Download globalization

Slide
Post WW2 alternative models of economic development (besides the model supported by the
B-W system, which we could call a system of partial liberalism).
1. Import Substitution Industrialization (ISI): (in response to the first limitation of free
markets, namely, inequality of participants).
Latin America’s protectionist industrial development: rejection of free trade.
Government involvement (like that in W. Europe and North America in the 19th century)
relied on trade barriers to stimulate national industry.
Stimulating manufacturing to produce goods that had previously been imported.
Developing countries (e.g., Argentina, India, Iran, and Zambia) rejected free trade in favor of this
same model.
ISI had achieved its goal: Latin America had industrialized (but very little attention was given to
rural conditions).
New governments following ISI shifted resources and people from farming and mining to
manufacturing, from the countryside to the cities.
Africa and Asia no longer relied upon Europe for their administration, investment, and industry.
But international trade in these regions declined precipitously.
2. Communism (state intervention but also redistribution of wealth and virtual elimination of
private ownership)
(Largely addressing the second limitation of free markets, excesses in financial markets).
The Soviet Communist system engineered the most rapid industrialization drive in history.
Soviet planning was a stunning success in many ways. From 1928 to 1937 industrial production
went up fivefold while per capita GDP rose by 57 percent between 1928 and 1937.
This achievement was especially remarkable since the rest of the world experienced
unemployment and stagnation.
Even the most successful industrial countries, such as Norway and Sweden, grew only half as
rapidly as the USSR.
By 1959, Soviet-style socialism was firmly in place in more that a dozen countries with over
a third of the world’s people.
The Soviet Union and E. Europe grew faster than W. Europe; China grew faster than India.
Health care, education, and other social services were much better than in comparable
capitalist developing countries.
Illiteracy was essentially eliminated, even in China,
medical care was free,
and many socialist countries had more doctors and hospital beds per person than did industrialized
capitalist nations.
To the developed world, Soviet Socialism held out the promise of a full-employment system in
which central planning rather than profits,
determined the shape of the economy.
Soviet socialism seemed a serious rival to capitalism.
Between 1945 and 1970 the principal global geopolitical goal of the US and the Soviet Union
respectively, was to prove the other side wrong.
The US argued that global capitalism is good for growth,
The Soviet Union argued that development and equity could best be achieved by rejecting global
capitalism.
The early 1970s were the high watermark of the postwar world economy (as it led to the end
of the Breton Woods system).
Slide:
Two trends, undermined the Bretton Woods system.
The first was the restoration of international finance (free movement of capital). World financial
markets revived over the course of the 1960s.
Now short-term investors could move money in response to differences in national monetary
conditions.
In so doing they could threaten the independence of national macroeconomic policy
The second, and closely related to the first, the increasing pressure on the American dollar.
This was largely due to the growing economic importance of W. Europe and Japan.
As the American share of the world economy shrank, the divergence of American monetary
conditions from those of its partners became untenable.
Investors around the world began to doubt the US government’s commitment to its exchange rate.
Troubled first came in 1959 and 1960, when an American payments deficit led to a loss of
confidence in the dollar.
As the 1960s continued, the problem was made more pressing by the two wars the country was
fighting:
the Vietnam War
and the War on Poverty.
Neither was universally popular, and the administrations of Lyndon Johnson and Richard
Nixon resorted to deficit spending.
The same political factors that challenged the monetary system also threatened
international trade and investment.
Postwar trade liberalization had a particularly great impact on W. Europe and Japan.
But as more European and Japanese
steel,
textiles,
footwear, and clothing came into the US, American producers fought for protection.
GATT members had agreed not to raise nonagricultural tariffs, so those who wanted to shelter from
foreign competition found other means (new nontariff barriers):
The liberalism of the postwar trading order had originated with American pressure.
An American turn toward protection seemed likely to reverse the course of global trade
integration.
Consequences of the end of the B-W system
The Bretton Woods System eventually broke down because of a decline in the power and
influence of the US.
