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					Globalization
                  Topics
• What is globalization?
• Is it something new? Historical
  perspectives
• What are the causes?
• Do developing countries benefit from
  globalization?
• Role for Ukraine in the globalized world?
                           References
•   Bordo, M., Eichengreen, B., and Irwin, D., 1999, Is Globalization Today Really
    Different than Globalization a Hundred Years Ago?, NBER Working Paper No.
    7195
•   Edwards, S., 1999. How Effective are Capital Controls?, Journal of Economic
    Perspectives Vol. 13 (Fall): 65–84.
•   Obstfeld, M. and Taylor, A. 2002, Globalization and Capital Markets, NBER
    Working Paper No.8846.
•   Edwards, S, “Capital controls sudden stops and current account reversals,” 2005,
    NBER Working Paper No. 11170
•   Kose, Prasad, Rogoff, and Wei, (2006), Financial Globalization: a reappraisal,
    NBER Working paper No. 12484
•   Stultz, R, (2006), Financial Globalization, Corporate Governance, and Eastern
    Europe, NBER Working Paper No. 11912
•   Martin and Rei (2006), Globalization and Emerging Markets: With or without
    crash?, American Economic Review, Vol. 96, No.5
•   Schmukler,S. and Zoido-Lobaton, P.,2001, Financial Globalization: Opportunities
    and Challenges for Developing Countries, The World Bank, mimeo.
•   Frankel, J., 1992, Measuring International Capital Mobility: A Review, American
    Economic Review Vol. 82(2): 197-202
•   Thomas Friedman, “The World is Flat”
       What is globalization?
• Growth in international trade in goods and
  services
• Increasing role of multinational
  corporations (MNC), surge of foreign direct
  investment (FDI)
• Higher integration of the financial markets
• Increase in labor mobility, outsourcing of
  jobs and migration
            The world is flat
• T. Friedman, NY Times columnist, the
  author of “The World is Flat”
  – competitive playing fields between industrial
    and emerging market countries are leveling
  – creates opportunities for labor force in
    emerging economies to join global markets
  – examples: Shanghai, China; Bangalore, India
  Historical Perspective: 1870 -
               1914

• Gold standard as a dominant monetary
  system (fixed-exchange rate regimes)

• Global capital market centered in London

• Increasing globalized capital market, with
  surging capital flows
  Historical Perspective: 1914 -
               1945
• Destruction of global economy with increasing
  non-cooperative economic policy-making
• Broken credibility on the gold standard and
  adoption of floating rates
• Monetary policy became subject to domestic
  goals to help finance wartime deficits
• Capital controls to protect gold and avoid
  currency crises
• Capital flows were minimal
• International prices and interest rates were out
  of synchronization
    Historical Perspective: 1945-
                1971
• Bretton Woods era
• Effort to rebuild globalized economy
• Trade flows in remarkable expansion
• Economic growth in its most rapid spurt in
  history
• Capital Flows expanded, but at a low rate
• Capital controls were still accepted and
  sanctioned by the IMF as a way to prevent
  currency crises and runs, and also giving some
  space for activist monetary policy
• Late 1960s: end of the fixed-exchange rate
  system
    Historical Perspective: Post
                1971
• Post-Bretton Woods floating era
• Still some fixed-exchange rate regimes
• Increasing capital mobility
• Decreasing capital controls
• In peripheral countries: economic reforms
  reduced transaction costs and risks of foreign
  investments
• Small developing countries tended to adopt fixed
  exchange rates (dollarization and currency
  boards) while larger ones tended to adopt
  floating exchange rates with inflation targeting
U-Shape Curve – Stylized Fact
  Comparison of integration today and pre
   1914 for trade and finance in the US
Bordo et al (1999):“…trade today is strikingly more
  important than a century ago. Three indicators
  sustain this view:

• a higher share of trade in tradeables production
• the growth of trade in services
• the rise of production and trade by multinational
  firms.”
   Trade in good and services
• Trade is now much larger as a share of
  tradeable goods production.
• The value of U.S. service exports
  (excluded from the merchandise trade
  figures considered above) now amount to
  about 40 percent of the value of
  merchandise exports.
 The Role of Multinational Trade
        and Production
• Multinational enterprises existed in the late
  nineteenth century, but they were
  exceptional (i.e. East India Company,
  Standard Oil of New Jersey, Singer
  Sewing Machine)
• The value of direct investments has
  soared since the early-1980s and is now a
  quantum leap above a century ago
        Measures of Financial
            Integration
• Feldstein-Horioka condition
• Real Interest Rate Parity
• Uncovered Interest Rate Parity
• Covered Interest Rate Parity
• Gross Stock of Foreign Capital
• Equity and Bond Prices
  Real Interest Parity since 1870
Long-Term Real Interest Differentials




