Slide1 : Managing Globalization
Doha, Qatar
November, 2005 Joseph E. Stiglitz
Columbia University
New York
Outline : Outline What is globalization?
Why has it become such a topic of concern?
The mixed record of globalization
The changing landscape of globalization
The problems of natural resources
Explaining puzzle of oil prices
The natural resource curse
What is Globalization? : What is Globalization? The closer integration of the countries of the world as a result of lowering of communication and transportation costs and the elimination of man-made barriers
Expansion of the size of the market holds out prospects for increasing standards of living, gains for all
But Globalization, As It Has Been Managed, Has Not Benefited All… : But Globalization, As It Has Been Managed, Has Not Benefited All… Losers in developed countries
Competition from low wage workers abroad
And increasing threat up the skill ladder
Outsourcing
Even if only small fraction of jobs can be outsourced, there can be large effects on wages
Undermined traditional response to the threat of globalization
“We don’t want those low-skilled jobs anyway….”
We just need to up-skill
Mixed Record in Developing Countries : Mixed Record in Developing Countries East Asia, the most successful region in the world, has grown as a result of globalization
Globalization of technology
Globalization of markets
Some have benefited enormously from foreign direct investment
But they managed globalization on their own terms
Slow to open up their markets
Many still have not fully liberalized capital markets
Did not follow prescriptions of the Washington Consensus
Elsewhere, Globalization Has Not Gone So Well… : Elsewhere, Globalization Has Not Gone So Well… Decline in real incomes in Africa
Stagnation in Middle East
Failures in Latin America
Unemployment rose
Fraction of population in informal sector up
Growth rates half of what it was prior to 1980
Poverty persists
Gap with the advanced industrial countries increased
Even true for Mexico, with free access to the U.S. market
The Lessons : The Lessons The Washington Consensus has failed
Emphasis on liberalization, privatization, macro-stability (emphasis on price stability) is neither necessary nor sufficient conditions for growth
But since the core of Washington Consensus was “opening up markets for globalization,” in many quarters, its failure has led to opposition to globalization
The Real Problem… : The Real Problem… A particular view of the market economy was pushed
Which did not even describe U.S. economy
U.S. has strong industrial policy
Large role of government in financial markets
Safety net—social security
Macro-policy with emphasis on employment, growth, not just inflation
Question: Role of ideology, bad economics, and special interests
Policies were those which advantaged particular interests in U.S. and other advanced industrial countries
Globalization and the End of the Cold War : Globalization and the End of the Cold War The end of the Cold war provided an opportunity for redefining international economic policy
Could now be based on principles
Or it could be based on interests, unchecked by threat of competition from Russia
U.S., West chose the latter course
With adverse effects for many in Third World
The Uruguay Round : The Uruguay Round Unfair to developing countries
Poorest countries were actually worse off
Allowed advanced industrial countries to continue levying tariffs four times higher on imports from developing countries than on imports from fellow developed countries
TRIPs agreement may stifle future economic growth (kicking away the ladder)
Even the worst, deprives developing countries of life-saving drugs
U.S. , Europe reneging on commitments made in Doha for a ‘Development Round’ of trade talks
U.S. meanwhile increased agriculture subsidies
Europe now refuses to open up its markets
But agriculture just one of many issues
Even if an agreement emerges, it would not deserve the epithet of a ‘development round’
Capitalism: An Efficient System : Capitalism: An Efficient System But capitalism has inevitable winners and losers
And in modern democracy, capitalism is often tempered
But internationally, this tempering does not occur
Disproportionate role of “special interests” in international institutions
Intellectual property in TRIPs
At the IMF, capital market liberalization
Which finally IMF has recognized is not necessarily good for the developing countries
The Changing Global Landscape: Rise of China and India : The Changing Global Landscape: Rise of China and India Enormously rapid growth
Their integration into the global economy is ushering change of historic proportions
2.5 billion people
With different factor ratios
Enormous adjustments may be required
Theory predicts enormously strong downward pressures on unskilled labor in North, growing inequality
Potential source of backlash
Competition from China and India : Competition from China and India For the first time, there has been such combination of technology, unskilled labor, skilled labor, and access to international markets by a developing country
Even developing own global entrepreneurs (Infosys)
China’s success in textiles not based just on low wages
Chinese apparel exporters have been able to reduce unit cost by more than 40% between 2000 and 2004
Although labor cost is higher in China than in Bangladesh, Kenya, Cambodia or Madagascar, China is still the least cost producer of clothing - cost saving mostly came from automation of processes, especially from effective sourcing and supply chain management
Increasing Role of Asia in the Global Economy : Increasing Role of Asia in the Global Economy As source of manufactured goods
Asia, especially the East Asian miracle countries and India, likely to continue to be the bright stars in the global economy
As a source of technology
And as source of savings
China far larger source of global savings than the U.S.
