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On the sustainability of global development Alessandro Vercelli Department of Economic Policy, Finance and Development University of Siena [email protected] 1 Basic References -Borghesi, S. and A. Vercelli, 2008, Sustainable Globalization. Social and Environmental conditions, Palgrave Macmillan (Alessandro Vercelli e Simone Borghesi, 2005, La sostenibilità dello sviluppo globale, Carocci editore, Roma.) -Stiglitz, J.E., 2006, Making Globalization work, Norton, New York (Stiglitz, J.E., 2006, La globalizzazione che funziona, Einaudi, Torino) 2 FIRST PART BASIC CONCEPTS AND THE EMPIRICAL EVIDENCE 3 Approach On globalisation we cannot say anything in general: → different phases characterised by different features and effects → any appraisal is relative to a particular point of view. My own: PHASES OF SUSTAINABLE GLOBALISATION DEVELOPMENT I want to clarify whether: • the recent phase of globalisation is consistent with the requirement of sustainable development • the current phase of globalisation is sustainable or requires substantial modifications • → policy implications 4 Definition of economic globalisation Process of progressive integration of world markets based on the free movement across borders of goods, services, and production factors THREE PERIODS: • • • 1820-1915: FIRST GLOBALISATION 1915-1945: DE-GLOBALISATION 1945-2007→: SECOND GLOBALISATION 5 The three phases of economic globalisation: the world exports Ratio between world export of goods and world GDP 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1820 1870 1913 1929 1950 1973 1990 2000 EXP/GDP Source: Maddison (2001) updated using WTO (2001) 6 The three phases of globalisation: the stock of Foreign Direct Investment Ratio between the world stock of FDI and world GDP 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1870 1913 1930 1945 1960 1980 1985 1990 1995 2000 FDI/GDP Source: Obstfeld and Taylor (2004) 7 Sustainable development: definitions Development: process of expansion of individual economic freedom (Sen, 1999) Sustainable development: “Development is sustainable if it satisfies present-day needs without compromising the capacity of future generations to satisfy their needs” (Brundtland Report, 1987) 8 Sustainable development Foundations • Income DISTRIBUTIVE EQUITY • Wealth • Resources CHOICE FREEDOM 2 CONDITIONS INTER-GENERATIONAL INTRA-GENERATIONAL ENVIRONMENTAL CRITERION SOCIAL CRITERION 9 Ethical and economic foundations: the social condition equal access to the basic economic opportunities: ethical foundations this is also a fundamental condition of economic efficiency -prerequisite for a well-functioning competitive market: guarantees that the winners of the economic competition are actually the best participants as each of them plays on a “level playing field” -poverty (malnutrition) implies a restriction of the option set reducing the potential contribution of poor people to economic efficiency and wealth: among poor people who cannot afford a good education there are potentially good scientists, engineers, physicians, managers and so on -social and political tensions that have negative effects on income growth (Alesina and Perotti, 1996; Benhabib and Rustichini, 1996) 10 Ethical and economic foundations: the environmental condition similarly environmental degradation has adverse economic effects: ↓ health of people → ↓ productivity ↓ land productivity poverty-environment trap: the poor rely heavily on the direct exploitation of natural resources: ↑ environmental degradation →↑ poverty →↑ environmental degradation 11 The influence of globalisation on the conditions of sustainability The main influence is through the impact of globalisation on income → positive correlation for sound theoretical reasons: - ↑ extension of markets → ↑ division of labour → ↑ productivity ↑ scale and scope economies →↑ efficiency ↑ across borders and domestic competition ↑ diffusion of information and technology across borders - Globalisation offers opportunities of development provided that the country adopting an outward trade orientation complies with a few crucial conditions: rule of law, institutions to monitor, control and regulate markets - Notwithstanding this proviso, the empirical evidence generally finds a positive correlation: e.g. Bhagwati (2004), Wolf (2004) 12 Orientation of trade and growth rate of GDP 1963-1992 Average rates of growth of per capita GDP In developing countries Orientation of trade 1963-1973 1973-1985 1980-1992 Open to trade 6.9 5.9 6.4 Moderately open 4.9 1.6 2.3 Moderately protectionist 4 1.7 -0.2 Protectionist 1.6 -0.1 -0.4 Fig. 2 Source: World Bank 13 Evolution of per capita GDP Source: Lomborg (2001) Per capita GDP United Kingdom Fig. 3 Per capita GDP (thousands of £) Per capita GDP (thousands of $) Per capita GDP United States 14 Impact of globalisation on the social conditions of sustainability 1a) BETWEEN 1) INEQUALITY { COUNTRIES 1b) WITHIN 15 Inequality indexes of individual incomes 1820-1992 Theil inequality coefficients global inequality (*) Inequality between countries Inequality within countries (*) Global inequality is the sum of the other two curves Source: Bourguignon and Morisson (2002) Fig. 1 16 Correlation between globalisation and inequality? The global index suggests a positive answer however, as soon as we decompose it in its two determinants, and consider different phases, the outlook becomes more complex and articulated Between-country inequality: Correlation in the 19th century In the 20th century the positive correlation breaks down globalisation has two opposite effects on the inequality: between globalising and non-globalising countries →↑ inequality and within globalising countries → ↓inequality → the weight of the second effect progressively increased during the second globalisation as a consequence of the spreading of globalisation negative correlation? Question not yet settled (Branko Milanovic, 2002) 17 Correlation between globalisation and inequality? Within-country inequality: mild positive correlation the aggregate index conceals the empirical pattern of groups of countries new globalising countries: India, China, Russia: ↑ inequality most OECD countries → U pattern since 1915: 1915-1971: ↓ inequality (solidarity from wars, depression, welfare state) 1975-2005: ↑ inequality (“neoliberal policies”) → I will focus on the second empirical trend that has important policy implications 18 Variation in within-country income inequality 1975-1985 1985-1995 AUSTRIA BELGIUM CANADA CHECK REP. DANMARCK FINLAND FRANCE GERMANY UNGHERIA ITALY JAPAN COREA HOLLAND NEW ZELAND NORWAY POLAND SWEDEN Source: OECD 0 + -+ -0 + 0 0 - ++ + 0 +++ ++ + + + +++ + + + ++ +++ + +++ +++ Fig. 4 +++ HIGH INCREASE > 15% ++ INCREASE 7-15% + MODERATE INCREASE 2-7% 0 NO VARIATION -2 - +2% - MODERATE REDUCTION 2-7% -- REDUCTION 7-15% --- STRONG REDUCTION > 15% 19 Inequality in the U.K., 1939-1996 (%) 56 52 48 44 Gini index 40 36 32 28 24 20 16 1985 1945 1955 1965 1975 1935 1995 1970 1990 1940 1950 1960 1980 2000 Source: Brandolini (2002) Fig. 5 20 Inequality in the USA, 1929-1996 56 52 48 44 Gini index 40 36 32 28 24 20 16 1915 1925 1985 1995 1955 1965 1975 1935 1945 1970 1990 2000 1920 1930 1940 1950 1960 1980 Source: Brandolini (2002) Fig. 6 21 Share of income (quintiles: 1985-1995) MIN. INCOMES AVER. INCOMES MAX. INCOMES = = = = + = = + --= = = = --= = --= = = --= = --- = = +++ = +++ + + = +++ + +++ + +++ + +++ + + AUSTRALIA AUSTRIA BELGIUM CANADA DENMARK FINLAND FRANCE GERMANY HUNGARY ITALY JAPAN MEXICO HOLLAND NORWAY SWEDEN TURKEY U. K. U.S.A. Source: OECD Fig. 7 +++ INCREASE > 1.5% + INCREASE between 0.5 E 1.5% = VARIATION between -0.5 and +0.5% - DECREASE between 0.5 E 1.5% --- DECREASE > 1.5% 22 The impact of globalisation on the social condition of sustainability The indirect effect on inequality: the environmental Kuznets Curve 23 Indirect correlation between globalisation and within-country inequality Extensive empirical literature on within-country inequality studying its correlation with per capita income Since there is a strong correlation between globalisation and per capita income we can interpret the above as an indirect correlation between withincountry inequality and globalisation Literature initiated by the Nobel-laureate Simon Kuznets who suggested in 1955 the conjecture that within-country inequality increases in the first phase of industrial development but decreases in a second phase 24 KUZNETS CURVE (1955) Inequality Social carrying capacity Per capita income Fig. 9 25 KUZNETS CURVE (1955) Plausibility → take-off (triggered by the adoption of outward-oriented