Sapienza Università di Roma
Dipartimento di Scienze Sociali ed Economiche
International Economic Policy
Academic Year 2015-2016
Prof. Emanuele Ragusi
Sapienza Università di Roma
Dipartimento di Scienze Sociali ed Economiche
The international economic policy topics
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Introduction
Globalization
The commercial interdependence
The monetary interdependence in the short term
The monetary interdependence in the long run
The financial interdependence
The labor interdependence
The international coordination of economic policy models
The uncompensated interdependencies and international collective
action
• The multilateral trade coordination
• The international monetary system coordination
• The development policies coordination
2
Introduction to International Economic Policy
The economic policy today is confronted with a set of problems and issues,
whose size and whose socio-political and economic implications go beyond
the competencies and responsibilities of national governments
Technological development, markets liberalization, the expansion of
international finance and foreign direct investment, increasing migration
flows and ICT developments have deeply transformed the conceptual
framework within which the public decision-makers have to define national
and local aims
The global economic interdependence raises problems for which it is not
possible to answer relying only on national economic policy instruments
The well known "toolbox" of Schumpeter should be expanded to include
international economic policy coordination in the achievement of global goals
3
The economic policy in an international
environment
Trade policies
use of customs duties, quotas and other tools to limit and regulate the
international trade flows
Exchange rate, monetary and fiscal policies
policies available to the authorities in a fixed or pegged, floating or flexible and
pegged-floating or managed exchange rate, economic policy models in the short
and long term, the time-inconsistency
Financial Policies
used to diversify their investments and develop the financial market
International development cooperation policies
to facilitate coordinated actions for the development of the poorest countries
Macroeconomic policies coordination
within the main international organizations, formal (WTO, IMF, WB, the
specialized agencies of the UN), informal (G8/G20) supranational (EU).
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The IEP focus
2 interaction channels
- international consequences from domestic economic policies (avoiding
"beggar-thy neighborhood“ policy)
- global goals in terms of well-being, income distribution, safety
environment can not be achieved individually (" public goods“ approach)
The first channel requires a greater awareness of the interdependence of
domestic economic policy, as well as new tools for the pursuit of
international goals
The second channel requires the search for the most appropriate
"institutions" (rules, formal, informal and / or organizational structures) that
would facilitate the economic policy coordination for the achievement of
"higher goals" (as the MDGs)
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Sapienza Università di Roma
Dipartimento di Scienze Sociali ed Economiche
Globalization
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Destroy
or
change ?
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The main topics
1. Definition
2. The 4th phases of globalization
3. The differences in the globalization processes
4. The inequality
5. The financial crisis
6. The new scenarios
7. The Global Governance
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1. Definition
In terms of markets: widening, deepening, interconnected
In terms of economic geography: the overlapping of different
levels (global, regional, national, local)
In terms of space-time connections: changes in the organization of
human activities between regions and continents
A satisfactory definition should capture all of these elements:
- markets extension (of goods, services, capital)
- economic growing interdependence
- ICT developments
- Impact on main areas
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The definition of the economists
A process characterized by operators (banks, businesses man,
enterprises, services,) working in highly integrated markets
where they move freely, facilitated by the development of
innovations in the telecommunications and data processing:
- goods and services (foreign trade)
- capital (financial assets and foreign direct investment)
- labor (immigration)
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2. The 4° phases of the globalization
Globalization is not a new phenomenon but its features have
changed substantially over time.
We can talk of at least four historical phases:
- The first between 1870 and the first world war
- The second between the end of World War II and the end of
the 70s
- The third in the late 80s and early twenty-first century(2001)
- The fourth in the last 13 years
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The first phase (1870-1914)
The most significant events:
- reduction of traveling time
-reduction of transport costs
- increased flows of goods (trade), financial capital and labor (migration)
due to market opening and technological innovations
The main results:
- exports recorded a twofold increase (8%) than that of world income
- cash flow tripled compared to income growth in Africa, Asia and Latin
America
- about 10% of the world population was involved in migration. It is
estimated that at least 60 million people have emigrated from Europe to the
"New World" and an equally large number of people from China and India
to other Asian countries, such as Sri Lanka, Burma, Thailand, the Philippines
and Vietnam
- per capita income grows at rates not seen before (World Bank, 2002a).
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Three waves of Globalization
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1998
1994
1990
1986
1982
1978
1974
1970
1966
1962
1958
1954
1950
1946
1942
1938
1934
1930
1926
1922
1918
1914
1910
1906
1902
1898
1894
1890
1886
1882
1878
1874
1870
Tariffs barriers
T MEDIA MONDIALE
25
20
15
10
5
0
Pierluigi Montalbano – Università di Roma “La Sapienza”
Trade liberalization
Customs in % of goods value
1913
1950
1990
2004
Germany
20
26
5.9
3.6
Giapon
30
25
5.3
3.9
France
18
25
5.9
3.6
U.S.
