Globalization Gobbledigook: Sid Harth
bademiyansubhanallah
http://yaleglobal.yale.edu/display.article?id=12327
The global financial crisis that has devastated the world economy has
spawned a growing literature on its causes. In part one of our two-
part series, World Bank economist and Carnegie Endowment scholar
Branko Milanovic argues that while analysts can quibble over the
contributing factors to the financial meltdown, a deeper, more
fundamental problem was the real cause: income inequality. Growing
income inequality led to an abundance of investable funds searching
for superior returns, which ultimately could only be achieved through
riskier investments. But this only tells part of the story. That real
income of the middle class has not risen over the past twenty years
created a massive political problem: wealth redistribution. The
solution came in the form of easier credit, which allowed the middle
class, if not to save like the wealthy, at least to spend like them.
But had there been less inequality would the outcome have been any
different? As Milanovic notes, the middle class have higher priorities
than excess investment returns, so there would have been less money
chasing riskier assets. This would ultimately have led to more stable
development. – YaleGlobal
Two Views on the Cause of the Global Crisis – Part I
Income inequality and speculative investment by the rich and poor in
America led to the financial meltdown
Branko Milanovic
YaleGlobal, 4 May 2009
Grounded: American middle class, with stagnating income, now has to
bear the debt burden brought about by the income gap
WASHINGTON: The current financial crisis is generally blamed on
feckless bankers, financial deregulation, crony capitalism and the
like. While all of these elements may be true, this purely financial
explanation of the crisis overlooks its fundamental reasons. They lie
in the real sector, and more exactly in the distribution of income
across individuals and social classes. Deregulation, by helping
irresponsible behavior, just exacerbated the crisis; it did not create
it.
To go to the origins of the crisis, one needs to go to rising income
inequality within practically all countries in the world, and the
United States in particular, over the last thirty years. In the United
States, the top 1 percent of the population doubled its share in
national income from around 8 percent in the mid-1970s to almost 16
percent in the early 2000s. That eerily replicated the situation that
existed just prior to the crash of 1929, when the top 1 percent share
reached its previous high watermark American income inequality over
the last hundred years thus basically charted a gigantic U, going down
from its 1929 peak all the way to the late 1970s, and then rising
again for thirty years.
What did the increase mean? Such enormous wealth could not be used for
consumption only. There is a limit to the number of Dom Pérignons and
Armani suits one can drink or wear. And, of course, it was not
reasonable either to “invest” solely in conspicuous consumption when
wealth could be further increased by judicious investment. So, a huge
pool of available financial capital—the product of increased income
inequality—went in search of profitable opportunities into which to
invest.
But the richest people and the hundreds of thousands somewhat less
rich, could not invest the money themselves. They needed
intermediaries, the financial sector. Overwhelmed with such an amount
of funds, and short of good opportunities to invest the capital as
well as enticed by large fees attending each transaction, the
financial sector became more and more reckless, basically throwing
money at anyone who would take it. While one cannot prove that
investible resources eventually exceeded the number of safe and
profitable investment opportunities (since nobody knows a priori how
many and where there are good investment opportunities), this is
strongly suggested by the increasing riskiness of investments that the
financiers had to undertake.
But this is only one part of the equation: how and why large amounts
of investable money went in a search of a return on that money. The
second part of the equation explains who borrowed that money. There
again we go back to the rising inequality. The increased wealth at the
top was combined with an absence of real economic growth in the
middle. Real median wage in the United States has been stagnant for
twenty five years, despite an almost doubling of GDP per capita. About
one-half of all real income gains between 1976 and 2006 accrued to the
richest 5 percent of households. The new “gilded age” was
understandably not very popular among the middle classes that saw
their purchasing power not budge for years. Middle class income
stagnation became a recurrent theme in the American political life,
and an insoluble political problem for both Democrats and Republicans.
Politicians obviously had an interest to make their constituents happy
for otherwise they may not vote for them. Yet they could not just
raise their wages. A way to make it seem that the middle class was
earning more than it did was to increase its purchasing power through
broader and more accessible credit. People began to live by
accumulating ever rising debts on their credit cards, taking on more
car debts or higher mortgages. President George W. Bush famously
promised that every American family, implicitly regardless of its
income, will be able to own a home. Thus was born the great American
consumption binge which saw the household debt increase from 48
percent of GDP in the early 1980s to 100 percent of GDP before the
crisis.
The interests of several large groups of people became closely
aligned. High net-worth individuals and the financial sector were, as
we have seen, keen to find new lending opportunities. Politicians were
eager to “solve” the irritable problem of middle class income
stagnation. The middle class and those poorer than them were happy to
see their tight budget constraint removed as if by magic wand, consume
all the fine things purchased by the rich, and partake in the longest
US post World War II economic expansion. Suddenly, the middle class
too felt like the winners.
This is what more than two centuries ago, the great French philosopher
Montesquieu mocked when he described the mechanism used by the
creators of paper money in France (an experiment that eventually
crumbled with a thud): ‘People of Baetica”, wrote Montesquieu, “do you
want to be rich? Imagine that I am very much so, and that you are very
rich also; every morning tell yourself that your fortune has doubled
during the night; and if you have creditors, go pay them with what you
have imagined, and tell them to imagine it in their turn”.
The credit-fueled system was further helped by the ability of the US
to run large current account deficits; that is, to have several
percentage points of its consumption financed by foreigners. The
consumption binge also took the edge off class conflict and maintained
the American dream of a rising tide that lifts all the boats. But it
was not sustainable. Once the middle class began defaulting on its
debts, it collapsed.
