Mishkin: Globalization: A Force for Good?

The newest Fed Governor, Frederic Mishkin, gives his first speech. The topic, the globalization of financial markets, has been covered here recently in an commentary by Mishkin from the Financial Times, and an interview from Crooked Timber about his book on the same topic. Here's one small section of the speech:

Globalization: A Force for Good?, by Frederic S. Mishkin, Board of Governors: ...Can more globalization--in particular, financial globalization--be a force for good?

The globalization of trade and information over the past half century has lifted vast numbers of the world's people out of extreme poverty. Despite the doom and gloom that you often hear, world economic growth since the Second World War has been at the highest pace ever recorded. What we are seeing in countries that are export oriented, and thus able to take advantage of the present age of globalization, is a reduction in poverty and a convergence of income per capita toward industrial-country levels. In India and China, for example, globalization in recent years has lifted the incomes of more than 1 billion people above the levels of extreme poverty. ...

The benefits of globalization of trade in goods and services are not controversial among economists. Polls of economists indicate that one of few things on which they agree is that the globalization of international trade, in which markets are opened to flows of foreign goods and services, is desirable. But financial globalization, the opening up to flows of foreign capital, is highly controversial, even among economists...

For example, in his best-selling book Globalization and its Discontents, Nobel laureate Joseph Stiglitz is very critical of globalization because he sees the opening up of financial markets in emerging-market economies to foreign capital as leading to economic collapse. Even Jagdish Bhagwati, one of the leading economists defending globalization of trade (after all, his book is titled In Defense of Globalization), is highly skeptical of financial globalization, stating that "the claims of enormous benefits from free capital mobility are not persuasive." George Soros, the prominent financier, opens his book On Globalization with a chapter entitled "The Deficiencies of Global Capitalism."

One reason for the controversy is that opening up the financial system to foreign capital flows has led to some disastrous financial crises causing great pain, suffering, and even violence. These crises can arise when bad policies encourage excessive risk taking by financial institutions, policies that rich elites in the developing countries often advance for their own profit. There are those (including Stiglitz and Bhagwati) who put the primary blame for the failures of financial globalization in emerging-market economies on outsiders, specifically on the International Monetary Fund, or what they refer to as the Wall Street-Treasury complex. The evidence has brought me to the conclusion that institutions like the IMF or the U.S. Treasury are not primarily to blame, although neither are they blameless--public and private financial institutions active in the international capital markets have often aided and abetted poorly designed financial globalization, although that was not their intention. ...

We have seen that the repression of the financial system is a great obstacle to economic growth and the reduction of poverty in poorer countries. Yet, if financial development offers such tremendous benefits, why doesn't every country jump on the path to growth and prosperity by imitating the institutions of the advanced economies? Part of the answer is that good institutions need to be home-grown; institutional frameworks that have been developed in the rich countries frequently do not translate well to poorer countries. This is a lesson that many in the advanced economies of the world have yet to learn. The development of good institutions in the advanced countries took hundreds of years; as they grew, they adapted to local conditions. Poor countries must develop their own institutions, and the citizens of these nations must feel they have ownership of the institutions or the institutions will be ineffective and short lived. ...

I will conclude by saying that those who oppose any and all globalization have it completely backward: Protectionism, not globalization, is the enemy. It is true that, by itself, globalization in both finance and trade is not enough to ensure economic development and that economies must position themselves to handle foreign capital flows. But as I said, to be against globalization as such is most assuredly to be against poor people, and this is presumably not the position antiglobalizers want to take. Developing countries cannot get rich unless they globalize in both trade and finance. Making financial flows truly worldwide and creating robust, efficient financial markets in developing countries is not optional: It needs to be the focus of the next great globalization. In sum, I want to challenge those who oppose globalization to rethink their objections. As Kofi Annan, the Secretary General of the United Nations, has put it, "The main losers in today's very unequal world are not those who are too much exposed to globalization. They are those who have been left out." Rather than opposing or limiting globalization, we in the rich countries and those in the developing countries must, as a moral imperative, work together to make globalization work for the general good of people all over the world.

