Sunday, November 23, 2014

Getting Globalization Right

OXFORD – Recent evidence suggests that much of the world has entered a period of low financial-market volatility. But this is no time for complacency; more turbulent times are likely to lie ahead.

Over the last quarter-century, rapid technology-driven globalization – characterized by the physical and virtual integration of the global economy, including the opening of world markets – has contributed to the fastest increase in incomes and population in history. But, while globalization has created unprecedented opportunity, it has also unleashed a new form of systemic risk – one that threatens to devastate political institutions and national economies.

Systemic risk is intrinsic to globalization. Greater openness and integration necessarily increase the potential for cascading crises and amplification of shocks.

As individuals and societies become richer, they come into closer contact with one another – virtually, through communication technologies, and physically, through population growth, urbanization, and travel. Meanwhile, rising consumption of products like food, energy, and medicine enhances the externalities, or spillover effects, of individual choices, with the connectivity of global systems increasing these effects’ range and impact.

For example, taking an antibiotic may be a rational individual decision. But when billions of people take antibiotics, and livestock producers use them to boost efficiency, they often become ineffective. The same paradox applies to energy use, owing to the destructive impact of large-scale carbon emissions. Even the consumption of basic necessities like food (production of which can have major environmental consequences) and water (given limited supplies) is not exempt.

Furthermore, increased openness and market integration, driven by rapid technological change, is exacerbating divisions within and among societies. Those who miss the globalization train at the start often are unable to catch up later.

Nowadays, the world’s most pressing challenges – from climate change to cyber-crime – increasingly transcend national borders, making them extremely difficult to address effectively. Worse, they can have a cascading effect, with, say, a pandemic or cyber-attack provoking a financial or political crisis and imposing costs disproportionately on those who can least afford them. The vectors of connectivity – such as the Internet, financial markets, airport hubs, or logistics centers – facilitate “super-spreading” of globalization’s effects, both positive and negative.

Though the systemic risks brought about by globalization cannot be eliminated, they can be mitigated, if world leaders work together and learn from past mistakes. Unfortunately, neither appears likely.

For starters, national politics in key countries is largely moving away from cooperation, with rising inequality and social fragmentation making it difficult for governments, especially in democracies, to make tough decisions. At the same time, populations are rejecting regional and global institutions. Europe, for example, is witnessing an upsurge in support for nationalist parties, like Britain’s UK Independence Party, and increasingly loud calls for self-determination, such as in Scotland and Catalonia.

Equally problematic, the world has largely failed to learn from globalization’s most obvious and far-reaching consequence yet: the 2008 financial crisis. While it is impossible to safeguard the system fully, sound regulation and effective oversight could have prevented the crisis, or at least reduced its impact on millions of people’s livelihoods. The problem was that central banks, finance ministries, and multilateral organizations like the International Monetary Fund – the pillars of the global economy’s institutional framework – failed to grasp globalization’s emerging characteristics and effects, owing partly to the difficulty of discerning structural shifts in the huge mass of data now available.

In this sense, the crisis should have served as a wake-up call, spurring the financial sector, policymakers, and multilateral organizations to take action to enhance systemic stability. But, despite employing tens of thousands of highly educated economists whose primary job is to determine how best to protect the financial system from globalization’s destabilizing effects, these institutions seem to be even less willing to act now than they were before the crisis.

This is particularly true in the advanced economies, where depleted financial reserves and political paralysis are preventing constructive investments in areas like infrastructure and education, which can enable citizens to take advantage of globalization’s benefits. Making matters worse, some of these countries have reduced their contributions and commitment to the reform of regional and global institutions, which are essential to managing systemic risks.

In this context, it is not surprising that ordinary citizens feel uncertain about the future and frustrated with their governments, which have so far failed to protect them from globalization’s fallout. But wresting power back from regional and international institutions – however shadowy and distant they may seem – would only compound the problem, for it would reduce the ability to guide the supranational trends that are shaping the world’s future. More, not less, cooperation is necessary to manage growing complexity and integration.

It is time for our leaders to recognize new systemic risks and work together to mitigate them. Otherwise, the recent past will be prologue, with those risks likely to get the better of the global economy.