This decline led to the switch to a regime of floating exchange rates from 1971.
What happened to alternative models:
1. The typical ISI economy went through periodic balance of payments crises.
The government restricted imports but there was an ongoing need for imported goods.
Spending chronically outpaced government revenue, and these budgets deficits were usually
covered by printing money.
By the 1960s, many ISI economies had been caught in a vicious cycle of balance of
payments deficits, budget deficits, inflation, and recession.
The communist world also faced increased difficulties:
Economic growth in the centrally planned economies slowed continually over the late 1960s
and early 1970s.
The problem was political.
The end of the B-W system marked the end of the rules dear to the US and opened up the room
for the reconstruction of the economic order.
Slide
The push for the New Economic International Order
American policy-makers imagined postwar international economic institutions as
progressively abolishing national restrictions.
States that had been wealthy before the War (colonial powers) went along because the US
gave the previously rich market states the opportunity to reconstruct their economies
(through the Marshall Plan).
Latin American and the independent and colonial areas in Asia and Africa. accepted the system,
because they had no choice (and were not politically organized at the time).
Third World governments felt cheated out of the trade-induced growth that the rich nations
enjoyed in the 1950s.
The Free World Order was only a partial liberalism (and only a partial global trade system)
The American actions, in August 1971, reenergized the Third World alliance in the fall UN general
assembly session.
So-called Group 77, the group of developing countries, by using the UN forum (UN General
Assembly) tried to counter the economic influence of the developed world.
It pressed for changes in the rules of the international economic system to make it easier for
poor countries to participate).
Third world countries such as Argentina, Brazil, India, and Lebanon argued for:
international economic regimes that would REGULATE rather than ABOLISH national
interventions
greater access to OECD markets.
for aid similar to what the US had given to Europe.
(Latin American officials, in particular, argued that it was only fair that richer countries aid them
because they had contributed to European reconstruction through UNRAA in response to US
appeals based on the economic rights and duties of states).
and
higher prices for exports,
This set of proposals (put forth over the 1970s) came to be known as the New International
Economic Order (NIEO).
It was meant to be a revision of the international economic system in favor of Third World
countries, replacing the Bretton Woods system, which had benefited the leading states that had
created it – especially the United States.
Things were getting complicated for the US and the international economic system it tried
to promote.
On top of this political pressure from the Third World countries…
Individual oil producers and, later OPEC as a whole, jumped on the industrial West’s
growing oil dependence.
Two important material changes:
First, in 1978, 18 of the 25 largest American corporations were in oil and manufacturing; just three
were in high tech, and telecommunications.
By the early 1980s, most of the top 25 companies were in high tech and telecommunications, with
just two in petroleum and manufacturing.
Most of theses high-tech companies were increasingly interested in global markets.
Cell phones.
Only a truly global market could support the vast research, development, and marketing expenses
necessary for Nokia to remain an industry leader.
Second, there was growing popular concern about
high unemployment,
slow growth,
and inflation,
which left voters and others open to new policies.
Many people in Britain and the US gave the benefit of the doubt to the alternative policies.
In the heyday of the Bretton Woods system almost nobody would have considered bringing
inflation down by 10 percent at the cost of raising unemployment by 10 percent.
But people became accustomed to this (because they believed that it was worthwhile in fighting
high inflation).
Milton Friedman and his followers: Their approach came to be called "market
fundamentalism," since it saw "freer" markets as the solution for every economic problem.
All of these factors combined pushed a pendulum away from Keynesian economics and towards
freer markets.
The rise of supply-side economics.
Thatcher + Reagan
You jump-start the economy by privatizing (UK), cutting taxes, and deregulating.
Reagan came into office in 1981 with several objectives:
Antiinflationary policy at the domestic level:
At the international level: The push in the direction of regional trade agreements:
The larger blocs:
made exports cheaper to produce,
allowed firms to grow,
made it easier to attract foreign investment,
and encouraged the consolidation of banks and corporations.
