Globalization and foreign trade

1. As with most of the issues that we have discussed, demand-side economists and supply-side economists tend to look at globalization and free trade from polar opposite viewpoints. For the supply-side economist, globalization is unavoidable and inevitable, so American workers need to either become more productive or accept the lower worldwide wage. If American workers wish to have a job in textile manufacturing, they must be willing to accept a wage that is below $50 a month. For the demand-side economist, globalization is offered up by corporations for lawlessness in the international arena, and capital is used to change laws in poorer countries to suit the needs of the corporations and not its inhabitants. Globalization and foreign trade

2. Globalization is nothing new. It has existed for centuries. It has simply been called different things at different times. Mercantilism and imperialism were both forms of globalization. Whatever the name of these systems of worldwide trade, there have always been winners and losers. It typically turns out to be a zero-sum game and not the win-win answer to the world’s problems as advertised. History of globalization

3. The goal of mercantilism was to bring specie (gold and silver) into the domestic economy while preventing specie from exiting the economy. This meant that under the imperialist systems of the 17th through 20th century, governments sought to purchase raw materials at a low price, bring them home for manufacturing, then sell the manufactured goods at a higher price. As we discussed earlier, additions of gold and silver (or increasing the money supply) was an important factor in being able to grow the economy without deflation. Spain and Portugal both developed vast riches from mining in South America, but rather than investing in infrastructure, they purchased the goods they wanted from other countries like France, the Netherlands, and England. Pretty much every country in the world that has made the transition to being an advanced, industrialized country did so by adhering to some form of mercantilism. The best example of this is probably provided by the states of East Asia. Many of these countries were extremely impoverished at the end of World War II with little in the way of infrastructure, wealth, institutions, or an educated population. Many managed to become advanced industrial economies in a period of less than 50 years, some in even less time. mercantilism

4. Much has been made about the rapidity with which these states developed while countries in Africa and South America failed to succeed in a similar manner. South American countries were often rich in natural resources while Taiwan, South Korea, Singapore, Hong Kong and others had little in the way of comparative advantages. Some claim that it has to do with Asian cultures; difficult to measure variables like greater cooperation and less competition within society, or even Confucian social norms. Others claim it had more to do with a long history of quality bureaucracies. Supply-side economists like to claim that it is because these countries were open to free trade. A Keynesian perspective is that these East Asian tigers were pragmatic in their economic policies. Rather than following a rigid doctrine of socialism or laissez-faire capitalism, they developed what we refer to as mixed economies, as had all the other countries that had been successful in economic development before them. Shared economic prosperity was high on their list of priorities. “It doesn't matter if a cat is black or white, so long as it catches mice.”- Deng Xiaoping Why east asia?

5. “The countries had been successful not only in spite of the fact that they had not followed most of the dictates of the Washington Consensus, but because (emphasis in original) they had not. Though the experts’ findings were toned down in the finished public report, the World Bank’s Asian Miracle study laid out the important roles that the government had played. These were far from the minimalist roles beloved of the Washington Consensus.” Stiglitz (2002) Globalization and its Discontents

6. When we look to the history of economic development in South America and Africa, we typically see a flipping back and forth from one economic doctrine to another. Laissez-faire capitalism is tried but succeeds only in making a few people (often foreign investors) wealthy while leaving the majority of the inhabitants in poverty. Revolutions, coups, and sometimes elections supplant capitalism with socialism. Resources that had previously been privatized become nationalized, much to the chagrin of the former owners of these enterprises (again, often foreign investors). The government, once falling to the will of accumulated capital, now is subservient to the unions running these state-owned industries. By giving in to excessive labor demands, these resources are unable to compete in the international markets. In both cases, balance of payments become problematic and the country falls further into debt. The IMF and the World Bank bail these nations out, but require structural adjustment programs (SAPs) as conditions of the loans. Natural resources are reprivatized at pennies on the dollar, and rules and regulations are rewritten to favor businesses. These SAPs are the policy prescriptions that have come to be referred to as Washington Consensus policies. When the Washington Consensus policies produce cycles of boom and bust, proponents of these policies point to the governments who had these policies forced upon them and claim that the problem was with a corrupt government, not the policies. What they fail to recognize is that these policies create the conditions in which corruption flourishes, namely disparities of wealth in which a special few accumulate mountains of capital while the majority of the population falls further and further behind. This has also been the case in the United States over the past 30 years. Following doctrines

