07 11 12 Bangkok Siam U Peace Foundation

Fitting Globalization into the National Economic Development strategy: 

Fitting Globalization into the National Economic Development strategy Robert Mundell Columbia University Siam University, Bangkok November 12, 2007

Topics: 

Topics Megatrends Globalization Economic Model and Sufficiency Economy Sufficiency Policies Harmony in International Agreements sian Currency and World Money

Megatrends: 

Megatrends

The World Economy: 

The World Economy Unique period All the major economies expanding Never before What are the drivers?

Slide5: 

The International System: 2007 $ Russia CFA Latin American & Caribbean Brazil Canada Indonesia Mexico Australia Korea Hong Kong RMB Sweden Gulf Countries India Taiwan $ € Malaysia Malaysia

Key Trends in the World Economy: 

Key Trends in the World Economy Globalization IT Revolution Advent of the Euro Rise of China

Four Challenges for the World Economy: 

Four Challenges for the World Economy Adjusting to globalization Absorbing /spreading IT revolution Fitting China into the World Economy Stabilizing currency areas

Key Factors in World Growth: 

Key Factors in World Growth US Economy as Motor US Deficits as Fuel IT Revolution Rise of China Advent of the Euro Political Stability Globalization

Globalization: 

Globalization

Globalization: 

Globalization Globalization is integration at the world level. It has been going on at a rapid pace since 1945 but in a world that did not include the Soviet Bloc and China. Globalization began after China joined the world economy in 1980. It became a buzz word after the Cold War ended in 1990.

Globalization: 

Globalization Associated with the “Pax Americana” of the single superpower. Entire world now involved except Cuba, North Korea, Myanmar, Iran, and Venezuela.

Globalization as a Process: 

Globalization as a Process It means economic integration at the world level. It proceeds by openness. The natural state of the world when not split into blocs Not unique to our age. Globalization has many dimensions.

Dimensions of Globalization: 

Dimensions of Globalization Economic Integration Political Integration Cultural Integration Social Integration Religious Integration Military Integration

Slide14: 

Here are my suggestions for characterizing the degree of different types of globalization over the past two centuries.

Globalization: 

Globalization Each dimension of globalization is achieved to a degree depending on the culture, type of government and religious system, and technology. Once an equilibrium degree of globalization is achieved, it is further reinforced periodically by technological revolutions.

Ten Industrial Revolutions: 

Ten Industrial Revolutions 1. Gunpowder 2. Printing Press 3. Sc/Technology 4. Steam Power 5. Electricity 6. Auto and Airplane 7. Oil Power 8. Mass Production 9. Nuclear Power 10. Computer-IT

How Much Globalization?: 

How Much Globalization? Each country has to determine the right of opening, of globalizing. An extreme degree of globalization would involve free movements of goods, factors, technology and information, amounting closely to economic union. Most countries stop short of this degree of integration in the light of national and religious values as well as economic and political motives.

Qualifications : 

Qualifications Cultural diversity. Different societies, religions, geographies have different needs. Difficulties for inland states. Vital interests, dependence and security Information networks and censorship

The Economic Model and the Sufficiency Economy: 

The Economic Model and the Sufficiency Economy

The Economic Model and Adam Smith: 

The Economic Model and Adam Smith A stereotype of the economic model is based on individual self interest, individuals maximizing utility, within the framework of the market economy. Rational man makes choices which make him better off. This was the model used in Adam Smith’s Wealth of Nations, published in 1776.

Theory of Moral Sentiments: 

Theory of Moral Sentiments Adam Smith’s book was an exposition of economics based on the ‘economic man’ who is a selfish maximizer. It is sometimes forgotten that Smith published much earlier (1759) his Theory of Moral Sentiments examining altruistic sentiments. A more complete man is a composite of selfish and altruistic sentiments, in addition to religious and political sentiments.

King Bhumibol Adulyadej’s Sufficiency Economy Philosophy: 

King Bhumibol Adulyadej’s Sufficiency Economy Philosophy His Majesty’s philosophy advocates growth with economic stability, sustainable development, sound macroeconomic policies and the equitable sharing of benefits of economic prosperity. It eschews excessive risk-taking, untenable inequalities and the wasteful use of natural resources.

