Dec.

04

Globalisation: Myths and Realities Leonardo Iacovone

CONTENT OF THE LECTURE

1. Definition and clarification 2. Is globalisation today really new? 3. What WTO really is? 4. Impact on the world: global inequality and global poverty? 5. Impact on developing countries: growth, poverty, inequality? 6. Impact on developed countries: unemployment?

Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

1. DEFINITION AND CLARIFICATION 1. Various elements to be considered and need to be distinguished 1. Increased flows of services and goods 2. Increased flows of capital 3. Increased interdependence

2. Various determinants: 1. Reduction of trade barriers VERY IMPORTANT 2. Reduction transport costs (communication, information, etc.) LESS MARKED FOR OCEAN FREIGHT THAN AIR FREIGHT VERY STRONG FOR COMMUNICATION/INFORMATION COSTS 3. Removal of non-tariff barriers: DEEPER INTEGRATION

Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

2. IS GLOBALISATION TODAY REALLY NEW? 3. Various scholars argue that this is not the case: Zevin 19921 believes that while financial markets have certainly tended toward greater openness since the end of the Second World War, they have reached a degree of integration that is neither dramatic nor unprecedented in the larger historical context of several centuries. Sachs and Warner (1995) argue that the re-emergence of a global, capitalist market economy since 1950, and especially since the mid-1980s, in an important sense reestablishes the global market economy that had existed one hundred years earlier Rodrik (1998) concludes that in many ways, todays world falls far short of the level of economic integration reached at the height of the gold standard

Cited by Bordo Irwin Eichengreen p.2

Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

Information Rules: A Strategic Guide to the Network Economy Varian2

Carl Shapiro Hal R.

As the century closed, the world became smaller. The public rapidly gained access to new and dramatically faster communication technologies. Entrepreneurs, able to draw on unprecedented scale economies, built vast empires. Great fortunes were made. The government demanded that these powerful new monopolists be held accountable under antitrust law. Every day brought forth new technological advances to which the old business models seemed no longer to apply. Yet, somehow, the basic laws of economics asserted themselves. Those who mastered these laws survived in the new environment. Those who did not, failed. A prophecy for the next decade? No. You have just read a description of what happened a hundred years ago when the 20th-century industrial giants emerged. Using the infrastructure of the emerging electricity and telephone networks, these industrialists transformed the U.S. economy, just as today's Silicon Valley entrepreneurs are drawing on computer and communications infrastructure to transform the world's economy.

Information Rules

Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

Shares of trade to GNP have risen over the last 50 years but from low base of 1930s and are only just now passing 19th C levels
Table 1: Merchandise exports as a percentage of GDP (Source: Bairoch, 1996)

Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

Low tariffs are an important feature of the present globalisations wave (not really of the previous one!)
Table 2: Average Tariffs on Manufactured Goods (Source: 1989, 1993)

Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

IMPORTANCE OF FDI AND MULTINATIONALS DESERVE SPECIAL ATTENTION

DATA from UNCTAD WIR 2002
FDI inflow FDI outflow FDI inward stock FDI outwd stock X-border M&As Foreign affiliates (FA) Sales * Gross production of FAs * Total assets of FAs* FA exports* Memorandum GDP at factor cost GFCF Royalties # Exports # (Gds & Services) 1982 59 28 734 552 2541 594 1959 670 17987 2285 9 2081 Current $Bns 1990 202 233 1874 1721 151 5479 1423 5759 1169 21672 4841 27 4375 2001 735 621 6846 6582 601 18517 3495 24952 2600 31900 6680 73 7430

For full explanation see WIR 2002, Table 1.1 available at http://www.unctad.org/en/docs/wir00ove.en.pdf FA = Foreign Affiliates GFCF= Gross Fixed capital formation, ie investment *These data are estimates using a regression based on investment stock data # actual data.

Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

What do the UNCTAD data really show? Sales by foreign affiliates are twice direct exports Sales by foreign affiliates are not same as multinational production. Gross product of foreign affiliates (FA) is about 20% of Foreign Affiliate sales. So sales include local production and re-sold purchases most of which will be intra-firm exports to sales affiliates. However FDI is ONLY about 8% of total Gross Fixed Capital Formation on average.BUT THIS VARIES A LOT (In 1995 it was 6.8% for EU, 7.7% for US, 20% for Canada, 6.9% for overall Africa but 50% for Nigeria and 25% for Swaziland, 18.4% for Latin America overall, and in Asia 52% for Malaysia, 2% India, 23% Hong Kong, 18% China, 7.3% Taiwan)

Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

What is REALLY new? QUALITATIVE DIFFERENCES AND TECHNOLOGY Transport costs but even more communication costs are dramatically different (but not necessarily their relative change) Tariffs Technology transfer costs are all falling

Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

3. WHAT WTO REALLY IS?

Political importance of trade and integration: After 1945 people believed if goods NOT FREE TRADE BUT RULES BASED TRADE: Establishes what measures to
restrict trace are allowed. Countries schedule their maximum tariffs and which service sectors they agree to open. If they do not keep these promises other members can challenge SAFEGUARDS ALLOWED: WTO rules also allow broad class of exceptions and define principles for evaluating primarily domestic regulations dont cross frontiers soldiers will THE CASE OF EU

A DEFENSE AGAINST ABSOLUTE POWER OF STRONGER NATIONS: o Largest class of cases brought at WTO are challenges to United States anti-dumping
actions against NICs and US typically loses o Main complaint of developing countries now is that enforcement of WTO rules against EU & US shd be tougher o HOWEVER RULES COULD BE IMPROVED: See Oxfams report Rigged Rules and Double Standards but we have positive examples like the recent cases of sugar and cotton disputes: Brazil triumphant over US and EU
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Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

4. IMPACT ON THE WORLD: GLOBAL INEQUALITY?

Brad de Long observes: 200 years ago maximum difference between peasants world wide was 2:1 - This widened hugely till 1975 and now due to India and China is shrinking Sala i Martin argues that The across-country reductions in inequality are driven mainly, but not fully, by the large growth rate of the incomes of the 1.2 billion Chinese citizens. BUT If China and India [2bn people] continue to grow over the next 50 years and the incomes of the 700 million Africans remain stagnant, world income inequalities will start rising again.

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Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

Table 3: GDP per capita by region 1820-1998 (Source: Maddison, 2001)

Western Europe Western Offshoots (1) Japan Asia (excluding Japan) Latin America Eastern Europe and Former USSR Africa World Africa vs Leaders Asia (EJ) vs leaders

1820 1,232 1,201 669 575 665 667 418 667 03:01 1.38

1870 1,974 2,431 737 543 698 917 444 867 05:01 4.48

1913 3,473 5,257 1,387 640 1,511 1,501 585 1,510 09:01 8.21

1950 4,594 9,288 1,926 635 2,554 2,601 852 2,114 15:01 14.63

1973 11,534 16,172 11,439 1,231 4,531 5,729 1,365 4,104 13:01 13.14

1998 17,921 26,146 20,413 2,936 5,795 4,354 1,368 5,709 19:01 8.91

Notes: (1)Western offshoots includes Canada, US, Australia and New Zealand. (2Inter-regional spread is the ratio of the highest income to the lowest income for that year. For 1820, this is the ratio of Western Europe to Africa; for the remaining years, Western Offshoots to Africa.

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Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

Summary What has happened to global inequality in the last 20 years? -a) between countries: weighted inequality fell due to China and India. -b) between people across the whole world Most studies suggest improvement - due to China & India

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Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

What has happened to global poverty? Barro summarises Sala-i-Martin: The number of people in extreme poverty -- below the $1-a-day standard -- fell from 550 million, or 17 per cent of the world's population in 1970, to 350 million, or 6.7 per cent of the population at the end of the 1990s. For the $2-a-day standard, the decline was from 1.3 billion people, or 41 per cent of the population, to 970 million, or 19 per cent of the population. Thus, the past 30 years have seen a dramatic decline in world poverty Africa is the issue: At the end of the 1990s, 66 per cent of those with incomes below $1 a day resided in sub-Saharan Africa. In 1970, this fraction was only 11 per cent. At the $2-a-day level, the comparable figures are 38 per cent and 11 per cent. http://www.networkideas.org/feathm/aug02/feathm21_More_Papers.htm
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Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

5. IMPACT ON DEVELOPING COUNTRIES: GROWTH, POVERTY, INEQUALITY? Identify the causal linkages between globalisation and growth is not uncontroversial: correlation DOES not mean causality! Reliable historical analysis argue that: o Pre-WWI (between 1875-1914) the relationships appear to be positive! (Bairoch, 1993; ORourke, 2000; Clemens and Williamson, 2002) o However it appears that the relationships reversed in the post-WWII (Clemens and Williamson, 2002) - EXPLANATION: importance of reciprocal liberalisation (role of GATT/WTO!) o Economic historians tend to raise the importance of gradual openness and openness after having developed domestic capacities (e.g. East Asian Miracle) o BUT other historical examples show the importance of trade in the process of growth: (1) Europe-China divergence starting in XIIX century (Pomeranz, 2000); (2) Importance of trade for Japans growth in post-Meiji period (Lockwood, 1954)

