Globalization and International Competitiveness: Some Broad Lessons of the Past Decade

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade
JEFFREY D. SACHS, Harvard University ANDREW M. WARNER, Harvard University

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The world has now experienced a little more than one decade of rapid globalization following the collapse of communism in Eastern Europe and the former Soviet Union. In the period since 1989, international markets have become more integrated than ever before, and economic prospects of individual countries have becomemore than ever beforebound up in the fate of the world economy.We have learned much about the world economy in that period. Experience has forced us to re-think and re-analyze accepted propositions of economic theory.Those lessons will be extremely helpful for individual businesses, national government, and policy makers in international institutions attempting to navigate in the untested and sometimes rough waters of the global economy. At the time of the collapse of communism, there was considerable optimism about the chances for a new era of prosperity in the world based on the spread of market institutions and the extension of world trade to economies that had previously been cut off from world markets. Much of that optimism proved to be correct, of course. In most of the rich economics, and especially in the richest of all economies, the United States, the 1990s was indeed an era of economic success. As economic theory would have predicted, the expansion of global markets provided strong incentives for innovation, and innovation, in turn, provided the dynamism that led to rapid economic growth. In many poorer countries, the optimism also proved to be correct. China, India, Poland, and much of East Asia experienced increased global integration accompanied by rapid economic growth. Even in Western Europe, certainly less flexible and dynamic than the US economy, the broad economic trends were favorable, especially in the final years of the decade, when economic growth was strong and unemployment rates finally began to decline. Two things were not so widely predicted, however. First, the world economy moved ahead at different speeds in the 1990s, as some parts of the world forged ahead, others stayed in place, and still othersoften the worlds poorest countriesfell further and further behind. By the end of the decade, a coalition of anti-globalization forces in rich countries blamed globalization itself, a position that was strongly condemned in poorer countries. If anything, the opposite was true, that the lack of integration supported by entrenched elites in poorer countries explained the lack of progress. Nevertheless, the political conflict produced a stalemate that frustrated attempts to develop international institutions to deal with globalization. Second, the 1990s turned out to be a period of unprecedented market volatility in many of the newly industrialized countries.The crises of Mexico (19941995), Argentina (1995), East Asia (19971998), and South America (19981999) were all unanticipated at the

time that they occurred, and all led to cycles of boom and bust of great intensity, with considerable economic and social dislocation and suffering. The Global Competitiveness Report has evolved along with globalization itself, and in this years report, we take a close look once again at these major trends. Our major innovation this year, building on the work of previous years, is to place the innovation process more centrally in our account of global competitiveness. In recent years we have defined competitiveness of an economy as the capacity to achieve high rates of economic growth on a sustainable basis. Our tests based on the growth experience of the 1990s suggest that sustained high rates of economic growth depend on the ability of a national economy to upgrade technology, either through innovation at home or through the rapid and extensive adoption of technologies developed abroad. In light of this evidence, we have therefore introduced new measures of technological innovation and diffusion as key indicators of national competitiveness. The United States shows up as the worlds most technologically dynamic economy, combining a remarkable power of innovation with a set of economic institutions that supports the rapid adoption of new technologies throughout the economy.We have also examined more closely the boom-bust patterns of the emerging market economics to identify better indicators of risks of macroeconomic upheavals. Globalization, then, has produced three overarching characteristics: more rapid global growth, a multi-speed world economy divided by technological dynamism, and tumultuous cycles of boom and bust in many of the emerging economies.This essay discusses these three features of the new global economy and their implications for charting the competitiveness of national economics in future years. Globalization, innovation, and economic growth Since Adam Smith first described the advantages of international trade in the Wealth of Nations in 1776, economists have believed that an expanded world market would contribute to faster overall economic growth. As Smith so famously described, a larger world market supports a greater degree of specialization and a more sophisticated division of labor. A larger market also gives larger incentives for innovation, since the fixed costs of research and development for a particular product will now be recompensed by more extensive sales in a larger world market. Thus, when virtually all of the non-market economics of the world began to introduce market reforms and open international trade at the end of the 1980s, hopes naturally ran high that the expanded world market would provide a major boost to growth in all parts of the world. For many major regions of the world, especially North America,Western Europe, much of East Asia, and a

