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Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

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Page 1: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

Competitiveness, Latin America and the Changing

Global LandscapeJoseph E. Stiglitz

Mexico City

March 9, 2006

Page 2: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

A PERIOD OF ENORMOUS CHANGE

• NOT JUST GLOBALIZATION– THE CLOSER INTEGRATION OF THE

COUNTRIES OF THE WORLD AS A RESULT OF LOWERING OF TRANSPORTATION AND COMMUNICATION COSTS AND THE ELIMINATION OF MAN MADE BARRIERS

– FACILITATING FASTER MOVEMENT OF GOODS, CAPITAL, LABOR ACROSS BORDERS

Page 3: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

BUT THE INTEGRATION OF 2.5 BILLION PEOPLE INTO THE

GLOBAL ECONOMY• ASIA, INCLUDING INDIA AND CHINA• AFTER A LONG PERIOD OF EXCLUSION AND

MARGINALIZATION, ECONOMIC SUPPRESSION UNDER COLONIALISM

• GROWING AT AN UNPRECEDENTED PACE– EVEN IN THE INDUSTRIAL REVOLUTION,

GROWTH WAS ONLY 3 TO 3.5%– INDIA HAS BEEN GROWING AT 6% FOR A

QUARTER CENTURY—NOW APPROACHING 8%– CHINA HAS BEEN GROWING AT 9% FOR THREE

DECADES

Page 4: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

NOT JUST ECONOMIC GROWTH

• BUT IMPROVEMENTS IN BROADER MEASURES OF LIVING STANDARDS

• AND IMPRESSIVE REDUCTIONS IN POVERTY, ESPECIALLY IN CHINA

Page 5: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

THESE CHANGES ARE IMPOSING ENORMOUS STRAINS• ON DEVELOPED COUNTRIES

– DECLINING MANUFACTURING SECTOR– BUT EVEN COMPETITION IN OUTSOURCING IN

SOFTWARE, HI-TECH– IMPOSING DOWNWARD PRESSURES ON WAGES,

ESPECIALLY OF LOW SKILLED WORKERS• Long time predictions of economic theory of what a fully integrated

global economy might look like may be coming true• Leading to rich countries with poor people

– WORRIES ABOUT AMERICAN COMPETITIVENESS• The World is Flat

– SURGE OF PROTECTIONISM, RESISTANCE TO SALE OF ASSETS (STEEL, PORT)

• And reinforcing long standing charges of hypocrisy

Page 6: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

BUT THERE ARE ALSO STRAINS ON EMERGING MARKETS AND OTHER

DEVELOPING COUNTRIES

• Globalization has been associated with increasing inequality– Partly because of “unfair” globalization—refusal of

advanced industrial countries to reduce subsidies on agriculture, maintaining tariff structures almost designed to stymie development

– Partly because of asymmetric globalization• Capital liberalized more than labor

– And partly because globalization has increased demand for certain skills

Page 7: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

STRAINS TO COMPETE

• THE WORLD IS NOT FLAT– Some have the resources and capabilities to compete

more effective• Disparity between haves and have nots (within and between

countries) may even be growing

– Large countries have resources to invest in research – New global monopolies (Microsoft) may be creating a

less even playing field – The Uruguay Round made the world less flat

• Especially TRIPs

Page 8: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

LESSONS FROM THE SUCCESS

• CHINA’S SUCCESS IN SPITE OF IT NOT FOLLOWING MOST OF DICTATES OF WASHINGTON CONSENSUS– Not even clear property rights

• But clearer property rights might have led to even more impressive growth!

– Large role of government• Including Industrial policy

– No free trade in earlier high growth period– No free capital market liberalization—even today

• SUCCESS BECAUSE THEY FOLLOWED A DIFFERENT AGENDA

Page 9: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

India’s success

• In spite of weaknesses in infrastructure– Including electricity

• In spite of absence of natural resources– Or perhaps because

• The “natural resource curse”

• Growth occurred before trade liberalization

• And, like China, there is still not full capital market liberalization

Page 10: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

WHAT DO THESE SUCCESS CASES HAVE IN COMMON?

• SOUND MACRO-POLICY– But a focus on growth, not just stabilization– Concern about access to credit

• Explicit initiatives in China and India directed at foreign banks

• LARGE ROLE FOR GOVERNMENT– Including in fighting poverty

• HEAVY INVESTMENTS IN EDUCATION, AND ESPECIALLY SCIENCE AND TECHNOLOGY– In the case of India, going back a century– Even outpacing in some ways more advanced

countries

Page 11: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

Some statistics

• NUMBER OF GRADUATES IN SCIENCE AND ENGINEERING NOW DWARFED BY THOSE IN ASIA– Of 2.8 1st university degrees in science and engineering

• 1.2 million in Asia• 830,000 in Europe• 400,000 in U.S.

