Friday, May 26, 2017

ANALYZING GLOBAL TRENDS FOR BUSINESS & SOCIETY By Mauro Guillen Wharton University of Pennsylvania COURSERA. Roilo Golez notes. Coursera.

University of Pennsylvania

Mauro F. Guillén is the Zandman Professor of International Management at the Wharton School, and Director of the Lauder Institute of Management and International Studies, University of Pennsylvania. He is the Co- Chair of the Global Agenda Council on Emerging Multinationals at the World Economic Forum, an elected member of the Sociological Research Association, and a recipient of the Aspen Institute’s Faculty Pioneer Award. He is a former Fulbright and Guggenheim Fellow, and Member in the Institute for Advanced Study, Princeton. He has published ten books and dozens of articles on globalization. His personal website is at:
Video 1 Welcome to Analyzing Global Trends

Global trends affect regions, countries, industries and even firms in heterogeneous ways
Global trends are tornadoes, not tsunamis. they don’t change everything in their way. they have very large profound effects on some parts of the world, some companies, industries but not everyone
Trends entail both challenges and opportunities
Uncertainty will be a key feature of the 21st century: the new normal

What is needed?
New programs, new products?
Companies will need to change their business models. Ways they do business. New decision models?
New mindset? Need to rethink the assumptions

Some initial discussion questions:
As of today, do more people in the world live in cities or in the countrysides? More people live in cities than in the countryside since 2009
Are there more people suffering from hunger or obesity? More people in the world suffering from obesity than hunger since 2010
Which are the largest consumer markets, in the US and Europe, or in China and India? the largest consumer markets are in Europe and the US today, but within 20 years they will be in India and China
Is the number of failed states greater or smaller than the number of dictatorships? There are more failed states than dictatorships since the late 1980s

You will learn three very important tools in this class:
Concepts and tools to analyze how the world is changing
The direction and intensity of trends in the global marketplace
The relevance of the main risks threatening businesses and societies around the world. to want extent are they at risk due to the changes

How to take this class:
Take each week’s opinion survey. I will post the results 24 hours after the deadline. watch the mini lectures for each week
Try to answer the discussion questions
Consult the powerpoint presentations
Do the readings
Do the readings
Answer the quiz or test at the end of each week Participate in discussion forums and social media

Some thoughts on where the world is now and manifestations of Globalization
Increased cross border activities
Supranational organizations and forums such as UN, IMF or forums like the World Economic Forum Attempts at supranational political organizations or groupings such as EU, NAFTA
Spread of ideas and practices around the world

What is the Global Economy?
Increasing flows of labor, money, goods, services, and information
It is not just a discrete linking of nation-states
Definition by Manuel Castel: “The global economy is an economy with the capacity to work as a unit in real time on a planetary scale.” The difference today is that the global economy is coordinated in real time.
It is very different from the “international economy” of the 14th, 16th and 19th centuries.
In its present form, it came into being during the 1980s

Why is the global Economy so fascinating?
We see a clash, a conflict between two powerful ideas.
1. Because it puts two kinds of liberalism on a collision course:
Liberalism of the market, which is boundary transgressing. “The division of labor is limited by the extent of the market.”
Liberalism of citizenship, which seeks to establish and maintain boundaries. “Relationship between an individual and a state, with associated individual rights and obligations.” Some citizens may feel they are not getting good share, that there are downsides to the global economy

Showed photo of a demonstration with caption: "Join the international anti-globalization movement.”
Video 1.2 Measuring globalization
How to measure globalization
Two approaches to measurement:
Aggregate indicators such as trade, investment, Internet use, tourism, etc Networks :Data on dyadic relationships. Between individuals or companies

Showed tables: Aggregate globalization Indicators 1980-2010
Economic: Exports & imports as % of world GDP (38% to 56%); Developed 39.5% to 55.9%; Emerging and developing 32.8% to 56.7%;(a)Inward foreign direct investment stock (6.5% to 29.7% for world; For developed (4.9% to 25.3%); emerging and developing (11.8% to 50.2%) (b)Exports & imports of goods and services: 38.4% to 52.0%) (c) emerging and developing economies 32.8% rot 62.0%
Financial: currency exchange turnover; cross border banking,
Internet Users, % of population (30.2%) comparing developed countries (73.4%) with emerging and developing countries (21.5%)
Demographic: Stock of international migrants as % of world population (2.2% to 3.1%), refugee population as % of world (... to .2%) and workers’ remittances as % of world GDP (.41% to .75%)
Political: Nation states with membership in UN; International organizations, number: Intergovernmental and non-governmental
Social & cultural: International tourist arrivals; books on the topic of globalization

How fast is fast?
Variable Index 2010 (1980=100) Exports plus imports 146
Foreign Direct investment Stock 457
Foreign Direct investment Stock 457
Daily currency exchange turnover 900 Nongovernmental international organizations 192 International migration stock 141
international tourism 391
Books in print on globalization 6662

Global internet traffic:
All parts of the world covered US at the center of the flows

Submarine cables: first cables laid down in 19th century more than 100 years ago Definitions:
GDP Gross Domestic Product
Total value of goods and services produced in an economy during a given year. The economy consists of:
Financial institutions

Simple calculations:
One number, divided by another
Example Total Dependency Ratio: Ratio of the sum of the population ages 0-19 and that aged 65+ to the population aged 20-64. for China its about .5 but is predicted to reach 1.0 by 2075. it can also be expressed as a %.