few other parts of the world, both the logic of the analysis and the economic outcomes have vindicated these expectations. Economic growth did accelerate in most of the advanced countries (Japan being a notable exception), and it seems that much of that acceleration resulted from a technological boom that has been spurred, if not caused, by the globalization process.There can be little doubt that the revolution in computing, communications, and other forms of information technology has been a major stimulus to faster global growth, and that globalization itself has been a major stimulus to information technology itself, by increasing the profitability of innovations in the sector. What was less clear a decade ago, however, was how varied would be the capacity and desire of different economies to share in this technological revolution. Both technological innovation and technological diffusion are complex economic processes, and both processes depend on a complex set of institutions.The United States, for example, has developed a rich set of institutions in both the public and private sectors to support a very high level of technological innovation, while other countries lack institutions to give even rudimentary support to the innovation process. A closer look at the US innovation process can give us insights as to what is missing in other economies. Innovation depends on a complex interplay of basic science opening doors to new technologies and commercialization of those technologies in new products and production processes. Basic science is not exclusively a market-driven activity, because it is difficult for markets alone to cope with the conflicting objectives of maximizing incentives and maximizing dissemination. Markets often do not offer high rewards for innovation because it is so easy for others to grab the invention. Intellectual property protection and patents help, but these are imperfect and block wide dissemination of the invention, which is also desirable.Thus, a range of market and non-market institutions usually carries out basic science. Examples include government laboratories (such as the National Institute of Health in the United States), academic centers such as universities, and think tanks. Of course, some corporations sponsor basic scientific research in their laboratories as well. The innovation process depends on a strong foundation of basic science, which is then carried forward to the commercialization of new products and processes.This step almost inevitably takes place in market-based institutions: mainly business enterprises that can capture the returns to commercialization of inventive activities through patent rights, royalties, or simply first-mover advantages in the introduction of new products. An effective commercialization process depends on several things. First, there must be a close interface of basic scientists and applied scientists.This can be fostered, for example,

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade 19

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade

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through a close cooperation between academic centers and business enterprises. Second, there must be strong intellectual property rights to encourage enterprises to make large outlays in research and development activities for many years before a product is actually introduced to the market. And third, the economy must be flexible enough to support the rapid adoption and diffusion of new technologies. For example, venture capital funds should be available to the innovative firm to put a new technology into commercial use. Also, no state monopoly (such as in the power sector or telecommunications) should have the ability to block a new innovation through the use of monopoly power. The United States has done uniquely well on each of these counts. First, the US government, together with private foundations and philanthropies, provides vast funding for basic scientific research in the United States. Current US federal outlays for scientific research are now a whopping $85 billion or so, or roughly 1 percent of US GDP. These outlays have provided the seed money for basic science in many crucial areasincluding information technology (the Internet, of course, started as a US Defense Department project), biotechnology, and materials sciences, among others.These outlays support vast research activities in government laboratories as well as academic institutions. Second, the United States has developed many innovative methods for linking businesses undertaking applied R&D with universities undertaking basic scientific research. Perhaps most importantly, the US education system has allowed scientific faculty to participate in private-sector R&D undertakings, and has allowed universities to own patents for products developed by their faculty. Patent rights owned by major universities now provide a significant flow of funds to those universities.This pattern of close business-university linkages is quite distinct from the situation in much of Europe, where universities are purely state enterprises with little contact with private industry. Faculty members are often civil servants (state employees) with no rights to engage in commercial activities, and universities cannot become patent holders for inventions undertaken at the university or in collaborations (if any) between faculty and private business. Third, the United States has a remarkably vigorous venture capital system, which can mobilize billions of dollars of financing for the development and commercialization of new products. Moreover, ever since the deregulation of key infrastructure sectors in the United States (transport, energy, and communications) and the breakup of monopolies such as AT&T in the 1980s, start-up enterprises with new technologies have been able to challenge old giants, leading to the process of creative destruction in which new technologies supplant old, well-established technologies. Once again, in many other parts of the

world, monopolies have the power and incentive to drag their feet in order to slow down the introduction of new technologies. On the whole, the United States stands out, far and away, as the most technologically dynamic economy. Western Europe and Japan also show a high degree of innovation in comparison with most of the rest of the world, but both Europe and Japan tend to fall far short of the United States in two major areas: the links of universities and business needed to turn new ideas into new products, and the vigor with which capital markets and regulatory systems support the introduction of new enterprises and new products. Of course, innovation is only one of two routes by which new technologies may get introduced into an economy. Even if an economy is not an innovator, it might share in new technologies by adopting them from abroad.This is especially true in the poorer countries, which usually lack the scientific and technological base to innovate on their own, but which still have the ability to absorb technologies introduced in the advanced countries. But just as the world economies differ markedly in their capacity to innovate, economies also differ markedly in their capacity to absorb and adopt technologies from abroad. Technology can be adopted from abroad in several different ways. First, a multinational firm may invest in the country, thereby introducing an advanced production technology into the economy. Second, the technology can be imported directly as a capital good (such as advanced telecommunications equipment) or as a consumer product (such as a home computer).Third, the technology can be licensed from a patent holder, for use in the borrowing country. Fourth, the technology can be engineered by the adopting country and suitably modified by local engineers for domestic production and use. The ability of economies to adopt technologies through these various routes differs widely, according to economic policies and even physical geography. Economies such as Mexico or Poland, which have relatively low wages but which are close to major markets, are attractive sites for FDI. Mexico, for example, has dramatically upgraded its production technology in recent years through the rapid inflow of US investments in key sectors such as automobiles, electronics, textiles, and pharmaceuticals. Singapore, Malaysia, and Ireland are also key examples of technological upgrading through large inflows of foreign direct investment. All of these economies are characterized by favorable geography combined with strong incentives for foreign investors. Technological adoption fails in three kinds of conditions. Some countries pursue economic policies that are hostile to technological adoption, for example, by blocking inflows of foreign investment, or by failing to protect

