The economic theory of globalization

Prof. Pier Francesco Asso

(Università di Palermo)

Two papers: P. F. Asso, Globalizzazione reale e globalizzazione

finanziariaD. Rodrik, The disappointments of financial

globalization

The economic theory of globalization ---contents of these lectures

• Some quotations … pros and cons globalization

• Some definitions … yesterday and today

• Main features … nature, origins, causes, implications

• Globalization in real markets (costs and benefits)

• Globalization in financial markets (costs/benefits)

• Disappointments … financial globalization - LDCs

• The real issue: the economic consequences of financial globalization

Economists and globalization: some quotations …

• “Economic globalization is a process of integrationof national economies, through trade, directinvestments, short term capital flows, labourmovements, technology transfers etc. ….

Jagdish BhagwatiColumbia University

• Globalization has many dimensions … it is not an

homogeneous and undifferentiated phenomenon

• Globalization is useful, though not enough … what

is needed is a good governance of globalization

Economists and globalization: some quotations

• “…for many countries, trade openness has

contributed to higher economic growth than would

otherwise have been possibile

Jo StiglitzNobel per l’Economia, 2001

• Export-led economic growth has become the pride

of Asian industrial policy which managed to improve

the economic conditions of milions of people

• Globalization reduces the sense of isolation of many

LDCs and allows an easier access to knowledge and

information. Millions of people live longer and

better off…”

Economists and globalization: some quotations …

• Postwar experience shows a positive and causal correlationbetween foreign trade and economic growth. On average a1% increase in the volume of exports determines a 2%increase in Ypc (Jagdish Baghwati, Columbia Univ.)

• Globalization is the wrong enemy: a closed economy doesnot induce growth, does not reduce poverty, does noteliminate inequalities; in the XXc. we have no convincingexamples of countries that have become developed countriesthrough protectionism (Kenneth Arrow, Stanford Univ.)

• If globalization has to be efficiently managed we must payattention to the speed with which a country exposes itself toglobalization … it is definitely preferable a gradualreduction of protective barriers (Jagdish Bhagwati,Columbia Univ.)

Economists and globalization: some definitions

• It cannot be said that financial globalization

always generates economic growth

• A systematic evaluation of the available evidencessuggests the impossibility of establishing a strongcausal relationship between the level of financialintegration and the growth of output

• The process of capital liberalization seems to haveproduced a much greater vulnerability of nationaleconomies

Kenneth RogoffChief Economist, IMF, 2003

Economists and globalization: some citations

• “Barriers and monopolies that relegate many

countries at the margin of economic development must

be broken

Giovanni Paolo IICentesimus Annus, 33, 35

• “Countries outside the process of internationalintegration are doomed to stagnation and recession.

• “There is one form of Economic Globalizationconducive to greater efficiency and the growth ofoutput which, together with stronger interrelationsbetween people, strengthen peace and unity …however, if Globalization means only the adoptionof market laws, its consequences maybe negative

Economists and globalization: some citations

• Now a Joke … on the economic consequences of FG

• “A geologist, a chemist and an investment banker arearguing over whose profession is the oldest.

• The geologist: “My science is as old as the earthitself …

• The chemist: “Long before the Earth was formed,there were masses of gas, chemicals etc. Before that,there was just chaos …»

• The investment banker (sipping a martini): “Andwho do you think created all that chaos???»

• However, (moral of the story): do not put all the blame ofthe crisis on greedy bankers! complicated events are, bydefinition, complicated …

Globalization: definitions

It is a process by which economies become

more and more integrated by means of a

reduction of barriers (fiscal, administrative,

legal, bureacratic etc.) that stimulate economic

transactions (or decrease their costs)

Greater integration is achieved through trade,

investments (direct and portfolio), labor

movements and the spread of knowledge,

innovations and technology

Reduction of barriers to trade + the mobility of goods through

multilateral or regional agreements (PTAs)

Reduction of barriers to finance and to the mobility of capital

through changes in legislation (exchange controls etc.)