Comments

[yartrebo]

It isn't globalization (defined as "planet-scale integration") that is the problem, but rather imperialism.

Regimes such as patents, copyrights, and trademarks serve both as a massive wealth transfer from developing countries to wealthy ones and to hinder the growth of high-value industries. In order to pay these fees, poor countries must export commodity products at extremely low prices.

At wholesale prices, it takes about 250 lbs of sugar to buy a CD, or about a tonne (~2,200 lbs) of sugar to buy a brand name shoe (of which >90% of the price can be attributed to the USA, and <10% to the country that actually made it).

These price differentials are no accident. By manipulations such as these, we get access to third world resources without sending much in return.

[cm]

yartrebo: And as a consequence, or perhaps rather co-feature, US/Western living standards rest on thinner ice than meets the eye. Much of the practical discontent with "globalization" - note the quotes - is related to that.

[evagrius]

So we get dinosaurs influencing the market when mammals are on the rise ?

[ninjaplease]

"I will conclude by saying that those who oppose any and all globalization have it completely backward: Protectionism, not globalization, is the enemy. It is true that, by itself, globalization in both finance and trade is not enough to ensure economic development and that economies must position themselves to handle foreign capital flows. But as I said, to be against globalization as such is most assuredly to be against poor people, and this is presumably not the position antiglobalizers want to take."

But then...

"One reason for the controversy is that opening up the financial system to foreign capital flows has led to some disastrous financial crises causing great pain, suffering, and even violence. These crises can arise when bad policies encourage excessive risk taking by financial institutions, policies that rich elites in the developing countries often advance for their own profit."

"world economic growth since the Second World War has been at the highest pace ever recorded."

And the population difference between then and now is...?

"What we are seeing in countries that are export oriented, and thus able to take advantage of the present age of globalization, is a reduction in poverty and a convergence of income per capita toward industrial-country levels."

Oh there's nothing like speaking in generalities... How many of the 300 million "middle class" people in India live on less than $10 per day? I guess the united states is NOT export oriented, which of course means, that we're not a low wage center. Can we please stop glossing over what we really mean when we make arguments for or against an ideology?

"In India and China, for example, globalization in recent years has lifted the incomes of more than 1 billion people above the levels of extreme poverty. ..."

Teriffic, an actual number presented to defend a thesis. Now, tell me another number, what will the median US wage be at when India, China, Mexico, the EU and the US converge? If I have to start up a subsistence greenhouse, I'd like to know by this coming spring...

What is the limit of capital? What is needed to get the other 4 billion people out of extreme poverty? I see our economy rapidly approaching that of Christmas Island, when it runs out of Phosphate--we got nothing to sell that anyone would want to buy.

In our current global financial system, think for a moment what would happen if China switched to the Euro. The Great Deflation...

[yartrebo]

cm:

I'm well aware that the US situation is quite precarious. Historically, the common citizens of imperial countries might have fared better than the common residents of colonies, but they still suffered.

Still, it's worthy to note that the blame rests entirely on the imperial states, not the colonies and vassal states that have no say in the matter and it's important to remember that the biggest losers are the colonies.

The wealth that's taken from the 3rd world flows mostly to the upper classes (capital). The rich benefit from the immense profits in this lop-sided trade. The upper-middle class (professionals) doesn't fare too poorly either, as the cost of many luxuries is greatly reduced and the price of the professional services they sell remains high.

Thus it's easily conceivable that a country overflowing in loot could have serious issues regarding the common welfare - how the pie is split up is often more important than how large the pie is.

