Day 7 Ns 1

Globalization: Opportunity for
Economic Growth or Crisis

Debt Crisis
• Data:
• The debt of all developing countries (World
Bank): $567 billion (1980)  $1.6 trillion (1992)
 $4 trillion (2012)  $8.7 trillion (2020).
• In 2002, they paid out $325 billion (14% of
their earnings).
• Iraq: after the war, $120~130 billion.
• GDP: $12.3 billion (2000)  $55.4 billion (2007) 
$112 billion (2009)
• Reparations: $350 billion
Source: Bank of Korea
Some Numbers
• During 1945~1995:
• 16.2 million were killed in wars
• About 317,000 per year
• Every year in 21st c.:
• About 1 million die from suicide
• In 2006,
• 2.9 million died of AIDS
• In 2003,
• Every day,16,000 children die of hunger-related
causes
• In 2005 (2017),
• 10.1 (5.4) million children died before they reached
their 5th birthday.
How Bad Economy Affects Conflict? Diversionary Foreign Policy
• _________: people’s tendency to become more supportive of

their own government during an external crisis.
• Approval ratings for a leader often jump at the onset of a

war.
– E.g., After the terrorist attacks of September 11, 2008,
President George W. Bush’s approval rating jumped 35
percent
• Bad economic conditions promote political incentive to

utilize _________
The Rally Effect and the Diversionary Incentive
The Rally Effect and Theory of Diversionary Foreign Policy
• People “rally around the flag” because international conflicts

can:
– Cause an increase in ___________________
– Avoid _______ of the government/economy
– Give leaders an opportunity to scapegoat or blame the
country’s problems on foreigners
Global Debate
 Then, the question is how Economic

Integration and Institutional Reforms
affect the economy?
 Are neoliberal policies necessary
conditions for development?
What have the international economic institutions done?
 Economic Liberalization (Integration)
 Domestic Institutional Reforms

• Trade/financial deregulation
• Privatization
• Building legal codes and standards
 Washington Consensus
• Promoted by both the IMF and the World Bank
• Market Liberalization
• Fiscal Austerity
• Privatization
Trading in Illusions – Dani Rodrik –
 Question?
 Development (economic growth) =
global integration + institutional reforms vs.
_______________ ?
 Economic failure after integration? =

slippage in the implementation of
complementary reforms vs. a poorly designed
liberalization?
 Institutional reforms?
• Trade and Financial deregulation.
(e.g., Article VIII, the IMF)
• Privatization
• Building legal codes and standards.
o E.g., Financial Stability Forum’s 12 key standards
(a G-7 organization)
http://www.fsforum.org/cos/key_standards.htm
 Opportunity Costs of Institutional reforms?

Institutional reforms vs. Opportunity costs
 Opportunity costs: preclusion of
investments in other areas
 Public health
• E.g.: South Africa’s import of patented AIDS drugs
from cheaper (unauthorized) sources (1997) 
violation of WTO rules on intellectual property (TRIPS)
• 2.4 million AIDS deaths in Africa in 2000
• Costs for AIDS drugs with patents: $10,000 or more vs.
Costs for generic drugs: $ 200
• 2nd line of treatment drugs (no refrigerator, no side-
effects) are still expensive
From UNAIDS
Protest march in Pretoria, South Africa, against pharmaceutical
companies’ efforts to keep drug prices high.
Photo: Associated Press
 Opportunity costs
 Investment:
• Foreign reserve requirement as an insurance
policy against sudden capital outflows
• E.g., Peru’s foreign reserves:
As much as the size of 15 months of imports
From Bird and Rajan 2003
 Opportunity costs: preclusion of
investments in other areas
 Public health
 Investment
 Decreasing Government R&D spending
How can we explain development with
‘unconventional’ plans?
 The Asian experience (the Asian Model of

Economy)
 Good examples of benefits of economic
integration.
 But, by few institutional constraints.
• High levels of tariffs and non-tariffs barriers, public
ownership of banking and industry, export subsidies,
restrictions on capital flows,….
 ____________ strategy  Development (X).
____________ strategy  Liberalization (O).
Four Asian Tigers
 Export-driven model of economic development
 Rates of double-digit growth for decades
 High saving rate
 High education
 Easy access to the world market
 Protection
Hong Kong Singapore