We should not focus on the superficial aspects of the crisis, on the
arcane of how “derivatives” work. If “derivatives” they were, they
were the “derivatives” of the model of growth pursued over the last
quarter a century. The root cause of the crisis is not to be found in
hedge funds and bankers who simply behaved with the greed to which
they are accustomed (and for which economists used to praise them).
The real cause of the crisis lies in huge inequalities in income
distribution which generated much larger investable funds than could
be profitably employed. The political problem of insufficient economic
growth of the middle class was then “solved” by opening the floodgates
of the cheap credit. And the opening of the credit floodgates, to
placate the middle class, was needed because in a democratic system,
an excessively unequal model of development cannot coexist with
political stability.
Could it have worked out differently? Yes, without thirty years of
rising inequality, and with the same overall national income, income
of the middle class would have been greater. People with middling
incomes have many more priority needs to satisfy before they become
preoccupied with the best investment opportunities for their excess
money. Thus, the structure of consumption would have been different:
probably more money would have been spent on home-cooked meals than on
restaurants, on near-home vacations than on exotic destinations, on
kids’ clothes than on designer apparel. More equitable development
would have removed the need for the politicians to look around in
order to find palliatives with which to assuage the anger of the
middle-class constituents. In other words, there would have been more
equitable and stable development which would have spared the United
States, and increasingly the world, an unnecessary crisis.
Branko Milanovic is an associate scholar with the Carnegie Endowment
for International Peace and a lead economist in the World Bank's
research department, where he has been working on the topics of income
inequality and globalization.
Rights: © Copyright 2009 Yale Center for the Study of Globalization
Lax regulation may have been the lever that pushed the world into the
present financial crisis, but the fulcrum was the twin excesses of
over-financialization and over-globalization, according to UC Berkeley
economist Ashok Bardhan. In the case of over-financialization,
financial asset bubbles rose to several times the global GDP, leading
to an overheating of the economy. Meanwhile, over-globalization
through global trade imbalances and risky cross-border lending created
the pathway for the financial virus to spread. But there is also a
self-correcting mechanism to these excesses. Global trade is receding
and capital flows are falling thanks to the economic crisis. And
government stimulus packages tend to squeeze out foreign investment
through their focus on domestic growth. But despite this trend, there
are larger issues with which to contend: the conflict between
globalization, free-market principles, democracy, and national policy
independence. All four cannot share center stage, so something will
have to give to return to equilibrium. What that will be remains an
open question for the moment. – YaleGlobal
Two Views on the Cause of the Global Crisis – Part II
The twin excesses – financialization and globalization – caused the
crash
Ashok Bardhan
YaleGlobal, 6 May 2009
Export overload: China's growing dependence on exports introduced an
element of instability in global economy
BERKELEY: In their effort to explain the global crisis analysts have
identified lax regulation and other attributes of the financial system
as the principal culprits. To grasp fully the reason it also needs to
be recognized that this is the first crisis of the modern era of
globalization. If the proximate cause is the “laissez faire” to
“laissez financer” progression in free-market idolatry, leading to
bubbles in asset prices and the subsequent crash, then the
facilitating condition was yet another quasi-bubble – a bubble in
globalization. It may be easier to appreciate the virulence and speed
with which the crisis has spread if we recognize that in addition to
over-financialization domestically, there was perhaps over-
globalization internationally.
While over-globalization was evident in ever-faster trade and capital
flows and increasing off-shoring of production, over-financialization
could be seen in rise in the size of financial assets relative to the
real economy as indicated by gross domestic product. Globally, the
holdings of financial assets, comprising equities, government and
private bonds and bank deposits ballooned way out of proportion to
global GDP, the primary underlying measure of real economic activity
(see Figure 1). Similarly, the gross market value of outstanding
derivative contracts more than doubled between mid-2006 and mid-2008.
The share of financial services in GDP has increased dramatically in
the US and UK in recent years; in the latter it has doubled in the
last decade alone. In many countries, the financial sector grew to a
size disproportionate to its primary raison d'etre - to efficiently
bring savers and borrowers together, allocate savings to viable
investments, and manage diversification of risk. Liquid and deep
financial markets are necessary; indeed, they are the lifeblood of
economic activity, but to extend the analogy, not if they cause high
blood pressure to the economy!
Figure 1. Global Financial Assets to Global GDP Ratio Enlarge image
Globalization too has played its role. A large part of the new trade
volumes generated were a result of diversion from potential
consumption by domestic consumers to consumption by consumers half-way
across the world. There is an ongoing debate in China, for example,
whether the economic wisdom of having nearly a 40 percent share of
exports in GDP has served the developmental goals of the country well.
At least some of the blame for income inequality, lopsided development
and consumption stagnation in the country can be laid at the feet of
the overgrown external sector.
Global imbalances, on which reams have been written, provided the
financing for the insatiable appetite of US and other consumers, met
by the unbounded capacity of China’s manufacturing machine. Footloose
capital ran hither and thither for better returns and ended up in high
risk investments. The US-China globalization axis may have been
critical but by no means was it the only game in town. Reckless
lending by western banks to East European clients drove much of the
importing frenzy in those countries. It was finance that drove and
propelled international trade, in addition to that generated by
underlying patterns of global specialization and competitiveness.
