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Week Poli 12: Return to Globalization
What is the return to globalization?
Why did this happen? (Structural adjustment)
Explore implications (onion i.e. war/IOs etc, for state power)
What is the return to globalization?
What is globalization?
o Interaction: e.g. trade/travel
o Interconnection: e.g. food products contain ingredients from different places
Level of interconnection, even in ordinary (consumer) goods, has increased a lot
Goods may be sources from many states, and not necessarily neighboring nations
o Interdependence: e.g. Chinese economy grows because of US consumption
Some countries do a lot of exporting, and thats how they grow their domestic economy
When did the return start? Two things, different dates
End of Cold War (for Soviet Bloc):
o Date: after 1989/1991
o Soviet satellites were forced back into the global economy as the Soviet Union could no longer support them
o Fall of USSR meant socialist model was unviable didnt produce goods of a quality good enough for export
o USSR could no longer help DCs, who had to reform
Before, were subsidized by Soviet Union and could rely on getting cheap goods for the Soviet Union
End of ISI (for developing countries):
o Date: after 1986
o State is the problem in the development agenda need an opening of markets (not state-led development) need
more privatization within the state and open economy to competition from the outside
o Focused on opening up financial markets and these economies
o Why did these countries accept IMF programs?
Debt problems/lack of growth meant that DCs moved away form ISI and towards trade
o ISI had a lot of inefficiencies rates of growth werent good enough for these DCs; because the goods produced by
these economies were not up with the standards of other countries, their exports suffered
Because they didnt export much, they were constantly importing more than exporting (negative net
exports) paid for this with debt
How IMF debt restructuring works (Jamaica)
Jamaica is in debt and goes to IMF for bridge loan
o When people have a shortfall of money, they have a liquidity problem and a solvency problem
Liquidity: a problem of cash flow in the short term, but over time youll be able to pay debt off
Solvency: lose your job and no one will employ you; will never be able to pay off debt ( long term)
o Bridge loan: money to solve your liquidity problem
IMF says OK, if following conditions are met:
o Cut government spending
Rationale: reduce size of deficit (bring down interest rate in the future)/control inflation
o Privatize government services
Raise money to pay for debts
Rationale: raise money for government coffers
o Open markets
Financial markets
Rationale: attract foreign investment your economy is having problems, you have a general shortfall of
investments, your people are broke, so you must attract money from outside; only way is to reduce trade
barriers you have on investment
Goal of SAP (Structure Adjustment Program)
Convince foreign-debt holders to continue lending to Jamaica
o Thats why theyre called bridge loans
How do you do this?
o Control inflation
Spending usually drives up inflation, and IMF wants to avoid this to ensure Jamaica will have credit in the
future
o Control deficit
Dont want to augment negative net exports
o PAY BACK THE LOANS
SAPs prioritize paying back loans credit worthy
o Do these by reducing government spending (austerity)
Problems of SAP
Cut in government spending means people in Jamaica are poorer
o Public workers, standard of living to the people, government programs
Open markets means foreign competition, creating problems for domestic industry
Open markets mean capital can flow out of country, creating volatility
o Capital flight huge amount of money leaving the country at once which depresses the stock market
Is there an alternative to SAP?
