Reflections on Current Perceptions and History of Globalization: Cure or Curse?

1. Reflections on Current Perceptions and History of Globalization: Cure or Curse? by Can Erbil Brandeis University and EcoMod

2. Definition of “globalization”: Integration of world economies (O’Rourke & Williamson) through trade, migration and money flows (Rodrik). Eliminating the artificial obstacles limiting the free flow of goods, services, capital, knowledge and (to a lesser degree) labor (Stiglitz).

3. How to measure globalization? “Increase in the trade volume of countries” misleading: trade volume can increase due to an increase in the world supply curve. “Price convergence across countries” is a better evidence on globalization (O’R&W) Trade creating forces should change domestic commodity prices. The change in prices should change resource allocation between economic activities.

4. When did globalization begin? O’R & W: look for evidence for convergence of prices of traded goods by investigating transportation costs.  A decrease in transportation cost implies price convergence and therefore globalization. First Era (Pre 18th Century) Second Era (19th Century) Third Era (20th Century - Present)

5. O’R & W’s Findings: Data: Evidence on shipping costs for the three era. Findings: Trade boom during the first era, but no sign of globalization. Dramatic price convergence in 19th Century. Decline in the transport costs between Europe and the rest of the world continued but slowed down during the 20th century.

6. Econometric Test of Globalization: Theory:Globalization begins in 19th century Proposition:If countries were not integrated before 19th century then domestic factor and commodity prices should be determined merely by domestic supply and demand. Since globalization is claimed to begin in 19th century, domestic prices in this century should be determined by global supply and demand not domestic supply and demand.

7. Results of Econometric Test:  In an open economy, commodity prices will be determined purely by global market and therefore rising land/labor ratio will not have an effect on the relative prices of the goods. O’R & W divide their data in two parts: before 1820 (represents no globalization) and after 1820 (represents globalization period). They employ different tests using this data set.  econometric analysis of the theory also confirms that globalization begins in 19th century (they could pinpoint 1840).

8. Coincidence of the take-off and the starting date of globalization: -Technology, values, politics and economic institutions

9. Current (1990s) record of globalization: Sub-Saharan Africa: economic growth worse than late 1970s. Latin America: worse than in the 1950-80 period. Former socialist economies: real output low, poverty rates high. Mexico, East Asia, Brazil, Russia, Argentina and Turkey: enormous volatility and painful financial crises. Practically in all developing countries: worsening income inequalities and deep economic insecurity.

10. A few success stories: China: high growth, improving life standards India: lower but steady growth and decrease in poverty similarly: Vietnam and Uganda Argument for pro-globalizers: greater integration with the world higher growth rates and faster poverty reduction Counter-argument: Many other countries (such as Argentina) followed the “rules” of globalization much closer than China, and got disappointed repeatedly.

11. What are the “rules” of globalization? Washington Consensus: 1. Fiscal Discipline2. Reorientation of public expenditures3. Tax reform4. Financial liberalization5. Unified and competitive exchange rates6. Trade liberalization7. Openness to Foreign Direct Investment (FDI)8. Privatization9. Deregulation

12. Who determines these “rules”? The IMF and the World Bank (in Washington DC, USA) + WTO The disappointments and frustration about the results of globalization with its agenda managed by the “Washington Consensus” widespread reaction and protests against “globalization” (Seattle, 1999, Washington DC, 2000, 2001, etc…)  search for a change in the original policy reform agenda

13. A quick fix to globalization, add a new(!) set of rules to the original WC: “Augmented” Washington Consensus: 10. Corporate governance11. Anti-corruption12. Flexible labor markets13. WTO agreements14. Financial codes and standards15. “Prudent” capital account opening16. Non-intermediate exchange rate regimes17. Independent central banks/inflation targeting18. Social safety nets19. Targeted poverty reduction

14. Will the “Augmented” WC work? Rodrik: No! ”infeasible, inappropriate and irrelevant” too broad, undifferentiated agenda of institutional reform an impractical blueprint with the “one size fits all” mentality leaves no room for policy “space” and local strategies describes developed countries, but not how to become one of them doesn’t provide a good sense of priorities

15. Costs of AWC (or global integration in general): long list of admission requirements new patent laws, banking standards, etc… successful trade liberalization Tax reform to make-up lost revenue (Erbil 2002), social safety nets, administrative reform, labor market reform, technological assistance, training programs standards and codes for sound financial systems (by the Financial Stability Forum) All very costly, and LDCs have limited sources, binding budget constraints

16. Why insist on the WC? The current agenda calls for liberalization of developing countries in trade of commodities (such as full liberalization in agriculture) and financial markets, while ignoring liberalization in trade of labor service (international labor mobility). primary beneficiaries of this agenda are the developed countries. TRIPS (largely driven by the interests of pharmaceutical companies in the US)

17. Are developed countries benevolent towards developing countries? Foreign Aid “Do Corrupt Governments Receive Less Foreign Aid?” (Alesina and Weder)  “US appears to give more assistance to more corrupt governments”! (which are mostly easier to persuade)  Even in the case of foreign aid, there is some significant concern of benefit and influence

18. Did the developed countries play by the rules of the WC while they were developing? No. Ex.: US import tariffs in the second half of the 19th century higher than in many developing countries today. Regulations that developing countries face today were non-existent (Ex.: TRIPS increases prices of essential medicine in poor countries).

19. Can we learn from the successful countries? The Case of China: trade regime: not liberalized significantly and became member of WTO only 2 years ago, still very protected currency markets: not unified until 1994 financial markets: closed to foreigners until very recently no significant privatization and no private property rights in the Western sense

20. Can we learn from the successful countries? (continued) China obviously violated most of the “rules” of globalization set by the Washington Consensus. Instead, it focused on “institutional innovations suited to its local conditions”: household responsibility system township and village enterprises special economic zones two-track pricing regime, etc…

21. Caution: “Institutional innovations do not travel well (Rodrik)!” Mimicking China will most probably will not work for most of the countries. Success strategies vary significantly between different countries. Need home-grown strategies and active policy innovations rather than a consensus. “Global integration is not a substitute for a sound country-specific development strategy”. Globalization is no short cut, but can become rather a dead end if governed badly.

22. Shall we give up on “globalization”? No.  world markets are a very vital source of capital and technology, which can provide a set of opportunities for the developing countries. What needs to be changed is how globalization is “governed”!  developing countries need to have autonomy for developing their own way to integrate their economies to the world economy.

23. How to develop a successful growth strategy? a la Rodrik: Two crucial elements: An investment strategy, and An institution-building strategy combination of “carrots and sticks” policies + pushing for “international labor mobility”

24. Limitations of the Rodrik Plan: “The trilemma of global economic governance 1.Cannot have nation states, democracy and full economic integration simultaneously. 2.Shallow integration, “thin” set of rules more appropriate and realistic. 3.Policy autonomy for LDCs valuable”(from Rodrik)

25. Caution! We cannot conduct controlled experiments in economics. Experimentation and self-discovery is costly (both politically and economically). Some developing countries which have already been disappointed by the results that WC generated cannot afford costly “trial and error” approaches and risky innovations.

26. Where are we today regarding “globalization”? It has been a while since Stiglitz published his “Globalization and Its Discontents” where he was calling for action towards change. Dani Rodrik has also been advocating (for a while) for departure from the WC and he has been warning clearly that the AWC is also bound to cause disappointments for the developing countries. Many others (Easterly in particular) joined them since then.

27. Where are we today regarding “globalization”? (continued) However, since the Fall of 2001, the world’s attention has been drawn away from the debate of how to govern “globalization” correctly. Regionalism and unilateralism came into the foreground (sharp reductions in international movement of capital and labor). This could be an opportunity for the developing countries. Time for experimentation, for implementing gradual and narrow ranged reforms and investing in know-how.

28. What else could be done? determine the reasonable framework of experimentation (with disciplined and systematic economic analysis) work on “mapping desirable institutions to initial structural conditions and political economy” (case studies) – enhances the multiplicity of alternatives instead of “one size fits all” work on a “narrow range of policy reforms and institutional arrangements” self-confident political leadership with a strong political and social base (working democracy)

29. What else could be done? (cont’d) target high economic growth in the short-run with narrow ranged policy reforms and institutional arrangements and use the high growth period for building high quality institutions strengthen the institutional base of markets avoid growth collapses

30. Not everybody agrees! Sachs “Institutions Don’t Rule” (2002)  geography is more important  malaria risk  But then, policy implications don’t matter a whole lot (not much one can do about geography).

31. Partial association between income and distance from equator(Source: Rodrik)

32. Partial association between income and quality of institutions(Source: Rodrik)

33. Partial association between income and trade(Source: Rodrik)

34. References Alesina, Alberto and Weder, Beatrice, “Do Corrupt Governments Receive Less Aid?”, May 1999, NBER working paper. Becker, Gary, “When Globalization Suffers, the Poor Take the Heat”, April 21st, 2003, Business Week,. O’Rouke, Kevin and Williamson, Jeffery, “When Did Globalization Begin?”, April 2000, NBER working paper. Rodrik, Dani, “In Search of Prosperity: Analytic Narratives on Economic Growth”,  Edited and with an introduction by Dani Rodrik.  Princeton University Press, 2003. Rodrik, Dani, “Globalization for Whom?”,  July 2002.  Published in Harvard Magazine. Rodrik, Dani, “After Neoliberalism, What?”, August 2002.  Remarks at a conference on Alternatives to Neoliberalism.  Rodrik, Dani, "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence," (with Francisco Rodríguez), Macroeconomics Annual 2000, eds. Ben Bernanke and Kenneth S. Rogoff, MIT Press for NBER, Cambridge, MA, 2001. Rodrik, Dani, “Has Globalization Gone Too Far?”, Institute for International Economics, Washington, DC, 1997. 

35. References Sachs, Jeffery, “Institutions Don’t Rule: A Refutation of Institutional Fundamentalism”, December 2002, Working Paper, Columbia University. Williamson, John, “What Should the World Bank Think about the Washington Consensus?”, The World Bank Research Observer Volume 15, Number 2, August 2000