Globalization - Who Gains, Who Gets Hurt, and Why It Matters

Montclair State University

College of Humanities and Social Sciences

World Cultures Day

Thursday, April 3, 2008

10:30-11:20 Session

Phillip LeBel, Ph.D.

Professor of Economics

Department of Economics and Finance

School of Business

Lebelp@mail.montclair.edu

What Is Globalization, and Why Is It Important?

1. Globalization is an expansion of economic interdependence through international trade and factor mobility that generally leads to higher levels of per capita income. Rising economic interdependence means that countries engaged in globalization can no longer afford to ignore events in other parts of the world and that they must craft policies that take into account both domestic policies and those of other countries around the world.

2. Globalization constitutes one of four ways that countries can raise per capita income. These factors are: a. an increase in the stock of inputs (land, labor, capital, and entrepreneurship), b. technological change, c. input specialization, and d. output specialization through international trade.

3. Measures to expand globalization must proceed in a coherent and coordinated fashion if all countries are to benefit. Absent such coordination there will be significant differences between gainers and losers that could create pressures to limiting or reversing the process. As such reversals occurred during the Great Depression of the 1930s and during the Second World war, one should not take for granted the challenges and opportunities that globalization presents.

International Trade, Investment, and Factor Mobility Show Rising Interdependence around the Globe

Global trade flows - in goods and services, in portfolio and direct foreign investment, and in international labor migration - have been rising in rough

proportion to increases in Global Domestic Product levels. Some trends:

1. 75 percent of global exports are among developed countries; 25 percent among developing ones

2. Developed countries export primarily manufactured goods, accounting for over eighty percent of their total and sixty percent of total world exports.

3. Developed countries export more primary products than developing countries and developing countries export more manufactured goods than primary goods.

4. The United States has increased its dependence on international trade from approximately 5 percent in the late 1950s to over 13 percent today. Because the United States has such a large economy, it accounts for the largest single market in international trade.

5. Because the United States also has run chronic trade deficits, when the U.S. also runs budget deficits, as it has done over several periods, foreigners increase their stock of dollar reserves. These rising stocks often have been used to finance U.S. Treasury deficits.

Foreign Direct Investment Flows Increase From Developed Countries to Emerging and Developing Economies

Ratio of Foreign Direct Investment to GDP

World FDI-GDP Trend

y = 0.0039x2 + 0.0402x + 0.3999

R2 = 0.7619

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Africa East and South Asia Central and Latin AmericaNorth America West Europe Central and East EuropeMiddle East and North Africa World World FDI-GDP Ratio Trend

Source: The World Bank, Iworld Development Indicators 2006

Rising Trade and Payments Imbalances in the U.S. Reduce U.S. Monetary and Fiscal Policy Independence

U.S. International Tradein current $U.S. billions

Export Trendy = -0.0005x4 + 0.0481x3 - 0.7718x2 + 9.1309x + 4.2377

R2 = 0.9906

Import Trend y = 0.0012x4 - 0.0874x3 + 2.8004x2 - 22.278x + 64.568

R2 = 0.9944

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Exports Imports Export Trend Import Trend

Source: U.S. Dept. of Commerce, BEA

U.S. International Trade Balancein current $U.S. billions

y = -0.0017x4 + 0.1375x3 - 3.6224x2 + 31.842x - 61.219

R2 = 0.878

($1,600)

($1,400)

($1,200)

($1,000)

($800)

($600)

($400)

($200)

$0

$200

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

U.S. International Trade Balance US International Trade Balance Trend

Source: U.S. Dept. of Commerce, BEA

US Budget and International Trade Balance RatiosMeasured in relation to the U.S. Gross Domestic Product

Net Balance Trend

y = 2E-06x3 - 6E-05x2 - 0.0019x + 0.0105

R2 = 0.5296

-0.1000

-0.0800

-0.0600

-0.0400

-0.0200

0.0000

0.0200

0.0400

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

US Budget Balance Ratio to GDP US Trade Balance to GDP Ratio

US Net Budget and Trade Balance Ratio to GDP Net Balance Trend

Source: U.S. CBO, Budget of the United States; U.S. Department of Commerce, Bureau of Economic Analysis, International Statistics

