Ebook Challenges of globalization imbalances and growth: Part 2 presents the following content: Chapter 6 Meeting the China challenge is meeting the challenge of comprehensive engagement and multilateralism; Chapter 7 Institutional systems and economic growth; Chapter 8 Impact of “legal school” versus recent colonial origin on economic growth; Chapter 9 Does the European union emulate the positive features of the East Asian model? Chapter 10 Eight potential roadblocks to smooth EU-China economic relations.
06 Ch 127-152 6/19/08 9:39 AM Page 127 Meeting the China Challenge Is Meeting the Challenge of Comprehensive Engagement and Multilateralism WING THYE WOO The rise of China should more properly be understood as the return of China First, China has not always been poorer than Western Europe The GDP per capita (measured in 1990 international dollars) of China and Western Europe was $450 for both in AD, but by 1000 AD it was $450 for China and $400 for Western Europe (table 6.1) Second, Japanese growth since 1870 suggests that the income disparity between China and Western Europe need not be permanent In 1870 the average Japanese income was 37 percent that of the average Western European income, but by 1998 it was 14 percent higher, and the growth experiences of South Korea and Taiwan since 1965 confirmed that catching-up growth was not unique to Japan Third, China’s average annual growth rate of 10 percent for the last 30 years gives hope that China has finally embarked on the path of modern economic growth described by Simon Kuznets (1966) Wing Thye Woo is senior fellow at the Brookings Institution and professor at the University of California, Davis, and the Central University of Finance and Economics, Beijing The author is grateful for helpful and insightful comments from participants of the Fifth International CASE Conference, Winds of Change: The Impact of Globalization on Europe and Asia, held in Kyiv, Ukraine, March 23–24, 2007 He is also immensely grateful to Marek Dabrowski and Anders Åslund for their kind patience in guiding this paper to its completion 127 06 Ch 127-152 Table 6.1 Country/ region Western Europe United States 6/19/08 9:39 AM Page 128 GDP per capita around the world, AD to 1998 AD (1990 international dollars) 450 1000 1500 1600 1700 1820 1870 1913 1950 400 1973 1998 774 894 1,024 1,232 1,974 3,473 4,594 11,534 17,921 400 400 527 1,257 2,445 5,301 9,561 16,689 27,331 Japan China India 400 450 450 425 450 450 500 600 550 520 600 550 570 600 550 669 600 533 737 1,387 1,926 11,439 20,413 530 552 439 839 3,117 533 673 619 853 1,746 World 444 435 565 593 615 667 867 1,510 2,114 4,104 5,709 Source: Maddison (2001, table B-21, 264) China’s very likely return to center stage in the global economy has given rise to immense optimism on some fronts and intense pessimism on others Optimistic analysts have predicted that China’s reemergence as an independent growth pole would create a new web of synergistic relationships that would unleash greater global prosperity On the other hand, pessimistic analysts have pointed out that rising powers in the 20th century inevitably came into conflict with existing powers: Germany in the First World War, the Japan-Germany axis in the Second World War, and the Soviet Union in the Cold War The real lesson from the history of the 20th century is not that conflict is inevitable but that rising powers and existing powers should work hard together to avoid past mistakes—to falsify Karl Marx’s quip that “history repeats itself, first as tragedy, second as farce.” It is not naïve to think that conflict is preventable, because the most important power to rise and prevail in the 20th century, the United States, has in general been a stabilizing force in the international order But averting a pessimistic outcome requires adherence to the multilateralist principle of the existing powers accommodating rising powers, and the latter becoming responsible stakeholders in the international system The dialogue between existing and rising powers must be comprehensive because the range of global public goods that must be supplied is very broad (ranging from the establishment of a universal postal system to the peaceful use of outer space), and the nature of some of these global public goods is highly complicated (e.g., a scheme to control the emission of greenhouse gases) In this chapter, I focus on an economic issue where the need to engage China in constructive dialogue is important for sustainable global growth: the protection of the world trading system 128 CHALLENGES OF GLOBALIZATION 06 Ch 127-152 6/19/08 9:39 AM Page 129 Rising Protectionist Sentiments Against Trade with China The threat of a major disruption in trade between China and the developed countries should be taken seriously The turn against free trade is especially notable in the United States The 2007 Pew Global Attitudes Survey revealed that the proportion of US residents who have a positive view of trade was 59 percent, a dramatic drop from the 78 percent reported from the 2003 survey (Pew Research Center 2003, 2007) The rising skepticism about the benefits of free trade has come to focus on the large US overall trade deficit and the big Chinese overall trade surplus China’s current account balance became chronically in surplus in 1994 and started climbing steadily upward from 2001 on The current account surplus went from 1.9 percent of GDP in 2000 to 2.8 percent in 2002, 4.2 percent in 2004, and 8.7 percent in 2006.1 Recently, Jun Ma (2007), a perspicacious analyst at the Deutsche Bank, forecasted in December 2007 that China’s current account surplus would reach 9.5 percent of GDP in 2007 One disharmonious result from this large sustained rise in China’s current account surplus is that increasingly harsh words are being said about China’s trading practices and exchange rate policy At a US congressional hearing in March 2007, Morris Goldstein (2007) opined that the renminbi was overvalued by 40 percent against the US dollar and accused China of exchange rate manipulation, a charge echoed by C Fred Bergsten (2007) On June 14, 2007, four US senators introduced legislation “to punish China if it did not change its policy of intervening in currency markets to keep the exchange value of the currency, the yuan, low.”2 Both Hillary Clinton and Barack Obama, the frontrunners for the Democratic presidential nomination, declared that they supported the bill.3 The introduction of the US Senate bill was followed by demands from the International Monetary Fund (IMF) and European Union that China change its policy regime on external economic engagement On June 19, 2007, the IMF, with the strong endorsement of the United States Treasury, adopted a new country surveillance framework that sets out a catch-all obligation on countries not to adopt policies that undermine the stability of the international system, and lists a set of objective criteria that will be used to indicate whether a country is complying with its commitments Warning lights will include large-scale currency intervention, the accumulation of reserves and “fundamental exchange rate misalignment”—a term that mirrors language in a bill before the US Congress that would impose penalties on nations that The current account surplus as a percent of GDP was 1.6 in 1999, 1.9 in 2000, 1.5 in 2001, 2.8 in 2002, 3.2 in 2003, 4.2 in 2004, 7.2 in 2005, and 8.7 in 2006 “4 in Senate Seek Penalty for China,” New York Times, June 14, 2007 “Clinton and Obama back China crackdown,” Financial Times, July 5, 2007 MEETING THE CHINA CHALLENGE 129 06 Ch 127-152 6/19/08 9:39 AM Page 130 fail to correct such misalignments Rodrigo Rato, managing director of the IMF, said: “This decision is good news for the IMF reform programme and good news for the cause of multilateralism [because this new framework]” gives clear guidance to our members on how they should run their exchange rate policies, on what is acceptable to the international community and what