End of the 3rd globalization? What are the choices for Asian countries? December 2018 Hyun-Hoon LEE Kangwon National University, Republic of Korea 1
1. Introduction Source: The Economist, January 28th 20172
1.1. History of globalization 1 st globalization: From 1 st Industrialization to World War I 2 nd globalization: World War I to Great Depression 3 rd globalization: World War II to present Source: Bordo, M. (2003), "Globalization in Historical Perspective", NBER Working Paper 3
1.2. Drivers of the 3rd globalization Liberalization of Trade GATT/WTO Economic Integration Development of Transport Sea Transport Air Transport Development of Telecommunication Telephone Internet 4
Source: The Economist, January 28th 2017 5
Source: The Economist, January 28th 2017 6
Is globalization in retreat? Source: The Economist, January 28th 2017 7
Contents 1. Introduction 2. What is going on? 3. Why de-globalization? 4. What are the choices for East Asian countries? 5. Concluding remarks
2. What s going on? Globalization refers to international integration in commodity markets, capital markets, and labor markets. What is going on in these three markets? Source: The Economist, January 28th 2017 9
2.1. Trade flows Source: World Bank, World Development Indicators database 10
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2.2. FDI flows Source: UNCTAD, World Investment Report: Annex Tables 15
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Source: UNCTAD, World Investment Report: Annex Tables 17
Source: UNCTAD, World Investment Report: Annex Tables 18
Source: UNCTAD, World Investment Report: Annex Tables 19
2.3. Cross-border capital flows Source: Financial Times (2017), Globalisation in retreat: capital flows decline since crisis, August 22. 20
2.4. Migration flows Inflows (permanent and temporary) of foreign population Immigration flows Work migrant inflow Source: Immigration Data portal 21
2.5. Political environment Donald Trump s America First policy New trade deals with America s allies US-China Trade War The U.S. is shaking the whole structure of international governance, which it created after World War II Brexit More members may also leave the EU Is the EU doomed to fail? 22
2.6. Key findings Globalization seems to have reached its limit. Globalization refers to international integration in commodity markets, capital markets, and labor markets. It seems to have started going downward in some markets. Political environment has become very hostile to globalization Growing backlashes against globalization in most countries for various reasons Eg. U.S.-China trade war, Brexit, etc. 23
3. Why de-globalization? Source: The Economist, January 28th 24 2017
Reasons for de-globalization 1. Polarization of income and wealth within countries 2. The globalization may have gone too far 3. De-polarization of income and wealth between developed and developing countries 4. The 4th industrial revolution 5. Secular stagnation due to population aging 25
3.1. Polarization of income and wealth within countries 26
Source: PEW Research Center, (2015), Share of adults living in middle-income households is falling 27
Note: Labor market flexibility and financial deepening are also largely due to the greater competition among countries driven by globalization (HH Lee) Source: Dabla-Norris, et al (2015), "Causes and Consequences of Income Inequality: A Global Perspective", IMF Staff Discussion Note No. SDN/15/13. 28
Implications Growing backlashes against globalization in both developed and developing countries Increasing polarization of income and wealth income is common not only in developing countries but also in developed countries. Low-end population has become hostile against globalization. Middle-income group, which has been in support of globalization, has become smaller in total population. 29
3.2. globalization may have gone too far We cannot simultaneously have hyper-globalization, democracy, and national sovereignty. Source: Rodrik, D. (2013). The Globalization Paradox", ppt. See also Rodrik, D. (2007). The inescapable trilemma of the world economy, Dani Rodrik s wellog Rodrik, D (2016), Brexit and the Globalization trilemma. Dani Rodrik s weblog. 30
Source: Rodrik, D. (2013). The Globalization Paradox", ppt. 31
EU today (also WTO system and regional integration to some extent) Narrow domestic policy space in macro, financial, tax, structural and other domains to minimize globalization s drawbacks such as widening polarization. Individual countries must sacrifice some degree of democratic politics. Source: Rodrik, D. (2013). The Globalization Paradox", ppt. 32
Straight Jacket A jacket-like garment with very long sleeves which can be secured in place, thus preventing the wearer from moving his or her arms. 33
United States of America (and United States of Europe): Individual countries (states) do not have national sovereignty It requires significant restraint on national self-determination and reduction in regulatory, institutional, and policy diversity Source: Rodrik, D. (2013). The Globalization Paradox", ppt. 34
Implications Individual countries do not have much room for responding to growing backlashes against globalization. With a high level of globalization, the countries are wearing golden jackets of higher income and welfare. But the golden jackets are straight jackets. i.e. With a high level of globalization, there is a narrow domestic policy space in macro, financial, tax, structural and other domains to minimize globalization s drawbacks such as widening polarization. 35
