Globalization = Threats or Challenges

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					Globalization =
Threats or Challenges?
Westminster Business School, February 15, 2008 www.globalfinance.org
Michel Henry Bouchet
Glob@l Finance Center MH Bouchet/CERAM (c)

Who coined the term Globalization?
Theodore Levitt (1925-2006) former profesor at
Harvard Business School (1983)



involves the change in technology and social behavior that allows MNCs to sell the same products worldwide under global brands »
MH Bouchet/CERAM (c)

« Globalization

What is Globalization all about?
Worldwide

extension of the market economy = Stage of capitalist development where market-based and profitoriented forces prevail in almost every production and exchange of goods and services worldwide
MH Bouchet/CERAM (c)

Marxist approach to economic development
capitalist economic system is doomed to become worldwide in its never-ending struggle to increase the rate of profit under the pressure of competition”
MH Bouchet/CERAM (c)

1848: “The

“Globalization is an endeavor that can spread worldwide the values of freedom and civil contact – the antithesis of terrorism!”. Alan Greenspan

“Globalization, like the telephone, is both a
blessing and a curse…Globalization is like a giant wave that can either capsize nations or carry them forward on its crest…” J. Stiglitz
MH Bouchet/CERAM (c)

General Colin Powell on Globalization…
is no point in being « for » or « against » globalization. Like the weather, it is just there!  One should concentrate on how to live with it, maximize its benefits, and minimize its cost! »
 There

MH Bouchet/CERAM (c)

The 4 prerequisites of Globalization
1.

2.

3.

4.

Sharp increase in productivity (1850= industrial revolution) Economic and trade liberalization (1960= trade openness) Technological breakthrough in NTIC (1980-90): reduction in transaction costs Growing competition for market shares and profits + shareholder pressure for wealth maximization: “responsiveness revolution”  Premium on competitiveness and flexibility
MH Bouchet/CERAM (c)

Marked acceleration of productivity = economic take-off

1850 = Industrial revolution

Source: R. Lucas

MH Bouchet/CERAM (c)

Emerging Globalization
YEAR 1750 1850 1900 1960 1980 85-90 95-98 1999 2002 2005 2007 2015 Population

760 0,3% 500 0,4% 650

1100 0,5% 825 2,5% 750

1600 0,6% 1800 3,5% 1100

3021 2,2% 6500 2,4% 2150

4435 1,7% 10900 2,5% 2610

5220 1,6% 20000 3,3% 3800

5900 1,3% 29000 2,8% 4900

6000 1,3% 30000 3,7% 5000

6200 1,2% 32810 3,1% 5225

6500 1,15% 44700 4,4% 6990

6650 7000 1,15% 55000 65000 4,9% 3% 7750 8500 1%

∆% GDP ∆%
GDP per capita

∆% Wealth Gap

0,2% 1

1% 4

1,5% 10

1,5% 33

1,5% 45

1,5% 50

1,2% 60

1,5% 71

1,5% 71

1,5% 70

1,6% 2,1% 70

60

R. Lucas, IMF, OECD

MH Bouchet/CERAM (c)

Technological Innovation Cycles
Genetics ? Internet Computers Aeronautics Chemistry Transportation Automobile

Electricity Steam Telephone Radio

Engine

1800

1870

1900

1950

1980

1990

2020

MH Bouchet/CERAM (c)

Cost of a 3-Minute Telephone Call NY- London
(Constant 1990, U.S. $)
350 300 250 200 150 100 50 0
1930 1940 1950 1960 1970 1980
$0.30

1990

Number of years for mass-access
(>50 million people market)
80 70 60 50 40 30 20 10 0 Phone Radio PC
MH Bouchet/CERAM (c)

Years

TV

WEB

Measuring Globalization?
 How

much « global » is the global economy?

 Globalization

should not be taken for granted: Trend, cycle, threshold or ideology?

MH Bouchet/CERAM (c)

Share of Exports/GDP in %
30 25 20 15 10 5 0 1870 1890 1913 1929 1938 1950 1972 1992 2002 2005 2007
MH Bouchet/CERAM (c)

Europe Japan USA

Global trade openness index
35 30
29%

XGS/GDP %
=18300/57300

32%
26%

25 20 15 10 5 0 1870 1913 1987-96
5% 12% 20%

1997-06

2005

2008

A. Maddison, IMF/WEO 2007

MH Bouchet/CERAM (c)

Trade openness ratio (X+M/GDP%)
400% 350% 300% 250% 200% 150% 100% 50% 0%
Hongkong Singapour Malaysia Vietnam Philippines Thailand Indonesia
MH Bouchet/CERAM (c)

