The economic theory of globalization · 2018-05-04 · Economists and globalization: some...
Transcript of The economic theory of globalization · 2018-05-04 · Economists and globalization: some...
The economic theory of globalization
Prof. Pier Francesco Asso
(Università di Palermo)
Two papers: P. F. Asso, Globalizzazione reale e globalizzazione
finanziariaD. Rodrik, The disappointments of financial
globalization
The economic theory of globalization ---contents of these lectures
• Some quotations … pros and cons globalization
• Some definitions … yesterday and today
• Main features … nature, origins, causes, implications
• Globalization in real markets (costs and benefits)
• Globalization in financial markets (costs/benefits)
• Disappointments … financial globalization - LDCs
• The real issue: the economic consequences of financial globalization
Economists and globalization: some quotations …
• “Economic globalization is a process of integrationof national economies, through trade, directinvestments, short term capital flows, labourmovements, technology transfers etc. ….
Jagdish BhagwatiColumbia University
• Globalization has many dimensions … it is not an
homogeneous and undifferentiated phenomenon
• Globalization is useful, though not enough … what
is needed is a good governance of globalization
Economists and globalization: some quotations
• “…for many countries, trade openness has
contributed to higher economic growth than would
otherwise have been possibile
Jo StiglitzNobel per l’Economia, 2001
• Export-led economic growth has become the pride
of Asian industrial policy which managed to improve
the economic conditions of milions of people
• Globalization reduces the sense of isolation of many
LDCs and allows an easier access to knowledge and
information. Millions of people live longer and
better off…”
Economists and globalization: some quotations …
• Postwar experience shows a positive and causal correlationbetween foreign trade and economic growth. On average a1% increase in the volume of exports determines a 2%increase in Ypc (Jagdish Baghwati, Columbia Univ.)
• Globalization is the wrong enemy: a closed economy doesnot induce growth, does not reduce poverty, does noteliminate inequalities; in the XXc. we have no convincingexamples of countries that have become developed countriesthrough protectionism (Kenneth Arrow, Stanford Univ.)
• If globalization has to be efficiently managed we must payattention to the speed with which a country exposes itself toglobalization … it is definitely preferable a gradualreduction of protective barriers (Jagdish Bhagwati,Columbia Univ.)
Economists and globalization: some definitions
• It cannot be said that financial globalization
always generates economic growth
• A systematic evaluation of the available evidencessuggests the impossibility of establishing a strongcausal relationship between the level of financialintegration and the growth of output
• The process of capital liberalization seems to haveproduced a much greater vulnerability of nationaleconomies
Kenneth RogoffChief Economist, IMF, 2003
Economists and globalization: some citations
• “Barriers and monopolies that relegate many
countries at the margin of economic development must
be broken
Giovanni Paolo IICentesimus Annus, 33, 35
• “Countries outside the process of internationalintegration are doomed to stagnation and recession.
• “There is one form of Economic Globalizationconducive to greater efficiency and the growth ofoutput which, together with stronger interrelationsbetween people, strengthen peace and unity …however, if Globalization means only the adoptionof market laws, its consequences maybe negative
Economists and globalization: some citations
• Now a Joke … on the economic consequences of FG
• “A geologist, a chemist and an investment banker arearguing over whose profession is the oldest.
• The geologist: “My science is as old as the earthitself …
• The chemist: “Long before the Earth was formed,there were masses of gas, chemicals etc. Before that,there was just chaos …»
• The investment banker (sipping a martini): “Andwho do you think created all that chaos???»
• However, (moral of the story): do not put all the blame ofthe crisis on greedy bankers! complicated events are, bydefinition, complicated …
Globalization: definitions
It is a process by which economies become
more and more integrated by means of a
reduction of barriers (fiscal, administrative,
legal, bureacratic etc.) that stimulate economic
transactions (or decrease their costs)
Greater integration is achieved through trade,
investments (direct and portfolio), labor
movements and the spread of knowledge,
innovations and technology
Reduction of barriers to trade + the mobility of goods through
multilateral or regional agreements (PTAs)
Reduction of barriers to finance and to the mobility of capital
through changes in legislation (exchange controls etc.)