3.3. De-polarization of income and wealth between developed and developing countries Source: Roser, M. (2016), Global Economic Inequality", Our World in Data (https://ourworldindata.org/global-economic-inequality) 36
Global income inequality between countries, 1960-2013 Source: Milanovic, B. (2016). Global Inequality: A New Approach for the Age of Globalization. Cambridge, Massachusetts: Harvard University Press. 37
The world in transition Shift of global balance Source: The Economist (2014), The world in transition, November 13 th. 38
Implications Multinational companies are facing higher competition in developing countries Local firms in developing countries have become more sophisticated. Wages of local workers have risen rapidly. For many industrial, manufacturing, financial, natural-resources, media and telecoms companies, global reach has become a burden, not an advantage. (The Economist, The multinational company is in trouble, Jan 28th 2017) Multinational companies are facing more aggressive protectionist government in home countries As developed countries are caught up with by developing countries in various areas, there have been growing backlashes against globalization in these countries. Political leaders of these countries want their multinationals to comeback home. (To avoid punitive treatment, all you have to do is stay (Donald Trump) 39
3.4. The 4 th industrial revolution The 4 th Industrial revolution underway 1 st : Late18th century 2 nd : Early 20 th century 3 rd : Late 20th Century (Digital revolution) 4 th : Artificial intelligence (AI),Big data, robots, etc. Source: Rodrik, D. (2013). "The Globalization Paradox", ppt. 40
1st-3th industrial revolutions: physical labor was replaced by machines 4 th Industrial revolution: not only physical labor but also metal labor are being replaced by AI, Big data, robots, etc. As manufacturing goes digital, a third great change is now gathering pace. It will allow things to be made economically in much smaller numbers, more flexibly and with a much lower input of labor, thanks to new materials, completely new processes such as 3D printing, easy-to-use robots and new collaborative manufacturing services available online. Source: The Economist, "A third industrial revolution", Apr 21 st 2012. "We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before. Source: Klaus Schwab, The Fourth Industrial Revolution, The World Economic Forum Annual Meeting 2016 41
Anti globalization sentiments will further increase Productivity will be enhanced greatly, as not only physical labor but also metal labor are being replaced by AI, Big data, robots, etc. Polarization of income and wealth will intensify Re-shoring of multinational companies to home countries Importance of labor in production process will shrink 42
3.5. Secular stagnation due to population aging United Nations (2016). World Population Aging, 2015. 43
United Nations (2016). World Population Aging, 2015. 44
A compared to medium-age workers (more generally, the working-age population), 1. The elderly participate less actively in the labor force; 2. Their productivities are lower (Skirbekk, 2003; Aiyar, et al, 2016; Liu and Westelius, 2016); and 3. They save less (Park and Shin, 2012; Horioka and Niimi, 2017) What does this mean for economic growth? 45
Effects of population aging on economic growth The world, particularly developed country group, is very likely to enter secular stagnation, due to increasing old-age population and decreasing working-age population Source: Lee, H.-H. and K. Shin (2018), Nonlinear Effects of Population Aging on Economic Growth, Draft. Lee, H.-H., K. Shin, and D. Park (2017), Population Aging and Its Impact on Economic Growth 內閣府經濟社會總合硏究所經濟分析, 第 195 号, 159-179. 46
Empirical Specification We use a panel data set of 142 countries for the period 1960-2014 In order to minimize the yearly fluctuations due to business cycles, we use five-year averages of variables for eleven sub-periods of (1960-1964), (1965-1969), (1970-1974), (1975-1979), (1980-1984), (1985-1989), (1990-1994), (1995-1999), (2000-2004), (2005-2009), and (2010-2014). We then calculate the growth rates of GDP per capita for 5 year interval (i.e. 1 period interval) and 10 year interval (i.e. 2 period interval), using the Penn World Table version 9.0 s real GDP using national-accounts growth rates (RGDP NA ) We control for country-fixed effects. We also include period dummies to take account of factors such as the global business cycle, global capital market shocks, and so forth. We assume that the productivity of the economy, ln(a), is is influenced by the initial levels of physical capital and human capital, as well as the initial demographic structure. In addition, it is also assumed to be influenced by trade openness. 47
Major findings (i) Decrease in working-age population share hampers economic growth (A 10 percentage point decrease in the working age share will decrease the annual growth rate by 1.7 percentage points.) (ii) Increase in old-age population share hampers economic growth (A 10 percentage point increase in the old age share will decrease the annual growth rate by 3.5 percentage points.) (iii)population aging hampers economic growth to the greatest extent in countries where population aging has already reached a high level. (iv) The negative impact of population aging on economic growth becomes greater as population aging deepens. 48