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    1. Commentedhari naidu

      It was Dani Rodrik (lonely academic voice) who initially argued against globalization and its impact on national sovereignty.

      Ian Goldin is begging the fundamental issue. It’s not that IMF and rest of the global regulatory institutions have failed to recognize and understand impact of globalization; Clinton/Rubinomics sought and faught hardball during the end of Uruguay Round of GATT Multilateral Trade Negotiations (Morocco) to supplant national sovereignty of FX markets and unleash international financial transactions without (regulatory) frontiers. US Treasury (weighted) voting rights imposes policy constraints on IMF.

      Thus, under WTO, Asian financial meltdown was followed by Russian and ultimately 2008 global financial meltdown…. Few nations (i.e. India and China) were (still) able to impose domestic currency control on FX markets.

      Rubinomics was essentially designed to promote Citibanks global expansion (after Rubin left the bank to become Clinton's Treasury boss).

      In aftermath of 2008 financial meltdown, Citibank was bailed out by US taxpayers to the tune of US$100 Billion, according to Bloomberg. Literally turning Citi Group into (Treasury) or public ownership…with other major Wall Street Banks.

      The rest is economic history and, for the record, 2008 financial meltdown was fundamentally a US domestic (regulatory) subprime case….

      The genie was thus out of the bag once WTO was formalized; there is no way to put it back into the bottle.

      G20 will find it more and more difficult to regularize global financial transactions…as more and more players enter the market.

      Nor is US Congress able and willing to impose the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) commonly referred to as simply "Dodd-Frank", to lower risk in various parts of the U.S. financial system.

      Globalization demands transparency and WTO cannot and may not succeed in doing it – as regional FTAs now abound.

      However current ECB/EU Banking Union (expected Nov 2014) may or could finally succeed in retrenching and exposing EU Banks (internal) balance sheets and its restructuring – i.e. avoiding too big to fail!

    2. CommentedZsolt Hermann

      The article suggest the Australians are "choosing" to follow the US economic example.
      And indeed Australia is the new America, Western Australia with its mining boom is like the "old" California.

      But are they really choosing? Do we have free choice?

      In truth we are simply instinctively driven by our inherently self-calculating, egocentric human nature, and the previous American and current Australian examples are the peak examples of this nature working at full force, maximally exploiting the "maximum profit/minimum investment" principle, regardless of any collateral damage to human or natural resources, regardless of problems in the natural environment, longevity, sustainability or tensions in the human society.

      We are like alcoholics or drug users who simply cannot stop even when the end is nigh. I have just been to Australia in the region of the Great Barrier Reef, where those working on the Reef are seemingly resigned to the fact that the Reef is dying.
      They mention "doom and gloom" with a strange smile on their face as if there was nothing we could do, and simply we should just enjoy what we have as long as it lasts.

      And this is how the whole, global human society feels and behaves nowadays.
      But we have a capability that no other living creature has, critical self-assessment and conscious self-change.

      And this is where our only "free choice" starts to play part, the only thing we can change is ourselves, the only choice we have is to build and maintain such a human society, environment that directs our insatiable desire for pleasure, for profit in a positive, mutual direction, for sustaining the whole, common, global "ship", based on the understanding that either we all sail together in a natural system we help in maintaining its balance and homeostasis, or we all drown.

    3. CommentedZsolt Hermann

      Very interesting article and even more interesting comments, full of insight.

      I think if I tried to summarize the picture perhaps the most important key for any solution, for any future step is the understanding that "globalization" is not a man-made process, state, but we have inevitably evolved into a global, integral world.

      Thus integration, mutually complementing collaboration is an evolutionary necessity, since only such, positive interaction in between the parts can safeguard the general balance and homeostasis crucial for supporting and maintaining life.

      As one of the other comments suggest, only education, information exchange is necessary for each and every one of us to understand the absolute necessity and know-how of adapting to this global, integral system instead of trying to shape to our so far very limited understanding.

    4. CommentedWayne Davidson

      Globalized out of existence, the beneficiaries of the industrial revolution, an generational deviation driven by economics and evolutionary technology. RW

      "It is only a slight exaggeration to say that mankind constitutes even now a planetary community of production and consumption"
      Albert Einstein. 1949.