Relation to the Economic Model: 

Relation to the Economic Model It is not inconsistent with a good economic model but it adds to it some motives that complement the economic man. These are empathy, compassion, fairness and generosity. It treats the human being as evolving, rather than static, through learning, ethics, perseverance and tolerance.

The Sufficiency Triad: 

The Sufficiency Triad It involves moderation, wisdom, insight, the middle way between want and extravagance. It involves reasonableness, knowledge, integrity and honesty, which includes understanding of the consequences of actions not only in the present but in the future, not only on ourselves but on our fellow humans and societies. It involves resilience to risks, self-immunity to withstand shocks and reserves against shortage.

Sufficiency Policies: 

Sufficiency Policies

The ‘Sufficiency Individual’: 

The ‘Sufficiency Individual’ The sufficiency man is the economic man with empathy, compassion, fairness and generosity built in. This model of the economic actor is not incompatible with economic development and globalization. Nor is it incompatible with free enterprise and economic growth.

Sufficiency Macroeconomics: 

Sufficiency Macroeconomics National policies should take account of the sufficiency triad. Countries should maintain enough reserves against shocks. Countries should take into account the effect of their policies on their neighbors and the rest of the world. Actions are to some extent reciprocated, and overly aggressive actions invite retaliation.

Macroeconomic Interdependence: 

Macroeconomic Interdependence Global interdependence increased by innovations in transportation and communication. Overuse of energy bids up the terms of trade against other countries. Changes in tariffs and quotas affect other countries’ terms of trade and employment. Sharing of fishing, wild life resources, preservation of endangered species, rain forest, problem of global warming.

Interdependence and Policies: 

Interdependence and Policies The international business cycle is transmitted from one country to another. The balance of payments of one country has its equal and opposite counterpart in the rest of the world. No country has an exchange rate to itself. There is always a partner.

Fundamental Goal of Interdependence Management: 

Fundamental Goal of Interdependence Management Interdependence management may require an institution, e.g., the International Monetary Fund for currencies. The goal of that management should be harmony. But the practice has been different. Interdependence management in the international monetary system has not been harmonious.

The Bashing Approach Not Harmonious: 

The Bashing Approach Not Harmonious Japan-bashing in the 1980s to force China into undesirable currency appreciation. It failed to change Japan’s trade surplus and it misdiagnosed the cause. China-bashing in the 2000’s did not change China’s surplus. Bilateral bashing implies a failure of system and policy.

Search for International Harmony: 

Search for International Harmony Need to rethink exchange rate policies along the lines of honesty, reasonableness and transparency. The system of ‘managed flexible exchange rates’ has been a failure.

The Three Propositions of Advocates of Flexible Exchange Rates: 

The Three Propositions of Advocates of Flexible Exchange Rates 1. Flexible exchange rates would eliminate the need for foreign exchange reserves. 2. Flexible exchange rates would eliminate exchange controls. 3. Flexible exchange rates would eliminate global imbalances.

All Propositions Falsified: 

All Propositions Falsified Reserves were $less than $50 billion when floating began, now over $5 trillion! Most countries have some kind of exchange control over capital movements. Trade imbalances are vastly bigger than ever. The reason for the three mistakes is that the basic model of exchange rate advocates was wrong.

Managing Interdependence: 

Managing Interdependence Throughout history, for thousands of years, and in the post-war years, up until 1973, exchange rates were managed by an international monetary system. Since managed floating began it is no longer managed multilaterally. But since the Plaza Accord in 1985, it has been managed by the G-7.

Unreasonableness: 

Unreasonableness A good example is the Asian crisis. Many officials claim that the Asian crisis was caused by fixed exchange rates and capitalist cronyism. The truth is that it was caused by the instability of the two most important exchange rates in Asia.