intellectual property rights (thereby discouraging investments by high-tech firms), or by failing to preserve macroeconomic stability. Other countries, particularly in landlocked regions of South America or Africa, are geographically isolated and thereby have a very hard time attracting inflows of foreign investment. Some regions are so burdened by disease, poor agriculture, water scarcity, or other physical disadvantages that they too are shunned by international business. Of course, in some egregious cases, economies share all of these liabilities: poor policy, geographical isolation, and physical burdens that hinder development. It may well be the case that much of the tropical world faces a special challengeindeed a special disadvantagein this regard.Technological advances in one region of the world are not always applicable in another, because technology is often rooted in the physical and climate conditions of an economy. For example, the agricultural problems facing farmers in the temperate zones are very different from the problems confronting farmers in the tropics: the crops, pests, soil, water patterns, growing seasons, and other factors are all different. Similarly, the health problems are also distinctive: temperate-zone families may worry about heart disease while tropical-zone families must battle malaria and schistosomiasis. In the world today, almost all of the rich countries, and most of the scientific advances, are taking place in the temperate zones.Thus, even when a tropical country is well managed, the range of technologies that it can usefully adopt from the high-tech countries will be limited. Large regions of the world, especially in the tropics, have so far failed to benefit from the technological progress of the advanced economics.Tropical Africa, Central Asia, the Andean region, and parts of Asia (especially landlocked regions of South, Central, and East Asia), have fallen further and further behind the advanced countries and, in many cases, have experienced economic collapse rather than economic progress. In many parts of Sub-Saharan Africa, the situation is desperate. Geography (tropical climate and great distances from major international markets) has contributed to a kind of technological isolation.These economies are competitive only in a very narrow range of low-tech primary commodities, such as coffee, tea, cocoa, hydrocarbons, and minerals. High population growth and high disease burden contribute to the downward spiral.Without a new strategy of economic development, it is unlikely that globalization alone will solve the problems of many parts of the African continent. In this and future issues of the Global Competitiveness Report we will strive to provide better tools for measuring and predicting the innovation and diffusion of new technologies, and we will endeavor to use these new measures to help explain the emerging patterns of global economic growth.

Globalization and macroeconomic instability Economists have long distinguished between trend rates of economic growth that occur over decades and short-term year-to-year cyclical swings in growth. Indeed, much of modern macroeconomic theory was elaborated in the past century to help explain short-term business cycles. Recent years have put traditional macroeconomic theories to a series of tough tests. Although macroeconomic management has done pretty well in most of the high-income countries, macroeconomic management has performed rather poorly in the developing countries, especially in the emerging market economics. One emerging market after another has succumbed to a serious short-run crisis in recent years, and these crises have shared several troubling characteristics. First, they were mostly unpredicted. Second, they led to downturns that were much deeper than expected at the outset of the crisis.Third, the recovery phase generally took place earlier and more vigorously than was expected in the depths of the crisis. In short, there have been several sharp economic fluctuations, most famously in Mexico in 19941995 and East Asia in 19971998, where the sharp economic swings proved to be a big surprise to forecasters and economic policymakers. When the economic crisis of East Asia unfolded in 1997 and 1998, we noted in the Global Competitiveness Reports of 1998 and 1999 that the downturn could not really be understood in terms of long-term competitiveness factors in the region. Sure, Asian economies were not perfect in management or competitiveness, but according to the GCR indicators there were no weaknesses of such magnitude as to explain the outright economic collapse as occurred in 1998.We therefore surmised that Asias collapse was a short-term macroeconomic phenomenon, not a signal of long-term economic decline. Indeed, we predicted that Asia would experience a rapid and significant economic recovery as the short-term factors that caused the collapse in output in 1997 through 1998 were reversed in later years. As we predicted, most of Asia has staged a rapid recovery. Indeed, after declining by around 6 percent in 1998, the Korean economy registered 12 percent growth in 1999. Similar, if somewhat less dramatic, recoveries are underway in the rest of the region, including Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, and Thailand. As we explain in considerable length in the Asian Competitiveness Report 2000 (MIT Press), and as we surmised in last years GCR, the Asian economic crisis was really a short-run financial crisisa new kind of international business cycle that is actually part of the process of globalization itself.When Latin American and East Asian developing economics opened their financial markets to global capital flows in the 1990s, enthusiastic investors from the rich countries poured in hundreds of billions of dollars in search of high rates of return.To be safe, or at

