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Greenspan on Globalisation
25/8/2000
| US Federal Reserve Chairman recently spoke about globalisation, the new productivity of the new economy as well as the relative situation of the US and Europe. An interesting and important speech. |
Remarks by Chairman Alan Greenspan
At a symposium sponsored by the Federal Reserve Bank of Kansas City,
Jackson Hole, Wyoming
August 25, 2000
Global Economic Integration: Opportunities and Challenges
Globalization as most economists understand it involves the increasing
interaction of national economic systems. Of necessity, these systems
are reasonably compatible and, in at least some important respects,
market oriented. Certainly, market-directed capitalism has become the
paradigm for most of the world, as central-planning regimes have
fallen into disfavor since their undisputed failures around the world
in the four decades following World War II. But there remains an
active intellectual debate over the elements of capitalism that are
perceived as most essential for a productive and civil society.
The practical manifestation of that debate can be seen in the stresses
on our various political and legal systems. Opposing forces sometimes
reflect significantly different underlying views of how societal
values should be traded off, but more deeply, they often demonstrate
different understandings of the way economies work.
Earlier in the postwar period, even we in the West believed that
market failure was a common occurrence. To some, this belief justified
significant state controls and frequent intervention on the
microeconomic level to improve, as they saw it, the functioning of
markets and to maintain economic stability and growth. At the
macroeconomic level, an exploitable tradeoff between unemployment and
inflation was widely believed to exist, and a little inflation was
perceived as useful to prime the pump of prosperity.
Remnants of those views, of course, remain. But it is remarkable how
far economic opinions and "conventional wisdom" have shifted since the
1970s. At the risk of some oversimplification, there has been a
noticeable reversion in thinking toward nineteenth-century liberalism,
with the consequence that deregulation and privatization have become
policies central to much governmental reform.
To a marked degree, this shift in policy orientation reflects a
response to technologically driven globalization. By lowering the
costs of transactions and information, technology has reduced market
frictions and provided significant impetus to the process of
broadening world markets. Expanding markets, in turn, have both
increased competition and rendered many forms of intervention either
ineffective or perverse.
The recognition of this prosperity-enhancing sea-change in world
markets and, in that context, of the counterproductive consequences of
pervasive intervention has led many governments to reduce tariffs and
trade barriers and, where necessary, to deregulate markets. These
actions themselves have further promoted the very globalization that,
interacting with advancing technology, spurred the deregulatory
initiatives in the first place. The result of this process has been an
advance and diffusion of technical change that has raised living
standards in much of the world.
The conceptual battleground has moved far from the stark terms of the
earlier capitalist-socialist confrontations. The failed experiment in
central planning in Eastern Europe and the Soviet Union after World
War II has largely muted the arguments of most ardent socialist
planners. The debate has now shifted to the nature and extent of
actions appropriate for governments to take in order to ameliorate
some of the less desirable characteristics that are perceived to
accompany unfettered competition. But unlike in much of the nineteenth
century, little unfettered competition is actually practiced in
today's world. In large part, driven by the value standards of our
societies that developed out of the Great Depression, some government
regulation is practiced virtually everywhere.
Nonetheless, it has become generally understood that governmental
actions often hinder incentives to investment by increasing
uncertainties, boosting risk premiums, and raising costs. Even among
those who deride the more unbridled forms of capitalism, there is a
growing awareness that many attempts to tame such regimes are not
without cost in terms of economic growth and the average living
standards of a nation.
A recent manifestation of these costs can be seen in the lower level
of high-tech capital investment in continental Europe, on average, and
in Japan, relative to that in the United States. Arguably, this
outcome has resulted to an important degree from the particular legal
structures and customs that govern labor relations in much of Europe
and Asia. By choice over the decades, Europe, for example, has
endeavored to protect its workers from some of the presumed harsher
aspects of free-market competition. To discourage layoffs, discharging
employees was made a difficult and costly process in comparison with
that in the United States. By law and by custom, American employers
have faced many fewer impediments in recent years to releasing
employees.
This difference is important in our new high-tech world because much,
if not most, of the rate of return from the newer technologies results
from cost reduction, which on a consolidated basis largely means the
reduction of labor costs. Consequently, legal restraints on the
ability of firms to readily implement such cost reductions lower the
prospective rates of return on the newer technologies and, thus, the
incentives to apply them. As a result, even though these technologies
are available to all, the intensity of their application and the
accompanying elevation in the growth of productivity are more clearly
evident in the United States and other countries with fewer
impediments to implementation.
Parenthetically and counter-intuitively, the increased ease of layoffs
in the United States, by reducing the risks of hiring by American
employers, has contributed to a higher rate of employment in the
United States compared with the vast majority of our major trading
partners.
A particular irony in all this is that Europeans have been finding
investments in the United States increasingly attractive and have
accounted for an increasing share of the expanding total of foreign
investment in U.S. direct and portfolio assets. In an effort to raise
returns on domestic assets, many governments, European and others, are
being led away from former dirigiste regimes to place greater reliance
on markets. These governments see such a direction as necessary in
order to enable their firms and workers to achieve the efficiencies
required to meet the rigors of international competition. Recent plans
for tax reforms, significant initiatives to create more flexible labor
markets, and ongoing steps toward greater privatization in Europe and
elsewhere underscore the extent to which views have changed in recent
years.