      "The theoretical reduction of unmanageable multiplicity to comprehensible unity becomes the practical reduction of human diversity to subhuman uniformity, of a freedom to servitude"
      Huxley Aldous. Over-organization

    5. CommentedEdward Ponderer

      Professor Goldin's discussion is a very important opening opening to what we all must start dealing with--the inevitable integration of Humanity. And as people gelled into villages, cities, and nations--the latter must gel into a single Humanity. This does not mean to give up national identity, etc. Quite to the contrary, specific national talents are today more important than ever. Our individual unity in the human body certainly does not demand that kidney, brain, heart and lung meld into some generic organ--that is suicide, as would be the complete dissolution of subgroup uniqueness within global humanity.

      However, national break off and walk-away, is as those organs breaking away to make it on their own. Worse still is the re-invoking the humanity cancer of national fascism and imperialism--from the most primitive brutality of the jihadist, nuclearizing Iranian weapons sugar Daddy (we know where all those nice Hamas missiles and civilian-targeting drones that the supposed flower-children"peace flotillas" were caring came from), to the North Korean loner, to the more sophisticated militarism of the nouveau Soviet or the thinly veiled political-economic adventurism of the West.

      So there is much work to do for us all. But as all great newly former structures, the reliability of the building material is the key. We need education to understand the inevitability, importance, and great advantages of global human integration once truly democratic forces of mutual responsibility come into play. Yes--responsibilities, not rights. Because if you don't make everyone happy, completely cooperate rather than compete, in a truly globally interconnected world, you will strangle in the intertwining. "Love your fellow as yourself" is no longer "enlightened self-interest," it is common-sense self-interest as anybody watching the little hate your fellow experiment through most of the Middle East in recent years is seeing from the negative in reductio ad absurdum.

      Once we have it right, or big enough piece of us "get it," we have a very nice mass media that can convince you that rat poison is health food. Surely it can be brought into to powerful positive service in terms of providing an environment psychologically supportive of mutual responsibility -- caring, trusting human relationship being the molecular bonding of a new, successful (for everyone) global world.

    6. CommentedJonathan Lam

      gamesmith94134: Getting Globalization Right

      " The vectors of connectivity – such as the Internet, financial markets, airport hubs, or logistics centers – facilitate “super-spreading” of globalization’s effects, both positive and negative. Though the systemic risks brought about by globalization cannot be eliminated, they can be mitigated, if world leaders work together and learn from past mistakes."

      I was humbled by the Lloyds of London and Fleet Street incident, perhaps, still to-day, Mr. Bingham may still laugh at my missing front tooth and jived at my insurance salesman lookalike; but we all are silenced after Libor and AIG. Yesterday, I was irritated by the vanity sales in pension as in bonds that they cannot contain them; and I may overacted. I would apologize. How well did we learn of the globalization effects after Lehman Brothers? It was not mobility or liquidity of the cash flow, but we are over harvesting on the low hanging fruit by consolidating foreign assets that makes bubbles through the vectors of connectivity. It was not easy as own the gold in South Africa, or partner in Brazil, we have another labor and cost problem.
      To-day, single house in London is about 450,000 pounds; and it reached 1 million in average San Francisco. I have questions on the Mr. Know-how but there is no proper answer on our present global financial system; and all of them are paid in cash or creditable equivalent. did Goldman Sachs said 'no growth' after QE slowed down? May be the hedge fund managers are grounded; and who is going to bail out the city magistrates and central bank if they are restrained by their appetites? I am not talking of the half full or half empty glass now; because the problem may not be the price or value since we bridged the globalization in a system that cannot keep its balance on how these investment are created through the convenient price of the reserve currencies that including dollar and pounds. Now, the housing is local as can be, it is how Londoner or San Franciscans to achieve its margin of affordability. And, we have a conflict of financial policy that treating disinflationary and employment locally are the goal. They are just interim as the tide changes; when local apparatus are not supplemented like compromise on the financial risks. It is why we are suffering the crisis periodically. Many will resent unpredictable or inevitable with their wealth.
      It is why I rather choose ecology of finance that grows like a tree. All currencies are the roots of periphery attribute to growth that passes on to the trunk of global financial system that branches out to leaves and flower. Then, we all can harvest on the fruit that grows and expands. Politics is the soil that many politicians have grounded. Rules and regulations are the water supply and care we apply to the system. Investments are the sunshine domestically or foreign, harmonized in photosynthesis that put human resource to produce. Stimulation means to fertilize; but it shortens the life of the tree as well. There is finite in life; and it is how we face the shortcoming of the present system that we over done.
      Of course, we can sustain the financial risks by limiting the increase of interest rate or currencies exchange through certain domination of power of reserve; but life cycle of its root or leaves should not be neglected. Otherwise, the holder must juggle with it PPI, CPI, or trade deficits like water supply and fertilizer to revive the life of the global financial system as intended. It is how you would utilize interest rate to militate financial risks or fall off the rift like 90s'.
      "Political scrutiny “would essentially undermine central bank independence in the conduct of monetary policy and I believe that global experience has shown that we have better macroeconomic performance when central banks are removed from short-term political pressure,” Yellen said."
      We really need the world leaders to join hands to restore the global financial system that keeps the root and leaves alive and grows fruit. Half full or half empty applies locally, and we need to put a seed in the fresh soil on the fundamentals of the global financial system like its trunk that can converge leaves and roots to grow; and bear fruit.
      I hope it will sell with lesser tone of insurance; and be accepted generally.
      May the Buddha bless you?