[james]

modern myths

trademarks, patents, and copyrights are not protectionism

bilateral trade agreements being promoted by us government which focus on trademarks, patents, and copyrights are not protectionism for patent, trademark and copyright owners

consolidation of financial entities in financial globalization movement is not oligopolistic, not anti-competitive, not protectionistic

multinational exploitation of cheap labor in china, indonesia, etc is being done to lift the "unfortunates" in those countries out of poverty
out of poverty

[calmo]

Mish gushes

What we are seeing in countries that are export oriented,
[Such a clumsy phrase Mish, was Mexico troubling you?]
and thus able to take advantage
[and this one not so clumsy, just troubling --my advantage is your disadvantage?]
of the present age of globalization,
[Not like The Age of Aquarius people --suitably under capitalized]
is a reduction in poverty
[Do not mention the beating the environment has taken. This is about us forchrisake! (That would be those who know what an advantage is by golly.)]
and a convergence of income per capita toward industrial-country levels.
[As per Roach, this convergence will never reach anything like wage parity.]

More bits that deserve some, (but from windy me, less) attention:

One reason for the controversy is that opening up the financial system to foreign capital flows has led to some disastrous financial crises causing great pain, suffering, and even violence.
[ see yartrebo on imperialism and know that the guns on those European expeditions were not afterhoughts.]

Poor countries must develop their own institutions, and the citizens of these nations must feel they have ownership of the institutions or the institutions will be ineffective and short lived. ...[but China?]

Rather than opposing or limiting globalization, we in the rich countries and those in the developing countries must, as a moral imperative,[Excuse me? Since when did morality have anything to do with it? These oblique references to high mindedness are singularly disasterous, Mish. Leave Kant to the Kantians.] work together to make globalization work for the general good of people all over the world.

yartrebo needs to expand this imperially:

It isn't globalization (defined as "planet-scale integration") that is the problem, but rather imperialism.

james, not impeded by any moral imperatives, just in-yo-face common sense:

multinational exploitation of cheap labor in china, indonesia, etc is being done to lift the "unfortunates" in those countries out of poverty
out of poverty

[Movie Guy]

Frederic Mishkin- "I will conclude by saying that those who oppose any and all globalization have it completely backward: Protectionism, not globalization, is the enemy."

"oppose any and all..."

Mishkin is an idiot.

[PrinceOfDarkness]

Ninjaplease,

>And the population difference between then and now is...?
Much smaller than change in GDP. From 1945-2005 US gdp (in year 2000 $) went from 1.8T$ to 11.8T$. While number of USians went from 132M to 297M. GDP per captia after adjusted for infation went up by ~3x.

>How many of the 300 million "middle class" people in India live on less than $10 per day?

Per capita GDP (PPP) in India is now around $3600 and population is around 1.1B. Indian income distribution is fairly gaussian. So I would guess none.

>Now, tell me another number, what will the median US wage be at when India, China, Mexico, the EU and the US converge?

Somewhere around $80,000 to $120,000.

>What is the limit of capital? What is needed to get the other 4 billion people out of extreme poverty?

Not much. Free and fair trade, reasonable govt regulation will allow those 4B people to generate the captial required to lift themselves out of poverty.

[yartrebo]

calmo:

Re: "yartrebo needs to expand this imperially:"

Imperialism means building an empire. An empire consists of a homeland and colonies. Colonies are vassal states who are mostly autonomous but must operate in a way that the imperial country approves of. This can be done by having a military presence in the country, by being able to topple the local government at will, by intimidation, or by a combination of means.

The sole purpose of a colony is to advance the aims of the ruling class of the homeland. This usually means suppling the homeland with resources. Traditionally this was raw materials and gold, but recently labor-intensive goods and services as well as the assumption of debt (holding worthless dollars as reserves) have become popular too. The bulk of the people in colonies are intentionally kept very poor, so as to keep local consumption to a minimum to keep exports flowing, even at rock-bottom prices.

