More from Jackson Hole on attempts to better understand the forces and consequences of globalization:
Policymakers fear ‘lumpy’ growth may not benefit all, by Krishna Guha, Financial Times: ...This year no fewer than 20 central bank governors, ... plus other senior officials ..., made the pilgrimage to the Fed’s annual Jackson Hole gathering. ...[T]he ... group discussed the defining force of our time: globalisation.
Like businesspeople and investors, central bankers are struggling to keep pace with rapid changes in global economic activity. They listened as some of the world’s leading academic economists presented research offering insights into how globalisation works. But even those speaking admitted that the process, its likely outcomes and its demands on policy remain imperfectly understood.
As Mr Bernanke remarked ..., the current period bears some resemblance to past episodes of global integration, [but] ... it is unique in several important respects. The rapid integration of China, India and the former Soviet bloc into the world economy is unprecedented; the old economic relationship between the industrialised core and the developing periphery has been turned on its head, with the developing world exporting manufactured goods and capital; production processes are fragmenting geographically; and global financial markets are larger and more sophisticated than ever before.
Economists and policymakers, therefore, are forced to understand this latest wave of globalisation anew... [W]hy are some developing countries benefiting much more from globalisation than others? What impact does offshoring of production to developing countries have on wages for workers in the developed world? What is the relationship between financial globalisation and economic growth? And how should monetary policymakers respond to globalisation? ...
Some argued that the differences between different developing countries can be put down to economic policies and institutions. ... But Tony Venables, a professor at the London School of Economics, gave the central bankers an alternative explanation. Production may be inherently “lumpy” due to positive agglomeration effects that cause similar businesses to cluster together to take advantage of specialist labour pools, knowledge spillovers and complementary business activities. “The story, then, is that sectors will relocate but this relocation will be lumpy, sectorally and in aggregate, with some countries being left out,” he said.
If Mr Venables is right, development will not spread evenly even if all countries adopt basically sound policies. Instead, nations will advance one after the other, as in the famous “flying geese” pattern of development in Asia. ...
[I]t was impossible to ignore popular anxiety that the effective doubling of the world’s labour force would lead to downward pressure on low-skilled wages in the west. “Economists have to confront these fears not in a way that dismisses them but in a way that addresses them,” Doug Irwin, a professor at Dartmouth, told the symposium.
Gene Grossman, a professor at Princeton, offered the central bankers a new way of thinking about the problem, which paints offshoring in a more positive light. He argued that we should think about trade not as an exchange of goods but an “exchange of tasks”. If some tasks that used to be performed onshore are offshored to lower-cost locations, the result will be an increase in the productivity and wages of workers who perform related tasks that cannot easily be offshored.
Analysis of the US from 1997 to 2004 suggests this positive productivity effect could outweigh the negative labour supply effect on wages in sectors where there had been a lot of offshoring. But it still does not appear large enough to offset the broader negative effect on low-skilled wages arising from the ongoing fall in the relative price of labour-intensive goods.
Another way lower skilled workers could avoid wage depression, policymakers noted, is to shift from tradable to non-tradable sectors. Mr Trichet said this is already happening in Europe: “Wages and salaries are going up, up and up in all these non-tradable services.”
Trade flows, of course, are only one piece of the current wave of globalisation. Global financial integration is proceeding even more rapidly. But the relationship between capital flows and growth remains contested.
Today, capital flows “uphill” from poor to rich nations – above all the US – in contrast to the predictions of all standard economic theories. Moreover, as Raghu Rajan, chief economist at the International Monetary Fund, explained ..., there is no evidence of a positive relationship between net capital inflows and long-term growth in developing countries. ... This is surprising, since extra capital should normally boost growth. ...
Central bankers are only too aware that they cannot ignore the force of globalisation. But there is broad consensus that they are not powerless in the face of it. On the contrary, as Ken Rogoff, a professor at Harvard and former chief economist of the IMF argued, a central bank with a freely floating currency can still achieve the inflation rate it wants over the medium term. Mr Rogoff said it is “absurd” to say that China is exporting disinflation when its emergence as a manufacturing powerhouse only changes the relative price of manufactured goods compared with other products. But he said it did make sense to think of China triggering a positive terms-of-trade shock for the western world – the opposite of an oil price shock. ...
Mr Rogoff said ... globalisation is a double-edged sword. Success in bringing stability to growth and inflation worldwide has resulted in a sharp appreciation in asset prices in the past decade, making them more, not less, vulnerable to changes in fundamentals. Moreover, global integration has permitted the build-up of record current account imbalances, including the record US current account deficit, which pose a serious risk to economic stability.
As Martin Feldstein, a professor at Harvard, observed, a sudden loss of appetite for US assets could result in both an increase in US long-term real interest rates and a sharp fall in the dollar, posing a dilemma for the Fed. Alternatively, if US savings rise, other countries could experience a negative demand shock for their exports. Their central banks would have to decide whether to offset this with easier monetary policy. The US, too, could see a short-term decline in aggregate demand.
None of the central bankers suggested they could do much to solve global imbalances. But the unspoken fear at Jackson Hole was that if these imbalances do unwind with wrenching global adjustments, it will fall to them to pick up the pieces...