is not.4 According to the UK Evening Standard:5 European Trade Commissioner Peter Mandelson has warned that China is taking business with Europe for granted Writing to EU President Jose Manuel Barroso, he said: “The Chinese juggernaut is, to some extent, out of control.” China is the EU’s largest source of manufactured goods but trade the other way is negligible Mandelson called the relationship “deeply unequal” and said China was being “procedurally obstructive.” Under the headline “EU Hoping to Hit Back at Chinese on Trade,” the International Herald Tribune reported on October 18, 2007 that: Peter Mandelson, the European trade commissioner admitted] that dialogue and cooperation with Beijing have failed to secure concessions for Europe, [and he called for the European Union to] align policy more closely with Washington and be more ready to take cases against China to the World Trade Organization The comments came before EU heads of government were to meet on Thursday in Lisbon to discuss calls from Nicolas Sarkozy, the French president, and Angela Merkel, the German chancellor, for a more aggressive stance toward emerging Asian economies over trade These recent developments in the United States and European Union should be seen as warnings that China, Europe, and the United States could be heading toward a trade war Nature of the Link Between Globalization and Worker Anxiety in the United States It is not uncommon to encounter allegations that the bilateral US-China trade deficit represents the export of unemployment from China to the United States A recent study by Robert Scott (2007) of the Economic Policy Institute used an input-output model to arrive at the claim that the bilateral trade deficit of $49.5 billion in 1997 caused the loss of 597,300 jobs that year and the 2006 bilateral trade deficit of $235.4 billion caused the loss of 2,763,400 jobs, and that every state suffered a net loss in jobs from the rise in the bilateral trade deficit during 1997–2006 The alleged job loss in 2006 from the bilateral trade deficit implied that the 2006 unemploy4 “IMF Set to Scrutinize Exchange Rate Policies,” Financial Times, June 19, 2007 “Mandelson: China Trade ‘Out of Control,’” UK Evening Standard, October 17, 2007 130 CHALLENGES OF GLOBALIZATION 06 Ch 127-152 6/19/08 9:39 AM Page 131 ment rate was 1.21 percentage points higher than if the bilateral trade balance were zero.6 Another alleged outcome of US-China trade that is commonly heard is that the bilateral deficit has forced down US wages.7 As it is well documented that US worker anxiety has increased steadily in the last two decades, just as US-China trade has increased steadily, it is tempting indeed to blame the rise in US worker anxiety (Otoo 1997, Valletta 2007) on China’s rise as a major trading nation Actually, an analyst with a broader grasp of global developments would have seen that the integration of China into the international division of labor was only part of the broader process of economic globalization that accelerated in the last decade of the 20th century and hence would have argued that economic globalization must have depressed wages in the advanced countries and thus heightened worker anxiety in those countries The common understanding from the post-1990 integration of the labor force in the former Soviet Union, India, and China (SIC) into the international division of labor is that this must have exerted large downward pressures on US wages.8 Table 6.2 shows that the distribution of the global labor force was already 2.315 billion in 1990, of which the combined SIC labor force was 1.232 billion This division of labor was certainly unnatural because up until then half of the world’s workforce had been kept out of it by autarkic SIC policies A decade after the start of internationalization, the number of workers involved in the international economic system had increased to 2.672 billion in 2000, with 1.383 billion SIC workers The Heckscher-Ohlin model The US civilian labor force in 2006 was 151.4 million (Economic Report of the President 2007, table B-35, available at www.gpoaccess.gov) Strictly speaking, import competition could lower US wages permanently without increasing the unemployment rate permanently The structural adjustment required to accommodate the increased imports would cause a temporary increase in the unemployment rate The economic isolation of the Soviet bloc started crumbling when the new non-Communist Solidarity government of Poland began the marketization and internationalization of the Polish economy on January 1, 1990 The economic transition and political disintegration of the Soviet bloc became irreversible when Yeltsin replaced Gorbachev as the unambiguous leader of Russia in August 1991 and implemented market-oriented reforms in January 1992 For the Chinese elite, the events in the Soviet Union confirmed that there did not exist a third way in the capitalism-versus-socialism debate In early 1992, Deng Xiaoping led a successful campaign to put China firmly on the path of convergence to a private market economy In 1991 India faced a balance of payments crisis and responded by going well beyond the administration of the standard corrective macroeconomic medicine of fiscal-monetary tightening and exchange rate devaluation to comprehensive adjustments of microeconomic incentives The trade regime was deregulated significantly, restrictions on foreign investment were relaxed, reform of the banking sector and capital markets was initiated, and divestment of public enterprises and tax reform were announced MEETING THE CHINA CHALLENGE 131 06 Ch 127-152 6/19/08 9:39 AM Table 6.2 Page 132 Distribution of the global labor force, 1990 and 2000 (millions) Category Non-SIC countries Developed Developing Total SIC countries Former Soviet bloc India China Total Global total 1990 2000a 403 680 1,083 438 851 1,289 213 332 687 1,232 2,315 214 405 764 1,383 2,672 SIC = Former Soviet bloc, India, and China a The 2000 total is different from that in Freeman (2004) Source: Freeman (2004) would predict that this doubling of world labor, achieved by bringing in cheaper SIC labor, would lower the relative price of labor-intensive goods and hence reduce the income of labor in the industrialized countries.9 The fact that US capital could now move abroad to set up production facilities in the SIC economies to service both the US and foreign markets meant another channel (besides the cross-border movement of goods) for globalization to depress the US labor income It is important to note that the imposition of a very high US tariff would not only drastically curb imports from SIC but also radically reduce US foreign direct investment (FDI) in the SIC There is no denying that the Heckscher-Ohlin model provides a coherent mechanism for globalization to lower US labor income and to cause US unemployment to rise in the process The fact that the overall US trade deficit has widened steadily from 1.5 percent of GDP in 1991 to 2.5 percent in 1996, 4.4 percent in 2001, and 6.7 percent in 2006 could only have worsened the drop in labor income and the rise in the unemployment rate This is because even if US exports had increased by the same amount as US imports, there would still be deleterious consequences on US workers because US exports are less labor-intensive than US imports The inconvenient truth, however, is that the above two expectations based on the Heckscher-Ohlin model have turned out to be wrong The alleged rise in US unemployment is not seen in the 1998–2006 period chosen by Robert Scott (2007) The average unemployment rate of 4.9 percent More accurately, the wages of the formerly isolated SIC workers would rise while those of workers in the industrialized countries would fall 132 CHALLENGES OF GLOBALIZATION 06 Ch 127-152 6/19/08 9:39 AM Page 133 during that time was actually lower than the rates in the immediately preceding periods of 1980–88 and 1989–97, which were 7.5 percent and percent, respectively