Increasing influence in global geo-politics
Increasing Role of Asia in the Global Economy : Huge savings
Ability to buy technology, corporations
And access to needed resources
New globalization provides them legal framework to do this
Unocal case expose U.S.’s unease
U.S. cannot stop them in most of the rest of the world
Growth of China may provide new check on U.S.
But unfortunately, will also provide limits on its ability to push democracy, human rights policies (Sudan)
Weak economic performance in the U.S. and Europe, however, is likely to lead to rise in protectionist sentiment
Though, as in Europe, protectionism will meet resistance
As retailers and consumers will be hurt
And even jobs
Increasing Role of Asia in the Global Economy
China-U.S. Inter-dependence : China-U.S. Inter-dependence Both countries gain from the economic relationship
Argument that China needs the U.S. to buy its goods and the U.S. needs china to buy its treasuries is not fully persuasive
China could expand domestic consumption, investment— it has great needs
Would other countries be as willing to hold U.S. dollars as China has been?
What are consequences of shift of deficit from China to others?
Easier to increase consumption than to decrease it
U.S. made a major mistake in dealing with the Chinese bid for Unocal
Even if some of the arguments about lack of full symmetry are correct
U.S. cannot stop China from buying energy assets elsewhere
U.S. has shown that it believes ownership/control matters
China Being Blamed for U.S. Trade Deficit… : China Being Blamed for U.S. Trade Deficit… But problem lies in the U.S. macro-economic policy
Much larger revaluation would put China in a difficult position
Lower prices in rural sectors
Rural-urban income inequality will grow– already a major source of concern
Will require costly use of government revenues to offset impact on farmers
Move to peg RMB to a basket of currencies and the increased flexibility in exchange rate management make sense for China
Global Economic Imbalances : Global Economic Imbalances Huge U.S. trade deficits
US$ 617.7 billion in 2004 – a 24% increase since 2003; trade deficit in 2004 stands at record 5.8 % of U.S. GDP
Twin deficit problem
Largely a result of huge fiscal deficit
But related to deeper problem, global reserve system
Leading to huge financial instability
High level of global uncertainty
Related to political uncertainties
Middle East instability (Iraq)
High and volatile price of oil
Eroding confidence in dollar as a reserve currency
Moving away from dollar reserves
No longer good store of value
Exchange rate fluctuations undermine its role as much as inflation would
Why American Economists Are Worried About the U.S. Economy : Why American Economists Are Worried About the U.S. Economy Growth has been sustained by consumption
Consumption has been sustained by borrowing against housing
Major source of economic growth:
Home building increased from 4.25% GDP 1980-2000 to 5.98%
Difference equals $200 billion year
Generating approximately 2 million jobs
Increase in housing prices added $7 trillion ($ 3 trillion if re-mortgage and inflation is taken into account) in wealth during the past five years
Adding $150 billion in spending
Generating 1.5 million jobs
But:
High level of household indebtedness
Large debt service
If primary residence excluded, net worth of median U.S. households declined by 13% during 2002-2004 – from $40,000 to $35,000
If interest rates rise, can consumption be sustained?