Rate: is the pace or rhythm at which a magnitude changes over a certain period of time. typical expressed as a percentage. For example, GDP growth rate in China was 7.8% in 2012 and only 2.6% in the US.
Index number
Proportion:Example income of 1% richest Americans was 7.8 % in 1970, Now its 19.3%

Least likely scenario is that the number of babies born per woman will remain constant between now and 2100. The constant number of babies perm woman or fertility, i.e., will not reach 30B in 2100.
Video 1.3 Understanding the global economy
International trade Foreign Investment Multinational firms
International trade
Cross border flows of goods and serves
Why does it take place? Theory of comparative advantage
Trade is good , but it also generates winners and losers. it can create jobs in some parts of the world. it can destroy jobs in others. Trace is always a political phenomenon as well as an economic one
Theory of absolute comparative advantage - Adam Smith 1776
Theory of absolute comparative advantage - Adam Smith 1776 David Ricard0 1819 - Theory of Relative comparative advantage
Comparative advantage is not the only thing that matters.’ Also transportation costs
Other costs of trade
Scale economies

Product differentiation
Home to 15,000 insurance companies

have operations in at least two different countries

FDI Foreign Direct Invesmtents
more than 104,000 multinational companies
Control 790K subsidiaries
71% of multinationals are based in rich countries
500 largest multinationals account for 25% of world product and 50% of world trade Receive 80% of all payments for technology royalties and fees

Gerry Davis: Multinationals as Citizens of the World
Discussion questions
Which country do you think is the country whose firms have invested the most abroad right up to the present time - it is still the US with $5,191 B in 2012
And the country ranked in second place - at first its the UK at $1,800 B. However if you add up China and HK, its HK/CHIN with around $1,800 B

Video 1.4 Financial globalisation
Financial globalization - the fastest growing indicator of globalization except for books
Global financial markets:
Foreign portfolio investment - buying shares, stocks
Currency markets:
Only 10% are commercial transactions
Discussion question: What accounts for the other 90%? To make money, for speculation. Financial:
1980 2010
Daily currency exchange turnover, % world GDP .7 6.3
Cross border banking external assets, % world GDP 13.7 47.9
Cross border bank loan, deposit, % world GDP 13.9 34.9

Banks: Dramatic increase in financial interconnectedness throughout the world
The great recession, proportion of OECD countries with at least two consecutive quarters of GDP decline

1975 around 40% 1980-1983 around 30% 1993 around 35% 2008-2010 almost 100%
video 1.5 concept of isomorphism
video 1.5 concept of isomorphism
Isomorphism: it means entities in the world are becoming similar, equal in form
Formal definition: Is the tendency of actors, organizations or other types of entities to become more similar or to adopt common patterns of behavior over time

Isomorphism can result from several dynamics, which we shall call drivers.
Examples: Modern nation-state; ministry of foreign affairs; prohibition of child labor; general schooling; tropism promotion offices; newspaper; blue jeans; pop music

Drivers of globalization: Isomorphic pressures
Driver Mechanism Examples
Normative Shared ideologies Keynesianism, neoliberalism world views, frameworks democracy, legal traditions
or templates culture

Coercive Power, dependency Hegemonic states, multilateral organizations, multinational

Mimetic Frequency based imitation Bandwagons, fads to cope with uncertainty and fashion
or secure legitimacy

Emulative Trait based imitation driven hegemonic states, states by the legitimacy of the considered to be successful
source or innovative

Competitive Performance Markets
Not every country in the world is exposed to the same drivers Boundary conditions:

Certain countries are more exposed to isomorphic pressures: Dependent states
States more embedded in trade
Democratic states

States with smaller level of public spending
Video 1.6 The Paradoxes of globalization
Paradoxes of globalization Three paradoxes:
Paradox of predictability
The global system is highly structured and predictable
It is also prone to unpredictable disruptions, crises and even systemic breakdown

Paradox of coupling:
Tight coupling among system components, specially financially, economically, environmentally and demographically.
There is increasing institutional decoupling between adoption dynamics and outcomes
There is increasing institutional decoupling between adoption dynamics and outcomes
Paradox of convergence:
isomorphic pressures towards convergence. Differentiation and specialization

Video 1.7 The effects of globalization
The consequences of globalization Winners and losers
Discussion questions:
Do you believe there is more or less inequality today in the world compared to say 10, 20 or 30 years ago?

Is globalization responsible for changes in inequality?
There is far less inequality today across countries. The poor countries have reduced the gap.
Gini coefficient:
Going down since 1950 from .55 to .49 in 2010 with China and .50 in 1950 to .54 in 2010 without China However from the point of view of inequality within countries, it is more complex:
Income Gini coefficients developed countries:

USA 35 in 1950 to 47 in 2010
UK, Spain, France, Germany, Swede, Japan steady
In China, Russia, etc inequality has been growing from 1950 to 2010, but coming down in Brazlil, Mexico, Colombia

Winners and losers:
Some people are saying that Capital won while labor lost

Winners Losers
Capital labor
Educated workers Unskilled workers Strong states Weak states
Economic ministry labor and social ministry Rich countries Poor countries

Video 1.8 Tensions in the Global landscape
Tensions and institutions Systemic global disruptions
Key Tensions
They occur at the border between the four key subcomponents: Economic including financial
Socio demographic
Key institutions:
Key institutions:
Labor market
Political representation system The state
The international system states

The key drivers of Change: Economy Socio-demographic Political
We will see how the growth of cities affect fertility rates. How many babies women will have on average. Social roles are changing. So are patterns go behavior. Patterns of consumption as people move to the cities. Effects on population and aging.
We will see how the different forces of the world are feeding on to one another. What are the kinds of risks and systemic disruptions they may create over time.
What we would need in the world us for the four key institutions work properly so we can reduce the risks. These institutions are:
The labor market
The political representation system

The state apparatus
The international system of states
We should think about: In what ways are the labor markets failing us? In what ways are the political representation systems doing their jobs with regard to the environment, financial system, Same with state apparatus and the international system of states

Mauro Guillen and Emilio Ontiveros (2012)Global Turning Points, Cambridge University Press

In 2001, two momentous events shook the world. On September 11 a small group of bold terrorists mounted a series of daring attacks on the United States, and on September 17 the World Trade Organization
concluded its 15-year-old membership negotiations with China.