44
14
4.8
4.0
Source: UNCTAD (1994a); WTO (2004).
The second phase (1944 to ‘70s)
The Breton Woods agreements led to the establishment of a new economic order based
on a system of rules, institutions, and procedures to defend :
- the exchange rate (the gold exchange standard, fixed but adjustable exchange rates)
-the monetary stability (IMF, International Monetary Fund)
- the reconstruction of countries emerging from conflict (the Marshall Plan) and the
development of LDC (World Bank)
Later (Geneva, 1947) a multilateral agreement was reached to regulate international
trade (GATT, the General Agreement on Tariffs and Trade)
This phase basically interested mainly the industrially developed countries, while the
countries of the socialist bloc (COMECON countries) and LDC countries remained
excluded
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The second phase (1944 to ‘70s)
The liberalization process concerned trade of goods, to a lesser extent
capital movements and financial services
Trade is mainly intra-industry trade (exchange of manufactures against
manufactures, oligopolistic competition and product differentiation)
Migration flows recover to grow, but not with the intensity of the first
phase of globalization
This phase ends with the crisis of the 70s:
- end of the Breton Woods regime (fixed exchange rates and the dollar
pegged to gold)
- increase in the prices of raw materials (quadrupling of oil prices)
- stagflation and abandon of Keynesian demand management policies
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The third phase (‘80s to ‘90s)
The neo-liberal policies of the 80s (Reagan and Thatch) accelerate the pace of
liberalization and markets deregulation both in industrialized countries and in
emerging markets.
Trade and foreign direct investment exceed the levels achieved in the first and
second phase of globalization
The emigration flows increased but with different characteristics compared to the
past
Financial deregulation favors the financialisation of the economy
The block of the socialist countries flakes
Emerging countries remained on the margins of globalization: China, India and
then Brazil, Russia, South Africa, Mexico and other countries of Southeast Asia
(Vietnam, South Korea, Thailand, Indonesia etc.).
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The fourth phase (2001-2013)
Since 2001, the global economy is hit by a series of unprecedented events
that led to the most serious economic recession, but also to a crisis in the
social, employment and international relations, including:
- the tragic events of September 11, followed by the wars in Afghanistan
and Iraq
- an increase in income inequality between rich and poor countries
-the failure of trade negotiations (Doha Round)
- the problems of environmental sustainability
- the severe financial and economic crisis erupted in the United States in
2007 and its impact on the world economy
- the conflicts arising from the Arab Spring
- the indebtedness of the most advanced countries and the fiscal restraint
that leave no room for growth
- the Eurozone crisis
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Global Trade
Production and world trade (rate of growth ,1870-2005)
12,0
10,0
8,0
6,0
4,0
2,0
0,0
Esportazioni mondiali in volume
PIL mondiale a prezzi costanti
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
3
-9
93
19
73
19
0
-5
73
5-
19
3
-1
13
19
0
90
-1
00
19
70
18
-2,0
2
21
22
23
24
25
26
27
2
28
22
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The shift of growth from IC to DC
5,0
(per capita GDP growth rate, percent)
4,5
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
1960s
Source: World Bank, WDI 2006
1970s
1980s
Industrialized economies
1990s
Developing economies
2000-2004
30
31
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The new tiger…
Figure 1: Average annual export, import and GDP growth (1990-2004)
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Average annual import growth (%)
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China
16
14
India
12
10
Latin America &
Caribbean
8
Sub-Saharan Africa
6
EMU
4
2
World
UK
Japan
0
0
2
Fonte: Qureshi e Wan, 2007
4
6
8
10
12
14
16
18
20
Average annual export growth (%)
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The new comers…
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3. The different features of globalization (1)
-Foreign trade and the development of science and technology are the most
dynamic components
-- Less mobility in the factors of production (labor and capital)
- In the period of maximum expansion of the globalization phase 1989-96,
the movement of foreign capital in the U.S. has never exceeded 1, 2% of
GDP, compared to 4, 6% reported by the same streams of the United
Kingdom in the period 1890-1913
- Trade liberalization has produced, over the past 40 years, a reduction of
customs duties estimated at more than 50% of the existing ones in the 70s
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The different features of globalization (2)
Starting from the nineties, international trade policy was even
more markedly geared to a general trend towards liberalization,
thanks to the creation in 1995 of the World Trade Organization
(WTO) and to the new and growing role played by developing
countries in the globalization of markets that has changed the
traditional paradigms of trade policy on a multilateral basis
The composition and direction of trade flows is mainly (about
70%) intra-industry trade and between developed countries
(North-North), where in the first phase was, on the contrary,
inter-industry and between advanced countries and developing
countries (North-South).