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade 21

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade

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least to feel safe, investors kept their lending heavily concentrated in short-term loans (which were also favored by regulatory procedures, which viewed long-term loans as riskier).Thus, the emerging market economies took in tens of billions of dollars in short-term loans, and often channeled those loans through the domestic banking system into long-term investment projects.The crisis arose in each case as a result of a dramatic loss of investor confidence, which in turn was usually proceeded by an overvaluation of the national currency (and therefore a loss of foreign exchange reserves of the central bank as it tried to defend the overvalued currency).Thus, we witnessed a repeated cycle of boom (as money poured in to the country), bust (as short-term loans were withdrawn), and then boom again (as capital inflows resumed). There are many policy lessons from these episodes. First, emerging markets should not rely on large inflows of short-term, and possibly volatile, capital. Second, emerging markets should generally not rely on pegged exchange rates, since these economies become vulnerable to financial panic when the central banks reserves decline sharply during a defense of the currency (thereby prompting a panicked withdrawal of investor funds).Third, short-term financial crises do not necessarily signal long-term losses of competitiveness, though they probably do signal the need to improve financial market regulation. There are also lessons for market watchers. It is important to be able to spot the symptoms of financial vulnerability that may leave an economy exposed to the risk of financial crisis. Such indicators include an overvalued currency, a high ratio of short-term external debt (owed to foreign banks) relative to short-term assets (especially foreign exchange reserves of the central bank), and rapid and undersupervised growth of domestic bank lending (leading to a boom that could likely be followed by a bust). Financial crises usually happen when unforeseen external shocks or events hit a country that is already in a vulnerable condition. Although the shocks are generally impossible to forecast, it is possible to highlight some of the conditions or symptoms of vulnerability. In this section we draw attention to four indicators of economic and financial vulnerability.These include perceptions of imminent recessions, perceptions of overvalued currencies, perceptions of insolvency in the banking system, and high ratios of short-term external debt relative to available international reserves. Regarding recession expectations, in recent years we have asked respondents to the Executive Opinion Survey whether their country is likely to be in a recession in the coming year. Since the survey is conducted in January and February, this question can be regarded as applying to the calendar year of the survey. In Table 1 we show the responses to this question during each of the past four

years.The answers are given on a scale of 1 to 7, where 7 corresponds to the lowest level of risk. As Table 1 shows, Zimbabwe,Venezuela, and Ukraine are currently perceived to be the highest-risk countries. In past years, this indicator has indeed correlated with GDP growth in the year of the survey, and not with GDP growth in the preceding year.This provides evidence that respondents are not simply re-reporting the current GDP announcements, but are anticipating the immediate future to some extent. The second set of indicators concerns exchange rate overvaluation.We ask in the survey whether the exchange rate of your country will be very volatile in the next two years. As of January 2000, respondents in Zimbabwe, Ukraine, Russia, Japan, and Mexico expect the most volatility (see Table 2).When asked whether the exchange rate of your country properly reflects economic fundamentals, respondents in Venezuela and Zimbabwe strongly disagreed, while more modest protests came from Indonesia, United Kingdom, and Argentina (Table 3). Another possible indicator of overvaluation is a large, and recent, appreciation in the external real exchange rate that is not justified by increased labor productivity or a positive shock such as an increase in international export prices of the country. If we compare the real exchange rates in 1999 with those of 1995, Mexico,Venezuela, and Ukraine have seen the strongest appreciations relative to the US dollar, while most of the rest of the world has depreciated (Table 4).This may signal some pending problems in Mexico and Venezuela, especially if the recent rise in global petroleum prices reverses itself. Finally, we note our measure of overvaluation presented later in this report (indicator 9.11).This indicator is based on the well-known observation that a countrys level of domestic prices naturally rises with its level of income (particularly prices of goods and services that do not get traded on international markets). Countries with price levels much in excess of this rule are said to have overvalued currencies.This indicator suggests that, for the year 1999, El Salvador, Jordan, and Egypt had the most overvalued currencies. Mexicos exchange rate in 1999 was rated as 27percent overvalued by this indicator (a number not to be taken as a precise figure).Venezuela was also rated as slightly overvalued. The third symptom of vulnerability is weakness in the domestic banking sector. Banks can be a source of vulnerability for a variety of reasons. One is that the nature of banking itselfborrowing short and lending longalways leaves banks vulnerable to sudden and unanticipated loss in deposits.This can happen internationally just as surely as it can happen domestically. If the creditors of the banksthe depositorshappen to be foreign, then perceptions of exchange rate vulnerability can interact with perceived banking vulnerability to produce a particularly volatile chemistry.Therefore, to allow readers of this report to keep track of perceived banking problems, we asked in

Table 1: Recession Expectations

Your country is not likely to be in a recession during the next year (1=strongly disagree; 7=strongly agree)
Jan97 Jan98 Jan99 Jan00

Table 2: Exchange Rate Stability

The exchange rate is likely to be stable in the next two years (1=strongly disagree; 7=strongly agree)
Jan97 Jan98 Jan99 Jan00

Zimbabwe Venezuela Ukraine Slovak Republic Ecuador Bolivia Colombia El Salvador Bulgaria Jordan Peru Russia Egypt Japan Indonesia Czech Republic Argentina Vietnam Poland Philippines Mauritius Costa Rica Mexico Thailand China Portugal Norway Iceland Italy United States Israel Korea Turkey Hong Kong SAR Chile Denmark Brazil Taiwan Austria New Zealand Malaysia India Germany Hungary Greece United Kingdom Switzerland South Africa Singapore Sweden Canada Belgium Australia Spain Netherlands France Finland Ireland Luxembourg

