Intellectual Capital, Thursday, February 18, 1999
A Global Economy -- or Not?
by Robert J. Samuelson
One of the central questions of our time is whether we have a truly global economy or simply a collection of interconnected national economies.
Until recently -- and despite all the talk of “globalization” -- most economists seemed to agree that economics remain largely national. But the present world economic crisis has thrown that assumption into question and, at the very least, raised the possibility that national economies are beginning to fade into history.
Defining the issue
The distinction between a genuinely global economy and an assembly of national economies is profound, if little understood. As long as economies remain mainly national, governments retain -- at least in theory -- a fair amount of control over their economic destinies. They can influence production, employment, prices and incomes in their countries.
Of course, culture, history and politics shape their freedom, and it is also limited by global developments that affect the prices of their imports and the demand of their exports. Still, national economies by definition empower national governments.
Now, suppose that growing global flows of goods, services, money, investment and people (as workers and tourists) overwhelm governments’ power to control production and prices within their borders. Then we have something new: a global economy.
A good analogy is the status of American states. All states can modestly affect the business climates within their borders; and all states are economically unique, depending on varying industries (farming, heavy manufacturing, entertainment or whatever). But no state can insulate itself from the larger U.S. economy. The mobility of products, money and workers prevents that.
The world economy may now be experiencing a similar change. Indeed, the possibility may be an underlying cause of the present world economic crisis. Fickle global financial markets collided with entrenched national practices (poor bank lending, corruption, “crony capitalism”) to produce highly unstable flows of capital into and out of developing countries. And the crisis has endured because it defies the power of any single country to resolve. There is no political, intellectual or institutional framework to impose a genuinely global solution.What does a “truly global economy” mean?
Just how global?
Start with the word “economy." It is verbal shorthand for producing, buying, selling, saving and investing. The more these activities stay within national borders, the more the economies are national. The more they spill over borders, the more that national economies blend to form a larger world economy.
By this standard, economic activity remains largely national. Consider the United States. Exports of goods and services are a little less than 11% of total production (gross domestic product); imports are slightly higher. Meanwhile, foreigners own only about 7% of U.S. stocks, 16% of corporate bonds, and 34%of U.S. Treasury securities, according to the investment-banking firm Goldman Sachs. None of these figures -- with the exception of U.S. Treasury bonds -- is especially large. And most Americans put the bulk of their savings into U.S. stocks, bonds, savings and real estate.
The situation is similar in most other large countries. In Japan, where exports represent about 9% to 10% of GDP; Japanese households have (until now at least) invested even less abroad than Americans. Exports for the European Union -- not including shipments between member countries -- constitute only about 12% of their GDP.
So economies are mainly national. This is one reason why (so far) the United States has withstood the global economic slowdown. Confident Americans keep buying, and their consumer purchases have offset lower exports. It’s also true that as long as major economies preserve separate currencies -- the dollar, yen or euro -- they also essentially set their own price level and interest rates. Creating too much money will raise inflation and interest rates; keeping money creation under control will mean low inflation and interest rates. Today’s low U.S. interest rates, for example, aid the economy by encouraging home buying.
More than numbers
However, the story is more complex. Even by the numbers, major economies have grown more intertwined with the world. In 1960 U.S. exports were under 5% of GDP, less than half today’s level. Moreover, some industries are more “globalized” than the numbers indicate.
In 1998, for example, imports were only 13% of U.S. car and light truck sales. But imports have dropped in part because Japanese companies built plants in the United States. And imports could surge again if exchange rates or vehicle quality recreate a competitive edge for foreign producers. So the car industry is heavily “globalized”.
Likewise, Americans may invest mainly in U.S. stocks. But U.S. companies have operations abroad that increasingly affect their profits. By one estimate, about 30% of the profits of the firms in the Standard & Poor’s 500 index come from exports and overseas sales.
