46 This is still another area in which, at the time I wrote GAID, there was insufficient research. Indeed, little attention was given even to the concept of systemic fragility and the implications of that for the design of financial structure (or as I referred to it in my 2010 paper on contagion, financial architecture). See, in particular, the work of Franklin Allen and Douglas Gale (“Financial Contagion,” Journal of Political Economy 108 [1] [2000], pp. 1–33) and my work with Bruce Greenwald, Towards a New Paradigm in Monetary Economics (Cambridge: Cambridge University Press, 2003), chapter 7. My work was in part inspired by the East Asia crisis, and the challenge of resolving systemic bankruptcy described in chapter 8—when firms owe money to each other, and the ability of each to repay depends on what it gets repaid. There is obviously a high degree of interdependence, with very non-linear relationships in the presence of bankruptcy costs. A reasonably full analysis has only been achieved recently. See Tarik Roukny, Stefano Battiston, and J. E. Stiglitz, “Interconnectedness as a Source of Uncertainty in Systemic Risk,” op. cit.
Most notable of the work after the crisis on systemic risk is that of Andy Haldane and his coauthors—P. Gai, A. Haldane, and S. Kapadia, “Complexity, Concentration and Contagion,” Journal of Monetary Economics 58 (5) (2011), pp. 453–70; or A. G. Haldane and R. May, “Systemic Risk in Banking Ecosystems,” Nature 469 (7330) (2011), pp. 351–55. See also S. Battiston, G. Caldarelli, R. Maye, T. Roukny, and J. E. Stiglitz, “The Price of Complexity in Financial Networks,” PNAS (Proceedings of the National Academy of Sciences of the United States of America) 113 (36) (2016), pp. 10031–36.
47 At a dinner I attended in New York, one of his chief economic advisers waxed poetic about how Trump was quickly going to undo regulations, including and especially in the financial sector, apparently not fully understanding the process by which regulations got adopted and repealed or replaced. Someone asked a rhetorical question which went unanswered: Hadn’t there been a major financial crisis in 2008, which had proven enormously costly? What did the Trump administration propose, to avoid a recurrence?
48 President Clinton had hoped that the new round of negotiations would be initiated in a meeting in Seattle in November 1999. Massive street protests—sometimes referred to as the “Battle of Seattle”—led to the scuttling of talks.
49 As we explained in chapter 3, even if the U.S.-China deficit improved, the multilateral trade deficit wouldn’t be affected, because that is determined by macroeconomics. Given the low level of trade barriers, the effect on global GDP of the absence of new trade agreements may be limited. As I noted earlier, what was described as the largest trade agreement ever, TPP (set aside by Trump in one of his first acts as president) was estimated to have a negligible effect on growth.
50 I argue in Making Globalization Work that such a cross-border tax would in fact be WTO-compliant. There is increasing support for such actions, especially as firms in countries that are responding to climate change argue that the failure of the United States to do anything gives its firms a competitive advantage; because they don’t have to pay this cost of production (the costs of carbon emissions), they are effectively being subsidized, and such subsidies are not compliant with the WTO system. Countries can impose countervailing duties.
51 As I noted earlier, they simultaneously refused to provide the additional funds necessary, or to change the governance rules to allow those that did provide funds to have a say in governance commensurate with their contributions. Others naturally remain unwilling to provide additional funds unless they have a greater share in the governance (in voting rights).
52 I noted earlier the enormous potential supply of funds. Some of these “funders” are reluctant to take on excessive risk, but one of the advances in modern financial markets has been the ability to shift and reallocate risk. The New Development Bank, it is anticipated, will take advantage of these new developments.
53 It officially opened for business on January 16, 2016, and the Articles of Agreement went into force on December 25, 2015.
