Bernanke on Global Economic Integration

This is pertinent to some of the conclusions of my previous post, that Globalism has a lot to answer for in regards to those who are negatively affected. Just to clarify, being mostly a utilitarian, I remain convinced that Globalism produces far more in net benefits than it does in negatives. That said, the system is far, far from perfect.

The current Fed Chairman, Ben Bernanke is a breath of fresh air compared to his predecessor. All kudos to the Oracle Greenspan, but Ben is actually comprehensible and shows signs of wanting to engage in a dialog with his constituency. Worth reading in its entirety is his Aug 25 speech at the Federal Reserve Bank of Kansas City's Thirtieth Annual Economic Symposium, Jackson Hole, Wyoming. A very good synopsis of the history of global economic integration going from the Romans to the present day coupled with an open-eyed analysis of the problems of Globalism.

The physical distance along a great circle from Wausau, Wisconsin to Wuhan, China is fixed at 7,020 miles. But to an economist, the distance from Wausau to Wuhan can also be expressed in other metrics, such as the cost of shipping goods between the two cities, the time it takes for a message to travel those 7,020 miles, and the cost of sending and receiving the message. Economically relevant distances between Wausau and Wuhan may also depend on what trade economists refer to as the "width of the border," which reflects the extra costs of economic exchange imposed by factors such as tariff and nontariff barriers, as well as costs arising from differences in language, culture, legal traditions, and political systems.

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A second conclusion from history is that national policy choices may be critical determinants of the extent of international economic integration. Britain's embrace of free trade and free capital flows helped to catalyze international integration in the nineteenth century. Fifteenth-century China provides an opposing example. In the early decades of that century, the Chinese sailed great fleets to the ports of Asia and East Africa, including ships much larger than those that the Europeans were to use later in the voyages of discovery. These expeditions apparently had only limited economic impact, however. Ultimately, internal political struggles led to a curtailment of further Chinese exploration (Findlay, 1992). Evidently, in this case, different choices by political leaders might have led to very different historical outcomes.

A third observation is that social dislocation, and consequently often social resistance, may result when economies become more open. An important source of dislocation is that--as the principle of comparative advantage suggests--the expansion of trade opportunities tends to change the mix of goods that each country produces and the relative returns to capital and labor. The resulting shifts in the structure of production impose costs on workers and business owners in some industries and thus create a constituency that opposes the process of economic integration. More broadly, increased economic interdependence may also engender opposition by stimulating social or cultural change, or by being perceived as benefiting some groups much more than others.

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By almost any economically relevant metric, distances have shrunk considerably in recent decades. As a consequence, economically speaking, Wausau and Wuhan are today closer and more interdependent than ever before. Economic and technological changes are likely to shrink effective distances still further in coming years, creating the potential for continued improvements in productivity and living standards and for a reduction in global poverty.

Further progress in global economic integration should not be taken for granted, however. Geopolitical concerns, including international tensions and the risks of terrorism, already constrain the pace of worldwide economic integration and may do so even more in the future. And, as in the past, the social and political opposition to openness can be strong. Although this opposition has many sources, I have suggested that much of it arises because changes in the patterns of production are likely to threaten the livelihoods of some workers and the profits of some firms, even when these changes lead to greater productivity and output overall. The natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures. The challenge for policymakers is to ensure that the benefits of global economic integration are sufficiently widely shared--for example, by helping displaced workers get the necessary training to take advantage of new opportunities--that a consensus for welfare-enhancing change can be obtained. Building such a consensus may be far from easy, at both the national and the global levels. However, the effort is well worth making, as the potential benefits of increased global economic integration are large indeed.

I will say that he does not go far enough. Most economists agree that worker training programs do not do much for workers dislocated by the demand for their current skills moving offshore. But he does realize that the entire regieme is shaped by political consensus. What is needed is a consensus in the "core" consuming contries of the US and EU that some global standards of labor rights (wage cost harmonization) and environmental protection (eliminating hidden subsidies on natural resource use) are important. That can get us moving towards helpful tweaks to the globalization system that can begin to provide some relief for those left behind.