Foreign direct investments become a crucial factor.

Multinational firms are the main player of global markets and

production is fragmented at the international level

Changes in the organization of multinational firms: mergers;

acquisitions; strategic alliances; offshoring and international

contracting; outsourcing.

Some general features of globalization

Some general features of globalization

Real Globalization: liberalization of goods and services.

Perfect integration of real markets.

Financial Globalization: Perfect liberalization of capital

movements (financial products). Perfect freedom of both short

term and long term movements

RG: Duties, tariffs, quotas, non tariffs barriers (licenses,

production standards, packaging, labelling, rules etc.) → 0

RG: no discriminations of foreign producers (other than for

health or safety reasons).

FG: No discrimination of foreign investors. All controls and

restrictions on the purchases of financial assets →0

Winners and losers

Winners: exporters; investors; international banks; all

firms and consumers that take advantage of a larger

market; poor countries that transform farmers into workers

in manufacturing operations for export markets .

Losers: increase of conflicts between:

- capital and labor;

- skilled and unskilled workers;

- industries and regions with comparative advantages

and industries and regions without etc.

- globally mobile professions and local producers;

Some general features about globalization

Is it new? No. 1^ era of Globalization: 1890-1914.

Similar indicators of trade openess, FDI/GDP

Today: many countries; FDI; financial markets.

WTO: global approach

Word was coined in 1957: global vs regional approach to

integration

Yesterday: few countries/sectors; trade; migration, few

issuers of financial paper (state, municipal, railway

bonds). GATT: regional approach

1. Fall of trade barriers and opening of markets to trade and investment.

2. Fall of transport costs and deregulation in transport industries and services (railroad, steamship, airfares etc.)

3. Fall of communication and information costs and development in their technologies (telegraphs, internet)

4. Liberalization of capital movements under the gold standard and in the 1980s

5. Reduction of taxation on capital and corporate profits

What were the driving forces that contributed to

globalization (first and second eras)?

Some general features on GlobalizationDo we have it today? Yes and No.

We have a trend toward RG with still many barriers and

many forms of rich vs poor countries discrimination

Reduction of tariffs and non tariff barriers. Quotas are

turned into tariffs …

However, restrictions still exist and there are many

forms of discriminations against LDCs: tariff peaks and

tariff escalation … what is it? See next

Some general features on Globalization

FG is fully at work. Perfect integration of financial

markets with little controls and taxation

No effective restrictions against capital movements that

are free to move all around the globe at a very high

speed

Further issues on real globalizationWhat is a tariff? Tax on imported commodities, that

discriminate foreign produces and have multiple

consequences in domestic markets

Consequences on domestic producers, consumers,

welfare, fiscal revenues

What is a tariff peak? Tariffs go down but remain high

for poor countries products

What is a tariff escalations? Take a simple value chain :

1. raw materials, 2. semi-finished products, 3. cheap

finished products, 4. expensive finished products …

What is a tariff escalation? Tariffs are 0 on 1, 5% on 2;

10% on 3; 40% on 4 … consequences ???

About the WtoInstituted in 1995 for multilateral negotiations on trade

policy

Many differences with Gatt (1947-1995)

Gatt: few countries; few sectors (mainly industrial); few

trade policy instruments (mainly tariffs); zero power to

settle controversies

Gatt succeeded in lowering tariffs. Poor countries sectors

(agriculture and textiles) remained unaffected

WTO was established with more power on all trade

instruments (quotas, NTB etc.) and on all sectors

(services, property rights) and on dispute settlements

About the WtoMain mission: reduce the costs of protections for all

countries. What are its main principles?

1. Principle of single undertaking: every item of the

negotiation is part of a whole and indivisible package

and cannot be agreed separately. “Nothing is agreed

until everything is agreed”. No special treatment

2. National treatment clause: Foreigners and locals

are treated in the same way. if a State grants a

particular privilege to a local firm, it must grant

those advantages to the firms of other states while

they are in that country.

