Globalization: An Economic Perspective

Professor Peter BrewsKenan-Flagler Business School,

University of North Carolina at Chapel

Hill

World View Global Education Leaders' Program

23 June 2011

Globalization has many facets/dimensions:

Historic...first globalization of peoples; then globalization for resources (scramble for Africa...)

Most recently: economic globalization

Discussion today pertains to economic globalization, which relates to the explosion of productivity experienced over the past three hundred years or so

Economic Globalization:

Relates to understanding differences between pre-industrial, industrial, post industrial contexts, and what drives competitiveness in the last two

Pertains to knowing which factors/resources/competencies are available/becoming available in other parts of the world, and then knowing

what to do/focus on to compete in this widening productivity/resource/competence availability

Requires knowing the difference between market and supply seeking, and to what happens to consumption/PPP as nations get in the game

Industrial Post Industrial

Main factors of production

Land

Labor (physical)

Capital

Land

Labor (mental)

Capital

Key work units

Urbanized, vertically integrated, hierarchically controlled factories

Small/large, centralized/de-centralized, local/global, vert. de-integrated/IT integrated networks

Capability of Capital

Dedicated, inflexible, electro-mechanical processors, supported by dedicated humans; hands and machines

Flexible, ‘smart’ programmable processors, operating with little human intervention once programmed; minds and machines

Marketing challenge

Meeting demands of unsophisticated consumers with little choice

Meeting demands of informed consumers with much choice; services and solutions intensive

Principles of production

High volume, low variety leads to high quality/low cost; specialization, standardization, mass production/distribution

Automation, specialization, high/low vol., high variety, speed, flexibility, mass customization, continuous innovation/advantage upgrading

The Industrial and Post Industrial Worlds

Industrial Post Industrial

Physical capital dependent; asset and labor intensive

Intellectual capital dependent; fewer ‘smarter’ people

Physical/tangible product based Intangible, high value added services/solution based

Employs many, mostly in the factory Employs fewer, on the campus, at home, anywhere

Balance sheet orientation Income statement orientation

Low net income per person High net income per person

Scale constraints Easily scaleable

Low market value per person (MVP) High MVP

Slow wealth creation dispersed to outside suppliers of capital; few inside shareholders

Fast wealth creation more dispersed to inside suppliers of knowledge; more inside shareholders

Industrial versus Post Industrial Organizations: A Summary

The industrial to post industrial shift profoundly effecting:

• Role of humans in productive work

• Structure, scope, speed, operational performance of firms

and

• Nature/complexity of goods and services (and solutions) on offer

All organizations and workers around the world are currently adjusting to the effects of this structural change

Why is Economic Globalization important to the state/citizens of North Carolina?

• First, economic globalization for Americans was a supply seeking enterprise; consumers in America greatly benefitted

• Over the 20th Century America was consumer of last resort to the global economy

• Economic globalization will now become more a market seeking enterprise for Americans; instead of selling only to 300 million at home the potential market is billions of consumers elsewhere…go where the money is!

• Can producers in America offer products/services/solutions others in the world will want?

At the leading edge innovating faster than those behind can replicate is best route for competitive survival (remember Solow’s tfp as the major source of US

economic growth)

Political, community, and education leaders must ensure North Carolinians are ready to compete in this post industrial, globalizing, fast moving world…

And that NC is an attractive location to invest in in the ongoing struggle for productivity, as well as an attractive place to live in, holiday in, and retire in…

What must educators do?

• Prepare American human capital for knowledge intensive, creative work, so we can innovate at a rate faster than others can replicate; here, high level math and science skills are table stakes

• Discipline and deferred gratification must be instilled in students so they make the educational investment and learn how to THINK, problem solve, research, imagine, create, connect dots etc.

• Schools, Community Colleges, and Universities must develop curricula that prepare workers for 21st Century, high value creative work, or for working with smart machines and systems delivering smart goods, services, or solutions

• NC K-12 schools must give world class grounding in basic subjects across the spectrum, instill strong work ethics, sensitize students to global issues and cross cultural differences

• My contract with my children…

Potential Jobs in the Future ?

