Über die Autorin bzw. den Autor

Frederic S. Mishkin is Alfred Lerner Professor of Banking and Financial Institutions at the Columbia University Graduate School of Business, a research associate at the National Bureau of Economic Research, and a member of the Federal Reserve's board of governors. He is the author of many books, including "Monetary Policy Strategy" (MIT), "The Economics of Money, Banking, and Financial Markets" and (with Ben S. Bernanke, Thomas Laubach, and Adam S. Posen) "Inflation Targeting" (Princeton).

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"The Next Great Globalization offers real understanding of both the causes of recent financial crises around the world and the dramatic opportunities we have in future development in world financial architecture. Mishkin's thoroughness and at the same time his grasp of the big picture come through beautifully in this book."--Robert J. Shiller, author of Irrational Exuberance and The New Financial Order

"At long last a book that stares the financial sector firmly in the eye, shows its serious faults, identifies the factors that lie behind them, and proposes constructive solutions for developing economies. This highly readable book is rooted in state-of-the-art research on recent developments in emerging market economies. It convincingly posits a central and controversial proposition: namely, that private financiers, given the right set of incentives, can open the doors to progress, while their absence will likely perpetuate inefficiency and cronyism. Mishkin has thrown down his gauntlet to the antiglobalizers for whom the financial sector is a bête noire. Readers will enjoy this book, and engaging in the debate that will certainly follow."--Guillermo Calvo, University of Maryland, former chief economist at the Inter-American Development Bank

"This is a fabulous book, and I can hardly endorse it strongly enough. It is simply the best single thing I have ever read on financial globalization, and I felt tremendously educated, entertained, and motivated after reading it. It is a great blend of technically accurate and careful argumentation with accessible exposition that will appeal to a wide audience. Indeed, Mishkin's clear, jargon-free, concise writing, combined with his technical expertise and reputation, puts this book far above the vast majority of writings by economists for broader audiences."--William Easterly, author of The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good

"The past six decades have seen a steady forward march in the interdependence of national economies. While many aspects of this globalization process have proved controversial, none has been as potentially explosive as financial globalization-the international integration of national financial markets. Mishkin carefully reviews the factors that have caused financial meltdowns in past emerging-market globalization episodes, and lays out a blueprint for avoiding such crises in the future without cutting off access to foreign finance. Compelling, comprehensive, and accessible, this book makes the case that developing countries can safely embrace financial globalization, and should."--Maurice Obstfeld, University of California, Berkeley

"Eschewing sharp rhetoric in favor of cogent analysis, Mishkin calmly and convincingly explains why developing countries that get financial globalization right will ultimately far outperform those that try to shut it out. Even China will be no exception."--Kenneth Rogoff, Harvard University, former chief economist and director of research, International Monetary Fund

"This is the first book to make a comprehensive and compelling argument for financial globalization. It makes a powerful case that financial globalization is a necessary part of policy reforms to promote economic growth among stagnating countries and provides guidance on how to proceed while avoiding the crises that are sometimes associated with reform. Mishkin has an extraordinary ability to write for a broad audience without sacrificing intellectual rigor. This book should be read by everyone interested in economic development, as well as those focused on financial sector issues."--Ross Levine, Brown University

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The Next Great Globalization

Princeton University Press

Chapter One

In 1960 South Korea was one of the poorest countries in the world, with an average income per person less than that in many countries in sub-Saharan Africa. It was only minimally engaged in trading goods and services with the rest of the world, and the flow of capital from abroad into South Korea was minuscule, amounting to less than $400 million per year. Today South Korea is a member of the rich-countries club, the Organisation for Economic Co-operation and Development (OECD), and the booming metropolis of Seoul looks like any prosperous, world-class city. International trade is a key feature of the Korean economy, with over a third of the economy engaged in exporting, and the annual net flow of foreign capital into South Korea has increased over twentyfold to more than $10 billion.

What has happened to South Korea to allow it to grow like this? Globalization, the increasing involvement of its economy in world markets.

What Is Globalization?

Globalization is a term that is often used imprecisely and can mean many things. This book focuses on economic globalization, the opening up of economies to flows of goods, services, capital, and businesses from other nations that integrate their markets with those abroad.

Economic globalization takes many forms. When a New Yorker orders a Mercedes that is made in Germany, rather than a Cadillac built in America, she is taking advantage of the globalization process. When MGM sells a DVD of one of its hit movies to a teenager in Singapore, this also is a result of globalization. When a company based in London makes use of an Indian computer programmer in Bangalore, globalization is again at work. All of these examples of globalization involve international trade, the flow of goods (Mercedes cars and DVDs) and services (computer programming). Globalization of trade in goods and services has expanded at an extremely rapid pace in the past forty to fifty years, growing from a little over $1 trillion (at current prices) in 1960 to over $15 trillion today.