Theoretically, yes
o Idea from Joseph Stiglitz
Alternative to SAP:
o Government spends money to raise growth (remember the Depression)
Grow your way out of the problem
o Put limits on the outflow of capital (prevent money from leaving the country (capital flight))
o Dont privatize (so dont sell assets on cheap)
Sell assets in a short span of time giving up a chance to raise good money
Rationale: raise growth, risking inflation and risk of default, to fix the economy
o Raise risk of inflation, raise risk of default because youre spending money like crazy (putting money in the hands
of people) target is to raise economic growth in the long run
Hope that more people will start to invest, and then the economy will return to health sooner, and be able to
pay off debts that you were owing in the beginning
SAP: deal with debt, then growth
Alternative: do growth first, then deal with debt
Political Choices
SAP
Inflation
Government spending
Deficit
Market opening
Winners
Losers
Controlled
Down
Down (hopefully)
Markets opened
Holders of DC debt (inflation down, debt is paid back)
People in DC (unemployment rises)
Alternative to SAP
Increases, possibly drastically
Up
Up (possibly massively)
Markets controlled
People in DC (hopefully) if economic growth is raised
Holders of DC debt (inflation up, possible default)
The great irony/hypocrisy of 2008
Whats good for goose is NOT good for gander
DC debt problems: strong medicine (tastes bad, hurts you, but you have no choice but to take it)
Poli 260
Week 12: Return to Globalization
o Cut G: reduce benefit programs/deficit (frankly, put your people through hell)
o Privatize government firms like utilities (electricity, water)
Financial crisis in US: opposite solution
o Did the opposite of what the IMF did to DCs in the 1980s and 1990s
o BIG stimulus ($787 billion) but supposed to cut spending
o BIG bailouts, NOT privatization (e.g. GM/Citi) but supposed to privatize government firms
With that money, they are able to avoid default because they built on their assets based on the money given
to them adds to deficit that the US has
o What the US did was spend over $2 trillion and made the deficit worse
This is seen as hypocritical result in riots (in places like Greece)
Not a matter of economics, is a political problem
Lessons
Why this matters:
o If reaction to crisis varies some get austerity while others dont there is loss of confidence in global economic
order
Complain that this is not what US or France did
Countries facing austerity may give up (as they see it as hypocritical) once that perception becomes real,
countries who are funding the bailout will also switch off
Political choices (which are made for open economic order) may be under threat
o Commitment to open economic order may fadejust like it did in 1920s-1930s
These are political choices:
o Remember: globalization is a CHOICE, not a fact
o People decided to return to it, and can also decide to leave it
o There is no guarantee that states will trade
o There are winners and losers from every policy (important!)
The Golden Age vs. Today
Is current globalization the same as in 1900?
Why does this matter?
o Same problems may happen
Can states stop globalization by becoming protectionist like in the 1930s?
Can major war result?
o Same policies may apply/or not.
Use of gold standard? (Or some way to reduce imbalances between states)
Fiscal policy to fix recession? (Is there a role for big amounts of government spending in many economies,
rather than policies being used right now?)
Oversimplified answer
NO: current globalization different from 1900
Good:
o Broader economic base: non-Western economies are also growing
Means that the gains are more broadly shared (at least, between states)
o More actual economic interdependence: war becomes harder
Goods not produced within one jurisdiction/country, interdependence increases
Bad:
o Broader economic base: non-Western economies run surpluses, US economy runs deficits
Inseparable from the good part
Savings imbalance: US and Europe have not been saving money, and China/Japan/Korea has been saving
excess saving has moved from Chinese/Japanese/Korean economies into US/European economies
through the mechanism of debt; the debt in Europe and US has increase significantly
o More actual interdependence: economic crises are more common, and reverberate
If you have such economic interdependence, you run a greater risk of contagion (economies arent isolated
from each other what goes bad in the US affects economies elsewhere)
Increases level of exposure to crisis and volatility
Globalization without gold standard
Recall what the gold standard did:
o Reduced state control over monetary policy/exchange rate
o If you committed to gold standard, meant you would control your inflation (wont inflate away your debt)
o Creditors happy so they made loans
How do we have globalization without the gold standard?
o States commit to restraining economic policy
Sent credible signals that they wont screw around with the economy. How did they do this?
Independent central banks: inflation control (not run by legislature)
Deficit control: lower risk of default (cutting spending)
Open economic policies: creditors get money back (if you invest, you can withdraw your money;
we will pay you back with the money you put into our economy) foreign investors fear
nationalization of foreign investments, and open economic policies will ensure this wont happen
Whats behind the return to globalization?
Different strokes for different folks
o I.e. states changed trade policies for different reasons
External influences:
o Fall of USSR: revenue dropped (didnt have the same supply of foreign aid and subsidy)
Ex-communist states (e.g. Vietnam)
o Pressure by lending agencies, like IMF
Debtor states (e.g. Jamaica) some states were coerced into opening their markets
o Incentives to engage in open trading system (realized that their competitive advantage in, for example, labor, gave
them an incentive to practise free trade)
Bigger states (e.g. China)
Attract foreign investment and be a trading power
Internal reasons
Problems of ISI
o Lack of economic growth (there was some, but wasnt significant)
o Led to an use inefficient of resources
Public desire for better standard of living
o Cultural side of globalization
Consumer goods were of bad quality translated into a low standard of living
Too many restrictions on business/consumption as a result of ISI
Increased exposure to world (media)
Increased understanding that things were better in other parts of the world
o Adds up to a public demand to really try something different
o I.e. globalization is cultural as well as economic
Cultural: what does this mean?
