Kristina Persson: Globalisation, imbalances and possible ways forward
Speech by Ms Kristina Persson, Deputy Governor of the Sveriges Riksbank, at a conference on social
economics, Stockholm, 3 May 2006.
* * *
Thank you for the invitation to come here and speak on a topic that interests me very much, both in my
role as representative of the Riksbank and privately, as a person with a strong interest in social issues.
Let me begin by saying that I will not be talking about the current economic situation in Sweden. The
discussion from the most recent monetary policy meeting will be published on 11 May.
I shall begin with a run-through of the opportunities and challenges that economic globalisation entails
for a country like Sweden. I will then go on to discuss the imbalances that currently exist in the global
economy, particularly in the exchange of goods, services and capital between Asia and the United
States. The trade deficit is financed through the global financial markets, which are an important
driving force in the globalisation process. Finally, I shall talk about some of the reforms currently being
discussed within the International Monetary Fund (IMF).
Introduction
Ten years or so ago the word globalisation did not arise in the public debate, the term used then was
internationalisation. The question is whether this indicates that something new has happened? My
answer is that a number of political, technological and economic changes over the past 15-20 years
have combined to bring about a more intensive phase in global economic integration.
The political changes can be summarised in the word deregulation, which has released flows of
capital, goods and services across national borders. Trade barriers and customs duties between
countries have declined.1 The international capital markets were deregulated during the 1980s, which
enables a free movement of capital towards investments that have the best return. Many product
markets, particularly within the EU, have been opened up to competition. Large countries, such as
China and India, which together comprise approximately one third of the world's population, are rapidly
being integrated into the world economy. Following the breakdown of the Soviet Union, central
European countries have joined the EU and adopted market economies.
Technological progress, particularly within the field of information technology, enables rapid and
simple communication and money transfers from one part of the world to another, which makes it
easier for companies to build up global trade and manufacturing networks. The cost of transporting
goods between countries has also declined in recent decades, although the really major breakthrough
in this field came earlier.
This has resulted in world trade increasing almost twice as much as GDP since 1985, direct
investment has increased four times as much and the turnover in the global foreign exchange market
is currently ten times larger than it was 20 years ago. Trade in goods and services now amounts to 5
per cent of the total cross-border currency flows, which can be compared with just over 30 per cent
twenty years ago.
Globalisation entails increased competition, which leads to a higher degree of specialisation and
benefiting from comparative advantages. Each country and region must dispose of its total resources
so that they do what they are best at compared with others. This international division of labour means
that resources are used more efficiently and lead to greater productivity in the world as a whole. This
is not a new phenomenon; it has been going on for a long time. What is new is the deregulated capital
markets which enable capital to move quickly across national borders, and the fact that many more
countries now participate in the international trade exchange.
Since the 1980s, purchasing power per capita has more than doubled in the world as a whole.
However, the increased welfare has not benefited everyone. The number of poor people, that is, those
living on less than USD 2 a day, has actually increased by almost 300 million, to 2.7 billion people
during the period 1981-2001. A positive note is that the number of extremely poor people, that is,
those with less than USD 1 a day to live on, has declined by almost 400 million. This means that 100
million people have moved to "stage 3", that is, marginally above the poverty line. There have also
been major geographical changes in the spread of poverty. The number of poor people has declined
in Asia, but increased in other developing countries. Africa South of the Sahara has fared the worst,
with the number of poor people there doubling over the past 20 years. Over the past two years, Africa
has enjoyed the highest GDP growth in more than 30 years.2 So even there, globalisation may begin
to have a positive impact.
China - an important force in the change process
China's entry into the global market economy has been one of the driving forces in the change
process that the world economy is currently undergoing. The country's significance in the global world
economy has increased at a rate and in a scope that few people considered possible a few decades
ago. Since the reform policy began at the end of the 1970s, average growth has been 9 per cent a
year. China has accounted for one third of the world's real growth in recent years. The country has
rapidly transformed into the second largest economy in the world, become the third largest trading
nation and one of the largest recipients of foreign direct investment.3
The strong growth in China has been driven by investment and exports. Investment comprises just
over half of GDP, which is much higher than the shares in OECD countries or in other rapidly-growing
economies. The high level of investment has been almost entirely financed through domestic savings.