Although the world’s preeminent geopolitical power had been the target of other terrorist attacks during the preceding decade, 9/11 was qualitatively different not only because of the large number of victims but also because it undermined the country’s sense of security. Likewise, China’s economic and financial rise had been in the making since the 1980s, but it was not until the early 2000s that the world came to the realization that Earth’s most populous country would one day also become the largest economy, and that it was already the world’s largest exporter and the second largest importer. Chinese exports, trade surpluses, and currency reserves soared, with the US reaching record deficits in its current account. These global imbalances set the stage for the most severe global economic and financial crisis in decades.
Welcome to the twenty-first century. The new centennial is not even a teenager and it has already developed its own, unique per- sonality. This book deals with the challenges facing us in the new
1 ‚

c Mauro Guillen and Emilio Ontiveros (2012)Global Turning Points, Cambridge University Press

2 • Welcome to the twenty-first century
century. It is not one more exercise at projecting past trends into the future, but an analysis of the major global turning points confronting us, namely, the game-changing events and trends that are transform- ing the world beyond recognition. A series of such inflexion points have occurred over the last decade or so – and they will reshape the economic, socio-demographic, political, and geopolitical affairs for decades to come:
The global economy is out of balance. Most of the large rich econ- omies, with the notable exceptions of Germany and Japan, are running large trade deficits while most emerging economies are enjoying large surpluses. After two decades of intense economic growth, emerging economies now represent about half of global economic activity. Emerging economies are also flexing their financial muscle because they own two thirds of foreign exchange reserves, of which they are accumulating an additional two billion dollars every day.
Emerging-market multinational firms are expanding around the world like wildfire. Once a marginal phenomenon, as of 2010 they represented 25 percent of the largest 500 companies in the world, 29 percent of the total number of multinational firms, and 41 per- cent new foreign direct investment flows over the previous five years.
Demographic conditions are changing fast. For the first time in human history, Japan and several Western European countries have inverted age pyramids with more people above age 60 than below age 20. Also for the first time, more people live in cities than in the countryside, and greater numbers suffer from obesity or being overweight than from hunger.
The political landscape in many parts of the world has taken a turn towards uncertainty, chaos, and anarchy. For the first time since World War II there are more countries in the world affected by state failure than countries ruled by dictators. In general, there

c Mauro Guillen and Emilio Ontiveros (2012)Global Turning Points, Cambridge University Press

Welcome to the twenty-first century • 3
is a sharp decline in the legitimacy and capacity of the state in both developed and developing countries.
We live in an increasingly disparate world. Although income

inequality across countries has decreased since the turn of the twenty-first century due to the rise of the emerging economies, inequality within countries has continued to increase, posing dif- ficult social and political problems in developed and developing countries alike.
Sustainability has become a key priority. Top scientists predict that, without corrective action, climate change will become irre- versible at some tipping point during the twenty-first century. By 2030 food prices could be twice as high as in 2012, and half of the world’s population could be affected by severe water shortages.
The global balance of power is shifting rapidly. During most of the twenty-first century India will be the biggest country in terms of population, China the largest in output, and the United States the richest among the major economies on a per capita income basis.
Some people find it hard to accept that the world order they grew up with might be coming to an end. Others
Some people find it hard to accept that the world order they grew up with might be coming to an end. Others feel that change is so pervasive that one can no longer assume any givens. Both reactions are understandable, precisely because the changes are so massive and they affect so many different aspects of global affairs. There are simply too many moving parts. Complexity is a key future of contemporary global society. Although the risks and the stakes were also high, the Cold War period never gave us a sense of overwhelming insecurity. Even the risk of nuclear war provided the foundation for the doc- trine of “mutually assured destruction,” which made it possible for the two global superpowers to find an accommodation. The twenty- first century is different. We are at the mercy of the catastrophic disruptions that a malfunctioning component of the increasingly complex global system can bring about. Think about epidemics such

c Mauro Guillen and Emilio Ontiveros (2012)Global Turning Points, Cambridge University Press

4 • Welcome to the twenty-first century
as SARS or the swine flu, global financial meltdowns like the one triggered by the subprime crisis in the United States, the European sovereign debt debacle, the riots generated by rising food prices in much of the developing world, or the quake and tsunami in Japan and its widespread consequences for global production and trade. The twenty-first century is the century of complexity.
Perhaps we could easily learn to cope with complexity if it did not come hand in hand with uncertainty. We know how to deal with risk: we can measure it, we can prepare for it, we can anticipate the consequences. But uncertainty is a situation in which we do not understand the variables involved and we lack the tools to quantify them. Uncertainty is difficult to grasp or comprehend. The rise of the global network society has unleashed many different kinds of uncertainties. We are just not sure as to what the effects of droughts, declining fertility rates, or political upheavals will be. We simply have little clue. The twenty-first century is the century of complex- ity coupled with uncertainty.
Another most intractable feature of the twenty-first century is that most changes appear to be paradoxical. Consider the following examples. The rise of the emerging economies is making it possible for hundreds of millions of people to overcome poverty. However, it also poses stern challenges in terms of job losses in the devel- oped world, competition for energy and natural resources, and glo- bal economic and financial governance. We will explore this topic in Chapter 2. Another example is the rise of the emerging-market multinationals, companies that were invisible a few years ago but have suddenly become household names. The paradox about them is that their increasing power and competitiveness is not necessarily based on the possession of technology or marketing skills. They have rewritten the rules of business competition, much to their advan- tage and at the expense of the traditional multinational firms from Europe, the US, and Japan. We will cover the fascinating rise of the emerging-market multinationals in Chapter 3.