In reality, the US economy was a highly successful job creation machine in 1998–2006 Many analysts have pointed out that the inflation-adjusted weekly earnings (wages and salaries) of nonsupervisory employees in 1980 was higher than in every year in the 1982–2006 period.10 So is the backlash against globalization in the G-7 countries the result of the immiseration of their low-skilled workers? The answer is no because earnings is only one of the two components of worker compensation; the other is employerpaid benefits (e.g., pension contributions and health insurance) The omission of benefits gives the wrong picture on labor income because the growth of benefits has been especially rapid in the last decade due to the soaring costs of health insurance When we measure labor income as the sum of earnings (wages and salaries) and benefits, then we find that labor income in 1980 was lower than in every year in the 1982–2006 period, refuting the conclusion drawn from looking at only the earnings component of labor income Figure 6.1 reports the evolution of four data series over the 1979–2006 period, each indexed at 100 in December 1979: Ⅲ series (a) is the inflation-adjusted earnings received by a blue-collar worker in December of each year, Ⅲ series (b) is the inflation-adjusted compensation of a blue-collar worker in December of each year, Ⅲ series (c) is the inflation-adjusted compensation of an average worker in December of each year, and Ⅲ series (d) is the inflation-adjusted compensation of a white-collar (excluding sales occupations) worker in December of each year Series (a) shows that the earnings of the blue-collar worker in 2006 was percent lower than in 1979 Series (b) shows that the compensation (earnings plus benefits) of the same worker in 2006 was 12 percent higher than in 1979 In fact, blue-collar compensation since 1991 has been higher than in 1979 Furthermore, it started growing faster beginning in 1997, just as the US overall trade deficit started growing faster Series (d) shows that the compensation of the white-collar worker in 2006 was 28 percent higher than in 1979 This much higher income growth of the white-collar worker caused the compensation of the average worker, series (c), in 2006 to be 20 percent less than in 1979 The important message from figure 6.1 is that the income growth of the United States in the 1990–2006 period of accelerated 10 For example, see figure in Polaski (2007) MEETING THE CHINA CHALLENGE 133 06 Ch 127-152 134 6/19/08 Figure 6.1 Compensation received by US workers, 1979–2006 1979 = 100 130 120 Blue-collar earnings plus benefits 100 Blue-collar earnings 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 19 19 81 19 79 19 80 90 Note: Each data series is produced by combining the relevant Standard Industrial Classification (SIC)–based series of the 1979–2005 period with the relevant North American Industrial Classification System (NAICS)–based data for 2006 Source: BLS (2007a, 2007b) Page 134 110 Average-worker earnings plus benefits 9:39 AM White-collar earnings plus benefits 06 Ch 127-152 6/19/08 9:39 AM Page 135 globalization was shared by both low- and high-skilled workers, albeit the latter getting a larger share of the income growth In my opinion, the key to reconciling the theoretical predictions of the Heckscher-Ohlin model with the actual outcomes is to recognize that economic globalization was not the only significant economic process in the last two decades The other was accelerated technological innovation, especially in the advanced economies, notably the United States The reason US real labor income has not fallen despite economic globalization is that US productivity growth has been remarkably high since the late 1980s, enabled in large part by the information and communication technology (ICT) revolution It is instructive here to note that Alan Greenspan has attributed his (generally hailed) superior ability in making the “correct” policy to his early recognition that the United States entered a period of rapid technological innovation in the late 1980s I note that while this high productivity growth was able to offset the downward pressures on the real labor income from economic globalization, it was also likely to have joined economic globalization in diminishing the labor share of GDP.11 Recent technological innovations have not just substituted capital for labor (e.g., fewer secretaries are needed because answering machines can now convert messages into voice files and email them to traveling professionals), they have also transformed many traditionally nontradable services to tradable services, allowing jobs to be outsourced to foreign service providers For example, the ICT revolution has allowed offshore call centers to handle questions from US customers, offshore accountants to process US-based transactions, and offshore medical technicians to read the X-rays of US patients.12 What, then, is fueling US resentment toward imports from China when the average US worker is experiencing neither more unemployment nor lower compensation? The explanation is that the US worker is feeling more insecure in the 2000s than in the 1980s because of the faster turnover in employment Globalization and technological innovation have required workers to change jobs more often and they find that there are consider- 11 Besides capital-biased technological innovation and economic globalization, two other developments in the US economy are likely to have contributed to the decline in labor share of GDP The first is changes in the institutional nature of the US labor market; union membership has declined and there has been an upward shift in compensation norms for highlevel executives (This shift in compensation norms could reflect a combination of a shift in social attitudinal norms and more collusion between managers and their boards Akerlof (2007) provides a recent discussion of “norms” and their economic consequences.) The second development is increased immigration to the United States (before 2001); see Borjas (1994) and Ottaviano and Peri (2005) 12 There is a large empirical literature on the relative impact of technological changes and globalization on the US wage rate; notable contributions include Sachs and Shatz (1994) and Feenstra and Hanson (1996, 1998) MEETING THE CHINA CHALLENGE 135 06 Ch 127-152 6/19/08 9:39 AM Page 136 Figure 6.2 Median tenure at current job by age of US workers, 1983–2006 years 16 55 to 64 14 45 to 54 12 10 35 to 44 25 to 34 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 87 19 86 19 85 19 84 19 19 19 83 able costs associated with each job change because of the inadequacies of the US social safety nets The more frequent job changes are shown in figure 6.2 by the declining trend in the length of median job tenure for older male workers From 1987 to 2006, the median job tenure for males Ⅲ aged 33 to 44 decreased from 7.0 to 5.1 years, Ⅲ aged 45 to 54 decreased from 11.8 to 8.1 years, and Ⅲ aged 55 to 64 decreased from 14.5 to 9.5 years In terms of social safety nets, Gary Burtless (2005) reports that in the G-7 in 2004, only the United Kingdom had less generous unemployment benefits than the United States Figure 6.3 shows that an unemployed person in the United States received initial unemployment benefits that equaled 53 percent of previous income compared with 78 percent in Germany, 76 percent in Canada and France, 61 percent in Japan, 60 percent in Italy, and 46 percent in the United Kingdom Figure 6.4 shows that the duration of unemployment benefits was months in the United States compared with 12 months in Germany, months in Canada, 30 months in France, 10 months in Japan, and months in Italy and the United Kingdom The dilemma is that the fast rate of technological innovation has been good for labor income but bad for job stability because technological improvements in the production process usually mean occupational obsolescence The unfortunate fact is that the temporary unemployment