About the Wto

3. Principle of no discrimination: no preferential

agreements among countries unless these agreements

lead to lower tariffs

4. Principles of the most favored nation" (MFN). If a

country grants a treatment to another, must be ready

to grant the same advantages to all other countries.

5. Dispute settlement process to solve trade

controversies. WTO acts as the authority in power.

Different trial phases: the system has worked quite well:

more transparent with many out of court settlements.

Trade and transaction costs declined sharply (1)

Transport and communication costs declined sharply (2)

Trade and transaction costs declined sharply (3)

Effects of globalization: the boom of Foreign Direct Investments : 1870 vs 1900 and 1980 vs 1995

0

10

20

30

40

50

60

1870 1900 1914 1930 1945 1960 1980 1995

FDI/GDP --- world figures

Fonte: Obstfeld and Taylor (1999)

Theoretical and empirical analysis of the consequences of globalization

• How to understand its consequences? Useful

distinction between Real and Financial G.

• Benefits and costs of real and financial

globalization

Benefits/Gains: real globalization• Gains from specialization: domestic resources and

productive factors (L, K) are more efficiently allocated if the market is larger; countries benefit from a more optimal division of labor (static advantages and the theory of comparative advantages)

• Gains from innovation: strong evidence that “global firms” are more innovative and capable to absorb knowledge.

• Also for small firms it is not difficult to entry into a new foreign market. It is difficult to remain, grow and resist competition. Innovation is a “must”

Exports→ innovations → exports → innovations → growth

This causal chain is true for different sources of innovation and for different regions … Take Sicily, for instance …

Benefits/Gains: real globalization• Asso and Trigilia (2013) conducted an empirical research

comparing Sicilian exporting and non exporting firms in specific sectors where Sicily had “comparative advantages” (wine and foodstuffs; agricultural products; chemicals, electronic etc.)

• It turned out that exporting firms enjoyed higher:

• rates of growth; productivity; employment; etc.

• Propensity to innovate; propensity to cooperate; resist to the crisis

• More particularly, their performance regarding innovation was superior under all the different types of innovation (product; process; organization; marketing; packaging etc.)

Exporting firms are more innovative under all the different types of innovation

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

politica di marketing

packaging

organizzazione del lavoro

gestione complessiva

processo

prodotto

esportatrici non esportatrici

Benefits: real globalization Gains from scale economies: specialized firms can

sell their products to a wider number of consumersand where income is rising (advantages related toscale economies)

Dynamic advantages: in global markets firms mayreap advantages from delocalization and a morewidespread diffusion of knowledge and information

Institutional advantages. In global marketsinstitutions are more «inclusive» and there are lesscosts related to “rent – seeking”, lobbying etc.

Costs: real globalization• Specific cases where protectionism has some

rationale: strategic industries; infant industries;unfair competitition; cheap labour.

• Adjustment costs to RG: resistance to change,collapse of certain productive sectors (creativedestruction…, loss of fiscal revenues)

• Stories of success: countries that haveexperimented import substitution growth

• Greater inequalities: is real globalization anengine of greater inequalities? (remember theelephant graph)

Globalization has been a driving force behind the growth miracle in emerging markets, lifting millions of people out of poverty over the past few decades.

How was the global income pie divided?

The elephant graph (by economist B. Milanovic) details which segments of the global population saw a rise in their real incomes from 1988 to 2008

Inequalities were reduced at the world level

However, there were non-winners from globalization, particularly from the middle class people in the Western World

Inequalities and globalization: the «elephant graph»

The graph shows how different deciles fared in percentage of income gains in the last decade before the crisis

Point 1 corresponds to those who have gained the most from the recent globalizing wave …

A global middle class that is emerging all around the world with 9/10 living in China and India

Point 2 corresponds to people who belong approximately to the 80th percentile of global income distribution and that have gained 0 from globalization

The vast majority is the middle class in historically rich countries of the Western world + Australia and Japan

Point 3 corresponds to the global 1%: global rich (everywhere)

Inequalities and globalization: the «elephant graph»

The elephant graph

The biggest losers (other than the very poorest 5%), or atleast the 'non-winners,' of globalization were thosebetween the 75th and 90th percentiles of the globalincome distribution whose real income gains wereessentially nil.

