Transcript Managing Globalization - Columbia Business School

Managing Globalization
Doha, Qatar
November, 2005
Joseph E. Stiglitz
Columbia University
New York
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?
 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…
 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
 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…
 Decline in real incomes in Africa
 Stagnation in Middle East
 Failures in Latin America
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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 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…
 A particular view of the market economy
was pushed
– Which did not even describe U.S. economy
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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
 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
 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 lifesaving 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
 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
 Enormously rapid growth
 Their integration into the global economy
is ushering change of historic proportions
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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
 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
 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
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…
 But problem lies in the U.S. macroeconomic 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
 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
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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
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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
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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:
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High level of household indebtedness
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If interest rates rise, can consumption be sustained?
– 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
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
 Oil prices soar
– Yet investments in alternative energies,
conservation have not
Rising Oil Price Since 2003
Long Term Trends in Oil Price
WTI Crude Oil Price: 1970-Sept 2005
90
2nd Oil Shock
80
Nominal Price
Real Price
70
60
50
1st Oil Shock
40
1st Gulf War
30
2nd Gulf War
20
Source: U.S. Energy Information Administration
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Futures: High Oil Price is Here to Stay?
NYMEX: Light Sweet Crude Oil Futures
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Low
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…
 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
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 preinvasion 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
And the Demand for Oil is Growing,
Albeit at a Slower Rate
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
 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
 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
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Transparency
Stabilization funds?
The design of auctions
Design of contracts
 Resource curse is not inevitable - some countries
have managed their resources well
– Botswana
– Malaysia
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
 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?
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
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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?
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
 Global Warming
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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
 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
 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 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
 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