associated with job changes is especially painful in the United States compared with 136 CHALLENGES OF GLOBALIZATION 11 About the Contributors 269-270 6/19/08 9:53 AM Page 270 Ian Hurst is research fellow at the National Institute of Economic and Social Research in London Jean Pisani-Ferry is director of Brussels-based Bruegel and professor at the Université Paris-Dauphine Jacek Rostowski is the finance minister of Poland and former head of the Department of Economy at the Central European University in Budapest André Sapir is senior fellow at Brussels-based Bruegel and professor of economics at the Université Libre de Bruxelles Susan Schadler is the former deputy director of the European Department of the International Monetary Fund Birgit Schmitz is a postdoctoral researcher at the Institute of International Politics, University of Bonn Bogdan Stacescu is a candidate in the PhD program in finance at the University of Zurich Wing Thye Woo is senior fellow at the Brookings Institution and professor at the University of California, Davis, and the Central University of Finance and Economics in Beijing 270 CHALLENGES OF GLOBALIZATION 12 Index 271-284 6/19/08 10:08 AM Page 271 Index Africa See also colonial rule; specific country agricultural repression in, 188 economic relationship with China, 261 EU economic partnership agreements, 260–61 growth trajectories in, 177, 193 overview and history of economic growth in, 2, 153 agriculture, 155, 188, 189, 203 allocative efficiency, 156 “Anglobalization,” 61n Argentina, 5, 147–48 ASEAN (Association of Southeast Asian Nations), 149 Asia See East Asian model/East Asian Tigers Association of Southeast Asian Nations (ASEAN), 149 Australia, 69n, 263 Austria, 51, 244–45 balance of payments (BoP) constraints, 59–73 See also current account balances alternative analytical framework proposal, 68–73 challenging “home country bias”, 66–67, 69 concepts and limitations, 63–65, 70 currency-based nature of statistics, 66n, 70n current account deficits in new EU member states and current and potential EU candidates, 62t elimination of BoP constraints between EMU members, 70 government guaranteed debt, 64 greater flexibility in analyzing, 65–67 historical background, 60–63 overview of, 7–8 residency-based nature of statistics, 66n, 70n world current account imbalances (1980–2007), 68t Balassa-Samuelson effect, 232 Baltic countries See also Central and Eastern European countries (CEECs); specific country current account deficits, 62–63, 64–65 determinants of economic growth, 31f GDP growth out-of-sample predictions, 32 as members of eurozone, 72 total factor productivity (TFP), 21 Bangladesh, 147–48, 218 behavioral finance, 161n Belgium, 42 Bernanke, Ben, 10, 65, 100n Bill of Rights (US), 160n BoP See balance of payments constraints Brazil, 5, 149–50, 170, 218, 265 Bretton Woods system, 265, 266 271 12 Index 271-284 6/19/08 10:08 AM Page 272 BRIC economies, 2, 265 See also Brazil; China; India; Russia Britain See United Kingdom Buddhism, 217n Bulgaria See also Central and Eastern European countries currency, 6, 17n, 62n current account deficit, EMU membership, 62n external sovereign debt spreads, 36 income taxes, 244 per capita GDP, 20 Cameroon, 212 Canada, 67, 136–38 capital account liberalization, 61 capitalism, overview of, 4, 5, 12–14 See also specific country capital mobility, 60–61, 68, 69 capital ownership residency, 63–64 carbon-intensive industries, 263–64 Caribbean, 212n, 260–61 Catholicism, 216–17 Central and Eastern European countries accession to the European Union, 6, 37, 181 currencies of, 17n current account deficits, 4, 5–6, 17–38 exchange rate policies, export specialization index, 259t external sovereign debt spreads, 35–37, 36f, 37f foreign capital–financed spending, effectiveness of, 6, 32–33 GDP growth out-of-sample predictions, 32 growth, sources of, 20–24, 27–32 influenced by East Asian economic model, 240 large-scale use of foreign savings, vulnerabilities created by, 24–27, 28f list of, 17n, 21t manufacturing strengths, 256 per capita income gaps, 20f private investment-saving gaps, 6, 24–27 psychosocial legacies of socialism, 163 range of per capita GDP, 19–20 rapid credit growth, 27, 28–29f reserve accumulation, 27, 29f restrictions on capital flows eliminated by, 24 taxation, 13, 244 272 CHALLENGES OF GLOBALIZATION central banks See also specific bank current account deficits financed by bank loans, 47–48 economic growth and, 3–4 exchange rates targeted to US dollar, 10–11 monetary policies, 105, 106, 113 organizational restructuring, 191 privatization of, 61 real interest rates adjusted by, 88 transnational expansion of, 61 centrally planned economies, failures of, 179 Chile, 153 China, 9–10, 127–51, 144–50 See also East Asian model; renminbi African-Chinese economic relationship, 261 agricultural repression, 188 appreciation of the renminbi vs the dollar, 91f, 104, 142–44 banking system, 140–41, 146–47 barriers to innovation, 164, 176 bilateral trade with US, 10, 110, 112–13, 123, 130–31, 139 BRIC combined GDP, 265 capital account restrictions, 61n capital controls, 143 on climate change, 263–64 confiscatory corruption payments within Imperial China, 168 current account surplus causes of, 5, 9–10, 84–85, 99–100, 139–42 failure to translate savings into investments, 9, 140–42, 146–47 history of, 129, 139–42 rate of, 103 US-China trade deficit, 8, 80, 104, 108, 112–13, 119, 142–44, 143n demand growth, 95 economic reforms of Deng Xiaoping, energy and raw materials imports, 95, 97, 261–63 EU-China relations, 253–66 China’s demand for energy and raw materials, 261–63 Chinese integration into world economy, 258–60 climate change policies, 263–64 EU-China annual summit, 254 EU on China’s exchange rate policies, 129–30, 254 12 Index 271-284 6/19/08 10:08 AM Page 273 euro exchange rate risks, 264–65 European labor markets and, 257–58 EU’s status reduced by China’s rise in economic power, 260–61, 265–66 export specialization index, selected countries, 256t, 259t foreign direct investment to China, 253 Multi-Fiber Arrangement, 254 overview of, 13–14 US-China relations and, 255–57 exchange rate policy, 129–30, 142–44, 254, 264–65 export-led growth model, 78 GDP per capita, 2, 265 golden period of global growth, 2, 183 historical disparity between Western Europe and, 127 impact of political disintegration of the Soviet bloc, 131n Kyoto Protocol, 150 labor force, 130, 259 long-term growth trajectories, 177 market reforms, 181, 182–83 pandemic diseases within, 150 projected effects of a 10 percent appreciation of the renminbi (2007–27), 113f real effective exchange rates, 90–91, 91f repressed sectors as result of communist system, 156 rising protectionist sentiments against trade with, 129–30, 147–50 shifts in monetary policy, 108 SIC (former Soviet Union, India, and China), 131–33, 149 ties to states with nuclear capabilities, 150 townships and village enterprises, 182–83 two-tier price systems, 179 unlimited power of leaders, 195 US worker anxiety and, 130–39 WTO accession agreement, 146 CIS (Commonwealth of Independent States), 65 civil law, 205, 206–14, 206n See also legal systems climate change, 150, 263–64 coal, 97–98 coastal areas See tropical areas cognitive dissonance theory, 163n, 191n Cold War period, 128, 149 See also communism; Soviet bloc colonial rule colonies of settlement vs colonies of extraction, 221 education within, 213, 220 EU trade agreements with former colonies, 260 governance of, 211–13, 222 independence of, 211n large-scale capital exports to British colonies, 67 “legal school” vs recent colonial origin on economic growth, 201–28 the colonial heritage, 206–208 data and results, 213–15 differences in growth between British common law and French civil law countries, 210t differences in growth between former French and British colonies, 210t distribution of countries in the sample across institutional categories, 228t geography vs institutions, 220–21 investigative approach, 202–204 legal school as a determinant of