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Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

In the 90s a very strong debate on the causal linkage between globalisation and growth has emerged o Positive view: Sachs and Warner (1995): Openness has a positive effect on growth Frankel and Romer (1999): 1% higher trade share raises income per capita by 2%...abd the biggest channel is through productivity o Skeptical view: Rodrguez and Rodrik (2000): Many econometric problems affect the optimistic results and isolating trade policies was not done correctly! o What can we conclude? International integration has sizable effect on economic growth. Integration unleashes forces of convergence on the one hand and forces of divergence on the other (Helpmann, 2004) There is no evidence that in the post-WWII era that protection lead to higher growth.HOWEVER:
It is hard to disentangle all the channels through which trade affect growth and some of these channels are dependent upon: institutional, historical, technological factors and not trade policies onlyTHEREFORE it might be more productive to look for contingent relationships between trade policy and growth (Rodrguez and Rodrik, 2000)
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Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

6. IMPACT ON DEVELOPED COUNTRIES Is unemployment due to imports from low wage countries? If so could trade barriers help? Krugman et al. note external trade of the EU and USA is about 10% of GNP (imports+exports/2) Low wage trade is about 1% of French GNP Competition from low wage imports cannot account for unemployment of 10+% Most studies find impact of technical change greater - need for new IT skills etc. Only A. Wood says tech. change driven by low wage competition but even he says protection cannot be answer As poor countries grow they mostly run deficits increase demand at same pace as they sell more Composition alters but mostly their imports are things EU & US is well placed to sell. If competitiveness problem exists solution is to promote growth of productivity not restrict growth and trade elsewhere
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Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

EXTRA references on Globalisation and inequality Many more also at: http://www.networkideas.org/feathm/aug2002/ft21_More_Papers.htm F.Rodriguez & D.Rodrik Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-national Evidence NBER 2000 http://papers.nber.org/papers/w7081 David Dollar and Aart Kraay Spreading the Wealth ForeignAffairs, January/February 2002 Andrew Wells-Dang Having It Both Ways Foreign Affairs, July/August 2002 James K. Galbraith By the Numbers Foreign Affairs, July/August 2002 http://www.foreignaffairs.org/ From Marc Lee The global Divide http://www.policyalternatives.ca/publications/btn4-2.pdf A.Maddison The World Economy: a Millennial Perspective, OECD (2001), Xavier Sala-i-Martin The Disturbing Rise of Global Income Inequality http://papers.nber.org/papers/W8904 R. Barro The Bad news on poverty http://www.networkideas.org/feathm/aug02/feathm21_More_Papers.htm Danny Quah Some Simple Arithmetic on How Income Inequality and Economic Growth Matter http://econ.lse.ac.uk/staff/dquah/currmnu1.html Human Development Reports hdr.undp.org/reports/global/1999/en/
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Dec. 04

Globalisation: Myths and Realities Leonardo Iacovone

Branko Milanovic World Inequality in the Second Half of the 20th Century (2001) http://www.worldbank.org/wbi/B-SPAN/sub_branko.htm see critique Sanjay G. Reddy and Thomas W. Pogge How Not To Count The Poor Sanjay G. Reddy and Thomas W. Pogge http://www.columbia.edu/~sr793/count.pdf and press interview with Rodrik on SiM vs Milanovic http://www.cid.harvard.edu/cidinthenews/articles/Globe_010503.html Sachs and Warner (1995). Economic Reform and the Process of Global Integration. Brookings Papers on Economic Activity, Vol.1, p.1-118 Frankel and Romer (1996). Trade and Growth: An empirical investigation http://papers.nber.org/papers/w5476 Bairoch (1993). Economics and World History. Chicago: University of Chicago Press ORourke (2000). Tariffs and Growth in the Late 19th Century. Economic Journal 110, p. 456-483 Clemens and Williamson (2002). Why Did the Tariff-Growth Correlation Reverse after 1950? http://papers.nber.org/papers/w9181 Pomeranz (2000). The Great Divergence. Princeton: Princeton University Press Lockwood (1954). The Economic Development of Japan: Growth and Structural Change, 1868-1938. Princeton: Princeton University Press

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