Transcript document

Globalization
Topics
• What is globalization?
• Is it something new? Historical
perspectives
• What are the causes?
• Do developing countries benefit from
globalization?
• Role for Ukraine in the globalized world?
References
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Bordo, M., Eichengreen, B., and Irwin, D., 1999, Is Globalization Today Really
Different than Globalization a Hundred Years Ago?, NBER Working Paper No.
7195
Edwards, S., 1999. How Effective are Capital Controls?, Journal of Economic
Perspectives Vol. 13 (Fall): 65–84.
Obstfeld, M. and Taylor, A. 2002, Globalization and Capital Markets, NBER
Working Paper No.8846.
Edwards, S, “Capital controls sudden stops and current account reversals,” 2005,
NBER Working Paper No. 11170
Kose, Prasad, Rogoff, and Wei, (2006), Financial Globalization: a reappraisal,
NBER Working paper No. 12484
Stultz, R, (2006), Financial Globalization, Corporate Governance, and Eastern
Europe, NBER Working Paper No. 11912
Martin and Rei (2006), Globalization and Emerging Markets: With or without
crash?, American Economic Review, Vol. 96, No.5
Schmukler,S. and Zoido-Lobaton, P.,2001, Financial Globalization: Opportunities
and Challenges for Developing Countries, The World Bank, mimeo.
Frankel, J., 1992, Measuring International Capital Mobility: A Review, American
Economic Review Vol. 82(2): 197-202
Thomas Friedman, “The World is Flat”
What is globalization?
• Growth in international trade in goods and
services
• Increasing role of multinational
corporations (MNC), surge of foreign direct
investment (FDI)
• Higher integration of the financial markets
• Increase in labor mobility, outsourcing of
jobs and migration
The world is flat
• T. Friedman, NY Times columnist, the
author of “The World is Flat”
– competitive playing fields between industrial
and emerging market countries are leveling
– creates opportunities for labor force in
emerging economies to join global markets
– examples: Shanghai, China; Bangalore, India
Historical Perspective: 1870 1914
• Gold standard as a dominant monetary
system (fixed-exchange rate regimes)
• Global capital market centered in London
• Increasing globalized capital market, with
surging capital flows
Historical Perspective: 1914 1945
• Destruction of global economy with increasing
non-cooperative economic policy-making
• Broken credibility on the gold standard and
adoption of floating rates
• Monetary policy became subject to domestic
goals to help finance wartime deficits
• Capital controls to protect gold and avoid
currency crises
• Capital flows were minimal
• International prices and interest rates were out
of synchronization
Historical Perspective: 19451971
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Bretton Woods era
Effort to rebuild globalized economy
Trade flows in remarkable expansion
Economic growth in its most rapid spurt in
history
• Capital Flows expanded, but at a low rate
• Capital controls were still accepted and
sanctioned by the IMF as a way to prevent
currency crises and runs, and also giving some
space for activist monetary policy
• Late 1960s: end of the fixed-exchange rate
system
Historical Perspective: Post
1971
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Post-Bretton Woods floating era
Still some fixed-exchange rate regimes
Increasing capital mobility
Decreasing capital controls
In peripheral countries: economic reforms
reduced transaction costs and risks of foreign
investments
• Small developing countries tended to adopt fixed
exchange rates (dollarization and currency
boards) while larger ones tended to adopt
floating exchange rates with inflation targeting
U-Shape Curve – Stylized Fact
Comparison of integration today and pre
1914 for trade and finance in the US
Bordo et al (1999):“…trade today is strikingly more
important than a century ago. Three indicators
sustain this view:
• a higher share of trade in tradeables production
• the growth of trade in services
• the rise of production and trade by multinational
firms.”
Trade in good and services
• Trade is now much larger as a share of
tradeable goods production.
• The value of U.S. service exports
(excluded from the merchandise trade
figures considered above) now amount to
about 40 percent of the value of
merchandise exports.