The saving ratio in China amounts to around 45 per cent of GDP, which is a much higher level than in
most other countries. According to estimates, Chinese households save one third of their incomes.
One reason for the high level of saving is the lack of a social safety net and a general pension system.
As a consequence of the high level of saving, private consumption is relatively low. China has had
relatively strong growth in exports; in the past five years alone exports have trebled.4 The country is
currently a nation as open as, for instance, France and Italy, measured in the percentage of foreign
trade in GDP and considerably more "open" than the United States.
China has come to be called "the factory of the world" as an increasing number of foreign companies
have chosen to purchase goods and locate parts of their production there. For instance, China
manufactures more than two thirds of all photocopiers, microwave ovens and DVD players, and 40 per
cent of all of the world's computers.5 However, a large part of the input goods for these products are
imported from neighbouring countries, but the prevalent picture that China can only compete with
lowcost products is slowly changing. In recent years China has gone from specialisation in simple,
labourintensive low-cost products to also producing more technically-advanced and
internationallycompetitive products. The Chinese authorities conduct an active trade and industry policy to build up
the domestic industrial and technological capacity, for instance in the fields of telecommunications,
energy, motor vehicles and pharmaceuticals. Their goal is to have 30-50 Chinese countries among the
world's 500 largest within 5-10 years. In addition to investments in research and development, China's
human capital has also been reinforced by an increasing return flow of highly-educated Chinese who
have now begun to return home after studies abroad.
The rapid developments in China have so far mainly occurred in economic free zones along the coasts
and in adjoining areas. In rural areas, where the majority still live, poverty is widespread. The uneven
distribution of growth has given rise to social tensions, which risk slowing down developments in
future. The Chinese authorities are facing major challenges in terms of increasing private consumption
and dealing with the growing income gaps. Environmental pollution is another major problem, as is the
lack of human rights. The financial system in China is also under-developed.
Globalisation involves both challenges and opportunities
The increasing competition from, for instance, China, India and eastern Europe means that there is
increasing pressure on the early industrialised nations to transform their trade and industry structure.
This structural transformation will affect people, places and regions in different ways. However, history
shows that free trade and increased economic integration lead to increased economic welfare for the
world as a whole. The international division of labour that follows in the wake of globalisation leads to
lower production costs and productivity gains, which in turn means that labour and investment in the
industrialised nations can be moved to other sectors with more refined products and services. In that
sectors and companies that are not internationally competitive are knocked out, scope is created for
new employment in areas where different countries and regions have comparative advantages.
However, for an individual country or region to benefit in this process, the "creative destruction"
entailed in the structural transformation must lead to new jobs with a higher value added factor being
created at the same rate as the old ones disappear.
Effects on the labour market
China's and India's integration into the world economy is sometimes described in the debate as a
supply shock in the global labour market, which will result in rapidly-falling wages in the western
world.6 However, the expansion in exports in China has been made possible by the fact that
production per worker has increased, rather than by a dramatic increase in the amount of labour.7 The
"supply shock" is the result of modernisation and industrialisation, i.e. that workers who are not very
productive move from an old-fashioned structure of collective agriculture and state-owned companies
to modern companies that produce goods for export. The effects of this development on the labour
market and on real wages in the west will depend on how the exchange of various types of traded
goods develops and how this in turn affects relative prices.