c Mauro Guillen and Emilio Ontiveros (2012)Global Turning Points, Cambridge University Press

Welcome to the twenty-first century • 5
Equally puzzling are the demographic changes that are taking place in the world. The decline in the average number of children born to each woman has proceeded much faster in Europe, East Asia (especially China and Japan), and to a lesser extent North America. Women in those regions now have much better eco- nomic, political, and social opportunities available to them. But these societies are aging very quickly. In the meantime, popula- tion continues to increase in Africa, South Asia, and the Middle East. It is also ironic that as economic development spreads around the world, we find ourselves in a situation in which there are more people suffering from obesity (about one billion) than from hunger (800 million). As of the first decade of the twenty-first century, the world has become predominantly urban, with more people living in cities than in the countryside for the first time in human history. Competition for natural resources now affects not only oil and rare minerals but also food and water. We will address the causes and the consequences of these and other
demographic turning points in Chapter 4.
demographic turning points in Chapter 4.
If there is an enigma that is likely to haunt us during the twenty- first century, it is why democracy has made great strides as the dom- inant form of government in the world while at the same time the number of failed states has proliferated. Nearly 50 countries suffer from some degree of state failure, including not only egre- gious examples such as Chad, Congo, Sudan, Somalia, Iraq, and Afghanistan, but also other threatened states like Mexico, Nigeria, Pakistan, and India. This trend has caused major problems in the global economy and in trade, and made terrorism the dominant form of violent conflict, whereas in the twentieth century conventional wars were. In Chapter 5 we will explain that the confluence of rapid demographic growth, political instability, and natural resources in Africa, the Middle East, and South Asia poses serious threats to glo- bal society in the twenty-first century. Another paradoxical trend is the new emphasis on good institutional governance at a the same

c Mauro Guillen and Emilio Ontiveros (2012)Global Turning Points, Cambridge University Press

6 • Welcome to the twenty-first century
time that state capacity is diminishing due to the ideology of small government and the fallout from the sovereign debt crisis.
Global inequality and poverty have also come to characterize the twenty-first century in ways that are very different from the recent past. For the first time in two centuries, we are witnessing less inequality across countries at the same time that inequality within both developed and developing countries is on the increase. Enigmatically, poverty is coming down even in countries in which inequality is on the rise. We will analyze these puzzling turning points in Chapter 6.
Growth in the emerging economies has come hand in hand with environmental degradation. In developed and developing countries alike, a quest for sustainability is on. The emphasis is not only on energy, but also on green production and consumption of goods and services. Agriculture, construction, and tourism have also become targets of sustainability efforts. Technology and behavioral change are touted as the solutions. Emerging economies are making contri- butions of their own to global sustainability, as the cases of sugarcane ethanol in Brazil, water management in Thailand, or wind power in China and India attest. Water and food are also becoming scarce commodities. We will examine the challenge of global sustainability in Chapter 7.
These economic, demographic, and geopolitical turning points are rapidly eroding the dominance of the United States as the lead- ing global power. In April of 2011 the International Monetary Fund shook American public opinion with its prediction that China’s economy would be the world’s largest by 2016. We will explore in Chapter 8 to what extent historical patterns in the rise and fall of dominant global powers help understand the new situation created in the twenty-first century, one in which not one but several powers may share the global stage.
Finally, in Chapter 9, we will examine the implications of these global turning points for business and for society at large. We seek

c Mauro Guillen and Emilio Ontiveros (2012)Global Turning Points, Cambridge University Press

Welcome to the twenty-first century • 7
to identify the challenges and the opportunities that stem from each of them. We will argue that the world needs new approaches to glo- bal governance in order to deal with the complexity, uncertainty, and
needs new approaches to glo- bal governance in order to deal with the complexity, uncertainty, and interconnectedness that characterizes the global economy, the international system of states, social dynamics, and geopolitics in the twenty-first century. The world is replete with uncertainty and complexity, and we do not seem to have in place the economic, pol- itical, and geopolitical institutions to cope with it all.
The issues summarized – the large and persistent global financial imbalances, the growing lack of competitiveness of rich-country firms relative to the emerging-market multinationals, population aging, urbanization, the obesity epidemic, failed states, terrorism, the unequal distribution of income, environmental degradation, global warming, the looming crisis over food and water, and the lack of global political leadership – present a formidable set of challenges. The potentially negative impact of these issues is exacerbated by the complex ways in which they interact with one another, the uncer- tainties they generate at all levels, from the local community to the global system, and the speed at which their effects can be felt in an interconnected world. Welcome to the twenty-first century.
Week 2.
Video 2.1 Importance of Demography
What is demography? Demography is study of human populations

Why should we care about demographic trends?
Economic importance of demography:
Relative abundance of labor depresses wages: global redistribution of production
Women participation in the labor force
Size of the market
Age structure/population ageing: demand for education, financial services, healthcare, leisure Savings:
Age structure of the population
Flows of capital from higher to lower-saving countries
Political relevance of demography:
Allocation of parliamentary seats by districts
Voting behavior
Lifecycle patterns
Cohort effects
International migration
changes in the demographic make-up of a country
immigrant communities tend to be concentrated in a handful of cities
Demography is integral part of nation building
Xenophobic political parties and social movements (reaction against immigration)

