Challenges of Globalization Imbalances and Growth Anders Åslund and Marek Dabrowski, Editors P eters on InstItute for InternatIonal economIcs Challenges of Globalization Imbalances and Growth Challenges of Globalization Imbalances and Growth Anders Åslund and Marek Dabrowski, Editors Peterson Institute for International Economics CENTER FOR SOCIAL AND ECONOMIC RESEARCH Washington, DC July 2008 00 FM iv-xii 6/20/08 8:35 AM Page iv Anders Åslund has been senior fellow at the Peterson Institute for International Economics since January 2006 He is the chairman of the Advisory Council of the Warsaw-based Center for Social and Economic Research He has served as an economic adviser to the Russian, Ukrainian, and Kyrgyz governments Before joining the Peterson Institute he was the director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace, and he codirected the Carnegie Moscow Center’s project on PostSoviet Economies He was founding director of the Stockholm Institute of Transition Economics and professor at the Stockholm School of Economics (1989–94) He is the author of eight books, including Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed (2007), How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, and Central Asia (2007), Building Capitalism: The Transformation of the Former Soviet Bloc (2001), How Russia Became a Market Economy (1995), and Gorbachev’s Struggle for Economic Reform (1989) He earned his doctorate from the University of Oxford Marek Dabrowski is the chairman of the Supervisory Council of the Center for Social and Economic Research (CASE) in Warsaw and chairman of the Supervisory Board of CASE Ukraine in Kyiv He served as the first deputy minister of finance of Poland (1989–90), member of Poland’s Parliament (1991–93), and member of the Monetary Policy Council of the National Bank of Poland (1998–2004) Since the end of the 1980s, he has been involved in policy advising and policy research in more than 20 countries of Central and Eastern Europe, Commonwealth of Independent States, and Middle East and North Africa and in a number of international research projects related to monetary and fiscal policies, currency crises, international financial architecture, EU and EMU enlargement, perspectives of European integration, European neighborhood policy, and political economy of transition He is coauthor and editor of several books including The Eastern Enlargement of the Eurozone (2006), Beyond Transition: Development Perspectives and Dilemmas (2004), Currency Crises in Emerging Markets (2003), Disinflation in Transition Economies (2002), and The Eastern Enlargement of the EU (2000) PETER G PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 1750 Massachusetts Avenue, NW Washington, DC 20036-1903 (202) 328-9000 FAX: (202) 659-3225 www.petersoninstitute.org C Fred Bergsten, Director Edward Tureen, Director of Publications, Marketing, and Web Development Typesetting by BMWW Printing by Edwards Brothers, Inc Cover by Naylor Design Copyright © 2008 by the Peter G Peterson Institute for International Economics All rights reserved No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without permission from the Institute For reprints/permission to photocopy please contact the APS customer service department at Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923; or email requests to: info@copyright.com Printed in the United States of America 10 09 08 Library of Congress Cataloging-inPublication Data Challenges of globalization : imbalances and growth / Anders Åslund and Marek Dabrowski, editors p cm Includes index ISBN 978-0-88132-418-1 (alk paper) Balance of payments Balance of trade Economic development Globalization Economic aspects I Åslund, Anders, 1952– II Dabrowski, Marek, 1951– HG3882.C44 2008 337 dc22 2008023675 The views expressed in this publication are those of the authors This publication is part of the overall program of the Institute, as endorsed by its Board of Directors, but does not necessarily reflect the views of individual members of the Board or the Advisory Committee 00 FM iv-xii 6/20/08 8:35 AM Page v Contents Preface vii Acknowledgments xi Introduction: Challenges of Globalization Anders Åslund and Marek Dabrowski Are Large External Imbalances in Central Europe Sustainable? 17 Susan Schadler Current Account Imbalances in the Euro Area 41 Alan Ahearne, Birgit Schmitz, and Jürgen von Hagen Rethinking Balance of Payments Constraints in a Globalized World 59 Marek Dabrowski A World Out of Balance? 77 Daniel Gros Sustainable Adjustment of Global Imbalances 107 Ray Barrell, Dawn Holland, and Ian Hurst Meeting the China Challenge Is Meeting the Challenge of Comprehensive Engagement and Multilateralism 127 Wing Thye Woo v 00 FM iv-xii 6/20/08 8:35 AM Page vi Institutional Systems and Economic Growth 153 Leszek Balcerowicz Impact of “Legal School” Versus Recent Colonial Origin on Economic Growth 201 Jacek Rostowski and Bogdan Stacescu Does the European Union Emulate the Positive Features of the East Asian Model? 229 Anders Åslund 10 Eight Potential Roadblocks to Smooth EU-China Economic Relations 253 Jean Pisani-Ferry and André Sapir About the Contributors 269 Index 271 vi 00 FM iv-xii 6/20/08 8:35 AM Page vii Preface Globalization is a great force of our time The last three decades of economic, social, and political achievements of globalization have been nothing short of spectacular After its defeat in World War II, Japan rose to become a great economic power The next group of fast-growing economies was the East Asian Tigers—Hong Kong, Singapore, Taiwan, and South Korea After three decades of tremendous economic growth—thanks to Deng Xiaoping’s reforms of 1978—China’s rise continues unabated India started growing at a similar speed in the early 1990s The former Soviet bloc has joined in the growth feat of East and South Asia with a vengeance, reaching an annual average growth rate of percent in recent years However, one of the greatest global booms ever is now ending following the eruption of a financial crisis that began in the United States and may spread to other regions Exceedingly accommodative monetary policy and loose regulation have caused the current US financial crisis and global overheating, which has resulted in surging commodity prices and global inflation In many countries, reform