North America and Europe, between 1985 and 2000, accelerated the integration of their
trade, investment, financial, and monetary affairs.
Regional integration (the EU, NAFTA, Mercosur) in the 1990s became an important
component part of the overall process of economic globalization.
From an economic point of view N. America and W. Europe defined the world’s course (1/10 of
the population but half the world economy and 2/3 of world trade).
During the 1990s the issue was decided in favor of supporters of global integration.
There was hardly universal agreement on free trade, but official policy came to accept it as a
matter of course.
The impact overwhelmed the rest of the world economy.
India dropped ISI,
China abandoned central planning and
Russia and Central Europe were switching to free market economies.
1980s
Faced with strong inflationary pressures, the United States pursued tight monetary policies.
These drove up interest rates on existing loans, which had been made at floating rates.
It also induced a recession in the developed countries and thus hurt prospects for countries
with significant debt problems to export their goods (Poland, Argentina, Mexico, Brazil).
By 1981, the crisis began to develop.
For oil exporters such as Mexico, the effect of an oil price plunge in 1981, higher interest
rates and worsening export prospects proved lethal.
Poland and Argentina were the first to seek bank rescheduling in 1981 and were followed by
Mexico, Brazil, and other major debtors.
By 1983, over 25 countries were in arrears.
For five years the banks, their governments, and the IMF managed the crisis to contain fallout for
the global financial system.
The Reagan administration tried to:
1. undermine the Third World alliance (why?)
2. undermine the UN system (why?)
3. continue to privilege institutions that encourage market discipline on Third World development
policies,
Important changes:
The IMF went beyond its traditional stabilization measures (which were supposed to correct shortterm problems with the balance of payments)
It was no longer needed as protector of the fixed exchange rate system.
Instead, the IMF’s dominant role has become enforcer of preferred government policies in
the Third World.
Slide:
The Washington consensus: the use of international financial institutions (the IMF and the
World bank) to promote free markets and supply side economics.
The IMF had been serving as a de facto "lender of last resort" – the last source of capital or credit
when confidence in creditworthiness is eroded – for indebted countries in the South.
Since the 1980s, the IMF played a pivotal role in responding to crises in
global finance, including emergencies in Asia, Russia, Latin America and Turkey.
Here is how it works:
the IMF steps in and bails a given country out by imposing conditions.
The conditions, it was promised, would ensure that the recipient countries got out of their debt
traps and would restore their prosperity.
Slide:
International financial institutions (not just the IMF but the also the World Bank starting with the
late 1970s. In 1979, the World Bank embarked on its structural adjustment programs. These
came to take precedence over the traditional lines of financing for projects, which had previously
been the focus of its credit strategy)
would write the new rules
The World Bank: devoted to eradicating poverty.
The IMF: devoted to maintaining global monetary stability.
Since the 1980s their activities became increasingly intertwined (with the IMF as having an
imperialistic view).
that promoted economic liberalization in the developing world (things such as trade and
capital markets) with a corresponding deregulation of all aspects of the economy.
The rationale behind financial deregulation was that freer markets produced a superior outcome.
Capital would flow to its most productive use, boosting economic growth and improving
welfare.
(Within America several studies have shown that states which did most to deregulate their banking
systems in the 1970s grew faster than other states. In 2006 economists at the IMF compared
deregulated Anglo-Saxon financial systems with more traditional bank-dominated systems, such as
Germany’s or Japan’s, and found that Anglo-Saxon systems were quicker to reallocate resources
from declining sectors to new, fast-growing ones.
The assumption was that economic problems were caused by too much state intervention.
The IMF and the World Bank moved to sponsor economic restructuring programs in over 80
countries
IMF (and the WB) structural adjustment programs in the late 1970s and 1980s in Africa and L.