7. Washington Consensus view of Asian success. Open to trade, governments build coalitions with business, repression of labor. David Waldner, (1999) State Building and Late Development Stephan Haggard, (1990) Pathways from the Periphery Peter Evans, (1995) Embedded Autonomy Contrasting views of economic growth

8. Commitment to shared growth. Business AND labor kept in check, profits are shared, open to exporting but have tariffs in place for ISI. Facts are consistent with those presented in the other books. Campos and Root, (1996) The Key to the Asian Miracle. Nancy Birdsall, DaniRodrik, Arvind Subramanian, 2005 “How to Help Poor Countries”, Foreign Affairs. (available in Proquest) Joseph Stiglitz, (2002) Globalization and its Discontents Mander and Goldsmith Eds. (1996) The Case Against the Global Economy: And for a Turn to the Local The other story

9. Textiles, toys, and trinkets. These are the industries that are typically first in line for moving from being a 3rd world country to becoming an advanced industrial nation. These are goods that can be produced and sold at relatively low costs. They do not require a great deal of upfront startup costs, they can be manufactured using illiterate and relatively unskilled labor, and with protectionist policies, they are assured a domestic, albeit captive consumer base. Much of what was in the Navigation Acts imposed upon the colonies had to do with protectionist policies of the textile industry. Our first Treasury Secretary, Alexander Hamilton, in his “Report on Manufactures” (1791) advocated for direct government intervention to encourage the development of certain industries in the new United States. Chapter 18

10. Hamilton, in his report to Congress, first enumerated the arguments of the time for pursuing the comparative advantage of the United States, namely the production of agricultural goods and trading produce for manufactured goods. Hamilton then discussed the advantages of developing new industries, including national security, the development of capital and a sound and independent economy, the development of a domestic market for agricultural surpluses, the development of human capital including through emigration, improvements of technology, and employment for existing surpluses of labor (women and children). Hamilton discussed certain actions to be taken in order to encourage new industries: protectionist tariffs and duties, prohibition of export of raw materials, pecuniary bounties (subsidies), exemptions of raw materials from duties, patents, quality standards of goods, and the facilitation of systems of transportation. First among the list of industries that Hamilton lists as desirable to develop domestically is iron, its importance for both military uses and the development of other industries (including agriculture) is the least disputable. He also lists sugar, glass, gun powder, paper, books, and coal among others. We owe the early industrial development of the United States to our first Secretary of the Treasury who went against the common wisdom of free trade and comparative advantage. Report on manufactures (1791)

12. Government vs private identification of worthwhile projects

13. Where would we be if government had not intervened to develop industries?

14. We have discussed those items that are necessary to shift the LRAS curve to the right: land, labor, capital, technology, energy, human capital, and the money supply. Individual businesses, concerned with their own industries and profits, are unlikely to encourage those activities that are necessary for economic growth, or even to recognize the limiting factor. Currently, corporations sitting on trillions in capital are calling for lower tax rates, yet capital is not currently the limiting factor in our economy, demand is. If it were true that businesses could better determine what is best for the economy, corporations would pay their workers more and/or charge consumers less, but it is not the job of businesses to look after the macroeconomy, that is the job of government. Banks encourage low interest rates and greater risks as they make themselves more profitable. Oil companies discourage alternative sources of energy as they do not want the competition. The steel industry, rather than updating technology, will push for tariffs to reduce competition. Corporations will hold patents to prevent technological innovations that might harm their profits. Chevron and NiMh. Pharma and AIDS. The private sector doesn’t undertake the building of dams, schools, or roads and bridges. Shifting the LRAS curve

15. We had previously discussed the link between reduced population growth and increased economic growth. Population growth and economic growth

16. The example given was one of a private wholesaler hoping to increase production of soybeans in India. With information regarding the going price for soybeans, farmers were encouraged to grow more soybeans, thus bringing the price of soybeans down for the wholesaler. Freedom of information

17. In many of the cases where the change is made from 3rd world status to industrial nation, there has been a political strongman involved. The status quo that exists to keep the majority impoverished must be broken to achieve economic advancement. Dictatorial regimes made this successful transition in South Korea, Taiwan, Singapore, and even Iran before the revolution. Many of these regimes suffered as a result of the second spike of the oil crises of the 1970s, with Korea’s Park Chung Hee being assassinated in 1979 and the Shah of Iran being overthrown earlier that same year. These regimes are often identified as being oppressive of the larger population, but in reality they tended to also keep the wealthier classes in check and committed to a program of shared economic growth. In the final analysis these regimes developed human capital, emphasized education, technological advances, and the development of a strong middle class. That middle class became the catalyst for the development of democratic institutions. While Singapore rates at the top of the indexes for economic freedom, they are rated as only half-free in democratic indexes. The role of the dictator

