Download Globalization and economy: a small country perspective

Globalization and economy: a
small country perspective
Jaakko Kiander
Government Institute for
Economic Research
Globalization and economy: a small
country perspective
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Old and new globalization
What globalization means?
Drivers and new actors
How small open economies are affected
Conclusions
Old and new globalization
• There have been periods of large scale
economic integration and free trade in
economic history
– Ancient Rome and the Mediterranean
economy
– 19th century; especially 1870-1913
• Large movements of goods, capital and labour
between continents
New globalization
• Steps towards free trade since 1945
– GATT, WTO
• Financial market deregulation and free
capital movements in the 1980s
• Regional integrations processes:
– EU and NAFTA
• Emerging economies
– East-Asian tigers, China 1978, CEEC 1989,
India etc.
What globalization means?
• Free movements of goods and capital (and
people, to some extent)
• The basic logic of economic globalization (and
integration)
• Economic convergence as a result
• Who is going to benefit from globalization?
The basic logic of economic globalization
(and integration)
• Liberalization likely to increase factor
movements and trade
• More international trade (and benefits from
division of labour)
• Capital movements from rich to poor
countries (FDI)
• Labour movements from poor to rich
countries (migration)
Investment as a vehicle of
development
• Rapid productivity growth enabled through
FDI:
– Greenfield investment: more capacity
– Transformation of old capital stock: higher
productivity
– New technology embodied in new equipment
– Organizational and managerial skills imported
– Rapid access to export markets
The process: continuous
adjustment to profit opportunities
• Faster growth in emerging economies due
to cost advantage
• New technologies adopted
• Structural change: industries in rich
countries using unskilled labour shift their
production to emerging markets
• Increasing flow of cheap imports from
emerging economies keep inflation under
control
Convergence as a result
(in long term)
• Real wages and price levels in emerging
economies grow faster than in rich
countries
• The larger are factor movements, the
faster is the convergence process (but it
still takes decades … cf China)
• Large effects in emerging economies, only
minor effects in rich countries
Who is going to benefit from
globalization?
• Almost everybody benefits in emerging
economies; but structural change also likely, and
can be costly
– will there be any compensation?
– Rising income differentials
• Capital owners, consumers and skilled workers
benefit in rich countries; but some unskilled may
be losers
– Global income distribution becomes more equal
Economy tends to balance itself…
• Growing output and exports of emerging
economies will be balanced by their
growing imports: jobs do not disappear
• Adjustment process may require
substantial changes in relative prices
(exchange rates)
• During the period of globalization
employment has increased everywhere
Economic globalization changes
the world
• New economic super powers: China and
India
• New middle-size powers: Russia, Brazil,
Mexico, South Africa, Iran, Pakistan,
Korea, Indonesia…
• Old economic super powers will become
smaller: Germany, UK, Japan,…
The Finnish growth record: the last
100 years
• Finland as an example of a small country
benefiting from globalization
• An impressive record: catching up from
poor to rich
• Rapid productivity growth – mostly due to
international competition
• Increased employment through population
growth and higher labour force
participation
Long-term economic growth in
Finland
2500
2000
1500
1000
500
19
00
19
10
19
20
19
30
19
40
19
50
19
60
19
70
19
80
19
90
20
00
0
GDP
GDP per worker
GDP per hour
The old post-war model of
economic growth: 1945-1990
• Export-oriented: importance of export
industries widely understood (cf. Japan
and China)
• Capital intensive: emphasis on
industrialization and heavy industries –
high savings and investment rates
• Statist: government and state as central
decision makers – in co-operation with
banks and export industries
The old model
• Government had a central role:
– state-owned companies
– aggressive industrial & regional policy
– regulation of markets, ownership, capital
flows, and investment decisions
– systematic investment in education and
training
The old model
• Macroeconomic policy targeted to
maintain & improve competitiveness
– Flexible exchange rates and incomes policy
• …and to support investment
– Taxation and corporate governance supported
growth targets, not profitability
– Corporate finance based on debt
– Investment ratio usually close to 30 % of GDP
(China: 50 %)
Assessing the old model
