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Challenges of Globalization:

I m b a l a n c e s a n d G r o w t hAnders slund and Marek Dabrowski, editors July 2008 416 pp. ISBN 978-0-88132-418-1 $29.95

Te last three decades o economic, social, and political development in the world have been nothing short ospectacular. Japan rose to become a great economic power ater its deeat in World War II. Its success was ol-lowed by rapid growth in the East Asian igersHong Kong, Singapore, aiwan, and South Korea. Tanks toDeng Xiaopings reorms in 1978, China has risen to become a global economic superpower. India is growing ata similar speed, with the ormer Soviet bloc joining in the growth eat, reaching an annual average growth rateo 9 percent in recent years.

However, one o the greatest global booms ever is now ending ollowing the eruption o a nancial crisisthat began in the United States and may spread to other regions. Global imbalances, exceedingly accommoda-tive monetary policy and loose regulation have caused the current US nancial crisis and global overheating,which has resulted in surging commodity prices and global ination. In many countries, reorm atigue has ol-lowed the reorm impetus o the 1990s. Te current round o multilateral trade negotiations in the World radeOrganization, the Doha Round, is paralyzed.

A major macroeconomic concern derives rom the inordinate imbalances in international payments. Chi-na, Japan, Russia, and East Asian and oil-exporting countries have accumulated huge international reserves,while the United States has run a large and persistent current account decit. Another worry is that inequalityappears to have increased in the last two decades in virtually all countries.

Tis bookbased on the international conerence on Winds o Change: Te Impact o Globalization onEurope and Asia held in Kyiv, Ukraine, on March 2324, 2007 and organized by Warsaw-based CASE-Centeror Social and Economic Research and CASE-Ukraineaddresses the growing macroeconomic imbalancesand the challenges o globalization and long-term economic growth, with a ocus on Europe and Asia. Variousaspects o the macroeconomic imbalances are the theme o the rst six chapters. Te second part o the bookdiscusses how the capitalist model o economic development, which has delivered this growth, is developing orshould evolve. Te last two chapters consider options available to European policymakers to compete with andadjust to the rapidly growing East Asian igers and China.

Global Imbalances

I properly accounted or, total current account surpluses must be balanced by a sum o corresponding currentaccount decits. Te anomaly o the last decade has been that the United States has become the largest net debt-or to the rest o the world economy. Another region that has experienced lasting and sustained current accountdecits is Central and Eastern Europe. In chapter 1, Susan Schadler acknowledges that By conventional stan-dards, the external imbalances o many o the Central and Eastern European countries are indeed large enoughto justiy serious concerns. In chapter 2, Alan Ahearne, Birgit Schmitz, and Jrgen von Hagen observe that thecurrent account imbalances in the euro area have widened markedly over the past one-and-a-hal decades andthat these imbalances have been aggravated since the creation o the Economic and Monetary Union (EMU).

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New EU members should expect even larger capital inowsand current account decitswhen they nallyadopt the euro. Marek Dabrowski takes this argument urther in chapter 3, where he conronts the traditionalramework o analysis or balance o payments with the new realities o a highly integrated world economywith great capital mobility. He proposes an alternative analytical ramework that could have ar-reaching policyimplications.

In chapter 4, Daniel Gros broadens the picture to external imbalances in the world economy. He sum-marizes three views o the key cause o the excessive global imbalances: Washington blames China or under-consumption and manipulation o its exchange rate in order to promote exports, Europeans complain aboutthe US scal decit and the loose monetary policy o the Federal Reserve, and Asians accuse the United Stateso overconsumption while themselves seeing a competitive exchange rate as a necessary element o an export-led growth strategy. He concludes that the United States and some European economies have been overheatedbecause o housing ination, which has been nanced internationallya problem that should be resolved.

In chapter 5 Ray Barrell, Dawn Holland, and Ian Hurst discuss sustainable adjustment o global imbal-ances. Tey ocus on the US current account decit o 6 percent o GDP, which has led to a negative US netasset position o 20 percent o GDP. Tey argue that mere exchange rate changes driven by monetary policywould only temporarily improve the US current account. I a sustained change is to take place, the real economy

must change.In chapter 6, Wing Tye Woo brings China into the discussion. He considers US animosity to Chinesetrade surpluses with the United States misdirected. He sees US concern as one o increased job insecurity thatderives rom both enhanced globalization (not only rom trade with China) and rapid technological innovation.Woo nds that the main cause o the Chinese current account surplus is the countrys dysunctional nancialsystem. otal savings exceed investment expenditures, and this savings glut is the cause o the current accountsurplus. Woo argues that China primarily ought to speed up the renminbi appreciation that started in 2005,not least to contain ination, accelerate import liberalization, and pursue a more expansionary scal policy tosoak up excess savings. Te United States ought to improve its scal balance and reinorce the dwindling radeAdjustment Assistance program, retraining support, and medical insurance to enhance Americans sense osecurity.