Poli 260
Week 12: Return to Globalization
Trade includes cultural goods
Buying a set of symbols, associations with different ways of living
o Media: Friends in India
o Sports: Manchester United in Asia
o Get a broader sharing and understanding of what things are like in the world
We used to think this meant Americanization/McWorld/cultural imperialism
o Everyone feared that this would lead to a trend towards massive homogeneity
Not true (for the most part). Instead:
o Adaption by Western firms (e.g.?)
o Lots of hybrid cultural forms (e.g.?) not dominated by the West
o Culture exported from non-West as well (e.g.?)
November 24, 2011
Lesson plan: implications of globalization
Back to his sexy onion
States:
o What are the prospects of war and peace in globalization?
o What are the prospects of economic policy more broadly?
o Domestic policy
International Organizations
Domestic politics and activist networks
(1) Prospects for War
Great powers integrated to unprecedented degree
o People are trading with each other, not just to satisfy their needs, but because the success of one economy is
predicated to how much it sells to another economy
o Production: China makes PCs
o Consumption: Americans buy PCs (on credit)
o Debt: China buys US debt this leads to interdependence
Individual Chinese citizens are saving a lot of money low levels of consumption means GDP in China
will be low
Risk of war should be low (if trade trends continue)
Chinese economy does not have the level of demand that will allow the level of employment
(increasing wage level) to sustain (largely driven by foreign demand)
China depends on foreign markets/US
Isolated cases: some states are not integrated
o E.g. North Korea (DPRK)
Will DPRK fight or not?
No: no alliances, weak, high costs, discover the cult
Yes: ideology/military, no audience costs, nothing to lose
(2) Prospects for economic policy
Most states are committed to open markets:
o Free(r) trade
o Attract investment (FDI vs. FII?)
2 types of foreign investment
(FDI) Foreign direct investment goes into making things like a factory
o More likely to lead to jobs
o Much less mobile than FII
(FII) Foreign institutional investment financial assets (stocks, bonds)
o Can lead to jobs as well but indirectly by providing investment and credit
o Can flow out of economy very quickly (capital run)
o Paying back creditors
How do you raise money/attract investors?
You give up some decision-making autonomy:
o I will give up some decision making authority to attract foreign investors to come into my economy
Trade policies I will restrict my ability to set my own trade policies by joining an international
organization and agree to the IOs policies
o Trade policies have to conform to international guidelines (WTO rules)
o Central banks must be independent (no control over monetary policy)
Sending a signal that inflation will be kept within a certain range)
o Deficits to be controlled (limits on fiscal policy)
Loss of autonomy, a case study: Ireland last year
Problem: deficit 32% of GDP/debt 64% GDP
o Once they had this bust, had to bail out all their banks. By guaranteeing the bank debt, government spending went
up a lot, and Ireland had not run a deficit, but to bail out their banks, their deficit (gap between spending and taxes)
grew substantially.
o Revenues low/spending high
Ireland wanted: US$114 billion bailout
o Irelands 2009 GDP: US$227 billion (asking for a bailout 50% of GDP)
Solution:
o Cut public spending by $20 billion over 4 years
Cut social welfare by 15%
Eliminate 24,750 public jobs (pop. 4 million)
Cut minimum wage by 9%
o Keep corporate tax rate at 12.5% to attract foreign investment
Why is Ireland doing this?
Convince foreign-debt holders to continue lending to Ireland (and lower interest rates)
How do you do this?
o Cut spending: control inflation
Maintain value of loans ensure that they will pay back the loans and maintain the value of the loans by
controlling interest rate
o Cut spending: control deficit
Reduce risk of default so people will loan money to you in the future
o Keep taxes low: encourage investment (FDI)
Consumption (people are poorer) and government spending reduced
Hoped that investment will increase (draw money from outside that would lead to economic growth)
Did it work?
