What the financial meltdown means for the future of globalization

There’s been a lot of chatter recently over what the global financial crisis and impending recession means for the future of globalization. You see, critics have latched onto the recent failures of markets as the perfect argument for why we need to curb international economic integration.

Although many economists strongly argued for the impending dominance of emerging economies, I think the ongoing global financial crisis has really shown us that these developing countries have not decoupled from the developed ones. We haven’t seen an unwinding of the US current account deficit, for instance, and in fact, in the last month, there has been a flight to safety to the dollar.

Thus, one detail to keep in mind is that while the relative growth of these emerging economies is quite impressive, their absolute economic power still does not yet rival that of the US, Japan, EU, etc for dominance. Furthermore, the spread of the global financial crisis to emerging economies (salient examples include Russia and China) signal that these markets have not achieved a degree of magnitude large enough to have decoupled from developed markets.

So what’s really at stake here? It’s pretty much accepted science that globalization, taken as a whole, has helped mankind to an unimaginable extent. That’s not really being debated now. But that doesn’t mean there aren’t losers.
For me, one salient question is whether globalization helps or hurts the poor. But what makes this debate so difficult is that both sides tend to pick and choose their evidence. For instance, depending on whether the poverty line is set at $1/day or $2/day, income inequality can be made to appear like it is shrinking (using the former) or expanding (using the latter). The same goes for calculating income distribution using household surveys (increasing income gap) versus national accounts (decreasing income gap).

Thus, there is this ever-shifting line in the sand for determining when globalization helps and when it hurts. So I think this debate really becomes a framing problem. That is, are we talking about a Rawlsian “veil of ignorance”, a bottoms-up view where gains for the majority must not come from losses to the minority, or a Millsian utilitarian approach to social welfare, a top-down view where the greatest good to the greatest number of people is what counts.

What we find from behavioral economists is that the Rawlsian paradigm (anti-globalization in this context) may be hard to fight, as “people are reluctant to harm some people in order to help others, even when the harm is less than the forgone help. Although there were certainly authors who championed the all-powerful forces of free markets to do good, I tend to side with the critics who say we need to move beyond utter reliance on markets.

“Most academic agree that markets, by themselves, do not lead to efficiency; the question is whether government can improve matters,” said Economics Nobel Laureate Joseph Stiglitz. When it comes to alleviating poverty and income inequality, I believe the government must be a force greater than the invisible hand.

Now, with any discussion on globalization, we can’t help but talk about China. As I read the gushing hyperboles on China, one big question I keep asking myself is “Can anyone compete with China?” They have an enviously high savings rate, a huge foreign reserves warchest, and the world’s largest population. Obviously, they do not hold a comparative advantage in everything (especially in industries requiring heavy skilled labor), but, some economic models indicate China’s growth will lead to some global losers, such as Singapore, the Phillipines, much of South Asia, and Europe.

We also know from recent research that Africa hasn’t been able to compete with China. Yet the only recipe for growth for many of these lower-end third-world countries, such as India, is an export model based on labor-intensive manufacturing. Ironically, China’s wild success with this model may remove it as a long-term competitor, as we’ve already seen wage rates on the coast skyrocket. Thus, there just may be hope yet for other countries looking for a piece of the pie.

A related question is if China’s rise detract investment elsewhere? Would Vietnam be more seeing higher growth if it wasn’t so close to such a global star? Upon closer introspection, I would argue this is not the case if global savings is liquid and we do not presume there is only X dollars to go around. Now that China is moving into more skilled industries, textiles may move to Vietnam, and thus, investors may move capital (that they may not have invested at all otherwise) there to seek higher returns. One caveat that many of the author failed to explore, furthermore, is that China’s growth means a burgeoning middle class (45% of its population by 2020 some estimate) that will stimulate global demand and consumption.

Another topic definitely worth addressing is the rise of multinationals from emerging markets. An Economist “special report” on globalization from this Sept said that 62 of the global Fortune 500 are from emerging markets this year, up from 31 in 2003, and expected to “rise rapidly.” Here’s why this trend is significant: we are no longer seeing globalization as a one-way street from the developed to the developing world. Rather, these emerging markets are actually investing and expanding into the US and Europe. Take Lenovo, which bought out IBM and discarded the IBM logo last year, confident that its Chinese-brewed brand was good enough to go global.

One surprising study from a couple months ago is turning the idea that China’s growth harms American workers (by depressing wages or even shuttering jobs) on its head. A must read!

I would say globalization, either through trade or capital flows, cannot pull a country out of poverty. Two-thirds of India’s children drop out of school before 8th grade. And thus, social improvements (such as education and healthcare) and physical infrastructure improvements (roads, telecom, energy grid, etc) need to be prioritized by the government, and this in turn enables globalization to power the engines.

I think an interesting lens to examining globalization’s impact on emerging markets is to look at the differences behind China and India, where China’s recent growth has been doubled that of India. Before doing the readings, I had thought it was mainly due to the greater trade liberalization of China. But China has fundamentally better infrastructure, not just socially and physically, but also in regulatory and financial aspects. Other reasons for why China has achieved greater success include the lack of protectionism for small-scale industries, looser labor laws, and the most intellectually-surprising possibility, a more homogeneous society (Sweden and Japan are similar models).

Spy games: A look at North Korea’s covert operations (part 2)

Read part 1 of this post here. And for additional reading, be sure to check out former Gadling blogger Neil Woodburn’s excellent series, “Infiltrating North Korea,” from last year. I also reported from North Korea for The Washington Post and The Christian Science Monitor this August.

The Blue House raid in January of 1968, although daring to the point of insanity, marked the first of several failures in the North’s efforts to liberate the South by instigating a grassroots communist revolution. The assassin squad had trained two years for the job, with every detail of the mission mapped out, including figuring out the right insignia on their fake ROK uniforms.