In the modern world, most of Africa, all of Central America, much of South America and Asia, and some of the Middle East and Oceania can be considered colonies (with the USA holding the bulk of them, and Russia, Japan, the EU, and China having a few each). The line between a country that is sovereign (like China or India) and one that is a vassal (like Iraq, pre-Chavez Venezuela, or Afghanistan) is not always clear-cut, and things are much more fluid and less transparent than they were in the days when the US were colonies themselves.

The reasons I say that Imperialism is the problem should be quite evident: People in colonies generally have despotic governments pushed down their throats (or their representative governments bought, bribed, coerced, or overthrown), they have very low standards of living, and they are not even sovereign.

The common people in the homeland do fare somewhat better - at least there are cheap goods and a welfare state (maybe not that pronounced in the US, but it sure beats what's available in the colonies) - but they do suffer from large disparities in wealth (since the loot from an empire flows to the rich and their capital), social decay, and from fascism/police states.

[Movie Guy]

yartrebo - "In the modern world, most of Africa, all of Central America, much of South America and Asia, and some of the Middle East and Oceania can be considered colonies (with the USA holding the bulk of them, and Russia, Japan, the EU, and China having a few each)."

First, you don't know what you're talking about; second, you didn't breathe one word about the European nations and the broad EU influences around the world.

[calmo]

Thanks yartrebo. I was expecting much less. (Can I command you at will?) [I am barely in command of myself, so take my suggestions with the same quantity of salt I do: plenty.]
This is not a frequent word, "imperialism", outside of academic circles and characterizing current trade relationships as imperialistic with MNCs as the Home Country (usually headquartered in the US in any case) is not done even there. Globalization sounds so much more modern and victimless.
Thanks again for your overview that didn't even mention Marx or socialist/communist ideology.

[ninjaplease]

Excellent deduction prince of darkness.

http://earthtrends.wri.org/updates/node/6

Oops, that reality dream smasher again...
380 million. Not zero.

You believe the median us wage will hit 80-120k? Can you explain what jobs will pay this wage in the US?

[ninjaplease]

"Not much. Free and fair trade, reasonable govt regulation will allow those 4B people to generate the captial required to lift themselves out of poverty."

Wow, I'm speechless. Not much huh?

[yartrebo]

Ninjaplease: Quite easy - add in enough inflation and 80k-120k won't even buy you a loaf of bread. I'm not fond of the statistics on people living on under a dollar or two dollars a day for this reason. The bar gets lower every year and it's useless if one wants to look at poverty over time.

[anne]

Yartrebo

"At wholesale prices, it takes about 250 lbs of sugar to buy a CD, or about a tonne (~2,200 lbs) of sugar to buy a brand name shoe (of which >90% of the price can be attributed to the USA, and <10% to the country that actually made it)."

Please document and explain such an important illustration further. A single illustration worked through carefully and referenced will help me understand this issue better.

[anne]

Development in China has always involved technology or intellectual property transfer, which I have argued is critical for sustained development. There is an overwhelming relative imbalance in intellectual proterty control by developed nations. How then does India or Brazil or Mexico or Ghana gain control of enough intellectual property to generate sustained development? A Mexico or Ghana that does not gain intellectual property will not develop as China no matter the resource base. Now, Brazil is a major sugar producer. What does Brazil need in sugar production to afford CDs?

[yartrebo]

Anne: I used $.04/lb for the price of sugar, and $10/unit for the price of CDs. Those prices are a few years old as I haven't bothered to get newer figures - but the exact numbers aren't important.

The reason it's important is that 1st world exports are artificially propped up to many times their free market price (for a CD, this price is perhaps 10 cents in large enough quantities).

As far as the developing world goes, they would be best served by not having any concept of IP. The balance of trade would shift massively in their favor, their currency would strengthen dramatically, and market forces would favor production to meet domestic ends (raising the standard of living). Too bad doing such a thing would be a sure-fire way of getting trade sanctions or having a coup d'etat.