Brazil= 24% India= 20%

Taiwan

Korea

China

Globalization Index: The Top 20 /62
     


    

1. Singapore 2. Ireland 3. Switzerland 4. US 5. Netherlands 6. Canada 7. Denmark 8. Sweden 9. Austria 10. Finland 11. New Zealand 12. UK

          

13. Australia 14. Norway 15. Czech Rep. 16. Croatia 17. Israel 18. France 19. Malaysia 20. Slovenia 52. Russia 54. China 62. Iran

MH Bouchet/CERAM (c)

ATKearney

The 6 threats of Globalization
Triumph of Flows vs Stocks  2. Volatility & Spill-over effect  3. Digital divide  4. Wealth gap  5. Capital concentration  6. Markets versus nation-states
 1.

The challenge of global regulation
MH Bouchet/CERAM (c)

1. The triumph of Flows vs Stocks
The

overwhelming supremacy of cross-border transactions:

what

gets value is what is

traded

MH Bouchet/CERAM (c)

Overwhelming importance of trans-national flows
Old World = STOCKS  Territory  Population  Army  Raw materials  Official reserve assets  Gold stock New World = FLOWS  Trade of Goods & Services  Capital flows and FDI  Culture & Knowledge  Information & Economic intelligence  Networks & “Knowledge economy”

MH Bouchet/CERAM (c)

(p) IMF

 GDP and Global Trade

IMF/WEO 08

08 20 07 20 06 20 05 20 04 20 -07 98 19 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 90 19

13

11

GDP Exports

9

7

5

3

1

%

-1

MH Bouchet/CERAM (c)

Discrepancy between growing financial flows vs real output
 Total

daily FX transactions: US$3200 billion >20 times worth the daily underlying production of goods and services.
world official reserves < US$6500 billion

 Total

 Destabilizing

speculation: ex.: oil trading (one physical barrel gives rise to 5 to 7 financial barrel transactions)
MH Bouchet/CERAM (c)

The overwhelming supremacy of Finance over the « real » economy
200000 150000 100000 50000 0
GDP
Source: IMF/2007

In US$ billion 400% of GDP

Reserves

Stock market capitalization
MH Bouchet/CERAM (c)

Financial assets

Hedge Funds
hedge funds  US$2200 billion of assets (twice Belgium’s GNP)  25% annual growth rate over the last 10 years  LTCM lost >$1.8 billion in 1998 after borrowing > 50 times its equity capital!  Calpers’s investment fund: $135 billion (it pulled out of 12 EMCs)
MH Bouchet/CERAM (c)

 6000

2700 2200 1700 1200 700 200

Hedge Funds’ Assets
US$ billion

10,000 hedge funds manage close to US$2200 billion

-3001992

2003

2004

2005

2006

2007

2010

MH Bouchet/CERAM (c)

The USA currently attract 60% of global capital flows
2000 1800 1600 1400 1200 1000 800 600 400 200 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total capital inflows in US$ billion
USA 150 EMCs

Source: IMF/2007

MH Bouchet/CERAM (c)

2. Volatility & Spill-over effect
Trade and financial liberalization (current + capital accounts) increases vulnerability to exogenous shocks and crisis contamination
MH Bouchet/CERAM (c)

€£ $

Globalization = Rising volatility?
 1.

2.

3.

4.

Why has volatility risen so much since the 1970s-80s? sharp increase in worldwide inflation that followed the oil shocks poor monetary and fiscal policy responses, following the end of the Bretton Woods agreements global deregulation and liberalization of financial markets and capital flows rapid spread of NTIC

MH Bouchet/CERAM (c)

Long-term trend in bond and stock return volatility

Source: BIS 2006

MH Bouchet/CERAM (c)

Evolution of Euro-$ LIBOR
12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08

3-month 12-month

MH Bouchet/CERAM (c)

Evolution in Gold Price
900 800 700 600 500 400 300 200 100 0 US$ per ounce
Afghan crisis Iraq crisis Koweit crisis US Subprime crisis

Kippour crisis

Asian crisis

19 48 19 75 19 80 19 85 19 90 19 95 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07
MH Bouchet/CERAM (c)

Short-term capital flow volatility & spill-over
Net short-term BIS Banks' Claims
Philippines 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 US$ million Indonesia Thailand Malaysia

déc-90

déc-91

déc-92

déc-93

déc-94

déc-95

déc-96

déc-97

déc-98

déc-99

déc-00

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déc-01

3. The “Knowledge Society” and the digital divide

MH Bouchet/CERAM (c)

How many people are online throughout the world?
1400 1200 1000 800 600 400 200 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2008

Source: Nua Internet

MH Bouchet/CERAM (c)