Impact of demography on the welfare state:
In the rich countries ( and some merging economies)
Lower birth rates
Higher life expectancy
Difficult for countries to reallocate resources across:
Old-age pensions
Chronic problems with funding “pay as you go” or “defined benefit” welfare programs (as opposed to “defined contribution” programs)
Geopolitical impact of demography
Population size and global power:
Development stars in the 1960s-80s: south Korea, Taiwan, Singapore and HK
Developments stars of the 1990s and 2000s: China, Brazil and India
Discussion question: Are population size and density both relevant from a geopolitical point of view?
What is demography?
The systematic, often statistical, study of human populations, especially with reference to size, density, distribution and vital statistics
Small demographic alterations can cause large transformations if trends persist for years Demographic reversals take years to occur
Demographic policies are hard to design, difficult to implement and have effects only years into the future - at least a generation or a generation and a half into the future
Video 2.2 Population Growth What’s the projected growth of the world’s population?
How do we calculate?
We need to make assumptions about key magnitudes:
Total fertility = children per woman. The average number of children a hypothetical cohort of women would have at the end of their reproductive period if they were subject during their whole lives to the fertility rates of a given period, and if they were not subject to mortality.
Life expectancy at birth = The average number of years of life expected by a hypothetical cohort of individuals who would be subject touring all their lives to the mortality rates of a given period.
Assumptions by the UN Population Division Four different assumptions on fertility:
No change

Medium, We will use this one
Mortality or life expectancy: Only one variant is used in the projections and that is MEDIUM
UN divided countries into three different regions. Regions by level of economic development:
More developed: Europe, US, Canada, Australia, New Zealand and Japan
Less developed: Africa, Asia (except Japan), Latin America and the Caribbean, and Oceania (except New Zealand)
Least developed: 49 countries: Africa (34), Asia (9), Oceania (5) and Latin America (1)
Medium fertility projections:
Average woman in the world had 5 children
More developed: less than 3, around 2.8. Then this went down to less than 2 in the 1990s
Less developed: 6 then down to 2.8, 2.9 today. then 2 by 2100
Least developed: 6.5. Around 4 today then 2 in 2100
Today that has come down to around 2.5. And by 2100 the average woman will give birth to around 2
Observations: Women on average are having fewer and fewer children as time passes. By 2014, we still see differences by different levels of development. Stll high in the least developed countries.
What this means is that we will still see very rapid population growth in the poorest countries of the world. And we will see shrinking population in the richest parts of the world. Except that there will be some migrations from the poor parts to the rich parts of the world.
Discussion question:
Why do demographers assume that a population needs a fertility rate of approximately 2.1 children per woman in order for intergenerational replacement to take place?
Answer: Not all children survive to have their own children. And mort all children that survive actually have their own children.
Situation in rich countries: Since the late 1960s, populations in Europe and the US have not been replacing themselves. Fertility rate has been below 2.1. this means that without immigration, the populations in those countries would have decreased.
Medium life expectancy in years.: 1950 2014 2100
World: 45+ 70 80
More developed: 65 78 88

Less developed: 42 70 80
Least developed: 36 60 78
Observations: People are living longer and longer no matter where they are in the world.

World population projections 2011-2100 1950 2015 2100
World 3 billion 7 Constant 29 High 16
Medium 10-11
low 6-7

Constant assumption is not a good assumption. Most reasonable is the medium assumption.
Video 2.3 Regional populations
Regjonal distribution of the population:
Eastern Asia: China, Japan, the two Koreas, Mongolia
Southeastern Asia:
South-Central Asia: From Iran to Bangladesh, plus the “Stans”
Western Asia: From Turkey to Iraq, plus the Caucasus and the Arabian Peninsula Europe (including the Russian Federation
Latin America and the Caribbean

Regional distribution of population in % (based on medium growth) 1950 2014 2100
Africa 9 15 39-40
Southeastern Asia 7 9 7

China 21 19 10
Eastern Asia 26 22 12
USA 6 5 5
Western Asia 2 4 4+
South Central Asia 20 25 21 Latin America
Europe 22 10 6

South Central Asia includes India
Generally fertility comes down when economic growth starts, population gets more education. Women’s education is one of the most important predictors of the number of children.
Drivers of population decline in China: Government policy: one child policy Economic growth
Discussion question:
What does the demographic rise of Africa mean for global economic and geopolitical dynamics?

Immigrants as % of population
World High income countries
1960 around 2.4% 5
2010 around 3% 11.5
immigration is a very important force in the world. this is the reason why the population in Europe and US have remained stable in spite of their low fertility
Video 2.4 Age pyramids Age structure of the population: Age pyramids
Germany, getting older much faster than the US, because futility has dropped more quickly in Germany
China: ageing very quickly, One child policy, greater access to education by women and great rates of labor force participation by women which is driving fertility down
RussiaL gender imbalance. Men appear to be dying at much younger age than women. Attributed to bad lifestyle, in particular excessive alcohol.Liver disease one of tyne top killers in Russia
Brazil: Ok in 1960, but now, Less teenagers, children than working age. good at first, but by 2060, population will start to age because there;s not enough children born to replace the ageing population
India: 1960 good. Still ok in 2010, but ageing will start in 2060.
all palces experiencing varying degrees of ageing
Discussion Question: why should we care about demography
What are the consequences of population ageing for stock market?
Prices go up when population is getting younger and down when population is older younger people tend to invest in equities, high risk

As they approach retirement age, they start investing more in bonds.
Video 2.5 Growth of cities
For the first time in history, we have more people living in cities than in the countryside

Urbanization % of population living in cities 1950 2015 2050
World 30 55 68
Most developed 54 79 85

Less developed 19 53 69 Least developed 9 28 68
Rate of urbanisation in the poorest countries of the world is the fastest. Every week around 1 million people join the city dwellers
World’s largest cities:
Back in 1960, there were only two cities with a population of 10 million or more: New York and Tokyo 1980: 4 cities with more than 10 M. Mexico and Rio de Janeiro
2011: more and more
Discussion questions:
Think about the economic implications:
What are the implications of the growth of cities t=fro consumer markets?
And for food and water?

