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

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

• by Can Erbil
• Brandeis University and EcoMod

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Definition of globalization

• Integration of world economies (ORourke
  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).

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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 (ORW)
• Trade creating forces should change domestic
  commodity prices.
• The change in prices should change resource
  allocation between economic activities.

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When did globalization begin?

• OR 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)

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OR Ws 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.

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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.

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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.
• OR 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).
•  

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Coincidence of the take-off and the starting date
of globalization

• -Technology, values, politics and economic
  institutions

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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.

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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.

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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

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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

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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

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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
• doesnt provide a good sense of priorities

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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

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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)

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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

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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).

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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

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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

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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.

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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.

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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

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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)

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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.

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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.

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Where are we today regarding globalization?
(continued)

• However, since the Fall of 2001, the worlds
  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.

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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)

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What else could be done? (contd)

• 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

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Not everybody agrees!

• Sachs Institutions Dont Rule (2002)
• ? geography is more important
• ? malaria risk
• ? But then, policy implications dont matter a
  whole lot (not much one can do about geography).

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Partial association between income and distance
from equator(Source Rodrik)
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Partial association between income and quality of
institutions (Source Rodrik)
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Partial association between income and trade
(Source Rodrik)
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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,.
• ORouke, 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. 

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References

• Sachs, Jeffery, Institutions Dont 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