policies): -diffusion takes time -urbanisation -growing pressure in favour of redistribution (progressive taxation, transfers, welfare state) Optimist message; the problem tends to disappear “spontaneously” Kuznets conjecture corroborated by econometric studies up to the 1970s since the early 1980s new econometric studies have progressively weakened the empirical support (emergence of the U-pattern in OECD countries) historical explanation: the KC described a specific historical process and not general tendencies intrinsic in the process of globalisation→ policy is needed 26 The impact of globalisation on the social condition of sustainability The effects on poverty 27 Impact of globalisation on the social conditions of sustainability: 2) poverty we have to reject the optimist message of the Kuznets curve however, according to many economists, in order to study the social effects of globalisation we should focus not on inequality but on poverty Conviction based on the “Bhagwati hypothesis and prescription”: Countries have similar distribution of income → we can only reduce poverty by increasing the rate of growth of income (Bhagwati, 2004, p.66) 28 Impact of globalisation on the social conditions of sustainability: 2) poverty misleading hypothesis: Bourguignon and Morisson (p.733) calculated that: “had the world distribution of income remained unchanged since 1820, the number of poor people would be less than 1/4th than it is today and the number of extremely poor people would be less than 1/8th of what is today” → we should try hard to realize a more egalitarian growth 29 The long-run trend of poverty (< $2 a day) POVERTY 3000.0 100.0% 90.0% 2500.0 80.0% 60.0% 1500.0 50.0% 40.0% 1000.0 headcount (percents) headcount (millions) 70.0% 2000.0 30.0% 20.0% 500.0 10.0% 0.0 0.0% 1820 1850 1870 1890 1910 1929 poverty 1950 1960 1970 1980 1992 poverty % Source: Bourguignon and Morisson (2002) 30 The long-run trend of extreme poverty (< $1 a day) EXTREME POVERTY 1600 90.0% 1400 80.0% 70.0% 60.0% 1000 50.0% 800 40.0% 600 headcount (percent) headcount (millions) 1200 30.0% 400 20.0% 200 10.0% 0 0.0% 1820 1850 1870 1890 1910 1929 extreme poverty 1950 1960 1970 1980 1992 extreme poverty % Source: Bourguignon and Morisson (2002) 31 Poverty in the world from 1987 to 1998 Extreme poverty (headcount) 100 75 Variations 50 25 0 -25 -50 -75 -100 -125 -150 East Asia and Pacific Area Europe and central Asia Latin America and Caraibi Middle East and North Africa South Asia Sub-saharian Africa Fig. 10 Source: World Bank 32 Variation rates of poverty (1985-1995) Pre-tax transferts Post-tax transfers Poverty is defined as the number of persons who detain less than 50% of average income of total popolation. Taxes include all direct taxes on incomes, included social security contributions. The transfers include all the benefits deriving from money transfers. Fig. 8 Source: OECD 33 The impact of globalisation on the environmental condition of sustainability The indirect effect: the environmental Kuznets Curve 34 Environmental KUZNETS curve (Panayotou, 1993) No historical series of comprehensive indexes of environmental deterioration → correlation with specific indexes of environmental deterioration Some of them behave as in the KC → “environmental Kuznets curve” Plausibility: -take-off: shift of labour from agriculture to heavy industry then increase of light industry and services -growing pressure of final users and electorate Econometric studies seemed to corroborate the hypothesis but then it was falsified in many cases: - it works only when the environmental effects are local - recently N-shaped curves 35 Environmental KUZNETS curve Environmental deterioration Environmental carrying capacity Per capita income Fig. 11 36 Environmental KUZNETS curve (sulfur dioxide) Sulfur Dioxide g/m3 1972 1986 Per capita income (PPP$) DEVELOPMENT Source: Shafik (1994) Fig. 12 37 Environmental KUZNETS curve (particulate matter) 1972 1986 Per capita income (PPP$) DEVELOPMENT Source: Shafik (1994) Fig. 13 38 Thousands coliforms per 100ml Environmental KUZNETS curve (coliform bacteria) 1986 1979 Per capita income (PPP$) DEVELOPMENT Source: Shafik (1994) Fig. 14 39 Generalisation of the environmental Kuznets curve Environmental sustainability relation: ED growth = pc income growth + intensity of ED growth + population