Video 2.6 Global cities
What is a global city:
A city whose importance and identity transcends the country in which it is situated. A place where the work of globalisation gets done. (Saskia Sassen)
Concentration of financial, economic, political, cultural activities that affect the entire world.
Concentration of financial, economic, political, cultural activities that affect the entire world. Crucial dimensions: economics, finance, culture, politics, diversity
Features of global cities:
large, influential, prominent

Culturally and ethnically diverse
Culturally thriving: museums, universities, schools, music Advanced infrastructure
Rich in business services
Open, friendly, safe
Legally and politically secure

Drivers of global cities
Agglomeration economies: When one puts together a lot of bankers, consultants, researchers, doctors, their become collectively so much more productive
Growth of specialized service firms
Coordination of dispersed activities around the globe new communication technologies
Let’s take a look at some of the largest cities in the world

Largest city GDPs Tokyo US$1520 New York City 1210 Los Angeles 790 Seoul 774
London 731 Paris 669 Osaka/Kobe 654 Chicago 525
Moscow 520
Shanghai 517
Countries GDP Australia 1542 Mexico 1177 Turkey 788 Holland 771 Saudi Arabia 711 Switzerland 631 Iran 548
Sweden 523 Norway 500 Poland 490
Types of global cities
Truly global hubs: London and New York
Regional hubs: Singapore, Miami, Dubai, Panama Gateways: HK, Sydney

Discussion question:
Why do cities want to host global sporting events (e.g. Olympics) when the benefits do not exceed the costs? Benefits:
Short term vs long term
tangible vs intangible
Direct vs indirect vs induced
Infrastructure for future use
tax collection
Renovation, regeneration and revitilization
Very rare for city to benefit
Issue is how sustainable are those benefits
Other issues:
Who pays for the vents
Is there crowding out
Are they transformational
Does bidding for the Olympics bring most of the benefits of actually hosting them

Montreal 1976 - not able to sustain the hype - City still paying bonds issued to pay for the infra
Moscow 1980
Los Angeles 1984
Seoul 1988 aaas successful. Became global
Barcelona 1992 became famous, develop tourism
Atlanta 1996 well organized
Sydney 2000 quite successful,
Athens 2004 infra problems
Beijing 2008 successful
London 2012 transformational
Not more than 3 actually benefited; some cities became well known by organising a global sporting event

Video 2.7 Health status
Health Status. Discuss the most important health epidemic of the 21st century.
Back in the 20th century , we thought that the most important health related risk was smoking.
Now we have a different kind of health problem emerging in may different parts of the world.
And that’s obesity.
There’s an interesting and horrifying fact. According to the WHO, there are more people now suffering form obesity than suffering from hunger.
There are 800 million suffering from hunger in the world. There are 1 billion suffering from obesity or overweight.
How obesity iOS calculated. Using BMI or body mass index. Weight in kg divided by square of height in meters. If result is greater than 30, then that person is classified as obese. If between 20 and 30, that is overweight.
In the US upward of 40% are obese. In most parts of Europe its 1015% or 30-35%. The only rich country with small obesity is Japan. 3% of males and 1% of females.
Obesity is increasing all over the world. Including among children.
Whyis obesity on the increase? Too much cheap and bad food. Changes in lifestyle. Urbanization. when they move top the cities, they change their habits. They change the kids of food they eat.
How is ti affecting healthcare? Healthcare spending: diabetes, cardiovascular diseases, cancer, arthritis, etc.
Video 2.8 Demograpjic trends and the clothing industry. Clothing industry.
1.4 Trillion dollars in global annual sales.
Affected by cross cutting trends:

Increasingly demanding young people Population ageing
Clothing and urbanization: Functionality
Speed: fast fashion
Young people
Spend a greater % of their income on clothes, more than any groups The millenials or Y generation

Strong sense of community (local vs, global) narcissism though to selfishness
Hungry for media/technology
Population ageing

60+ people account for an increasing share of global clothing sales - because there are more of them, especially in Europe, East Asia and US
Clothing firms spend 95% of their advertising targeting the under 50s. there are exceptions: Chicos live for the present , featuring Diane Keaton, 65
American Apparels advanced basics
In response, most brands have decided to grow in emerging markets with youthful populations Online websites are beginning to target the aging populations, China’s largest online shopping bazaar, began targeting the over-50 in 2012 The prevalence of obesity is changing the definition of the average clothing consumer
In 1985 the average US woman was a size 8
In 2013 the average US woman was a size 12-14

Seats, airbags, fuel economy


This week we will analyze recent trends in: Global inequality and poverty
The rise of the global middle class
What companies are doing about the growth of middle class consumption
What companies are doing about the growth of middle class consumption The relationship between changing gender dynamics and wealth
Analyzing poverty
Poverty has to do with the bottom segment of the income distribution if you draw the line at $1.25 per day
In 1990 there were 1.9 billion poor people
In 2010 there were .2 billion poor people