Foreign direct investments become a crucial factor.
Multinational firms are the main player of global markets and
production is fragmented at the international level
Changes in the organization of multinational firms: mergers;
acquisitions; strategic alliances; offshoring and international
contracting; outsourcing.
Some general features of globalization
Some general features of globalization
Real Globalization: liberalization of goods and services.
Perfect integration of real markets.
Financial Globalization: Perfect liberalization of capital
movements (financial products). Perfect freedom of both short
term and long term movements
RG: Duties, tariffs, quotas, non tariffs barriers (licenses,
production standards, packaging, labelling, rules etc.) → 0
RG: no discriminations of foreign producers (other than for
health or safety reasons).
FG: No discrimination of foreign investors. All controls and
restrictions on the purchases of financial assets →0
Winners and losers
Winners: exporters; investors; international banks; all
firms and consumers that take advantage of a larger
market; poor countries that transform farmers into workers
in manufacturing operations for export markets .
Losers: increase of conflicts between:
- capital and labor;
- skilled and unskilled workers;
- industries and regions with comparative advantages
and industries and regions without etc.
- globally mobile professions and local producers;
Some general features about globalization
Is it new? No. 1^ era of Globalization: 1890-1914.
Similar indicators of trade openess, FDI/GDP
Today: many countries; FDI; financial markets.
WTO: global approach
Word was coined in 1957: global vs regional approach to
integration
Yesterday: few countries/sectors; trade; migration, few
issuers of financial paper (state, municipal, railway
bonds). GATT: regional approach
1. Fall of trade barriers and opening of markets to trade and investment.
2. Fall of transport costs and deregulation in transport industries and services (railroad, steamship, airfares etc.)
3. Fall of communication and information costs and development in their technologies (telegraphs, internet)
4. Liberalization of capital movements under the gold standard and in the 1980s
5. Reduction of taxation on capital and corporate profits
What were the driving forces that contributed to
globalization (first and second eras)?
Some general features on GlobalizationDo we have it today? Yes and No.
We have a trend toward RG with still many barriers and
many forms of rich vs poor countries discrimination
Reduction of tariffs and non tariff barriers. Quotas are
turned into tariffs …
However, restrictions still exist and there are many
forms of discriminations against LDCs: tariff peaks and
tariff escalation … what is it? See next
Some general features on Globalization
FG is fully at work. Perfect integration of financial
markets with little controls and taxation
No effective restrictions against capital movements that
are free to move all around the globe at a very high
speed
Further issues on real globalizationWhat is a tariff? Tax on imported commodities, that
discriminate foreign produces and have multiple
consequences in domestic markets
Consequences on domestic producers, consumers,
welfare, fiscal revenues
What is a tariff peak? Tariffs go down but remain high
for poor countries products
What is a tariff escalations? Take a simple value chain :
1. raw materials, 2. semi-finished products, 3. cheap
finished products, 4. expensive finished products …
What is a tariff escalation? Tariffs are 0 on 1, 5% on 2;
10% on 3; 40% on 4 … consequences ???
About the WtoInstituted in 1995 for multilateral negotiations on trade
policy
Many differences with Gatt (1947-1995)
Gatt: few countries; few sectors (mainly industrial); few
trade policy instruments (mainly tariffs); zero power to
settle controversies
Gatt succeeded in lowering tariffs. Poor countries sectors
(agriculture and textiles) remained unaffected
WTO was established with more power on all trade
instruments (quotas, NTB etc.) and on all sectors
(services, property rights) and on dispute settlements
About the WtoMain mission: reduce the costs of protections for all
countries. What are its main principles?
1. Principle of single undertaking: every item of the
negotiation is part of a whole and indivisible package
and cannot be agreed separately. “Nothing is agreed
until everything is agreed”. No special treatment
2. National treatment clause: Foreigners and locals
are treated in the same way. if a State grants a
particular privilege to a local firm, it must grant
those advantages to the firms of other states while
they are in that country.
