Globalization

Dave Backus

© NYU Stern School of Business, October 2004

Globalization

Dave Backus

© NYU Stern School of Business, October 2004

Rules of engagement

• Say what you think

• But use your head

• And cite evidence when you can

Globalization: world trade

Source: Bergoeing and Kehoe, “Trade theory and trade facts,” ms, 2003.

Globalization: US trade

Source: Bergoeing and Kehoe, “Trade theory and trade facts,” ms, 2003.

Globalization: rich countries

Source: Prasad, Rogoff, Wei, and Kose, “Financial Globalization,” IMF, 2003.

Globalization: poor countries

Source: Prasad, Rogoff, Wei, and Kose.

Questions

• Why sharp increase in trade?

– Technology? Policy?

– A good thing? For importers? Exporters?

• Why sharp increase in capital flows?

– Technology? Policy?

– A good thing? For borrowers? Lenders?

• Why have most of the increases been “North-North”?

Global dimensions of business

• Wal-Mart is now the largest employer in Mexico.

– Is this good for Mexican consumers? Workers? Businesses?

– Is this good for American consumers? Workers? Businesses? Wal-Mart shareholders?

• General Electric once employed >300k people in the US. Through outsourcing and off-shore production, it now employs <100k.

– Is this good for American consumers? Workers? GE shareholders?

– Is this good for foreign consumers? Workers?

Global dimensions of business

• US technology firms outsource jobs to India:

– Is this good for Indian workers?

– Is this good for American workers? Consumers? Shareholders?

• Thailand said to be attacked by speculators in 1998

– Are open capital markets a good thing? For Thailand? For the US?

– Can open markets trigger crises?

– Are capital markets different from goods markets?

Questions

• US protection of steel ruled illegal by WTO

– Does this hurt the US? Other countries?

• Brazil sued us over cotton protection

– Is this good for Brazil? The US?

• Is it ethical for an American firm to:

– Hire workers in Viet Nam for $2/day?

– Pollute third world country while obeying their environmental laws

– Bribe local officials to counter bribes made by competitors

Global Trade Watch

The WTO and GATT have functioned principally to pry open markets for the benefit of transnational corporations at the expense of national and local economies; workers, farmers, indigenous peoples, women and other social groups; health and safety; the environment; and animal welfare.

[They forgot Mexico losing to the US in the World Cup.]

Source: Global Trade Watch, http://www.citizen.org/trade/wto/

US balance of payments

Net exports -498.1

Net labor income from ROW -5.5

Net capital income from ROW 38.8

Net taxes and transfers from ROW -67.4

Current account -530.7

Net direct investment in US 133.9

Net purchase of private securities 251.0

Net purchase of US govt securities 248.6

Net loans and other -102.8

Capital and financial account (“inflows”) 542.7

Statistical discrepancy -12.0

US$b, 2003, from BEA.

BOP: Net exports + capital inflows = 0

Country 1 Country 2

IOUs

Goods

If Country 1 runs a trade surplus:

There is a capital “outflow” for Country 1, “inflow” for Country 2.

US current account

Source: Obstfeld and Rogoff, ms, 2004.

World current account balances

Source: IMF, Global Financial Stability Report, 2004.

Emerging market capital flows

Source: IMF, Global Financial Stability Report, 2004.

Questions

• Why invest in emerging markets? Why not?

– Is this good for us? For emerging markets?

• Should emerging market investors access US markets?

– Is this good for them? For us?

• Why is capital flowing into US?

– Is this good for the US? For other countries?

• Why is the US running a current account deficit?

– Is this good for the US? For other countries?

The problem with foreign lending

• Repayment

– What if the borrower says “no”?

– Why different from domestic loan?

• Example

– US lender offers 100 to Argentina for one year

– Competition among lenders keeps rate at 5%

– Argentina has project that generates profit of 15

– What happens?