Most of the decrease had to do with the merging economies like China, India, Brazil, Mexico Meanwhile, poverty has increased in both Europe and the US
Where are the poor?
570 million in South Asia, that includes India 396 million in Sub Saharan Africa
284 million in East Asia
50 million in Latin America

In the US, the government calculates that:
46 million or 16% are under the poverty threshold ($23,050 income for a family of four)
Nearly 4 million are in extreme poverty ( less than $2 per day)
In the EU, a smiler proportion (16%) lives in poverty or at risk of being poor.
What’s the difference between the concept of poverty and inequality?
Inequality refers to the distribution of income (*wealth) across the entire population, not just the poor
is inequality on the decrease or increase? Poverty is on the decrease in the world but on the increase in the US and Europe
What are its causes?
Does too little or too much of it reduce the incentive to work hard and to invest?
What should we do about it?
Measuring income inequality
You can just compare the difference in income between those at the top and those at the bottom.

Gini coefficient: A measure of the deviation of the distribution of income among individuals, households or countries from a perfectly equal distribution. A value of 0 means each has the same income, while a value of 100 means that just one of them enjoys all the income.
Discussion Question
Is there more or less income inequality in the world today than 20 years ago? You will notice that the answer is not so simple.
Income inequality across countries Gini coefficient
All countries Without China
1950 .55 .51

1960 .53 .5 1970 .56 .53 1980 .57 .535 1990 .56 .56 2000 .54 .565 2010 .485 .54
Income inequality within countries
Gini coefficient for developed countries 1950 1960 1970 1980 1990 2000 2010

US 36 36 40 40 43 45 47
UK 30 29 28 35 37 36
Sweden and UK, there’s been decline from 2000 to 2010 For emerging countries

China, Russia: Income inequality has increased during past 20 or 30 years
Brazil and Colombia - income inequality has been coming down in the last 5-10 years. In Brazil decline is due to government redistribution program
Another indicator is to look at the income of the top 1%. The top 1% are now earning more of the income of the world.
During the great recession, the income and wealth of the top 1% came under scrutiny. IN THE US, the 1 % have:
IN THE US, the 1 % have:
More than $394,000 income
More than $8.4 million in wealth
Income of the top 1% as per cent of total income
Between 1910 to 1960: the income of the top 1% came down But from 1970 to present, that proportion went up
U shaped pattern. Going down first then going up

Video 3.2 The causes of Rising Inequality Causes of rising Inequality
Technological change
Skills gap: The skills gap or the mismatch between the technological requirements of jobs and people’s skills, especially people who are in their 40s, 50s and 60s. Older workers have more difficulty adopting. Technology is not the great equalizer
Trade (foreign)
Has reduced inequality in emerging economies by stimulating economic growth
Has increased inequality in developed markets due to job migration

Foreign investment
Part of it involves eliminating jobs in the home country of the firm. That type of foreign investment is called vertical. For example, a firm shutting down a factory and shifting the production to a foreign country
It has been a net contributor to inequality globally, according to the IMF (World Economic Outlook 2007) Growth of the service sector
According to Paul Osterman, a Professor at the MIT Sloan School of Management, “The migration of manufacturing jobs to other parts of the world has generated a decline in the share of income accounted for by labor. Meanwhile, jobs created in the service sector have proved to be much more heterogeneous in terms of skill level, stability, and pay than those in manufacturing.”
Welfare state retrenchment
Many counties have been forced to cut welfare benefits. The welfare state reduces both poverty and inequality by making education and healthcare available, by redistributing income, and by protecting children, the elderly, and the unemployed.
When social spending is cut, that tends to increase inequality. This has been demonstrated in different parts of the world.
The recent austerity measures in Europe and the US as a result of the recession have led to increased poverty and inequality
Growth of wealth accumulation (capital gains)
The rich enjoy higher levels of income. They invest the excess in the tom of savings and thus result in growth of their wealth.
Share of labor in national income has dropped in Europe and the US in favor of capital’s share. People with wealth are generating more income
High income often translates into higher savings, and cumulates over time into greater wealth in a self perpetuating cycle
Capital gains often get better tax treatment than wage income
Changes in taxation

Capital gains receive favorable tax treatment compared to wage income The average tax rate has been declining in the last 50 years
The average tax rate has been declining in the last 50 years
In the US, the top .1% of taxpayers’ average tax rate for income purposes was:
Over 50% in the 1940s
Just under 40% during the 1960s and 70s
Under 30% since the 1990s
Growth of emerging economies
The Kuznets curve
Inequality is highest when countries are making the transition from developing to developed. At very low levels of economic development, countries tend to have less inequality than at medium levels of economic development. And at high levels of economic development, there is less inequality than at medium levels of economic development.
GDP per capita
Gini Index 3.8 4.7 4.6 3

Elusive curves
Inequaltiy has risen in most countries but only Brazil has seen the eventual fall in inequality as shown by the inverted U-shaped Kuznets curve

China (1964-2005) is rising inequality fro Gini 30 to 47 Russia (1992-2005) from 35 to 40
US (1950-2008) from 35 to 40
Brazil (1960-2007) from 53 to 60 to 52

Very little evidence on the accuracy of Kuznets curve
To summarize
Gini Income Coefficients

