Globalization and Growth:then (1972) and now

Growth benchmarksAnnual growth rates, 1972-2006

Real output

Total Per capita

The world 3.7% 2.1%

The US 3.0% 2.0%

Theory: why globalization helps1. Countries produce their low-opportunity cost items and trade

them for their high-opportunity items (this generates income)

2. LDCs spread their scarce capital widely across labor-intensive industries instead of concentrating it in capital-intensive industries (this raises LDC wages)

3. Countries sell to a huge global market (this exploits economies of large-scale production)

4. Countries gain access to better technology (this raises growth rates)

5. Industries face more competition (this reduces monopoly exploitation)

6. Foreign investment adds to scarce savings in LDCs (this further adds to demand for labor and raises wages)

7. Labor migration allows LDC workers to gain higher incomes abroad and send remittances home to their families

8. Countries can use the incomes they gain to make investments in physical and human capital that helps them grow (this can change their comparative advantage over time)

Growth takes more than globalization, including…

• Good governance to use income wisely• Stability• High rates of saving • Investments in infrastructure and education

The evidence: lesser known facts about 1972

• “Globalization” did not appear in economics textbooks

• A natural experiment was in progress:--Import Substitution Industrialization (ISI) versus--Export Led Industrialization (ELI)

• The "Asian Miracle" was already underway, but not yet in the news

• Dr. J was a sophomore in college, not paying much attention to the news anyway

Jeopardy 311

These four countries collectively comprise the “Asian Tigers.”

The Asian Tigers pursued ELI:

• South Korea

• Taiwan

• Singapore

• Hong Kong

Tiger 1: South Korea up to 1972• 1953: The Korean War ended, with 2/3 of South

Korea’s industrial capacity destroyed.• 1960: South Korea was poorer than Bangladesh, Haiti,

and the Ivory Coast. It exported only 3% of its output and imposed average import tariffs above 50%.

• Mid 1960s: --South Korea began outward-oriented reforms --British economist Joan Robinson "referred to the economic miracle of North Korea and declared that it would economically overwhelm the poverty-stricken South.”

• 1972: South Korea’s exports had risen to 20% of its output, with textiles accounting for 25% of exports. Per capita income had doubled in the 12 years since 1960.

South Korea today

• South Korea exports over 40% of its output.• Computer and transportation goods have

replaced textiles as its leading exports.• It has been the fastest growing country in

the world since 1960.• It is now more than 10 times richer than

Bangladesh, Haiti and Ivory Coast, its peers in 1960.

Tiger 2: Taiwan

• In 1949, Chiang Kai-Shek’s Nationalists arrived.

• Sociologist Max Weber asserted that Confucianism is incompatible with capitalism.

• Taiwan stopped receiving US aid in 1965

• It has been the world’s third-fastest growing country since 1960.

Tigers 3 & 4: Singapore and Hong Kong

• In 1965, Singapore seceded from 8-year old Malaysia to become its own country, not quite as rich as Brazil.

• Both Singapore and Hong Kong have small populations, no tariffs and exports that exceed total output.

• Singapore explicitly courts Multinational Corporations (MNCs).

• Both are well off today: Singapore’s income in 2006 was 3.5 times as high as Brazil, and Hong Kong is even richer.

The Asian Tigers have shown significant convergence toward US income levels

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The “miracle” is no longer just “Asian”….

Jeopardy 1972

This country, known at the time as “the poor man of Europe,” becomes a member of the European Community (now called the European Union).

In Europe,…IrelandIn 1972, Ireland was poorer than Spain

and 14 other European countries

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Ireland since 1987• 1987: Ireland was still the Poor Man of Europe

Foreign Direct Investment was less than 1% of GDP Ireland began macroeconomic reforms. It began promoting FDI (as Singapore did).

• Today: Ireland is known as the “Celtic Tiger.” FDI now exceeds 20% of its GDP. It earned the #1 Globalization Index ranking from 2001-2004. It has been the fastest growing EU economy since 1987.

Ireland moved up from #16 in 1987 to #3 in 2006, passing the UK in 1997

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Jeopardy 311

This Latin American country depended on copper for 80% of its export earnings in 1972.

In Latin America,…Chile – 1970s• Latin America was the laboratory for ISI• 1970: Salvador Allende, a Socialist, was elected

president of Chile.• 1973: Allende died in a military coup, and Augusto

Pinochet assumed power.• Late 1970s:

--The Chicago Boys of Santiago’s Catholic University began administering reform. --105 percent average tariff rates were sharply reduced.

