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Threats to Globalisation
Geoff RileyA2 Economics, February 2009
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Who wrote the following?
“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages...The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion...were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalisation of which was nearly complete in practice.”
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Has globalisation contributed to the crunch?
• Globalisation initially helped to usher in decade of low inflation
• Rise in global growth and increase in the value of world trade
• Positive sum game for many
– But rising trade imbalances
• Emerging market current account surpluses
• USA – spender and borrower of last resort
– And contributed to sharp rise in commodity prices
• Shift of income to ‘high saving’ countries
• Rise in global savings led to fall in long term interest rates
• Cheaper money stimulated:
– Property bubble
– Search for higher yields among lenders (riskier)
– The genesis of sub-prime?
– Rising inflation in 2008 must not be discounted as a factor behind the current crisis
Expanding Trade – what will happen in 2009?
Real value of world trade in US dollars, at constant 2000 prices
Global Exports of Goods and Services
Source: Reuters EcoWin
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
tho
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Globalisation initially brought low inflation
Annual percentage change in consumer prices, source IMF World Economic Outlook
World Inflation
Source: Reuters EcoWin
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
0
5
10
15
20
25
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35P
erc
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But then a spike in commodity prices
Index of Prices 2000=100
The Economist Commodity Price Index
Source: Economist Commodity Price Index
00 01 02 03 04 05 06 07 08 09
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All Commodities
Industrial Metals
Food
Long term interest rates
Long-term interest rate on government bondsDid the fall in bond yields contribute to the crunch?
United Kingdom United StatesSource: Reuters EcoWin
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
3
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World Property Boom and Bust
Citi Group - World Property Price Index
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09
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Including the USA
Monthly house price index Jan 2000=100
US House Prices - S&P Case-Shiller Index
S&P Case-Shiller, Chicago S&P Case-Shiller, Composite-10
S&P Case-Shiller, New York S&P Case-Shiller, San Francisco
Source: Reuters EcoWin
95 96 97 98 99 00 01 02 03 04 05 06 07 08
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China’s Mounting Surplus
$ billion, annual data
China's Trade Balance in Goods and Services
Source: Reuters EcoWin
95 96 97 98 99 00 01 02 03 04 05 06 07
bill
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US
D (
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And mountainous FOREX reserves
Billions of US dollars
China's Mountain of Foreign Currency Reserves
Source: Reuters EcoWin
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
tho
usa
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0.00
0.25
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1.00
1.25
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US
$s
(th
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ns)
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
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Gains from globalisation
• Traditional approach– Exploitation of comparative advantage– Gains from specialisation and trade
• Higher output• Lower real prices• Welfare gains for all participants in trade and exchange• A “free lunch” welfare gain from a reallocation of
scarce resources• Mutual gains from trade between nations• Falls in the costs of transport increase the
opportunities for extended trade
– Every country has a comparative advantage in some type of economic activity
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Fault-Lines for a globalising world
• Globalisation and inflation
– 1990s – the “great stability” (calm before the storm)
– Surge in demand for and prices of commodities
• The paradox of inequality within countries
– Secular decline of Western manufacturing / structural U
– Pressure on real wages / relative living standards
– Globalisation has failed to benefit the poor people in many countries (e.g. agflation and absolute poverty)
• Changing balance of power in the world economy
– Politically unwelcome shifts in ownership
– Politically unwelcome shifts in global production
• Widening global trade imbalances
– Consequences for capital flows
• Threats to the global commons
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De-globalisation
• Steep slowdown in world economic growth
• Unemployment worldwide will rise by around 30m above 2007’s level in 2009
• Sharp fall in global trade
• Fall in net private debt and equity flows to developing countries
• Worldwide FDI inflows shrank 21% in 2008 to $1.4 trillion
• Partial reversal of migrant flows and also remittances
• Evidence of a return towards economic nationalism