Greater Interdependence Means.. : Greater Interdependence Means.. Problems in one part of global economic system impact others
“That which is unsustainable will not be sustained”
The U.S. Deficits not sustainable
A Downturn—or even stagnation—in U.S. will have global ramifications
The Puzzle of High Oil Price : The Puzzle of High Oil Price Oil prices soar
Yet investments in alternative energies, conservation have not
Rising Oil Price Since 2003 : Rising Oil Price Since 2003
Long Term Trends in Oil Price : Long Term Trends in Oil Price Source: U.S. Energy Information Administration
Futures: High Oil Price is Here to Stay? : Futures: High Oil Price is Here to Stay?
Puzzles of Sustained High Price : Puzzles of Sustained High Price The Futures Market is predicting oil price to hover around $65/barrel during 2006 and 2007 and to remain in the low $60 range till 2009
The oil price increased by more than 40% since 2004
While oil shales – with an extraction cost of $27-$30 per barrel – represents a viable alternative to crude oil in case the price crude oil remain over $40 range
The US Office of Naval Petroleum and Oil Shale Reserves estimates there are some 1.6 trillion barrels of oil contained in oil shales around the world, with 60–70% of reserves (1.0–1.2 trillion barrels) in the United States
The puzzle – why isn’t sustained high oil price inducing a relatively quick shift away from oil to other viable alternatives – natural gas and oil shales?
A Possible Answer: In an Uncertain World… : A Possible Answer: In an Uncertain World… Risks and uncertainty about future prices make investment in alternative energy sources costly
Market takes a short term perspective – price hike is temporary and there is no incentive for investment in innovation
Risk of Peace – there is a perception that price of oil will inevitably fall if there is a lasting peace in the Middle East
Market also cannot rule out the possibilities of new discoveries of oil deposits
Innovations for efficient and alternative energy solutions will require governments to bear the cost of innovation and risk
Oil in a Globalized Economy : Oil in a Globalized Economy Supply and Demand Shocks
The spare capacity in crude oil production is dwindling – most of the oil producing countries are running on full capacity
Production in Iraq remains lower than the pre-invasion level – current production level is about 1.9 million bpd compared to over 2.5 million bpd in 2002
Even if Iraq reaches full capacity production, the impact on the world oil price will be insignificant
Demand growth – especially from China and India – will continue to out pace the growth in oil supply
Dwindling Spare Production Capacity : Dwindling Spare Production Capacity
And the Demand for Oil is Growing, Albeit at a Slower Rate : And the Demand for Oil is Growing, Albeit at a Slower Rate
Economic and Political Consequences : Economic and Political Consequences Macro-economic consequences
Slowdown in global economy
Especially if Central Banks continue focus on inflation
High/volatile prices forcing countries to think more about what is required for energy security
Worries about distributional consequences
Discussion in U.S. of “windfall profits” tax
Especially in light of huge subsidies in last energy bill
The Resource Curse : The Resource Curse Paradox: Countries with large endowments of resources have not (on average) done well
Many face high levels of political instability
Many are not democratic
Related to instability of oil prices
Exacerbated by pro-cyclical lending
Dutch Disease problems
Rent seeking/corruption
Keys to Avoiding Resource Curse : Keys to Avoiding Resource Curse How to maximize the fraction of the value of the resources that is available for public purposes
Minimizing “diversion” to private interests
Whether as a result of public sector corruption
Or private sector cheating
How to ensure that funds are well spent
How to manage macro-economics to avoid Dutch Disease problems
Issues involve both politics and economics
Keys to Avoiding Resource Curse : Corporations wish to minimize prices paid
Which can sometimes be done by bribing government officials
Institutional arrangements can make a difference
Transparency
Stabilization funds?