[anne]

Agreed; the issue of trade in raw resources in return for technically driven products or intellectual property is critically important, but it is important to be as precise as possible in data and description to properly present the problem. I have not thought carefully enough nor in proper detail about the problem. Thank you for these comments.

[anne]

Even loose data on price differences in sugar and music disks gives a sense of why in Rio walkway stands are filled with pirate disks. There are 5 or 6 international music producers and distributers, and there was a time when music in Rio formally cost more than in London, but that was in music company controlled stores and not along the walks. But, I must learn more about this sort of example.

[DarkPrince]

Ninjaplease:

You asked how many people in the 300 Million middle class in India live on less than $10 a day. The answer is zero at current PPP prices. Do the math!

More trade and better technology will allow each person to produce more. Which means the average salaries will go up. Also with China and India being more productive will mean more stuff is being made. So more stuff will be paid out. ie incomes will go up and have been going up over any long period of time.

I don't know what the professions will be, but I guess farming is going to be big :-) since US has the most farmland in the world. There will also be some technologies which will have dense clusters in the US. Manufacturing is now a small part of the total value added for lot of products. For example a shirt's retail price has only 1-4% direct manufacturing labor content. The rest is other stuff!! As long as US can do the other stuff well,we will be fine. Not sure why people obsess over the 4% and forget about the 96% value added.

yartrebo:

No this is without inflation. US income is going up around 2% year after removing inflation. China ~8% and India ~6%. (I am typing these from memory but they should be close enough).

Ok now you are making me pull up a spreadsheet. :-) So number of years China will catch up with US is when

GDP_US*(1+R_US)^N = GDP_CH*(1+R_CH)^N
So,
N = log(GDP_US/GDP_CH)) / log( (1+R_CH)/(1+R_US) )
where GDP is the GDP per captia and R is it's growth rate

Plug the numbers in and you get 30.6 years and the GDP is ~76K$. At the low end of my range. For India with lower growth rate the number is $152K in 65.6 years. Ok my estimate was a bit off but not too bad for a top of my head estimate. :-)

Ya, I know you have you have to take into account dependacy ratios, investment efficiency, slow down as incomes catch up etc etc but these are hand waving numbers. US gdp grew by 3x since WW2 inspite (because?) of all the outsourcing of manufacturing and technology. Not sure why it is not about to happen again. Show me a 10 year period when incomes haven't grown in the US since then.

[Movie Guy]

yartrebo,

You made the claim: "In the modern world, most of Africa, all of Central America, much of South America and Asia, and some of the Middle East and Oceania can be considered colonies (with the USA holding the bulk of them, and Russia, Japan, the EU, and China having a few each)."

Name the "colonies" of the USA in Africa, Central America, South America, Middle East, and Oceania.

[Movie Guy]

Fixing the format error...

[yartrebo]

Movie Guy: Nigeria, Angola, Indonesia, Taiwan, Afghanistan, Pakistan, Iraq, Columbia, and Nicaragua are prominent examples from each of the regions I mentioned.

There's plenty more, but those are the ones where the influence and control has been pretty overt.

[Movie Guy]

yartrebo,

Appreciate the response.

Indonesia? No way.

We do not control Nigeria, Angola, Taiwan, Pakistan, Columbia, and Nicaragua. Heavily influence, perhaps, but not control.

Your original claim: "In the modern world, most of Africa, all of Central America, much of South America and Asia, and some of the Middle East and Oceania can be considered colonies (with the USA holding the bulk of them, and Russia, Japan, the EU, and China having a few each)."

Let's break down your first list:

South America: Columbia

Central America: Nicaragua

Africa: Nigeria, Angola

Asia/Oceania: Taiwan, Indonesia

Middle East: Iraq

Eurasia: Afghanistan, Pakistan

I only count two reasonably powerful regional players in your first list.

There must be more nations (colonies) on your private list.

[ninjaplease]

Do your homework, Oceana is controlled by phosphate mining companies.