economic performance, 204–206 list of countries in the sample, 227t overview of, 12–13 policies vs institutions, 221–23 replication of key regressions excluding the “other countries” category, 209t summary statistics, 225t–26t tests of robustness, 215–17, 216t theoretical background, 211–13 legal systems of former colonies, 206n malaria within, 217-19 movement of population across borders, 213 settler mortality, 204 trade benefits to colonies, 215 command economies, 174–75, 176, 187–88, 191 common law system, 204–14 See also legal systems Commonwealth of Independent States (CIS), 65 communications See technological innovation INDEX 273 12 Index 271-284 6/19/08 10:08 AM Page 274 communism and communist regimes See also Cold War period; Soviet bloc barriers to innovation within, 164 human capital created by education system, 187 political and economic decision making power, 156, 161 potential reemergence of, repression of service sector, 188 compensation received by US workers, 134f Confucians, 217n corporate tax, statutory rate (EU members), 246t corruption, 168–69, 237–38, 238f, 241 creditor countries/nations, 64n Croatia, 17n See also Central and Eastern European countries crude oil spot and forward prices, 93f currency See exchange rates; specific currency current account balances See also balance of payments constraints; specific country; sustainable adjustment of global imbalances change in, 78t under Economic and Monetary Union, 44f and speed of convergence in the EU, 34f in new EU member states and current and potential EU candidates, 62t emerging-market economies financing advanced economies, 84f Percent Doctrine, 66 global, 68f institutional factors contributing to deficits, 184n persistent cross-country investmentsavings imbalances, 71 potential of fiscal policy to correct deficits, 72 regional contributions to, 85f twin deficits, 72 Cyprus, 62n Czech Republic, 17, 17n, 20 See also Central and Eastern European countries; Visegrad countries debtor countries/nations, 64n democracies/democratization See also specific country constitutional constraints and economic policies, 195 274 CHALLENGES OF GLOBALIZATION proceeding with economic modernization, 14 “Third Wave”, Deng Xiaoping, 2, 131n Denmark, 183 dictatorships, 162n Doha Round, 4, 10, 261 See also World Trade Organization dollar appreciation of, 111n depreciation of, 10–11, 91f, 104, 108, 123–24, 142–44, 264–65 dominance of, 11 exchange rate changes, 110–11 overview of exchange rates, real effective exchange rate, 81, 91f, 121f yen-dollar exchange rate, 142 domestic transactions, 63 Dominican Republic, 218 dotcom bubble burst, East Asian model/East Asian Tigers See also specific country ASEAN imports, 149 Asian crisis, causes of, 6, 238, 240–41 deflation following appreciation during, 113 difference in growth following, 232 IMF conditionality at time of, 266n risk of private imbalances highlighted by, 24, 66 capital accumulation, 240 CEECs influenced by, 240 corruption in East Asia and EU-15 (2006), 238f current account surpluses, 4, 5, 65, 119 described, determinants of economic growth, 31f economic freedom in 234f EU model compared with, 229–49 adaptation and reform of the European Union, 241–49 controversy over the East Asian model, 239–41 overview of, 13 export-led growth model, 78 external sovereign debt spreads, 35, 36f, 37f GDP in East Asia and EU-15, 231t government size, 31 history of East Asian model success, 230 12 Index 271-284 6/19/08 10:08 AM Page 275 labor markets in East Asia and EU-15, 236t long-term growth trajectories, 177 oil-consuming technologies, 95 political freedom in, 239f public expenditures in, 235f stabilization indicators in, 233t total factor productivity growth, 240 Eastern Europe See Central and Eastern European countries Economic and Monetary Union (EMU) See euro/euro area; specific country economic development, history of expansion of trade in the 15th to 17th centuries, 156 globalization, overview of, 60–61 golden period of global growth, 2–4 increased inequalities, post-1800s, 153, 154, 176–77 post-World War II, 5, 153, 177 pre-1800s, 153, 154–55, 176 pre-World War I international economic integration, World War II, 2, 5, 128, 153, 177, 187 economic freedom in East Asia and EU-15 (2007), 234f economic nationalism, 171n education See also human capital under colonial rule, 213, 220 East Asia, 237 Europe, 31, 237, 256 increased global literacy, Latin America, 31 policies that encourage, 222 United States, 256 emerging-market countries See also specific country; Central and Eastern European countries current account positions, 18f current account surpluses, 84–85, 90, 100–101 domestic savings and investment, 25f external sovereign debt spreads, 36f financing advanced economies, 84f foreign direct investment, 83 gap between actual and “explained” spreads, 37f growth performance, 22f history of crises in, 83–85 list of, 21t national saving and investment positions, 86f savings and industrial countries’ investment positions, 87f employment See labor force EMU (Economic and Monetary Union) See euro/euro area; specific country energy demand See climate change; coal; natural gas; oil Engels Law, 155 entrepreneurship, 163–64, 168–69, 178 ERM-2 (Exchange Rate Mechanism), 62n Estonia See also Central and Eastern European countries currency, 17n, 62n current account deficit, EMU membership, 62n income taxes, 244 range of per capita GDP, 20 small or no sovereign bond issues, 35n on tax competition, 244 ethnolinguistic fractionalization, 216–17 European Union (EU) See also euro/ euro area; specific country acquis communautaire, 242, 243, 248, 249 capital flows between rich and poor countries, 48–49, 55–56 on climate change, 263–64 common institutional systems within, 159n corporate taxes, 244, 246t current account balances, 43f current account deficits and speed of convergence in, 34f decentralization in old European model, 243–44 decision making process, 242–43, 249 East Asian model, 229–49 adaptation and reform of the European Union, 241–49 compared with the EU model, 230–39, 234f, 235f, 239f controversy over, 239–41 overview of, 13 economic partnership agreements with African, Caribbean, and Pacific (ACP) countries, 260–61 education spending, 256 energy and raw materials imports, 52, 55, 97, 261–64 enlargement accession benefits, 6, 24, 37, 62 competition within reinforced by, 13 current account surpluses in the Middle East and East Asia accommodated by new member states, 65 INDEX 275 12 Index 271-284 6/19/08 10:08 AM Page 276 European Union (EU)—continued economic integration of new member states, 258–60 future entry of CEECs, 181 EU-12 See euro/euro area EU-15 corporate tax, statutory rate of, 246t corruption, 238f–39f economic freedom in, 234f trade balances of, 49–55 GDP in, 231t general government expenditure, 247t labor markets in, 236t members of, 48n net financial flows, 48 political freedom in, 239f public expenditures in, 235f stabilization indicators in, 233t EU-Africa summit, 261 EU-China relations, 253–66 China’s demand for energy and raw materials, 261–63 Chinese integration into world economy, 258–60 climate change policies, 263–64 EU-China annual summit, 254 EU on China’s exchange rate policies, 129–30, 254 euro exchange rate risks, 264–65 European labor markets, 257–58 EU’s status reduced by China’s rise in economic power, 260–61, 265–66 export specialization index, selected countries, 256t, 259t foreign direct investment to China, 253 Multi-Fiber Arrangement, 254 overview of, 13–14 European Central Bank, 232 European Constitutional Treaty, 243 European Globalization Adjustment Fund, 258 European Union Greenhouse Gas Emissions Trading Scheme (EU ETS), 263 EU Stability and Growth Pact, 19 export specialization index, 259t GDP per capita, 229 general government expenditure (EU members), 247t government size, 31 history of modern economic growth, 153 276 CHALLENGES OF GLOBALIZATION housing prices, 89–90 impact on US current account, 110, 114f income taxes, 244, 245t knowledge