54 One of Trump’s first acts as president was to withdraw from TPP, but the TPP is not quite dead, since the 11 remaining members have said that they will revive it. But many of the provisions of the TPP were put there at the insistence of the United States (such as those concerning intellectual property, and particularly drugs). Without the United States, there would be no reason for them to retain those provisions. If the TPP is revived, it will need to be renegotiated.
55 I say “seemingly” because all of the protectionism may be little more than campaign rhetoric. Though he has continued with some of the same rhetoric, those he has appointed seem more in synch with advancing the interests of America’s rent-seeking plutocrats than in helping those who lost their jobs in manufacturing.
56 Source: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, Key Findings and Advance Tables. ESA/P/WP/248. Available at https://esa.un.org/unpd/wpp/Publications/Files/WPP2017_KeyFindings.pdf.
57 In 2016, the United States and the EU accounted for 32 percent of the World GDP. They are projected to account for 21 percent of the World GDP by 2050. China and India accounted for 25 percent of the World GDP in 2016 and will account for 35 percent of the World GDP by 2050. Source: “The World in 2050,” PWC, available at https://www.pwc.com/gx/en/issues/economy/the-world-in-2050.html.
58 As I noted above, these were reflected in policies to reshape the World Bank under Paul Wolfowitz.
59 For China, “core interests” include claims it makes over islands in the South China Sea. “Full text of President Xi’s speech at opening of Belt and Road Forum,” available online by the Permanent Mission of the People’s Republic of China to the UN, http://www.china-un.org/eng/zgyw/t1465819.htm.
60 Poor countries do not pay low wages to take advantage of trade agreements; they pay low wages because they are poor. Differences in the cost of labor are part of comparative advantage. One cannot say one is in favor of free trade, but only if it is fair, and fair trade entails paying workers wages comparable to those in the United States. Labor standards/working conditions are analogous. There are likely to be longer hours of work in poorer countries—just as there was in the United States a hundred years ago. So outside of a few egregious cases—like the use of prison labor—it is hard to determine what “unfair” labor conditions means. Some agreements simply say that governments have to enforce whatever conditions they specify. But this may actually have an adverse effect. In some countries, setting labor conditions in law serves a “norm”-setting function; it defines what firms should aspire to. Large differences from these norms are punished. If they are told to punish even small differences, they will set standards lower.
61 Belgium had held up for a while the Canadian-EU trade agreement in 2016.
62 When the United States lost a case brought by Nicaragua over its covert war against that country, the United States decided to accept the court’s jurisdiction only on a case-by-case basis.
63 This form of competition is called “Bertrand competition.” With Bertrand competition, small differences in (marginal) costs can result in large differences in market share, in contrast with the more common Cournot competition, where firms with slightly different costs share the market place, and the firm with the lower costs has a slightly larger market share. An important part of the analysis is that firms are able to entrench themselves. Joseph Schumpeter (1883–1950), the great scholar of innovation, argued that one should not be worried that markets where innovation is important are dominated by a single firm. That monopoly power would be temporary; there would be a succession of monopolists; and competition for the market would replace competition in the market. Research over the past quarter century has shown that he was wrong; the dominant firm has mechanisms to ensure its position becomes entrenched, the resulting equilibrium is inefficient both statistically and dynamically. For globalization, this becomes particularly
important when a disproportionate share of the entrenched monopolies is in the United States or other advanced countries, and then the United States and the other advanced countries work to create global rules that, on the one hand, allow the monopoly to remain entrenched, stifling innovation elsewhere and, on the other, allow the monopoly to avoid paying taxes on the economic activities that occur in the developing countries and emerging markets.
64 Microsoft’s anticompetitive policies were clever and effective—but ruled to be illegal on three continents. But the legacy of these anticompetitive practices was significant; its market domination continued for years after it discontinued some of its worst practices.