• 1983: Following 2 global and domestic recessions, Chile's standard of living was still only 2% higher than a generation before.

Chile today• Chile applies a uniform tariff on imports, at a rate

of 6% since 2003.• Chile exports more than twice as much copper

now as in 1972, but copper accounts for less than 40% of export earnings compared to 80% in 1972

• Since 1983, Chile has been Latin America's fastest-growing economy with per capita output growth of 5.1% per year, 2.5 times as fast as the US --Its standard of living has more than doubled. --It has moved from the 8th to the 2nd richest country in Latin America.

Jeopardy 311

This country is the world’s number one diamond exporter.

In Africa,…BotswanaBackground: 1972

• Many African countries were newly independent.

• Several started off well.

• In 1972, Nigeria was among the top 25% of the world's countries in its rate of growth

• The curse of natural wealth: oil-rich Nigeria was poorer in 2001 than in 1972.

Botswana• Transparency International has ranked Botswana

as Africa's least corrupt country since the ratings began in 1998.

• Moody's Investors Service and Standard & Poor's have assigned Botswana “A” grade credit rating.

• Since independence in 1966, it has had the world's 6th-fastest growth rate of per capita income

• It moved from one of the poorest countries in the world to a middle-income country with a per capita income of $11,000 in 2006.

• The bad news: It has the world's highest incidence of HIV/AIDS

Late boomers….

Jeopardy 311

A policymaker from this country defended his pragmatic economic reform proposals by remarking that “It doesn't matter whether a cat is black or white so long as it catches mice.”

China

• 1972: Mao Zedong was still in power.

--The Cultural Revolution was recent history.

--Nixon visited China.

• 1973: Pragmatic reformer Deng Xiaoping was “rehabilitated.”

• 1978: Deng’s lasting reforms kicked in.

China favored self-sufficiency before the reforms of Deng Xiaoping in 1978

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Real GDP per capitaExports as % of GDP

1952:GDP per capita, % of US: 5.2%Exports as % of GDP: 2.8%

1978:GDP per capita, % of US: 4.4%

Exports as % of GDP: 4.6%

Since 1978, China has been much more outward looking, and its real GDP per capita has grown at an average annual rate of 8.3%.

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1978:GDP per capita, % of US: 4.4%

Exports as % of GDP: 4.6%

2005:GDP per capita, % of US: 17.8%

Exports as % of GDP: 33.4%

1952:GDP per capita, % of US: 5.2%Exports as % of GDP: 2.8%

Jeopardy 311

Economist Jagdish Bhagwati wrote in one of your online course readings that he was in charge of the preparation of this country’s first Five-Year Plan.

India• According to one of its own economists: "India's

misfortune was to have brilliant economists, an affliction that the Far Eastern super-performers were spared."

• Historically, India has been democracy with Soviet-style economic planning and South American-style ISI strategy

• 1972: India exported 4% of its output, and operated under a bureaucratic system known as the “Permit Raj.”

• 1991: India adopted reforms sparked by a financial crisis.

Until 1991, India pursued ISI and its Permit Raj system of regulation

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1950:GDP per capita, % of US: 6.7%Exports as % of GDP: 7.8%

1991:GDP per capita, % of US: 6.0%

Exports as % of GDP: 8.6%%

India switched to ELI only recently, but its real GDP per capita has grown at an average annual rate of 4.2% since 1991

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1950:GDP per capita, % of US: 6.7%Exports as % of GDP: 7.8%

1991:GDP per capita, % of US: 6.0%

Exports as % of GDP: 8.6%

2005:GDP per capita, % of US: 8.8%

Exports as % of GDP: 20.3%

Recap

• The “Asian Tigers”: South Korea, Taiwan, Singapore, Hong Kong

• ELI leaders elsewhere: Ireland, Chile, Botswana• Late boomers: China and India• Some other countries on the move:

Africa: Mauritius Asia: Vietnam Latin America: Mexico

What lies ahead?

In the opinion of Rana Foroohar, in “The Poor Speak Up”:

“The game is on. It pits the emerging front of poor nations against rich governments, who once made the rules, but also against Western activists, who once claimed to speak for them. The victors will shape the changing global order.” (Newsweek, 2002)