and innovation, 255–57, 259t labor markets, 257–58 liberal migration rules, 244 link between growth and current account deficits within, 32–35 Lisbon Agenda, 13, 229, 242, 243, 256, 257 macroeconomic policy, 232 tax competition, 13 Treaty of Rome, 242 euro/euro area adjustment to US deficit, 78, 79, 105–106 appreciation of, 91f Baltic states as members of, 72 current account balances, 41–56 average trade balances, 50f causality tests, 52t correlation between intra- and extra-EU trade balances, 51t determinants of, 53t, 54t dispersion of trade balances, 49f growth of GDP and domestic demand, 80t intra–euro area real trade-weighted exchange rates, 46f net financial flows and the EMU, 48–56 overview and stylized facts, 6–7, 42–48 real exchange rates and current account balances, 47f widening differences among EU member states, 49–55 defined, 19n, 49 effects on the economies undertaking monetary expansions, 114–15 elimination of BoP constraints between EMU members, 70 ERM-2 (Exchange Rate Mechanism), 62n exchange rate risk eliminated by, 48 exchange rate risk with other currencies, 72 exports from, 81 impact of monetary expansion on the euro area, 115f nature of capital flows changed by EMU, 7, 52–56, 61–62 non-EMU states, 72 shifts in monetary policy, 108 exchange rates, 110–15 percent doctrine, 66 12 Index 271-284 6/19/08 10:08 AM Page 277 Central and Eastern European countries policies, Chinese policies, 104, 264–65 current account balances and, 45–47, 67n economies with inconvertible currencies, 63 elimination of risk, 48, 70, 72 EU-China relations, 264–65 Exchange Rate Mechanism (ERM-2), 62n exchange rate risk, defined, 70 expected rate of return influenced by, 71 external sovereign debt spreads, 35–37, 36f, 37f “market-clearing exchange rate”, 142–43 national monetary authority, 60 nominal, 108 reversal of net direction of capital movement, 73 risk of EU new member states, 62 risk premium– and domestic absorption–driven adjustment, 116–17, 119–22, 124 risks transferred to consumer sector, US deficit and, 10–11, 81–82, 105, 110, 111, 117, 264–65 export specialization index Central and Eastern European member states of the EU, 259t selected countries, 256t ExxonMobil, 96 FDI See foreign direct investment Finland annual surpluses, 42 education, 237 public expenditures, 247–48 taxation, 244 trade balances, 51 fiscal regimes, 194 foreign direct investment (FDI) emerging-market countries, 6, 83 EU countries and, 48–49, 56, 253 limited by macroeconomic crises, 170 macroeconomic vulnerability of states that borrow, 64–65 foreign technology transfer, 155 France 1914 stock market capitalization, 13 civil law, 205, 206–208, 215, 220 See also legal systems colonies See also colonial rule governance of, 211–12, 213, 222 independence of, 211n malaria within, 218 on emerging Asian economies, 130 European Constitutional Treaty rejected by, 243 as example of constrained market economy, 179 labor market, 257, 258 protectionist sentiments vs China, 147–48 on tax competition, 244–46 unemployment benefits, 136–38 Freedom House report, 238 French Caribbean, 212n GDP See also specific country in East Asia and EU-15, 231t GDP per capita around the world (0 AD to 1998 AD), 128f world rankings, 265 geographical determinants, 159n, 160n, 202–203, 218, 219n, 220–21 Georgia, 244 Germany 1960s market pressure on the exchange, 78 annual surpluses, 42, 47, 50–51 bank loans to and from, 48 civil law system, 206n corporationism, 179 East Germany, 192 on emerging Asian economies, 130, 147–48 exports, 47, 259–60 as financial intermediary in Europe, 50 fiscal policy, 47 German colonies, 214n housing prices, 89 labor market, 47, 136–38, 257 long-term growth trajectories, 177 manufacturing strengths, 256, 257 on tax competition, 244–45 West Germany, 194n World War I, 128 World War II, 128 global credit crisis, 77–106 See also sustainable adjustment of global imbalances oil prices and, 77, 79, 91–103 demand shock, 93–96 longer-term outlook for oil prices, 97–99 model-based analysis of global growth, interest rates, and oil prices, 99–103 tight supply situation, 96–97 overview of, INDEX 277 12 Index 271-284 6/19/08 10:08 AM Page 278 global credit crisis—continued “savings glut” hypothesis, 10, 100n US current account deficit, 4, 82–91 causes of, 77, 80–82 changes in global financial markets, 82–83 effects on current account balances, 87–91 emerging-market economies financing advanced economies, 84f growth of GDP and domestic demand, 80t housing sector, 8, 10, 77, 89–90, 105, 106 investment booms and busts, 83–87 mirrored by international savings from emerging markets, 100–101 overview of, 9–12 politicized arguments and explanations, 103–104 readjustment of monetary policy, 105 global institutions, 151, 160, 265–66 See also specific organization global investment and US real interest rates, 88f global liquidity glut, 65 global real interest rates, 87–90, 89f, 99–103 global savings equilibrium and shifts in the investment-saving (IS) curve, 104f global savings equilibrium, negative supply shock, 103f global savings glut, 10, 65 gold standard era, 67 Gorbachev, Mikhail, 131n, 162n government guaranteed debt, 64 government size, 31 Greece current account deficit, 6–7, 42, 45, 47–48, 50, 69n economic integration into the EU, 260 endemic malaria, 218 greenhouse gas emissions, 150, 263–64 Greenspan, Alan, 135 Group of Four (G-4), 149–50 Group of Seven (G-7) combined GDP, 265 on free trade, 147–50 reduction in representation, 265–66 unemployment benefits, 136–38 Group of Six (G-6), 278 CHALLENGES OF GLOBALIZATION Group of Twenty (G-20), 266 growth from comprehensive reforms, 190f from limited reforms, 190f under restrictive barriers, 184f Haiti, 218 health (global), Heckscher-Ohlin model, 132–35 home-country bias in investment decisions, 66–67, 69 Homeland Investment Act, 81 Hong Kong, 179, 207, 237, 240 See also East Asian model/East Asian Tigers horizontal fragmentation of power, 204 housing sector, 6, 10, 89–90, 90f, 105, 106 human capital, 3, 187, 187n, 230–32 See also education; labor force Hungary, 6, 17n, 20 See also Central and Eastern European countries; Visegrad countries ICT (information and communication technologies) See technological innovation IIP (international investment position), 63 IMF (International Monetary Fund), 64n, 84, 108, 129–30, 266n incentive barrier to innovation, 158 India balance of payments crisis, 131n barriers to innovation under British rule, 170 BRIC combined GDP, 265 capital account restrictions, 61n as economic giant, 151 endemic malaria, 218 on free trade, 147–48 GDP per capita, 265 golden period of global growth, on multilateral trade liberalization, 149–50 SIC (former Soviet Union, India, and China), 131–33, 149 Indochina, 213 Indonesia, 146–47, 241 industrialized countries boom and bust of the 1990s, 86 industrial policy, 237 investment in, 86, 87f national savings, 90 infant mortality rates, inflation, 45–47, 232 See also specific country 12 Index 271-284 6/19/08 10:08 AM Page 279 information and communication technologies (ICT) See technological innovation innovation-based growth, 154–56 See also technological innovation institutional systems and economic growth, 153–97 barriers to growth, 158, 166–76, 185–86 defined, 154 geographical variables, 220–21 improper protection of property rights, 170–71 improper structure of property rights, 169–70 incentive barriers, 175–76 information barriers, 164–66 monopolies, 171–75 policy vs., 221–22 individual choice linked to institutional systems, 157–63 institutions, defined, 159, 201–202 overview of, 12, 176–80 reform packages, 180–95, 184f, 190f, 191n special growth mechanisms, described, 154 international investment position (IIP), 63 International Monetary Fund (IMF), 64n, 84, 108, 129–30, 266n interregional capital flows, 70 investments capital ownership residency, 63–64 East Asia model countries, 230–32 emerging-market domestic savings and investment, 25f innovation indirectly blocked by blocked investments, 166–70, 178 investment-saving