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The different features of globalization (3)
The flows of foreign direct investment mainly assume the characteristics of
intra-industry trade between countries (North –North)
Currently, less than 70% of FDI inflows comes from industrialized countries
and about 50 % of the total goes to other industrialized countries. In 2012 for
the first time FDI directed to developing countries have overtaken the flows
directed to ID
In recent years the participation of emerging countries in international trade
has significantly increased not only towards the most advanced countries but
also between the economies of developing countries ( South-South )
Emerging markets represent more than a third of global GDP and in recent
years they have provided more than a third of total global growth
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The different features of globalization (4)
Globalization has fostered, and was in turn influenced by the strong growth
registered in the daily volume of trade exchange and, in particular, in the
short and very short term capital movements.
Between the late '80s and 2010, daily trading volume has gone from less
than $ 600 billion to nearly 4000 today (Bank for International Settlements,
2010), a volume higher of more than 80 times the world exports of goods.
The current phase of globalization is, therefore, characterized by a boom of
short-term financial transactions which, together with substantially flexible
exchange rate regimes and ineffective international and national
surveillance systems, has greatly increased the instability of economic
systems .
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4. The inequality
Over the past twenty years, considerable progress have been made
in many aspects of human development: the majority of people are
healthier, live longer, are more educated and have access to a wider
range of goods and services.
Excellent results were also achieved in increasing the power of the
people to choose their own leaders, to exert influence on public
decision makers and share knowledge.
However, the overall picture is not positive.
In recent years we have also witnessed the rise of inequality, both in
developed countries and in the developing countries, and the
emergence of production and consumption patterns which have
proved increasingly unsustainable.
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The human development index (HDI e IHDI)
Poverty is being reduced but the economic development increases
inequality which manifests itself in many ways: in the incomes of workers in
rural areas, the reduction of social mobility, the lack of access to key public
goods
(education,
health,
political
participation​​,
etc.).
UNDP, the Institution that publishes the Human Development Index since
1990 (which is the composite measure of three indicators: life expectancy,
educational attainment and per capita GDP) has introduced in 2010 a new
indicator of the level of human development adjusted for inequality (IHDI).
Under conditions of perfect equality, HDI and IHDI are identical. A difference
between the two denotes inequality; the greater the difference, the greater
the inequality.
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The human development index (HDI e IHDI)
Applying the IHDI to 139 countries, UNDP obtains the following results:
- the average decrease caused by inequality amounts to about 22%. Once
adjusted for inequality, the global HDI for 2010 decreases from 0.62 to 0.49, a
downgrading retreating from high HDI to medium HDI.
The decline ranged from 6% (Czech Republic) to 45% (Mozambique). Four-fifths
of the countries are marking a decline of over 10% and almost two-fifths a loss
greater than 25%.
Countries with a lower human development tend to have greater inequality in
several dimensions.
The inhabitants of sub-Saharan Africa suffer the greatest losses of HDI due to
inequality in all three dimensions.
Inequality assumes a significant size in many advanced countries (USA)
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Fig. 5 Loss in the human development Index and its components due to
inequality, by region
Note: Numbers inside bars are
the percentage share of total
losses due to inequality
attributable to each HDI
component.
Living standard
Education
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Health
5. The financial crisis
Markets too much protected or too much public in economic management are
the reasons that have prompted the United States and England governments
(Reagan, Thatcher) to promote the processes of liberalization and privatization
and reducing excessive markets regulation
The financial markets began to present problems and increasing imbalances as
early as the 80s.
From the 90s the situation changes dramatically with the opening up of
domestic markets to short-term capital movements, the end of the distinction
between commercial and investment banks, the abolition of prudential rules
(introduced after the 1929 crisis)
Financial crises have been more frequent: Scandinavia ( 1990-92 ), Japan
(1992-1996), Mexico (1994), Southeast Asia (1996-97 ), Russia (1997-98 ), in
Argentina (2001-2002), but none is comparable to the present one in severity
and extent of adverse effects.
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The financial crisis (2)
The finance has evolved, over the last twenty years, from activities to
assist the process of accumulation of physical and human capital and
entrepreneurial innovation, into an activity that has grown up on
itself.
The international financial system consequently has been more
exposed to financial, banking, and currencies crises.
An indicator of the phenomenon of financialisation is the ratio
between the value of credits and the income produced: in the United
States in 1969 was 150%, in 2007 moved to 350%.
On the eve of the crisis of 2007, the profits of the financial sector
accounted for 40% of all corporate profits in US.