The Two Causes of the Asian Crisis: 

The Two Causes of the Asian Crisis The RMB was devalued in 1994 against the dollar under IMF auspices by 60 per cent, raising the dollar from 5.5 to more than 8.3 RMB. The dollar soared from 78 yen to 148 yen in the early period of the Asian crisis. This colossal depreciation of the yen choked off FDI from Japan to Southeast Asia.

Fallout from the Asian Crisis: 

Fallout from the Asian Crisis Japanese companies departed in droves from Thailand. Japanese imports from Southeast Asia dried up. The depreciated RMB and the depreciated yen undermined the international position of the economies of Thailand, Malaysia, Indonesia and S. Korea. Had the dollar exchange rates of China and Japan stayed the same there would have been no Asian crisis.

Multilateral Surveillance: 

Multilateral Surveillance An analogous problem of ‘reasonableness’ may arise as a result of the 2007 revision of the 1977 guidelines on multilateral surveillance. The new policies pt the IMF in the position of “attack dog” on exchange rate misalignment.

The New Guidelines: 

The New Guidelines In these guidelines the IMF can designate the exchange rates of countries with trade surpluses as misaligned and undervalued, and countries with trade deficits as misaligned and overvalued. Opponents of the revisions were outvoted by the other members. The new guidelines will not prove to be desirable or effective.

Misconception: 

Misconception The guidelines stress current account imbalances as the criterion for misalignment. This is unfortunate because exchange rates may have nothing to do with imbalances. E.g., in a common currency situation, such as the euro area, there are huge imbalances that have nothing to do with exchange rates.

Examples: 

Examples For example, Germany has a huge surplus of perhaps $180 billion, and Spain has a huge deficit of $90 but these countries don’t have a national currency to be aligned. By and large trade balances are driven by the relation between saving and investments and are not determined by exchange rates. Japan has had huge surpluses for a quarter of a century and tripled the value of its currency against the dollar. But the surplus, which is driven by an excess of savings due to demographic aging, persists.

Harmony in International Agreements: 

Harmony in International Agreements

The Goal of Harmony: 

The Goal of Harmony The basic goal of international interdependence management should be harmony. Harmony is a complement to the sufficiency idea of reasonableness. It was a very important concept in the thinking of Asian philosophers and is stressed in China today.

Harmony and Development of Human Beings: 

Harmony and Development of Human Beings The concept of harmony is deeply rooted in Asian culture. You can say that it is related to the Asian ‘world view.’

The World View: 

The World View Every civilization has its own ‘world view’—its essential attitude to reality. In China and much of East Asia the ‘world view’ is its conception of the universe as an organic whole.

Body and Spirit: No Dichotomy in Asia: 

Body and Spirit: No Dichotomy in Asia The dichotomy between body and spirit which has dominated the West for over two thousand years is not reproduced in Asia. There is no attachment, as in western philosophy, to the operation of “laws” from a patriarchal law-giver as in the Ten Commandments or Newton’s Principia, or to the transcendental.

Asia’s Doctrines: 

Asia’s Doctrines In most (if not all) of the dominant doctrines of Asia—Hinduism, Buddhism, Taoism or Confucianism—is there any clear conviction of the individual soul. The ‘path’ in Buddhism or ‘the Way’ in Tao, is in some way common all spiritual thinking in Asia.

Tao, the Way the Universe Works: 

Tao, the Way the Universe Works Tao is the way the universe works, the Order of Nature, which is action unified and spontaneous. Happenings in the universe are, by reason of an internal necessity, the interactions of parts of a whole.

Origins of Universe Naturalistic : 

Origins of Universe Naturalistic No thinker stresses the possibility of any initial conscious act of creation. Order derives from chaos spontaneously. The universe is conceived to evolve from initial simplicity and disorder to its present state of complexity and order in purely naturalistic terms.

Slide52: 

Nicolas Bob

Organic Unity also in the Social Order: 

Organic Unity also in the Social Order The conception of the natural order influenced the social order. The ideal was an organic unity of rulers and people. “Heaven sees as the people see; Heaven hears as the people hear.”

