Alan Greenspan: The important engine of growth for our
mutual economies - the force of globalization
Speech by Mr Alan Greenspan, Chairman of the Board of Governors of the US Federal Reserve
System, at the Banco de Mexico 75th Anniversary Conference "Stabilization and monetary policy: the
international experience", held in Mexico City, on 14 November 2000.
* * *
I am honored to be speaking before this distinguished group on the occasion of the Bank of Mexico's
75th anniversary. Appropriately, major mileposts encourage introspection and a search for perspective.
This morning, I shall focus my remarks on the important engine of growth for our mutual economies
the force of globalization.
Although globalization has its critics, I say with some conviction that the increasing interaction among
national economies has engendered benefits that have significantly exceeded their costs over the years.
And the clearest way to understand those net benefits in the 21st century is to examine the record of
the prior two centuries, both for ways in which the current experience is similar and for ways in which
it is different. After touching upon the benefits that closer linkages have provided to us all, I will then
discuss the importance of not ceding the progress that we have won thus far.
How the world is similar
Though economic data are increasingly suspect as we look further back into the past, three regularities
in the long sweep of the record strongly suggest that the degree of globalization today is not
measurably greater than that prevailing in the century-ago world of our great grandparents. One is the
importance of trade in the overall economy. Measures of total trade across industrial countries,
including those that simply sum merchandise exports and imports, have grown rapidly relative to total
output over the past fifty years. But this growth mostly reverses declines in the ratio of total trade to
GDP in the first half of the 20th century. In fact, for many industrial countries, total trade as a share of
GDP is not much above levels that were commonplace in the late 19th century.
Second, trade in goods was accompanied by substantial trade in assets. A century ago, net capital
flows across the major industrial economies were often greater than today when scaled to GDP. This
integration of global financial markets was made possible in part by technological advances, including
importantly the laying of the transatlantic cable in 1866. And, like today, open markets allowed capital
to flow to the most productive uses where prospective returns were judged to be highest.
Third, because funds could flow across national borders to their most profitable uses, national
investment was not limited to the pool of national saving. Indeed, in the last few decades of the
19th century, saving and investment at the national level apparently were far less correlated with each
other than they were for most of the 20th century, suggesting a greater degree of globalization of
investment financing in the latter part of the 19th century than existed in the succeeding century
relative to the size of our domestic economies.
Thus, our great grandparents lived in a world in which the product of their efforts well may have been
sent to foreign shores. Quite often, those efforts were funded in part by foreign investors. As a result,
what happened in the financial markets of the City of London, however distant, would echo around the
globe. Although this system produced inevitable errors of mispricing and panic on occasion, it reliably
funded the opening of new economies and the rolling back of frontiers across the Americas. A
considerable portion of the most impressive infrastructure built over the centuries - including the
center of old Mexico City itself, our system of canals in the United States, and thousands of miles of
railroad track bed and bridges in all our countries - provides eloquent testimony to the net benefit of
that international trade and finance.
How the world differs
But we should remember that the world of the 19th century differed in important respects from our
own. For one, our great grandparents were more likely to relocate. Given the great waves of
immigration in the mid and late 19th century, it was not unprecedented in some countries that
migration would change the population by one-tenth in a decade. The erection of hurdles to the free
flow of workers since then implies that our national relationship with foreign countries is more likely
to reflect commercial interests than lingering ties of earlier origin. It also requires that capital and
managers relocate to tap the pool of lower-cost workers available worldwide, helping to explain both
the rise of multinational firms and much of the expansion in real wages over time in developing
countries.
The output of our workers also differs. While ore-laden ships still cross the Great Lakes, quite often
goods of far higher value are packed in the hold of a single cargo jet bound for a more distant location.
Simply put, the advent of the microchip has allowed producers to increase the value of output while
shrinking the physical volume it takes up. The range of innovation in the high-technology industry is
truly awesome, bringing new products on line at a staggering pace and directly adding to the advance
of output per hour worked in that sector. And as knowledge and skill in harnessing this equipment
diffuses through the rest of the economy, other workers generally become more productive as well.
That is, advances in the new economy have spilled over to more established goods production. I
hesitate to use the phrase "old" economy because I am not sure how much of the truly old remains in
an economy where information from global positioning satellites is used to guide "old economy"
tractors in the field, robotic arms swing car doors in place on "old economy" assembly lines, and
seismic soundings have, during the past decade, doubled the odds of success in that stalwart of the
"old economy", wildcat drilling. Innovations in inventory control and better and more accurate routing
have made it cheaper to bring more traditional goods onto the world market. Taken together, modern
producers of goods - whether low or high tech - move goods between national markets at a lower real
cost and have more means at their disposal to meet foreign demands more flexibly than our great
grandparents could have ever imagined.