18. One of the most stark examples of the importance of property rights is the Jamestown Colony. Initially, land was commonly owned with output-sharing arrangements. Prior to the establishment of private property rights for settlers, colonists routinely starved. Of the first 6,000 settlers, 4,000 died. Some even resorted to cannibalism. Dead capital and property rights

19. Western political and economic thought has been in agreement for centuries regarding the desirability of established property rights and a consistently applied (as opposed to arbitrarily) rule of law. This is the basis of classical liberalism. The key to this concept is a government with the capacity and willingness to enforce these property rights and rules consistently and not in the interests of a few. Property rights and the rule of law

20. The textbook discusses trade offs between the production of consumption goods and capital goods. Where consumption levels are low, demand for capital goods are also low. This is an excellent argument for government intervention. When a capital good that would improve the economy is underprovided by the private sector, the public sector can step in. Roads, bridges, fire departments, public education, hospitals, universities, and new technologies are all items that were underprovided by the private sector. Under the ideological viewpoint that government is not as effective as the private sector in identifying worthwhile investments, it ignores the fact that businesses are simply pursuing profits. Businesses tend to pursue the production of goods and services that have already shown themselves to have demand and can be produced profitably. Government, on the other hand, is responsible for the macroeconomy and pursue those technologies and investments that may not prove to be immediately profitable, but can shift the LRAS curve to the right. Consumption goods vs capital goods

21. Autonomy: the ability to act independently of external forces. Capacity: The facility or power to produce, perform, or deploy. These are two characteristics that differentiate between effective and ineffective governance. When laws and regulations are designed to actively prevent entrepreneurial activities, they are often supported by a wealthy elite who wish to maintain the status quo. When this elite has more resources available to them than the government, the government becomes incapable of governance that contradicts the desires of the elite. Government Autonomy and capacity

22. It was the president of United Fruit, Sam Zemurray, who infamously said of Honduran officials; “A mule costs more than a deputy.” Campos and Root Autonomy and capacity

23. According to Campos and Root in The Key to the Asian Miracle (1996), a quality bureaucracy was one of the primary influences for successful economic development which was absent from South American and African nations seeking to industrialize. In these successful nations meritocracies were developed, political appointees in government were kept to a minimum, income disparities between private and public sectors were kept to a minimum, economic technocrats were given substantial autonomy yet were held accountable, the government retained control of the central banks, and capital mobility was controlled. Campos and root

24. The links between government inefficiency, corruption, and low literacy rates gives us an idea of what is meant by capacity. Bureaucratic inefficiency and economic growth

25. When evaluating data based on these indices, be aware of their shortcomings and even their ideological biases. For example, Singapore is at the top of the list for economic freedom but is considered only half-free on democracy indices. Also, Canada has a great deal more government intervention into its economy than the United States, an issue that these indices are purported to measure. Canada’s economy is performing better than the US. It would appear that the index may be reversed engineered to provide evidence that a lack of government intervention leads to greater economic growth. Indices of government efficiencies and economic freedom

26. Yunus operated a number of banks that were developed as socially responsible, non-profit entities. These banks made microloans, mostly to women, to help them move from activities in which they were routinely underpaid to activities that could at least support their families. The government of Bangladesh stepped in and removed Yunus as the head of his Grameen Bank. Muhammad Yunus

27. Those nations that have successfully developed have done so with largely protectionist policies. Looking at South Korea we find that their development was accomplished through policies previously employed by Western states in their own development. South Korea lacked the abundance of natural resources as can be found in many South American and African countries. Their only real resource was an abundance of unemployed workers. The government put into place tariffs and duties as protection for those industries that the government hoped to develop. Beginning with the development of light industry, South Korea repeatedly upgraded to higher value-added industries including chemicals, iron, steel, shipbuilding, electronics, and computer systems. This is import substitution industrialization (ISI). We see similar processes with Taiwan, Hong Kong, and Singapore. The government retained control of the central bank and kept interest rates high. This encouraged greater savings by workers which could then be utilized by the chaebols, or large corporations. The chaebolswere given preferential interest rates as long as they continued to meet export quotas. This was the export-oriented growth (EOG) that free traders glorify. Yet this is not free trade, it is mercantilism. Economic development

