The Macro Environmental Scan: Understanding Globalization

1. The Macro Environmental Scan: Understanding Globalization Tassu Shervani

2. Two “Types” of Capitalist Economic Systems Supply Side Economics Savings/ Capital Formation Investment/Production Employment Income Demand Side Economics Consumption/ Demand Investment/Production Employment Income

3. Economic Transformation • Since the New Deal and the end of WWII, the U.S. economy had relied much more on demand side logic • Since the end of WWII, Japan and Germany had relied much more on supply side logic • Since supply side economies invest more, they can become very productive and competitive over time, as Japan and Germany did

4. National Tax Revenue Structure of Selected Countries (%)

5. Personal Deposits and Savings in Japan (%) (1975 – 1993)

6. Macro-Economic Sectors TRADE PUBLIC DOMESTIC

7. Economic Transformation • By the 1970’s the U.S. economy had stagnated • In the 1980’s, the U.S. began to shift to supply side thinking What is the problem with this scenario? • Japan and Germany must move to demand side thinking

8. Economic Transformation: U.S., Japan and Germany, SE Asia • On September 22, 1985, the Plaza Accord was signed, under which the Yen and the Mark were revalued versus the U.S. Dollar • Realizing that the days of manufacturing in Japan and selling in the U.S. were over, Japan begins to target exports to Europe and to invest in SE Asia • SE Asian “Economic Miracle” is accelerated

9. Foreign Currency Exchange Rates Against the U.S. Dollar (national currency per US$)

10. Japan’s Direct Overseas Investment (FY 1951 – 1993)

11. Transformation in Europe • Western Europe amends the Treaty of Rome • Trade negotiations with Japan centralized • Initiatives to catch up with the U.S. and Japan in hi tech • Borderless Europe by December 1992 • Integration of Eastern Europe • Monetary union follows – Creation of the Euro • Next step: Common Immigration Policy - 2010 • Next step: Turkish entry into EU - 2015

12. Transformation in the U.S. • Foreign Exchange Policy • Trade Policy • Labor Environment • Capital Market • Tax Policy • Antitrust Policy • National Science & Technology Policy

13. Transformation in China and India • China watches SE Asian boom and accelerates process of reform in the late-1980’s. By mid-nineties the Chinese economy begins to take off • India watches China’s take-off, begins economic reforms in 1991. By the late-1990’s, India’s economy begins to take-off

14. China and India - Opportunities • 2.5 Billion people • $4,000 increase in per capita GDP over 15 years • $10 Trillion in GDP creation – roughly equal to the size of today’s U.S. or Western European economy • Infrastructure comes first • Big focus on transportation!!! • Go to where the opportunity is!!!!!

15. U.S. - Opportunities • Developed country with the demographic profile of a developing country • # 1 in assimilating and integrating immigrants • Growth in financial services, biotech, nanotech, infotech, and materials technology

16. Europe - Opportunities • Integration of Eastern Europe: • 150mm people X $30,000 per capita GDP = $4.5 Trillion • Similar to U.S., focus on financial services and technology in Western Europe • Tremendous edge in technology, market share of 24% in scientific publications

17. What Can Get in the Way? • United States • Terrorism – WMD attack • Declining educational system, K-12 • Declining science and technology funding and negative attitude toward sciences • Europe • Inability to absorb immigrants • Slowdown of integration efforts • Issue of Turkey in EU • China • No political reform • Failure to solve banking crisis • AIDS • India • Nuclear war • AIDS • Speed of economic reform

18. What Can Get in the Way? – For All • Energy Crisis • 2006 Production and consumption: 84 mm bpd • 2020 projected consumption: 110 mm bpd • Capex from 1975-2004 : $80B/year • Capex from 2005-2014: $250B/year • Saudi Arabia • Russia • Iraq • Iran • Kuwait • Venezuela • Nigeria 7 of Top 10 producers are highly unstable

19. Impact of Offshoring on Developed Countries • Assume 7-8 million jobs offshored • Assume cost reduction of $50,000 per job • Total savings: $350-400B annually • Assume half passed on to consumers: • Prices reduction of $175-200B • Assume half kept by firms • Profit increase of $175-200B • After tax $120-135B • P/E of 18, means wealth creation around $2 trillion • 60% of U.S. stocks owned by pension funds • Trend will stabilize as Yuan and Rupee are revalued and as local costs rise – already started!!!

20. Yuan and Rupee Revaluation 2007-2025 • Rupee has been revalued by 20% since 2003 • Yuan revaluation begins now, 2% in mid-2005 with more to follow, 8% to date • By 2025, 3-4 Yuan and 20-25 Rupees to the U.S. dollar • Same logic as with Japan in 1985 (Plaza Accord)

21. References Jeffrey Frankel, “The Yen-Dollar Agreement: Liberalizing Japanese Capital Markets”, The Institute for International Economics, 1984. Michael D. Bordo, and Ann J. Schwartz, “What has Foreign Exchange Market Intervention Since the Plaza Agreement Accomplished?”, Open Economics Review, 2(1), 1991, p.39-64. Raj Aggarwal, and David C. Schirm, “Balance of Trade Announcements and Asset Prices: Influence on Equity Prices, Exchange Rates, and Interest Rates”, of International Money and Finance, 11(1), February 1992, p.80-95 Michael Klein, Bruce Mizrach, and Robert G. Murphy, “Has the Plaza Agreement Mattered?”, Journal of Money, Credit, and Banking, 23(4), November 1991, p.742-51 Yoichi Funabushi, “Managing the Dollar: From the Plaza to the Louvre”, Institute for International Economics, 1988. Michael Klein, and Eric S. Rosengren, “Foreign Exchange Intervention as a Signal of Monetary Policy”, New England Economic Review, May/June 1991, p.39-50.

22. References (Contd.) Paul Eckert, “Blue Ribbon Panel On Reform Fights Ministries’ Opposition”, The Nikkeo Weekly, October 25, 1993, p.4 Shintaro Hori, “Fixing Japan’s White-Collar Economy: A Personal View”, Harvard Business Review, November – December 1993, p.81. George Gilder, Microcosm: The Quantum Revolution in Economics and Technology, Simon and Schuster, 1989. William H. Davidson, The Amazing Race: Winning the Technorivalry with Japan, John Wiley and Sons, 1984. Chalemers Johnson, MITI and the Japanese Miracle, Stanford University Press, 1982. Ezra F. Vogel, Comeback, Simon and Schuster, 1985. David Halberstam, The Reckoning, William Morrow and Company, Inc., 1986.