5.9 5.2 4.3 5.1 3.0 4.0 4.3 3.9 3.3 3.3 6.2 5.2 5.8 6.1 5.6 6.2 5.4 4.3 5.7 5.5 6.2 6.5 3.5 5.4 3.6 3.7 4.4 6.2 6.1 6.4 5.8 4.9 4.5 5.5 5.8 3.8 4.9 5.1 4.1 6.1 3.5 4.7 5.5 5.5 5.9 5.3 5.3 5.4 6.3 4.9 6.3 6.7 5.3

2.6 5.2 3.5 4.2 4.2 4.1 4.2 4.5 4.5 5.0 2.4 2.1 3.8 5.3 5.7 4.4 4.3 6.0 2.5 4.9 6.0 5.7 6.1 5.9 5.9 2.8 1.9 4.9 3.9 4.3 6.6 4.4 5.0 5.8 4.6 3.1 4.1 5.4 6.0 4.8 5.6 5.1 4.8 4.7 6.0 6.1 5.6 5.7 6.4 6.6 5.4 6.5 6.8 6.3

2.5 2.1 2.6 2.9 2.3 2.8 2.9 4.5 3.5 3.7 3.5 2.7 5.1 2.7 2.2 2.5 3.0 4.3 5.0 4.7 4.2 4.7 4.1 3.5 4.3 5.2 3.1 5.7 4.7 5.0 2.6 4.0 3.6 2.7 3.4 4.2 2.1 4.1 5.4 5.0 3.6 3.8 4.8 3.2 5.5 3.0 4.8 3.1 3.1 3.8 5.3 5.1 5.4 5.7 5.5 5.1 5.3 6.4 6.4

2.1 2.9 3.0 3.2 3.3 3.6 3.9 4.0 4.1 4.1 4.2 4.3 4.5 4.6 4.6 4.6 4.7 4.9 5.0 5.1 5.1 5.1 5.3 5.3 5.4 5.5 5.5 5.6 5.6 5.6 5.6 5.6 5.7 5.7 5.7 5.7 5.8 5.9 5.9 5.9 6.0 6.0 6.0 6.1 6.1 6.1 6.2 6.2 6.2 6.2 6.3 6.3 6.3 6.3 6.3 6.4 6.4 6.6 6.6

Zimbabwe Ukraine Russia Japan Mexico United Kingdom New Zealand Mauritius Slovak Republic Venezuela Australia Vietnam Indonesia Czech Republic Poland South Africa Philippines Colombia Korea Egypt Iceland China Luxembourg Brazil Norway Israel Taiwan Bulgaria Chile United States Peru Ireland Germany Canada Thailand Turkey Sweden India Malaysia Switzerland Ecuador Jordan Italy Hungary Costa Rica Singapore Bolivia Spain Greece France Portugal El Salvador Denmark Netherlands Austria Argentina Belgium Hong Kong SAR Finland

4.1 4.5 4.3 3.9 4.6 4.0 4.9 4.1 5.2 4.3 3.8 5.8 4.3 4.7 3.0 5.6 4.9 3.3 5.2 5.5 5.2 6.5 5.4 5.6 4.3 4.4 5.6 5.1 5.6 5.5 5.4 5.2 4.2 3.4 5.4 4.5 5.4 4.0 4.8 4.6 5.2 6.2 5.6 5.0 5.4 6.2 6.0 6.4 6.1 6.5 6.0 6.3 6.1

2.1 3.1 4.3 3.2 4.7 4.2 3.5 3.5 4.1 3.4 3.0 2.3 3.2 4.8 3.8 2.6 4.1 3.2 5.1 5.1 4.7 6.2 5.2 6.3 4.5 4.0 5.3 3.4 5.2 5.3 4.7 5.3 4.1 3.5 3.8 5.1 3.9 2.7 3.9 5.1 5.8 5.5 5.2 4.3 5.9 3.6 5.8 6.0 5.4 6.1 6.4 6.2 6.5 6.2 4.9 6.2

2.2 2.1 1.8 3.4 3.7 3.5 4.0 3.4 2.6 2.4 3.9 3.5 2.7 3.7 4.7 2.5 3.8 3.4 4.2 4.5 5.1 4.4 6.1 3.2 3.5 3.9 5.0 5.1 4.5 5.1 4.2 6.2 5.8 4.1 4.3 3.7 4.3 3.9 4.9 5.0 2.5 5.2 6.0 5.3 4.8 5.3 4.4 6.1 5.0 6.0 6.2 5.2 6.0 6.3 6.6 6.3 6.4 5.4 6.8

1.8 2.6 2.8 3.3 3.9 3.9 4.0 4.0 4.0 4.0 4.1 4.2 4.3 4.3 4.3 4.3 4.3 4.4 4.4 4.4 4.4 4.5 4.6 4.6 4.7 4.7 4.7 4.8 4.8 4.8 4.9 4.9 4.9 4.9 5.0 5.0 5.0 5.1 5.3 5.3 5.4 5.4 5.5 5.5 5.5 5.6 5.6 5.8 5.8 5.8 5.8 5.9 5.9 5.9 6.0 6.0 6.1 6.3 6.5