Together with the financial sector, globalization, as we know it –
global trade in goods and services, capital flows and off-shoring of
production – seems destined to decline in the short term. The total
market value of financial assets held worldwide has declined by about
a third, or more than $50 trillion, in 2008 according to a report by
the Asian Development Bank. Container traffic in the world’s busiest
ports is down by more than 20 percent. While trade volumes show
greater volatility than GDP, the figures for the former show a near
precipitous decline relative to the former. The IMF expects global GDP
to decrease by 1.3 percent in 2009, while economists from the World
Trade Organization forecast a 9 percent decline for global trade in
the same year, both the largest drops on record since World War II.
Export volumes are expected to decrease in every major region of the
world. Indeed, double-digit declines in real national variables are so
rare that declines in export volumes of over 30 percent, such as in
the case of Japan, make one wonder about the “bubble-like” nature of
the underlying demand. On the other hand, while Euro area GDP and US
GDP are both expected to contract in 2009, emerging economies are the
one bright spot with a GDP growth forecast of 1.6 percent.
In addition to trade, global financial flows and cross-border
investments are also expected to be adversely affected. The most
dynamic economic region of the world, Emerging Asia, is expected to
attract 40 percent less net private capital flows (which include
portfolio and direct investments) in 2009. It is as if both ships and
funds in search of a safe harbor are docked at home ports.
The prospect of offshoring, that recent offspring of globalization,
presents a mixed picture. While any downturn can only serve to further
intensify the ever-present cost-cutting impulse on the part of
management, the fundamental nature of downsizing and restructuring
underway in the US in key sectors, and the sharp cutbacks in many
parent operations in the financial services sector suggest that even
the seemingly unstoppable phenomenon of offshoring may slow down.
Already, there have been some cutbacks in the number of employees of
offshore call centers.
Increasing interventions by national governments in the economic
management of individual nation-states also tend to slow down the
globalization process. National stimulus packages have a domestic
stance and are inward-oriented, regardless of whether there is an
explicit “buy domestic” provision, since greater reliance on
government spending inevitably leads to less “leakage”
internationally. The mounting job losses, complexity of the financial
crisis, increasing range of conflicting interests, issues of
inequality and fairness, and last, but not least, compulsions of
electoral politics in an increasingly democratic world will all lead
to greater state intervention, curbing the power of the market.
Far too rapid and distorted growth in global economic linkages and the
financial services sector, as well as their mutual feeding off each
other, have brought into sharper focus contradictions facing the
future evolution of the global economy, the resolution of which is
bound to affect globalization. While the future shape of regulatory
reform is being vigorously debated, it is not clear how continued
globalization will be affected in the medium-term by the crisis.
All of this leads us to the following question: can we eat our cake,
have it too, and trade it in on the global markets? Dani Rodrik has
long pointed out the “inescapable trilemma of the world economy,” that
“democracy, national sovereignty and global economic integration are
mutually incompatible.” The present crisis shows that it is actually a
quadrilemma. The international policy establishment must manage and
reconcile simultaneously conflicting pulls and pushes. To begin with
there are the universal free market guiding principles. These operate
in individual nation-states, which are the primary arena of economic
policy. Economic policies, in turn, are largely shaped by a democratic
polity that is apprehensive and insecure about increasing free trade
and international economic integration. It is difficult to see how the
tenuous co-habitation of these four – globalization, free-market
principles, democracy, and national policy independence – can survive
in the present circumstances. Something may have to give way, if just
a little...
Ashok Bardhan is an economist at UC Berkeley.
Rights: ht 2009 Yale Center for the Study of Globalization
...and I am Sid Harth
bademiyansubhanallah
Throughout history, global crises have disrupted trade, immigration
and other activities that connect far corners of the world and promote
wealth. Modern-day governments in wealthy, developed countries had
assumed that their institutions, regulations, stockpiles and systems
would secure against problems emerging elsewhere in the world. “The
acceleration of transport and communication, and reduced barriers to
trade over the past three decades have created wealth at an
unprecedented scale and speed,” writes Nayan Chanda, editor of
YaleGlobal, in his Businessworld column. He points out that the speed
and extent of the reversal is just as shocking. One reason behind the
widespread speed of economic decline is the vertical specialization in
manufactured products, with components coming from all over the world.
“As much of global trade is linked to production chains, pulling the
plug in one location causes shockwaves all around, driving down trade
in a more synchronised manner than it would in a less integrated
world,” Chanda explains. Protectionist measures will disrupt the
global production chain that could restore economic order. –
YaleGlobal
Globalization Disrupted
Resurrecting trade barriers could stifle prospects of recovery that
globalized production promises
Nayan Chanda
Businessworld, 17 March 2009
Is it time to say goodbye to globalisation? Many have already
proclaimed its death, and the current crisis merely marks its
unceremonious burial for them. Watching how the world seems to be
collapsing around us, such a prognosis seems plausible. But from a
historical perspective, the current crisis and the accompanying social
turmoil echo many wrenching readjustments from the past. The only
differences today lie in the scale of the crisis, the speed of change
and its global visibility.
Past disruptions to global integration, whether through the Bubonic
Plague, the Industrial Revolution or the Great Depression, affected
much smaller sections of the planet, and that too at a comparatively
gentle pace. The acceleration of transport and communication, and
reduced barriers to trade over the past three decades have created
wealth at an unprecedented scale and speed. The reversal too has come
at a shocking pace.