Globalisation could certainly entail downward pressure on Swedish real wages, but both data and
historical experiences so far indicate that this is not the case. At least, there is nothing in the statistics
to indicate that there has been any deterioration in industrial nations' trade conditions towards either
China or other Asian countries. In the long term, Swedish and Chinese wages will probably converge,
but this does not necessarily mean falling real wages in Sweden. It is particularly those with no higher
education who risk experiencing pressure from the new industrial nations, but a general reduction in
real wages does not appear very likely. Sweden has been exposed to international competition for a
long time without suffering any deterioration in our welfare, and over the past 10 years we have had
rising real wages, despite the expansion in China.
However, it is likely that the distribution of income will be affected in terms of growing gaps between
those with and without higher education. Wage shares have fallen in many countries, without any real
explanation, while profits in the OECD area have been at an all-time high. Technological
developments have led to both increased profits and increased demand for highly-educated labour in
relation to less qualified. The possibility that increased competition from low-wage countries could be
part of the explanation cannot be entirely ruled out.
However, there is no support in the statistics to say that economies that are more dependent on
foreign trade have higher unemployment than others. It is rather the other way round; that increased
trade often goes hand in hand with lower unemployment and higher welfare. The rapid market growth
in such large countries as China and India means that demand for goods and services produced in the
old industrial nations increases.
The investment in research and development in China and the transition to increasingly advanced
production does not mean that "all jobs" will move there. Experiences from Europe's trade exchange
with Japan and Korea in recent decades indicates a different development. There one can see that an
increasing percentage of trade has developed to become what is known as inter-sector trading, that is,
one exchanges goods with one another that are produced using roughly the same technology. Welfare
increases in that there is greater variety in the supply offered to consumers and companies can benefit
from economies of scale in their production. There are many indications that the trade with China and
the other rapidly-growing economies are developing in this direction.
How will Sweden meet the challenges?
So far, it appears as though Sweden has managed the structural transformation well, although some
groups and regions may experience negative effects during a transitional period. The Swedish Institute
for Growth Policy Studies (ITPS) demonstrates in a study that Swedish-owned industrial companies
which increased the number of their employees in low-wage countries during the 1990s at the same
time showed an increased demand for labour force with higher education back home in Sweden. This
is in line with the development that has taken place in the United States and the United Kingdom.
According to the Swedish Labour Market Administration's figures on redundancy notification and
ITPS's media monitoring, few jobs moved abroad as a result of companies transferring their
operations abroad during 2005. In total, the number of jobs was 2,000-4,000, of which 1,500 involved
a move to another EU country.
The major challenge for the future lies not in the number of jobs moving abroad, but in managing the
transition required to make it possible to create new jobs as new employment is created mainly in
other countries/regions. This requires a good corporate climate, a good capacity to attract knowledge
and capital and an ability to transform, including flexibility in the labour market so that employees can
apply to new sectors and areas as smoothly as possible. If this is not successful, there is a risk of
growing structural unemployment.
At the time of the extensive structural transformation in the 1970s, the public sector took in many of
the new entrants on the labour market and those who lost their jobs. This possibility is no longer
available to the same extent. Instead, it is the private service sector that will have to expand. In a
sparsely-populated country like Sweden, however, labour market matching can be particularly
problematic as many service companies require proximity to population centres in order to be
profitable.
A key issue in future will be how we can attract capital to invest in Sweden. Regarded in this
perspective, the falling investment ratio in recent years provides cause for concern, although there
was a recovery last year. Sweden currently has a large trade surplus, but many of the large Swedish
companies choose to invest their export income abroad. Swedish investment in foreign countries
amounted to approximately SEK 200 billion in 2005, while Swedish industrial companies' investment in
foreign debt securities increased by almost SEK 70 billion. The capital inflow during the same period
was approximately SEK 100 billion.8 According to Swedish companies, one of the main reasons why
their export flows remain abroad is that expansion in new markets and new production capacity occur
mainly abroad and not in Sweden.9 The fact that an increasing share of direct investment is aimed
towards emerging economies in South East Asia is part of an international trend that can be seen in
most OECD countries.
