Sapienza Università di Roma

Dipartimento di Scienze Sociali ed Economiche

International Economic Policy and Development

Academic Year 2016-2017

Prof. Umberto Triulzi

Sapienza Università di Roma Dipartimento di Scienze Sociali ed Economiche

The Topics of International Economic Policy • 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

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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

Introduzione alla Politica Economica Internazionale

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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, flexible and administered exchange rate, economic policy models in the short and long term, time-inconsistency Financial Policies for investments diversification and financial market developments 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 Globalization Cycles

1. Definition

2. The 4th cycles 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

- Impacts on main areas 9

The definition of the economists

A process characterized by operators (banks, businesses man,

enterprises, services,) working in highly integrated markets

where :

- goods and services (foreign trade)

- capital (financial assets and foreign direct investment)

- labor (immigration)

move freely, facilitated by the development of innovations in

the telecommunications and data processing

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2. The 4° cycles 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 cycles:

- 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 15 years

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The first cycle (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 moved 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). 12

Globalizzazioni a confronto

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Tarifs barriers

T MEDIA MONDIALE

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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 cycle (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 cycle (1944-end 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 cycle (‘80 - ‘90)

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 cycle (2001-2016)

Since 2001, the global economy has been 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 - increase in income inequality between rich and poor countries

- failure of trade negotiations (Doha Round) - problems of environmental sustainability - severe financial and economic crisis erupted in the United States in 2007 and its impact on the world economy - conflicts arising from the Arab Spring

- indebtedness of the most advanced countries and the fiscal restraint that leave no room for growth - Eurozone crisis

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Global Trade

Production and world trade (rate of growth ,1870-2005)

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

1870-1900

1900-13

1913-50

195-73

1973-93

19931994

19951996

19971998

19992000

20012002

20032004

2005

Esportazioni mondiali in volume PIL mondiale a prezzi costanti 20

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23

24

1 25

26

1 27

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20 Source: UNCTAD FDI-TNC-GVC Information System, FDI database (www.unctad.org/fdistatistics).

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The new tiger…

China

Japan

UK

Sub-Saharan Africa

World

Latin America &

Caribbean

India

EMU

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2

4

6

8

10

12

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0 2 4 6 8 10 12 14 16 18 20

Average annual export growth (%)

Avera

ge a

nn

ual

imp

ort

gro

wth

(%

)

Figure 1: Average annual export, import and GDP growth (1990-2004)

Fonte: Qureshi e Wan, 2007

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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 Organisation (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, 52% of FDI inflows comes from industrialized countries and about 48 % goes to emerging 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 5000 today (Bank for International Settlements, 2015), a volume higher of more than 100 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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International trade:

the international production fragmentation

A production process previously integrated into

One site is divided into components, which are allocated to production sites located in different countries

Most of the electronic consumer goods,

Cars or industrial machines are obtained

Assembling components produced in different areas of the

world

The weight of international trade in intermediate goods, semi-processed goods and parts and components

More and more relevant (over 30%).

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1

1

1

The iPhone value added

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The iPhone Cost Components

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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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Source: World Bank Group, 2015 50

The global poverty rate has fallen to single digits in 2015. Yet, the number of poor remains high

The Human Development Dimension

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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).

The Index value is between 1 (the highest in term s of human development) and 0 (the lower)

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

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Education

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 post-globalizzazione

• 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.

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OCSE Countries public debt (% of GDP) 2002 2008 2009 2010 2011 2012 2013 2014 2015

Euro area 75,2 78,0 88,8 93,9 95,9 104,4 106,7 107,7 106,9

Austria 68,7 74,3 78,8 80,6 86,0 83,4 90,0 89,5

Belgium 108,4 92,6 101,0 100,9 104,1 106,4 106,7 106,8 105,4

France 67,3 79,3 91,4 95,7 99,3 109,3 112,6 115,1 116,1

Germany 62,2 69,9 77,5 86,2 85,8 88,5 85,9 83,9 79,8

Greece 117,6 122,5 138,3 157,3 179,9 167,5 186,0 188,7 188,2

Ireland 35,2 50,1 71,1 88,5 103,9 127,8 134,6 133,1 132,0

Italy 119,4 118,9 132,4 131,1 124,0 142,2 145,5 147,2 147,4

Japan 152,3 171,1 188,7 193,3 209,5 216,5 224,6 229,6 232,5

Netherlands 60,3 64,8 67,6 71,9 76,1 82,7 86,2 87,5 87,7

Portugal 65,0 80,8 94,0 104,0 118,4 134,6 139,4 141,3 142,2

Spain 60,3 48,0 63,3 68,4 78,8 92,6 104,0 108,5 111,5

United

Kingdom 40,8 57,3 72,1 81,7 97,1 101,6 99,3 101,7 103,1

United States 56,8 72,6 85,8 94,6 98,8 102,1 104,3 106,2 106,5

OECD-Total 71,6 79,9 91,2 97,5 102,1 107,1 109,5 111,1 111,2

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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 achieving their objectives ?

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