30. The textbook offers two approaches for achieving growth in developing nations: “Rely on private markets to find ways to direct capital goods toward their best uses,” or “entrust the world’s governments (international institutions) with the task of developing and implementing policies that enhance economic growth.” Based on historical, empirical evidence there is a third alternative. Countries can, themselves, develop quality bureaucracies, beginning with economists committed to economic development through shared economic growth. By following pragmatic policy choices rather than following an ideology, individual states can, if they can maintain their autonomy, make the shift from underdeveloped, to developing, to developed. Promote greater global growth

31. “The combination of high savings rates, government investment in education, and state-directed industrial policy all served to make the region an economic powerhouse.” “The benefits of growth were shared widely.” “As in the Washington Consensus, trade was important, but the emphasis was on promoting exports, not removing impediments to imports.” “While the Washington Consensus policies emphasized rapid financial and capital market liberalization, the East Asian countries liberalized only gradually…” “In the Washington Consensus view, industrial policies, in which governments try to shape the future direction of the economy, are a mistake. But the East Asian governments took that as one of their central responsibilities.” Stiglitz on Asian miracle

32. “While the Washington Consensus policies paid little attention to inequality, the East Asian governments worked actively to reduce poverty and limit the growth of inequality…” Most broadly, while the Washington Consensus policies emphasized a minimalist role for government, in East Asia, governments helped shape and direct markets.” stiglitz

33. Loans from banks and other sources. Requires repayment, but the state retains greater autonomy for economic policies. Portfolio investments: less than 10% of the shares of ownership in a company. The country and the economy becomes more dependent on the whims of the market. Foreign direct investment: more than 10% share of a firm’s ownership. Foreign investors take a more active role in the formation of policy, lobbying hard for policies that will benefit their financial interests. Governments are leveraged by powerful interests for policies that may actually be detrimental to prospects of success. Play by my rules or I’ll take my dollies and go home. Private investment in developing nations

34. Ghana: President Kwame Nkrumah pushed for rapid industrialization. With the natural resources of bauxite and rivers which could be dammed, Nkrumah struck a deal with Kaiser aluminum for the building of a dam and an aluminum plant. The dam was funded with loans from the World Bank. Along with military expansion and efforts at industrialization, Ghana was heavily in debt by the time of his ouster aided by the CIA. A tale of two refineries

35. Aluminum production is the most energy intense industry. Ghana is joined by Cameroon, South Africa, Mozambique, and Guinea as nations who have committed substantial portions of electrical production to this single industry, often at rates below cost. In Ghana, Kaiser aluminum negotiated low power rates, a ten year tax holiday, a corporate tax ceiling, no tariffs or duties on goods either imported for production or finished goods exported. Kaiser maintained a 90% share in the aluminum plant. What taxes may have come due were manipulated by Kaiser by manipulating prices of the inputs and outputs to assure the business was unprofitable on paper. The bauxite mines initially were unexploited, but today they are operated by Canadian company Alcan who ships the bauxite to Scotland while Alcoa in Ghana receives bauxite from its own company in Jamaica. http://www.internationalrivers.org/resources/aluminum-in-africa-3998 PDF of case studies available Ghana, kaiser, and guaranteed profits

36. Unlike Ghana, South Korea had no natural resources for exploitation, yet President Park Chung-hee was determined to invest in developing a steel industry in South Korea initially as ISI but with an ultimate goal of exports. Park was warned against such a move because Korea lacked any comparative advantages in making steel. Park normalized relations with Japan in order to borrow capital and expertise. He suffered a political backlash at home for making this effort. With additional financial backing from the US, a joint venture was formed between the government and a South Korean firm. Today POSCO is the 4th largest steel producer by output, the largest steel manufacturer by market value, and the 146th largest corporation on the Forbes 500. South korea and self-determination

37. Private investment seeks out the greatest returns on investment (ROI). In a competition between third world countries attempting to attract foreign direct investment (FDI) the winner is most typically that country that allows multi-national corporations (MNCs) to extract the maximum amount of wealth from the economy. In the case of the aluminum processing in Africa, it is questionable whether there is any net benefit to these countries and it could even be that the overall effect is harmful to these economies. Everywhere that countries have been successful in economic development, there have been policies developed to prevent economic leakages and encourage economic injections. Private investment

