Whither the Economic Globalization?
（Keynote Speech by Professor Liqing Zhang, at the workshop on “Future of RMB Internationalization and Korean Economy” jointly organized by CIFS with CUFE and NEAR Foundation on June 26, 2017, Seoul.
2017年6月26日，张礼卿教授在由中央财经大学国际金融研究中心与韩国东北亚研究基金会联合主办、韩国进出口银行和韩国国际金融研究中心协办的“人民币国际化的未来和韩国经济研讨会”上的主旨演讲）
The economic globalization is now standing at crossroad after over three and half decades’ rapid development after nearly four decades’ development. Since last year, unexpected episodes, such as the Brexit, the emergences of extreme right political forces in continental Europe, and the prevailing populisms in the developed countries have brought the most serious challenges to the global economic integration. In the United States, under the repeated saying of “buy American, hire American”, the withdrawal of TPP, the revision of NAFTA and the possible border adjustment tax, protectionism has obviously appeared as the main theme of trade policies of the Trump Administration.
1. What is wrong with the globalization?
Over the past three decades, the economic globalization, was considered as one of the most important sources of global economic growth. The rapid development of international trade, capital movement and labor mobility has played a significant role in job creation, poverty reduction and enhancement of living standards in many countries, particularly developing countries. At the same time, consumers in advanced economies benefit from the reduction in prices of traded goods.
However, on the other hand, it has brought increasing problems, including financial instability, income inequality and even social chaos, which are without doubt the sources of backlashing against it. The Asian financial crisis in the late 1990s should be largely attributed to the unsophisticated financial opening. The global financial crisis in 2007-2008 was in some sense related to the global trade imbalance starting from the early 2002. More recently, the widespread populism in developed countries largely reflects that more and more people believe they fail to gain from the globalization and they are losers. In the United States, imports of foreign goods reduce wages and employment for low-skill workers.In continental Europe and the eurozone, the situations are much worse. Largely due to the economic integration, the average unemployment rate is above 10% (much higher in the eurozone periphery – more than 20% in Greece and Spain) with youth unemployment over 30%.
Why does the economic globalization come with increasing problems? There are at least three fundamental reasons. First, the conflict between economic globalism and political nationalism is rapidly growing. When the main economies become more globally integrated, they do need a more globally integrated political regime and governance structure. However, what we see in EU and many other places in the world is that when the various markets become more and more globally integrated, the political systems in main economies are still very national. The rise of populism is largely a reflection of the growing tensions and conflicts between these two processes.
Second, when economic globalization goes deeper, the efficiency effects are likely to be declining, but the income distribution effects come to be increasingly significant. Taking NAFTA as an example, based on an empirical study by Hakobyan and McLaren (2016), the estimated aggregate “welfare” for US only range from 0 to 0.2%, but the wage growth in the most affected industries was reduced by 17 percentage points (relative to other industries). By and large, when the restrictions on trade and capital movement become less, the less-skilled workers in developed countries and the less-competitive industries in emerging economies will become more discontent. This may help explain why trade agreements become politically more contentious as trade and financial barriers get smaller.
Third, just as in the domestic market, international economic integration is unlikely to avoid the problems stemmed from market imperfection. Due to adverse externality, asymmetric information and various irrational behaviors, the free trade does not necessarily cause the best efficiency and often suffer from frictions, conflicts and contentions; the free capital flows often cause financial instability, macroeconomic uncertainty and even financial crisis; the uncontrolled migrations often cause social identity problems and even political chaos. Hence, without necessary regulations, fully removing the restrictions on trade and capital movement may create inefficiency rather than efficiency.
2. Why do we need economic globalization?
There are sufficient reasons for us to believe that we still need economic globalization. It is not only necessary for the short economic recovery, but also plays a key role in the long run economic growth.
After the global financial crisis in 2008, the main economies in the world were experiencing a slowdown of economic growth for almost eight years. Early last year, in an article “The Age of Secular Stagnation”, Larry Summers argued that, compared with the strong economic growth before the crisis, the slowdown of economic growth in US and other main economies after the crisis indicates that the world economy might have stepped into an era of secular stagnation. The reasons for that is there is an increasing propensity tosave and decreasing propensity to invest in US and many other economies. However, we tend to believe that the extremely low growth rate of international trade since 2012 (even lower than the world GDP growth rate during the same period) also plays a significant role in this regard.