About the Wto
3. Principle of no discrimination: no preferential
agreements among countries unless these agreements
lead to lower tariffs
4. Principles of the most favored nation" (MFN). If a
country grants a treatment to another, must be ready
to grant the same advantages to all other countries.
5. Dispute settlement process to solve trade
controversies. WTO acts as the authority in power.
Different trial phases: the system has worked quite well:
more transparent with many out of court settlements.
Trade and transaction costs declined sharply (1)
Transport and communication costs declined sharply (2)
Trade and transaction costs declined sharply (3)
Effects of globalization: the boom of Foreign Direct Investments : 1870 vs 1900 and 1980 vs 1995
0
10
20
30
40
50
60
1870 1900 1914 1930 1945 1960 1980 1995
FDI/GDP --- world figures
Fonte: Obstfeld and Taylor (1999)
Theoretical and empirical analysis of the consequences of globalization
• How to understand its consequences? Useful
distinction between Real and Financial G.
• Benefits and costs of real and financial
globalization
Benefits/Gains: real globalization• Gains from specialization: domestic resources and
productive factors (L, K) are more efficiently allocated if the market is larger; countries benefit from a more optimal division of labor (static advantages and the theory of comparative advantages)
• Gains from innovation: strong evidence that “global firms” are more innovative and capable to absorb knowledge.
• Also for small firms it is not difficult to entry into a new foreign market. It is difficult to remain, grow and resist competition. Innovation is a “must”
Exports→ innovations → exports → innovations → growth
This causal chain is true for different sources of innovation and for different regions … Take Sicily, for instance …
Benefits/Gains: real globalization• Asso and Trigilia (2013) conducted an empirical research
comparing Sicilian exporting and non exporting firms in specific sectors where Sicily had “comparative advantages” (wine and foodstuffs; agricultural products; chemicals, electronic etc.)
• It turned out that exporting firms enjoyed higher:
• rates of growth; productivity; employment; etc.
• Propensity to innovate; propensity to cooperate; resist to the crisis
• More particularly, their performance regarding innovation was superior under all the different types of innovation (product; process; organization; marketing; packaging etc.)
Exporting firms are more innovative under all the different types of innovation
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
politica di marketing
packaging
organizzazione del lavoro
gestione complessiva
processo
prodotto
esportatrici non esportatrici
Benefits: real globalization Gains from scale economies: specialized firms can
sell their products to a wider number of consumersand where income is rising (advantages related toscale economies)
Dynamic advantages: in global markets firms mayreap advantages from delocalization and a morewidespread diffusion of knowledge and information
Institutional advantages. In global marketsinstitutions are more «inclusive» and there are lesscosts related to “rent – seeking”, lobbying etc.
Costs: real globalization• Specific cases where protectionism has some
rationale: strategic industries; infant industries;unfair competitition; cheap labour.
• Adjustment costs to RG: resistance to change,collapse of certain productive sectors (creativedestruction…, loss of fiscal revenues)
• Stories of success: countries that haveexperimented import substitution growth
• Greater inequalities: is real globalization anengine of greater inequalities? (remember theelephant graph)
Globalization has been a driving force behind the growth miracle in emerging markets, lifting millions of people out of poverty over the past few decades.
How was the global income pie divided?
The elephant graph (by economist B. Milanovic) details which segments of the global population saw a rise in their real incomes from 1988 to 2008
Inequalities were reduced at the world level
However, there were non-winners from globalization, particularly from the middle class people in the Western World
Inequalities and globalization: the «elephant graph»
The graph shows how different deciles fared in percentage of income gains in the last decade before the crisis
Point 1 corresponds to those who have gained the most from the recent globalizing wave …
A global middle class that is emerging all around the world with 9/10 living in China and India
Point 2 corresponds to people who belong approximately to the 80th percentile of global income distribution and that have gained 0 from globalization
The vast majority is the middle class in historically rich countries of the Western world + Australia and Japan
Point 3 corresponds to the global 1%: global rich (everywhere)
Inequalities and globalization: the «elephant graph»
The elephant graph
The biggest losers (other than the very poorest 5%), or atleast the 'non-winners,' of globalization were thosebetween the 75th and 90th percentiles of the globalincome distribution whose real income gains wereessentially nil.