In part for these reasons, world markets are increasingly important for those who produce goods that
can be traded. While I noted earlier that merchandise trade as a share of GDP in the United States is
not much different today than it was in the late 19th century, it is important to remember that the
composition of GDP has changed considerably. One hundred years ago - even fifty years ago
agriculture, mining, and manufacturing made up about 40% of US output. Today, that figure stands
closer to 20%. On the spending side, governments have tended to take increasing shares of total
output. Thus, comparing the 21st to the 19th century, a proportionally smaller industrial base now
supports a similar relative volume of trade, suggesting that we are now more reliant on foreign
markets.
The ongoing revolution in computing and communication has also allowed US producers of services
to find foreign buyers as well. At the end of the 19th century, US exports of services were de minimis.
Indeed, as late as 1970, service exports amounted to about 1% of GDP. Today, that share stands closer
to 31⁄2%. Representative of this progress are the rapid advances in financial services, which have
knitted together national markets and added value by searching out prospective high-return firms and
projects. The speed at which capital can now cross national borders is reflected in a considerably
higher short-term component of capital flows than was the case in the 19th century. In those earlier
days, by contrast, the slower pace of round-trip investment curbed the incentive to accumulate
shortterm assets.
Of course, freely flowing capital brings costs along with benefits. The short-term nature of capital
flows implies that their direction can reverse quickly, sometimes with quite disturbing consequences.
As opposed to the 19th century, we have mechanisms to help cushion the effects of crises and a
willingness to change national monetary policies when the need arises.
The role of policy
As with our great grandparents, our own economies are made better by our interaction with the wider
world around us. International trade in goods, services, and assets are the chief means of facilitating
that interaction. And those interactions and connections in recent decades have become stronger. To
some extent, we can credit good national policy making for this. The progress in lowering trade
barriers since World War II marks the triumph of putting an important idea into practice - that
international trade benefits all nations. Indeed, in every nation, those benefits are shared by people
spread across quite different income brackets. The pity is that this idea has been well known in the
economics profession for the two past centuries. To be sure, some of this recent progress was bred by
necessity, as national governments came to appreciate the patent inevitability of globalization. By
lowering the costs of transacting and sharing information, technology has reduced market frictions and
provided significant impetus to the process of broadening world markets. Expanding markets, in turn,
have increased competition and narrowed the ability of governments to influence economic outcomes.
In recognition both of the prosperity possible through an open trading system and of their lessened
ability to halt that tide, many governments have reduced tariffs and trade barriers and, when necessary,
deregulated markets. These actions themselves have further promoted globalization.
The risks we face
Understanding the process by which this progress has been accomplished highlights a critical risk
going forward. Simply put, good economic performance has made it easier to make good economic
policy. However, any notable shortfall in economic performance from the exemplary standard of
recent years runs the risk of reviving mistrust of market-oriented systems, even among conventional
policymakers. Thankfully, such views are not widespread, and most fall quickly to the force of reason.
Still, the arguments against the global trading system that emerged first in Seattle and then spread over
the past year arguably touched a chord in many people, in part by raising the fear that they would lose
local political control of their destinies. As some analysts have noted, protests have arisen not against
"economic forums" per se, but rather against "world economic forums". Clearly, the risk is that
support for restrictions on trade is not dead, only quiescent.
In many important respects, the past half century has represented an uneven struggle to repair the close
linkages among national economies that existed before the First World War. The hostilities bred of
war, the substantial disruptions to established trading patterns associated with that conflict, and the
subsequent poor economic performance over the next few decades triggered the erection of trade
barriers around the world that have taken even longer to dismantle. To repeat that error would be a
tragic act of foolishness and waste.
Central bankers can make two contributions to ensure an open trading system. For one, we should not
hesitate to remind our fellow citizens of the manifest net benefits of free trade in goods, services, and
assets, benefits that accrue not only to all trading partners on average but also especially to some of the
least fortunate within those trading societies. I would further emphasize that the free market system
has proven itself better than all other forms of organization dedicated to harnessing the underlying
competitive forces of the division of labor and comparative advantage. For another, we monetary
policymakers must keep hold of the anchor provided by price stability so as to support maximum
sustainable economic growth over time. By fostering such economic performance, our arguments for
free trade and open markets should find a receptive audience.