Nothing illustrates the speed of the reversal more than the sharp and
synchronised drop in global trade since the crisis erupted last
September. According to the IMF, world trade volumes are expected to
fall by 2.8 per cent this year — the first time in a quarter century
that global trade will decline. The value of China’s exports fell by
18 per cent in January (year-on-year) and Japan’s fell by 47 per cent.
How do we explain this dramatic collapse across the board? The drying
up of credit for exporters, rising unemployment and plunging consumer
demand spawned by the collapse of the financial sectors are easy to
identify as reasons for falling trade.
A less obvious, but perhaps more pertinent explanation for the
rapidity of the collapse is the vertical specialisation of
manufactured products. A recent study, ‘The collapse of global trade,
murky protectionism, and the crisis: Recommendations for the G20’,
suggests that “widespread use of international supply chains” might be
a major factor. Currently, as much as 40 per cent of manufactured
products originate from supply chains spanning continents. Whatever
their ‘made in’ labels may suggest, when a car or a refrigerator or a
television reaches a consumer, it contains parts that have circled the
earth many times at different stages of production. This process has
enabled reduction in production costs and made efficient uses of
manpower and resources in producer countries. The benefits of
industrialisation have spread around the globe. This vertical
specialisation has been possible thanks to the dramatic drop in
transportation and communication costs and tariff barriers. Since the
goods-in-process cross many borders, falling tariffs in particular
have boosted this type of production.
The gains achieved through this process are now revealing their
downside. As the US cuts back on its demand for personal computers,
countries supplying PC components have fewer orders to fill. When
they, in turn, stop importing processing chip or other US-supplied
parts, American exports also fall and the impact ripples throughout
the supply chain. As much of global trade is linked to production
chains, pulling the plug in one location causes shockwaves all around,
driving down trade in a more synchronised manner than it would in a
less integrated world.
One effect of the supply chain production system is multiple counting
of the components and semi-assembled products as they repeatedly cross
borders. An imported transmission in a car that is exported is counted
twice in trade statistics: once as an export component and once as an
import, embedded in the car. The synchronised drop in trade numbers it
has produced tends to magnify the psychological impact of the fall.
As global demand contracts, countries are tempted to protect their
export industries by offering subsidies and raising both tariff and
non-tariff barriers. According to the World Bank, various governments
have proposed or enacted 78 trade restricting measures to protect
domestic industries since the crisis began. Although the impact of
these measures are hard to judge at this point, they are likely to add
to the spiral of contraction. Attempts to protect a country, which is
part of an interlinked production organism, by shutting out others
ultimately risks hurting the very country politicians are seeking to
protect.
In this dismal beggar-thy-neighbour scenario, one can only hope that
countries that benefited from vertically specialised industries will
be careful not to undermine prospects for recovery by resurrecting
trade barriers. Because when the recovery begins, it will be those
very industries who could be in the best position to propel a
synchronised rise in world trade.
Nayan Chanda is director of publications at the Yale Center for the
Study of Globalization and editor of YaleGlobal Online.
Source:
Businessworld
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Even as economists fret about sustaining global economic integration
and politicians in the wealthiest nations make opposition to
globalization a winning campaign theme, the phenomenon continues to
connect the world. Such a dichotomy may not continue for long, warns
economist Mark Thirlwell. Growing alarm in the developed nations stems
from the emergence of powerful competitors in the developing world,
especially China and India: Workers in wealthy nations worry about
open markets and competition from workers in countries with low wages;
industry leaders worry about more competition for non-renewable
resources, including oil, and a new economic world order; and
environmentalists and a growing segment of the public at large worry
that emerging economies and rapid growth will quicken the pace of
climate change. Thirlwell argues that governments trying to restrict
the inevitable process of globalization will only increase competition
and add to their list of challenges. Instead, governments should
pursue a strategy of cooperation, continuing along a path that has
long led to economic prosperity and security. – YaleGlobal
Globalization Was Good Then, Not Now
Wealthy nations grimace about competition, only after emerging
economies follow their advice
Mark Thirlwell
YaleGlobal, 17 September 2007
America first: Globalization brought prosperity to the US, but fears
of a reversal drive protesters to the street
SYDNEY: After reaping benefits from globalization for decades, the
developed world is having second thoughts about its value.
Pollsters in advanced economies report declining public support for
open markets and free trade; politicians increasingly gain more
political mileage by being identified as a globalization skeptic than
globalization booster; and essays fretting over the sustainability of
international economic integration fill the opinion pages of the
world’s leading financial newspapers and international-affairs
journals
Yet at the same time, globalization itself continues apace, as trade
and investment flows surge around the globe, tying national economies
ever closer together and delivering perhaps the strongest period of
growth for the world economy since the Second World War.
Can this dichotomy persist, or will the rich world’s rising
globalization angst be sufficient to send the integration process into
reverse?
Certainly, there are clear signs that the international policy
environment is becoming less globalization-friendly, a development
marking a pronounced reversal in the general trend since the 1980s.
After the failed meeting in Potsdam, the Doha round of international
trade negotiations looks to be on its way from intensive care to the
crematorium. Meanwhile, protectionist sentiment is on the rise in the
US and Western Europe, manifesting itself in public and political
disquiet over offshore outsourcing, foreign investment in sensitive
areas, migration and, in particular, trade with China.