It can be assumed that the effects on the world economy of the integration of, for instance, China and
India, will continue for some time to come. There is a long way to go before the whole of China is
included in the global market economy. However, it has recently been possible to see some inward
movement within the country as wages have risen in the coastal regions. Nevertheless, there still
remain many hundreds of millions of poor people in China who are prepared to take jobs with very low
remuneration compared with the wages paid in Sweden, for example.
One effect that is of significant importance to the Riksbank is lower prices in international trading. The
low inflation in Sweden over the past years can be explained by low import prices and high
productivity. The latter is also connected with globalisation through the increased competition and
changes in production patterns.
Globalisation and imbalances in the world economy
The deregulated international capital market has meant that countries have to a much greater extent
than before been able to finance consumption and investment via borrowing abroad. This could
indicate that trade imbalances are something we have to live with in a world with deregulated capital
markets and a greater degree of free trade than before. At the same time, risks of rapid adjustments
may be built up.
In connection with the slowdown in economic activity in 2000-2001, US economic policy was shifted in
a more expansionary direction. Income tax was lowered and public expenditure increased, at the
same time as the key rate was cut to an all-time low. This entailed a strong increase in demand, which
also stimulated exports in other countries - the United States acted as growth engine for the world
economy. The consequence of this was that the US current account deficit increased rapidly; in 2005 it
amounted to 6.4 per cent of GDP. The driving forces behind this were a budget deficit that amounted
to 2.6 per cent of GDP in 2005, and a large and growing deficit in household saving. Private
household saving turned negative in 2005, which was the first time since the 1930s and corresponded
to 0.3 per cent of GDP. The US current account deficit is counterbalanced to 40 per cent by the
surplus in Asia, particularly China and Japan. The remainder is accounted for by a number of
oilproducing countries and a few small, open economies, including Sweden, Norway and Switzerland.
Several different explanations have been put forward for the large US current account deficit. The
explanation most often highlighted in the United States is that the deficit reflects stronger productivity
growth and higher growth potential in the United States, compared with other parts of the world. Many
of the investments made in the 1980s and 1990s, particularly IT investments, had substantial positive
effects on productivity, after some time lag. When these investments were supplemented by
reorganisation and internal training within the companies, they had an even greater effect on
productivity.
The labour supply has also benefited from substantial labour immigration. According to the OECD,
potential growth, that is, how fast the economy can grow without problems arising in the form of
overheating, amounts to 3.4 per cent in the United States, with around 1 percentage point being
explained by the labour supply.10 The corresponding estimate for the euro zone is 1.9 per cent and for
Japan it is only 1.3 per cent. The relatively better growth prospects have meant that many investors
have chosen to invest their capital in the United States, where the expected return is higher than in, for
example, Europe. This has led to a capital flow that has strengthened the dollar, which has contributed
to reducing net exports and thereby increasing the current account deficit. Expectations of increased
income have also contributed to subduing saving by US households.
Another explanation is that the deficit is a result of the domestic policy in the United States. The
expansionary economic policy has contributed to reducing saving both among households and in the
public sector, which has stimulated consumption and growth.
A third explanation points out Asia's structural saving surplus as the driving force behind the
imbalances. Private saving is generally at a high level in Asia. This applies in particular to the
emerging economies, but Japan also has substantial private saving. Following the financial crisis in
Asia in 1997, there was a correction of the earlier investment bubble, and the investment ratio fell from
very high levels. The exception is China, where both saving and investment have increased
substantially.
The increased saving has to a great extent been invested in US bonds, which has pushed down
longterm interest rates in the United States an further stimulated US household consumption.
Approximately two thirds of saving in the world is currently channelled to the United States. Many
Asian central banks have brought dollars that are invested in US government bonds in order to
prevent their own currencies appreciating against the dollar, which would reduce their
competitiveness. China, in particular, has been strongly dependent on exports to maintain a stable
increase in employment and thereby to avoid even higher unemployment. This has meant that the
foreign exchange reserves in Asia have increased dramatically in recent years. The consequences of
the saving have been that household consumption has been kept down and the increase in welfare
has not been as large as it could otherwise have been.
