Globalisation: key challenges and

policy implications for OECD countries

Jørgen ElmeskovOECD Economics Department

Oslo, 26 March 2008

Globaliseringens utfordringer for offentlig sektor

INTRODUCTION

• Globalisation is not new but the current episode is unprecedented in scope/speed

• It is driven by lower barriers to flows of goods, capital and people,…

• … by internal policy reforms in emerging economies,…

• … and by steady advances in transportation, communication and information technologies.

2

ROADMAP

• Globalisation presents benefits and challengesfor the OECD economies

• I will examine its expected effects and policyimplications in a number of areas including:

Trade and financial linkages

Labour markets

Inflation and monetary policy

Tax competition

3

4

THE CURRENT GLOBALISATION PHASE

IS HISTORICALLY LARGE

Source: Maddison (2007)

0

50

100

150

200

250

1870 - Entry of North America and peripheral Europe

1950 - Entry of Japan 2000 - Entry of China and India

Population of integrating economies as a ratio of that in advanced countries

GDP per capita gap between integrating and advanced economies

5

TRADE AND TRANSACTION COSTS HAVE DIMINISHED

0

5

10

15

20

25

30

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Tariffs

Non-OECD countries OECD countries

0

20

40

60

80

100

120

1930 1940 1950 1960 1970 1980 1990 2000

Real transport and communication costs

Sea freight Passenger air transport International calls

1E-08

0,000001

0,0001

0,01

1

100

10000

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Costs of processing information2005 US$ per million operations (log scale)

Sources : World Bank, World Development Indicators; Fraser Institute; Busse, M. (2003); Hummels, D. (2006); US Bureau of Labour Statistics; Nordhaus (2001); OECD calculations.

TRADE LINKAGES ARE STRENGTHENING

• Intra-industry or intra-firm trade and globalsupply chains have developed. Growing role of“task trade”. International trade in services hasexpanded.

• Trade contributes to a more efficient use ofresources:

Comparative advantage, economies of scale, strongercompetitive pressures

OECD growth project : a 10 pp increase in tradeexposure is associated with a 4% rise in income percapita.

6

7

10

15

20

25

30

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Imp

ort

s o

f go

od

an

d s

ervic

es %

of

wo

rld

GD

P

Trade exposure is increasing globally

5

10

15

20

25

30

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Per

cen

t

Direct imports as a share of manufacturing production value

in major OECD economies

8

0

2

4

6

8

10

12

14

16

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

% o

f W

orl

d G

DP

Foreign equity investment Foreign direct investment Cross-border lending

Source: IMF, Balance of Payment statistics

GLOBAL CAPITAL FLOWS

ARE RISING FASTER THAN GDP

INTERNATIONAL FINANCIAL LINKAGES

• Financial markets have become more global

• Capital flows can spur productivity growth Efficient allocation of capital, transfer of technology

• Domestic saving and investment are no longer closely associated This should in general be welfare enhancing: it allows

savers to diversify so as to reduce risk and boost return

Emerging countries and fuel exporters (Norway, Mexico) are saving abroad

In some cases this runs counter to economic logic and may reflect repressed financial markets ad weak social safety nets.

9

THE TRANSMISSION OF SHOCKS IS INTENSIFIED BY

TIGHTER INTERNATIONAL LINKS

• A given increase in domestic demand in the non-OECD region will have twice as large an effect onOECD output in 2015 as in 2005 (Hervé et al., 2007)

• The effect on GDP in OECD economies of higher riskpremia in the rest of the world is expected to be 50%larger in 2015 than in 2005

• But international diversification makes for a betterrisk/return profile

• And domestic shocks in OECD economies will leakabroad to a larger extent

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GLOBALISATION AND LABOUR MARKETS

• Perception that globalisation undermines aggregateemployment in OECD countries.

• The problem is not lack of aggregate demand: bothexports and imports from/to emerging economiesgrow fast. Any surpluses are recycled and boostfinancial markets. And OECD country monetarypolicy can always adjust.

• Supply side: the negative effect of greater labourturnover is small. But could be larger if not allpeople who lose jobs find new ones. At the sametime, employment is boosted by greater productmarket competition and wage moderation.