These people, who may be called a global upper-middleclass, include many from former Communist countriesand Latin America, as well as those citizens of richcountries whose incomes stagnated.“
Moral of the graph: middle and working classes indeveloped countries languished.
Inequalities and globalization
Benefits: Financial globalizationIn general the theoretical benefits of FG presume a first best (ideal)
world that does not exist. In its absence, we get manycomplications. However, imagine we live in an ideal world … FGwould lead to …
2. Less rigid application of the S-I constraint. In a closed economy S=I;in an open economy I>S thanks to foreign savings (many lessons fromhistory are useful in this respect …)
3. Increase intertemporal consumption through internationalborrowing
1. More efficient diversification of wealth and asset allocation.Increase savings mobility in order to acquire greater security orhigher returns
Benefits: Financial globalization
4. Increase efficiency of economic policy. It should be more
difficult to approve “non-sustainable” reforms
5. Financial globalization is a process that cannot be (easily)
halted at the national level. Capital controls or barriers do
not work. …see the Tobin tax: What is the Tobin tax?
6. Tax short term capital movements in relation to their
speediness … what does it mean? why did it not work?
7. i. Lack of agreement and fiscal paradises etc.
ii. A 10-20% tax rate does not really stop speculation
Reputation and credibility are values to defend in a global world
Costs: financial globalization
1. No empirical evidence that a greater financial integration
determines more growth.
The relationship between capital mobility and real GDP is
empirically weak. A rise of financial flows does not generate real
investments and does not improve fundamentals (employment etc.)
No empirical evidence that capitals move from “North to South” in
search for good investment opportunities. Es. 1987 – 1997
paradox: large capital inflows towards the Us
Where did foreign capitals go? Us Treasury bonds; Mortgage
bonds; Wall street; the new economy.
J/Ue/China savings have financed the growth of the most advanced
sectors in the US. Have financed financial innovations and
speculative bubbles …
Costs: financial globalization
2. Costs induced by short term capital movements: speculative
investments determine instability and uncertainty.
Most capital movements are portfolio investments and not foreign
direct investments. They modify expectations: “bite and run” and
no growth in real investments.
3. Costs induced by a reduction of policy effectiveness and
independence.
FG produces more tax distortions and evasion since capital is not
taxed as much as labor, consumption and fixed assets (houses).
Corporate taxes have fallen in all advanced economies.
Monetary policy is less able to achieve domestic objectives (loss of
independence and the principle of the inconsistent trinity …)
What is the principle of the inconsistent trinity?(1)
• National economies cannot maintain at the same time: 1.financial globalization; 2. a regime of fixed exchange rates;3. an independent monetary policy.
• These 3 policy objectives are “inconsistent” (trilemma).
• One of these objectives must be sacrificed
• If financial globalization is imposed (by technology, policyor deregulation), this means that a country must abandonfixed exchange rates or its own monetary policy.
• Hence, this is another cost of financial globalization …
• Why is it impossible to maintain an independent monetarypolicy, with fixed exchange rates and perfect capitalmobility? (as in the EMS 1987 – 1992)
What is the principle of the inconsistent trinity? (2)
• Under capital mobility, the central bank must fix interestrates at an adequate level for maintaining exchange rateparity
• It does so, regardless of domestic demand or the inflationrate
• If the exchange rate weakens, interest rates are increasedin order to avoid capital flight or a further depreciation;
• An increase of rates it is expected that will generate capitalinflows and re-establish equilibrium in the currency market
• If an independent monetary policy is desired, the centralbank must i. restrict capital mobility; ii. let its exchange ratedevalue; or iii. abandon national currencies.