Economic globalization can take another form: the movement of capital and financial firms across borders, a process called financial globalization. When a Japanese investor buys a U.S. Treasury bill or a share of IBM stock, capital has moved from Japan to the United States, and the purchase is an example of financial globalization. Citibank's loan to a Malaysian shoe manufacturer is also financial globalization. The opening of a Spanish bank office in Santiago, Chile, is a further move toward financial globalization. Financial globalization has also expanded dramatically. Since 1975, when the data were first collected, international capital flows have increased more than eightfold to over $1.4 trillion per year today.

The globalization process has given a new name to a class of countries that have only recently opened up their markets to the flows of goods, services, and capital from other nations: emerging market economies. The advent of emerging market economies and the huge increases in international trade and international capital flows suggest that we have entered a new Age of Globalization.

The First Age of Globalization, 1870-1914

The current Age of Globalization is the second great wave of globalization of international trade and capital flows. The first occurred from 1870 to 1914, when international trade grew at 4% annually, rising from 10% of global output (measured as gross domestic product or GDP) in 1870 to over 20% in 1914, while international flows of capital grew annually at 4.8% and increased from 7% of GDP in 1870 to close to 20% in 1914. John Maynard Keynes captured the feel of this era with the following famous passage from his The Economic Consequences of the Peace, which was published in 1919:

What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914! The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend.

This first wave of globalization was accompanied by unprecedented prosperity. Economic growth was high: from 1870 to 1914, world GDP per person grew at an annual rate of 1.3%, while from 1820 to 1870 it grew at the much smaller rate of 0.53%.

But did this greater economic growth translate into a better deal for the poor of the world? If economic growth during this Age of Globalization had been associated with growing income inequality, then the poor might not have benefited. However, this is not what happened for countries involved in the globalization process. The income gap narrowed between wealthy and poor nations that actively participated in global markets (although there was little effect on income distribution within these countries). Japan provides an extraordinary example. Starting in the seventeenth century, Japan completely cut itself off from the rest of the world, allowing only one Dutch ship per year to land in Nagasaki to engage in a small amount of trading. When Commodore Matthew Perry and his black ships arrived on Japanese shores in 1853 to force Japan to trade with the United States, Japan began to open up to the rest of the world. The resulting shake-up of Japanese society eventually led to the Meiji restoration in 1868, as a result of which Japan became fully engaged in the global economic system. In 1870, at the start of this period, Japan was a backward country with an average income per person that was less than a quarter of that in the United Kingdom. From 1870 to 1913, its income was able to grow at 1.5% in comparison to a growth rate of 1.0% for the United Kingdom, thereby narrowing the gap. Argentina's growth experience during this period was even more extraordinary. From 1870, when its income per person was a little over 40% of that in the United Kingdom, its income grew at 2.5% through 1913, raising its income per person to over 75% of that in the United Kingdom. The Japanese and Argentine examples illustrate how poverty was reduced in the countries that were active in the globalization process.

However, not all countries engaged in that process. Globalizers did well, but, as critics of globalization point out, some countries were unable to take advantage of globalization. For example, countries like India and China actually deindustrialized during this period, with China's income per person falling from 24% of the United Kingdom's in 1870 to 13% in 1914. However, this increase in income inequality between globalizers and non-globalizers occurred because non-globalizers did so badly relative to globalizers. For countries that were able to take advantage of the globalization process, income inequality actually fell because globalizers that were initially so poor did so well relative to globalizers that started out rich. Increasing income inequality between countries during the period was clearly not the fault of globalization. It was rather a consequence of the inability or unwillingness of some countries to enter the global economic system.

The End of the First Age of Globalization: The Great Reversal, 1914-1939

The first Age of Globalization came to an end with the advent of World War I. The war caused a disruption of capital flows and trade between nations that continued even after the conflict ended. From 1914 to 1929, the average level of international trade fell from 22% of world GDP to 16%, and capital flows dried up, falling from close to 20% to 8% of world GDP. And worse was yet to come. In 1929 the Great Depression started in the United States, and it quickly spread to the rest of the world. The economic devastation was immense. Unemployment reached a peak of 25% in the United States, and the income of the average person had fallen by 30% by 1933 and was only slightly above 1929 levels by 1939. However, the consequences of the Depression were far worse elsewhere. The economic collapse in Germany and Italy helped bring the fascists and Nazis into power. The world then entered the worst nightmare imaginable: a second world war. From 1939 to 1945, over fifty million people died, over half of whom were innocent civilians. The inhumanity of the Holocaust resulted in the slaughter of six million Jews and five million people of other religious and ethnic backgrounds in concentration camps.

The collapse of this first Age of Globalization, which has been given the name the "Great Reversal" by Raghuram Rajan and Luigi Zingales, provides two important lessons: (1) Globalization is not an immutable economic force; it can be reversed. (2) The economic and political nightmares of the interwar period should warn us that a backlash against globalization can be disastrous.