growth where ED is a global index of environmental degradation; pc is per capita Condition of long-term global environmental sustainability (ED growth ≤ 0 ): pc income growth ≤ - (intensity of ED growth + population growth) → positive growth of pc income may be sustainable only if: negative growth of ED intensity > population growth 40 Crucial requisite of sustainabilty Development is sustainable only if: Reduction rate of ED intensity > Rate of growth of population More likely in developed countries Calls for: Technologic change Consumption Increasingly eco-compatible 41 The environmental sustainability relation and the energy problem The condition for long–term energy sustainability is given by: pc income growth ≤ - (population growth+energy intensity growth+CO2 energy intensity growth) or: income growth ≤ – (energy intensity growth + ED growth) We may define: max sustainable growth of income: Max sustainable income growth = – (energy intensity growth + ED energy intensity growth) Sustainability Gap = actual income growth – max sustainable income growth 42 The sustainability gap in the current model of energy production and consumption sustainability gap 3.0 2.5 rate of growth 2.0 1.5 1.0 0.5 0.0 1971-1980 1981-1990 1991-2000 2001-2025 gap Average observed values for each decade (projection 2001-2005) Source: Energy Information Administration 43 SECOND PART An Attempt at Causal Interpretation 44 Prevailing empirical correlations SUSTAINABILITY OF DEVELOPMENT - - ENVIRONMENTAL DETERIORATION + + INEQUALITY AND POVERTY +/- (Kuznets) +/- + PER CAPITA INCOME + GLOBALISATION 45 Tentative answer to the first question Postwar globalisation: two phases WITHIN-COUNTRY INEQUALITY ENVIRONMENTAL DETERIORATION 1945-1971 MODERATE IMPROVEMENT WORSENING 1980-2002 WORSENING PARTIAL IMPROVEMENT NEITHER OF THE PHASES OF POSTWAR GLOBALISATION MAY BE CONSIDERED AS FULLY SUSTAINABLE ALTHOUGH FOR DIFFERENT REASONS 46 Towards a causal analysis STATISTICAL CORRELATION CAUSAL ANALYSIS DOES NOT IMPLY CAUSALITY ECONOMIC RATIONALE OF GLOBALISATION THE INTEGRATION OF LOCAL MARKETS IN A UNIFIED GLOBAL COMPETITIVE MARKET IN ORDER TO REALISE THE OPTIMAL ALLOCATION OF WORLD RESOURCES AND TO MAXIMISE THE WELFARE OF THE INTERNATIONAL COMMUNITY 47 Towards a causal analysis The validity of the argument depends on a series of conditions. In particular: Effective mobility across countries Anomalies Goods and services Production factors Technology and information A) barriers against imports from developing countries (agriculture, textiles) B) Strong restrictions to the international mobility of labour C) Free movement of capital without distinction between FDI and speculative flows 48 ANOMALIES A) according to estimates of the UN (1994) these protectionist measures produce a transfer of wealth equal to the overall flow of foreign aid B) these restrictions are much more severe now than at the time of the first globalisation → “last resort” equalizing instrument precondition of a competitive market (“laissez faire, laissez passer”, Smith) 49 ANOMALIES C) -FDI: factor of development – SF (speculative flows): source of instability: dramatic change in their proportion: Early 1980s FDI 90% Now much less than 10% while daily SFs exceed the sum of reserves in foreign currency of G7 countries Lucas paradox: according to the standard neoclassical theory capital should flow from rich to the poor countries until the return to investment is equalized in all countries in reality the opposite happens (notwithstanding the higher marginal product of capital in emerging countries): role of perceived risk and institutions 50 Short-termism the recent process of globalisation strengthened shorttermism: a) Growing importance of finance b) Greater flexibility of labour markets and industrial relations c) Incentives to top managers and directors 51 Short-termism a) Growing importance of finance: Goldsmith FIR: from about 1 in the early 1980s (G5) to 2/3 2000s Liberalisation of capital flows almost complete without distinction between FDI and speculative flows → change of proportion Stock exchange markets unified by Internet →↑ “herd behaviour” → huge gains and losses from short-term speculative transactions 52 Short-termism managers: frequent revisions b) deregulation labour markets { workers: short-term horizon short-term