• New goods, services, or solutions (post industrial creative work);

• Building, maintaining, operating, and improving machines that perform physical work (post industrial mechanical work);

• Helping industrial organizations negotiate the transition to post industrial status by finding more efficient ways to organize and produce existing products,

services, or solutions (post industrial transformational work); and

• Performing manual tasks machines do not do, or manually assisting machines in work they do (post industrial manual work)

• All must aspire to join Creative Core of organization they work for, and become post industrial entrepreneurial capitalists

• Know how to join Creative Core: technical/scientific vs. industry/ business knowledge route; where are opportunities for high value added human work in

your industry segment

Big question for all 21st Post Industrial workers: Do you have any ideas that are worth funding????

Rebalancing and Innovating: America in the Post Meltdown

World

Professor Peter BrewsKenan-Flagler Business School,

University of North Carolina at Chapel Hill

World View Global Education Leaders' Program

23 June 2011

Why Rebalancing and Innovating…

America is out of balance, this will be remedied one way or the other...

While rebalancing is accomplished America must innovate to resume economic growth, retain its primary position in the global

economy

The US is in worst shape it has been in for generations:

• 25 years living beyond means have finally caught up

• Economically, out of balance both publically and privately

• Politically divided, facing legislative gridlock with little convergence at center

• Some core industries in trouble (banking, automobiles, construction, retail) while important support industries face serious funding issues (healthcare,

education, military…)

Not really credit crisis but over-consumption/living beyond means crisis: credit symptom, not cause

Two propositions:

• Americans could cut consumption by 20% and probably wouldn’t notice: 20% smaller houses, 20% smaller cars; 20% less food; 20%

less clothing etc.

• In face of global imbalances and global competition/scramble for resources, 2006/7 American consumption levels unsustainable

US Political Economy: Public Sector Imbalances

.

                                                                                                                                  

                             

US Federal Gross Debt as % of GDP: 1940-2009

Source: zFacts.com

US Gross Federal Debt is now around 100% of US GDP

Source: http://www.usgovernmentspending.com/downchart_gs.php?year=1792_2010&view=1&expand=

Source: CBO http://www.cbo.gov/ftpdocs/108xx/doc10871/BudgetOutlook2010_Jan.cfm, Historical Budget Data.xls

Source: CBO http://www.cbo.gov/ftpdocs/108xx/doc10871/BudgetOutlook2010_Jan.cfm, Historical Budget Data.xls. CBO expects Federal Public Debt to reach 62% of GDP by end of 2010, highest since WW II

Even before the Credit Crisis:

• Social Security/Medicaid surpluses raided to balance federal budget

• Federal government borrowing to meet expenditures; foreign savers meeting some of need…Japan, China, Saudi Arabia etc.

Country Nov 2008 Nov 2009 Jan 2011

China 681.9 798.9 1,154.7

Japan 577.1 751.5 885.9

United Kingdom 360.0 249.3 278.4

Caribbean Banking Centers 220.8 171.7 166.5

Oil Exporters 129.6 185.3 215.5

Brazil 78.1 144.9 197.0

Total Top Six 2047.5 2,301.6 2,898.0

Total Foreign Holders - - 4,453.4

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES (in billions of dollars)

Source: Department of the Treasury/Federal Reserve Board, March 2011

US Political Economy: Private Sector Imbalances

Source: http://www.econ.yale.edu/~shiller

US Macroeconomic data: Home prices, building costs, interest rates, population

Graph constructed by Professor Christian Lundblad, Kenan-Flagler Business School, University of North Carolina at Chapel Hill.