As Washington and Beijing face off over China’s exchange-rate regime
and the ballooning bilateral trade deficit, the US Congress is busy
crafting bills that threaten punitive sanctions, and pundits warn of
the possibility of tit-for-tat trade sanctions. Granted, other forces
still drive economic integration – the effects of technological
innovation and the competitive pressures arising from the emergence of
something that now closely approximates global capitalism both
continue to run at close to full throttle. Nevertheless, the
foundations for globalization are no longer as solid as they once
were.
There are two strikingly new elements to this ongoing re-evaluation of
the costs and benefits of the global economy:
First, it is largely being driven not by the failures of globalization
– for example, a recurrence of the 1997-98 financial crisis – but
instead by its successes, principally the adjustment strains created
by the globalization-powered economic take-off in India and especially
China. Of course, should the global economic environment become
significantly less benign, anti-globalization pressures would likely
become even stronger.
Second, the most heated debate is taking place in the developed world.
Historically, much of the skepticism about the workings of the
international economy came either from developing economies themselves
or from their perspective. Critiques tended to be based on the
assumption that the system operated largely to the unfair advantage of
the rich world and the detriment of the poor, producing calls for a
New International Economic Order in the 1970s and 1980s. Such
criticisms can still be heard today, but they have been muted by the
evident economic success of developing giants like China and India.
Instead, many of the loudest attacks on the consequences of
globalization now come from those countries that were the architects
and builders of the new global economy.
There is a powerful irony here. Policymakers in the developed world
spent years preaching to their developing-country counterparts that
the path to greater prosperity lay in closer integration with world
markets. But when Beijing and New Delhi decided to listen, and
moreover, when that policy advice turned out to be right, many in the
developed world have found themselves increasingly disconcerted by the
results.
Some are now scared by the success of globalization in creating
powerful new competitors in global markets, while others are spooked
by the security implications of the consequent redistribution of
economic power. These critics seem to view unqualified support for
open markets on the part of the developed world as a modern variant on
the old theme of capitalists happily selling the rope to hang
themselves.
A second group of skeptics focuses on the distributional consequences
of globalization. They are ill at ease with a rise in national
inequality that correlates with growing international economic
integration and troubled by the implications of a growing share of
trade with heavily populated, low-income economies like China and
India. Alongside these longstanding concerns about the effects of
international trade, there are new fears that the nature of trade
itself has altered and that the steady expansion of the traded sector
of the economy to encompass more service-sector jobs has somehow
altered the basic rules of the game.
No matter how much mainstream economists argue that the logic of cross-
border exchange still applies or how often government statisticians
point to the relatively low number of jobs currently involved in
offshore outsourcing, the result has been that a new set of workers
feels exposed to the winds of international competition, and is hence
more ambivalent about the case for open markets.
A third set of issues raising rich-world fears relate to natural
resources and the environment. The prospect of intensified competition
for non-renewable natural resources is often seized on by those
searching for a zero-sum counterexample to most economists’
determinedly optimistic view of trade and globalization as positive-
sum games. Fears that the world might run out of resources have been
around since at least the time of Thomas Malthus’s 1798 “Essay on the
Principle of Population,” despite the fact that to date technological
progress and the price mechanism have worked to disprove earlier bouts
of resource pessimism. But the prospect of a sustained boost to
commodity demand, and hence commodity prices, due to the
industrialization and urbanization of the world’s two most populous
economies resurrects some old worries together with forecasts of a
scramble to lock up control of strategic resources in the face of
rising resource nationalism.
Meanwhile, the environmental consequences of feeding the growing
appetites of the Chinese dragon and Indian elephant also make the
developed world jumpy. With global warming now seen as a pressing
policy issue by a growing share of rich-country voters, the role of
both economies as major new polluters receives greater attention. So
while the overall level of carbon in the atmosphere is overwhelmingly
a legacy of the rich world’s own industrialization, the rapid rise of
developing countries on the list of current and future emitters has
not been missed, especially given recent estimates that China has
overtaken the US as the world’s largest emitter of greenhouse gases.
In summary, globalization in general and the rise of China and India
in particular now present the developed world with a series of reasons
to worry. Not all of these fears are shared by the same
constituencies, and it is far from clear that the best policy response
in each case would be to unwind the process of international economic
integration. Even so, the pressure on policymakers to temper or modify
that process is undoubtedly on the rise. For more than two decades
now, much of the world has pursued pro-globalization policies and the
result has been a wealthier and more dynamic global economy. That
globalization-friendly environment is now under threat because the
phenomenon may have succeeded too well for the rich world's comfort.
Mark Thirlwell is director of the international economy program at
Sydney’s Lowy Institute for International Policy. The paper “Second
Thoughts on Globalisation: Can the Developed World Cope With the Rise
of China and India?” is available for download here.
Rights: © 2007 Yale Center for the Study of Globalization
http://yaleglobal.yale.edu/display.article?id=6917
The world economy has done well in recent years, yet workers in rich
nations remain anxious about how globalization will affect future
jobs, wages and benefits. In the US, Ford and General Motors have
slashed jobs and closed plants. Plentiful skilled labor in emerging
countries raises fears about depressed wages worldwide. More
importantly, specific policies and conditions in Europe and the US
directly contribute to worries over pension and health plans. For
example, the US trade deficit has sprung from the low saving rate, not
economic integration and free-trade agreements. Similarly,
globalization is not the cause of exorbitant US health care costs or
outdated European pension systems. Indeed, free trade does not
directly sacrifice jobs; instead, high taxes on employment and trade
deficits do far more damage. Some benefits of globalization tend to be
unevenly distributed in society – and corporate leaders should
recognize that many workers would prefer long-term stability over a
chance for short-term wealth. Still, globalization is not the root of
all problems. Politicians on both sides of the Atlantic need to be
more candid about the source of the insecurity: In the US, consumers
and the government must save more, which could mean higher taxes;
Europe must reduce benefits and taxes, as well as improve labor
flexibility to court younger workers. These are not popular talking
points, but protectionist rhetoric is a bad solution to real problems.