indexes (stock options) c) incentives to top managers { → short-term objective function Short-termism jeopardises sustainability ↑ liberalisation of capital account globalisation contributed to these trends { ↑ deregulation 53 Regulation of international markets the effects of globalisation depend crucially on the regulation rules of the international markets Bretton Woods period (1945 - 1971) two phases { Washington consensus (1980 - 2000) Different philosophies of market regulation 54 Regulation of international markets The Bretton Woods System ACTIVE REGULATION OF 1. FIXED EXCHANGE RATES IN ORDER TO STABILIZE THE EXPECTATIONS 2. LIBERALIZATION OF INTERNATIONAL EXCHANGES BASED ON THE GATT AGREEMENTS 3. COUNTERCYCLICAL INTERVENTIONS OF IMF IN ORDER TO AVOID EFFECTIVE DOMAND DEFICIENCIES 4. STRUCTURAL INTERVENTIONS OF THE WORLD BANK MAINLY TO FIGHT POVERTY INTERNATIONAL MARKETS IN ORDER TO AVOID “MARKET FAILURES” 55 Regulation of international markets The “Washington consensus” 1. FLEXIBLE CURRENCY EXCHANGES 2. INSTITUTION OF OMC TO COMPLETE THE LIBERALISATION OF INTERNATIONAL TRADE 3. NEW PRESCRIPTIONS OF IMF: DEREGULATION, PRIVATISATION AND AUSTERITY 4. SUBORDINATION OF FINANCIAL SUPPORT OF THE WB TO THE COMPLIANCE TO IMF CONDITIONS PRIVATISATION AND DEREGULATION OF INTERNATIONAL MARKETS TO AVOID STATE FAILURES 56 Regulation of international markets The “Washington consensus” THE NEW POLICY PHILOSOPHY MAY JEOPARDISE SUSTAINABILITY A. THE WTO URGED THE REPEAL OF ENVIRONMENTAL AND SOCIAL CONSTRAINTS TO INTERNATIONAL TRADE INTERPRETED AS NON-TARIFF BARRIERS B. THE IMF URGED STRICT BUDGETARY POLICIES EVEN TO THE COST OF INTERRUPTING SOCIAL AND ENVIRONMENTAL INVESTMENT AND TRANSFERS 57 Microeconomic aspects SUSTAINABLE FIRM DEVELOPMENT IS SUSTAINIBILE ONLY IF IT IS BASED ON A FABRIC OF SUSTAINABLE FIRMS HAS UN A LONG-PERIOD TIME HORIZON AND TAKES INTO ACCOUNT THE INTERESTS OF ALL STAKEHOLDERS MAX LIFE EXPECTATION AND AVERAGE PROFITABILITY 58 Dow Jones indexes 350 300 DJSI World: SUSTAINABILITY INDEX Index 250 200 DJ World: GENERAL INDEX 150 100 50 Mar-02 June-01 Sept-00 Dec-99 Mar-99 June-98 Sept-97 Dec-96 Mar-96 june-95 Sept-94 Dec-93 0 Fig. 15 Source:www.sustainability-index.com 59 Total returns normalized to 100 The Influence of Globalisation The growing spatial fragmentation of productive activity made increasingly difficult the active control of stakeholders Progressive shortening of the time horizon of economic decisions The new regulation rules of International markets contributed to weaken the sustainability of development The case of banking: shadow finance 60 Concluding remarks The Implications for Economic, Environmental and Social Policies 61 Tentative answer to the second question The confrontation pro or con globalisation is misleading The problems depend on: Incompleteness of globalisation Anomalies of globalisation Inadequate regulation of markets The recent process of globalisation is not fully sustainable it can and should be made sustainable with apt interventions of economic, environmental and institutional policy 62 General policy interventions that descend from the analysis Strengthen the sustainability of world development: more egalitarian growth rapidly reducing poverty vigorous reduction in the intensity of environmental deterioration Defence and corroboration of genuine environmental and social constraints in cross-country trade Elimination of unjustified constraints to labour mobility Control of speculative flows and/or of their effects Incentives to CSR and enforcement of minimal standards Incentives to the financial system to channel saving towards sustainable investment 63 The basic policy dilemma Interventions such as those mentioned above may be implemented by national policy authorities but in the short period they could damage the national interests or powerful particular interests this problem extends to the global economy the dilemma: should the markets be regulated by some sort of public authority? 