These people, who may be called a global upper-middleclass, include many from former Communist countriesand Latin America, as well as those citizens of richcountries whose incomes stagnated.“

Moral of the graph: middle and working classes indeveloped countries languished.

Inequalities and globalization

Benefits: Financial globalizationIn general the theoretical benefits of FG presume a first best (ideal)

world that does not exist. In its absence, we get manycomplications. However, imagine we live in an ideal world … FGwould lead to …

2. Less rigid application of the S-I constraint. In a closed economy S=I;in an open economy I>S thanks to foreign savings (many lessons fromhistory are useful in this respect …)

3. Increase intertemporal consumption through internationalborrowing

1. More efficient diversification of wealth and asset allocation.Increase savings mobility in order to acquire greater security orhigher returns

Benefits: Financial globalization

4. Increase efficiency of economic policy. It should be more

difficult to approve “non-sustainable” reforms

5. Financial globalization is a process that cannot be (easily)

halted at the national level. Capital controls or barriers do

not work. …see the Tobin tax: What is the Tobin tax?

6. Tax short term capital movements in relation to their

speediness … what does it mean? why did it not work?

7. i. Lack of agreement and fiscal paradises etc.

ii. A 10-20% tax rate does not really stop speculation

Reputation and credibility are values to defend in a global world

Costs: financial globalization

1. No empirical evidence that a greater financial integration

determines more growth.

The relationship between capital mobility and real GDP is

empirically weak. A rise of financial flows does not generate real

investments and does not improve fundamentals (employment etc.)

No empirical evidence that capitals move from “North to South” in

search for good investment opportunities. Es. 1987 – 1997

paradox: large capital inflows towards the Us

Where did foreign capitals go? Us Treasury bonds; Mortgage

bonds; Wall street; the new economy.

J/Ue/China savings have financed the growth of the most advanced

sectors in the US. Have financed financial innovations and

speculative bubbles …

Costs: financial globalization

2. Costs induced by short term capital movements: speculative

investments determine instability and uncertainty.

Most capital movements are portfolio investments and not foreign

direct investments. They modify expectations: “bite and run” and

no growth in real investments.

3. Costs induced by a reduction of policy effectiveness and

independence.

FG produces more tax distortions and evasion since capital is not

taxed as much as labor, consumption and fixed assets (houses).

Corporate taxes have fallen in all advanced economies.

Monetary policy is less able to achieve domestic objectives (loss of

independence and the principle of the inconsistent trinity …)

What is the principle of the inconsistent trinity?(1)

• National economies cannot maintain at the same time: 1.financial globalization; 2. a regime of fixed exchange rates;3. an independent monetary policy.

• These 3 policy objectives are “inconsistent” (trilemma).

• One of these objectives must be sacrificed

• If financial globalization is imposed (by technology, policyor deregulation), this means that a country must abandonfixed exchange rates or its own monetary policy.

• Hence, this is another cost of financial globalization …

• Why is it impossible to maintain an independent monetarypolicy, with fixed exchange rates and perfect capitalmobility? (as in the EMS 1987 – 1992)

What is the principle of the inconsistent trinity? (2)

• Under capital mobility, the central bank must fix interestrates at an adequate level for maintaining exchange rateparity

• It does so, regardless of domestic demand or the inflationrate

• If the exchange rate weakens, interest rates are increasedin order to avoid capital flight or a further depreciation;

• An increase of rates it is expected that will generate capitalinflows and re-establish equilibrium in the currency market

• If an independent monetary policy is desired, the centralbank must i. restrict capital mobility; ii. let its exchange ratedevalue; or iii. abandon national currencies.

