Trends in globalisation and the world economy

1
Trends in globalisation and the world economy

• The Rt. Hon John Redwood MP

2
The current world background

• We are seeing a huge shift in relative economic
  power thanks to rise of China and India.
  Countries with 2,500 million Asian inhabitants
  are now enjoying fast growth and rising living
  standards. This is exerting a big increase in
  demand on world commodities
• Coal for power stations.
• Oil for transport.
• Grains for animal feedstuffs and for alternative
  fuels.
• Metals for manufacture.
• Gold and precious metals for the adornments of
  success
• Iron ore for steel production.
• We are witnessing a shift in the terms of trade
  in favour of commodity producers. Commodity
  prices have risen sharply, giving windfall income
  gains to Middle Eastern oil producers, to Russia,
  and to Australia.

3
The current world background

• At the same time as the surge in Asia is
  underway, the West has become heavily indebted.
  US and British consumers and governments have
  been especially heavy borrowers.
• The Western banking system made large sums
  available for house purchase and for companies,
  including lending to those who will find it
  difficult to pay the interest.
• These loans are now widely dispersed around the
  worlds financial system, thanks to
  securitisation and syndication. There is
  currently a crisis of confidence over this
  lending.
• China has 1.5 trillion of reserves. The Middle
  Eastern countries and Russia are also building
  substantial investment funds from the proceeds of
  higher oil and gas prices.
• A way has to be found to channel this wealth into
  the Western banks to recapitalise them, and into
  western investments to offset the Western balance
  of payments deficits.
• China meanwhile is investing heavily in commodity
  production and mineral extraction in Africa.

4
The current world background

• The likely trends over the next forty years
  include
• The continuing economic rise of India and China.
• High commodity prices, coupled with the search
  for substitutes and new technologies by the US
  and the West.
• The decline of Germany owing to population
  decline, along with much of the continent of
  Europe, and Euroland.
• Continuing relatively strong performance of the
  Anglosphere amongst the richer countries, based
  on a freer approach to the movement of people,
  capital and ideas.

5
What is globalisation?

• The increase of goods and services which are
  traded over national borders and between
  continents.
• The pursuit of specialisation by
  cities/regions/countries that have a relative
  advantage in supplying particular goods and
  services. For example textiles and DVDs from
  China software from the USA financial services
  from the City of London cars from Germany.
• The manufacture of complex products by making
  components and sub assemblies in different
  countries and continents before final assembly.
  For example vehicles/Airbus planes.
• The homogenisation of goods and services do we
  all want a MacDonald's washed down with a Coke,
  with a laptop running Microsoft programmes?

6
What is good about globalisation?

• It delivers higher living standards to more
  people.
• The more people specialise and trade the higher
  average incomes will be.
• It spreads best practice and new ideas rapidly.
• It allows many to enjoy global brands.
• Large companies can put more money into research,
  innovation, sales, service.
• It allows more people to live the Hollywood
  dream.
• Creates the potential for footballers, pop and
  film stars and others to become fabulously rich.

7
What is good about globalisation?

• Richer is cleaner it is good for the
  environment.
• It allows poorer countries to develop and cuts
  poverty.
• Instant news and communications exposes tyrants
  and bad governments to more international
  pressure.
• If you do not like the products of global
  companies you do not have to buy them.

8
What is bad about globalisation?

• Some say
• It is a new form of imperialism led by the United
  States of America.
• It damages the environment.
• It accentuates the gap between rich and poor.
• It leads to exploitation of cheap labour and of
  developing countries.
• It substitutes material values for more spiritual
  ones.

9
Is there an alternative to globalisation?

• The main alternative to global capitalism (allied
  to democracy) tried in the twentieth century was
  communism. This too became a global creed.
• It created a communist world which was poorer,
  dirtier and less free than the west. Many
  communists held global ambitions for their
  ideology. It collapsed in the USSR and Europe at
  the end of the 1980s through a series of popular
  revolts, and is being transformed by capitalist
  economics in China today.
• Today the critics of globalisation have in mind a
  mixture of more localism, accepting lower incomes
  in return for a gentler, kinder society as they
  see it and a new globalism, based on
  redistribution of income between the west and the
  rest through action by global institutions like
  the World Bank and UN, and increased aid budgets.

10
Is there an alternative to globalisation?

• Encouraging local action means losing the
  benefits of international specialisation and
  slows down the transmission of new ideas.
• Higher aid without freer trade can simply line
  the pockets of Third World Dictators and
  discourage poorer countries seeking to improve
  themselves.
• Unless Government is reformed in the developing
  world many will still be subject to civil war,
  famine and denial of human rights.

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• Which model of development works best?

12
Index of Economic Freedom
Source Index of Economic Freedom, Heritage
Foundation, 2008
13
Three models for world development

• The EU, the US, and China
• The USA is based on democratic challenge.
• The EU is based on bureaucratic consensus.
• China based on political repression allied to
  progressive
• economic liberalism.
• The US has lower taxes and more free enterprise.
• The EU has higher taxes and more Government
  management.
• China has low taxes and great freedom in lead
  sectors only.

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Three models for world development

• The EU, the US, and China
• The US has lighter regulation.
• The EU has stronger and wider ranging regulation.
• China has less regulation in lead sectors allied
  to Government control of the liberalisation
  process.
• The US allows you to do what the law does not
  stop.
• The EU allows you to do what they set out in law.
• China allows you to do what suits those in power.
• The USA globally engaged.
• The EU is more introspective.
• China invites in the best of the world in
  selected areas.

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The political contextThe USA

• The United States has a settled constitution
  based on
• A unified country following civil war.
• Separation of powers between executive,
  legislature and judiciary.
• Stable relationship between Member States and the
  Federal powerful government.
• It is the most powerful country in world, capable
  of projecting its power
• The only serious political risk or threat is that
  of terrorism against the worlds superpower.
  There is no likelihood of political instability
  or a major change of the system.

16
The political contextThe European Union

• The EU has a troubled and evolving constitution
  set up shortly after the end of World War 2. It
  is now looking very old-fashioned
• It is a set of divided countries coming together.
• There is no clear democratic control over
  executive or judiciary a largely impotent
  Parliament with no power to tax or legislate on
  its own.
• Unstable relationships how many States? And
  what relationship should they have to the central
  government?
• Little power outside the borders of EU and no
  established way of supporting its foreign policy
  outside the EU area.

17
The political contextThe European Union

• There are serious political risks of instability
  as different countries, peoples and parties want
  very different degrees of centralisation and
  government interference in Member States
  affairs.
• Over the next fifty years, there will be massive
  changes in the relationships and power balances.
• It is not immune to the risk of terrorism both
  internal and external. There is the risk of
  nationalist movements arising against the EU.

18
The political contextChina

• China is a one party state.
• The main decisions are made by Committee of the
  Political Bureau of the Communist Party.
• It entered WTO arrangements on the 10th October
  2000.
• Collective farming is being dismantled. There is
  a rapid movement of people from rural to urban
  areas.
• It is pursuing the Hong Kong/Singapore model of
  economic
• development through liberalisation and foreign
  capital allied to an authoritarian political
  system.

19
The rise of China

• China is currently the worlds fourth largest
  economy at market exchange rates and the second
  largest at purchasing power parity rates.
• It has a GDP of 10.21 trillion (2006) when
  measured on a purchasing power parity basis and
  3.42 trillion when measured in exchange rate
  terms.
• China has been the fastest growing major nation
  for the past quarter of a century with an average
  annual GDP growth rate above 10. Her per capita
  income has grown by an average rate of more than
  8 over the last three decades, drastically
  reducing poverty.
• She is now the worlds third largest trading
  nation after the United States and Germany, and
  as of 2007 has foreign exchange reserves of some
  1.474 trillion.
• Source International Monetary Fund New York
  Times The Economist and China Daily, 2007

20
The rise of China

• China accounted for only 3 of world output in
  1980, but according to a 2005 Treasury forecast
  will account for 19 of world output by 2015.
• This figure is likely to be much higher in light
  of Chinas sustained economic growth over the
  last few years.
• Whereas the G7 countries (the United States,
  Canada, Germany, France, Italy, Japan, and the
  United Kingdom) accounted for 50 of world output
  in 1980, they will account for only 33 of world
  output by 2015.
• Source Global Europe Full Employment Europe,
  HM Treasury, October 2005

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Imbalance of powerThe EU vs. the USA

• The EU has a bigger military force in terms of
  numbers of service personnel, but it is very
  poorly armed and ill equipped to move outside the
  European territorial area.
• The US has a near monopoly of modern troop
  carriers by sea and air, especially when acting
  with the UK as its main ally.

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Imbalance of powerThe EU vs. the USA

• PROJECTED SHARES OF GLOBAL GDP
• World GDP 2000 2050 Change
• EU 15 18 10 -44
• United States 23 26 13
• Ratio of EU to USA 1.3 2.6
• Source The EU Economy Review, European
  Commission, 2002

23
Projected global GDP inPPP terms relative to the
United States
Source The World in 2050, PricewaterhouseCooper
s, 2006
24
Population change

• The US has a dynamic population, growing from
  live births and immigration.
• The EU, excluding the UK and Ireland, has a
  falling population.
• Projected Total Population
• Millions 2005 2050 Change change
• EU 27 487 472 -15 -3.1
• USA 299 402 103 34.4
• China 1,312 1,408 96 7.3

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Projected Working Age (15-64)Populations
(millions) EU 27 and others

• Millions 2005 2050 Change Change
• Ireland 2.3 3.6 1.3 56.5
• UK 39.7 41.0 1.3 3.3
• France 39.8 39.6 -0.2 -0.5
• Netherlands 11.0 10.1 -0.9 -8.2
• Germany 55.2 41.6 -13.6 -24.6
• Austria 5.6 4.8 -0.8 -14.3
• Greece 7.4 5.9 -1.5 -20.3
• Spain 29.8 24.3 -5.5 -18.5
• Italy 38.8 29.5 -9.3 -24
• EU 27 302.7 237.0 -65.7 -21.7
• USA 200.6 248.3 47.6 23.8
• Japan 84.8 52.3 -32.5 -38.3
• Russia 102.3 65.9 -36.4 -35.5
• Source United Nations, Population Division,
  World Population Prospects The 2006 Revision.

