MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | EISUKE SAKAKIBARA
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2001 | IGM | SPEECHES | EISUKE SAKAKIBARA
Regional Vitality in the 21st Century
April 6-10, 2001 — Tokyo, Japan
Eisuke Sakakibara
( I ) For those well versed with economic history, globalization is nothing new and even has a sense of deja-vu. As a matter of fact, in many ways, today's world falls far short of the level of economic integration reached at the height of the gold standard in the late nineteenth and early twentieth centuries. As is the case with current globalization, technology played a major role in reducing the cost of both trade and capital transactions. The introduction of railways and the steamship significantly reduced the cost of transporting goods while developments in telecommunications brought about much lower costs for securities trading among different financial centers. During most of this period, Britain had a current account surplus of 8 to 9 per cent of GDP and recycled it to the rest of the world by financing mostly infrastructure investments through the purchase of bonds. Projects from, the construction of railways in the U.S. to opening of plantations in East Asia were financed globally principally in the London market. This huge surge of outward foreign investment from Britain and other European countries helped to spur much faster growth in the New World, namely the U.S., Canada, Argentina and Australia. The rapid increase in investment was accompanied by unprecedented expansion in world trade. At least, from the viewpoint of Britons, the period between 1870 to 1914 was the golden age. Of course, looking from the other side of the world, it was the period of British colonialism and imperialism. However, it is a fact that pervasive globalization, led by Britain, existed during the period. The British hegemony gradually shifted to the United States during the interwar years, and the world economy had been re-regulated and become inward looking, again. With the new U.S. hegemony, the global economy was reorganized around the Bretton Woods institution after the World War II but it was only after the collapse of the Bretton Woods system in 1971-73 that a new round of liberalization and globalization in private capital restarted. The Group of Five, the predecessor of the G-7, was organized in 1975 initiated by France and Germany. The G-5, and then the G-7, and international institutions like IMF, World Bank, GATT or WTO and OECD had provided the mechanism where the U.S., the hegemonic economic power, had formed the consensus and pushed various rounds of new liberalization both in trade and capital transactions. This second round of globalization of 1975 to 1990s, after the Pax Britannica years of 1870~1914, culminated in the first half of the 1990s, which evidenced a very dynamic resurgence of the world economy. John Williamson, in 1990, termed the then prevailing ideology for globalization, the Washington consensus. He identified and discussed the consensus on ten policy instruments, but here, it suffices to say that the basis for the consensus essentially boils down to "free market and sound money". Developing countries in Central and Latin America, Asia and countries in transition after the demise of socialism opened their economies following such consensus. According to David Hale, "During the 1990s, more than 50 developing countries have established domestic capital markets in order to encourage the privatization of public enterprises and attract greater foreign investment. The combined stock market capitalization is now US$ 2.1 trillion compared to less than US$ 400 billion in the late 1980s". This second wave of globalization during 1975~94 could be called Pax Americana globalization as against that of Pax Britannica during 1870~1914. It was the globalization led by the hegemon, United States, utilizing international organizations like the IMF and WTO and coordination forum such as the Group of Five or Seven. The similarity between the two periods was that globalization was imposed by hegemons, namely, Britain and United States from above. I would call this type of globalization hierarchical globalization or current account globalization. Hierarchical, because there had been triangular hierarchy from the hegemonic center to the periphery of newly emerging countries. The system was naturally skewed to the center but at the time of prosperity, there was some substantial trickling down to the periphery. Current account because the center of international transactions were either trade or direct investment. Portfolio investments in capital markets of newly emerging countries were relatively limited although these investment started to surge in early nineties. Many analysts may argue that the globalization we are experiencing in the first year of the new century is the continuation of globalization of 1975~94. I do not deny that there are some elements of that. However, it should be recognized that today's globalization seems to be driven by the IT revolution and a part of the transition from the old production economy to the new knowledge or information economy. Accordingly, it is quite different from old globalization in two respects. First, it is more decentralized and much more participation is possible from the bottom or periphery. It can be called networking globalization as against old hierarchical globalization. The organization of the global system seems to be less hierarchical, flatter and more decentralized. The proliferation of global NGOs as counter-forces against hierarchical organizations such as WTO, IMF and World Bank is one prominent feature of networking globalization. The international community of today cannot neglect the impact of NGOs and needs to incorporate them as integral parts of the system. Second, global markets in information, money and capital have been created. Increased interdependence and feedback among all participants of the markets renders the system more volatile and sometimes explosive. This accelerated feedback or reflexivity results in amplification of boom and bust cycles and renders the recurrence of a new capital account crisis more likely. This new capital account globalization can be contrasted to old current account globalization. A new globalization that is quickly spreading throughout the world, now has both positive and negative sides. The fact that networking globalization is less hierarchical, more decentralized due to much wider participation is certainly positive. However, the question of governance may emerge as a new problem. The system is more transparent and requires the process of decision making to be more open and less dominated by the center. On the other hand, with huge and real time flows of money and capital, capital-account globalization is much more volatile and is likely to be subjected to recurrent crises. Yes, we are in uncharted territory of new globalization which is much more decentralized and which is much less stable. ( II ) The major problems in the world now are that the present international economic and financial infrastructure are legacies of the old hierarchical or current account globalization days. International organizations such as IMF, WTO, World Bank, G7 and others are becoming increasingly obsolete and cannot effectively cope with problems