Summary of costs of financial globalization

1. No empirical evidence that financial flows generatemore real investments and growth

2. Financial flows (short term) generate moreinstability, uncertainty and volatility

3a. Financial globalization reduces policy effectiveness

3b. Financial globalization reduces policy independence

LET US CONTINUE …

Costs: financial globalization

4. Costs induced by a greater moral hazard

What is “moral hazard”? It is a form of implicit insurance againstinsolvency.

Economic agents take excessive risks … since they know that incase of mistakes or failures, someone will come to their rescue

Who bears the responsibility of moral hazard? It depends … 1. Nation states (guarantee on debt); 2. IMF 3. Others authorities (bailout clauses … “too big to fail”)

Costs: agents take excessive risks --- bubbles are created and

explode --- markets instability is increased --- investments are

made not because of fundamentals but of short term gains …

What is moral hazard?

- It has nothing to do with “morality”,

- It has to do with incentives to risk taking

- The central idea: people who are insured against some risks areless likely to take pains to avoid them (examples …?).

In finance, MH concerns arise whenever a third party (e.g. thegovernment) intervenes to insure the risk of loss or default(deposit insurance, state guarantee against default, bailouts)

MH exists, the problem is its magnitudes and tradeoffsWhy should you use OPM to save a bank? Do you create a precedent

for the future? How can you modify behaviors?

Costs: Financial globalization5. Costs induced by asymmetric information that are intrinsic

of financial markets. Two questions

1. When information are asymmetric? Not every agent has:

The same information on conditions, state of the economy,

nature of the investment etc.

Or has it at the same price

Or has it with the same degree of worthiness

2. What happens if information are asymmetric or are

manipulated by few powerful players? Where are the costs?

Excess of risks; Excess of volatility; “Herd behavior” is

produced thus increasing the instability of markets.

Moral Hazard and Asymmetric Information

The presence of asymmetric information and moral hazard reduces market efficiency

( in fact … we live in a second best world)

Why?

Savings go towards more risky investments … less

prudence

Instability propagates fast from one market

(country) to another: contagion effects

6. Costs of financial globalization: contagion effects

Costs generated by the possibility of “contagion and

propagation of financial crisis”

Financial crisis are very different from industrial crisis.

Capital flows increase the international transmission of financial

crisis

Financial crisis tend to be more widespread while real crisis are

more concentrated in specific countries or specific sectors

What are the main channels of transmission of financial crisis?

A. Trade links (exchange rates);

B. B. Financial links (assets values)

1. Mexico is hit by a exogenous shock (political upheaval);

2. investors sell financial assets in Mexico; many leave Mexico;

3. Strong pressures toward devaluation of the local currency;

4. Arg., Bra., Chi., lose some of their competitiveness and export

markets;

5. Investors expect that A, B, C, will face crisis and sell shares thus

putting new pressures on crisis.

6. The contagion spreads.

Costs of financial globalization: contagion effects

under the trade link

1. Financial markets in Mexico collapse;

2. Foreign banks that have Mexican securities in their portfolio

lose value of their collateral;

3. to recreate this value banks sell other shares of countries not

yet involved in the crisis;

4. Contagion spreads

Costs of financial globalization: contagion effects under

the financial link

Major explosions of financial flows, due to liberalization and the Washington consensus

Gross inflows to developing countries are doubled in terms of GDP (1980-2000)

After 1980: explosion of capital flows

Spectacular growth (+volatility) of capital

flows, compared to the growth of trade and gdp

Role of politics in promoting financial globaliz.

• IMF + investment banks pushed hard for openness in the capital account and mobility (Washington consensus)

• Sudden and complete openness maybe at the origin of financial and banking crisis (index of openness)

• Data record a great increase of openness particularly for Eastern and Central Europe, compared to their restrictiveness in the age of socialism

• Latina America decreased its rate of openness after the debt crisis of the 1980s … then reopened and today is very open

• Asia has steadily increased since the 1970s but then decreased its rate of openness after the crisis of the late 1990s

Role of politics in generating capital mobility

Did investment in LDCs really increase?