38. “many stand ready to withdraw their financial support at a moment’s notice.” In the last 40 years there has been significant deregulation of the banking and financial sectors worldwide. This has made for a worldwide financial system in which money is made solely from exchanges of financial instruments with little or no basis in the production of goods and services. International finance has become a giant casino. (Barnet & Cavanaugh (1996) Electronic Money and the Casino Economy) In the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) which developed the World Trade Organization (WTO), many underdeveloped nations were forced to take on new policies and regulations that eliminated their ability to control capital flows. They lost monetary policy autonomy and many experienced financial crises. Currency speculation and arbitrage then proceeded to extract significant amounts of wealth from these countries. “Hot money” would enter the economy looking for returns on investment, producing what appeared to be a boom, but that money would leave just as quickly, extracting wealth and leaving the economy in ruins. (Stiglitz (2002) Globalization and its Discontents) Capital flight

39. 1994 economic crisis in Mexico 1997 Asian financial crisis 1998 Russian financial crisis Argentine economic crisis (1999–2002) Global economic crises

40. Portfolio investments move into a country in waves, hoard assets for a short time driving up the price, then move out abruptly, extracting wealth and leaving the economy in shambles. The issue of assymetric information, adverse selection, and moral hazard could be argued to be the reverse of what the textbook states. Bankers from Western states are substantially more knowledgeable and sophisticated than the politicians and businessmen of underdeveloped and developing countries. Portfolio investment vs FDI

41. The textbook confuses the issues of foreign aid and foreign investment. Foreign aid is intended to strengthen an economy. This is the goal. The goal of foreign investment is to extract as much wealth from the country as is possible. Extractions of wealth from an economy is a leakage. As we have discussed earlier, leakages weaken an economy. Why not? Foreign aid to poor countries

42. “In the 1980s, the World Bank and the IMF (International Monetary Fund) used debt renegotiations as a club to force the developing nations into implementing structural adjustment programs (SAPs) in their economies…The SAP measures included large-scale deregulation, privatization, currency devaluation, social spending cuts, lower corporate taxes, expansion of the export of natural resources and agricultural products, and removal of foreign investment restrictions…In effect, the SAPs have become instruments for the recolonization of many developing countries in the South in the interest of TNCs and banks.” (Clarke, 1996, Mechanisms of Corporate Rule) SAPs: Free-market, Washington Consensus policies that poor countries are required to adopt in order to receive loans or favorable terms from the World Bank or the IMF. IMF and the world Bank

43. In discussing the IMF in the context of the East Asian financial crisis: “Indeed, in retrospect, it became clear that the IMF policies not only exacerbated the downturns but were partially responsible for the onset: excessively rapid financial and capital market liberalization was probably the single most important cause of the crisis…” stiglitz

44. In its development, the United States government has been the primary investor in communications and transportation investments. From the post office to satellite communications to the Internet and from expansion of the railroads to the Eisenhower freeways, these were all major projects that the private sector would have underprovided but that made significant differences in the ability to shift the LRAS curve to the right. The textbook suggests that the World Bank should make loans directly to private companies for cellphone networks. World bank and private cellphone networks

45. Richest man in the world 2010-2013 Telecommunications monopolist in Mexico Chairman and CEO of Telmex(90% of landlines) and America Movil(largest Mexican cel-phone carrier) Personal wealth $66.8 billion or 5% of Mexican GDP Median income of Mexico $3,086 (2010) http://www.republicreport.org/2012/cell-phone-corruption-bill/ Consider the case of carlos slim

46. The textbook discusses the fact that successful development is dependent on uncorrupt government agencies, yet fails to recognize that the Washington Consensus policies offer the ingredients for corruption, most specifically, income disparity. One of the policies advocated is “simplifying the processes for putting capital goods to work most efficiently.” This has typically meant easy in, easy out financial reforms that have preceded the financial crises listed above. Rethinking long-term development lending

47. Problem #1: Malaysian “Valley of the BioGhosts” might have worked out better if they had spent a lot of money on educating bioengineers a couple decades earlier. And BITS is similar to an SBA for hi-tech businesses. Private entrepreneurs with public funds

48. Issues of moral hazard and government corruption are real and substantial. How did South Korea do it? Maintained control of the Central Bank. Kept interest rates high to encourage saving. Made loans available to chaebols at special rates but made access to future loans dependent on past performance of meeting export quotas and financial management. Eventually had similar programs for small local businesses. Problem #2

49. Protective tariffs were the primary source of government revenue prior to the 20th century. During the Keynesian era workers had more disposable income, banks were regulated and paid interest on savings accounts and that money was available for those with solid business plans through the banks. More regulation not less. More intervention not less. Less income disparity not more. Anti-trust legislation and truly progressive tax codes prevented any corporations from being too big to fail or from having enough money to buy legislation favorable to them. How did the US do it?