The Role of Multinational Trade
and Production
• Multinational enterprises existed in the late
nineteenth century, but they were
exceptional (i.e. East India Company,
Standard Oil of New Jersey, Singer
Sewing Machine)
• The value of direct investments has
soared since the early-1980s and is now a
quantum leap above a century ago
Measures of Financial
Integration
• Feldstein-Horioka condition
• Real Interest Rate Parity
• Uncovered Interest Rate Parity
• Covered Interest Rate Parity
• Gross Stock of Foreign Capital
• Equity and Bond Prices
Real Interest Parity since 1870
Long-Term Real Interest Differentials
Source: Obstfeld and Taylor (2002)
Real Interest Parity since 1870
• Differentials have varied widely over time
• But have stayed relatively close to a zero
mean
– The series appear to be to have been
stationary over the very long run, and even in
shorter sub-periods.
• Krugman, Paul (1995), “Growing World Trade:
Causes and Consequences,” Brookings Papers
on Economic Activity 1, pp.327-362:
• “…the general picture of world integration that
did not exceed early twentieth century levels
until sometime well into the 1970s is thus
broadly confirmed. In the last decade or so, the
share of trade in world output has finally reached
a level that is noticeably above its former peak.”
What are the causes
• lower transportation costs
• lower trade barriers
• development of new telecommunication
technologies
Transportation costs
• increasing role of air transportation
• improvements in traditional transportation
– better technology, MNC in transportation
(UPS, FedEx)
– more developed infrastructure (roads, ports
etc)
Lower trade barriers
Role of Information
• First wave of globalization coincided with the invention of the
telephone and radio
– transatlantic cable was laid in the 1860s, coming into operation in 1866
– Prior to its opening, it could take as long as three weeks for information
to travel from New York to London
– With the inauguration of the cable, this delay dropped to one day
• Garbade and Silber (1978) compare the London and New York
prices of US bonds four months before and four months after the
cable and find a significant decline in the mean absolute difference.
• Information asymmetries can explain the disproportionate
importance of family groups in the pre-globalization period (the
foreign branches of the Rothschild and Morgan families, for
example)
Factors Behind Globalization – Potential Benefits
• Development of the financial sector
– More and new type of capital is available
• Deeper and more sophisticated markets
• Increased market discipline
– Better financial infrastructure
• Insurance
• Smoothing of socks
• More transparent, competitive, and efficient
financial system – capital seeks its highest
rewards
Factors Behind Globalization – Potential Costs
• Inconsistency of some policy goals and the free
flow of capital across international boundaries
• Risk of financial and balance of payments crises
– More market discipline
– Imperfections in international markets
• Contagion
– Higher exposure to foreign shocks
– Fundamental Contagion: real or financial
– Non-fundamental contagion: herding behavior
Costs of Financial Liberalization
Gcrises is the annual growth rate of real GDP at the crises year. G(N) is
the annual growth rate of real GDP N years before/after the crises.
Source: Bordo, Eichengreen, and Irwin (1999)
Net Benefits of Financial Globalization
• Balance
More Developed Markets
versus
Non-fundamental crises
Cross-country contagion
Fewer instruments
• Still positive but…
• More evidence is needed
Policy Options
What explains the long stretch of high capital
mobility that prevailed before 1914, the
subsequent breakdown in the interwar period, and
the very slow postwar reconstruction of the world
financial system ?
The Choice of an Exchange Rate Regime
The Choice of an Exchange Rate Regime
• The Macroeconomic Policy Trilemma for Open
Economies - “Inconsistency Trinity”
A country cannot simultaneously determine:
– Exchange rate
– Interest rate
– Monetary policy oriented towards domestic objectives
• In a world with full freedom of cross-border
capital movements:
– fixed exchange rates and independent domesticoriented monetary policy are incompatible choices
The Impossible Trinity
Source: Frankel (1999)
The Trilemma and Major Phases of Capital
Mobility
Does capital flow to poor countries?
Globalization and emerging economics
• Do developing countries benefit from globalization
– Yes: China and India
– No: more frequent financial crises in the last two
decades
• Capital flows to rich developing countries, poor countries
are left behind
• Role for Ukraine?
– it is very open economy measured by share of trade to
GDP, but did not join WTO yet
– Trade is not diversified, therefore high exposure to
price shocks
– it is not financially integrated yet, but surge of FDI in
banking sector