• Are savings going to less developed areas? Not really

• There is little empirical evidence to suggest that financial globalization has induced higher rates of Investment in LDCs

• For instance Latin America has not benefitted much from globalization and FDI remained lower than in the 1970s

• There is a poor correspondence between globalization and the increase of investments: investments are higher in countries that are not very open to FG (e.g. China and India)

• In LDC domestic savers fear a higher propensity to default when markets are open and tend to invest in safe markets (capital flight)

• The result is that FG did not promote growth in LDCs

After 1970s: the return to financial instability

The spectacular increase of capital mobility +

the collapse of the fixed exchange rate regime

After 1980: FG and high capital mobility are

accompanied by the return of banking crisis

Did investments in LDCs really increase?

Did real investment really increase?• Let us take a look at the actual flows

• Both gross outflows and inflows have increased. What really matters are net inflows

• Net inflows to the developing world have remained low. They were negative since 2005 – net wealth is going from the poor to the rich, rather than the other way round (wrong direction )

• On the whole net capital inflows to the developing world as a whole was actually negative (-5% of GDP in 2007)

• Of course results differ from country to country

Net investment flows often go in the wrong direction: from emerging and LDCs to the advanced economies

Did FG induce better risk sharing across countries?• FG did not have a strong impact on transferring savings to

poor countries, but it may promote a better risk sharing

• What is risk sharing? It is a measure of gains that investors obtain from diversification of assets

• Again the evidence is disappointing. Rodrik uses a simple measure of risk sharing (international portfolio diversification).

• Since 1970s industrial countries have improved their risk sharing, while developing or emerging countries have not.

• In fact for developing or emerging countries risk sharing is showing a downward trend

Risk sharing in different areas: the picture for developing countries is discouraging

Another cost: with FG countries increased self-insurance

• Financial crisis have induced countries to tremendously increase the use of resources in self-insurance. What is it?

• Most LDCs accumulate a large stock of official foreign reserves – even Africa.

• Is this good? Is this useful? Not really

• Since the 1980s the behavior of LDC changed and became more prudent: reserves increased unlike other countries

• Was this accumulation of reserves a way to shelter economies from financial crisis? Not really

• Russia, Korea, Brazil were hit by the crisis irrespective of the amount of reserves that amply covered their ST liabilities

• Conclusion: this self insurance policy has been costly (due to the high costs of protection) and useless

Insurance effects after the crisis: the third world builds up foreign reserves assets:

insurance effects are very costly …

Stocks of international reserves (% of GDP), advanced and emerging countries, 1990-2015

General reasons for building up international reserves

• Reserves are useful for intervention in the foreign exchange market

• To reduce currency volatility

• To enhance export competitiveness

• More open international capital markets raise – and not reduce – the precautionary demand for reserves

1. Liabilities (mostly short term and denominated in foreign currency) imply a greater risk of capital flow reversal

2. Foreign creditors could call for repayment of trade deficits or loans

3. Domestic investors may rebalance their portfolio toward foreign assets

• To protect against these risks and from the vagaries of international finance, emerging countries increased reserves

FG and economic development --- issues of mis-

alignment of the exchange rate

Costs of financial globalization: exchange rates

• Sometimes capital mobility and inflows tend to produce an

appreciation of the exchange rate that becomes

overvalued

• The more open you are to capital inflows, the greater the

risk that an exchange rate becomes overvalued

• This may depress investments, decrease exports and

growth prospects

• Empirical evidence shows that countries who maintained

an undervalued exchange rate grew more rapidly…

FG and economic development: issues of mis-alignment

of the exchange rate

Costs of financial globalization: exchange rates

• Statistical evidence suggests that there is a clear relationship

between episodes of undervaluation and episodes of growth

• China shows the importance of undervaluation for growth

• India provides more mixed records but the association persists

• The same has occurred for an African country – Uganda

• Mexico is the only relevant exception … the correlation is

negative: more undervaluation --- less growth

• Mexico follows a capital inflow driven pattern of growth

Devaluation is good for growth: some empirical evidence

Conclusions

How to increase its benefits at the expense of costs?

