Globalization: Impact

Globalization and its Impact

• Globalization's dark side is exemplified by the dangers of the new world economy and terrorism.
• Before 9/11, globalization was considered irreversible, but now events can shift its course.
• Ensuring that the interconnected world is more positive than negative is a challenge.
• The new global economy involves a century-long battle between central governments and free markets.
• The 1990s saw a global capitalist revolution, fueling unprecedented expansion of world trade.
• Globalization has improved lives but sparked debate about wealth, poverty, and global economy rules.

The Rise of Globalization

• The early 1990s, with the end of the Cold War and the Gulf crisis, marked the start of rapid globalization.
• This era features interconnectedness via investment, trade, ideas, culture, and travel.
• Free, open markets are the economic idea profoundly shaping globalization.
• Free trade is a fundamental aspect of capitalism for over 200 years.
• In the 1990s, a global market emerged that no government or politician could ignore.

America's Response to Globalization

• In 1992, America faced recession, unemployment, and foreign competition.
• Europe had formed a single trading bloc, while Japan appeared economically invincible.
• Bill Clinton promised to revitalize America.
• Clinton's agenda with Wall Street focused on reining in government spending, cutting the deficit, and embracing free trade.
• This agenda was needed to restore fiscal discipline and recover America's economy.
• Clinton supported trade liberalization.
• During the 1992 campaign, George Bush negotiated NAFTA promoting unrestricted trade between the US, Canada, and Mexico.
• Supporters believed NAFTA would create wealth, bind nations, and foster prosperity and security.
• NAFTA became the first major debate of the globalization era in America.

NAFTA Debate

• Opponents of NAFTA feared job losses in America due to low wages and lax regulations in Mexico.
• Ross Perot criticized Clinton's stance on NAFTA as inconsistent.
• Clinton supported NAFTA with conditions for environmental protection in Mexico, labor law standards, and retraining for American workers.
• As president, Bill Clinton prioritized restoring financial market confidence and reducing the deficit.
• He supported NAFTA, embracing changes in the global economy resulting from trade, technology, and market-based economics.
• Clinton argued that resisting these changes was futile, citing the fall of the Berlin Wall.
• The labor movement opposed NAFTA, viewing it as favoring multinational corporations over worker's rights.
• Clinton's support for NAFTA was viewed as a sellout to his traditional blue-collar supporters.
• Republicans provided crucial support for NAFTA's passage, as most Democrats voted against it.

NAFTA's Impact

• After NAFTA, foreign companies built factories in northern Mexico to export goods to the U.S.
• In northern Mexico, nearly a million workers found new jobs along the border, especially in television factories.
• The northern border region of Mexico has become more industrialized, with higher wages and better social indicators.
• 40% of Mexico's population lives in poverty, especially in the south.
• Developing countries increasingly viewed open markets as key to economic growth.
• Trade between the U.S. and Mexico increased from $40 billion to $280 billion in six years because of trade agreements.
• Since NAFTA, companies have become more aggressive in threatening to move production to Mexico, leading to lower wages and opposition to unions.
• About 400,000 American jobs have been negatively affected by trade with Canada and Mexico, but exports to these countries have created over a million new jobs.
• Global trade nearly doubled in the 1990s.

Global Finance

• The biggest trade is the continuous worldwide flow of stocks, bonds, and currencies.
• In the 1990s, individuals with savings in pensions or mutual funds became investors in the global order.
• Markets are made up of aggregated retirement savings and pension plans.
• The state of California runs one of America's largest pension funds, CalPERS, managing retirement savings for over a million state employees.
• CalPERS invested overseas, controlling 5% of France's entire stock market.
• Globalization is seen as Americanization by some.
• Pension funds became powerhouses of the global economy due to their large capital.
• Pension funds have a fiduciary responsibility to seek out global markets and use the return on investment to honor their obligations.

Emerging Markets

• With the end of the Cold War, nations opened their markets to foreign investment, creating new opportunities.
• Emerging countries grow faster so investment in these countries can make investors more money.
• The Clinton administration expanded the trade agenda, encouraging developing countries to open their economies to the global market.
• The US pushed for breaking down barriers to US firms and encouraged trade agreements.
• Some saw fast-moving flows of money as a new threat to their independence
• Capital is demanding that it can go anywhere and do whatever it likes.
• During the 1990s, more countries adopted market economics.
• Open markets could ensure global stability.

