Managing Globalization

1. Managing Globalization Doha, Qatar November, 2005 Joseph E. Stiglitz Columbia University New York

2. 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

3. 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

4. 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

5. 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

6. Elsewhere, Globalization Has Not Gone So Well… • Decline in real incomes in Africa • Stagnation in Middle East • Failures in Latin America • 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

7. 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

8. The Real Problem… • A particular view of the market economy was pushed • Which did not even describe U.S. economy • 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

9. 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

10. 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 life-saving 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’

11. 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

12. The Changing Global Landscape: Rise of China and India • Enormously rapid growth • Their integration into the global economy is ushering change of historic proportions • 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

13. Competitionfrom 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

14. 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

15. Increasing Role of Asia in theGlobal 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

16. 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

17. China Being Blamed for U.S. Trade Deficit… • But problem lies in the U.S. macro-economic 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

18. 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 • 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

19. Why American Economists Are Worried About the U.S. Economy • 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 • 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: • High level of household indebtedness • 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 • If interest rates rise, can consumption be sustained?

20. 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

21. The Puzzle of High Oil Price • Oil prices soar • Yet investments in alternative energies, conservation have not

22. Rising Oil Price Since 2003

23. Long Term Trends in Oil Price Source: U.S. Energy Information Administration

24. Futures: High Oil Price is Here to Stay?

25. 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?

26. 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

27. 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 pre-invasion 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

28. Dwindling Spare Production Capacity

29. And the Demand for Oil is Growing, Albeit at a Slower Rate

30. 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

31. 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

32. 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

33. 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 • Transparency • Stabilization funds? • The design of auctions • Design of contracts • Resource curse is not inevitable - some countries have managed their resources well • Botswana • Malaysia

34. 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

35. 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

36. 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?

37. 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 • 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

38. 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?

39. 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?

40. Environmental Issues • Global Warming • 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.

41. 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

42. 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

43. 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

44. 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