The same thing has happened to poor countries. They depend more and more on global flows of trade, investment and technology. As recently as 1975, basic raw materials and foodstuffs (oil, copper, coffee, grains) accounted for roughly 70% of developing countries’ exports. By 1995, that had dropped to about 17%. Meanwhile, exports of manufactured goods -- shoes, clothes, toys, computer chips, steel -- jumped from 28% to 83% of total exports.
Poorer countries also began receiving massive flows of foreign investment: as loans from U.S., Japanese and European banks to local companies, banks or governments; as the proceeds from bond or corporate stock sales; or as direct investment (buying entire companies or building factories). Between 1984 and 1989, foreign capital inflows to all developing countries averaged $13 billion annually; between 1990 and 1996, that jumped to $142 billion.
The inherent tension
Many countries, then, are betwixt and between: Their economies are neither fully national or completely global. The situation is ambiguous and potentially unstable. A successful economy depends on common customs, understandings, laws and rules that foster certainty, promote social and commercial relations, and lower the costs -- both economic and psychological -- of doing business.
Most national economies share common cultures, laws and governments, but they barely exist in the world economy. When companies and people venture across borders to do business, they face new political institutions, cultural values, business customs and legal practices. What may be fair, normal or legal in one society may be unfair, abnormal or illegal in another.
The tension is inescapable. Either global business must accommodate local and national differences, or nations must surrender their cultural, commercial and political distinctiveness to the dictates of global business and financial markets. What we have learned in the 1990s is how hard this conflict is to resolve. Global investors poured billions into developing countries on the assumption that these funds could be productively used or, if not, would be guaranteed by governments. Then they discovered in 1997 that many countries -- Thailand, Indonesia, Korea -- had squandered funds and that governments would not or could not make good on the losses. So global capital poured out as quickly as it had poured in.
The result has been a classic boom and bust -- on a global scale. While developing countries received foreign capital, they could spend freely. Dollars or yen were converted into local currencies and spent or used to buy imports. Then global capital departed in 1996. Asian countries (including China) received $100 billion in new foreign investment. By 1998, there was an outflow of $18 billion. And so spending and imports fell, and unemployment rose. The ill effects spread through trade, with Japan suffering most because about 40% of its exports go to the rest of Asia. But American exports to the region also suffered.
The International Monetary Fund is often described as a global “lender of last resort,” but it was never intended to play that role -- and does not have sufficient funds to do so. The IMF has typically lent money to individual countries that temporarily have run down their foreign-exchange reserves. And it has long prescribed policies aimed at reducing balance-of-payments deficits. But it was not designed to defuse worldwide capital flight from many countries simultaneously -- and that is at the heart of the present crisis.
The upshot has been much muddling. The IMF and the U.S. Treasury -- which have led the response to the crisis -- have tried to restore confidence by ad hoc measures and loans for individual countries. At best, this approach has partially succeeded. At worst, it has postponed the eventual reckoning.
Countries once eager to join the global economy are now withdrawing, either by choice or necessity. In 1998 Malaysia imposed controls on foreign capital; Russia defaulted on many of its debts; Hong Kong imposed new restrictions on investors (foreign and domestic); now Brazil is in trouble.
We are contending with an unavoidable collision. Countries still crave the higher living standards that they identify with global trade and investment. Multinational companies and global investors still seek new markets and high returns.
But countries also want to protect their cultural, commercial and political values. They want to retain control over their own economic destinies. Becoming engaged with the world economy threatens their autonomy and control. The contradiction is huge. The future of the world economy depends on how well it can be tolerated or regulated.
Robert J. Samuelson writes a regular column for Newsweek and The Washington Post, which is syndicated by The Washington Post Writers Group. He is also the author of The Good Life and Its Discontents: The American Dream in the Age of Entitlement (Vintage Books).
http://www.intellectualcapital.com/issues/issue170/item941.asp
How global is the economy? Why has the United States been able to avoid the recession that has hit much of the world? Is it a good thing for the economy to become more global?
Below are the ten most recent comments [as of Feb 20 1999].