In my opinion, all of these factors depend on one another and altogether they provide an explanation
of the US deficits and the global imbalances.
Are the imbalances sustainable in the long term?
Although opinions are divided as to the seriousness of the US current account deficit and the main
explanations behind it, most analysts agree that there must be a correction sooner or later.
Some claim that the sustainability of the US current account deficit is greater than many have earlier
believed. They point out that there has been no correction so far, despite the fact that the deficits have
remained high over a long period of time and that the dollar has even appreciated over the past year.
One argument in favour of the trade imbalances being sustainable is that the higher growth in GDP
and income from foreign ownership in the United States make it possible to continue to finance
interest expenditure on the foreign debt. The reform process for increasing potential production in
Europe and Japan is still proceeding slowly, which could indicate that growth differences will remain
for some time to come.
Other people, including me, consider that the imbalances comprise a serious risk to the world
economy and that the longer they remain, the greater the risk of negative effects arising from a
correction. The most probable scenario in the near future, according to the Riksbank and most other
analysts, is that there will be an orderly, gradual correction of the imbalances with manageable effects
on the world economy. In the long term, demographical factors, such as a larger percentage of elderly
people in the population of the rapidly-growing Asian countries, also argue in favour of a correction
taking place in the form of reduced private saving.
However, one cannot rule out the possibility of a more abrupt adjustment of the imbalances, which
could have considerable negative effects on the world economy. There are two possible scenarios that
could trigger a more abrupt adjustment. One is that the US households choose to rapidly increase
their saving, for instance, out of worry over future financing of general government healthcare and the
pension system. A slowdown in saving could also trigger a fall in house prices, which could in turn
further reduce saving. The second scenario could be that investors change their perception of
potential growth in the United States and the growth and income advantage which one previously
thought would persist. This would mean that interest expenditure on the foreign debt could be
perceived as untenable and trigger rising interest rates and rising costs for the US foreign debt.
In both of these scenarios there is a slowdown in growth in US consumption, which could have major
effects on global economic activity. One can also imagine that an international economic slowdown
would be reinforced by a fall in house prices and a change in the view of the United States as a
borrower, which could lead to an abrupt slowdown in the world economy.
The global imbalances and the threats to jobs from the increasingly stiff competition have triggered
increased demands for protectionism, both in the US congress and in Europe. A downturn in the world
economy could trigger a wave of protectionist measures, such as trade barriers and customs tariffs,
which could further worsen an economic downswing.
For a small country like Sweden that is dependent on foreign trade, an abrupt adjustment of the
imbalances could have a severe impact on the economy. A rapid fall in the dollar rate would probably
be followed by an upturn in the euro, which could push down European companies' competitiveness
and slow down growth in the euro zone. This would subdue growth in Sweden, which has around 40
per cent of its exports to the euro countries.
Conclusions and ways forward
It would be wrong to say that globalisation is a force of nature that cannot be stopped. However, it
would be very costly for an individual country or region to try to remain outside of this process. This
alternative does not really exist in practice. That applies in particular to a country like Sweden, which is
small and strongly dependent on foreign trade, and integrated with the outside world. At the same
time, globalisation brings new demands and challenges. Many of these require global or regional
solutions.
There are thus two additional paths to take: One is that society and the business sector try to manage
the changed conditions that globalisation involves in the best way possible, and one is that Sweden
together with other countries/organisations actively works to promote regulatory systems,
infrastructures, foreign aid and cooperation in the fields that require widespread support. This applies
in particular to the global imbalances I have described here.
Mobilisation of resources
In the domestic field, the challenge for Sweden in future is to develop and renew the business sector
so that we can meet the increasingly stiff competition. The general government and local governments
will probably be unable to create very many new jobs; Sweden's demographic situation means that
taxes will be used to maintain the level of service and transfers that already exists. What the public
sector can do, is to create good conditions for innovation, entrepreneurship and an efficient labour
market.