Confrontation and Crisis

• Karl Marx, Friedrich Engels, and others predicted a clash between the rich and the poor that could destabilize the entire system.
• The Zapatista rebels launched an uprising in southern Mexico when NAFTA took effect.
• The uprising and the assassination of a leading presidential candidate caused foreign investment to flee due to concerns about stability.
• The global economy faced a new type of crisis, as noted by Larry Summers who alerted others to the Mexican situation.

The Mexican Peso Crisis

• The Secretary of the Treasury alerted Alan Greenspan to a problem,.
• The potential implosion of the Mexican peso would destabilize the Mexican government.
• The crisis had the potential to drive a wave of five to nine million people north in search of employment.
• Greenspan recognized it as the first financial emergency of the twenty-first century.
• There was a risk that the proposed program wouldn't be effective.

President Clinton's Decision

• President Clinton believed that failing to act would lead to Mexico's failure.
• Clinton predicted that borders would be flooded with illegal immigrants in need of food and jobs.
• Clinton was concerned that the US would be perceived as an unresponsive neighbor, which could resonate negatively in the developing world.
• The bailout was considered a dangerous precedent, which would shield influential investors from risks they had willingly assumed.
• The US Treasury was perceived to be adopting a bailout policy that would reward risk-taking.

Technology and Globalization

• Technology transformed financial markets, enabling money to be moved across borders in seconds.
• During the 1990s, technology disregarded national borders, spreading commerce and ideas.
• Email became ubiquitous, transforming communication.
• The cost of telephone calls plummeted, leading to a surge in international calls.
• The number of international phone calls from the U.S. increased from 200 million to 5.2 billion in two decades.

Global Interconnectivity

• AT&T control center handles 300 million calls each day.
• Consumers checking their credit card balance could be routed to call centers in India, staffed by operators with American names.
• Farmers in remote Indian villages were paid the world price for their crops due to internet connectivity.
• Mariana Murti believed poverty eradication required the creation of new wealth, not redistribution.
• With just $250, Murti co-founded a computer software company in Bangalore, which became the world's second-largest software campus.
• Thirty percent of the world's software engineers are from India.

Entrepreneurship and Mobility

• Murti defined globalization as producing where it is most cost-effective, selling where it is most profitable, and sourcing capital from anywhere.
• America relaxed its immigration laws, attracting high-tech workers from across the developing world.
• Silicon Valley became the spiritual center of the new global village.
• Tim Draper believed the internet was going to transform the way the world worked by enabling commerce and communication.
• Draper noted that countries previously trapped could now participate in the world economy through the internet.

David Lee's Story

• David Lee, a Draper investment, was the first foreign-born American to take a high-tech company public.
• Lee's family left Beijing after the 1949 Revolution, escaping on a cargo ship with limited possessions.
• Lee established a joint venture in a free trade zone near Shanghai.
• China's communist leadership had embraced markets, attracting significant foreign investment.
• People migrated from rural areas to industrial towns in search of work in new factories.
• Globalization led to the largest wave of human migration in history.

China's Transformation

• Eighty percent of the world's future economic growth is expected to occur in cities rather than the countryside.
• A schoolteacher in the Chinese countryside saw a significant improvement in her life due to factory work.
• China's leaders aimed to emulate the tiger economies of Southeast Asia.
• By the mid-1990s, many Asian economies were growing at 10% or more per year, leading to confidence and hope.
• Japan experienced an unexpected slump.

Japan's Economic Challenges

• Japan's slowed economy struggled to adapt to the rapid changes of an interconnected world.
• Japan's closed society and economy were identified as obstacles.
• Japan had a highly competitive export-oriented sector as well as an uncompetitive domestic manufacturing and service industry.
• Bureaucrats managed a highly regulated economy.
• Calls for deregulation were met with skepticism.
• An Asian economic miracle was in trouble for the first time.

The Asian Financial Crisis

• By early 1997, Southeast Asia's rapid economic boom was overheating.
• Sira vaadwaur Evette aimed to become a multi-millionaire by building a luxurious condominium with a golf course designed by Jack Nicklaus.
• During the 1990s, Thailand opened up its capital markets, enabling local businesses to borrow money from foreign banks.
• Loans to Thai businesses tripled to over two hundred billion dollars in just four years.
• American and European governments initially advocated opening up capital markets but recognized weaknesses in the banking and regulatory systems.

