Bernanke on Global Economic Integration

by Roger Alford

Federal Reserve Chairman Ben Bernanke gave an important speech on Friday regarding global economic integration. It provides one of the best glimpses of the new Fed Chairman’s vision of economic globalism. In essence it is a statement of what is old and what is new about the current wave of globalism. It also is a wonderful speech espousing free trade, underscoring the historical roots of protectionism, and emphasizing the need for the benefits of globalism to be widely shared.

Here is an excerpt from the last half of the speech:

How does the current wave of global economic integration compare with previous episodes? In a number of ways, the remarkable economic changes that we observe today are being driven by the same basic forces and are having similar effects as in the past. [Discusses similarities between historical instances of integration and current integration]….

What, then, is new about the current episode? Each observer will have his or her own perspective, but, to me, four differences between the current wave of global economic integration and past episodes seem most important. First, the scale and pace of the current episode is unprecedented. For example, in recent years, global merchandise exports have been above 20 percent of world gross domestic product, compared with about 8 percent in 1913 and less than 15 percent as recently as 1990; and international financial flows have expanded even more quickly.3 But these data understate the magnitude of the change that we are now experiencing. The emergence of China, India, and the former communist-bloc countries implies that the greater part of the earth’s population is now engaged, at least potentially, in the global economy. There are no historical antecedents for this development….

Second, the traditional distinction between the core and the periphery is becoming increasingly less relevant, as the mature industrial economies and the emerging-market economies become more integrated and interdependent…. In the nineteenth century, the country at the center of the world’s economy, Great Britain, ran current account surpluses and exported financial capital to the periphery. Today, the world’s largest economy, that of the United States, runs a current-account deficit, financed to a substantial extent by capital exports from emerging-market nations.

Third, production processes are becoming geographically fragmented to an unprecedented degree. Rather than producing goods in a single process in a single location, firms are increasingly breaking the production process into discrete steps and performing each step in whatever location allows them to minimize costs….

The final item on my list of what is new about the current episode is that international capital markets have become substantially more mature. Although the net capital flows of a century ago, measured relative to global output, are comparable to those of the present, gross flows today are much larger. Moreover, capital flows now take many more forms than in the past: In the nineteenth century, international portfolio investments were concentrated in the finance of infrastructure projects (such as the American railroads) and in the purchase of government debt. Today, international investors hold an array of debt instruments, equities, and derivatives, including claims on a broad range of sectors. Flows of foreign direct investment are also much larger relative to output than they were fifty or a hundred years ago….

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.

4 Responses

  1. Any mention of how the failure of the Doha round of negotiations at the WTO fits this rather rosy picture?

  2. No it wasn’t that kind of speech. It was more of a tour of the horizon, focused on the long history of economic globalization.

  3. Thanks Professor Alford.

    Readers may be surprised to learn that, were Karl Marx alive today, he would not have been surprised at the empirical economic facts and trends cited in this speech, indeed, he would have been delighted to see this latest phase of the globalization of capitalism, including the increased prospects for ‘free trade’ (as Desai notes, Marx ‘was a champion of free trade, and no friend of tariff barriers’). For an explanation, please see Lord Meghnad Desai’s book, Marx’s Revenge: The Resurgence of Capitalism and the Death of Statist Socialism(London: Verso, 2002). While a critic of capitalism, Marx well understood and appreciated its dynamics and potential, for it is only when its progressive development comes to an end, when it has exhausted its potential as an economic form, that we will be able to envision a progressive alternative to capitalism, not unlike the historical evolution evidenced in the change from feudalism to capitalism….

  4. Well, I finally read the speech for myself, and as Tomer Broude over at the International Law and Economic Policy blog notes, ‘Only towards the end, does Bernanke mention the “opposition”. Multilaterlaism and regionalism appear to be interchangeable means to the end. Distributional effects are distractions, the failure of Doha merely a bump in the road:’

    “The critical role of government policy in supporting, or at least permitting, global economic integration, is a third similarity between the past and the present. Progress in trade liberalization has continued in recent decades–though not always at a steady pace, as the recent Doha Round negotiations demonstrate. Moreover, the institutional framework supporting global trade, most importantly the World Trade Organization, has expanded and strengthened over time. Regional frameworks and agreements, such as the North American Free Trade Agreement and the European Union’s “single market,” have also promoted trade. Government restrictions on international capital flows have generally declined, and the “soft infrastructure” supporting those flows–for example, legal frameworks and accounting rules–have improved, in part through international cooperation.

    In yet another parallel with the past, however, social and political opposition to rapid economic integration has also emerged. As in the past, much of this opposition is driven by the distributional impact of changes in the pattern of production, but other concerns have been expressed as well–for example, about the effects of global economic integration on the environment or on the poorest countries”.

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