America required governments to:
1. eliminate uncompetitive nationalized industries and protect bastions of local capitalists (thus
undermining their elite base);
2. cut subsidies to consumers and eliminate services (harming also their popular base)
These programs required the abolition of price supports on
essential food-stuffs,
steep reductions in spending on health,
education, and other social services,
and increases in taxes.
3. lift restrictions on capital movement;
For instance, in 1995 alone 65 states liberalized their rules governing foreign direct investment
(UNDP, 1999: 29).
The IMF's coercive power comes not only from its "lender of last resort" function, but also from the
fact that it has been assigned, informally, a "gatekeeper" role.
If a country does not have an IMF agreement which it is successfully adhering to (in the IMF's
judgment), it cannot get loans, aid, debt relief, or credit from any other multilateral institution, aid
agency, government, or private financer.
These conditions have to date been imposed on over 100 countries,
End Result:
The globe has once again become capitalist, and capitalism has once again become global.
Financial globalization was helped by two additional processes:
1. technological innovation, and
2. the growing international mobility of capital (due to significant political changes)
After the fall of the Berlin Wall, virtually every economy in the world moved to a capitalist
system. This eventually made the world awash with money looking for investments.
SO: For the past two decades the growing integration of the world economy has coincided with the
rise of the US and British brand of free-market capitalism.
Financial globalization: Increasingly integrated financial markets.
Financial markets, particularly in the rich world, have become increasingly integrated.
Figures compiled by Gian Maria Milesi-Ferretti, an economist at the IMF, show that the stock of
foreign assets and liabilities held by rich countries has risen fivefold relative to GDP in the past 30
years and doubled in the past decade.
The financial integration of emerging economies has been more modest, but has also
increased considerably in recent years—though with a peculiar twist.
Emerging economies, in net terms, have exported capital to the rich world as their central banks
have built up vast quantities of foreign-exchange reserves.
Global integration, in large part, has been about the success of markets over governments.
There are numerous problems with economic and financial integration (globalization):
In spite of our growing understanding of economic processes during the last fifty years,
crises around the world have been more frequent and (with the exception of the Great Depression)
deeper.
By some accounts, close to a hundred countries have faced crises.
Every major emerging market that liberalized its capital market has had at least one crisis.
Mexico, Argentina, Brazil, Poland, Turkey.
1997: East Asia, Russia,
The structural adjustment policies imposed upon Third World countries had most often
failed, leaving states in greater balance of payments difficulties.
Much of Latin American is still trying to make up for the lost decade of growth following the IMF
bailouts in the early 1980s.
IMF policies exacerbated the crises in Indonesia and Thailand.
The collapse in Argentina in 2001 is one of the most recent in a series of failures over the past few
years (high unemployment for 7 years).
The currency and banking crises that followed one another in the 1990s demonstrated than the
largest and most efficient international financial system in history had a downside:
Its very size and speed gave it the potential to destabilize the entire world economy.
Countries tried to protect their currencies as investors drained billions of dollars out of them, until
eventually each government had to give up and let its exchange rate collapse.
Most currency crises also caused bank panics.
So: the IMF failed in its original mission of promoting global monetary stability.
First the US Treasury and then the IMF pushed the liberalization policies in E. Asia.
They pushed these policies even though there was little evidence that such policies promoted
growth, and there was ample evidence that they imposed huge risks on developing countries.
Global capital markets constraining government policies. Growing tensions between global
finance and nationalism (Malaysia).
The more they incorporated their economies into the global financial system, the more their
economic policies were constrained.
Governments of globalized economies needed their currencies to be stable, but they also needed
to respond to national conditions that called for currencies to be devalued.
Very similar to the gold standard problem.
Current financial crisis:
World financial markets allowed governments, firms, banks, and people around the world to
borrow far more that they could have otherwise.
The world may not be better prepared to handle a truly major crisis in the 21 st century than it had
been in 1929 (we are in apolitical vacuum similar to the one between 1914 and 1944)
Soros: There is a crisis of economic governance. “Now that we have global financial markets
we also need a global central bank and some other international institutions whose mission would
be to keep financial markets on an even keel.