Most U.S. Trade Remains Among Developed Countries,the Exception Being the Rising Share of Imports from China and India

1. Net Immigration from Developing to Developed Countries Increases with Globalization

2. Immigration Rates Depend on Differences in Rates of Growth Across Regions and in Differences in Levels of Real Per Capita Gross Domestic Product

European Union Trend

y = -9816x2 + 425691x - 593566

R2 = 0.6966

United States Trend

y = 3923.1x2 + 24552x + 4E+06

R2 = 0.9371

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Sub-Saharan Africa East Asia & Pacific European Monetary UnionLatin America & Caribbean Middle East and North Africa South AsiaUnited States European Union Trend United States Trend

Global Net Migration by Region

Source: The World Bank, World Development Indicators 2007

Globalization Creates Changes in Relative Prices

Although the United States is the largest consumer of crude oil, falling domestic production rates combined with higher growth in global demand have produced rising real prices that are now reaching those of the early 1970s and may continue to do so for the foreseeable future. Such increases in crude oil place renewed pressure on trade dependence, and on the search for more sustainable energy and environmental policies.

U.S. Energy Trade Dependence(Net Energy Trade as a Percentage of Total Consumption)

y = 4E-05x2 - 0.0066x + 0.0206R2 = 0.8204

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

Observed Trade Dependency U.S. Energy Trade Dependency Trend

U.S. Proven Crude Oil Reservesin million barrels

y = -5E-05x2 + 2.6395x - 9395.5

R2 = 0.8654

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1904 1913 1922 1931 1940 1949 1958 1967 1976 1985 1994 2003

Energy Consumption Depends on the Level of Income and Relative Prices

Energy conservation starts with the proposition that consumers will respond rationally to the price of energy, given alternatives and the level of income. As long as rapidly growing economies such as China and India increase the demand for energy, pressure on the United States to improve conservation will expansion. This pressure reflects two considerations:

1. Growing dependence on imported energy

2. The growing impact of global warming as more countries increase their dependence on fossil fuels

Energy Intensity and Per Capita Income

IndiaPhilippines

China

Russia

South Africa

Poland

BrazilTurkey

MexicoHungary

Thailand

Venezuela

Argentina

MalaysiaChile

Czech Republic

South KoreaGreece

PortugalIsraelAustralia

Britain France

Canada

Japan

Singapore

Hong KongUnited States

India

RussiaSouth AfricaMexicoHungary

ThailandMalaysiaChileCzech Republic

South Korea

Israel

BritainGermanyFrance

JapanSingapore

United States

GermanyChina

Turkey

Australia

Indonesia

Energy Intensity Trendline

Y = 0.1732x3 - 8.0918x2 + 73.266x + 785.92

R2 = 0.3968

0

500

1000

1500

2000

2500

3000

Energy Intensity PPP GNP Per Capita Energy Intensity Trendline

Energy Intensity = Grams of Oil Equivalent Energy Consumption per $U.S. of GDP

PPP GNP Per Capita =Tens of $U.S. Dollars

Energy Intensity

PPP GNP Per Capita, 1995

Energy Intensity and Energy Prices

Venezuela

China

Philippines

Mexico

CanadaChile Australia

Poland

Brazil

South AfricaCzech Republic

GreeceArgentinaIsrael

Singapore

Hungary

Japan

South KoreaPortugal

FranceBritainHong KongRussia IndonesiaUnited StatesChile South Africa Japan BritainHong Kong

Russia

India

United States Germany

TurkeyMalaysia

Venezuela Australia Brazil

-5

0

5

10

15

20

25

Energy IntensityPremium Gasoline Price $U.S.Energy Intensity Trendline

Energy Intensity = decagrams of oil equivalent per $U.S. of GDP

Energy Intensity

Premium Gasoline Price, in $U.S. cents per gallon

Globalization and the Environment:1. Globalization That Produces Higher Levels of Per Capita Income Increases the Rate of Energy Consumption.

2. In Turn, Rising Energy Consumption Increases Environmental Emissions that Add to Global Warming.3. Global Warming and Rising Populations Threaten Habitats that Result in a Loss of Biodiversity.