Summary of costs of financial globalization
1. No empirical evidence that financial flows generatemore real investments and growth
2. Financial flows (short term) generate moreinstability, uncertainty and volatility
3a. Financial globalization reduces policy effectiveness
3b. Financial globalization reduces policy independence
LET US CONTINUE …
Costs: financial globalization
4. Costs induced by a greater moral hazard
What is “moral hazard”? It is a form of implicit insurance againstinsolvency.
Economic agents take excessive risks … since they know that incase of mistakes or failures, someone will come to their rescue
Who bears the responsibility of moral hazard? It depends … 1. Nation states (guarantee on debt); 2. IMF 3. Others authorities (bailout clauses … “too big to fail”)
Costs: agents take excessive risks --- bubbles are created and
explode --- markets instability is increased --- investments are
made not because of fundamentals but of short term gains …
What is moral hazard?
- It has nothing to do with “morality”,
- It has to do with incentives to risk taking
- The central idea: people who are insured against some risks areless likely to take pains to avoid them (examples …?).
In finance, MH concerns arise whenever a third party (e.g. thegovernment) intervenes to insure the risk of loss or default(deposit insurance, state guarantee against default, bailouts)
MH exists, the problem is its magnitudes and tradeoffsWhy should you use OPM to save a bank? Do you create a precedent
for the future? How can you modify behaviors?
Costs: Financial globalization5. Costs induced by asymmetric information that are intrinsic
of financial markets. Two questions
1. When information are asymmetric? Not every agent has:
The same information on conditions, state of the economy,
nature of the investment etc.
Or has it at the same price
Or has it with the same degree of worthiness
2. What happens if information are asymmetric or are
manipulated by few powerful players? Where are the costs?
Excess of risks; Excess of volatility; “Herd behavior” is
produced thus increasing the instability of markets.
Moral Hazard and Asymmetric Information
The presence of asymmetric information and moral hazard reduces market efficiency
( in fact … we live in a second best world)
Why?
Savings go towards more risky investments … less
prudence
Instability propagates fast from one market
(country) to another: contagion effects
6. Costs of financial globalization: contagion effects
Costs generated by the possibility of “contagion and
propagation of financial crisis”
Financial crisis are very different from industrial crisis.
Capital flows increase the international transmission of financial
crisis
Financial crisis tend to be more widespread while real crisis are
more concentrated in specific countries or specific sectors
What are the main channels of transmission of financial crisis?
A. Trade links (exchange rates);
B. B. Financial links (assets values)
1. Mexico is hit by a exogenous shock (political upheaval);
2. investors sell financial assets in Mexico; many leave Mexico;
3. Strong pressures toward devaluation of the local currency;
4. Arg., Bra., Chi., lose some of their competitiveness and export
markets;
5. Investors expect that A, B, C, will face crisis and sell shares thus
putting new pressures on crisis.
6. The contagion spreads.
Costs of financial globalization: contagion effects
under the trade link
1. Financial markets in Mexico collapse;
2. Foreign banks that have Mexican securities in their portfolio
lose value of their collateral;
3. to recreate this value banks sell other shares of countries not
yet involved in the crisis;
4. Contagion spreads
Costs of financial globalization: contagion effects under
the financial link
Major explosions of financial flows, due to liberalization and the Washington consensus
Gross inflows to developing countries are doubled in terms of GDP (1980-2000)
After 1980: explosion of capital flows
Spectacular growth (+volatility) of capital
flows, compared to the growth of trade and gdp
Role of politics in promoting financial globaliz.
• IMF + investment banks pushed hard for openness in the capital account and mobility (Washington consensus)
• Sudden and complete openness maybe at the origin of financial and banking crisis (index of openness)
• Data record a great increase of openness particularly for Eastern and Central Europe, compared to their restrictiveness in the age of socialism
• Latina America decreased its rate of openness after the debt crisis of the 1980s … then reopened and today is very open
• Asia has steadily increased since the 1970s but then decreased its rate of openness after the crisis of the late 1990s
Role of politics in generating capital mobility
Did investment in LDCs really increase?