The Second Age of Globalization, 1960 to the Present

The aftermath of World War II has been an extraordinary period. Even before the war ended, the soon-to-be victorious allies realized that the mistakes of the interwar period should not be repeated. They met in Bretton Woods, New Hampshire, in 1944 to develop a new international system to promote world trade and prosperity after the war. They created two new international financial institutions (IFIs) both of which were headquartered in Washington, D.C., just across the street from each other: the International Monetary Fund (IMF), whose job was to oversee the international financial system and ensure that it would facilitate trade between countries, and the International Bank for Reconstruction and Development, which became known as the World Bank, whose job was to provide long-term loans to war-torn Europe and to developing countries to aid in their economic development. An additional organization arising out of the Bretton Woods meeting, but not established until 1947, was the General Agreement on Tariffs and Trade (GATT), headquartered in Geneva. Created to regulate the conduct of trade between countries, this organization evolved into the World Trade Organization (WTO).

These new institutions were created to promote globalization, and in this they were extremely successful. Once the world economy had returned to normal by the end of the 1950s, globalization advanced at a rapid pace. From 1973 until today, world trade grew at 11% annually, rising from just over 22% of world GDP to 42%. Since 1973 the flows of capital between countries have also exploded, rising from 5% to 21% of world GDP. We are clearly in the second wave of globalization.

Have the participants in this new Age of Globalization experienced the good economic outcomes and the reduction of poverty associated with the previous Age of Globalization? Data suggest that they have. World economic growth from 1960 to today has been at the highest pace in the history of the world: world income per person has been rising at a 2% annual rate. Critics of globalization point out that income inequality across countries has grown and argue that for this reason globalization has not been good for the poor. But they have not looked carefully enough at the data. Income inequality across countries has risen only because, as in the period before World War I, those countries that have been active in global markets have grown very rapidly. Meanwhile those who have not (such as most countries in sub-Saharan Africa) have not only seen their position relative to globalizers fall but also experienced absolute drops in income per person. As before, the globalizers have won and the non-globalizers have lost. In 1960 the income of the average person in Somalia was 10% higher than that of his South Korean counterpart. Over the next forty-five years, Somalians experienced a drop in their income, so that Somalia's income per person is now less than one-tenth that of South Korea's: Somalia's income per person decreased by 33% while South Korea's increased by more than 1000%.

What we have seen in this new Age of Globalization is a convergence of income per person among countries that have been able to take advantage of globalization by becoming export oriented. For this set of countries, income inequality has decreased; for the non-globalizers, it hasn't. Furthermore, there is little evidence that globalization has increased income inequality within developing countries. (There has, however, been an increase in income inequality within rich countries in recent years that might be related to globalization.) Thus we are led to the same conclusion that we reached for the pre-World War I era: this new Age of Globalization has seen a reduction of poverty in developing countries that have been willing and able to globalize.

Another way of looking at the data also suggests that globalization has been associated with reductions in poverty. If, instead of looking at inequality across countries, where all countries are weighted equally, we instead look at inequality across the world population, where each person is weighted equally, we get a very different picture. The great success stories in recent years have been in Asia, which has two of the most populous countries in the world, India and China. Both countries came to globalization late and have sometimes used unorthodox methods to develop their economies, but their embrace of globalization has had high payoffs. Rapid growth in India and China has removed over a billion people from extreme poverty. When we realize that these billion make up a sixth of the world's population, it becomes obvious why research that weights every human being equally in computing inequality finds that income inequality has actually fallen, not risen, in recent years. The great success stories of India and China in reducing poverty are reflected not just in economic data but also in life expectancy. In 1955 life expectancies in India and China were thirty-nine and forty-one years, respectively; today they have risen to sixty-two years in India and seventy years in China.

These success stories are not meant to minimize the terrible plight of certain parts of the world, such as sub-Saharan Africa, where poverty has increased and life expectancy has actually fallen to disastrously low levels in recent years because of the AIDS epidemic. (Those in poverty, defined as having income of less than $2 per day, rose from 73% of the population to over 76% today, while life expectancy has dropped from fifty years in 1990 to less than forty-six years currently.) The plight of these countries, however, is due not to globalization but rather to the failure to globalize. This observation has been cogently expressed by economists Peter Lindert and Jeffrey Williamson: "As far as we can tell, there are no anti-global victories to report for the postwar Third World."

A word of caution: The association of the reduction in poverty with countries that have globalized could be the result of reverse causality. That is, countries that had the capability to grow fast were also the ones that could take advantage of globalization. Evidence and analysis presented later in this book, however, suggest that causality is likely to run from globalization to high economic growth and reductions in poverty.

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Excerpted from The Next Great Globalizationby Frederic S. Mishkin Copyright © 2006 by Princeton University Press. Excerpted by permission.
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