Implications (i) As the World s aging population continues to grow older dramatically while working age population begins to decrease, it is likely that the world may enter into the age of secular stagnation, as suggested by Summers (2013; 2015) and Eggertsson, et al (2017). (ii) Such a risk of secular stagnation is particularly high in the developed countries, where population aging is more advanced. (iii) Likely to trigger trade protectionism. 49
4. What will be happening Source: The Economist, January 28th 50 2017
4.1. History repeats Smoot-Hawley Tariff Act (1930) - During the 1920s, as European farmers recovered from World War I and their American counterparts faced intense competition and declining prices because of overproduction, U.S. agricultural interests lobbied the federal government for protection against agricultural imports. - In his 1928 campaign for the presidency, Republican candidate Herbert Hoover promised to increase tariffs on agricultural goods, but after he took office lobbyists from other economic sectors encouraged him to support a broader increase. - Although an increase in tariffs was supported by most Republicans, an effort to raise import duties failed in 1929, largely because of opposition from centrist Republicans in the U.S. Senate. - In response to the stock market crash of 1929, however, protectionism gained strength, and, though the tariff legislation subsequently passed only by a narrow margin (44 42) in the Senate, it passed easily in the House of Representatives. - Despite a petition from more than 1,000 economists urging him to veto the legislation, Hoover signed the bill into law on June 17, 1930. Source: Encyclopedia Britanica (https://www.britannica.com/topic/smoot-hawley-tariff-act) 51
Smoot-Hawley Tariff Act (1930) - continued 52
Smoot-Hawley Tariff Act (1930) - continued Effects - Smoot-Hawley contributed to the early loss of confidence on Wall Street and signaled U.S. isolationism. - By raising the average tariff by some 20 percent, it also prompted retaliation from foreign governments, and many overseas banks began to fail. - Within two years some two dozen countries adopted similar beggar-thyneighbour duties, making worse an already beleaguered world economy and reducing global trade. - U.S. imports from and exports to Europe fell by some two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect. Source: Encyclopedia Britanica (https://www.britannica.com/topic/smoot-hawley-tariff-act) 53
4.2. possible scenarios Rodrik, D. (2013). "The Globalization Paradox", ppt. 54
4.3. Implications of Scenario 3 Another World War? Globalization was one of the forces that helped created the first World War because it has profoundly destabilising effects, effects we are also seeing today. (The Economist, June 14 th 2017) The 1 st and 2 nd globalizations stopped with the outbreaks of World Wars. Unlikely to go for a full-scale hot war between nuclear superpowers. But, very likely go back to cold war between superpowers, not between the West vs. the East, but between the North vs. the South. Cold war may mean many small-scale wars: Just as in the first era, globalisation has disrupted international and domestic power structures. Thankfully this does not mean that another world war is inevitable. But it is easy to imagine regional conflicts: Iran against Saudi Arabia, or an American attack on North Korea that provokes a Chinese reaction. (The Economist, June 14th 2017) Source: The Economist (2017), The 1914 effect The globalisation counter-reaction, June 14 th. 55
4.4. Asian countries are likely to feel the worst pain Asian countries have grown rapidly relying on globalization Globalization in reverse means slower growth for these countries Asian countries are likely to be forced to choose one side in the new cold war The new cold war is likely between the U.S. (the North) and China (the South) Asian countries are likely to be in a situation of East European countries during the cold war between the U.S/European countries and the Soviet Union 56
5. What are the choices for East Asian countries? Source: The Economist, January 28th 57 2017
To be discussed. 58
References Bordo, M., A. M. Taylor, J. Willamson eds. (2003), Globalization in historical perspective, NBER. Dabla-Norris, et al (2015), "Causes and consequences of income inequality: A global perspective", IMF Staff Discussion Note No. SDN/15/13. Economist, The (2014), The world in transition, November 13th. Economist, The (2017), In retreat Global companies in the era of protectionism, January 28th 2017 Economist, The (2017), The 1914 effect The globalisation counter-reaction, June 14th. Financial Times (2017), Globalisation in retreat: capital flows decline since crisis, August 22 James, H. (2017), Deglobalization as a global challenge, CIGI Papers No.135, Center for International Governance Innovation. Lee, H.-H. and K. Shin (2018), Nonlinear Effects of Population Aging on Economic Growth, Draft. Lee, H.-H., K. Shin, and D. Park (2017), Population Aging and Its Impact on Economic Growth 內閣府經濟社會總合硏究所經濟分析, 第 195 号, 159-179. Milanovic, B. (2016). Global Inequality: A new approach for the age of globalization. Cambridge, Massachusetts: Harvard University Press. PEW Research Center, (2015), Share of adults living in middle-income households is falling. Rodrik, D. (2007). The inescapable trilemma of the world economy, Dani Rodrik s wellog Rodrik, D. (2013). The Globalization Paradox", ppt. Rodrik, D (2016), Brexit and the Globalization trilemma. Dani Rodrik s weblog. Roser, M. (2016), Global economic inequality", Our World in Data. United Nations (2016). World Population Aging, 2015. United Nations (2017). World Population Aging, 2017 key findings. 59