Problem:
The collective action dilemma: the deeper the roots of a crisis affecting actors collectively, the
greater will be the focus on short-term domestic palliatives, since the political and economic costs
of concerted action for a long-term resolution are formidable.
The disappearance of all five big American investment banks—either by bankruptcy or rebirth as
commercial banks—is powerful evidence that Wall Street failed “the test of the marketplace”.
Slide:
The direction of globalization will change in three important ways.
First, Western finance is going to be regulated. The balance between state and market is
changing in finance (the $55 trillion market for credit derivatives, will be regulated).
Second, the balance between state and market is going to change in other economic areas.
For many countries a greater shock over the past couple of years has been the soaring price of
commodities, which politicians have also blamed on financial speculation.
The food-price spike in late 2007 and early 2008 caused riots in some 30 countries (Indonesia,
Egypt, Haiti).
In response, governments across the emerging world extended their reach by:
increasing subsidies,
fixing prices,
banning exports of key commodities
and, in India’s case, restricting futures trading.
Concern about food security, particularly in India and China, was one of the main reasons why the
Doha round of trade negotiations collapsed this summer.
Third, the US is likely to lose its economic clout and intellectual authority.
Just as emerging economies are shaping the direction of global trade, so they will increasingly
shape the future of finance.
You have China’s vice-premier, Wang Qishan, suggesting it.
You have the German finance minister suggesting it.
Alan Greenspan, the former Federal Reserve chairman, told a House panel that he “made a
mistake” in trusting that free markets could regulate themselves.
Greenspan admitted that he had put too much faith in the self-correcting power of free markets and
had failed to anticipate the self-destructive power of mortgage lending.
Free trade:
Slide:
International trade negotiations:
The advanced industrial countries push the opening of the markets in the developing
countries to their industrial products.
At the same time, they continue to keep their markets closed to the products of the
developing countries, such as textile and agriculture.
While they preach that developing countries should not subsidize their industries, they
continue to provide billions in subsidies to their own farmers, making it impossible for the
developing countries to compete.
Artificially cheap food exported to poor countries.
Corn, rice or cotton exported by rich countries is so cheap that small farmers in poor
countries cannot compete, so they stop farming.
European farmers get 35% of their income from governmental subsidies.
American farmers get 20%.
Farm subsidies in the US are a huge corporate-welfare program, with nearly 70% of payments
going to the largest 10 percent of producers.
The benefits go mainly to companies like Archer Daniels Midland and Cargill.
For more than a decade, attempts by governments to get a global agreement to lower trade
barriers have been unsuccessful.
In France, just 1% of the work force is in farming; in England, it’s 2.8%, in the European
Union 4.8%.
But in Brazil it represents 25%, in Asian countries 50% and in Cameroon 70%.
Three-quarters of the world’s poor people are rural.
If they are forced off their land by subsidized grain imports, they starve.
African, Latin American, Caribbean, and Asian governments are usually not able to afford the kinds
of subsidies that industrialized countries routinely give to their farmers and corporations.
The US pushed for liberalization of financial services,
but resisted liberalization of the service sectors, in which the developing countries have
strength, such as construction and maritime services.
Slide
What about official trade negotiations?
The last time official trade negotiations were successful was in 1994 the year when the World
Trade Organization was created: 125 nations agreed to a significant drop in trade barriers.
WTO’s job was supposed to be a job similar to the IMF’s governing of international financial
relations (to promote free flow of goods and service.)
Trade negotiations have stalled since 1994.
In 1999, the attempt to launch a new round of trade negotiations crashed in Seattle. (Battle in
Seattle, a new movie coming out).
In 2001, the trade ministers met again in Doha, Qatar, and decided to initiate a new round that,
they agreed, would be concluded in four years.
In the preparatory activities for the Fourth WTO Ministerial Conference, held
Purpose: to give the poorest countries a chance by making it easier for them to sell their goods
around the world.