Source: Executive Opinion Survey 1997-2000

Source: Executive Opinion Survey 1997-2000

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade 23

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade

Table 3: Exchange Rate and Fundamentals

The exchange rate of your country properly reflects economic fundamentals (1=no; 7=yes)
Jan97 Jan98 Jan99 Jan00

Table 4: Real Exchange Rate Changes

Real Exchange Rate (local price level over US dollar price level, 1995=100)

1995

1999

24

Venezuela Zimbabwe Russia Indonesia Malaysia United Kingdom Argentina Ukraine Mauritius Hong Kong SAR Slovak Republic Mexico Egypt Peru Vietnam Japan Bulgaria Ecuador El Salvador China Poland Israel Jordan Philippines Ireland Canada Korea Iceland South Africa Turkey Thailand India Brazil Chile Greece Hungary Czech Republic New Zealand Bolivia Colombia Norway Costa Rica Germany Sweden Taiwan Italy Switzerland Portugal Australia United States Netherlands Singapore France Belgium Denmark Spain Finland Austria Luxembourg

3.6 3.7 2.8 5.7 5.1 4.8 4.6 4.9 4.4 4.7 4.7 6.0 3.3 4.1 4.5 3.8 4.7 2.7 3.9 4.8 5.7 5.0 4.5 5.2 3.4 4.4 5.1 4.2 3.1 4.6 2.6 5.1 4.0 4.4 2.9 6.4 5.1 5.5 4.6 4.7 4.1 4.8 5.0 5.2 6.4 5.6 4.5 4.4 5.4 5.1 6.0 5.4 6.6

2.5 3.6 3.5 3.3 2.6 4.0 4.8 4.3 4.1 4.4 4.8 5.2 3.6 3.6 4.4 4.4 4.2 3.9 4.4 3.1 4.6 4.1 5.0 4.4 3.7 4.8 4.5 4.7 3.6 4.5 3.1 4.1 3.1 5.1 4.6 5.2 3.9 6.7 4.9 5.4 6.1 5.1 5.2 4.6 5.5 5.5 5.6 6.3 6.2 5.1 5.3 5.6 5.6 5.9 5.9 5.8

2.3 3.1 3.0 3.4 4.2 4.5 5.0 2.8 4.2 3.8 4.3 5.2 4.4 4.3 3.7 4.5 3.8 2.8 4.7 4.1 5.4 4.2 5.2 4.8 5.8 4.0 4.4 5.1 3.9 4.7 4.8 4.7 2.8 4.2 4.4 5.4 3.9 5.8 4.8 3.8 5.0 5.2 6.0 4.7 5.6 5.5 5.2 5.9 5.5 5.8 6.5 5.8 5.7 5.8 5.9 5.8 6.1 6.5 6.3

1.6 1.9 3.1 3.5 3.5 3.6 3.7 3.9 4.0 4.0 4.1 4.1 4.2 4.2 4.3 4.3 4.3 4.4 4.4 4.5 4.5 4.6 4.6 4.6 4.6 4.7 4.7 4.8 4.8 4.8 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.1 5.1 5.1 5.1 5.2 5.3 5.4 5.4 5.5 5.6 5.7 5.7 5.7 5.9 6.0 6.0 6.0 6.1 6.1 6.2 6.2 6.2

Mexico Venezuela Ukraine Egypt United Kingdom El Salvador Jordan Bulgaria Bolivia Costa Rica Iceland United States Hong Kong SAR Vietnam China India Czech Republic Italy Poland Hungary Ireland Israel Turkey Canada Argentina Ecuador Greece Norway Colombia Slovak Republic Australia Portugal Sweden Spain Denmark Taiwan Philippines Chile Mauritius France Luxembourg New Zealand Peru Finland Netherlands Singapore Austria Belgium Germany Japan Switzerland South Africa Brazil Malaysia Indonesia Thailand Korea Zimbabwe Russia

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

128.2 124.6 116.6 114.5 107.1 106.9 102.8 101.2 101.0 99.5 99.4 98.9 98.7 97.3 95.3 93.7 93.6 93.5 91.6 91.5 91.2 90.3 90.0 88.7 88.3 87.6 87.0 85.7 85.7 85.3 84.8 84.5 83.7 82.5 81.0 80.8 80.6 79.5 79.1 78.2 78.0 77.7 77.1 76.9 76.7 76.6 76.1 76.1 75.3 75.3 74.0 73.9 73.2 71.4 70.9 70.3 66.6 64.1 52.0

Source: Executive Opinion Survey 1997-2000

Source: Authors calculations using data from International Monetary Fund

Table 5: Bank Solvency

Banks in your country are generally healthy with sound balance sheets (1=strongly disagree; 7=strongly agree)
Jan97 Jan98 Jan99 Jan00