• Are savings going to less developed areas? Not really
• There is little empirical evidence to suggest that financial globalization has induced higher rates of Investment in LDCs
• For instance Latin America has not benefitted much from globalization and FDI remained lower than in the 1970s
• There is a poor correspondence between globalization and the increase of investments: investments are higher in countries that are not very open to FG (e.g. China and India)
• In LDC domestic savers fear a higher propensity to default when markets are open and tend to invest in safe markets (capital flight)
• The result is that FG did not promote growth in LDCs
After 1970s: the return to financial instability
The spectacular increase of capital mobility +
the collapse of the fixed exchange rate regime
After 1980: FG and high capital mobility are
accompanied by the return of banking crisis
Did investments in LDCs really increase?
Did real investment really increase?• Let us take a look at the actual flows
• Both gross outflows and inflows have increased. What really matters are net inflows
• Net inflows to the developing world have remained low. They were negative since 2005 – net wealth is going from the poor to the rich, rather than the other way round (wrong direction )
• On the whole net capital inflows to the developing world as a whole was actually negative (-5% of GDP in 2007)
• Of course results differ from country to country
Net investment flows often go in the wrong direction: from emerging and LDCs to the advanced economies
Did FG induce better risk sharing across countries?• FG did not have a strong impact on transferring savings to
poor countries, but it may promote a better risk sharing
• What is risk sharing? It is a measure of gains that investors obtain from diversification of assets
• Again the evidence is disappointing. Rodrik uses a simple measure of risk sharing (international portfolio diversification).
• Since 1970s industrial countries have improved their risk sharing, while developing or emerging countries have not.
• In fact for developing or emerging countries risk sharing is showing a downward trend
Risk sharing in different areas: the picture for developing countries is discouraging
Another cost: with FG countries increased self-insurance
• Financial crisis have induced countries to tremendously increase the use of resources in self-insurance. What is it?
• Most LDCs accumulate a large stock of official foreign reserves – even Africa.
• Is this good? Is this useful? Not really
• Since the 1980s the behavior of LDC changed and became more prudent: reserves increased unlike other countries
• Was this accumulation of reserves a way to shelter economies from financial crisis? Not really
• Russia, Korea, Brazil were hit by the crisis irrespective of the amount of reserves that amply covered their ST liabilities
• Conclusion: this self insurance policy has been costly (due to the high costs of protection) and useless
Insurance effects after the crisis: the third world builds up foreign reserves assets:
insurance effects are very costly …
Stocks of international reserves (% of GDP), advanced and emerging countries, 1990-2015
General reasons for building up international reserves
• Reserves are useful for intervention in the foreign exchange market
• To reduce currency volatility
• To enhance export competitiveness
• More open international capital markets raise – and not reduce – the precautionary demand for reserves
1. Liabilities (mostly short term and denominated in foreign currency) imply a greater risk of capital flow reversal
2. Foreign creditors could call for repayment of trade deficits or loans
3. Domestic investors may rebalance their portfolio toward foreign assets
• To protect against these risks and from the vagaries of international finance, emerging countries increased reserves
FG and economic development --- issues of mis-
alignment of the exchange rate
Costs of financial globalization: exchange rates
• Sometimes capital mobility and inflows tend to produce an
appreciation of the exchange rate that becomes
overvalued
• The more open you are to capital inflows, the greater the
risk that an exchange rate becomes overvalued
• This may depress investments, decrease exports and
growth prospects
• Empirical evidence shows that countries who maintained
an undervalued exchange rate grew more rapidly…
FG and economic development: issues of mis-alignment
of the exchange rate
Costs of financial globalization: exchange rates
• Statistical evidence suggests that there is a clear relationship
between episodes of undervaluation and episodes of growth
• China shows the importance of undervaluation for growth
• India provides more mixed records but the association persists
• The same has occurred for an African country – Uganda
• Mexico is the only relevant exception … the correlation is
negative: more undervaluation --- less growth
• Mexico follows a capital inflow driven pattern of growth
Devaluation is good for growth: some empirical evidence
Conclusions
How to increase its benefits at the expense of costs?