The Doha talks were supposed to
reduce agricultural tariffs and subsidies
reduce barriers to both key agricultural products
That would allow them to sell their cotton at competitive rates around the world.
and industrial imports (a more rapid reduction of the industrialized countries’ trade barriers
affecting manufactures, in particular labor-intensive goods such as textiles and clothing).
and liberalization of trade in services that are of particular interest in terms of developing country
exports, (labor migration and the formulation of rules to govern short-term employment in another
country).
This past June (2008), after six years of talks, negotiators left the meetings on the Doha Round
and denounced each other as uncooperative.
Slide
Regionalism and Global Trade
Progress in talks through the World Trade Organization (WTO) is too slow. As a result:
Alternatives to global multilateral (?) liberalization: (MORE than one path can lead to a world of free
trade).
The Asia-Pacific Economic Co-operation forum and the Association of South-East Asian Nations.
Australia, Japan, Mexico and other countries are also pursuing alternatives to multilateral
liberalization.
China is also looking at regionalism
Yet, although it is possible to reconcile regionalism in trade with progress towards free global trade,
it also carries two big dangers:
that it could slow or even derail multilateral liberalization, and that
it could leave out many of the world’s poorest countries.
Will liberalization occur more quickly if it is pursued within and then between blocks, or if it
takes place among all countries in the WTO?
Present practice mixes these approaches: there is fast-track liberalization within blocks such as the
EU, NAFTA, Mercosur and their followers.
Multilateral progress is also taking place at the WTO but is lagging well behind.
It is even possible that, over time, deals between trade blocks could become the preferred
form of trade negotiation.
A free multilateral system might end up being replaced by one of several free-trade blocks, which
may or may not trade more or less freely with each other.
China’s gradualist polices have proven their merit over the past two decades.
Trade liberalization: Most of the advanced industrial countries – including the US and Japan –
had built up their economies by wisely and selectively protecting some of their industries
until they were strong enough to compete with foreign companies.
As the economy slows, tariffs may rise.
While there is a problem with trade agreements there is a surge in trade.
How so?
The short answer is technology and politics.
In the past quarter century, technological innovations—from the Internet to cargo containers—
lowered the costs of trading.
And, in the same period, an international political environment more tolerant of openness
created opportunities to lower barriers to imports and exports.
China, India, the former Soviet Union, and many other countries launched major reforms that
deepened their integration into the world’s economy.
In developing countries alone, import tariffs dropped from an average of around 30 percent in the
1980s to less than 10 percent today.
Indeed, one of the surprises of the past 20 or so years is how much governments have
lowered obstacles to trade—unilaterally.
Between 1983 and 2003:
66 percent of tariff reductions in the world took place because governments decided it was
in their own interests to lower their import duties,
In emerging economies the fear of China already lies behind a reluctance to cut multilateral tariffs.
(Many countries, including India, Egypt and Nigeria have been unilaterally slashing tariffs,
even as they refuse to offer big tariff cuts in the Doha round. The reason is that Doha
commitments are irrevocable and they want to keep the ability to raise tariffs, partly for fear of
China).
25 percent as a result of agreements reached in multilateral trade negotiations, and
10 percent through regional trade agreements with neighboring countries.
So, who needs free trade agreements if international trade is doing just fine without them?
We all do. Although trade may be booming, giving up on lowering the substantial trade barriers that
still exist—in agriculture, in services, or in manufactured goods traded among poor countries—
would be a mistake.
In this century, the quality of what is traded will be as important as the need to lower tariffs
was in the last.
The recent cases of deadly dog food and toxic toothpaste coming out of China prove as much.
No country acting alone stands as good a chance of monitoring and curtailing such lethal
goods as does the WTO working in concert with governments across the globe.
Moreover, a rules-based system accepted by a majority of nations can protect smaller
countries and companies from the abusive practices of bigger nations or large
conglomerates.