit opportunities

– Such regimes need to be specific, focused and enforceable

– The WTO has strayed too far from its primary focus on trade liberalisation

– The case for regimes covering investment and competition is strong. But such regimes do not need to be global

– It is in the long-run interest of countries to integrate into financial markets, but they should do so carefully

– It is necessary to accept renegotiation of sovereign debt as a normal feature of the world economy

– Official development assistance need to increase

– Countries need to learn from their own mistakes, but also we need the ability to rescue failed states