Yes and no
YES: exports still strong ($110 billion in 2010) still gets a fair amount of investment
o Drew in foreign investment more exports
o Compare with Greece: $22 billion
NO: bad economic indicators
o Unemployment: 13%
Poli 260
Week 12: Return to Globalization
o GDP growth: -1% in 2010 (-8% in 2009)
o Debt: 112% of GDP (increased from 64% in 2009)
Ireland said theyd cut government spending to bring down debt and deficit, as well as cut minimum wage together to
attract foreign investment. Ideally, thered be enough growth to cover the debt and reverse the deficit.
Problem of Imbalances
Current account = savings investment
o Difference between a countrys savings and their investments
o What are the surplus savings in the system?
o Current account surplus means state contributes savings to global pool
Excess savings in economy
With those savings, it buys assets outside the country (stocks, treasury bonds, etc.)
Level of domestic saving is very high (higher than level of investment)
o Current account deficit means state is borrowing from other states savings
Shortfall of savings relative to consumption and investment
What happens when you run persistent deficits?
o When you dont have savings, you borrow money
o You finance with debt (recall DCs in 1980s)
Imported much more than they exported
Debt crisis borrowed debt to finance the deficit
o The problem here: dont save enough and financing that shortfall with debt
o This is a problem in US/Europe: too much borrowing
o US debt: $15 trillion
What do these imbalances mean for US?
Problem: creditors freak out (like with Greece)
o Effect: interest rate on US debt (now 2% on 10 year T-bill) rises
o US option 1: raise taxes/cut spending (behave itself discipline)
Cut spending, raise revenues
Has to shrink its deficit so it can pay off its debt, rather than increase the amount of debt that it has
o US option 2: cause problems
Risk 1: US causes inflation: unlikely
Print money and increase spending
Risk 2: US puts up trade barriers
Can choose to limit/close off economy
China is consistently devaluing its currency (RMB) can push for trade restrictions with China to
offset this advantage
Goal: reduce trade imbalances (US imports more than it exports to China
How to avoid these risks?
US can take its medicine
o Reduce debt (government and household)
o But this means US economy grows very slowly
Government spending and consumption decreases
After average financial crisis: unemployment rises 4 years, housing values fall 6 years (Reinhardt and
Rogoff)
And as US economy is the biggest contributor to the world economy, world economy will slow down
But problem of imbalances remand until
o DCs increase C (less than 40% of GDP in China)
o Have a period of stagnant economic growth
o World economic growth must come from DCs in medium term, because of debt problems in West
Economic growth in the West will be pretty slow (biggest economies Euro/US)
Developing economies growing faster now, and gap shrinking
(3) Prospects for Domestic Policy
States have 2 audiences
o Foreign interests:
Creditors/investors/markets (individuals/businesses)
Trade partners (states) more reliant on them
o Domestic interests:
Winners from trade: want more trade
Losers from trade: want less trade/more help (retraining, cash transfers, etc)
o Sometimes these two audiences want different stuff there will be a clash
How this clash plays out is very important for politics for these countries
E.g. creditors want less spending, losers from trade want more spending
(4) Prospects for IOs
Why would IOs become more important?
o Problems/issues at global levels, not just state-level
More:
o UN does peacekeeping at higher levels
o WTO sets trade policies for states
o More regional organizations (e.g. EU)
Important change/realignment: IOs no longer dominated by Western powers
o E.g. Brazil, Russia, India, China now in top 10 of IMF shareholders
o No longer dominated by Western powers that set up these IOs
In general, IOs have become more important
Governance vs. government
Government: functions performed by states
o Bureaucracy, policing, etc.
Increasingly, functions of government are delinked from states (other people are doing them)
o E.g. European Central bank sets policies for nations (they have no say in them)
o Performed by IOs: e.g. trade rules
o Performed by private firms: e.g. security provision
Private providers of security to diplomats
This is governance:
o Governance can be private/foreign, as opposed to government, which is public/domestic
o Functions by non-state actors
Bottom Line
On aggregate (therefore on average), standard of living improves with globalization
o More consumer goods
o More efficient investment/use of resources (specialization, each economy is making what its best at making and
buying the rest)
Why isnt everything awesome/superior?
o Problem 1: disparities/inequality
Poli 260
Week 12: Return to Globalization
Winners are winning big, and losers are losing significantly (even though global economy is growing on a
whole)
o Problem 2: greater volatility/interconnection
A crisis in one place very quickly becomes a crisis in another place
o Problem 3: limited state power
Dealing with challenges, states have greater problems