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GLOBALISATION AND INCOME INEQUALITY

12

0

1

2

3

4

5

6

NOR SWE FIN DNK JPN CZE FRA AUS DEU NLD ESP NZL GBR IRL CAN KOR POL USA HUN

Wage dispersion (9th to 1st decile ratio)

1994 2005

0

1

2

3

4

5

6

7

DNK NOR SWE CZE BEL NLD LUX FIN AUT FRA DEU CAN ESP GBR IRL GRC ITA PRT JPN USA

Disposable income inequality across households (9th to 1st decile ratio)

1994 2005

OECD Employment Outlook (2006), Burniaux et al. (2006)

GLOBALISATION AND INCOME INEQUALITY

• Globalisation can strengthen dispersion at thetop of the wage distribution, which has widenedin most OECD countries.

• Inequalities have remained broadly stable in thelower half of the wage scale in most OECDcountries – perhaps because upskilling kept pacewith the shift in labour demand away from low-skilled. Will this continue? Education policiesare key.

• And disposable income distribution has shownno general trend since the mid-1990s.

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GLOBALISATION AND JOB SECURITY

• Average job tenure increased in most OECDcountries since the early 1990s (and when it hasfallen, it mostly reflects misguided policies)

• But the consequences of job loss can be drastic

Risk of being re-employed at much lower wage(especially if job loss is linked to globalisation)

Risk of not being re-employed (especially whenunemployment benefits give high coverage ofprevious wage – as opposed to future wageopportunity)

14

Average wage changes for workers who previously

had more than 10 years of job tenure

15Source: OECD Employment outlook (2005)

-25

-20

-15

-10

-5

0

5

10

15

FRA DEU GBR BEL CAN USA

LABOUR MARKET ADJUSTMENTS

16

• Globalisation underlines the needs for labour market flexibility to cope with short-term transition costs No “one size fits all” and different models have

proven successful (Jobs Strategy, 2006)

• Important to also focus on the design of social protection so as to avoid trapping people in dependency

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0

5

10

15

20

25

HUN FIN PRT DNK NOR GRC IRL ESP GBR FRA NLD SWE BEL AUT USA NZL

Migrants as a share of the male working age population

0

5

10

15

20

25

30

35

40

HUN FIN PRT DNK NOR GRC IRL ESP GBR FRA NLD SWE BEL AUT USA NZL

Share of migrants among highly skilled male workers

1992 or first available year 2004

Source: OECD

MIGRATION HAS INTENSIFIED

OPPORTUNITIES AND CHALLENGES ASSOCIATED

WITH MIGRATION

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• Immigration can be a source of greater labourflexibility and boost also employment of natives.

• Immigration of low-skilled workers can sharpenwage and income inequality and can putuniversal welfare systems under pressure.

• Immigration of highly skilled workers has theopposite effects.

• Greater mobility of high-skilled workers raisesquestions about government-paid highereducation financed through high and progressivetaxation.

GLOBALISATION AND INFLATION

• Favourable and unfavourable effects ofglobalisation on inflationDampening effects on the prices of manufactured goods

Dampening effects on wages

Upward pressures on many commodity prices

• Net effect has been favourable at least untilrecentlyGlobalisation has reduced inflationary pressures in net

terms by between 0 to ¼ percentage point per annumsince 2000 (Pain et al., 2007) before taking intoaccount wage moderation.

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IMPLICATIONS FOR MONETARY POLICY

• Monetary policy will have to react more to external influences

• Globalisation complicates the identification of inflation trends

• Insofar as globalisation put persistent downward pressure on inflation, inflation targets could be achieved with lower policy rates (Bean, 2006). If this effect is temporary, it could be accompanied by a temporary hike in asset prices.

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GLOBALISATION AND TAX COMPETITION

21

0

10

20

30

40

50

60

70

JPN

US

A

DE

U

CA

N

ES

P

FR

A

BE

L

ITA

NZ

L

LU

X

AU

S

TU

R

GB

R

NL

D

GR

C

ME

X

DN

K

NO

R

SW

E

KO

R

PR

T

FIN

AU

T

CZ

E

CH

E

PO

L

ICE

HU

N

IRE

Statutory corporate tax rates

1996 2006

Source: Yoo (2003); OECD Tax database

GLOBALISATION AND THE EFFICIENCY

OF THE TAX SYSTEM

• Globalisation triggers corporate tax rate cuts andfavours the move toward a “low-rate broad-base”system.

• It should encourage a move towards less elastic taxbases (away from capital and labour and towardsproperty and consumption), but does it in practice?

• But some aspects of globalisation (capital mobility,high-skilled migration) could reduce the ability ofthe tax system to achieve income redistributionobjectives.

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SUMMING UP

• Globalisation will continue to be a force shapingthe OECD economies

• Avoid the pitfalls of protectionism which wouldmagnify adjustment costs and will not stop theglobalisation process

• Need to establish the right framework to reapthe full benefit of globalisation

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