    7. CommentedMaarten van Schie

      The typical response is supposed to be one-size fits all, "this must apply to everything", while an adequate response will likely be local and specific. Our problem-solving methodology is also globalised and knowledge-intensive - stability-oriented, whereas the alternative - resilience-oriented - is another way of dealing with problems, which is to say with diversity of methods and a stronger reliance on local resources.

    8. CommentedMatt Stillerman

      Dear Mr. Goldin,
      Your article discusses globalization (which I take to mean global free trade and free flow of capital) as something that can be fixed with some minor tweaks. Well, I just don't believe it. The harm to ordinary people from every single recent free trade agreement is obvious. Consider NAFTA -- the harm from this was predicted well in advance (remember that "giant sucking sound"). Well, Ross Perot turned out to be exactly right. This agreement harmed ordinary people in the US, but also harmed ordinary people in Mexico. Of course some people got really filthy rich from NAFTA -- but most of us lost out. With regard to free trade agreements I challenge you to cite even one that has benefited ordinary people in each country. (And the WTO is the very worst.)
      Free flow of capital is even more stupid -- and many countries realized this and have instituted capital controls. The problem is that "hot" money rushes into a country that seems on the rise. But, at the slightest faltering, that money rushes out again. This "whipsaw" destroys the local real economy, causing harm to real people.
      So, go ahead and try to fix globalization. I am sure that your local tycoons will give you a medal!

    9. Commentedslightly optimistic

      'sound regulation and effective oversight could have prevented the 2008 financial crisis'

      It is worth emphasising that £billions were lost through the absence of effective oversight.
      The director of Oxford Martin will know that the matter was officially investigated in London. A parliamentary investigation into the collapse of the UK banks found that the bypassing of vital checks and balances was responsible. Auditors claimed that the UK government overruled their concerns, and clearly the government of a nation is influential - as one resolute firm found some years back it led to their ruin. So not unnaturally, the auditors caved in this instance. The banks later went bust and £billions of public money was spent in the rescue.
      No doubt this happened elsewhere - auditors aren't protected.
      Students aren't apparently taught about this professional dilemma which undermines financial stability.

        CommentedKevin Remillard

        Competent bankers avoid concentration of risk, assure liquidity, and mitigate exposure to capital markets. With respect to the 2008 financial crisis; government policy concentrated risk and encouraged it with liquid tools exposing investors to capital markets. The UK's lack of exchange markets for SWAPS sealed the deal. The financial sector "good" players knew this was a House of Cards long before the policymakers and multilaterals. The highly educated economists, author included, are the Tyrannical Experts who did not, will not, and won't understand; much like the man who lost his keys on one side of the street, but goes to the other side because the light is better.