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The financial crisis (3)
The main causes:
- macroeconomic imbalances (U.S. and China)
- the prevalence of expansionary monetary policies of the Federal Reserve
System that favored expanding liquidity and search for jobs more profitable
and less risky (new investors appear such as pension funds, insurance
companies, financial intermediaries in hedge funds) U.S. household debt
doubled from 50% of the 80s to 100 of national income in 2008.
- financial innovation , referring to a broad spectrum of activity of buying and
selling financial products in the very short period, with greater or lesser
degree of liquidity, with no specific connection with the evolution of the real
economy and with the assets results (positive and negative) of the
companies, but with the direct purpose of earning speculating on the
extreme volatility of their prices
- inefficient systems of financial supervision, both at international and
national level
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I temi
• La crisi dei mercati tra globalizzazione e postglobalizzazione
• Gli scenari evolutivi delle principali macroaree
• Gli attori della governance globale
• Le politiche dell’Unione Europea
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The consequences of the financial crisis
With the reduction of bank assets (which have in their portfolio
large amounts of toxic assets) and the strengthening of prudential
norms (Basel II agreements) banks have been forced to restrict
lending to businesses and the economy has definitely entered
into recession in the U.S., in England and other European
countries.
Once started the crisis tends to be self-sustaining.
The contagion of the financial crisis to the real economy has
developed with suddenness, intensity and simultaneity, giving
rise to a global recession.
The transmission channels identified in the economic literature
have simultaneously operated: the money market, foreign trade,
wealth impact, just to name a few.
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The consequences of the financial crisis
The seriousness of the crisis:
- confirmed that recessions arising from financial crises are more severe than
those resulting from other types of shocks (for example, oil price shocks).
- denied the conviction, gained in some academic settings, that in the last twenty
years the world economy had entered in a period of " great moderation " in
which macro-economic policies ensured high growth and stability.
The effects of the recession have occurred anywhere with an increase in
unemployment, inflation decline, a worsening of public finances, a change in the
direction of capital flows and a temporary and partial adjustment of balance of
payments imbalances.
The bank bailouts, the support measures to the banking systems (bad Banks,
recapitalizations, state guarantees ) and the anti- crisis plans launched by
advanced countries have produced increases in the public debt stock.
50
OCSE Countries public debt (% of GDP)
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6. The New Scenarios
The economic and social crisis that we have experienced in the last five years
has produced significant changes in the processes and dynamics of
globalization
The economic crises in general are not democratic, in the sense that do not
affect equally the rich and the poor
The current crisis affects the institutions, the state - market relationship
(which state for which market) , civil society and its participation in the
economic and political national and international arena, the big global issues (
environment, sustainable development , justice and human rights)
The capacity of countries to manage the growing economic and social tensions
generated by the crisis will separate most likely winners and losers in the next
round of globalization (Rodrik).
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The New Scenarios (2)
The Threats
In a rapidly changing international situation and uncertain future what can we
expect? Let's try to draw some conclusions:
it is likely that the large emerging markets, such as China, India and Brazil,
they go to fill the void left by declining powers (United States) increasingly
inward-looking and shaken by low growth rates, high levels of inequality and
internal political conflict.
In a recent article (2013) Dani Rodrik has described the three characteristics
that countries will need to show to overcome the crisis and return to growth:
- not too high public debt (no more than 80 to 90 percent of GDP)
- more inwards-oriented economic policies (less dependence from export
growth)
- solid institutional mechanisms for conflict management (strong
democracies)
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The New Scenarios (3)
Unfortunately, there are few countries that meet all three of these
characteristics (China, for example, only the first requirement). The
vast majority of countries will be in great difficulties
Risks to be faced: the existing conflicts in many regions of the world
will be strengthen and new conflicts will appear in areas with large
cultural, social and economic impact (raw materials, environment,
water resources, information technology, finance, bioterrorism, etc.).
The question is: what are the real threats in the coming decades?
The conflicts between the great powers (China-US), regional conflicts
(Syria, Israel and Iran), or maritime disputes (China-Japan)?
Considering the increase in population expected over the next 20
years: raw materials, natural resources, new information and
communication technologies?
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7. The Global Governance
Also in this issue we have more questions than answers, including the number of
new actors playing in the global arena, non- state actors, non governmental
organizations (NGOs).
Globalization has, in fact, paved the way to forms of “governance without
government” within the framework of global issues.
The main global actors:
The most advanced countries (G8 - G20)
The emerging countries ( BRICS ) and newcomers ( Asian, African, etc.).
The International Organizations (UN and its agencies , WB , IMF, WTO , OECD )
Regional Bodies (EU , but also NAFTA , MERCOSUR , ASEAN etc.).
Organized civil society (non-governmental organizations , business organizations
and workers, voluntary associations, foundations, religious communities etc.)
There is such a governance ? How is exercised and by whom ? Which forms of
coordination have been introduced ? Are these institutions really effective in
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achieving their objectives ?