gaps and current account deficits, 26f legal protection of, 205 limited by low domestic savings, 170 property rights and, 167–70, 169–71, 178 reduced by corruption taxes, 168–69, 178 Iran, 150 Ireland correlation between total trade balances and current accounts, 48n current account deficit, 45 deregulation of the labor market, 248 long-term growth trajectories, 177, 186 public expenditures, 247–48 on tax competition, 244 isolationism See protectionism Italy comparative advantages, 257 endemic malaria, 218 protectionist sentiments vs China, 147–48 trade and current account deficits, 45 unemployment benefits, 136–38 Japan bilateral Japan-US trade, 139 current account surplus, 4, 5, 119, 142 denied permanent membership of the UN Security Council, 150 dual economy, 179 historical disparity between Western Europe and, 127 housing prices, 89 impact on US current account of monetary expansions in Japan, 114f imports from, 149 post-World War II growth, 2, 153, 230 shifts in monetary policy, 108 transfer of manufacturing and assembly operations to China, 139 unemployment benefits, 136–38 World War II, 128 yen-dollar exchange rate, 142 Jordan, 147–48 justice systems See legal systems krona, 117 Kyoto Protocol, 150, 263 Kyrgyzstan, 244 labor force See also human capital compensation received by US workers, 134f Danish “flexicurity” system, 183 East Asia vs EU nations, 235–36 EU deregulation of, 13, 248, 257 global, 130–32 input among CEECs, 20–24 institutional constraints on flexibility of, 194 labor markets in East Asia and EU-15, 236t median tenure at current job by age of US workers, 136f productivity levels, 189 product market reforms and, 191 unemployment benefits, 138f United States, 9, 130–39, 136f, 144–50, 183, 257–58 landlocked countries, 202, 203 See also geographical determinants INDEX 279 12 Index 271-284 6/19/08 10:08 AM Page 280 Latin America See also specific country determinants of economic growth, 31f external sovereign debt spreads, 35, 36f, 37f history of modern economic climate, 2, 153 Latvia See also Central and Eastern European countries currency, 17n, 62n current account deficit, 6, 62–63 income taxes, 244 range of per capita GDP, 20 small or no sovereign bond issues, 35n legal systems civil law, 205, 206–14, 206n common law system, 204, 204–14, 212–13 Hayek–La Porta hypothesis, 205, 208, 215, 220 “legal school” vs recent colonial origin on economic growth, 201–28 colonial heritage, 206–208 data and results, 213–15 differences in growth between British common law and French civil law countries, 210t differences in growth between former French and British colonies, 210t distribution of countries in the sample across institutional categories, 228t geography vs institutions, 220–21 institutions vs malaria, 217–19 investigative approach, 202–204 legal school as a determinant of economic performance, 204–206 list of countries in the sample, 227t overview of, 12–13 policies vs institutions, 221–23 replication of key regressions excluding the “other countries” category, 209t summary statistics, 225t–26t tests of robustness, 215–17, 216t theoretical background, 211–13 organizational restructuring and, 191 liberal systems, 179 life expectancies, Lisbon Agenda, 13, 229, 242, 243, 256, 257 Lithuania See also Central and Eastern European countries currency, 17n, 62n current account deficit, 280 CHALLENGES OF GLOBALIZATION EMU membership, 62n GDP per capita, 244 income taxes, 244 Long-Term Capital Management (LTCM) failure, Luxembourg, 42, 244 Maastricht criteria, 232 macroeconomic policies, 4, 194–96 See also specific country malaria, 203, 217–19 Malawi, 218 Malaysia, 241 See also East Asian model Malta, 62n Mao Zedong, 188n, 195 Marx/Marxism, 128, 188 See also communism Merkel, Angela, 130 Mexican crisis, 66 Middle East, 2, 65 See also oil; specific country migration, 69n, 187n, 244 monetary policy, described, 111–13 monopoly rights, 171–75 See also protectionism mortgages See housing sector Muslims, 216–17 Mussolini, Benito, 218n NAFTA (North American Free Trade Agreement), 110 natural gas, 92, 262 neighborhood factor, 30–31 Netherlands, 42, 47, 50–51, 243 9/11 terror attacks, North Korea, 150, 195 Norway, 119 nuclear proliferation, 150 oil, 91–103 analysis of intersection of global growth, interest rates, and oil prices, 99–103 annual growth rates of world crude oil production and consumption, 95f Chinese imports and reserves, 97, 261–63 coefficient of variation of spot and forward crude prices, 94f crude oil spot and forward prices since 2000, 93f demand shock, 93–96 EU consumption, 97, 261–63 increase in global energy consumption, 97f 12 Index 271-284 6/19/08 10:08 AM Page 281 investment in, 96 longer-term outlook for oil prices, 97–99 new and substitute sources, 97–98, 99 non-OPEC production, 96 OPEC countries’ current account surpluses, 4–5, 8, 77, 79, 91–92, 99–103, 110–11, 119 real interest rates and oil prices, 87 secure access to, 262–63 US consumption and reserves, 96, 97, 123 very tight supply situation, 96–97 Pacific countries, 260–61 pandemic diseases, 150 personal disposition See individual choice Peru, 195 See also Latin America Pew Global Attitudes Survey, 129, 147, 149 Philippines, 241 PISA (Programme for International Student Assessment), 237 Poland See also Central and Eastern European countries; Visegrad countries barriers to innovation within, 164 currency, 17n current account deficits, 17 export specialization, 259 income taxes, 244 post-Soviet era economic transition, 131n range of per capita GDP, 20 political freedom in East Asia and EU-15, 239f political regimes See also institutional systems and economic growth constraints, 160 dictatorships, 162n modes of succession, 161–62 psychosocial legacies of socialism, 163, 164 socially dysfunctional systems, 168–69, 178 stabilizing institutions dependent upon, 194–95 successful economic reform packages and, 180–81 populism, Portugal current account deficit, 6–7, 42, 45, 47–48, 50–51, 55, 69n economic integration into the EU, 260 “Third Wave” of democratization, poverty, predatory taxation, 168–70, 178 private external debt, 64 Programme for International Student Assessment (PISA), 237 property rights, 167–71, 176, 178, 184, 205, 222 protectionism, 5, 60, 129–30, 147–50 See also monopoly rights; trade Protestants, 217 public expenditures in East Asia and EU-15 (2005), 235f public external debt, 64 Rato, Rodrigo, 130 real effective exchange rates, 9, 47f, 91f, 115, 119, 123f real estate markets See housing sector real interest rates, 105, 116–17, 119–22, 124 religion, 216–17 renminbi See also China appreciation vs the dollar, 91f, 104, 142–44 China’s capital controls, 143 EU-China relations, 142–44, 264–65 projected effects of a 10 percent appreciation of the renminbi (2007–27), 113f Ricardian comparative advantage, 156 rise in discontent with trade, 148t risk premia, 116–17, 119–22, 124 Romania, 6, 17n, 20, 36, 244 See also Central and Eastern European countries Romano-Dutch law, 206n, 207 Rome (Imperial), 175–76, 218n, 243 Russia See also Soviet Union BRIC combined GDP, 265 current account surplus, 4, 5, 119 early 1990s economy, 183 economic crisis, freedom of choice within Tsarist Russia, 160n GDP per capita, income taxes, 244 market reforms, 181 oil and natural gas resources, 14, 92, 96, 262 power of tsars, 162n Sarkozy, Nicolas, 130 SARS (severe acute respiratory syndrome) epidemic, 150 Saudi Arabia, 96 INDEX 281 12 Index 271-284 6/19/08 10:08 AM Page 282 “savings glut” hypothesis, 10, 100n Scandinavian countries, 206n See also specific country Senegal, 212n September 11 terror attacks, severe acute respiratory syndrome (SARS) epidemic, 150 Siberia, 160n SIC (former Soviet Union, India, and China), 131–33, 149 Singapore, 207, 237–38, 240 See also East Asian model/East Asian Tigers Slovakia See also Central and Eastern European countries; Visegrad countries currency, 17n, 62n current account deficit, export specialization, 259 income taxes, 244 range of per capita GDP, 20 Slovenia, 62n socialism