The two-tier global economy
who are kicking into e-gear… and those who are still struggling with getting hardwired phones into houses!  < 20% of the world population (1200 million) uses the Internet, and 85% of them live in industrialized countries!  Tokyo and Manhattan district alone have more telephone lines than the whole of Africa.
 Those
MH Bouchet/CERAM (c)

The “Knowledge Society”
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

US/Canada France EU OECD LAC ASIA CIS Africa World

Internet Access
MH Bouchet/CERAM (c)

Population

Digital divide: R&D Distribution
85%

MH Bouchet/CERAM (c)

4. Wealth Gap

MH Bouchet/CERAM (c)

Global economic divide : Shares of Global GDP %

150 countries = 48%

OECD EMCs
30 countries = 52%

Source: FMI 2007

MH Bouchet/CERAM (c)

Regional shares of global GDP in ppp
21,4%

All other countries
39%

16%

USA EU Japan China India Others

4,6% 10,9%
Source: FMI/2007

7%

MH Bouchet/CERAM (c)

Share in GDP, trade and population %
90 80 70 60 50 40 30 20 10 0 Trade
Source: IMF/WEO

84,7
67,7 52

32,9

OECD LDCs
15,3

48

Population
MH Bouchet/CERAM (c)

GDP

MH Bouchet/CERAM (c)

Taking off? (US$ PIB per capita on ppp basis)
40000 35000 30000 25000 20000 15000 10000 5000 0

UK USA China Japan France Brazil

1820 1850 1900 1950 1960
OCDE-2007, WB-WDI

1970 1980 1990 1995 1999 2005

MH Bouchet/CERAM (c)

The BRIC’s catch up process

MH Bouchet/CERAM (c)

The poorest countries: 5% of world population
– – – – – – – – – – 1980: ETHIOPIA TANZANIA BHUTAN BANGLADESH YEMEN MOZAMBIQUE CHAD MALAWI LAOS VIETNAM



– – – – – – – – – – – – – –

2005: GDP <$1000 SIERRA LEONE MADAGASCAR ETHIOPIA TANZANIA GUINEA-Bissau CONGO (DEM. REP.) BURUNDI YEMEN MALAWI MALI RWANDA NIGER NIGERIA ZAMBIA

Residents of poorest countries experienced almost no real income growth during 1980-2000! 80 years of income growth needed for 10% increase. Meanwhile, the rich are getting richer!
MH Bouchet/CERAM (c)

Stubborn world poverty % of population
70 60 50 40 30 20 10 0 1987 1990
MH Bouchet/CERAM (c)

<$1 <$2
2,71 billion 2,74 billion

1,22 billion 1,1 billion

2004

5. Bigger = Better?
Capital concentration and eroding competition...
 Global

market competition drives companies in their endless quest for profits and expansion

MH Bouchet/CERAM (c)

Global M&As 1990-2007 (in US$ billion)
2500

2000

1500

USA Europe

1000

Japan

500

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

MH Bouchet/CERAM (c)

The “most” Global Companies
Foreign sales Foreign Employees N° of countries

Lufthansa Ford Coca-Cola BASF IBM Microsoft GE SIEMENS

61% 38% 70% 75% 57% 57% 45% 75%

37% 54% 67% 56% 52% 32% 45% 60%
MH Bouchet/CERAM (c)

92 137 200 170 164 63 >100 190

Global Company
= 33% of Canada’s GDP  = 100% x Argentina’s GDP  = 130% x Poland’s GDP  2 x Thailand’s GDP  7 x Morocco’s GDP  26 x Tanzania’s GDP
 

Largest private corporation on the planet (after Exxon)

 2007


sales = $351 billion

Objective: to double sales within five years!

MH Bouchet/CERAM (c)

6. Government groveling to Big Business: the dictatorship of “ratings”
•The nation-state is no longer the deciding economic agent!
•Goverments strive to enhance their economy’s competitivess under the scrutiny of rating agencies

• Nations are assessed like any private business according to market-based principles of openness and efficiency
MH Bouchet/CERAM (c)

Economic Freedom Rating/Fraser Institute 2007
Hongkong 2. Singapore 3. New Zealand 4. Switzerland 5. US 6. Ireland 7. UK 8. Canada 9. Iceland 10. Luxembourg 11. Australia 12. Austria 13. Estonia 14. Finland 15. Netherland
1.
MH Bouchet/CERAM (c)