Thailand's Currency Crisis

• Thailand's central bank artificially kept its currency high, fueling speculation.
• The International Monetary Fund worried about Thailand's economic path.
• Mong Tong Thani, a new city for 700,000 people, was built but remained largely unoccupied.
• Thailand's currency, the Baht, was pegged to the dollar.
• Financial markets sensed that the policy couldn't last.
• As confidence in the Baht waned, the central bank spent US dollars to protect the currency, depleting foreign reserves.
• In July 1997, the Thai government was forced to devalue, bursting the bubble and starting the Asian financial crisis.

Aftermath in Thailand

• Sira vaadwaur Evette was unable to sell a single unit.
• Clients, even multi-billionaires, also went broke.
• The economic shock affected all levels of Thai society.
• Many people saw their income decrease
• To support his family, one person's husband became a motorcycle taxi driver.
• The cost of living increased while salaries remained the same or decreased.
• Thailand received an emergency rescue loan from the International Monetary Fund, but it was insufficient.
• When that didn't work, the Thai government requested even more assistance from Washington.
• Thailand's crisis had the potential to spark a global one.

Asian Financial Crisis Origins

• Initial lack of intervention in Thailand due to misjudgment of contagion effects
• The crisis was initially viewed as a financial issue, overlooking strategic global implications

Contagion

• Global markets feared hidden flaws in Asian economies, triggering capital flight
• The crisis spread rapidly, exceeding initial expectations, due to globalization
• Contagion affected Malaysia, leading to economic instability and feelings of helplessness

Indonesian Crisis

• The crisis spread to Indonesia, resulting in government collapse and social chaos
• Investors did not differentiate between Asian countries, thus property prices and companies collapsed.
• The crisis caused widespread social unrest, including attacks on churches and mosques

IMF Intervention

• IMF provided loans to Indonesia and other Asian countries with conditions
• Conditions included cutting government spending, raising interest rates, and eliminating corruption
• IMF's conditions were seen by some leaders as a form of neo-colonialism

Korean Crisis

• Late 1997, the crisis affected Korea, one of the world's largest economies
• Korea faced a severe financial crisis, nearly defaulting on loans
• The IMF's Stanley Fischer inspected their reserve in Seoul and found most reserves were gone.
• Banks agreed to roll over loans, and Korea received the largest bailout in history

Russian Default

• Financial markets briefly ignored risk, with investments flowing into Russia
• Russia defaulted on its debt, causing global investor panic
• Markets froze up, and a sense of massive risk spread

LTCM Collapse

• The crisis spread to America, threatening the collapse of Long-Term Capital Management (LTCM)
• LTCM controlled vast global assets
• Its failure threatened the entire global economy
• Major banks averted disaster by providing funds to rescue LTCM

Brazilian Crisis

• The crisis reached Brazil
• Early loan packages and reforms helped contain the crisis
• Global financial markets gradually returned to normal

Recovery

• Countries that implemented reforms, like Korea, Thailand, and Brazil, stabilized
• The world economy survived, but millions of ordinary people paid the price

Anti-Globalization Movement

• The crisis led to new unease about the global economy
• Critics, like Lori Wallach, channeled public anxiety into the anti-globalization movement

Seattle WTO Protests

• Protests disrupted the WTO meeting in Seattle
• Protesters represented a broad spectrum of concerns about globalization
• American labor unions blamed cheap labor overseas for job losses

Trade Politics

• Open markets faced political challenges due to visible losers and invisible beneficiaries
• Developing countries sought fairer trade rules
• The summit ended in failure, with developing countries vowing to block trade negotiations

Global Poverty

• Global poverty became a central issue for globalization's opponents
• The movement shifted from unions to grassroots activists

World Bank

• Protesters targeted the World Bank
• Officials struggled to address growing debates about globalization

Global Inequality

• The world is more unequal than ever
• A small part of the world achieved modern economic growth
• Hernando de Soto addressed the issue of why capitalism triumphs in the West but fails elsewhere

Property Rights

• De Soto emphasized the importance of property rights for capitalism to function
• Without property rights, people are excluded from the capitalist system

Bill Clinton's Address

• Bill Clinton advocated for open markets and rule-based trade
• He emphasized the need to build a new consensus on trade

Bush Administration

• The Bush administration continued the free trade agenda
• Vicente Fox sought to expand NAFTA throughout the Western Hemisphere

Quebec City Summit

• Anti-globalization activists targeted the Quebec City summit
• The summit's agenda included trade, poverty, and new rules
• The protests had a lasting impact, shifting the terms of the global debate

Post-9/11

• September 11th raised concerns about the reversibility of globalization
• The Bush administration sought to rebuild economic confidence
• A new round of trade negotiations was launched in Doha, addressing developing world concerns