innovations under, 174–75, 191 psychosocial legacy of, 163, 164 South Korea See also East Asian model/East Asian Tigers bilateral trade with US, 139, 149 capital accumulation, 240 East Asian crisis, 241 export orientation, 234 foreign trade regulations, 179 GDP per capita, 229 imports from, 149 long-term growth trajectories, 127, 177 state interventionist policy, 237, 241 total factor productivity growth, 240 transfer of manufacturing and assembly operations to China, 139 Soviet bloc, 2, 131n, 153, 164 See also Central and Eastern European countries; communism; Russia agricultural sector, 188 Cold War period, 128 education, 222 institutional changes by Gorbachev and Yeltsin, 162n repressed sectors as result of communist system, 156 SIC (former Soviet Union, India, and China), 131–33, 149 unlimited power of leaders, 195 282 CHALLENGES OF GLOBALIZATION Spain comparative advantages, 257 current account deficit, 6–7, 42, 45, 47–48, 50–51, 55 economic integration into the EU, 260 endemic malaria, 218 housing sector, 90 labor market, 257 “Third Wave” of democratization, special growth mechanisms, described, 154 Stability and Growth Pact, 47 stabilization indicators in East Asia and EU-15, 233t stabilizing institutions, 194 Stalin, Joseph, 195 subtropical zones, 218 See also geographical determinants sustainable adjustment of global imbalances, 107–24 See also global credit crisis exchange rate and monetary policy in a forward-looking model, 110–15, 113f, 114f, 115f orderly adjustment through risk premia, 115–18, 116f, 118f overview of, 8–9 real US dollar exchange rate in 2012, 123f US devaluation and demand change elsewhere, 119–22, 120f, 121f US net foreign asset ratio, 109f Sweden current account surplus, 42, 119 exchange rates, 117 liberalization of economy, 179 long-term growth trajectories, 177 public expenditures, 247–48 taxation, 244 Switzerland, 119 TAA (Trade Adjustment Assistance) program, 9, 145 Taiwan See also East Asian model/ East Asian Tigers banking system, 140–41 capital accumulation, 240 centralized economic decision making power, 237 export orientation, 149, 234 long-term growth trajectories, 127, 177 total factor productivity growth, 240 transfer of manufacturing and assembly operations to China, 139 Tanzania, 214n 12 Index 271-284 6/19/08 10:08 AM Page 283 taxation Central and Eastern European countries, 13 corporate taxes, 244, 246t corruption taxes, 168–70, 178 East Asia vs EU nations, 235 EU competition, 13 EU income taxes, 244, 245t Taylor rule, 112 technological innovation alternative options to, 175–76 competition as an incentive-reallocation mechanism, 185 discovery of, 173 within East Asian counties, 146, 234 geographical determinants influenced by, 160n industrial policies, 237 information barriers to, 158 innovation-based growth, 154–56 post-1800s economic history and, 61, 155–56, 176–77 regulations and compliance costs, 169n shifts of resources, 155, 188–89 social norms as barriers to, 175–76 United States, 135–37, 144, 255 temperate zones, 218 See also geographical determinants TFP (total factor productivity), 20–24, 201 Thailand, 237, 238, 241 See also East Asian model/East Asian Tigers Thatcher, Margaret, 248 Togo, 214n total factor productivity (TFP), 20–24, 201 trade EU economic partnership agreements, 260–61 expansion of trade in the 15th to 17th centuries, 156 nonconventional solutions, 182–83 protectionism, 5, 60, 129–30, 147–50 Ricardian comparative advantage, 156 rise in discontent with trade (2003–07), 148t shifts in relative competitiveness, 45–47 Uruguay Round, Trade Adjustment Assistance (TAA) program, 9, 145 transitional economic growth, 156 Transparency International Corruption Perceptions Index, 237–38 transportation, 160n Treaty of Rome, 242 tropical areas, 202, 203, 217–19 See also geographical determinants Turkey, Ukraine, 244 unemployment benefits, 138f United Kingdom See also colonial rule “Anglobalization”, 61n common-law system, 204–14 correlation between total trade balances and current accounts, 48n deregulation of the labor market, 248 history of modern economic growth, 153, 176 housing sector, 90 lax monetary policies of, 65 long-term growth trajectories, 177 not dependent on oil exports, 52 protectionist sentiments vs China, 147–48 on tax competition, 244 trade balances, 51 unemployment benefits, 136–38 United Nations (UN), 150 United States See also global credit crisis; sustainable adjustment of global imbalances adjustment to rise of SIC bloc, 149 on Asian imports during Cold War, 149 asset prices and consumption,89, 110 bilateral Chinese-US trade, 10, 110, 112–13, 123, 130–31, 139 bilateral Japan-US trade, 139 bilateral South Korean-US trade, 132, 139, 149 Bill of Rights, 160n on climate change, 263 common law courts, 205 corporate taxes, 244 current account deficit, 82–91 causes of, 77, 80–82, 110–11, 115–16, 123 changes in global financial markets, 82–83 current account surpluses in the Middle East and East Asia accommodated by, 65, 100–101, 111 emerging-market economies financing advanced economies (1995–2007), 84f INDEX 283 12 Index 271-284 6/19/08 10:08 AM Page 284 United States—continued financed by emerging-market economies, GDP per capita, 9, 80t, 133–35 housing sector, 8, 10, 77, 79, 89–90, 90f, 105, 106 impact on US current account of monetary expansions in Europe and Japan, 114f investment booms and busts, 83–87 national savings, 8, 81, 90 overview of, 4, 9–12, 10–12 politicized arguments and explanations, 103–104 projected impact of adjustment on US current account balance (2007–22), 120f projected impact of adjustment scenario on current account balances (2012), 120f readjustment of monetary policy, 105 dollar appreciation of, 111n depreciation of, 10–11, 91f, 104, 108, 123–24, 142–44, 264–65 dominance of, 11 exchange rate changes, 110–11 overview of exchange rates, real effective exchange rate, 81, 91f, 121f yen-dollar exchange rate, 142 education spending, 256 effective exchange rate, 117 endemic malaria, 218 exports from, 81 GDP per capita, 2, 265 Homeland Investment Act, 81 increased immigration to, 69n, 135n independent central bank, 194n information and communication technology (ICT) revolution, 135–37, 144 labor force, 9, 130–39, 136f, 144–50, 183, 257–58 lax monetary policies of, 65 as liberal system, 179 284 CHALLENGES OF GLOBALIZATION Long-Term Capital Management (LTCM) failure, long-term growth trajectories, 177 manufacturing sector, 255–56 national savings, 90–91 oil consumption and reserves, 96, 97, 111, 123 policy positions on China’s current account surplus, 143n production facilities in SIC economies, 132 protectionist sentiments vs China, 129–30, 147–50 real interest rates, 88f, 89f, 99–103, 105 “savings glut” hypothesis, 10, 100n sequence of risk premium–induced movements in the US exchange rate, 116f trade deficit and imports, 81f net foreign asset ratio, 109f saving-investment balance as percent of GDP, 83f Vietnam-US trade deficit, 139 Uruguay Round, Venezuela, 14, 96 vertical fragmentation, 204n Vietnam, 139 Visegrad countries, 21, 31f, 32, 35–36 See also Czech Republic; Hungary; Poland; Slovakia Washington Consensus, 14 World Bank, 230, 232, 235–36, 239 World Trade Organization (WTO), 4, 10, 146, 147–50, 261 World War I, 128 World War II, 2, 5, 128, 153, 177, 187 Yeltsin, Boris, 131n, 162n yen-dollar exchange rate, 142 Zimbabwe, 195 ... percent of GDP was 1.6 in 1999, 1.9 in 20 00, 1.5 in 20 01, 2. 8 in 20 02, 3 .2 in 20 03, 4 .2 in 20 04, 7 .2 in 20 05, and 8.7 in 20 06 “4 in Senate Seek Penalty for China,” New York Times, June 14, 20 07... (percent) 20 20 3 1 0 –1 –1 –1 –1 ? ?2 ? ?2 ? ?2 ? ?2 ? ?2 –3 –3 –4 –4 –4 –6 –6 –6 –7 –9 –9 –9 –10 –10 –11 –14 –16 –19 29 .0 38.5 13.3 7.1 5.1 3.3 3.9 1.1 1.1 0.0 0.0 –1.4 –1.3 –1.1 –1.1 ? ?2. 5 ? ?2. 4 ? ?2. 4 ? ?2. 2 ? ?2. 1... total 1990 20 00a 403 680 1,083 438 851 1 ,28 9 21 3 3 32 687 1 ,23 2 2, 315 21 4 405 764 1,383 2, 6 72 SIC = Former Soviet bloc, India, and China a The 20 00 total is different from that in Freeman (20 04) Source: