Globalization and Domestic Policies

1
Globalization and Domestic Policies

• Suffolk University
• CAS Seminar Series
• 3/31/1999

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Globalization and Domestic Policies

• Agenda
• What is globalization?
• The effects of Globalization
• Globalization and domestic policies
• Conclusion

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Globalization

• Definition
• The great economic event of our era
• IMF The growing economic interdependence of
  countries worldwide through the increasing volume
  and variety of cross-border transactions in world
  and services and of international capital flows,
  and also through the more rapid and widespread
  diffusion of technologies
• Result of three processes
• Technology development enhanced communications
  and lower costs
• Organizational innovation MNCs
• Economic and Trade Liberalization

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Globalization

• Process accelerated after WWII
• Ratios of exports to output have risen from 12 to
  17 since 1970
• Integration of financial markets 1.2 trillion
  per day
• Technology transfers
• Governments bound by multilateral agreements
• But (Wolf, 1997)
• UK capital outflow in 1914 was 9 of GDP, twice
  as big a share of GDP as outflows from Germany
  and Japan in the 1980s.
• Gold was the world currency
• Greater labor mobility then.

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The Effects of Globalization

• Two processes Globalization of trade and
  globalization of financial and capital markets
• Two views
• Negative consequences
• Industrial desertification, higher unemployment,
  reduced social protection, and lower wages that
  result from higher imports from developing
  countries
• Labor fragmentation and union weakening
• Investment focuses in developing countries
• Positive results
• New jobs in other sectors and more exports to
  developing countries
• Fosters investment, productivity and development

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The Effects of Globalization

• Reality Lower Wages and higher Imports?
• Most trade (94.5) still among industrialized
  countries. SEE TABLE 1.
• Imports from developing to industrialized
  countries only between 3-8 of the latters
  production
• Imports from developing countries increased only
  from 1.1 of all imports in 1967-68 to 5.4 in
  1987-89. Only 1.2 of OCDE countries GDP.
• Unemployment and lower wages affect both
  qualified and no-qualified workers as well as
  manufacturing, service and construction workers.
• Percentage of MNCs production outside of their
  countries of origin is only 6 of their total
  production and 0.2 in services

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The Effects of Globalization

• Other factors account for wages stagnation
• New jobs in the service sector (in U.S.A
  reduction in the of workers in the
  manufacturing sector from 28 to 16 between 1964
  and 1994)
• Lower productivity
• Lower Investment in Developed countries?
• Capital stock invested in developing countries
  only 3.1 of all fixed capital. SEE TABLE 2
• Most investment still takes place in developed
  countries
• Investment to developed countries has decreased
  from 30.6 in 1967 to 23.4 in 1991
• External debt has resulted in higher flows to
  developed countries

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The Effects of Globalization

• Reality
• Most of U.S. MNCs sales (70), fixed capital
  (78), employment (73), and value added is based
  in their home country. SEE TABLE 3.
• Other factors such as infrastructure,
  productivity, and skills play a critical role.
• Impact on Labor
• Shifted the balance of power between workers and
  employers in favor of the latter.
• KEY Impact of globalization on labor markets,
  institutions, and domestic structures.
• CONCLUSION Questionable impact!!

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Globalization and Domestic Policies

• Argument Globalization reduces governments
  autonomy to develop domestic policies.
• Oversimplifies the consequences of globalization
  and minimizes the power of governments
• Reality Governments are not prisoners of
  markets (The Economist, 12/6/1997)
• The role of governments was questioned long
  before the globalization process intensified in
  the 1980s.
• Crisis of the 1970s led politicians to question
  previous policies which led to liberalization,
  and economic integration which accelerated the
  globalization process. Supported by voters!!
• Liberalization, technological diffusion, and
  economic integration weakened governments
  powers. Governments have exploited these issues.

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Globalization and Domestic Policies

• Governments are not prisoners of markets
• Governments intervention in the economy has not
  decreasedpublic spending as proportion of
  GDP--which determines the level of intervention
  of governments in the economy--has increased
  systematically (30 in 1960 and 45 in 1996). SEE
  GRAPH 1.
• Governments have been able to maintain and
  increase taxes. This has been particularly the
  case with income taxes. SEE GRAPHS 2, 3 and 4.
• Governments are still able to determine social
  policies. They have a cost but they are also
  beneficial
• Limits in monetary politics and levels of public
  debt. However, high levels of debt have been
  possible with stable monetary policies.

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Conclusions

• Questions should be not so much about costs and
  benefits but how to distribute the benefits
• Globalization can facilitate the resources to
  develop social policies
• Governments are not prisoners of markets. They
  still have as much (or as little) control over
  their economies as they had in the past.
• Nice argument to deflect political pressures and
  justify unpopular policies. Governments should be
  responsible
• Risk democracy versus globalization. Markets and
  democracy are both necessary to fulfill the
  ideals of liberty, solidarity, and equality
  intrinsic to Western values.
• Capital markets are also mediated by public
  institutions, and political decisions. Some
  Politics are not inevitable.
• Governments should act to configure markets.