– Yale Global
Unpopular Globalization: Why So Many Are Opposed
Blaming globalization for workforce anxiety in the US and Europe is
misguided
David Dapice
YaleGlobal, 2 February 2006
Feeling unprotected: Despite surging corporate growth US workers see
only threat of pay cuts
BEDFORD, US: The world economy has performed well in recent years -
but the mood in rich nations is uneasy. The reason: While
globalization fuels economies, citizens see little gain. They tend to
blame globalization rather than specific policies for economic
stagnation and growing retirement and health crises. And for
politicians seeking to avoid necessary but unpopular policy changes,
that is just as well.
Western economies recovered from the burst of the technology bubble
and the fallout from the “war on terror.” Unemployment is falling in
the US, EU and Japan while inflation remains muted. Gross Domestic
Product (GDP) growth rates, corporate profits and stock prices are
up.
Yet a recent survey conducted for the World Economic Forum reports
that over half of those responding in the EU and nearly two out of
five in the US anticipate a bleak economic future. Most economists see
growth, trade and global economic integration as threatening some
special interests but, on the whole, helping everyone. Still, what if
the sum of “special interests” represents the majority?
Table 1. Gap in Growth: Corporate Gain Soars While Wages Stagnate
Enlarged image
The attitudes in the US – historically an optimistic society, fluid
and adaptable – are most surprising. Yet real wages, with all data in
constant prices, have fallen from $9 an hour in 1973 to $7.50 in 1993,
before rising to $8.25 in 2002 and falling gently since then. Real
compensation, which includes fringes such as health insurance, did
rise 20% from 1992 to 2005 – but that is only half of the growth in
labor productivity, the measure economists use to assess efficiency
shown by output per person-hour. Productivity growth has fattened
corporate profits, which rose, after taxes, from 5.2% of GDP in 1992
to 7.5% in 2005, tying an all-time record. Corporate profits and
executive compensation have also soared. Pundits commonly link these
trends with economic integration and free trade agreements. Yet, the
trends have more to do with automation, immigration, and the US trade
deficit than with globalization per se. The low saving rate in the US
workers has created the trade deficit, not free trade.
Likewise, US worries about soaring health care costs are not linked to
free trade. Rather, the US health care system is exquisitely
inefficient. The US government does not provide universal health care,
but ends up spending more per capita on health care than total per
capita spending by Canada on its federal health care. Yet 15% of the
US population, or more than 45 million, are uninsured, and tens of
millions more have inadequate insurance. A Canadian born today can
expect to live 80 years; a Costa Rican 78 years; a US baby only 77
years. Out-of-control medical spending threatens to bankrupt
corporations and government at all levels. Workers spend ever more of
their paychecks on health care as double-digit cost increases eat up
meager pay gains. Globalization has little to do with US health care,
but certainly influences global business decision: Witness the
decision of Toyota to build its new plant in Canada.
In Europe, the health care system is cheaper and produces better
outcomes. But the Europeans still worry as jobs go offshore and the
graying population complicates the financing of a comprehensive social
safety net, thus leading to budgetary pressures for less generous
treatment and pessimism about future access. The mood would remain
glum even if unemployment rates in Europe fell and private job growth,
now weak, improved. Governments promise generous pensions, but with
the baby boom-generation retiring, these are becoming less affordable.
As with health care, financing these benefits will become unbearable
unless older people work longer and pensions are delayed or reduced.
US workers also face retirement uncertainty, with even profitable
companies like IBM abandoning defined-benefit pensions. Many
companies, such as those in the steel and airlines industries, use
bankruptcy as a tactic to eliminate pension obligations. Most workers
run their own retirement savings accounts, even though research points
out the pitfalls. US Social Security, already modest, is replacing an
ever-lower share of previous income, but at least it is certain and
indexed to inflation. This bit of certainty might explain why so few
supported the reform proposed by President Bush
Perhaps the potential of holding a “good job” poses the greatest
uncertainty. US layoffs in many industries continue to make headlines.
Manufacturing employment, stable from 1980 to 2000, lost 15% of its
workers during the last five years due to foreign competition, and
those laid off are not likely to find new manufacturing jobs.
Employers even outsource services, though the scale is small, with
perhaps 1% of all service jobs affected.
In most of Europe, the pace of private sector job growth has been
painfully slow, particularly in Germany. Unemployment rates, though
falling, are still in the 8-10% range. The government imposes high
taxes to finance the social benefits, including high unemployment
compensation. Laying off workers is difficult and expensive. Thus,
many firms create new jobs or move old ones to Eastern Europe. The
possibility of hordes of immigrant workers snatching jobs that go
unwanted by most living in wealthy nations – indeed, the specter of a
low-cost Polish plumber helped explain France’s rejection of the EU
constitution. – threatens even non-traded sectors.