Table 6: Distribution of Liabilities to BIS Banks

Liabilities of countries to member banks of the BIS, May 2000, by maturity (percent distribution)
Ratio of short-term/ long-term unallocated liabilities

Ecuador Indonesia Mexico Thailand Czech Republic Japan Vietnam Colombia Russia China Korea Ukraine Slovak Republic Turkey India Hungary Peru Bulgaria Malaysia Venezuela Poland Egypt Zimbabwe Taiwan Jordan Philippines Costa Rica Italy El Salvador Bolivia Argentina Brazil Norway Mauritius Greece France Portugal Iceland Chile South Africa Austria Finland Israel Sweden United States Belgium Singapore Hong Kong SAR Germany New Zealand Switzerland Spain United Kingdom Denmark Ireland Canada Netherlands Luxembourg Australia

4.3 2.4 4.8 2.7 3.1 3.1 5.3 3.1 3.8 2.9 2.5 3.5 4.8 3.9 3.4 5.1 5.5 2.7 3.1 6.1 5.6 4.7 4.8 5.5 3.2 3.6 3.4 5.6 4.5 3.8 5.5 4.5 5.6 5.9 5.1 3.3 5.2 5.7 5.7 5.5 6.4 6.3 6.4 6.1 6.1 5.1 6.4 5.8 6.4 6.7 6.6 6.5 6.1

2.3 2.4 3.2 2.4 2.6 2.9 4.7 3.2 3.2 2.7 2.6 3.2 4.1 4.2 4.0 5.2 3.5 4.8 3.3 3.5 5.3 4.9 5.4 4.8 4.8 4.5 3.8 4.8 4.6 4.0 5.5 4.5 4.1 5.6 5.1 5.6 6.0 5.6 5.0 5.5 5.7 6.0 5.9 6.2 5.9 6.5 6.2 6.4 5.8 6.3 6.6 6.5 6.7 6.8 6.3 6.6

2.1 1.7 2.2 2.3 2.4 2.2 3.5 3.3 2.1 3.0 2.7 2.8 2.4 3.4 3.8 4.1 4.1 3.8 3.1 3.5 4.4 5.1 3.6 4.7 5.3 4.8 4.4 4.5 4.0 3.0 4.4 4.4 5.5 6.1 5.2 4.7 5.8 5.4 5.7 5.8 5.9 5.1 5.6 5.7 5.9 5.8 6.0 5.8 6.1 6.1 6.5 6.0 6.3 6.3 6.4 6.6 6.5 6.6 6.5

1.8 2.0 2.5 2.6 2.8 3.2 3.2 3.3 3.3 3.4 3.4 3.5 3.6 3.7 4.0 4.1 4.3 4.3 4.3 4.3 4.3 4.7 4.8 4.9 5.0 5.3 5.3 5.4 5.4 5.4 5.5 5.6 5.8 5.8 5.9 5.9 6.1 6.1 6.1 6.1 6.1 6.2 6.3 6.3 6.4 6.4 6.4 6.4 6.4 6.5 6.5 6.6 6.6 6.7 6.7 6.7 6.8 6.8 6.9

up to 1 yr

1-2 yrs

2+ yrs

Taiwan Jordan Korea South Hong Kong Bolivia El Salvador South Africa Zimbabwe Costa Rica Peru Turkey Sri Lanka Brazil Argentina Czech Republic Egypt Thailand Ecuador Slovak Republic Philippines Indonesia Malaysia Ukraine Greece Poland Vietnam China Mexico India Hungary Colombia Chile Venezuela Bulgaria Russia

0.77 0.62 0.58 0.66 0.66 0.70 0.65 0.62 0.64 0.63 0.57 0.60 0.55 0.53 0.54 0.56 0.50 0.48 0.45 0.46 0.47 0.43 0.40 0.34 0.40 0.42 0.41 0.38 0.40 0.30 0.36 0.33 0.34 0.28 0.23

0.04 0.11 0.11 0.05 0.05 0.02 0.06 0.12 0.04 0.07 0.08 0.06 0.07 0.09 0.07 0.06 0.09 0.03 0.10 0.09 0.07 0.07 0.18 0.04 0.07 0.08 0.09 0.04 0.10 0.09 0.11 0.15 0.07 0.03 0.08

0.14 0.17 0.18 0.22 0.24 0.26 0.25 0.26 0.27 0.28 0.28 0.32 0.31 0.30 0.31 0.37 0.35 0.35 0.35 0.38 0.42 0.40 0.39 0.34 0.44 0.46 0.45 0.43 0.45 0.35 0.51 0.50 0.52 0.55 0.66

0.05 0.10 0.13 0.07 0.05 0.02 0.04 0.00 0.05 0.03 0.07 0.02 0.08 0.09 0.08 0.00 0.05 0.14 0.10 0.07 0.04 0.10 0.02 0.28 0.10 0.04 0.05 0.14 0.06 0.27 0.02 0.02 0.07 0.13 0.03