Financial globalization does not provide:
•The growth of the world economy
•The stability of the world economy
1. Abandon globalization: neither desirable, nor feasible.
2. Regulate globalization: reform international economic
institutions towards more sustainable development
Financial markets operate in a highly second best environment due to their imperfections
• Theory of first best: free markets + competition → greater efficiency and growth. Hence remove barriers to freedom!
• Theory of second best: if you liberalize and remove obstacles, the system as a whole may perform worse than before
• … if we remove one distortion, in the presence of other distortions , this does not make you better off
• … it may thus be optimal for a Government to intervene in a way that is actually contrary to laissez faire and integration
• Some restrictions may actually make the system work better. Impediments to FG should be increased rather than reduced
• The question is: why financial markets operate in a second best environment? Three reasons
Financial markets operate in a highly second best environment due to their imperfections
• Problems of Information asymmetries … no direct observation on the borrower … who are you lending your money to? What for?
This leads to adverse selection and moral hazard
• Problems of agency … people who make the investment decision and the people who own the assets … are different and this creates an agency problem since the latter follows the former
• Problems of systemic spillovers … when a financial institutions goes into difficulty the costs are borne not only by the owners but also by the rest of the financial system … systemic spillovers
The sub-prime crisis
• Subprime mortgages … before the crisis it was thought that financial innovation increased welfare
• A large majority of people were able to afford home ownership, which was not possible in the absence of financial innovation
• Non bank lenders increased competition into mortgage lending
• The process of securitization served to reduce risk while credit agencies certified their value
• The system collapsed, different culprits: excessive leverage
– mortgage lenders; central bankers; rating agencies; global imbalances; lack of intervention in Lehman case; political fragmentation and sovereign risk; lack of regulation; toxic assets
Financial markets operate in a highly second best environment due to their imperfections
• What controls and supervision and domestic regulation can do?
– Sands in the wheels of finance … Keynes, Tobin, Stiglitz
– Impossible to neutralize imperfections complementary reforms are rather useless …
– Keynes: global finance possesses little self equilibrating mechanism
– They need to reduce the systems’ leverage and prevent institutions from taking too much leverage
– Strengthen international regulators, create an international lender of last resort
Images of globalization
Trade and transaction costs declined sharply (1)
Trade and transaction costs declined sharply (2)
Trade and transaction costs declined sharply (3)
Trade links were strengthened and trade openness was increased
Internationalization of production
Global capital flows rise faster than GDP
FDI outflows from OECD countries as a percentage of GDPAverage 2000-2003
FDI inflows to OECD countries as a
percentage of GDP
Average 2000-2003
05101520
Poland
Slovak Republic
Mexico
Czech Republic
Turkey
Greece
Korea
Japan
Hungary
New Zealand
Italy
United States
Germany
Australia
Norway
Austria
Ireland
Iceland
Portugal
Canada
Spain
United Kingdom
Denmark
France
Sweden
Switzerland
Finland
Belgium
Netherlands
%
0 5 10 15 20
Japan
Greece
Turkey
Korea
Italy
United States
Norway
Iceland
Australia
Austria
Mexico
Poland
France
Portugal
Germany
United Kingdom
Canada
New Zealand
Hungary
Finland
Spain
Switzerland
Sweden
Denmark
Czech Republic
Belgium
Slovak Republic
Netherlands
Ireland
%
Migration has intensified …
… also among skilled workers
Again on inequalities: rising but not at the same pace
Trend of the IFI ratio, for advanced countries…IFI= (foreign assets+foreign liabilities)/GDP. It is a good measure
of cross-country financial integration
… but also for emerging countries …
… and particularly for Europe
All liberalization indices went up …
… though cross border flows collapsed after the crisis
Value of cross-border flows