If the typical worker’s job is insecure, with stagnant wages and
uncertain pensions, the voter understandably becomes skeptical of the
benefits of global economic integration. It is all well to point out
the advantages of low prices evident at any Wal-Mart, but the trade-
off is inadequate. It is rational to prefer a stable life even if that
comes with a lower return. After all, many people prefer bank accounts
to junk bonds. The question, of course, is if such a choice is
possible. And if possible, would slowing global integration move the
outcomes in a more stable direction?
Most analysis suggests that free trade does not, by itself, destroy
jobs. High taxes on employment or high trade deficits – both caused by
other factors – can depress employment, or at least discourage
creation of “good” jobs. While trade does create benefits such as low
prices, and these benefits show up in rising real per capita
disposable income in the US, the distribution of benefits is uneven.
Most wealth outside of housing is concentrated in the top 10% of the
population, and a disproportionate share of the growth in disposable
income is due to growing non-wage payments such stock sale and
dividends. In other words, buoyed by globalization, corporate income
surged while the average citizen had little gain. Indeed, from 1999 to
2004, the share of US households making less than $35,000 a year, in
constant prices, rose while those making more than $75,000 fell. This
happened while debate about globalization was at its peak, and many
associate such shifts with the process. In Europe, many blame
globalization for sluggish growth and high unemployment.
If economic integration with the world is not a major cause of these
problems, why do politicians resort to protectionist rhetoric? Many do
not want to deliver the real message: In the US, both consumers and
government need to save more, which would mean less spending or higher
taxes. Europe requires cuts in benefits and taxes, along with labor
flexibility, to attract younger workers. The few politicians who try
modest versions of these messages have not done well with voters.
Perhaps someone gifted could sell what is inevitable to the unwilling.
But for now, the anxious have misdiagnosed the malady – and the cure
will continue to cause hurt.
David Dapice is associate professor of economics at Tufts University
and the economist of the Vietnam Program at Harvard University's
Kennedy School of Government.
Rights: © 2006 Yale Center for the Study of Globalization
chhotemianinshallah
R&D Could Help Modernise Industry
Chemical & Engineering News, August 17, 1998
Submitted by P.Sunthar (September 1, 1998)
Many among India's vast pool of highly trained academics are
underemployed. At the personal level, individuals who have received
graduate training often hold jobs for which they are vastly
overqualified, if they are working at all. On a macroscale, India
could harness its scientists to generate much-needed wealth. But
instead, the investment that has gone into their education is sadly
squandered.
"Last year, the U.S. Department of Education found the Indian
Institute of Science (IIS) to be the 18th strongest [research]
institute worldwide--with chemistry leading," says S. S.
Krishnamurthy, who heads the Chemical Sciences Division at IIS.
Located in pleasantly cool Bangalore, IIS was founded in 1909 through
a generous gift of Jamsetji Nusserwanji Tata, founder of Tata ,
India's largest business group.
Arguably India's premier scientific research institution, IIS retains
from the Tata group an abundant amount of real estate properties and
stocks in Tata companies. The institute offers only graduate education
programs. Its professors say that IIS gets India's brightest students--
those that don't go abroad to study, that is. Yet despite the caliber
of education it offers, many of its graduates cannot find meaningful
employment in India. "Half of our graduates go abroad [to work]. The
others work here, some in national labs," Krishnamurthy says.
The quality of researchers available for hire in India and the low
salaries they command by international standards are compelling
arguments for multinational firms to conduct research in India. "In
the U.S., it costs perhaps $5,000 to $10,000 per month to employ a
researcher," says chemical engineering professor V. M. H. Govindarao
at IIS. But when translated into rupees, "this is an enormous sum," he
notes.
Local firms barely take advantage of the country's vast intellectual
capital. One reason for the low level of interest is that Indian
chemical companies are either too small or too young to set up an R&D
establishment. R&D can turn into a costly investment that does not pay
off. So in the past, chemical companies have limited themselves to
sponsoring research providing relatively minor process improvements.
"Successful interaction between academics and industry has been
limited to academics with a flair for troubleshooting and
optimization," says IIS chemical engineering professor K. S. Gandhi.
Others are more harsh when commenting on Indian companies. Says
chemical engineering assistant professor Madras Giridhar: "Typically,
business thinks short term. They just license [technology] from the
U.S., and after some time, they re-license."
Second only to Japan within Asia, India's pesticide industry is fairly
large by world standards. But most of the companies are small--about
500 companies are formulating pesticides in the country. S. C. Mathur,
executive director of the Pesticides Association of India in New
Delhi, commends India's network of national labs for enabling the
country's pesticide industry to achieve its current size. But he notes
that Indian researchers have developed only new production processes.
As for the development of new molecules, he stated in a paper
published earlier this year: "This area of research calls for massive
investments and costs, and the Indian industry, due to its small size,
is not geared toward this end."
Until recently, the bureaucracy of the New Delhi-based License Raj,
now abandoned, led companies to attach little value to R&D compared
with the benefits that could be reaped by obtaining a license to build
a plant. "These licensing laws are partly responsible for the lack of
R&D enlightenment," says V. Kumaran, assistant professor of chemical
engineering at IIS. He believes that the pernicious influence remains:
"[Some] multinational companies understand India's R&D cost advantage,
but Indian companies are frozen in this [licensing] mind frame," adds
the Cornell University graduate.
So far, foreign companies, like Indian firms, have not conducted much
research in India. One reason is that only in this decade have they
started to resume interest in India. At this point, only a handful
have the local organization in place from which they could direct an
R&D effort.