 Source: Obstfeld and Taylor (2002)
 Real Interest Parity since 1870

• Differentials have varied widely over time

• But have stayed relatively close to a zero
  mean
  – The series appear to be to have been
    stationary over the very long run, and even in
    shorter sub-periods.
• Krugman, Paul (1995), “Growing World Trade:
  Causes and Consequences,” Brookings Papers
  on Economic Activity 1, pp.327-362:

• “…the general picture of world integration that
  did not exceed early twentieth century levels
  until sometime well into the 1970s is thus
  broadly confirmed. In the last decade or so, the
  share of trade in world output has finally reached
  a level that is noticeably above its former peak.”
        What are the causes
• lower transportation costs

• lower trade barriers

• development of new telecommunication
  technologies
        Transportation costs
• increasing role of air transportation

• improvements in traditional transportation
  – better technology, MNC in transportation
    (UPS, FedEx)
  – more developed infrastructure (roads, ports
    etc)
Lower trade barriers
                Role of Information
• First wave of globalization coincided with the invention of the
  telephone and radio
    – transatlantic cable was laid in the 1860s, coming into operation in 1866
    – Prior to its opening, it could take as long as three weeks for information
      to travel from New York to London
    – With the inauguration of the cable, this delay dropped to one day

• Garbade and Silber (1978) compare the London and New York
  prices of US bonds four months before and four months after the
  cable and find a significant decline in the mean absolute difference.

• Information asymmetries can explain the disproportionate
  importance of family groups in the pre-globalization period (the
  foreign branches of the Rothschild and Morgan families, for
  example)
Factors Behind Globalization – Potential Benefits
• Development of the financial sector
   – More and new type of capital is available
      • Deeper and more sophisticated markets
      • Increased market discipline

   – Better financial infrastructure
      • Insurance
      • Smoothing of socks
      • More transparent, competitive, and efficient
        financial system – capital seeks its highest
        rewards
 Factors Behind Globalization – Potential Costs
• Inconsistency of some policy goals and the free
  flow of capital across international boundaries

• Risk of financial and balance of payments crises
   – More market discipline
   – Imperfections in international markets


• Contagion
   – Higher exposure to foreign shocks
   – Fundamental Contagion: real or financial
   – Non-fundamental contagion: herding behavior
            Costs of Financial Liberalization
   Gcrises is the annual growth rate of real GDP at the crises year. G(N) is
   the annual growth rate of real GDP N years before/after the crises.




Source: Bordo, Eichengreen, and Irwin (1999)
     Net Benefits of Financial Globalization
• Balance
            More Developed Markets
                  versus
            Non-fundamental crises
            Cross-country contagion
            Fewer instruments

• Still positive but…

• More evidence is needed
               Policy Options


  What explains the long stretch of high capital
     mobility that prevailed before 1914, the
subsequent breakdown in the interwar period, and
the very slow postwar reconstruction of the world
                financial system ?

   The Choice of an Exchange Rate Regime
    The Choice of an Exchange Rate Regime
• The Macroeconomic Policy Trilemma for Open
  Economies - “Inconsistency Trinity”
   A country cannot simultaneously determine:
   – Exchange rate
   – Interest rate
   – Monetary policy oriented towards domestic objectives


• In a world with full freedom of cross-border
  capital movements:
   – fixed exchange rates and independent domestic-
     oriented monetary policy are incompatible choices
                   The Impossible Trinity




Source: Frankel (1999)
The Trilemma and Major Phases of Capital
               Mobility
Does capital flow to poor countries?
      Globalization and emerging economics
• Do developing countries benefit from globalization
   – Yes: China and India
   – No: more frequent financial crises in the last two
     decades
• Capital flows to rich developing countries, poor countries
  are left behind
• Role for Ukraine?
   – it is very open economy measured by share of trade to
     GDP, but did not join WTO yet
   – Trade is not diversified, therefore high exposure to
     price shocks
   – it is not financially integrated yet, but surge of FDI in
     banking sector