The foreign lending game

Dave(+5,+10)

Payoffs = (0,0)

Erol

What’s the outcome? What do we do about it?

(-100,+100)

Don’t lend

Lend

Default

Repay

Lending reconsidered

• Note: creditor rights help borrowers!

– Making it easy to default simply kills of loan market

• Finn Kydland and Edward Prescott got the Nobel prize for a similar idea:

– Monetary policy: commit to low inflation

– Capital taxes: keep them low to encourage investment

– Patent protection for intellectual investments

– Disaster relief?

• Evidence: states/countries with stronger creditor rights have more lending, lower rates

More questions and issues

• Currency prices:

– Is the dollar under/over-valued? Will it rise or fall?

• Inflation:

– Is it increasing?

• Price of oil:

– Rising? Is it a problem?

• Turkey:

– Can an Islamic country succeed economically?

• India and China:

– Good investments? Which looks better?

More questions and issues

• IMF and World Bank loans:

– Should they loan money to countries in trouble?

– Should they demand repayment from poor countries?

• Emerging market spreads:

– Why are interest rates so high on Argentine debt?

• Why do emerging markets go through crises?

– What was the US like in the 1800s?

For more information• My web site (or Google me):

http://pages.stern.nyu.edu/~dbackus/

• These slides:

http://pages.stern.nyu.edu/~dbackus/3386/HamCol Oct 04.ppt

• My PhD course in international macro/finance:

http://pages.stern.nyu.edu/~dbackus/3386/3386.htm

• Roubini’s global macro:

http://www.stern.nyu.edu/globalmacro/

• NYU Stern MBA macro site:

http://www.stern.nyu.edu/eco/b012303/gbe_links.htm

International diversification in the US

Source: Ahearne, Griever, and Warnock, JIE, 2004.

US international investment positionUS-owned assets abroad 7,864.0

Direct investment 2,730.3

Corporate equity 1,972.2

Bonds 502.1

Loans and other 58.4

Reserves & govt 268.3

Foreign-owned assets in the US 10,515.0

Direct investment 2,435.5

Corporate equity 1,538.1

Corporate bonds 1,853.0

US govt (treasuries, currency, official) 2,334.6

Loans and other 2,353.8

Net investment position -208.5

US$b, 2003, from BEA.

More balance of payments

Arg Auz France Mexico Poland

Net exports -1.8 -4.4 20.2 -11.7 -10.9

Net foreign income -7.5 -10.9 13.7 -13.5 -1.5

Net transfers 0.3 0.0 -13.5 7.0 2.4

Current account -9.0 -15.3 20.5 -18.2 -10.0

Net direct investment 10.6 6.2 -126.3 13.3 9.3

Net portfolio investment -2.4 9.9 36.2 -0.9 3.3

Net loans and other 0.7 -1.4 59.9 5.7 -2.5

Official reserves 0.4 1.4 2.4 -2.9 -0.6

Capital transfers 0.1 0.6 1.4 0.0 0.0

Capital and financial acct 9.4 16.7 -26.5 15.2 9.6

Errors & omissions -0.4 -1.4 6.0 3.0 0.4

US$b, 2000, from IMF, BOP Yearbook, 2001.

International investment positions

Auz Chile France Poland Spain

Assets 209.1 18.6 2,407.2 44.6 558.3

Direct investment 82.0 na 1,006.2 1.0 160.4

Portfolio investment 58.4 na 614.3 1.6 169.1

Loans and other 49.8 3.8 723.1 14.6 193.3

Reserves 18.8 14.8 63.6 27.5 35.6

Liabilities 417.6 39.3 2,347.0 99.3 672.3

Direct investment 112.1 na 702.7 33.6 142.4

Portfolio investment 229.8 9.1 869.1 18.1 242.8

Loans and other 75.7 30.2 775.2 47.7 287.2

Net investment position -208.5 -20.7 60.2 -54.7 -113.9

US$b, 2000, from IMF, BOP Yearbook, 2001.