65 Baumol’s disease is the rise of real wages in jobs that have not experienced any increase in labor productivity, in response to rising wages in other sectors in which labor productivity has increased. Baumol was the first to make that observation in the performing arts sector (in Theatre, Opera, Music, etc.). Real wages had increased in this sector in the first half of the twentieth century despite no real productivity growth in the sector. See W. Baumol and W. Bowen, Performing Arts—the Economic Dilemma: A Study of Problems Common to Theatre, Opera, Music and Dance (New York: Twentieth Century Fund, 1966).
66 In some ways, our metrics overestimate growth; they don’t take into account, for instance, the lower quality of service provided in most modern retail stores, where the customer may have to spend more time searching for the right product himself and is provided with less information about the qualities of the products being purchased.
67 For instance, MOOCS, the massive online open courses, have provided valuable access to some of the best teachers in the world, and even while free, the numbers reached remains limited and so too the extent to which they have been integrated into standard instructional programs. This may, of course, change in the future.
68 There is an extensive literature on the relationship between subjective well-being and income suggesting that this is the case.
69 While the United States and Britain have low unemployment rates, globally, some 200 million remained unemployed in 2016, about 15 percent more than before the 2008 crisis. Source: World Bank (from modeled ILO estimates).
70 See J. M. Keynes, “Proposals for an International Clearing Union,” in Seymour E. Harris, ed., The New Economics: Keynes’ Influence on Theory and Public Policy (London: Dennis Dobson, 1943).
71 I note in chapter 4 the increase in concentration in a large number of important sectors in the United States. Market power can be exercised even when there are two or three firms. Prices will be far higher than costs, and there can be sustained profits, which show up as abnormally high returns to capital.
INDEX
Page numbers listed correspond to the print edition of this book. You can use your device’s search function to locate particular terms in the text.
Page numbers beginning with 395 refer to endnotes.
Addis Ababa, 123, 132, 362–64
affirmative action, 37
Afghanistan, xxx, xxxiii, 426
Africa, xvi, xviii, xxx, xlii, 58, 59, 107, 120, 121, 135, 145, 172, 182, 235, 315, 341, 362, 377, 400
desertification in, 393
effect of Uruguay Round on, 157, 332
worsening conditions in, 104, 170–71, 427
see also specific countries
aggregate demand, 109–10, 198, 204, 279, 285, 388
agriculture, xli, 103, 105, 114–15, 150–51, 157, 170, 178, 193, 231, 274, 335
China’s reforms in, 272
percentage of labor force in, 58
U.S. subsidies in, xxx, xxxii, xlii, 20, 23–24, 73, 105, 341
Aguas Argentinas, 166
Ahmad Mohamed Don, 216
AIDS, xvii, xviii, xx, 26, 104, 106, 118, 133, 137, 175, 312, 333
Airbnb, 384
Airbus, 418
aircraft, 8, 65–66
Alcoa, 263–66
alcoholism, 56
aluminum cartel, 263–66, 332, 436
Amazon, 383
America First policy, xxxiv, xxxvii, 54, 69, 71, 78, 375, 376, 377, 393
American Civil Liberties Union (ACLU), 42
American Revolution, 254
Amin, Idi, 136
analytic propositions, 308
“animal spirits,” investor moods as, 194
annuities markets, private, 151
anti-globalization movement, 95, 390
antitrust dumping, 68
antitrust laws, 168, 265
APEC (Asia-Pacific Economic Cooperation), 166, 184
apparel, 8