Due to the very expansionary monetary policies and fiscal stimulus, the US economy and many other economies have significantly recovered since last year, but it is too early to say that story of secular stagnation is completely over. For securing the recovery in short run, it is necessary to continuously pursue expansional fiscal policies, as Larry Summers suggested; at same time, it is also very important to reduce the trade protection, since a strong external demand will certainly be helpful for increasing investment and consumption in many economies, especially those export-oriented economies.
For the long-run economic growth, economic globalization could play a more critical role. Why is that? First, over the past decade, there have been sharp slowdowns in measured output per worker and total factor productivity. In advanced economies, for example, productivity growth has dropped to 0.3 percent, down from a pre-crisis average of about 1 percent. This trend has also affected many emerging and developing countries, including China.According to IMF’s estimate, if total factor productivity growth had followed its pre-crisis trend, overall GDP in advanced economies would be about 5 percent higher today. Looking forward, the decline of the productivity could be a continuous process and a big challenge to the recovery and keeping long-run economic growth. However, economic globalization could be an effective way of improving productivity, because free trade encourages firms to invest in innovative technologies and more efficient business practices through more competition.
Second, demographic change and aging is another challenge to the long run economic growth. The IMF newly research suggests that the combination of aging and shrinking of fertility rate will reduce potential growth in advanced economies by about 0.2 percentage points in the medium term—and by twice as much in emerging economies.With more opened immigration policies, advanced economies may significantly alleviate the pressure from aging challenge and eventually prevent the long-run stagnation of growth.
Third, given that US and other main economies are pursuing the expansionary fiscal policies in the short run and the demographic change in the long run, many countries are expected to run high fiscal deficits and enormous public debt. A research carried by IMF staff suggests that in advanced economies alone, age-related spending is projected to jump from 16½ percent of GDP to 25 percent by the end of this century—unless policy action is taken. Another report by US congress budget office shows that the ratio of its public debt to GDP is expected to reach at nearly 180% by 2040. Although the uncontrolled global imbalance should be avoided, it is hard to image that US and other economies with high public debt can keep their economies going well without international borrowing.
3. How to defense economic globalization?
First, the speed of economic globalization should be in accord with the level and efficiency of global governance. In theory of “political trilemma of world economy”, Dani Rodrik argued that, for globalization, national sovereignty and democratic politics, we can only have two of them, any of the two, but never all the three. In his view, if we want to keep a high-level globalization (in his words, hyper-globalization), we must give up either national sovereignty or democratic politics. If we are not able to give either of them, it is better to slowdown the globalization. The history of globalization and the recent backlash is obviously supportive of his argument. Therefore, we have two choices. One, slowdown of the globalization; two, making deeper cooperation in global governance. Obviously, to secure the globalization, main economies should try their best to accelerate the construction of global governance framework. For instance, through G20 and other multilateral policy dialogue platform, main economies should deeply strengthen their macroeconomic policy coordination; make more effort to strengthen the cooperation in financial regulation; and continue to push forward multilateral trade negotiation.
Second, making compensation for the losers in the globalization, for instance, those less-skilled workers. One of the main discontent about globalization is the growing inequality. For dealing with this problem and alleviate the growing backlashes, main economies should use fiscal policies, including the expanding public expenditure, increasing subsidies and tax reduction, to compensate those losers.In addition, helping those low-skilled workers to get new jobs via providing more vocational training may play some positive roles.
Third, to defense the globalization, United States and China should closely work together for making rules for economic globalization and bringing more economies into the process of globalization, rather than fighting against each other in the areas of trade and investment. As two largest world economies, both US and China has significantly benefited from globalization over the past two decades. Through deeply involving in the world markets, China successfully created over 50 million job opportunity and lifted hundred million people from poverty. Through opening its markets, American people largely joined low price goods, low inflation and low interest rates. So, there is no any reason for both not to welcome globalization.
Recently, there are some positive evidence showing that Trump administration seems to be making its trade policies more realistic. For instance, in currency manipulation, NAFTA and less trust those hawkish advisors. But there are still lots of uncertainty. China, obviously much more actively in building up a constructive bilateral economic relation. In addition, China has been very much actively pushing forward a new wave of economic globalization through OBOR, AIIB, Silk Road Fund and Brics Bank. Moreover, it has decided to enlarge its openness in those highly restricted service sectors, including the financial sector.