64 Paradigm pro-regulation Dominant paradigm in the Bretton Woods period: STATE government regulation standard objection: interventions reaction -omniscient state → state failures { -benevolent market failures economic power defence: democratic control Invisible hand MARKET 65 Paradigm pro-deregulation Dominant paradigm in the Washington consensus era: STATE government deregulation privatisation economic power standard objection: the real market is not the }→ market failures state failures reaction perfect competitive market defence: reduction of the gap Invisible hand MARKET 66 The gap between real markets and the ideal model of a perfectly competitive market distribution a) perfect competition market: limits { incompleteness → externalities ideal perfectly competitive market b) wide gap between { real markets: strong uncertainty, bounded rationality, transaction costs, irreversibility of time... c) the gap may be reduced but not fully eliminated (e.g. incompleteness) → markets, even global markets, have to be regulated 67 Traditional paradigms Alternation at least since Adam Smith Both paradigms are simplistic, unilateral and misleading: mistaken foundations of the sources of economic power and failures: State: hierarchical and centralised (government) trad. sources { Market: impersonal - decentralised (invisible hand) third source → Firms: hierarchical and centralised (governance) -different from the state: control of stakeholders -different from the market: Coase (1937) → corporate failures (short-termism & C Irresponsibility) 68 the three sources of economic power and failures STATE regulation and deregulation regulation and deregulation GOVERNMENT state failures constraints lobbying ECONOMIC FAILURES market failures corporate failures INVISIBLE CORPORATE manipulation HAND MARKET GOVERNANCE competitive pressures FIRMS 69 Concluding remarks on the policy dilemma Very often deregulation and privatisation translated not in more power to the market more power to firms (mainly to the big ones, often transnational) this did not mean more competition: collusion, insider trading, conflicts of interests, regulatory capture, and other corporate failures undermine competition neither less power to the state: -the share of public expenditure did not diminish: what has changed is the structure of taxation and public expenditure in a less egalitarian way -collusion between particular corporate and political interests: crony capitalism is by no means a distinctive trait of developing countries (Bhagwati, 2004) 70 The policy dilemma and globalisation What we need both at the national and international level is: more effective competition on a really level playing field (→↓ inequality and poverty) more democratic control on government from citizens more democratic control on corporations from stakeholders the problem is not so much the dislocation of nominal power between the three sources, but the quality of the management of power at the national and global level: -genuinely competitive markets government -accountability and transparency of { corporate governance under these conditions globalisation may offer crucial opportunities of development guaranteeing at the same time its sustainability 71 Theoretical presuppositions 1) assertions on the market -distribution a) perfect-competition market: intrinsic limits { -externalities ideal of perfect competition (GEM) b) wide gap between market { real: incompleteness, strong uncertainty, limited rationality, externalities, transaction costs, irreversibility, etc. c) The gap may be narrowed but not fully closed (e.g. incompleteness) 72 2) liberalism vs. neoliberalism α) classic β) updated (Keynes, Pigou, etc.) Liberalism → discontinuity: { γ) neoliberalism α) e β) endorse the three assertions { γ) rejects or underscores them: externalities → property relations a) optimism { distribution: collateral effects of growth (temporary: Kuznets) b) minimization (e.g. contestable markets) c) no limits in principle (e.g. Arrow securities to complete markets) 73 3) Policy implications a) public interventions inevitable Liberalism { b) ↓ gap but further interventions necessary → ↑ well-being c) abolition of unjustified constraints a) avoid public Interventions (state failures in principle worse) Neoliberalism { b) reducible through deregulation and privatization c) completely superable: completion of markets, etc. 74 4) Postwar globalizations i) liberal (Keynesian updated liberalism): 1945/1971 Globalization { ii) neoliberalism: 1980/2007 i) ↑ welfare state Social condition { ii) ↓ welfare state i) ↓ awareness Environmental condition{ ii) ↑ environmental policies: rise and decline 75