Global Warming Data, 1867-2001

Celsius Trendy = 6E-05x2 - 0.0043x + 13.886

R2 = 0.6043

Fahrenheit Trendy = 0.0001x2 - 0.0077x + 56.995

R2 = 0.6043

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1867 1878 1889 1900 1911 1922 1933 1944 1955 1966 1977 1988 1999 2010 2021 2032

Celsius Fahrenheit Celsius Temperature Trend Fahrenheit Trend

Global Warming Data, 1960-2001

Fahrenheit Trendy = 0.0004x2 + 0.0103x + 57.057

R2 = 0.683

Celsius Trendy = 0.0002x2 + 0.0057x + 13.921

R2 = 0.683

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 2020 2026 2032 2038

Celsius Fahrenheit Fahrenheit Trend Celsius Trend

Renewable Resource Biodiversity Growth Profile

S-1 S-2 S-3 S-4 S-5

M

3

t

Index of Relative Biodiversity

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

1 13 25 37 49 61 73 85 97 109 121 133 145 157

IB

t

Globalization and Inequality:1. Globalization can produce rising average levels of per capita income for the world.

2. Because policies and levels of risk differ across countries, globalization may initially cause rising inequality across countries.

3. It also can produce rising inequality within countries for the same reasons.4. Policies that are designed to raise per capita incomes through globalization need to take measures to

see that the benefits are broadly distributed.

Income Inequality and per Capita Income

Ethiopia340

Tanzania630

Rwanda770

Uganda1070India

1210Bangladesh1230

Kenya1360

Mauritania1380

Côte d'Ivoire1640

Senegal1750

China1910

Pakistan2130

Philippines2480

Sri Landa2810

Peru3080

Poland4880

Tunisia5130

Botswana5190

Algeria5740

Thailand5890

Mexico7490

Chile8090

S.Korea8950

Spain13170

N.Zealand14400

Israel14600

Singapore16720United Kingdom

16730Australia17350

Netherlands17560Sweden17610

Italy17730Norway

18040Belgium18160

Denmark18650

France19200Canada

19720

Hong Kong20050

Japan20160

Germany20610

Switzerland22100

United States23120

y = -0.0005x2 + 0.0213x

R2 = 0.5385

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

Ethiopia340

Bangladesh1230

China1910

Poland4880

Mexico7490

Israel14600

Sweden17610

France19200

Switzerland22100

Actual Gini Inequality-Income Trend

Source: World Development Report 1994 (Washington, D.C.: The World Bank, 1994)

Gini Coefficients for U.S. Household Income

Income Inequality Trendy = 0.0001x2 - 0.0117x + 0.5677

R2 = 0.9356

0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 2024

Gini Coefficients Gini Inequality Trend in the U.S.

Source: U.S. Census Bureau, Department of Commerce

Measures for Successful Globalization1. Countries need to work in concert to bring about

harmonization of monetary, fiscal, and trade policies that provide broadly distributed global gains. This means close cooperation among the G-8 major countries, and the WTO trade framework.

2. Banking and financial accounting standards need to be developed for transparent capital flows that provide accurate information for an efficient allocation of investment. This means adopting and upholding capital adequacy ratios consistent with prevailing norms, as in the Basel Accords framework.

3. Countries need to work through international organizations such as the WTO to ensure that trade benefits are universally upheld. This means the extension wherever possible of global agreements rather than side agreements that skew the benefits of trade and investment.

4. Political measures that improve transparency, including greater clarity in property rights, electoral accountability in government, and judicial independence are essential if globalization is to deliver on the promise of broad-based gains.

5. Finally, it means a commitment to maintaining sufficient liquidity in global financial markets that results in non-inflationary sustainable growth in ways that also strengthen environmental quality and promote broad-based gains.

Above All, Globalization Requires a More Sophisticated Understanding of the Global Economy

than We Have Sometimes Displayed

As globalization expands, the United States can not afford to adopt simplistic attitudes in foreign policy choices. Avoiding such simplistic notions requires that one take into account differences in cultures, in economic conditions, and the varying policies in different parts of the world. Above all, it requires that one not forget John Donne’s dictum: “…No man is an island, entire of itself…any man’s death diminishes me, because I am involved in mankind; and therefore never send to know for whom the bell tolls; it tolls for thee”*.

*Meditation XVII, 1624.

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