Good strategy for economic growth?
 Good developmental strategy?
 _______-industry protection
 Tax incentives; export subsidies
 Public enterprises for _____________.
 Should be tailored to prevailing domestic
institutional strengths.
“The only clear pattern is that countries
dismantle their trade restrictions as
they ___________. This finding explains why
today’s rich countries, with few exceptions,
embarked on modern economic growth behind
protective barriers but now display low trade
barriers.” (Rodrik)
 “Government involvement in
macroeconomic policy is pivotal for
development” (Stiglitz and Squire)
 Health, education, infrastructure,

power, water, telecommunications,
regulation of financial market,…
Lessons for the future of developing countries?
 Central planning has failed. But, markets
cannot be left completely uncontrolled.
 If privatization and liberalization of markets are

motivated more by __________ than economic
analysis, they may proceed too far.
 Opening to the world market and to foreign capital

should be taken after substantial domestic
markets have been developed.
The close link between government and
business, but different experience in East Asia
and Latin America (Africa).
 __________ is as important as industrial policy

itself.
 Independent from a small group of people’s
interest; ________________ system.
 Government investment on social, political
infrastructure is important.
How about the effects of financial
integration on the economy?
Does financial globalization promote economic
growth in developing countries?
 Theoretically, Yes
 Practically, no strong relationship

between financial globalization and
economic growth.
Debates on Causes of Financial
Crises in the U.S.
• Too Much Regulations vs. Too Much

Deregulations
– Too much regulations: governments force

mortgage firms to aggressively lend loans
– Too much deregulations: lenders are primarily

responsible for aggressive lending
“Fannie Mae, the nation’s biggest underwriter of home
mortgages, has been under increasing pressure from
the Clinton Administration to expand mortgage
loans among low and moderate income people and
felt pressure from stock holders to maintain its
phenomenal growth in profits.”
- New York Times (Sep.30, 1999) –
“Bush administration’s failed economic policies-

policies built on budgetary recklessness, on an
anything-goes mentality, with no regulation, no
supervision and no discipline in the system.”
- Democratic speaker Nancy Pelosi (CNN) -
Some Facts
• Backgrounds of sub-prime mortgage crisis:
– Housing bubble  Downturn of the U.S. house
market
– Risky lending and borrowing [Removal of
interest rate ceilings, _________ laws (1933
1978: Marquettee vs. First of Omaha)]
– Excessive individual and corporate debt levels
– C.f., Elizabeth Warren, “A Fighting Chance”
Usury Laws
• Laws that limit the maximum interest rates

charged on loans
• The U.S.: no limit in12 states
– Nevada, New Hampshire, South Carolina,
Delaware, Maryland,…
– Many exceptions: e.g., credit cards
• Korea:
– 20% (1962)  36.5% (1965)  25% (1972) 
40% (before 1997)  no limit (1998~)  66%
(2002)  44% (2010)  39% (2011)  34.9%
(2014)  27.9% (2017)  24% (2018)
Some Facts
• Numbers:
– The Federal Reserve lowered the federal funds rate
target from 6.5% (2000) to 1.0% (2003)
– Interest rate differences between subprime and
prime mortgage: 2.8% (2001)  1.3% (2006)
Financial deregulation policies
– ERISA (The Employee Retirement Income S
ecurity Act 1974):
• Pension funds, insurance company: investment on risky se
curities (e.g., junk bonds, venture fund) was allowed
– Garn-Saint Germain Act (1982)
• Permits savings and loans institutions to hold junk bonds an
d to lend to risky new ventures
– Commodity futures modernization Act (2000)
• ________________ derivatives transactions ($21 trillion,
2010) were unregulated.
• Over-the-counter: off-exchange bilateral trading (no
publication/regulation on price); no formal risk-assessment
[16% of US stocks in 2008  40% in 2014]
Financial crisis in the U.S.
 America’s oligarchs
– The Wall Street-Washington corridor
• Robert Rubin: chairman of Goldman Sachs  Treasury secretary
 Chairman of Citigroup
• Henry Paulson: CEO of Goldman Sachs  Treasury secretary
• John Snow: Treasury secretary  chairman of Cerberus Capital
Management
• Alan Greenspan: FR  consultant to Pimco (the biggest player in
international bond markets)
– Capital-friendly policies: deregulation
– _______ instead of bankruptcy policies
Shareholder Value Maximization
• An Agent theory
• Since 1990s
• The job of CEOs is to maximize shareholder value, (not
employees or consumers.)
• Create an incentive for CEOs through stock ownership or
options
• From ‘retain and reinvest’ to ‘________ and ________’
• Agents: moral-hazard problem; risky and aggressive
business management
• Slow growth
• CEO tenure: 10  6 years

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Globalization: Opportunity for

Economic Growth or Crisis

• _________: people’s tendency to become more supportive of

• Approval ratings for a leader often jump at the onset of a

• Bad economic conditions promote political incentive to

• People “rally around the flag” because international conflicts

 Then, the question is how Economic

 Economic Liberalization (Integration)

 Domestic Institutional Reforms

 Economic failure after integration? =

 Opportunity Costs of Institutional reforms?

 The Asian experience (the Asian Model of

Hong Kong Singapore

 Health, education, infrastructure,

 If privatization and liberalization of markets are

 Opening to the world market and to foreign capital

 __________ is as important as industrial policy

 Practically, no strong relationship

• Too Much Regulations vs. Too Much

– Too much regulations: governments force

– Too much deregulations: lenders are primarily

“Bush administration’s failed economic policies-

• Laws that limit the maximum interest rates

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