But it is clearly pragmatism, not ideology, that is the main driving
force in these evolving views. The structural policy adjustments in
Western Europe and Japan, not to mention the efforts in China and
Russia to move toward market capitalism, are being motivated, for the
most part, by the evident ability of market competition to elevate
living standards.
Thus, despite the meaningfully different views initially held of the
way the world does, and should, work, powerful global competitive
forces appear for now to be driving the economic and legal paradigms
of many nations into closer alignment around a more competitive market
capitalism.
It is by no means self-evident, however, that these trends will
eventually lead to world convergence of economic regimes and to
agreement about the conceptual framework that such a convergence would
likely require. Certainly, the demonstrated ability of relatively
unfettered markets to raise living standards over time creates
considerable incentive for movement in that direction. But the speed
of that movement--indeed, its very persistence over time--is far less
clear. Even among liberal democracies, one can still find deep-seated
antipathy toward free-market competition and its partner, creative
destruction, to use Joseph Schumpeter's now famous insight. While
recognizing the efficacy of capitalism to produce wealth, there
remains considerable unease among some segments about the way markets
distribute that wealth and about the effects of raw competition on the
civility of society.
Thus, should recent positive trends in economic growth falter, it is
quite imaginable that support for market-oriented resource allocation
will wane and the latent forces of protectionism and state
intervention will begin to reassert themselves in many countries,
including the United States.
For now, the process of globalization is being aided by strengthening
economic growth, which is clearly being driven by an accelerating
application of new insights. Technological innovation, however,
arguably comes in bunches as new discoveries feed on one another to
push forward innovation until the effects of the initial impetus
finally peter out. The vast electrification of our societies and,
before that, the spread of the railroads helped elevate economic
growth for a considerable period of time. But the pace of growth
eventually slowed when full, or near-full, exploitation of the newer
technologies was achieved.
The most recent wave of technology has engendered a pronounced rise in
American rates of return on high-tech investments, which has led to a
stepped-up pace of capital deepening and increased productivity
growth. Indeed, it is still difficult to find credible evidence in the
United States that the rate of structural productivity growth has
stopped increasing. That is, even after stripping out the significant
impact on productivity acceleration of the recent shape of the
business cycle, the second derivative of output per hour still appears
to be positive.
If we knew at what stage of the current technological wave we were in,
we could, I assume, confidently project when these elevated rates of
change in long-term earnings expectations, productivity growth, and,
hence, wealth creation would return to a more historically average
pace.
For it seems evident that once such a wave begins to crest, much of
the self-reinforcing virtuous cycle presumably fades, as it has in the
past. In such a scenario, full development of available technological
synergies and their competitive deployment would damp the historically
high prospective rates of return on capital investment and slow the
pace of capital deepening. The level of structural productivity does
not recede, of course, since once gained new technological insights
are never lost, but its rate of increase would slow, and projections
of long-term profits growth presumably regresses back to earlier
magnitudes.
From any perspective, of course, a tapering-off in productivity
acceleration is inevitable at some point in the future. In the past
few hundred years for which we have some rough productivity
approximations, human ingenuity, even at its best, appears to have
rarely produced annual productivity growth approaching double-digit
rates for any protracted period of time.
Any notable shortfall in economic performance from the standard set in
recent years, as I indicated earlier, runs the risk of reviving
sentiment against market-oriented systems even among some conventional
establishment policymakers. At present, such a shortfall is not
anticipated, and such views are not widespread. But they resonate in
some of the arguments against the global trading system that emerged
in Washington, D.C., and Seattle over the past year. Although most of
these arguments may be easy to reject, those of us who support
continued endeavors to extend market-driven globalization need to
understand and, if possible, address the concerns that give rise to
the desire to roll back globalization.
How the convergence of economic systems toward the most
market-oriented capitalist structures will fare if world long-term
economic growth trends revert to historic norms is an intriguing
question. In the meantime, this extraordinary period of technological
advance continues to exhibit great vitality, bringing with it the
prospect of further globalization, greater competition, and the
resulting improvements in the economic welfare of most of the world's
citizens. It is almost surely the case that, the longer the process of
globalization of economic activity continues, the more firmly
entrenched will be the gains we are beginning to realize.
But our past endeavors at long-term forecasting afford us little
confidence in being able to anticipate seminal changes in global
economics and finance. We cannot, however, refrain from reflection.
That is what this conference is all about.
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Bildt Blog Comments
In addition to this webpage, and the email letters ongoing since 1994, I have now started a blog as well.
You find it at http://bildt.blogspot.com.
At www.bildt.net you will continue to find articles, speeches and different documents.
At the blog there will be the shorter and perhaps somewhat faster comments.
And the e-letter continues to give at the least an attempt at analys.
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