Moreover, many foreign companies lack a long-term perspective on
India. Says Kumaran, "Every two months or so, we get delegations from
multinational companies. They usually ask: 'Do you have any idea what
will make us money?' It doesn't work that way. We don't know what will
make them money. We expect that they will invest for two or three
years in the project and see what comes out of it. [But] they want
immediate benefits."
Starting up an Indian research program is costly. To seed the effort,
a foreign company must dispatch researchers from its central labs to
India. Given that India is considered a "hardship" posting for
Americans and Europeans, it costs up to $1 million per year per
expatriate researcher to start up an Indian corporate R&D lab. And
these research managers have to stay in place until local staff are
clear about the company's goals. Until then, paying salaries for the
expatriate staff can obviate the benefits derived from hiring Indian
researchers cheaply. That is why most foreign multinationals prefer to
wait until their sales and profits in India have reached a "critical
mass."
Other than the cost of expatriate researchers, a further disincentive
to conducting research in India is the weak protection given to
intellectual property. India offers protection, but it doesn't meet
international standards. The Indian Patent Law Act of 1970 has
eliminated product patent protection, retaining only process patents.
In a paper presented in May at the Outsource USA '98 conference in San
Francisco, Mukund S. Chorghade, director of chemical process R&D at
Cytomed in Cambridge, Mass., and Veena M. Chorghade, vice president of
business development at CP Consulting in Wellesley, Mass., explained
the current state of patent protection. They said: "[First,] any
patent obtained prior to July 1995 in any World Trade Organization
(WTO) country will not be valid in India; only process patents will be
honored. The patents will be covered by existing Indian patent laws
for manufacturing and marketing. [Second], drug patents filed after
July 1, 1995, will not be available to Indian companies to manufacture
or sell without license from the inventor, even if they are
imported. . . . [Third], for a molecule patented after July 1, 1995,
if approved for marketing prior to January 2005 in any WTO country, a
five-year exclusivity period (or until an Indian patent is granted or
denied, whichever is shorter) will be granted to the marketing company
in India. The product will still have to be approved for its safety
and efficacy in India."
The Chorghades also explained the rationale behind Indian resistance
to having a more standard patenting system. Indian thinking regarding
patent protection has been shaped by a statement by the late Prime
Minister Indira Gandhi: "There should be no patenting of life and
death."
The Chorghades also noted that "Indian violations of product patents
have habitually led to denunciations of 'intellectual piracy' by the
developed nations. Care, however, must be exercised in levying such
charges, as they could lead to retaliatory charges of 'biopiracy'
against Western pharmaceutical companies. Indian sensitivities have
been aroused to the continued patenting of traditional Indian herbal
remedies, natural products obtained from indigenous flora and fauna,
and even the culinary delights of India by Western companies."
Fortunately, some encouraging signs indicate that India will tighten
up its patent protection regime. That's because there are compelling
reasons to do so. For instance, the Chorghades pointed out that some
Indian companies have begun to file international patents for their
drug discoveries.
Moreover, the Council of Scientific & Industrial Research (CSIR)--
which is a 10,000-researcher strong, government-sponsored network of
labs--has a new strategy. By 2001, CSIR hopes to provide a "global R&D
platform, providing competitive R&D and high-quality, science-based
technical services." Its labs have discovered 14 new drugs in recent
years, the Chorghades said, many of which were derived from Indian
natural products.
Indian universities and some local companies also hope for stronger
patent laws. According to IIS professor Gandhi, with liberalization
and the growing need to compete globally, Indian companies have begun
to realize the edge that uniquely differentiated products could
provide them in world markets. His colleague, professor Govindarao,
observes: "Just now, thanks to globalization, industry realizes that
it has to offer competitive products." Assistant professor Kumaran is
also optimistic about the changes under way in India: "In the future,
Indian companies will need to take a longer term view. [India] is
becoming a free market. Profitability will depend on the ability to
develop new processes. Change will take place. Some companies will go
bankrupt, while some will innovate."
So far, most of the chemical research agreements between universities
and companies have taken place in Mumbai because that is where most
chemical companies are headquartered. The Department of Chemical
Technology of the University of Bombay is reputed to be most active in
collaborating with the chemical industry. But other universities in
India are feeling increasingly motivated to get "a piece of the
action."
One reason is that government funding of universities has followed a
downward trend in recent years. Gandhi says that 90% of the department
of chemical engineering's budget goes toward paying salaries. To
improve their financial condition, the universities need to
collaborate with companies. It's difficult to imagine that
universities will not support a strengthened patent regime in order to
attract more corporate funding. "We are actively looking for
partners," Gandhi says. "It's a big transition now. . . . There is an
enthusiastic attitude of faculty members toward collaborating with
industry."
The international scientific community's linkage with India has
improved in recent years, thanks to the Internet in particular. But as
is the case with the development of industry in general, the future of
R&D in India, and particularly the cooperation between universities
and corporations, depends to a large extent on government policies.
Recent developments in that regard have not helped. The nuclear tests
conducted in May have reduced the level of cooperation between
researchers in the U.S. and India (C&EN, June 22, page 6).
Furthermore, the decision in early June to raise India's import
tariffs across the board by 4% will reduce in time the incentive for
industry to develop more differentiated products. Both moves also
decrease the attractiveness of India to multinational corporations,
and therefore the likelihood that they would invest in research in
India.