new globalization has brought about. First, they are too hierarchical and excessively dominated by developed countries. Views of emerging and developing countries have not sufficiently been reflected in their policies. Second, the ideology of old hierarchical globalization did not allow them to directly confront with new problems of real time free flow of huge amount of information, money and capital. The old ideology of hierarchical globalization has been the market fundamentalism or Washington consensus that advocated liberalization on all fronts including short-term capital flows. If liberalization is accompanied by sound macro management, it was preached, all is well and the country could enjoy sustained non-inflationary growth. However, the basic nature and characteristics of the new network globalization defies the market fundamentalism or Washington consensus. First, constant interactions and strong feedback among participants with huge amount of real time capital flows renders the international financial system very volatile and unstable. This, in turn, casts serious doubts on the liberalization of capital, particularly short-term capital, flows. For small open economies, some control or at least strong monitoring of short-term capital flows seems necessary. The Malaysian type de-internationalization of domestic currency is one viable option available. In all cases, stronger supervision of both domestic and international financial institutions is being called for. The direction we should be heading is not necessarily deregulation but re-regulation of international financial system or construction of a new international financial architecture befitting a new network globalization. Second, the very rapid pace of technological innovation leads to greater uncertainty and fast and constant structural changes. These phenomena imply more attention needs to be paid to micro structural issues than macro economic issues. The stability of standard macro relationship such as demand for money function is now in question. The definition of money alone has become complicated and difficult. The validity of orthodox macro analysis needs to be seriously questioned. The IMF probably has to reexamine its general theoretical framework when prescribing policies to borrowing countries. This, of course, does not necessarily imply economic analysis has become invalid. As long as scarcity exists, economics as a discipline will not disappear. However, a new paradigm reflecting a new phase of globalization should be sought after, emphasizing uncertainty, risk, rapid structural change, fast feedback, history and the specific condition the economy happens to be in. Indeed, on the forefront of economic theory, some serious efforts are being made in this direction using game theory and biological concept rather than the one of Newtonian physics. Unfortunately, this research has not yet reached policy circles, respective governments and international organizations. ( III ) What are the implications of the advent of new globalization for the international financial and economic architecture of this century. First, networking rather than hierarchical or hegemonic globalization allows for a more balanced compromise between free-wheeling global markets and participating sovereign nation states or a group of nation states. In other words, bilateral as well as regional networking is consistent and compatible with global networking. Looking at it from the other angle, we could say that days of liberatization imposed from above, be it by international organizations or by the hegemon, are now over. Indeed, further liberalization or coordination is necessary but it should be increasingly implemented either regionally or bilaterally. In other words, networking liberalization or cooperation should became more important than hierarchical liberalization imposed by the WTO or IMF. Indeed, EU, NAFTA, MERCOSUR have already headed in that direction. NAFTA countries and Latin America have now agreed to create a 34-member FTA of Americans by 2005. Meanwhile, the Latin American economies are themselves forming many FTAs. Asia is late in forming FTAs but countries like Singapore and Korea have started to negotiate and conclude FTAs with countries in Asia and Central and Latin America. Even though Japan has not concluded any FTAs so far, it is about to start negotiations on a FTA with Singapore. Liberalization and cooperation within Asia such as AFTA and ASEAN plus 3 will proceed but relationships and agreements across the Pacific are important as well. Rather than sticking to old the APEC framework, it is useful to make strategic moves accumulating FTAs one by one bilaterally. Networking globalization makes it possible and effective to form strategic alliances around the globe and it seems that Asia and Central & Latin America are in good position to do this. Both have close relationships with the U.S. but forming a strategic alliance without the U.S. would probably be mutually beneficial in various ways. I am not necessarily advocating exclusion of the United States, but the nature of networking globalization implies that patterns of collaboration could be diverse and multiple networks might eventually materialize including or not including the U.S.. Another implication of these new developments is that the launching or the successful conclusion of WTO new round has become increasingly difficult. Unless G7 countries are willing to make new concessions in market access to their own economies that reasonable satisfy emerging and developing countries, they are not likely to agree to the new round. Particularly after a series of crises in late 1990's, emerging and developing countries have recognized that liberalization in services trade including finance and intellectual properties has benefited developed countries asymmetrically at their costs. Moreover, the benefits of liberalization can be obtained by bilateral or regional arrangement without making difficult concessions in global liberalization rounds. To some who are used to past global rounds of liberalization, these bilateral and regional moves may seem retrogressive. But from pragmatic viewpoint, unless countries adapt to this new development of proliferating FTAs, they would be discriminated against those already in FTA networks. Thus, countries like Japan which has so far been reluctant to conclude bilateral FTAs, are forced to conform to this new networking. I, for one, support such turnaround because these developments reflect structural change of the world economy toward new type of globalization as I mentioned earlier. A new strategic thinking in creating our own network without depending too heavily on the United States is being required for Japan and probably for the rest of Asia. This kind of horizontal networking allows for globalization that interconnects each region and country with their unique culture and socioeconomic regime. True, countries in Asia Pacific are quite different from each other. However, globalization thriving amid diversity is my vision for this century and I strongly believe this co-existence of diverse civilizations with global and strategic networking will create a much better world than the unilateral imposition of monolithic ideologies, such as market fundamentalism or socialism. |
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