5.52 3.73 3.19 3.01 2.75 2.65 2.56 2.39 2.38 2.26 2.04 1.89 1.78 1.78 1.75 1.51 1.42 1.38 1.28 1.21 1.12 1.07 1.03 1.01 0.91 0.91 0.90 0.88 0.88 0.84 0.71 0.66 0.66 0.51 0.35

Source: Authors calculations using data from The Bank for International Settlements

Source: Executive Opinion Survey 2000

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade 25

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade

Table 7. Short-term Liabilities and International Reserves

Ratio of short-term liabilities to international reserves* Zimbabwe South Africa Bolivia Argentina Russian Federation Mauritius Singapore Brazil Turkey Hong Kong, China Mexico Peru Indonesia Ecuador Colombia Philippines Slovak Republic El Salvador Costa Rica Korea Chile Hungary Thailand Czech Republic Ukraine Venezuela Jordan Poland India Egypt Malaysia Taiwan Israel China Bulgaria 2.87 2.12 1.67 1.34 1.29 1.03 1.01 0.98 0.92 0.77 0.74 0.74 0.72 0.67 0.65 0.58 0.56 0.53 0.52 0.47 0.47 0.44 0.42 0.41 0.39 0.38 0.28 0.27 0.27 0.27 0.25 0.17 0.17 0.12 0.12

26

Source: Authors calculations using data from The Bank for International Settlements and The International Monetary Fund * Liabilities of the country of one year or less to B.I.S. reporting banks in May 2000 divided by international reserves in December 1999

each country whether banks in your country are insolvent and may require government bailouts.The responses are shown in Table 5. Banks in Ecuador, Indonesia, Mexico,Thailand, the Czech Republic, and Japan are considered the most vulnerable, while The Netherlands, Luxembourg, and Australia are considered to have the most solvent banks. In Indonesia and Thailand, these perceptions should be seen as a legacy of the banking crisis that began in 1997, not necessarily a forecast of further impending problems. A final indicator of vulnerability, related to the previous two, is high amount of short debt in relation to the hard currency reserves of a countrys central bank.This indicator is more relevant the more a country is defending a fixed exchange rate. If foreign creditors see that a country does not have enough hard currency to meet its shortterm liabilities, then the country is at risk of a bank-run situation, as each creditor wishes to get his money out before the hard currency runs out.This is an important indicator of vulnerability to a creditor grab race discussed above in relation to the Asian financial crisis. In Table 6 we show a number of emerging market economies and the term-structure of their external liabilities.The table shows that 77 percent of the liabilities of Taiwan residents to banks outside the country had maturities of one year or less in May 2000. Four percent had maturities between one and two years; fourteen percent had maturities of more than two years (long term), and five percent could not be allocated to any one of these categories. As a summary indicator of the debt structure, we show the ratio of short-term debt to long-term debt in Taiwans case, 5.52. A high share of short-term liabilities, such as we see in Taiwan, does not necessarily show lack of liquidity because it may be matched with sufficient short-term assets.Taiwan is not especially at risk for a financial crisis because its central bank has enough hard currency reserves to cover these liabilities. A better indicator of national illiquidity is therefore the ratio of short-term assets to the international reserves of the central bank.We show this in Table 7, and indeed Taiwan is almost at the bottom of the list, with a ratio of only 17 percent. Of the countries shown, South Africa and Zimbabwe are the two with the greatest potential liquidity problems, with short-term liabilities more than twice as high as available reserves. Countries further down the list, but still with a dangerous ratio greater than one, include Bolivia, Argentina, and Russia. It should be born in mind that countries are much less at risk of a creditor panic if their currencies are freely floating since they do not have to spend these reserves in a defense of the exchange rate.

Conclusion The evidence today still suggests that increased global integration of the 1990s will be seen eventually as one of the brightest events for millions of the worlds poor. New jobs in international companies and export sectors have raised incomes of millions in the past two decades, and most of these have been for people with below-average incomescertainly below average by global standards if not also by the standards within the countries themselves. Furthermore, many of the countries that have achieved rapid growth via global integration were relatively poorer countries in East Asia such as China, Malaysia,Thailand, Indonesia, Korea, and Taiwan; or were relatively poorer countries in Africa such as Mauritius; or were relatively poorer countries in Europe such as Ireland and Poland. If the era of globalization has seen widening global disparities, it is due to the laggards in globalization as much as to those countries that have taken advantage of the opportunities to grow rapidly. Geographic isolation, the burden of poor climates and disease, wars, and richcountry bias in research all help explain continued global poverty. But leaders without effective policies, or entrenched elites resisting change, also accounts for part of the problem. Globalization alone is unlikely to solve the problems of much of the worlds poor, yet a reaction against globalization is even less of an answer. Countries can counteract the isolating effects of geography with infrastructure, break local telecommunications monopolies that make access to the Internet prohibitively slow and expensive, ensure proper incentives for innovation to overcome their own specific problems, and leave aside false solutions based on a fear of global integration.

Globalization and International Competitiveness: Some Broad Lessons of the Past Decade 27