Globalization Threats or Challenges Westminster Business School, February 15, 2008 www.globalfinance

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Globalization Threats or Challenges?Westmi
nster Business School, February 15,
2008www.globalfinance.org

• Michel Henry Bouchet
• Glob_at_l Finance Center

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Who coined the term Globalization?

• Theodore Levitt (1925-2006) former profesor at
  Harvard Business School (1983)
•  Globalization involves the change in technology
  and social behavior that allows MNCs to sell the
  same products worldwide under global brands 

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What is Globalization all about?

• Worldwide extension of the market economy
• Stage of capitalist development where
  market-based and profit-oriented forces prevail
  in almost every production and exchange of goods
  and services worldwide

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Marxist approach to economic development

• 1848 The capitalist economic system is
  doomed to become worldwide in its never-ending
  struggle to increase the rate of profit under the
  pressure of competition

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Globalization is an endeavor that can spread
worldwide the values of freedom and civil contact
the antithesis of terrorism!.
Alan
GreenspanGlobalization, like the telephone, is
both a blessing and a curseGlobalization is like
a giant wave that can either capsize nations or
carry them forward on its crest J. Stiglitz
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General Colin Powell on Globalization

• There 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! 

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The 4 prerequisites of Globalization

• 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

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Marked acceleration of productivity economic
take-off
1850 Industrial revolution
Source R. Lucas
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Emerging Globalization
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R. Lucas, IMF, OECD
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Technological Innovation Cycles
Genetics ?
Internet
Computers
Aeronautics Transportation
Chemistry Automobile
Electricity Telephone Radio
Steam Engine
1870
1950
1980
1990
2020
1800
1900
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Cost of a 3-Minute Telephone Call NY-
London (Constant 1990, U.S. )
0.30
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Number of years for mass-access (gt50 million
people market)
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Measuring Globalization?

• How much  global  is the global economy?
• Globalization should not be taken for granted
• Trend, cycle, threshold or ideology?

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Share of Exports/GDP in
15
Global trade openness indexXGS/GDP
18300/57300
32
29
26
20
12
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A. Maddison, IMF/WEO 2007
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Trade openness ratio (XM/GDP)
Brazil 24 India 20
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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

ATKearney
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The 6 threats of Globalization

• 1. Triumph of Flows vs Stocks
• 2. Volatility Spill-over effect
• 3. Digital divide
• 4. Wealth gap
• 5. Capital concentration
• 6. Markets versus nation-states
• The challenge of global regulation

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1. The triumph of Flows vs Stocks

• The overwhelming supremacy of cross-border
  transactions
• what gets value is what is traded

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Overwhelming importance of trans-national flows
New World FLOWS
Old World STOCKS

• Trade of Goods Services
• Capital flows and FDI
• Culture Knowledge
• Information Economic intelligence
• Networks Knowledge economy

• Territory
• Population
• Army
• Raw materials
• Official reserve assets
• Gold stock

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? GDP and Global Trade

(p) IMF
IMF/WEO 08
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Discrepancy between growing financial flows vs
real output

• Total daily FX transactions US3200 billion gt20
  times worth the daily underlying production of
  goods and services.
• Total world official reserves lt US6500 billion
• Destabilizing speculation ex. oil trading (one
  physical barrel gives rise to 5 to 7 financial
  barrel transactions)

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The overwhelming supremacy of Finance over the
 real  economy
In US billion
400 of GDP
Source IMF/2007
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Hedge Funds

• 6000 hedge funds
• US2200 billion of assets (twice Belgiums GNP)
• 25 annual growth rate over the last 10 years
• LTCM lost gt1.8 billion in 1998 after borrowing gt
  50 times its equity capital!
• Calperss investment fund 135 billion (it
  pulled out of 12 EMCs)

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Hedge Funds Assets
US billion
10,000 hedge funds manage close to US2200 billion
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The USA currently attract 60 of global capital
flows
Source IMF/2007
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2. Volatility Spill-over effect

Trade and financial liberalization (current
capital accounts) increases vulnerability to
exogenous shocks and crisis contamination

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Globalization Rising volatility?

• 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

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Long-term trend in bond and stock return
volatility
Source BIS 2006
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Evolution of Euro- LIBOR
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Evolution in Gold Price
US Subprime crisis
Afghan crisis
Iraq crisis
Koweit crisis
Asian crisis
Kippour crisis
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Short-term capital flow volatility spill-over
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3. The Knowledge Societyand the digital divide
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How many people are online throughout the world?
Source Nua Internet
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The two-tier global economy

• Those who are kicking into e-gear and those who
  are still struggling with getting hard-wired
  phones into houses!
• lt 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.

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The Knowledge Society
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Digital divide RD Distribution
85
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4. Wealth Gap
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Global economic divide Shares of Global GDP
150 countries 48
30 countries 52
Source FMI 2007
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Regional shares of global GDP in ppp
All other countries
Source FMI/2007
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Share in GDP, trade and population
Source IMF/WEO
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Source R. Lucas
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Taking off? (US PIB per capita on ppp basis)
OCDE-2007, WB-WDI
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The BRICs catch up process
Goldman Sachs 2007
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The poorest countries 5 of world population

• 1980
• ETHIOPIA
• TANZANIA
• BHUTAN
• BANGLADESH
• YEMEN
• MOZAMBIQUE
• CHAD
• MALAWI
• LAOS
• VIETNAM

• 2005 GDP lt1000
• 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!
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Stubborn world poverty
of population
2,71 billion
2,74 billion
1,22 billion
1,1 billion
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5. Bigger Better? Capital concentration and
eroding competition...

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

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Global MAs 1990-2007 (in US billion)
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The most Global Companies
50
Global Company

• Largest private corporation on the planet (after
  Exxon)
• 2007 sales 351 billion
• Objective to double sales within five years!

• 33 of Canadas GDP
• 100 x Argentinas GDP
• 130 x Polands GDP
• 2 x Thailands GDP
• 7 x Moroccos GDP
• 26 x Tanzanias GDP

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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 economys
  competitivess under the scrutiny of rating
  agencies
• Nations are assessed like any private business
  according to market-based principles of openness
  and efficiency

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Economic Freedom Rating/Fraser Institute 2007

• Hongkong
• Singapore
• New Zealand
• Switzerland
• US
• Ireland
• UK
• Canada
• Iceland
• Luxembourg
• Australia
• Austria
• Estonia
• Finland
• Netherland

• 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

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Davos-WEF 2007 Competitiveness Index
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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

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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

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World Bank Doing Business in 2007

• Singapore
• New Zealand
• USA
• Canada
• HK
• UK
• Denmark
• Australa
• Norway
• 11. Japan
• 21. Germany
• 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
BRICs
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Transparency Internationals Rating of most
Corrupt Countries (2007 Survey)
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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?

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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

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Worldwide privatisation operations
US billion
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 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

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Washington Consensus Ten rules of sustainable
market-economic developmentJohn Williamson (IIE
1990)

• Fiscal discipline
• Redirection of public expenditure priorities
  toward social investment
• Tax reform (to lower marginal rates and broaden
  the tax base)
• Interest rate liberalization
• A competitive exchange rate
• Trade liberalization
• Liberalization of inflows of FDI
• Privatization
• Deregulation (to abolish barriers to entry and
  exit)
• Secure property rights

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Challenge stabilizing the global economy while
enhancing International financial regulation

• 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

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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?
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Alternative to Globalization? No! (short of a
systemic crisis, a meteorite-driven 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