The Globalized Knowledge Economy: risks

1
The Globalized Knowledge Economy risks
opportunitiesCERAM- International Workshop
January 8-12, 2008

• Michel Henry Bouchet
• Glob_at_l Finance Center

2
What is the Knowledge Economy?What is
Globalization?What is the Globalized Knowledge
Economy?
3
What is the Knowledge Economy?

• An economy whose growth momentum and competitive
  advantage are driven by dynamic investment in
  intellectual capital and innovative RD, with
  deep structural, institutional and organizational
  implications.

4
The 5 features of the Knowledge Economy

• 3 key factors of production labour physical
  and human capital (scientific knowledge,
  technology, education, training, life-long
  learning)
• Economic growth is driven by the accumulation of
  knowledge (new growth momentum in the 1990s)
• Corporate revolution in the 1980s with NTIC
  facilitator of knowledge creation and sharing in
  innovative societies
• Rapid rise in innovation-led productivity since
  the 1980s (services industry)
• RD-driven competition between countries and
  between companies Intellectual capital is a
  growing firm's source of competitive advantage
• Macroeconomic transformation rising share of
  services in countries GDP (72 in OECD)
• The rising role of intellectual capital has deep
  institutionnal and organizational implications in
  modern societies

5
What is Globalization all about?

• Stage of capitalist development where
  market-based and profit-oriented forces prevail
  in almost every production and exchange of goods
  and services worldwide

6
Who coined the term Globalization?

• Theodore Levitt (1925-2006) former profesor at
  Harvard Business School (1983)
•  Globalization involves the change in technology
  and social behavior that allows MNCs to sell the
  same products worldwide under global brands 

7
Marxist approach to economic development

• 1848 The capitalist economic system is
  doomed to become worldwide in its never-ending
  struggle to increase the rate of profit under the
  pressure of competition

8
Globalization is an endeavor that can spread
worldwide the values of freedom and civil contact
the antithesis of terrorism!.
Alan
GreenspanGlobalization, like the telephone, is
both a blessing and a curseGlobalization is like
a giant wave that can either capsize nations or
carry them forward on its crest J. Stiglitz
9
The  flat world  by Thomas Friedman (2006)

• As the world goes flat, and the dynamics of
  collaboration and exchanges gets stronger and
  stronger, the gap between cultures that have the
  will, the way and the focus to adopt and adapt
  this dynamics and those that do not, will get
  larger and larger.
• How outward is a countrys culture, i.e. open to
  foreign influence and ideas? How well does it
   glocalize ?
• How inward is the culture, i.e., is there a sense
  of national solidarity and identity, and to what
  extent the elites focus on long-term sustainable
  development?

10
General Colin Powell on Globalization (2000)

• There is no point in being  for  or  against 
  globalization. Like the weather, it is just
  there!
• One should concentrate on how to live with it,
  maximize its benefits, and minimize its cost! 

11
 Globalization is a threat for France and for
the French people 
Sondages CSA-Challenges 12/2005 et Eurobaromètre
2006 et mai 2007
12
The 4 prerequisites of Globalization

• Sharp increase in productivity (1850 industrial
  revolution)
• Economic and trade liberalization (1960 trade
  openness)
• Technological progress in NTIC (1980-90)
  reduction in transaction costs
• Keen competition for market shares and profits
  shareholder pressure for wealth maximization
• responsiveness revolution
• Premium on competitiveness and flexibility

13
Marked acceleration of productivity economic
take-off
1850 Industrial revolution
Source R. Lucas
14
The Prerequisites to Globalization Population,
Productivity and Income annual growth rates
15
Emerging Globalization
16
Technological Innovation Cycles
Genetics ?
Internet
Computers
Aeronautics Transportation
Chemistry Automobile
Electricity Telephone Radio
Steam Engine
1870
1950
1980
1990
2020
1800
1900
17
Cost of a 3-Minute Telephone Call NY-
London (Constant 1990, U.S. )
0.30
18
Number of years for mass-access (50 million
people market)
19
Measuring Globalization?

• How much  global  is the global economy?
• Globalization should not be taken for granted
• Trend, threshold or ideology?

20
Global trade indexXGS/GDP
16140/51500
31
26
20
12
5
IMF/WEO 2007
21
Trade openness ratio (XM/GDP)
Brazil 24 India 20
22
Globalization Index The Top 20 /62

• 1. Singapore
• 2. Ireland
• 3. Switzerland
• 4. US
• 5. Netherlands
• 6. Canada
• 7. Denmark
• 8. Sweden
• 9. Austria
• 10. Finland
• 11. New Zealand
• 12. UK

• 13. Australia
• 14. Norway
• 15. Czech Rep.
• 16. Croatia
• 17. Israel
• 18. France
• 19. Malaysia
• 20. Slovenia
• 52. Russia
• 54. China
• 62. Iran

ATKearney
23
The 7 deadly sins of Globalization?