Yet they made several simple miscalculations due to these delusions of South Korean communist sympathies. For instance, on the first day in the South, they encountered four woodcutters; they proceeded to spend the next five hours indoctrinating them in DPRK ideology rather than racing to Seoul. Furthermore, the agents released the woodcutters, who immediately reported the incident to the military. As a result, the country was on high alert when the agents entered the capital.
Though they posed as a ROK counterguerrilla unit (the irony is a bit much here), the squad was forced to split up and flee after a confrontation with a police officer. Over the next few weeks, all but one of them went down in vicious firefights, taking the lives of 31 South Korean civilians along the way.

While the last of the Blue House infiltrators were still running free, news broke on January 23 of the North Korean capture of USS Pueblo, a spyship operating under the guise of conducting oceanic research, along with the 82 crew on board (one was killed in the initial skirmish; the rest spent eleven months in DPRK captivity). Historians have since heatedly debated the extent of the link between these two incidents.

Recently declassified Eastern-Bloc documents suggest a direct relationship, with the USS Pueblo incident a ploy to divert attention away from the failed Blue House coup. A statement released to socialist allies by the DPRK read in part, “The US imperialists, who try ever more desperately to instigate a new war in Korea, yesterday allowed an armed spy ship to invade the coastal waters of the DPRK, and commit systematically hostile actions.” This position echoed earlier clashes, instigated by the DPRK but ultimately blamed on the US or ROK.

The largest operation of this period came that October, when some 120 North Korean commandos made an amphibious assault on a ROK seaside village, Kosu-dong. The naiveté of the DPRK agents could be seen in their very objective: to convince the forty hapless villagers to join the communist cause and start a revolution. This operation, known as the Ulchin-Samchok Raid, rivaled the Blue House mission in its harebrained execution; villagers, for instance, were forced to fill out application forms to join communist organizations and to listen to speeches championing the noble DPRK cause. Again, the commandos failed to comprehend the extent of anti-communist sentiments in the South, as villagers quickly escaped to warn the authorities. Most of the agents managed to escape back north.

Ironically, the DPRK’s attempts to undermine the ROK only solidified the South’s anti-communist stance and it was ultimately miscalculation or disillusionment on Kim Il Sung’s part of communism’s appeal that led to the campaign’s failure. In almost every raid, including Blue House and Ulchin-Samchok, South Korean civilians strongly opposed the crude attempts by the North Koreans to start a revolution (and often risked their lives to alert authorities of the incursions).

In response to the recurring DPRK raids, South Korea created, in February 1968, the Homeland Defense Reserve Force, the equivalent of the US National Guards. According to one historian, this program “proved to be the single most crucial step in the Second Korean Conflict … Within 6 months, 2 million enthusiastic Southern citizens, including 15,000 women joined up … While not well armed for some time, they became an invaluable information web and eventually a source of supplemental troops for regular ROK Army formations.”

But as ill advised as the North’s campaign may have appeared to the outside world, Kim Il Sung and his henchmen had struck gold, particular with the USS Pueblo. One crewmember summed it up well: “Our value to them was apparently as propaganda pawns only.” And for eleven months, the DPRK government kept the “American spies” in the public spotlight, with frequent news of their trips to the theater, concerts, and circus and confession letters printed in the Pyongyang Times.

What to do after your flight gets canceled

My weekend sucked. On Friday, I was suppose to fly out to Pittsburgh to visit my girlfriend, but my flight was inexplicably canceled. Well, Continental did offer a reason–Newark was too windy to take-off. But the funny thing was US Airways had a flight that departed 50 minutes later, with no problems.

Isn’t that wind fickle, I tell you. I should probably kick myself, considering my long-time policy to actively avoid flying on US Airways. As my girlfriends says, there honestly should be a rule that if US Airways flies, then everyone else should be forced to. I would call it the “bare-bottoms rule.”

I did invoke Rule 240 at the ticket counter, which I wrote about a couple weeks ago–this little-known rule requires the major carriers to put you on another airline’s flight, at no charge. But aside from this small victory, which got me nowhere because the US Airways flight was already booked full, I’m out over $100 for my troubles getting to and from the airport.

I did get a refund of the ticket, but I still feel miffed. What are my options? An executive e-mail bomb may be in order, but first, I’m going to try the “senior” customer service line. Last time I did that with US Airways, they gave me a $250 voucher on top of my flight refund.

Hedonism Vacations: Spring Break for adults

Economic woes got you down? Here’s a solution: party nude with the Aussies. A holiday resort in tropical Queensland has planned a month-long bacchinalian for guests to get their naked grooves on.

The White Cockatoo Resort, which is located near the town of Mossman, apparently operates on three levels of functionality: nudist, clothing optional and fully clothed for family fun. These occur at different times of year so that the kiddies don’t get confused from the nudies.

Next March, they are going for a full-scale, adults only party month as a so-called ‘hedonism resort’. I did a little digging and it turns out that the White Cockatoo is just one of dozens of places around the world to take a hedonist vacation.

Essentially, this sounds to me like the type of place where Joe Office would go to fulfill his wildest fantasies: eating food that’s bad for you, walking around naked, drinking in the morning and going all-night clubbing. Like Spring Break for grown-ups.

What happens when you overload a donkey cart

I don’t usually Laugh-Out-Loud at silly Youtube videos, but I couldn’t help it with this one. I think it’s because the people who are busy trying to unload the cart are totally not realizing the absurdity of the situation (there’s a donkey stuck in the air, let me just ruin it for you).

Bonus for any well-traveled Gadling reader. Can you guess where this was shot?