fatigue has followed the reform impetus of the 1990s The current round of multilateral trade negotiations in the World Trade Organization, the Doha Round, is paralyzed A major macroeconomic concern derives from the inordinate imbalances in international payments China, Japan, Russia, and East Asian and oil-exporting countries have accumulated huge international reserves, while the United States has run a large and persistent current account deficit Most countries in Central and Eastern Europe also have large current account deficits Another worry is that many advantages of globalization are not genuine and that inequality appears to have increased in the last two decades within virtually all countries This book, edited by Anders Åslund and Marek Dabrowski, addresses the growing macroeconomic imbalances and the challenges of globalization and long-term economic growth, with a focus on Europe and Asia vii 00 FM iv-xii 6/20/08 8:35 AM Page viii Various aspects of the macroeconomic imbalances are the theme of the first six chapters The second part of the book discusses how the capitalist model of economic development, which has delivered all this growth, is developing or should evolve The last two chapters consider options available to European policymakers to compete with and adjust to the rapidly growing East Asian Tigers and China This book is based on the CASE 2007 International Conference on Winds of Change: The Impact of Globalization on Europe and Asia held in Kyiv, Ukraine, on March 23–24, 2007 The conference was organized by CASE (Center for Social and Economic Research), a Warsaw-based international think tank, and CASE Ukraine in Kyiv The conference included 40 panelists drawn from the International Monetary Fund, European Commission, United Nations Economic Commission for Europe, various governments, leading Washington- and Brussels-based think tanks, and universities across the world The panelists were organized into six sessions, which focused on the Asian challenge to Europe, global imbalances, migration, aid and trade, governance and economic development, and EU enlargement This book features ten of the most interesting papers presented at the conference CASE thanks System Capital Management and its main shareholder Rinat Akhmetov for being the main sponsor of this conference and the German Marshall Fund for additional support The Peter G Peterson Institute for International Economics is a private, nonprofit institution for the study and discussion of international economic policy Its purpose is to analyze important issues in that area and to develop and communicate practical new approaches for dealing with them The Institute is completely nonpartisan The Institute is funded by a highly diversified group of philanthropic foundations, private corporations, and interested individuals About 30 percent of the Institute’s resources in our latest fiscal year were provided by contributors outside the United States, including about 12 percent from Japan The Victor Pinchuk Foundation provided generous support for the publication of this volume The Institute’s Board of Directors bears overall responsibilities for the Institute and gives general guidance and approval to its research program, including the identification of topics that are likely to become important over the medium run (one to three years) and that should be addressed by the Institute The director, working closely with the staff and outside Advisory Committee, is responsible for the development of particular projects and makes the final decision to publish an individual study The Institute hopes that its studies and other activities will contribute to building a stronger foundation for international economic policy around the world We invite readers of these publications to let us know how they think we can best accomplish this objective C FRED BERGSTEN Director May 2008 viii 00 FM iv-xii 6/20/08 8:35 AM Page ix PETER G PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 1750 Massachusetts Avenue, NW, Washington, DC 20036-1903 (202) 328-9000 Fax: (202) 659-3225 * C Fred Bergsten, Director BOARD OF DIRECTORS * Peter G Peterson, Chairman * George David, Vice Chairman * Reynold Levy, Chairman, Executive Committee Leszek Balcerowicz Chen Yuan * Jessica Einhorn Mohamed A El-Erian Stanley Fischer Jacob A Frenkel Timothy F Geithner Maurice R Greenberg * Carla A Hills Nobuyuki Idei Karen Katen W M Keck II Michael Klein * Caio Koch-Weser Lee Kuan Yew Harold W McGraw Donald F McHenry Mario Monti Nandan M Nilekani Hutham Olayan Paul OíNe ill David J O’Reilly * James W Owens Frank H Pearl Victor M Pinchuk * Joseph E Robert, Jr David Rockefeller Renato Ruggiero * Richard E Salomon Edward W Scott, Jr Lawrence H Summers Jean-Claude Trichet Laura D’Andrea Tyson Paul A Volcker Jacob Wallenberg Edward E Whitacre, Jr Marina v.N Whitman Ernesto Zedillo ADVISORY COMMITTEE Lawrence H Summers, Chairman Isher Judge Ahluwalia Richard Baldwin Robert E Baldwin Barry P Bosworth Menzie Chinn Susan M Collins Wendy Dobson Juergen B Donges Barry Eichengreen Kristin Forbes Jeffrey A Frankel Daniel Gros Stephan Haggard David D Hale Gordon H Hanson Takatoshi Ito John Jackson Peter B Kenen Anne O Krueger Paul R Krugman Roger M Kubarych Jessica T Mathews Rachel McCulloch Thierry de Montbrial Sylvia Ostry Tommaso Padoa-Schioppa Raghuram Rajan Dani Rodrik Kenneth S Rogoff Jeffrey D Sachs Nicholas H Stern Joseph E Stiglitz William White Alan Wm Wolff Daniel Yergin Richard N Cooper, Chairman Emeritus Ex officio * C Fred Bergsten Nancy Birdsall Richard N Cooper Honorary Directors Alan Greenspan Frank E Loy George P Shultz * Member of the Executive Committee 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 ... macroeconomic imbalances in the world economy and how they contributed to the current crisis Various aspects of these imbalances are the theme of six of the ten chapters of this book Globalization arouses... those of the authors This publication is part of the overall program of the Institute, as endorsed by its Board of Directors, but does not necessarily reflect the views of individual members of the. .. AM Page viii Various aspects of the macroeconomic imbalances are the theme of the first six chapters The second part of the book discusses how the capitalist model of economic development, which