• 1. Triumph of Flows vs Stocks
• 2. Volatility Spill-over effect
• 3. Digital divide
• 4. Wealth gap
• 5. Capital concentration
• 6. Markets versus nation-states
• 7. The challenge of global regulation

24
1. The triumph of Flows vs Stocks

• The overwhelming supremacy of cross-border
  transactions
• what gets value is what is traded

25
? GDP and Global Trade

(p) IMF
IMF/WEO 07
26
Discrepancy between growing financial flows vs
real output

• Total daily FX transactions US3200 billion 20
  times worth the daily underlying production of
  goods and services.
• Total world official reserves
• Destabilizing speculation ex. oil trading (one
  physical barrel gives rise to 5 to 7 financial
  barrel transactions)
• Private capital puts profits before people
• Capital is both smart and coward risk-aversion!

27
Hedge Funds

• 6000 hedge funds
• US1300 billion of assets (twice Belgiums GNP)
• 25 anual growth rate over the last ten years
• LTCM lost 1.8 billion in 1998 after borrowing
  50 times its equity capital!
• Calperss investment fund 135 billion (it
  decided to pull out of 12 EMCs in 2003)

28
Hedge Funds Assets
US billion
Around 10,000 hedge funds manage close to US1700
billion
29
The overwhelming supremacy of Finance over the
 real  economy
In US billion
400 of GDP
Source IMF/2007
30
2. Volatility Spill-over effect

Trade and financial liberalization (current
capital accounts) increases vulnerability to
exogenous shocks and crisis contamination

31
Globalization Rising volatility?

• Why has volatility risen so much since the
  1970s-80s?
• sharp increase in worldwide inflation that
  followed the oil shocks
• poor monetary and fiscal policy responses,
  following the end of the Bretton Woods agreements
• global deregulation and liberalization of
  financial markets and capital flows
• rapid spread of NTIC

32
Long-term trend in bond and stock return
volatilities
Source BIS 2006
33
Evolution of Euro- LIBOR
34
Evolution in Gold Price
Afghan crisis
Koweit crisis
Iraq crisis
Asian crisis
Kippour crisis
35
Brent Oil Price in US/barrel
36
3. The Knowledge Societyand the digital divide
37
How many people are online throughout the world?
Source Nua Internet
38
The Knowledge Society
39
Digital divide RD Distribution
85
40
4. Wealth Gap
41
Globalizations impact?

• Globalization, still, tends to widen the gap
  between  rich and poor ,  skilled and
  unskilled ,  mobile and immobile ,  adaptive
  and passive .
• As globalization has broadened the range of the
  market economy worldwide, it has sharply
  increased the ratio of global labour/capital with
  the integration of emerging economies fall of
  the share of total wages in national income and
  surge in the share of profits
• Everyone  wins  but those who hold capital win
  much more than those who earn wages in return for
  their work

Fed. Reserve Bank of Kansas, 2006 Symposium
42
Declining share of wages in the G10 countries
value added

• Higher labour productivity
• Integration of emerging market economies in the
  global production process has doubled the supply
  of active workers!
• Increased international labour mobility and
  rising labour competition
• Offshoring has curtailed the bargaining power of
  unskilled workers in the OECD
• BUT inflation is lower, hence higher real wages

Source BIS 76th annual report 2006
43
Bridging the divide?

• Link between globalization, inequality and
  poverty? Modern technology and economic
  liberalization have not made the poor poorer. But
  globalization has helped make the rich countries
  richer.
• Result growing global inequality and a
  concentration of extreme poverty in the countries
  that have not jumped on to the growth ladder and
  stay on it.
• Rich countries have failed to give the poor the
  technical, financial and institutional assistance
  as well as market access they need.

44
Global economic divide GDP
150 countries 48
30 countries 52
Source FMI 2007
45
Regional shares of global GDP in ppp
160 countries
Source FMI/2007
46
GLOBAL GDP DISTRIBUTION
52 of global GDP
47
Share in GDP, trade and population
Source IMF/WEO
48
Globalisation Income Divergence(GDP per capita
in 1990 000s)
49
Source R. Lucas
50
Taking off? (US-PIB per capita)
OCDE-2007
51
The BRICs catch up process
Goldman Sachs 2007
52
How rich is China?

• Until recently, China had never participated in
  the careful price surveys needed to convert
  accurately its gross domestic product into PPP
  dollars. China has repeatedly raised the prices
  of food, housing, healthcare and a range of other
  non-traded goods and services. These reforms
  should have lowered the PPP adjustment.
• 2007 new, more accurate ADB statistics
  describing a smaller, poorer China and India. PPP
  adjustments affect poverty measures because the
  World Bank's dollar-a-day poverty line is a PPP
  dollar poverty line.
• Reducing PPP consumption estimates drops large
  numbers of additional households below the
  poverty line. For China, the number is likely
  more than 500m.
• China's economy is smaller and poorer than
  established estimates say. China's economy turns
  out to be 40 per cent smaller than previously
  stated. This more accurate picture of China
  clarifies why Beijing concentrates so heavily on
  domestic priorities such as growth, public
  investment, pollution control and poverty
  reduction. .

53
30 OECD
160 EMCs
54
Source IMF
55
Unequal rise in life expectancy
56
The poorest countries 5 of world population

• 1980
• ETHIOPIA
• TANZANIA
• BHUTAN
• BANGLADESH
• YEMEN
• MOZAMBIQUE
• CHAD
• MALAWI
• LAOS
• VIETNAM

• 2005
• SIERRA LEONE
• ETHIOPIA
• TANZANIA
• CONGO (DEM. REP.)
• BURUNDI
• YEMEN
• MALAWI
• MALI
• RWANDA
• NIGER
• NIGERIA

Residents of poorest countries experienced almost
no real income growth during 1980-2000! 80 years
of income growth needed for 10 increase.
Meanwhile, the rich are getting richer!
57
Stubborn world poverty
of population
2,71 billion
2,74 billion
1,22 billion
1,1 billion
58
5. Bigger Better? Capital concentration and
eroding competition...

• What constrains companies in their endless quest
  for profits is not governments but market
  competition

59
Global MAs 1990-2007 (in US billion)
60
The most Global Companies
61
Worldwide corporate Giants

• General Electric
• Microsoft
• Exxon/Mobil
• Pfizer
• Citigroup
• Wal-Mart
• Intel
• BP
• HSBC
• IBM
• Toyota
• Coca Cola
• Bank of America
• Royal/Dutch Shell
• General Motors
• Ford Motors
• Total/Fina

• The 100 largest international companies comprise
  6 million employees outside their country of
  origin and generate 2100 billion of turnover!

62
Global Company

• Largest private corporation on the planet (after
  Exxon)
• 2006 sales 345 billion
• Objective to double sales within five years!

• 33 of Canadas GDP
• 100 x Argentinas GDP
• 130 x Polands GDP
• 2 x Thailands GDP
• 7 x Moroccos GDP
• 26 x Tanzanias GDP

63
Nationality Breakdown of 500 Largest MNCs
worldwide
Fortune/07-2000
64
6. Government groveling to Big Business the
dictatorship of ratings

• Globalization rates and ranks nations like any
  private business according to market-based
  principles of openness and efficiency
• The nation-state is no longer the deciding
  economic agent!

65
World Bank Doing business in 2007

• 7 criteria
• 145 countries
• New company creation employment procedure
  company registration financing mobilization
  investment protection contract enforcement
  liquidation.
• 3 days to set up a company in Canada vs 12 days
  in New Zealand and 52 in Slovakia and 153 in
  Mozambique

66
World Bank Doing Business in 2007

• Singapore
• New Zealand
• USA
• Canada
• HK
• UK
• Denmark
• Australa
• Norway
• 11. Japan
• 21. Germany
• 35. France (44 en 2006)
• 39. Spain
• 93. China
• 96. Russia
• 121. Brazil
• 134. India
• 171. RDC

The ranking does not take into consideration the
macroeconomic framework nor organized crime
67
Economic Freedom Rating/Fraser Institute 2007

• Hongkong
• Singapore
• New Zealand
• Switzerland
• US
• Ireland
• UK
• Canada
• Iceland
• Luxembourg
• Australia
• Austria
• Estonia
• Finland
• Netherland

• 20. Chile
• 24. France
• 30. Spain
• 35. Korea
• 45. Italy
• 60. Mexico
• 60. Thailand
• 83. Indonesia
• 88. Brazil
• 95. China
• 102. Russia
• 124. Algeria
• 126. Venezuela
• 130. Zimbabwe

68
World Economic Forum competitiveness ranking

• The Global Competitiveness Report, which examines
  the growth prospects of 80 countries, remains the
  most up-to-date and comprehensive data source
  available on the comparative strengths and
  weaknesses of leading economies of the world.
• Countries in The Global Competitiveness Report
  are ranked by the Growth Competitiveness Index
  (GCI) (GCI Rankings) and the Microeconomic
  Competitiveness Index (MICI) (MICI Rankings),
  which combined encapsulate the relative strengths
  and weaknesses of growth within each economy.

69
Davos-WEF 2007 Competitiveness Index
70
Davos-WEF 2007 Competitiveness Index of EMCs

• Thailand 38
• China 57
• Mexico 58
• Russia 62
• Brazil 66
• Vietnam 77
• Venezuela 88
• Pakistan 91

• Bolivia 97
• Nigeria 101
• Cambodia 103
• Paraguay 106
• Cameroon 108
• Zimbabwe 119
• Ethiopia 120
• Angola 125

71
IMD Criteria

• Over 300 competitiveness criteria are selected.

72
IMD 2007 Competitiveness Index

• 1. USA
• 2. Singapore
• 3. HK
• 3. Luxembourg
• 4. Denmark
• 5. Switzerland
• 15. China
• 16. Germany
• 20. UK
• 24. Japan
• 26. Chile

• 27. India
• 28. France
• 29. Korea
• 30. Spain
• 33. Thailand
• 35. Hungary
• 38. Colombia
• 43. Russia
• 44. Romania
• 47. Mexico
• 55. Venezuela

BEST
73
7. Market forces crowding out the state

• Is the State doomed to death given the challenge
  of free-market forces and transnational flows?

74
Shrinking role from key actor to facilitator

• End of the monopoly position of the State, as
• guardian of national security end of
  bipolarity and cold war
• provider of information Internet
• main economic driving force in growth and
  development economic liberalization
• main employer provider of public services
  privatization
• deciding agent in economic policy issues
  caught between market forces and the IFIs
  guidance

75
Worldwide privatisation operations
76
 Washington Neoliberal Consensus  One size
fits all!

• Trade Financial liberalization Floating
  exchange rates Macroeconomic stabilization
  Minimum government intervention
• Governments are bypassed by market forces and
  under the control of regional and international
  organizations

77
Washington Consensus Ten rule of sustainable
market-economic developmentJohn Williamson (IIE
1990)

• Fiscal discipline
• A redirection of public expenditure priorities
  toward fields offering both high economic returns
  and the potential to improve income distribution,
  such as primary health care, primary education,
  and infrastructure
• Tax reform (to lower marginal rates and broaden
  the tax base)
• Interest rate liberalization
• A competitive exchange rate
• Trade liberalization
• Liberalization of inflows of foreign direct
  investment
• Privatization
• Deregulation (to abolish barriers to entry and
  exit)
• Secure property rights

78
International financial regulation

• BIS (1933) Cooke Committee for international
  regulation
• Bretton Woods Institutions (1944) IMF and World
  Bank
• OECD (1961)
• IIF (1983)
• G7 G10 G24
• IOSCO (International organization for securities)
• IAS (International accounting standards)
• Financial Action Task Force

79
Conclusion Is there an alternative to
neoliberalism?
Can a different form of globalization be planned?
With what goals and what mechanisms of
regulation? How to improve the legitimacy,
transparency and democracy of IFIs? How to
promote global ethics?
80
Royal Dutch Shell/Global Scenarios to 2025

• Challenge of a globalising, deregulated,
  market-centric world
• TINA There Is No Alternative to increasing
  globalisation, the onrush of new technology and
  market liberalisation
• Dilemma balancing efficiency/social cohesion
  justice/ security?
• Continuous challenge of established authorities
  coupled with shrinking power but new role of the
  state
• New challenges (9/11 Enron) Terrorism,
  insecurity, distrust
• New emphasis on transparency, regulation,
  disclosure and good governance
• 3 Scenarios
• Market-centric, state-centric or society-centric
  world?

81
Alternative to neoliberalism? YesAlternative to
Globalization? No! (short of a systemic crisis,
a meteorite-driven mass extinction or a nuclear
war)
Paradox Capitalist model enjoys a worldwide
supremacy while it faces a major legitimacy
challenge
82

First level the  Lula approach 

• Globalization requires strong global institutions
  to represent the civil society and give a voice
  to those who have none (better transparency,
  bigger voice to LDCs, enhanced involvement of
  NGOs)
•  global economic governance  of the 2002 UN
  Monterrey Conference

83
Second level the  Mike Moores approach The
voice of NGOs and militant pressure groups to
meet the challenge of the global market!
Porto Alegre, Oxfam, Jubilee 2000 for debt
forgiveness The lack of concern about global
poverty, the environment, governance and
democracy are a matter of values.
84
Third level Enhanced role of the civil society
for sustainable development

• Ethics-driven consumption (coffee, cocoa,
  clothes) and ethical investing
• environment-oriented investment
• socially-responsible investment
• governance-based portfolio management (Calpers,
  Malongo, NGO Max Havelaar and its ethics charter)
• Values matter!