Sunday, July 31, 2005

Weekend reading

LSE professor John Gray on Thomas Friedman and globalization in NY Review of books.

Globalization has no inherent tendency to promote the free market or liberal democracy. Neither does it augur an end to nationalism or great-power rivalries Describing a long conversation with the CEO of a smal Indian game company in Bangalore, Friedman recount the entrepreneur concluding: "India is going to be superpower and we are going to rule." Friedman replies: "Rule whom?" Friedman's response suggests that the present phase of globalization is tending to make imbalances of power between states irrelevant. In fact what it is doing is creating new great powers, and this is one of the reasons it has been embraced in China and India

Neoliberals interpret globalization as being driven by a search for greater productivity, and view nationalism as a kind of cultural backwardness that acts mainly to slow this process. Yet the economic takeoff in both England and the US occurred against the background of a strong sense of nationality, and nationalist resistance to Western power was a powerful stimulus of economic development in Meiji Japan.

Nationalism fueled the rapid growth of capitalism in the nineteenth and early twentieth centuries,[2] and is doing the same in China and India at the present time. In both countries globalization is being embraced not only because of the prosperity it makes possible, but also for the opportunity it creates to challenge Western hegemony. As China and India become great powers they will demand recognition of their distinctive cultures and values, and international institutions will have to be reshaped to reflect the legitimacy of a variety of economic and political models. At that point the universal claims of the United States and other Western nations will be fundamentally challenged, and the global balance of power will shift.

Interview with BCA Research economist Martin Barnes on our strange and fascinating low-return macro times.

Why do you see inflation staying low? Yeah, we've had the almost perfect conditions for inflation in the last few years. The Fed has run a very stimulative monetary policy. We have run big budget deficits. We have driven the dollar down. To top it off, oil prices are up. We've had the perfect inflationary mix, and yet we haven't really had any inflation despite that.

If you look around the world, there is no evidence of inflation at all. China is perhaps the best place to prove it. Here is a country that has been growing at 9% to 10% and effectively adopted U.S. monetary policy by pegging its currency to the dollar. Yet there is no inflation in China at all. In fact, there is deflation, and that tells you there is something very powerful going on there in terms of a supply-side boom.

In the U.S., there are tough competitive conditions. And the Internet and technology in general is still a very powerful force for disinflation. There are pockets of inflation, but the overall picture isn't all that bad. The Fed's view is there is still a problem. They are worried about labor costs going up. But a lot of the inflation indicators we look at are rolling over. Producer prices are easing.

If the economy was to continue growing really strongly here, at a 4% clip for the next year, of course, there would be pressures on resources and the unemployment rate would fall and wages would go up. But that's not likely. The economy is going to do OK -- but I don't see it growing much above trend over the next year.

Would you expect to see capital expenditures stronger than they have been? The corporate sector is still in a post-bubble world after the information-technology boom. The Enron and WorldCom scandals have also shaken up the corporate world. Corporate executives are worried also about housing bubbles and trade deficits and protectionism. It is not an environment where companies feel that they want to be great heroes and strongly expansionist.

They are investing to become more efficient, but not expanding capacity in a big way. They could have invested more strongly, given how healthy cash flows have been, but they've been focusing more on repairing balance sheets and getting their financial house in order, taking the view that the markets are rewarding them more for stronger finances than they would for being expansionist.

That attitude might change gradually the longer the economy stays OK. Then the problem becomes slowing profit growth. It is hard to make the case for capital-spending growth to accelerate. It is probably going to weaken a bit. You end up with a decent economy, but it is not going to be growing at an inflationary pace, in my view.

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