The design of auctions
Design of contracts
Resource curse is not inevitable - some countries have managed their resources well
Botswana
Malaysia Keys to Avoiding Resource Curse
There Have Been Problems Even in Advanced Industrial Countries : There Have Been Problems Even in Advanced Industrial Countries Fire sales in U.S.—reduces government revenues
Failure to use well designed auctions
Contrast with telecom
Alaska and Alabama—cheating on contracts
Environmental problems
Valdez
Alaska
The Rate Of Extraction and Usage of Depletable Natural Resources : The Rate Of Extraction and Usage of Depletable Natural Resources Azerbaijan— 20-25 years of supply
IMF recommendation—lower taxes; uniform rate of “spending” out of natural resources
Bolivia and Ecuador—resources are about to come online, but the country in recession; education and other budgets being cut drastically to reduce budget deficits
Should they be ‘allowed” to borrow against these future incomes to support deficit spending
The Rate Of Extraction and Usage of Depletable Natural Resources : Nigeria—a long history of squandered resources
Spending of natural resource revenues leading to currency appreciation
Should it now spend all of its revenues?
Chile—creates stabilization fund
But IMF treats spending out of stabilization fund just like any other form of deficit spending
Does this make sense?
Bangladesh—limited reserves of natural gas
Should it sell natural gas to India? The Rate Of Extraction and Usage of Depletable Natural Resources
Political Issues : Political Issues Angola
BP offers transparency (publish what you pay), government threatens to throw country out, other companies support government position
Sudan
Providing support for a government engage in genocide in Darfur
Though some in international community wanted to embrace the government for having stopped its ruthless campaign against the South
Would an embargo simply provide others (like the Chinese) who pay no attention to human rights greater scope
What pressure should be brought to bear against Sudan?
Chad—little economic opportunity other than oil
But current government likely to misappropriate funds
With funds used to maintain itself in office
And worries about environmental damage of pipeline
Oil will still be there when a future government takes office
Political Issues : Venezuela
Venezuela (also Bolivia, Botswana) demand new contracts
Claiming that previous contracts were unfair
Sometimes signed by uninformed or corrupt government (with or without bribery)
Circumstances have changed (high oil prices)
What is a fair and efficient contract? Political Issues
Environmental Issues : Environmental Issues Papua New Guinea
major gold mine provides substantial fraction of country’s exports
Studies showing that environment damage would be minimal later turn out to flawed
No economically feasible way of producing gold and containing the damage
Mine has to be shut down
Should the mine operator pay for cleaning up the river and the surrounding environment?
Or should they just walk away?
In the future, what can governments do to prevent this?
Environmental Issues : Environmental Issues Global Warming
Major concern of our time
Overwhelming evidence
Requires curtailing usage of fossil fuels
How active should one be in promoting conservation measures?
Even if it lowers prices and profits
Should but if prices are lowered, usage may not be curtailed—only change in who gets rents
Should one argue for quantitative restrictions
Is one’s primary responsibility to one’s shareholders ()in which case one might oppose these measures) or to society more broadly.
Cartel and Competition Issues : Cartel and Competition Issues Market economy requires competition
Cartels are designed to limit competition
Should one support/oppose cartels in one’s industry
Raise price
Using arguments about “stabilization”
Could be used in most other industries
Cartels in Oil, aluminum; proposed in steel
Many of These Present Conflicts Between Interests of Firm and Interests of the Society : Many of These Present Conflicts Between Interests of Firm and Interests of the Society Why cannot we simply rely on firm’s maximizing its market value
Adam Smith’s invisible hand suggests that doing so will ensure economic efficiency
Modern economic theory helps explain why Maximizing shareholder value does not lead to economic efficiency
Adam Smith’s Invisible Hand… : Adam Smith’s Invisible Hand… Adam Smith’s Invisible Hand said that pursuing self-interest leads to economic efficiency
But does not ensure either social justice, the preservation of the environment, or human rights
Many market failures involve externalities—including environmental failures
When there are these market failures, maximizing shareholder value does not let to efficiency or societal well being
Concluding Remarks : Concluding Remarks Good business goes beyond maximizing shareholder value - There are multiple stakeholders—workers, customers, communities
A broader view of corporate governance
Reflected in many European countries legislation
A corporation can do well by doing good
Acting in a responsible manner can be good for profits
But collective action (government regulation) is often required in addition
Self-regulation does not suffice