20. Chile  24. France  30. Spain  35. Korea  45. Italy


60. Mexico  60. Thailand  83. Indonesia  88. Brazil  95. China  102. Russia  124. Algeria  126. Venezuela  130. Zimbabwe


Davos-WEF 2007 Competitiveness Index
Switzerland
Finland Sweden Denmark Singapore United States Japan Germany Netherlands United Kingdom Hong Kong SAR Norway Taiwan, China Iceland Israel

1
2 3 4 5 6 7 8 9 10 11 12 13 14 15
MH Bouchet/CERAM (c)

Canada
Austria

16
17 18 19 20 21 22 23 24 25 26 27 28 29 30

France
Australia Belgium Ireland Luxembourg New Zealand Korea, Rep. Estonia Malaysia Chile Spain Czech Republic Tunisia

Davos-WEF 2007 Competitiveness Index

Thailand= 38  China= 57  Mexico= 58  Russia= 62  Brazil= 66  Vietnam= 77  Venezuela= 88  Pakistan= 91


Bolivia= 97  Nigeria= 101  Cambodia= 103  Paraguay= 106  Cameroon= 108  Zimbabwe= 119  Ethiopia= 120  Angola= 125


MH Bouchet/CERAM (c)

World Bank: Doing business rating
  



7 criteria 145 countries New company creation; employment procedure; company registration; financing mobilization; investment protection; contract enforcement; liquidation. 3 days to set up a company in Canada vs 12 days in New Zealand and 52 in Slovakia and 153 in Mozambique

MH Bouchet/CERAM (c)

World Bank: « Doing Business » in 2007
Singapore 2. New Zealand 3. USA 4. Canada 5. HK 6. UK 7. Denmark 8. Australa 9. Norway 11. Japan 21. Germany
1.

BRICs

35. France 39. Spain 93. China 96. Russia 121. Brazil 134. India 171. RDC

The ranking does not take into consideration the macroeconomic framework nor organized crime
MH Bouchet/CERAM (c)

162

Turkmenistan

162
168

Venezuela
Congo, Democratic Republic

Transparency International’s Rating

168
168

Equatorial Guinea
Guinea

of most

Corrupt Countries
(2007 Survey)

168
172 172 172 175 175 177 178 179 179

Laos
Afghanistan Chad Sudan Tonga Uzbekistan Haiti Iraq Myanmar Somalia

MH Bouchet/CERAM (c)

Conclusion: Market forces crowding out the state & the regulation challenge
 Is

the State doomed to death given the challenge of free-market forces and transnational flows?

MH Bouchet/CERAM (c)

Shrinking role… from key actor to facilitator
End of the monopoly position of the State, as:  * guardian of national security: end of bipolarity and cold war  * provider of information: Internet  * main economic driving force in growth and development: economic liberalization  * main employer & provider of public services: privatization  * deciding agent in economic policy issues: caught between market forces and the IFIs’ guidance
MH Bouchet/CERAM (c)

Worldwide privatisation operations
180 160 140 120 100 80 60 40 20 0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
MH Bouchet/CERAM (c)

US$ billion

« Washington Neoliberal Consensus »: One size fits all!
Global marching order = • Trade & Financial liberalization + Floating exchange rates + Macroeconomic stabilization + Minimum government intervention
• Governments are bypassed by market forces and under the scrutiny of regional and international organizations

MH Bouchet/CERAM (c)

Washington Consensus:
“Ten rules” of sustainable market-economic development John Williamson (IIE 1990)
1. Fiscal discipline 2. Redirection of public expenditure priorities toward social investment 3. Tax reform (to lower marginal rates and broaden the tax base) 4. Interest rate liberalization 5. A competitive exchange rate 6. Trade liberalization 7. Liberalization of inflows of FDI 8. Privatization 9. Deregulation (to abolish barriers to entry and exit) 10.Secure property rights

MH Bouchet/CERAM (c)

Challenge: stabilizing the global economy while
 BIS

(1933) & “Cooke Committee” for international regulation: Basel II  Bretton Woods Institutions (1944): IMF and World Bank  OECD (1961)  IIF (1983)  G7 & G10 & G24  IOSCO (International organization for securities)  IAS (International accounting standards)  Financial Action Task Force
MH Bouchet/CERAM (c)

enhancing International financial regulation

Conclusion
Can a different form of globalization be planned? With what goals and what mechanisms of regulation?
***

How to improve the legitimacy, transparency and democracy of IFIs?
***

How to promote a sustainable global market economy?
MH Bouchet/CERAM (c)

Alternative to Globalization? No! (short of a systemic crisis, a meteoritedriven mass extinction or a nuclear war)

Alternative to stop-&-go growth with on-going large wealth gap? Yes

Challenge: Market economy model enjoys a worldwide supremacy while it faces a major legitimacy challenge
MH Bouchet/CERAM (c)