In an open world economy, it is not only companies that compete with one another; places, regions
and countries all compete to attract labour, top competence and investment capital. Growth is a
necessary condition for increasing welfare and it is only more work and better use of time/working
hours (productivity) that create growth. Research and development, investment in innovations and
increased efficiency that liberate resources for more productive purposes are a necessary condition for
production to be able to manage to increase in value and to survive in competition with 'low-cost'
countries.
However, not everyone will be able to, or need to, work in branches exposed to competition. Large
areas of private consumption, notably education, healthcare, care services, personal services, trade in
non-durable goods, etc. benefit from local anchorage. Many of the new jobs will in future be in this
field. Creating good conditions for the growth of the service companies is therefore an important
element of a policy to manage the challenges of globalisation.
Mobilisation of resources and the promotion of creativity usually assume cooperation between different
interests, within politics, the business sector and academia. Sweden has well-developed traditions to
build on, this applies in particular to the local and regional work on developing the business sector.
Global policy
Globalisation creates the conditions for increased growth and welfare, but entails greater risks in terms
of the threat to the environment, access to strategic commodities, security and a growing mutual
dependence. Globalisation must therefore be matched by cooperation between countries and regions.
It is my conviction that we will need an increasingly international political cooperation to be able to
manage the downside of globalisation and to reduce the economic gaps in the world.
With regard to the risks related to global imbalances, there is an organisation that was given the role,
back when it started more than 60 years ago, of monitoring global financial and economic stability: the
International Monetary Fund (IMF), which was formed to provide temporary balance of payments
support to its 45 western member countries.11 Since then there have been major changes in the world
economy. The number of IMF member countries has increased to 184, the fixed exchange rate system
has collapsed and worldwide capital markets have been established. The IMF's lending has declined
from approximately USD 60 billion in 2003 to around USD 20 billion in 2006, which also entails a major
reduction in the income that has so far financed the organisation's activities.
At present, there are intensive discussions within the IMF and its member countries as to how the
organisation should be reformed in order to better meet the needs and problems of a new age. At the
recent 2006 spring meeting, the member countries supported a proposal that the IMF should be given
the task of acting more powerfully to correct global imbalances and other threats to financial and
economic stability. Today's threats and risks can largely be found in the interaction, or perhaps the
lack of it, between the politics conducted in different countries/regions. Examples here are China's
exchange rate regime, the US current account deficit and the EU's agricultural policy.
The proposal involves the IMF being given a stronger regional and global monitoring role and the
possibility to call countries to multilateral consultations. The Fund's older task of monitoring exchange
rate developments in particularly systemically-important and large growth countries is also being given
a more prominent role.
It is also observed in the reform proposal that efficient supervision is not merely a question of correct
analyses and high quality advice. It is at least as important to communicate the analysis in a manner
that creates confidence and means that the advice is followed. To achieve this, a new communications
strategy is proposed, which is based on openness, transparency and a more intense dialogue with
society as a whole. This should increase understanding among the population for implementing
necessary measures and put pressure on governments to do so. Every other year, a special
Globalisation report will be produced. This will contain a more in-depth version of the annual analyses
of global financial and economic stability.
One very important question for the Fund's legitimacy and ability to act is how it is governed. Today
the governance of the IMF to a large extent reflects the distribution of power in the world when the IMF
was established. The question of influence and governance has gained a new explosive force through
the economic developments in a number of large growth economies such as China, India, Brazil and
Mexico, who now demand greater influence.
If nothing is done to reform the IMF's forms of governance, there is a risk that the organisation will lose
legitimacy and relevance. It will most likely take time before a sustainable solution has been drawn up.
Personally, I regard the regional principle as the most democratic and efficient in the long term. This
would mean that the large regions - which are currently more or less well-organised - the United
States, Latin America, Europe, Africa, Asia, etc. - reinforcing there regional platforms in order to
shoulder global responsibility together.
Thank you!