Financial globalization does not provide:

•The growth of the world economy

•The stability of the world economy

1. Abandon globalization: neither desirable, nor feasible.

2. Regulate globalization: reform international economic

institutions towards more sustainable development

Financial markets operate in a highly second best environment due to their imperfections

• Theory of first best: free markets + competition → greater efficiency and growth. Hence remove barriers to freedom!

• Theory of second best: if you liberalize and remove obstacles, the system as a whole may perform worse than before

• … if we remove one distortion, in the presence of other distortions , this does not make you better off

• … it may thus be optimal for a Government to intervene in a way that is actually contrary to laissez faire and integration

• Some restrictions may actually make the system work better. Impediments to FG should be increased rather than reduced

• The question is: why financial markets operate in a second best environment? Three reasons

Financial markets operate in a highly second best environment due to their imperfections

• Problems of Information asymmetries … no direct observation on the borrower … who are you lending your money to? What for?

This leads to adverse selection and moral hazard

• Problems of agency … people who make the investment decision and the people who own the assets … are different and this creates an agency problem since the latter follows the former

• Problems of systemic spillovers … when a financial institutions goes into difficulty the costs are borne not only by the owners but also by the rest of the financial system … systemic spillovers

The sub-prime crisis

• Subprime mortgages … before the crisis it was thought that financial innovation increased welfare

• A large majority of people were able to afford home ownership, which was not possible in the absence of financial innovation

• Non bank lenders increased competition into mortgage lending

• The process of securitization served to reduce risk while credit agencies certified their value

• The system collapsed, different culprits: excessive leverage

– mortgage lenders; central bankers; rating agencies; global imbalances; lack of intervention in Lehman case; political fragmentation and sovereign risk; lack of regulation; toxic assets

Financial markets operate in a highly second best environment due to their imperfections

• What controls and supervision and domestic regulation can do?

– Sands in the wheels of finance … Keynes, Tobin, Stiglitz

– Impossible to neutralize imperfections complementary reforms are rather useless …

– Keynes: global finance possesses little self equilibrating mechanism

– They need to reduce the systems’ leverage and prevent institutions from taking too much leverage

– Strengthen international regulators, create an international lender of last resort

Images of globalization

Trade and transaction costs declined sharply (1)

Trade and transaction costs declined sharply (2)

Trade and transaction costs declined sharply (3)

Trade links were strengthened and trade openness was increased

Internationalization of production

Global capital flows rise faster than GDP

FDI outflows from OECD countries as a percentage of GDPAverage 2000-2003

FDI inflows to OECD countries as a

percentage of GDP

Average 2000-2003

05101520

Poland

Slovak Republic

Mexico

Czech Republic

Turkey

Greece

Korea

Japan

Hungary

New Zealand

Italy

United States

Germany

Australia

Norway

Austria

Ireland

Iceland

Portugal

Canada

Spain

United Kingdom

Denmark

France

Sweden

Switzerland

Finland

Belgium

Netherlands

%

0 5 10 15 20

Japan

Greece

Turkey

Korea

Italy

United States

Norway

Iceland

Australia

Austria

Mexico

Poland

France

Portugal

Germany

United Kingdom

Canada

New Zealand

Hungary

Finland

Spain

Switzerland

Sweden

Denmark

Czech Republic

Belgium

Slovak Republic

Netherlands

Ireland

%

Migration has intensified …

… also among skilled workers

Again on inequalities: rising but not at the same pace

Trend of the IFI ratio, for advanced countries…IFI= (foreign assets+foreign liabilities)/GDP. It is a good measure

of cross-country financial integration

… but also for emerging countries …

… and particularly for Europe

All liberalization indices went up …

… though cross border flows collapsed after the crisis

Value of cross-border flows