– In engineering, Asia produces 8 times U.S.– since 1993, the number of American citizens in graduate

science programs has fallen from 55,000 to under 42,000 while the global supply of Ph.D. in science has increased by 25%--mostly in Asia

– Just under half of all doctorate degrees in engineering and computer science in the United States are earned by foreign students

• Serious visa problems since 9/11

Page 12: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

• PROBLEMS START EARLIER IN ELEMENTARY AND SECONDARY SCHOOLS– EVIDENCED BY PERFORMANCE IN

STANDARDIZED TESTS IN SCIENCE AND MATH. For example, at 8th grade

• 44% of Singapore performed at highest level• 38% of Taiwan• 7% U.S.

Page 13: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

We are not only a Globalized Economy, but a Knowledge Economy

• We now recognize that what separates developed from less developed countries is not just a gap in resources, but a gap in knowledge

• There is a limit to the pace at which you can close a gap in resources– Though China’s savings rate in excess of 42% helps

speed the process– But closing the gap in knowledge can occur at a very

rapid rate– That is why even a natural resource rich country like

Malaysia has, in the last two years, switched from focusing on investments in infrastructure to investments in people and research

Page 14: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

China’s success is not just because of its cheap labor

• Labor costs in textiles actually higher than many other developing countries

• Chengdu becoming software center

• Jilin –example of how to deal with “rust belt problems”

Page 15: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

China’s 11th 5 year plan

• Next week, China will adopt its 11th 5 year plan– Comprehensive approach to development– Emphasis on problems of inequality, and

especially in the rural area– Emphasis on the environment– And emphasis on science and technology,

maintaining competitiveness• Including establishing global class universities• A basis of independent innovation

Page 16: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

Latin America Can Compete

• Brazil had, before 1980, three quarters of a century of extremely rapid growth (5-6 percent), surpassed later only by East Asian countries. Other countries too had impressive growth rates

• But growth in Latin America since 1980 has been dismal—even in the 90s, after reform, growth was half the rate in pre-1980 decades

• And the growth of the first half of the 90s was not sustainable—and was not sustained– Largely based on capital inflows

Page 17: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

• Brazil has demonstrated technological leadership– Embraer airplane global best seller– Bio-fuels have helped Brazil achieve energy

independence– All done with important support from

government• Including through development bank (BNDES)

• These have resulted in impressive export performance

Page 18: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

Puzzle

• Brazil’s overall performance has not been as strong as one would have thought from its strong export performance

• Explanation: excessively tight monetary and fiscal policies

Page 19: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

A Competitiveness/Growth Strategy for Mexico

1. Enhancing Competition– Requiring strong anti-trust laws– Strong regulations of natural monopolies

2. Strengthening the public sector– More revenues—current revenues insufficient to

finance investments needed to compete• Strengthening progressive taxation

– Less reliance on V.A.T.• More taxation of oligopolies

– Increasing transparency• One of great achievements of current Administration

– Benchmarking efficiency

Page 20: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

3. Putting people first– Investments in education, health– Mexico ranks 53 in the world in HDI

• With great disparities within the country

4. Pro-growth policies– Expanding credit– Maintaining a pro-growth macro-policy– Industrial/export promotion policies at national and

state level• Including investments in advanced education and research

Page 21: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

Promoting the Economy

• Identifying dynamic comparative advantages– Location near U.S.

• Not question of picking winners, but looking for externalities, coordinating needed infrastructure investments, other investments

• Almost every successful country has had such policies– Today, America’s is largely embedded in defense department– But current American Administration is finally recognizing

importance for America to remain competitive, increased NSF budget

• Though in scientific community, strong belief that Administration is anti-scientific

• And immigration policies are having their toll

Page 22: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

Mexico’s Choice

• Mexico has a choice between two strategies– One has not been working well in Latin America or

elsewhere– Failed in promoting well-being of ordinary citizens

• Success should not be measured by increases in GDP• In U.S. GDP has been increasing, but so too has poverty,

and real income even of median household has been declining

• One needs to have sustainable, equitable, democratic development

– Growth based on indebtedness is not sustainable– Growth based mainly on exploiting natural resources is not

sustainable• Better measures are Green Net National Product, Real

Income of Median Household, HDI

Page 23: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

• The alternative strategy—pursued in much of Asia-- has worked well, beyond the wildest expectations– Though any strategy has to be adapted to local

conditions; one size fits all policies do not work• Fifteen years ago there was considerable uncertainty

about the relative merits of alternative strategies– Enormous successes and failures has now brought

clarity– Though in many circles ideology/interests still prevail– Success of alternative model consistent with modern

economic theory, with its recognition of the strengths and limits of markets

Page 24: Competitiveness, Latin America and the Changing Global Landscape Joseph E. Stiglitz Mexico City March 9, 2006

Responding to the Competitive Challenge of Globalization

• Hopefully, Mexico will choose the strategy which is not only likely to enhance economic growth

• But also will have a greater chance of ensuring that the benefits of that growth are shared widely among the Mexican people