Apple, xxvi, 39, 362, 383, 384, 425
Argentina, xxxvi, 124, 166, 192, 214, 241, 308, 319, 323, 325, 326, 328
banking industry in, 164
2001 economic collapse of, xxx, 116, 164–65, 174, 221, 223, 364, 440, 441
Arrow, Kenneth, 272
Article 4 consultations, 144, 320
asbestos, 37, 415
Asia, 102, 105, 306, 374, 427
see also East Asia financial crisis, of 1997; specific countries
Asian Development Bank, 108–9
Asian Infrastructure Investment Bank (AIIB), 73, 373–74, 377
“Asian model,” 108–9
Asian Monetary Fund, 73, 205, 206, 343
Asia-Pacific Economic Cooperation (APEC), 166, 184
asset stripping, 235, 309
asymmetric information, 179, 406
austerity programs, of IMF, 149, 155, 172, 179
Australia, 15, 211
auto industry, 46, 61, 69–70, 383–84
automation, 13, 57
avian flu, xx
baht, collapse of, 183, 186, 188–89
“bail-ins,” 292–94
bailouts, less reliance on, 325–26
balanced budget expansions, 91
Balcerowicz, Leszek, 359
banana quotas, 102
Bangladesh, 15, 57
Bank of Botswana, 134
Bank of England, 8
bankruptcy, 207, 210–11, 231, 271, 337, 338, 339, 353–54
Chapter 11 provisions for, 223, 438
high interest rates and, 191, 202, 203, 205, 212, 224
IMF and, 290–92, 297–98, 325, 438
reform of, 325
banks, 10, 30, 53, 105–6, 108, 121, 155, 162, 175, 271, 293, 301
bailouts of, 69–70, 367
capital market deregulation and, 161
colonial dependency on, 345
in East Asia financial crisis, 188–89, 192, 203, 208–10, 215–16, 219, 220, 222, 301–2
in Ethiopia, 127, 129
externalities of, 367
failures of, 206–7
global vs. local, 127, 164–65
improved regulation of, 326, 441
in Kenya, 128
Russian loans-for-share program and, 250–51
Russian market transition and, 238, 242, 262, 434
self-regulation of, 367
in Soviet Union, 230
see also central banks
barter, 15, 243
Basel I, 367
Baumol’s disease, 386
behavioral economics, 399
Belgium, 273
Berlin Wall, fall of, xxxi, xxxii, 11, 112, 225, 227, 359
Bethesda, Md., banking system of, 127
BIA (best information available), 264
Big Pharma, 375, 418, 419
Bingaman, Ann, 265
bio-piracy, developing world and, 333
bird flu, 80
BlackBerry, 42
“black” economy, 242
Bloomberg, Michael, 36
Bloomingdale’s, 62
Bolivia, 116, 157, 165, 337
Bolsheviks, 253–56
bonds, 194, 324, 400
border risk, 73
borders, 378–79
Botswana, 133–36, 172, 182
IMF and, 134
outside advisers used by, 133–35
polit
ical and economic conditions in, 133, 134
Brazil, 77–78, 93, 106, 187, 192, 202, 214, 223, 241, 287, 292, 323, 370, 373
BRCA genes, 42
Bretton Woods conference (1944), 109, 113, 365, 373
“briberization,” privatization as, 154
BRICS, 77–78, 373
Brown, Ron, 166
Bruno, Michael, 145
bubbles, xxxiii, 76, 194–95, 287, 290
tech, 407
Buchanan, Pat, 156
Bucharest, 293
budgets, balancing of, 91, 104, 112, 124, 149, 172, 199–200, 279
Buffett, Warren, 91–92
“Buffett” plan, 91–92
Bulgaria, emigration from, 245
Bush, George H. W., 23
Bush, George W., 397, 426
Bush (George H. W.) administration, 196, 267
Bush (George W.) administration, 259, 396–97
Camdessus, Michel, 137, 211, 212, 215, 221
Canada, xxxiii, 11, 38, 69, 102, 112n, 265, 322, 384, 397, 423
investor state suits lost by, 36
U.S. trade surplus with, 24, 70
Cancún, Mexico, 3770
capital account liberalization, 398
capital adequacy ratio, 208–9
capital allocation, 220
capital controls, 115, 160, 187, 194, 216–18, 223, 347, 352–54, 424
in Latin American debt crisis, 353
capital flight, xxix, 30, 189, 194, 216, 434
capital flows, 34, 79, 83
short-term, 350
trade chits for, 91–92
capital gains, 87, 396–97
capital inflows, 422
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