Rational Humanism and Harmony: 

Rational Humanism and Harmony China’s world view has persisted through the ages and it has produced a constant characteristic of Chinese civilization. That characteristic, achieved through Rational Humanism, is the compelling need for harmony. Harmony between individuals, within social groups, within economic classes, between the people and government, and between governments on the world stage.

Harmony and the International Monetary Order: 

Harmony and the International Monetary Order The basic goal of international interdependence management should be harmony. This was the traditional view in management of the Bretton Woods arrangements. The system set up rules of management. Floating was adopted not because it was considered desirable but because a re-entry to the system could not be negotiated in 1972-74.

Asian Currency and World Money?: 

Asian Currency and World Money?

Would an Asian Dollar be useful in Asia?: 

Would an Asian Dollar be useful in Asia? A common currency would mitigate the harmful effects of major exchange rate changes, and could help to avoid such fiascos as the 1997-99 crisis. It could also be a catalyst for increased economic integration. But a single-currency monetary union is not feasible in Asia because it is not yet a security area. What does the status quo look like?

China overtakes Japan in GDP in 2012?: 

China overtakes Japan in GDP in 2012? $ Gulf Countries Russia CFA Latin American & Caribbean Canada Korea Hong Kong RMB Sweden India

GDP’s, 2040: China overtakes Europe: 

GDP’s, 2040: China overtakes Europe $ Gulf Countries Russia CFA Latin American & Caribbean Canada Korea Hong Kong RMB Sweden India

The Asian Currency Alternative: 

The Asian Currency Alternative The difficulty with an Asian currency is that Asia is not yet a security area, i.e., a war-free zone. Countries can share a single currency only if they have a defense alliance or union. This does not seem likely in the foreseeable future. But Asia could have a fixed exchange rate regime if it could find a suitable anchor.

Conditions for an Asian Monetary Area: 

Conditions for an Asian Monetary Area Consensus on Criterion for Monetary Stability Common Measure of Inflation Lock Exchange Rates Common Monetary Authority Division of Seigniorage

Alternative Scenario: Asian Currency Area, 2015?: 

Alternative Scenario: Asian Currency Area, 2015? $ Yen Yuan Latin Dollar Arab Bloc Africa Russia ₤ ₤ India WON RINGITT EURO HK$ Rupiah Baht P-Peso Australia-NZ Asian Currency Area Rupee

Currencies and Power Centers: 

Currencies and Power Centers A currency area would be a power center. But in Northeast Asia there are two power centers, China and Japan. It is unlikely that either China or Japan would be willing to give up their national currency, as Germany and France did in 2002. One solution would be a fixed exchange rate zone in Asia, anchored to the dollar. It could be an APEC currency area.

Alternative Scenario: APEC Solution? : 

Alternative Scenario: APEC Solution? $ C$? Peso$ RMB Latin Dollar Lat$ Arab Bloc Africa Pakistan ₤ ₤ Rupee YEN RINGITT EURO $ Ruble ¥ C¥

Need for a New International Monetary System: 

Need for a New International Monetary System We need to apply the principles of the sufficiency economy at the international level. We need to restore the international monetary system with a global currency that can be used as a universal anchor for countries that want to be part of a global system.

Global Currency: 

Global Currency The dollar has been the de facto international currency since World War I, when it took over that role from the pound sterling. The dollar initially shared honors with gold, but now it has displaced gold as the principal international asset. Yet the dollar cycle poses great problems for countries like those in ASEAN.

2010: 

2010 A global anchor based on two or three or four of the most important currencies would be a step toward a more reasonable international monetary system. I have suggested that a new kind of Bretton Woods treaty be debated and formulated by 2010. The debate over this issue would be a catalyst for dealing with other pressing economic and political problems.

Unfinished Business: 

Unfinished Business International monetary reform Growing recognition of need for world currency. Possible stabilization of $, €, ¥ as platform for a world currency, called the INTOR.

Monetary Reform by 2010?: 

Monetary Reform by 2010? $ RMB Latin Dollar Arab Bloc Africa Russia ₤ ₤ India

Thank You: 

Thank You