Click here to view the full comment history.[Post your comments] [View all comments]
2/20/99 8:30:19 PM JWJones
Jack - Actually, I was attempting to be optimistic. The record trade and integration with the global economy is a net contributor to our current prosperity. The unemployment, falling wages, and deindustrialization that was predicted by various protectionist factions has not materialized. There has been elimination of some jobs and sometimes painful dislocation, but other jobs, generally better paying, have been created. Employment has been shifted to more productive sectors, with the result of improving general prosperity. In my opinion, either culturally or economically, any entity that attempts to "protect" itself from "outside influences" tends to stagnate. In fact, these influences generally contribute to both a vibrant, dynamic culture and economy.2/20/99 8:18:12 PM Jack o'Neil
(cont'd) I look at your opinions here, and am amazed by the broadness of views . But there is a consensus-that certainly the world is heading for an eventual dimming of the lights again very soon, regardless of what action taken . It seems current events have polarized us, and the situation in Russia is a good example of what could be expected . I only fear when, and not if, such a event may occur . Certainly the breadlines are not our way to go .2/20/99 8:14:22 PM Jack o'Neil
(1)With the Digital Age and the internet arising as a comparitive form of communication , how would this affect our economy? (2) and with the prescence of the Euro, how too will we compete in this market? We must look at these questions seriously . Right now our practices in such interests as Haiti and even the Gulf being panned by such peoples as France and even Italy, I think it now we should question what is right for America, and what is right for us . We cannot be serious if we don't take a look around .2/20/99 5:23:54 PM JWJones
Ron again - Yes, you're right about culture. Notwithstanding the fact that the USA is a 50-state wide-open free trade zone, local and regional identities are not going to go away. The South, New England, and the intermountain West, for example, are always going to retain their distinct identities. And I'd like to repeat a hypothetical question that I posed on this forum a few months ago. Does anyone think that if the prohibition on internal tariffs were lifted, that a state or locality could increase its overall prosperity by implementing protectionist measures?2/20/99 5:11:32 PM JWJones
Ron - No, that was Paul Samuelson, the author of the widely-used introductory economics text, and no relation to Robert Samuelson.2/20/99 4:55:43 PM Ron rml33@columbia.edu
Wasn't Samuelson one of those great economists who wrote in 1980 that the USSR would soon surpass the US?Is anyone supposed to trust this socialist Keynsian?People choose to protect culture, just as they choose what to buy. Impoverishing people through trade restictions doesn't protect anyone but bureacrats and incompetant business.2/20/99 3:33:41 PM logos
Dent Ocaya..You have it wrong! We still feed most of you! Where do you turn when disaster and famine strike? Its usually in a westward direction from my experience. Africas emergence as a player in the global economy is certainly slow in developing probably because of extreme political instability! South Africa and Egypt are still the bigger players on your continent!2/20/99 6:23:11 AM Dent Ocaya-Lakidi olakidi@imul.com.ug
In all phenomena, the dynamic elements feed on the less dynamic: man vis-a-vis his/her environment; a speeding automobile against the static road. A global economy replicates this. We in Africa and other places like Africa are increasingly the less dynamic "economic environment" on which the ultra-dynamic economies of the U.S, Japan and Europe feed.2/19/99 10:25:43 AM mowgli
Interesting essay! I wonder since the USA is so dominant as a money source,(loans and IMF) if politics isn't at least partially responsible for who gets help? Our President is an example. When he visits a foreign country US capital investment/loans are not far behind. We more often than not attempt to shore up countries that are minor trading partners with mixed results.2/19/99 7:02:55 AM gordo enema@ibm.net
Bob--We are already in the midst of the global war you describe. Our side fights by proxy through governments like Saudi Arabia's, Columbia's, and Mexico's. We give them training and arms, and they fight against the people in their countries who demand a government accountable to the people of their nation, the right to organize unions, the right to protect the environment, and the right of the people to determine economic policy. It's not the kind of war we read about in junior high history class, in which wealthy nations struggle over scarce resources, but the more common kind of war fought by the marginalized people of poor nations against the proxies of the wealthy nations.Visit Intellectual Capital and [View all comments]
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