Capitalist Model of Economic Growth

In chapter 7 Leszek Balcerowicz discusses institutional systems and economic growth. He singles out innova-tion-based growth as potentially lasting and universal, while other orms o growth are merely transitional.Innovation-based growth must be based on a countrys institutional system, but it can be blocked by either aninormation barrier or an incentive barrier. Te latter is in eect when the expected utility an individual derivesrom a new system does not correspond to the utility to society o his or her act. Either investment is hamperedor the individual returns o an investment are in danger because o ofcial or private predation. With ew excep-tions, in countries where incentive barriers prevail, long-term economic growth requires a substantial change othe countrys institutions through reorm.

In a similar vein, Jacek Rostowski (now minister o nance o Poland) and Bogdan Stacescu consider theimpact o the legal school versus recent colonial origins on economic growth in chapter 8. Teir econometrictest ails to veriy that a legal system based on the English common law system is more conducive to growththan one ounded on French civil law. Instead, their regressions support the view that the problem lies in a widercomplex o institutions that are associated with having been a British or a French colony. Tey nd that ormerBritish colonies evidence better economic perormance than ormer French colonies.

Te last two chapters discuss the possibilities or the European Union to compete and adjust in relationto East Asias igers and China, respectively. In chapter 9, Does the European Union Emulate the Positive

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Features o the East Asian Model? Anders slund arrives at a surprisingly positive answer. In a comparison between keyeatures o the East Asian and EU economic models, he nds that East Asia has excelled in our regards: small transersand public expenditures, low taxes, reer labor markets, and strong education. He ocuses on the rst three, which are allprominent goals o the EU Lisbon Agenda o 2000.

In chapter 10, Jean Pisani-Ferry and Andr Sapir consider the dilemma o relations with China rom a Europeanperspective. Teir main concerns are that Europe will not reorm ast enough to keep up in the competition and couldbe squeezed in intensied competition between the United States and China, in which the ormer would be more in-

novative and the latter more cost eective. A number o actors contribute to the challenges or Europe vis--vis China.Chinese integration into the world economy may not help but interere with European integration. Similarly, Chinesecompetition may destabilize European privileged trade relations. Chinas great demand or energy and other raw materi-als will boost their prices and aect import-dependent Europe. Dysunctional European labor markets are a particularhandicap. With regard to policies on climate change, Europe and China take opposing positions, which may harmcontrol o greenhouse gas emissions and cause trade disputes. Te euro has shot up, while the renminbi is lingering (asa consequence o its continuous peg to the US dollar), urther squeezing EU trade. And ultimately, Chinas rise in eco-nomic power will reduce Europes weight not only in the world economy but also in international organizations.

But along with these international shits and concerns, something curious is happening. Globalization, ratherthan capitalism, is being questioned because o its huge orce that does not seem sufciently well managed by existinggovernmental institutions. At the same time, capitalism is developing ever urther in most countries. Deregulation andprivatization are proceeding in line with the Washington Consensus. Public expenditures are declining and converging.Similarly, democratization is proceeding with economic modernization. Te exceptions to this increasing adherence tothe rules o normal capitalism are ew, essentially some o the most resource-rich countries (such as Russia and Venezu-ela), which can aord poor economic policies as long as the oil price keeps reaching new peaks.

As the world improves in almost all regards, however, tolerance o the ew elements that are not improvinginequality and securityis steadily declining. Te economic success o capitalism and globalization may appear to be asgood as anybody could have hoped or, but capitalism also has to be politically sustainable.

To learn more about this book, visithttp://bookstore.petersoninstitute.org/book-store/4181.html.

To learn more about Anders slund, visithttp://www.petersoninstitute.org/staf/author_bio.cm?author_id=455.

To learn more about Marek Dabrowski, visithttp://www.petersoninstitute.org/staf/author_bio.cm?author_id=572.

http://bookstore.petersoninstitute.org/book-store/4181.htmlhttp://www.petersoninstitute.org/staff/author_bio.cfm?author_id=455http://www.petersoninstitute.org/staff/author_bio.cfm?author_id=572http://www.petersoninstitute.org/staff/author_bio.cfm?author_id=572http://www.petersoninstitute.org/staff/author_bio.cfm?author_id=455http://bookstore.petersoninstitute.org/book-store/4181.html