Saturday, August 26, 2006

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Bernanke on globalization

Federal Reserve Chairman Ben Bernanke gave an interesting speech entitled, "Global Economic Integration: What's New and What's Not?" that's worth a gander. Here's his answer to what's new:

Each observer will have his or her own perspective, but, to me, four differences between the current wave of global economic integration and past episodes seem most important. First, the scale and pace of the current episode is unprecedented. For example, in recent years, global merchandise exports have been above 20 percent of world gross domestic product, compared with about 8 percent in 1913 and less than 15 percent as recently as 1990; and international financial flows have expanded even more quickly. But these data understate the magnitude of the change that we are now experiencing. The emergence of China, India, and the former communist-bloc countries implies that the greater part of the earth's population is now engaged, at least potentially, in the global economy. There are no historical antecedents for this development. Columbus's voyage to the New World ultimately led to enormous economic change, of course, but the full integration of the New and the Old Worlds took centuries. In contrast, the economic opening of China, which began in earnest less than three decades ago, is proceeding rapidly and, if anything, seems to be accelerating.

Second, the traditional distinction between the core and the periphery is becoming increasingly less relevant, as the mature industrial economies and the emerging-market economies become more integrated and interdependent. Notably, the nineteenth-century pattern, in which the core exported manufactures to the periphery in exchange for commodities, no longer holds, as an increasing share of world manufacturing capacity is now found in emerging markets. An even more striking aspect of the breakdown of the core-periphery paradigm is the direction of capital flows: In the nineteenth century, the country at the center of the world's economy, Great Britain, ran current account surpluses and exported financial capital to the periphery. Today, the world's largest economy, that of the United States, runs a current-account deficit, financed to a substantial extent by capital exports from emerging-market nations.

Third, production processes are becoming geographically fragmented to an unprecedented degree.4 Rather than producing goods in a single process in a single location, firms are increasingly breaking the production process into discrete steps and performing each step in whatever location allows them to minimize costs. For example, the U.S. chip producer AMD locates most of its research and development in California; produces in Texas, Germany, and Japan; does final processing and testing in Thailand, Singapore, Malaysia, and China; and then sells to markets around the globe. To be sure, international production chains are not entirely new: In 1911, Henry Ford opened his company's first overseas factory in Manchester, England, to be closer to a growing source of demand. The factory produced bodies for the Model A automobile, but imported the chassis and mechanical parts from the United States for assembly in Manchester. Although examples like this one illustrate the historical continuity of the process of economic integration, today the geographical extension of production processes is far more advanced and pervasive than ever before. As an aside, some interesting economic questions are raised by the fact that in some cases international production chains are managed almost entirely within a single multinational corporation (roughly 40 percent of U.S. merchandise trade is classified as intra-firm) and in others they are built through arm's-length transactions among unrelated firms. But the empirical evidence in both cases suggests that substantial productivity gains can often be achieved through the development of global supply chains.

The final item on my list of what is new about the current episode is that international capital markets have become substantially more mature. Although the net capital flows of a century ago, measured relative to global output, are comparable to those of the present, gross flows today are much larger. Moreover, capital flows now take many more forms than in the past: In the nineteenth century, international portfolio investments were concentrated in the finance of infrastructure projects (such as the American railroads) and in the purchase of government debt. Today, international investors hold an array of debt instruments, equities, and derivatives, including claims on a broad range of sectors. Flows of foreign direct investment are also much larger relative to output than they were fifty or a hundred years ago. As I noted earlier, the increase in capital flows owes much to capital-market liberalization and factors such as the greater standardization of accounting practices as well as to technological advances.

To me, the most astonishing difference is number two.

posted by Dan on 08.26.06 at 09:19 PM


Though it is not directly related to this topic, I thought it was related to global social justice to point out that there is a new draft movement developing up to get Professor Jeffrey Sachs to run for president. The website for the campaign is:

It is time for a new set of priorities in America. Today, our country (and the world) is in great need of true leadership and vision. We believe that professor Jeffrey D. Sachs of Columbia University is someone who can deliver. He is a man of great knowledge, experience and integrity. That is why we are working to convince him to run for president of the United States in 2008.

Please check us out, and if you are interested, help.

posted by: Draft Sachs on 08.26.06 at 09:19 PM [permalink]

In the nineteenth century Britain was also exporting people and in the 21st the US continues to import them. Perhaps there is something else going on here.

posted by: Richard Heddleson on 08.26.06 at 09:19 PM [permalink]

With all respect to Bernanke, there is nothing new or very insightful in this. I would hope that he would be more of leader, instead of telling us what has already happened. For example, maybe he could explain how is it that the US can run a current account deficit for so long? How long can this go on, and what happens after? These are retorical questions of course, because I think the answers are fairly obvious. That is why we need LEADERS. I am so sad right now, I think I'll go take a nap.

posted by: OpenBorderMan on 08.26.06 at 09:19 PM [permalink]

Bernanke wants more jobs training for displaced American workers.

Job training for what jobs?

He, like most economists and politicians, has no idea. It's just a cliche.

Very helpful. And the Bernanke recession is gathering speed.

posted by: save_the_rustbelt on 08.26.06 at 09:19 PM [permalink]

Yes, draft Sachs by all means! If he can do for the US, what he did for Russia then we'll all....oh wait, nevermind...

posted by: jprime271 on 08.26.06 at 09:19 PM [permalink]

Yes, draft Sachs by all means! If he can do for the US what he did for Bolivia and the rest of the region then we'll all ... oh wait, never mind...

posted by: St. James the Lesser on 08.26.06 at 09:19 PM [permalink]

Job training for what jobs?


"Look over here! Watch the shiny object while we move our personal bank accounts to the Carribean and send more jobs elsewhere."

posted by: Babar on 08.26.06 at 09:19 PM [permalink]

Why has this blog's comment stream become infested with flat-earth populism? The same fallacies repeated with the same snark, over and over and over...

posted by: srp on 08.26.06 at 09:19 PM [permalink]

(There. That'll show those dummies how much smarter I am. Hee hee! Oops! Tinkled myself.)

posted by: srp's alter ego on 08.26.06 at 09:19 PM [permalink]

...there is a new draft movement developing up to get Professor Jeffrey Sachs to run for president.

Jefferey Sachs?

Isn't he the guy who thinks we can solve the problems in the third world by dumping so much cash on it that it would glut the appetite of the greediest and most corrupt crony?

Could someone please explain why anyone should take what he says seriously?

posted by: rosignol on 08.26.06 at 09:19 PM [permalink]

Okay, I admit I am not an economist. But I can read English and I have a purty good vocabulary but THIS MAKES NO SENSE. How do these people get these jobs? I wanna job where I can write gooblygook totally unrelated to reality and get paid booku bucks for it.

posted by: Twoticky on 08.26.06 at 09:19 PM [permalink]

...Especially since my job will be probably be outsourced to Pakistan very soon.

posted by: Twoticky on 08.26.06 at 09:19 PM [permalink]

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