Globalisation: key challenges and

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• Globalisation key challenges and
• policy implications for OECD countries
• Jørgen Elmeskov
• OECD Economics Department

Oslo, 26 March 2008 Globaliseringens
utfordringer for offentlig sektor
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INTRODUCTION

• Globalisation is not new but the current episode
  is unprecedented in scope/speed
• It is driven by lower barriers to flows of goods,
  capital and people,
• by internal policy reforms in emerging
  economies,
• and by steady advances in transportation,
  communication and information technologies.

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ROADMAP

• Globalisation presents benefits and challenges
  for the OECD economies
• I will examine its expected effects and policy
  implications in a number of areas including
• Trade and financial linkages
• Labour markets
• Inflation and monetary policy
• Tax competition

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THE CURRENT GLOBALISATION PHASE IS HISTORICALLY
LARGE
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TRADE AND TRANSACTION COSTS HAVE DIMINISHED
Sources World Bank, World Development
Indicators Fraser Institute Busse, M. (2003)
Hummels, D. (2006) US Bureau of Labour
Statistics Nordhaus (2001) OECD calculations.
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TRADE LINKAGES ARE STRENGTHENING

• Intra-industry or intra-firm trade and global
  supply chains have developed. Growing role of
  task trade. International trade in services has
  expanded.
• Trade contributes to a more efficient use of
  resources
• Comparative advantage, economies of scale,
  stronger competitive pressures
• OECD growth project a 10 pp increase in trade
  exposure is associated with a 4 rise in income
  per capita.

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GLOBAL CAPITAL FLOWS ARE RISING FASTER THAN GDP
Source IMF, Balance of Payment statistics
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INTERNATIONAL FINANCIAL LINKAGES

• Financial markets have become more global
• Capital flows can spur productivity growth
• Efficient allocation of capital, transfer of
  technology
• Domestic saving and investment are no longer
  closely associated
• This should in general be welfare enhancing it
  allows savers to diversify so as to reduce risk
  and boost return
• Emerging countries and fuel exporters (Norway,
  Mexico) are saving abroad
• In some cases this runs counter to economic logic
  and may reflect repressed financial markets ad
  weak social safety nets.

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THE TRANSMISSION OF SHOCKS IS INTENSIFIED BY
TIGHTER INTERNATIONAL LINKS

• A given increase in domestic demand in the
  non-OECD region will have twice as large an
  effect on OECD output in 2015 as in 2005 (Hervé
  et al., 2007)
• The effect on GDP in OECD economies of higher
  risk premia in the rest of the world is expected
  to be 50 larger in 2015 than in 2005
• But international diversification makes for a
  better risk/return profile
• And domestic shocks in OECD economies will leak
  abroad to a larger extent

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GLOBALISATION AND LABOUR MARKETS

• Perception that globalisation undermines
  aggregate employment in OECD countries.
• The problem is not lack of aggregate demand both
  exports and imports from/to emerging economies
  grow fast. Any surpluses are recycled and boost
  financial markets. And OECD country monetary
  policy can always adjust.
• Supply side the negative effect of greater
  labour turnover is small. But could be larger if
  not all people who lose jobs find new ones. At
  the same time, employment is boosted by greater
  product market competition and wage moderation.

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GLOBALISATION AND INCOME INEQUALITY
OECD Employment Outlook (2006), Burniaux et al.
(2006)
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GLOBALISATION AND INCOME INEQUALITY

• Globalisation can strengthen dispersion at the
  top of the wage distribution, which has widened
  in most OECD countries.
• Inequalities have remained broadly stable in the
  lower half of the wage scale in most OECD
  countries perhaps because upskilling kept pace
  with the shift in labour demand away from
  low-skilled. Will this continue? Education
  policies are key.
• And disposable income distribution has shown no
  general trend since the mid-1990s.

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GLOBALISATION AND JOB SECURITY

• Average job tenure increased in most OECD
  countries since the early 1990s (and when it has
  fallen, it mostly reflects misguided policies)
• But the consequences of job loss can be drastic
• Risk of being re-employed at much lower wage
  (especially if job loss is linked to
  globalisation)
• Risk of not being re-employed (especially when
  unemployment benefits give high coverage of
  previous wage as opposed to future wage
  opportunity)

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Average wage changes for workers who previously
had more than 10 years of job tenure
Source OECD Employment outlook (2005)
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LABOUR MARKET ADJUSTMENTS

• Globalisation underlines the needs for labour
  market flexibility to cope with short-term
  transition costs
• No one size fits all and different models have
  proven successful (Jobs Strategy, 2006)
• Important to also focus on the design of social
  protection so as to avoid trapping people in
  dependency

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MIGRATION HAS INTENSIFIED
Source OECD
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OPPORTUNITIES AND CHALLENGES ASSOCIATED WITH
MIGRATION

• Immigration can be a source of greater labour
  flexibility and boost also employment of natives.
• Immigration of low-skilled workers can sharpen
  wage and income inequality and can put universal
  welfare systems under pressure.
• Immigration of highly skilled workers has the
  opposite effects.
• Greater mobility of high-skilled workers raises
  questions about government-paid higher education
  financed through high and progressive taxation.

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GLOBALISATION AND INFLATION

• Favourable and unfavourable effects of
  globalisation on inflation
• Dampening effects on the prices of manufactured
  goods
• Dampening effects on wages
• Upward pressures on many commodity prices
• Net effect has been favourable at least until
  recently
• Globalisation has reduced inflationary pressures
  in net terms by between 0 to ¼ percentage point
  per annum since 2000 (Pain et al., 2007) before
  taking into account wage moderation.

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IMPLICATIONS FOR MONETARY POLICY

• Monetary policy will have to react more to
  external influences
• Globalisation complicates the identification of
  inflation trends
• Insofar as globalisation put persistent downward
  pressure on inflation, inflation targets could be
  achieved with lower policy rates (Bean, 2006). If
  this effect is temporary, it could be accompanied
  by a temporary hike in asset prices.

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GLOBALISATION AND TAX COMPETITION
Source Yoo (2003) OECD Tax database
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GLOBALISATION AND THE EFFICIENCY OF THE TAX
SYSTEM

• Globalisation triggers corporate tax rate cuts
  and favours the move toward a low-rate
  broad-base system.
• It should encourage a move towards less elastic
  tax bases (away from capital and labour and
  towards property and consumption), but does it in
  practice?
• But some aspects of globalisation (capital
  mobility, high-skilled migration) could reduce
  the ability of the tax system to achieve income
  redistribution objectives.

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SUMMING UP

• Globalisation will continue to be a force shaping
  the OECD economies
• Avoid the pitfalls of protectionism which would
  magnify adjustment costs and will not stop the
  globalisation process
• Need to establish the right framework to reap the
  full benefit of globalisation