Consumption and GDP data from the Bureau of Economic Analysis (BEA). Mortgage equity withdrawals are measured as the year-over-year change in mortgage debt (from the Federal Reserve Flow of Funds) minus 70 percent of residential

investment spending (from the BEA). (Source: L. Josh Bivens, Economic Policy Institute)

US Macroeconomic data: Consumption and Mortgage Equity Withdrawals

Private sector imbalances:

• Private consumption expenditure sustained by freely available low cost capital, tax cuts, real estate asset bubble/boom, credit card

debt

• World’s largest ponzi scheme ever operating between US consumers and PRC

• US private savings rate also very low/even negative over past decade

• 1990s dot.com boom was investment bubble; in 2000s cheap finance sustained consumption bubble; prosperity was borrowed

Immediate credit crisis result of many factors accumulating over last decade or so:

• Securitization of financial instruments/misalignment of incentives

• Poor financial market oversight/regulation

• Political desire to increase home ownership through Freddie Mae/Mac

• Expansionary US fiscal and monetary policy

• Real estate asset bubble that developed over 00s

All led to Borrow and Spend

Adjustments needed:

• < 5 - 10 % in US Consumption as % of GDP

• > in US Gross Savings to 5 - 10% of GDP

• > in US taxes 3 - 5 of GDP %

• < 20% in average US body weight

i.e. we all must save more, consume less, adjust consumption expectations, de-lever

Note: Note: 2010 QIV Personal Consumption Expenditure was estimated to be just under 71% of GDP, but personal savings rate now

over 5%

Key contingencies

• Where/when will US housing market bottom be reached?

• At what level will more careful, de-leveraged Americans spend? (Consumption as % of US GDP: 1953 – 1983, 61- 64%; 1995 67.5%; 2003 beyond >70%)

• How will US Administration/Congress act

• To what degree/how quickly will others step in to replace lost American consumers (i.e. what is the Growth story?)

Future US Scenarios:

Party On, Dude

To

Tighten Belts

Party On, Dude

• Bailouts continue/budget deficits grow, pandering rather than pain: no pay as you go imposed

• Government borrowing increases, private investment/GDFI crowded out, welfare grows - corporate and consumer

• Protectionist impulses lead to closing of American economy to buffer against foreign competition/protect US jobs

• World eventually becomes nervous of US$/Economy, dumps US$, status of world reserve currency lost to Euro or Rmb

• US descends into second class status, paying off today’s debt through inflation, debasing currency into Mickey Mouse money

• This is worst case scenario, unlikely but possible; if we don’t discipline ourselves the market eventually will…the US could be Greece in five year’s time

Tighten Belts: Take the Pain, Adjust, Emerge..

• After stabilization, tightening occurs: interest rates rise to encourage savings/counter inflation, budget deficit stabilizes, federal govt. > discipline; adjustments at State and Local levels also probably required

• Short to near term economic growth moderate, unemployment structural, Americans reduce consumption, increase savings to de-lever balance sheets, increase savings/cushions

• After initial adjustment US economy resumes growth based on ongoing productivity gains, clean tech/high tech/innovation, local and export led growth

• China, Brazil, India, others become locomotives of global growth, lasting well into the 21st Century, consumption model evolves

• US evolves from last Superpower to First Among Equals

Either way Americans must reduce consumption/living standards to

match productivity/income; and prepare for the additional overhead of healthcare, baby boomer retirement costs, and for clean energy

development costs

We cannot borrow, grow, vote, cut our way out of the current mess; painful adjustment will be required

More than likely, both future entitlement expenditure as well as living standards of the average American will have to be curtailed

Cuts in govt. expenditure as well as tax increases will probably be required

For the sake of our children/grand children we must deal with our current economic imbalances (short term), as well as with

Global Warming/Climate Change (long term)

We are currently mortgaging their futures, economically and environmentally…

BIG TIME

But don’t go from irrational exuberance to irrational depression

It is only a question of balance...

Whether US declines or revitalizes depends upon political choices/leadership, and willingness of all to confront reality and

adjust accordingly

And remember end of world not nigh, it could be far worse…

You could be an Icelander, or in Ireland, or Mexico, or Zimbabwe

US economy still envy of the world, flexible, innovative, open for business, productive

While recovering from our party and hangover, we must all work to keep it that way!!!!