• Not compatible with free markets and free
factor movements
• Overinvestment: inefficient use of capital
• Forced savings: consumption constrained
but rapid improvement in living standards
• BUT: Good results in terms of growth and
employment
Transition to new regime
• Liberalisation of product and capital markets in
the 1980s
• Liberalisation of foreign ownership in 1993
• End of bilateral trade with Soviet Union
• Financial crisis and restructuring in 1991-94:
–
–
–
–
rise in unemployment
a wave of bankruptcies
banking crisis
increase in foreign ownership
The new regime
• EU and EMU memberships as corner stones
– Macroeconomic policy cannot be used anymore to
improve competitiveness
• All sectors opened to competition and foreign
ownership
• Shareholder value as driving force in corporate
governance (instead of growth and investment)
• Corporate taxation reformed: no special
incentives to investment
The new regime
• Government not any more active in
industrial policy
• Large chunks of state-owned companies
privatised – less government control
• Even more emphasis on innovation
system, R&D policy, and education
R&D spending
3,5
3
2,5
2
1,5
1
0,5
0
1980
1984
1988
1992
1996
2000
2004
Experiences and lessons from the
new regime
• GDP growth record has been good since
1994 (almost as good as in the old
system)
• Rapid labour productivity growth has
continued (but is has been a bit slower)
• Investment ratio has fallen from 25 % of
GDP to 17 % although profitability has
improved
Export-led growth
• Policy priority: growth of exports
GDP, domestic demand and export volumes
300
1985=100
250
200
Domestic demand
Exports
150
GDP
100
50
1985
1990
1995
2000
2005
Declining unemployment rates
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
18
16
14
12
10
8
6
4
2
0
Finland
Sweden
Denmark
Productivity growth better than
elsewhere
160
140
120
Finland
France
USA
100
80
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
60
Experiences and lessons …
• Finland has been succesful – thanks to
– High technological level and specialization
– Good competitiveness (partly due to big devaluations in the
1990s)
• Rapid structural change to more high tech production
• The Nokia phenomenon: extra bonus to Finnish
economy
• Lots of innovative activity: education, skills, R&D, policy
• In spite of declining income share, real earnings have
developed well
Finland: adjusting to globalization
• So far, Finland has been succesful
– Rapid rise of exports
– Huge surplus in trade balance
• Continuous flow of plant closures: simple
manufacturing jobs move to low-wage countries
… but total manufacturing is doing well
– Specialization to high value added
• More competitive pressure:
– workers’ bargaining power eroded
– Tax competition
What explains the rapid growth of exports,
productivity and industrial production?
• ’Creative destruction’: the recession wiped out 25
percent of jobs in 1991-94 – the least productive firms
and plants were eliminated
• Competitiveness: hugely improved competitiveness as a
result of exchange rate movements, rising productivity
and wage moderation (achieved through unemployment
& centralized wage setting)
• Structural change: shift from resource-based to
knowledge-intensive production (IT sector)
• New technology: Finnish firms in the frontier of new
technology in the 1990s (Nokia)
• Luck & smallness: if there is a successful large firm in a
small country it has a decisive impact on everything
Role of policy 1/3
• National innovation system
– There has been a long term commitment to
build up innovation system
• IT sector development started in the 1970s
– Based on broad political consensus
– Network of universities and government
laboratories in co-operation with private sector
– New technologies traditionally adopted in
early phase (banking, telecommunications…)
– Strong industrial base
Role of policy 2/3
• Technology policy
– Government spending on R&D 1 % of GDP
• Consists of own research & subsidies
– Co-operation and competition
• Intermediate bodies which link research units and firms
• Government subsidies help to form joint projects with small firms
– Business sector R&D more than 2 % of GDP
• Problem: most of that concentrated in IT sector
• Education
– Skill formation, with emphasis on engineering and technology
– Increasing supply of skilled labour
• Abundant resource pool
• Moderate wage level
Role of policy 3/3
• Maintaining advantage in competition
– Price stability: since 1993 inflation less than EU15
average
– Wage moderation through long term commitment:
falling unit labour cost
– Tax policy crafted to face international tax
competition:
• Corporate and capital income taxation: flat tax since 1993;
current rate 26 %
• Labour taxation: gradual cuts since 1996, financed by
increased corporate tax revenues and higher environmental
taxes