26
Tax burden in EU Countries as a percentage of GDP

• Country 2003 2004 2005 2006
• Belgium 44.7 45.0 45.4 44.8
• Denmark 47.7 48.8 49.7 49.0
• France 43.1 43.4 44.3 44.5
• Germany 35.5 34.7 34.7 35.7
• Italy 41.8 41.1 41.0 42.7
• Ireland 28.7 30.1 30.5 31.7
• Netherlands 37.0 37.5 38.2 39.5
• Spain 34.3 34.8 35.8 36.7
• Sweden 50.1 50.8 51.1 50.1
• UK 35.4 36.0 37.2 37.4
• EU27 N/A 39.2 39.6 N/A

Source Revenue Statistics 1965-2005, 2007, Table
A. 2006 figures are projections only
27
Tax burden in developed countries as a Percentage
of GDP

• Country 2003 2004 2005 2006
• Australia 30.7 31.2 30.9 N/A
• New Zealand 34.4 35.6 36.6 36.5
• United States 25.7 25.5 26.8 28.2
• Switzerland 29.4 29.2 30.0 30.1
• Japan 25.7 26.4 27.4 N/A
• Korea 25.3 24.6 25.6 26.8
• OECD Total 35.8 35.9 36.2 N/A
• OECD America 26.1 26.0 26.7 27.4
• OECD Pacific 29.0 29.4 30.4 N/A

Source Revenue Statistics 1965-2005, 2007, Table
A. 2006 figures are projections only
28
Tax Burden in Developing Countries as a
Percentage of GDP

• Figures for the developing countries of Brazil,
  India, China, Russia and Hong Kong are only
  available for 2003.
• Other estimates of tax burdens in these countries
  vary depending on how they are calculated. The
  general trend indicates that lower tax economies
  achieve faster growth.

Country 2003 Brazil 32.7 India 10.1 Russia
15.0 China 17.1 Hong Kong 10.5
Source Global Competitiveness Yearbook, 2005
29
Increase in China and Indias GDP( Billions) by
PPP and current prices
Source IMF World Economic Outlook database, 2007
30
GDP growth ratecomparisons and estimatesChina,
the EU, and the USA

• China USA EU
• 1996 10.0 3.7 2.0
• 1997 9.3 4.5 2.7
• 1998 7.8 4.2 2.9
• 1999 7.6 4.4 3.0
• 2000 8.4 3.7 3.9
• 2001 8.3 0.8 2.1
• 2002 9.1 1.6 1.4
• 2003 10.0 2.5 1.5
• 2004 10.1 3.6 2.7
• 2005 10.4 3.1 2.0
• 2006 11.1 2.9 2.9
• 2007 11.4 2.2 2.6
• 2008 11.0 1.8 2.4
• 2009 9.2 3.3 2.4
• 2010 8.7 3.5 N/A
• 2011 9.2 3.2 N/A

Source IMF World Economic, October 2007, and
World Economic Outlook Update, January 2008
31
Share of the international financial markets as
a percentage of world activity in 2007

• UK US Germany
• Cross border bank lending 20 9 10
• Foreign equities turnover 58 36 4
• Foreign exchange dealing 34 17 3
• International bonds 70 N/A N/A
• Hedge fund assets 21 66 N/A
• Initial Public Offerings 15 26 N/A
• OTC derivatives turnover 43 24 4
• Securitisation issuance 6 79 1
• Source International Financial Markets in the
  UK, International Financial Services London,
  November 2007

32
Likely developments The USA

• Fast growth.
• Fast technology growth.
• Economic policy geared to domestic requirements
  of large single market.
• Interest rates and money growth to facilitate
  growth.
• Free enterprise competition driven model.

33
Likely developments The EU

• Population reduction.
• Slower and lop-sided technology growth influenced
  heavily by government.
• Economic policy in flux, trying to adapt to the
  different national and regional markets of the
  Euro-land area.
• Interest rates and money growth that are
  compromises for the different needs of different
  parts of the EU.
• Government/cartel/regulation driven model in
  certain key sectors, linked to competition driven
  model in other parts.

34
Likely developments China

• Continued rapid growth in output and per capita
  incomes.
• Growth of large domestic market for cars,
  household goods and other manufactured products.
• China accounts for 76 of world exports of
  leather goods, 55 of textiles and 32 of radio,
  TV and communications equipment. These sectors
  will continue to advance.
• China will now liberalise engineering including
  vehicle manufacture, chemicals and
  pharmaceuticals. These sectors will now grow
  very quickly.
• China will overtake UK, Germany and Japan and
  become second largest world economy at market
  exchange rates in the next twenty years.

35
Europes declining share of global output
Estimated changes inpercentage of global output
Source IMF Consensus ForecastHM Treasury
36
Europes Labour Market Challenge

• Source Eurostat, OECD At A Glance, and the
  Office of National Statistics 2007

37
Potential new entrants to the European Union