Transcript Impact on Advanced Economies

Robert J. Shapiro
November 4th 2008
The Forces Changing the
Course of Nations
• The New Economics of
Globalization
• The New Demographics of
Nations Aging
• The New Geopolitics of a
Sole Superpower
The New Landscape of
Globalization
• Global exchanges soar:
 1990 – 2006, share of worldwide GDP
traded across borders up from 18% to
roughly 30%.
• 2005: 180 national economies trade over
$12 trillion in goods and services (out of
$42 trillion world GDP), the highest levels and
the largest increases ever.
• U.S. imports top $2.2 trillion (2006), more
than the GDP that year of all but five other
countries.
Globalization Versus
Traditional Trade
• Traditional trade: Commodities from
developing economies, manufacturing
in advanced economies, and finished
goods marketed among advanced
economies.
• Modern globalization: FDI – driven
networks of sophisticated operations
around the world, to produce, market
and sell everyone to the world.
Impact on Developing
Nations
• Rapid modernization and growth,
based on transfers of modern business
organizations (FDI), investments in
education and infrastructure, and
reforms to allow more foreign and
domestic competition.
• East Asia, versus Latin America,
versus Africa: Case studies in the
difference that public investment,
macroeconomic stability, political
stability, and FDI make.
Impact on Advanced
Economies
• Ideas replace physical assets as main source of
wealth and growth in developed economies:
– US firms invest more in tangible assets than in physical
assets;
– 1980: Market value of the physical assets of top 150 U.S.
public companies = 75% of their stock value; 2004, this “book
value” of the top 150 companies = 36% of the value of their
shares.
– Nearly two-thirds of the value of large companies now comes
from what they know and the ideas and relationships they
own.
– Impact on US growth, productivity and incomes, versus
Europe and Japan
Impact on Advanced Economies – 2:
The Case Study of the United States
• Intense global competition holds down
inflation and interest rates;
• When intense competition collides with rising
fixed costs, the link between growth and job
creation is weakened;
• Same combination weakens the link between
productivity gains and wage progress
• Result: Globalization reduces job
opportunities and income gains for all but
those most adept in an ideas – based
economy
Ireland: A Developed Economy Uses
a Developing Nation Strategy
• Focus on education and
infrastructure, like East Asia
– 1990s: 5% GDP to infrastructure (2 x EU)
– Free university access
– 2005: 37% 25-34 year olds with postsecondary training, versus EU 27%
• Policies to draw FDI, like China
– 2004: Irish FDI stock, as share of GDP, 10 x
Germany, 5 x France, 4 x UK
Will the Global Crisis Change
These Dynamics?
• Is a global recession in the cards?
• The impact of a serious downturn
in advanced countries on trade
and FDI
• The impact on politics: Rising
demands for economic security
• How governments should respond
The New Demographics
• The historical uniqueness of an unusually
large generation followed by an unusually
small one, now happening across the world.
• Why: The spread of basic modernization,
changing roles for women & technological
advances.
• Result in most places: Average age of
national populations rising quickly
• Signs of aging populations: elderly
populations growing 3%/year in most
advanced countries.
• Why Ireland is different
The New Demographics -2
• The problem for Europe and Japan:
2005 – 2020, the number of elderly people
will increase 35%-50%, as the working age,
tax-paying cohort shrinks.
• Early costs of these changes:
 Falling saving, investment, and growth rates
 Fewer sources of revenues as demand for public
goods rise sharply.
• Longer term challenges: The political
battles over pensions and health care.
Impact for Different
Countries
• Hit very hard: Japan, Italy & Russia
• The hard time facing France and
Germany
• Why China will be less affected, even
with the world’s fastest aging population
Demographics and Prospects
for Ireland and the US
• How Ireland and US can avoid many of
these costs for a generation
– Role of immigration
– Role of public pension policy
– Role of globalization-based economic policies
Demographic Shifts Meet
Globalization
• How the combination intensifies
inequality
• The crisis of financing health care
 Fast–rising numbers of older people, meets,
concentrations of serious illness in older people,
and fast-rising costs to treat those conditions
 The increasing role of regulation
• Ireland’s trump: The relatively small
numbers of elderly Irish
Demographics Meets
Globalization - 2
• The effects on economic
growth
– Spectre of a generation of slow growth
for Japan, Germany, France, Italy and
others
– Why the outlook is better for the
U.S., China and Ireland
The New Geopolitics
• Historical anomaly of a sole military and
economic superpower with no near peer
– the United States.
• Iraq War: The test the superpower
passed and then failed
• Importance of collaborative
arrangements for on-going challenges –
trade, finance, terrorism, drugs, climate
• The inescapability of US leadership
The New Geopolitics &
Globalization
• The two poles of globalization
– U.S. (Western Pole) – where new ideas
are born and spread first.
– China (Eastern pole) – the world’s
production and assembly platform.
• US- Sino comity and conflicts
• The global challenges:
– Energy and Climate Change
– The new petro-politics – Russia, China and
OPEC
– Terrorism and Islamist fundamentalism
A World in Financial Crisis
• Its origin in globalization
– The globalization of capital
– Role of global competition in asset bubbles
– The role of America market ideology
• Tensions between national and
global solutions: Whither the EU?
• The outlook: How long and how
bad?
Why Ireland Has Succeeded
• Strategy combining public investments
(the path of the Asian Tigers) and waves of
foreign investments (see China)
– Public education spending up 150% since 1985
– Tax and other preferences for foreign firms
– Small welfare provisions
– Geography (EU) and the value of low wages
– Direct transfers focused on idea-based sectors –
IT, pharmaceuticals, medical equipment, financial
services
– Language
The Future for Ireland
• Can avoid the economic costs of aging population and
the public pension crisis looming for other countries
• High growth rates will likely settle down
• Can Ireland end its “dual economy,” wean itself from
dependence on FDI, and promote productivity spillovers
to domestic firms, especially in services
• Implications of recent education, tax and health care
policies on FDI and long term growth
• Unsettled: Competing with the accession countries