70 75 80 90 95 00 05 10 15
World 65 68 70 70 71 68 South Africa 63 60 58 65 65 Brazil 58 55 60 62 60 58 58 53 USA 39 40 40 43 45 46 48 48 China 29 26 32 33 39 40 40 58 Sweden 24 23 31 29 28 27 25
Video 3.3 Is there an optimal level of inequality?
Is too little inequality good?
Some economists, policymakers, and politicians argue that too little inequality - or not enough differentiation in rewards - undermines the incentives to invest in education and to work hard
Is too much inequality bad?
Clearly too much inequality can be bad, leads to:
Less investment in education
The undermining of the work ethic
less effort
More social conflict
More political mobilization (e.g., Arab Spring, Occupy Wall Street, etc.). they were all triggered by increases in inequality.
Is there an optimal level of inequality?
One can certainly calculate it

But the point is that inequality is the result of very complex forces
Inequality patterns shift over the course of economic development, sometimes in very unpredictable ways
Inequality patterns shift over the course of economic development, sometimes in very unpredictable ways Most importantly, inequality squeezes the middle class, which is the topic of the next lecture
it depends on the theoretical models you have
Are you adopting an economic, a political or perhaps a moral perspective? What’s the impact of inequality on human behavior?
What’s the effect of inequality on financial markets?
On consumer markets?

Video 3.4 What’s the Middle Class?
What’s the middle class?
Historically defined as the segment between the peasantry and the working class, on the one hand, and then upper class, on the other.
it was assumed to have different values and to exhibit different political behavior
Its rise had to do with the growth of cities and the new occupations created in them
At the global level, it is defined today as the segment between the poor and the rich
it has discretionary spending power. has enough power to cover all basic necessities and more, food and hosing and then some
it really did not exist until the early 20th century, starting in Europe and the US

How big is it?
Is the middle class growing globally?
Where is it located?
How much purchasing power does the middle class have?

The Middle Class is:
The middle class happens to be the foundation of modern democracy.
A key nexus in the chain of social mobility
A pillar of social and political stability
The largest consumer demographic in any country around the world
The largest beneficiary of the welfare state, more than the poor: education, healthcare, pensions, unemployment benefits. In many countries, the tax system subsidizes the middle class. While they pay more taxes, they make use of the social benefits like education, healthcare, etc than the poor.

What’s the global middle class?
It’s an ambiguous term. The middle class can only be defined within each country.
The OECD defines it as:
People with at least $10 to spend per day, but no more than $100 (adjusting for the const of living in different countries).
This translates into between $14,600 and $146,000 annual income for a family of four.

Breakdown of Poor Middle Class and Rich 0002040608101214 22 30
Poor 4.5 5 4 2
Middle Class 1.5 2 4 4.7
Middle Class 1.5 2 4 4.7
Rich .1 .2 .25 .3
Projection: By 2002, there will be more Middle Class in the world than poor

How about the distribution of Global Middle Class Consumption, 2000-2005 Today, more than half of the world middle class live in either Europe or the US
But by the year 2030, more than half of the middle class will live in China or in India. This is one of the most important turning points in the global economy right now. the center of gravity of the middle class will shift away from Europe and the US to India and China.
Note also that India will have a bigger middle class than China 20-30 years from now.
Why does the OECD project that India will have more middle class consumption than China within 20 years?

The first reason is population. India will have a bigger population than China in 15 years.
The pattern of economic growth in China is generating more inequality both in the cities and the countryside. This means the middle class is not allowed to grow that well in China. income inequality is inimical to the growth of the middle class.

Middle ClasS consumption per OECD (in trillion US $) Today 2030
World 21.3 55.7
North America 5.6 5.8

Europe (most of growth in Eastern E 8.1 11.3 Central & South America 1.5 3.1
Asia Pacific 4.9 32.6
Sub-Saharan Africa .3 .8

MENA .8 2.0
Africa middle class small. But big population. Will have 40 % of population by the end of the 21st century. Middle class will grow but it is still small. Poor have less than $2 per day. Middle is 4-20$. Rich is $20.
Video 3.5 India’s Middle Class India’s middle class
A business example
Since 1991, India has managed to grow in spite of the many bottlenecks facing the country in terms of politics, infrastructure, and access to education.
India has been growing. Not only services but also manufacturing has become competitive. Like Indian steel companies, automobile manufacturing companies.
Although in 2013 and 2014 the economy is slowing down, the long-term growth prospects remain optimistic. India’s middle class
In 2014 no more than 15% of the population was middle class ($10-100 per day)
By 2030, the proportion may rise to 50%
By 2030, the proportion may rise to 50%
As a result, social, political and consumer behaviour is changing India Companies are taking good notice.
What is this car?

Tata Nano
Launched in 2009 by Tata Motors, part of the Tata group, India’s oldest Family transportation for the new middle class of consumers:
Price at @2,500
634 cc engine
Target: sell 1 million units annually
An alternative to two or three wheelers
Billed as the world’s cheapest car
Tata Nano: an abject failure
Sold just above 250,000 Nanos in the first four years combined
Lost market share in India overall, and profits have plummeted

Discussion question: What went wrong?
Reasons for the failure:
Some quality problems, a few Nanos caught fire
Lacked aircon
The middle class is aspirational in its tastes. they want to buy goods and services that reflect their new status in society
Cars are a projection of the owner’s self image. you want to display your new status
Competitors like suzuki, Hyundai and Ford offered better models at a slightly higher price. the new middle class was attracted to those cars even though they are more expensive

A typical middle class consumer:
Shushank Sharma, 22, a computer operator - said he had a choice between a Nano and a two wheeler motorbike, which was around the same price. he bought the bike. “I don’t like the way the Nano looks to people and it’s all about the look,” Sharma said. “I take the bike to work, But if I have to go hang out with my friends or go for a marriage, then I prefer a car. But I would prefer to to sit at home if I have to go in a Nano.”

Video 3.6 Gender, income and wealth
Gender, income and wealth
Women continue to be discriminated against Are there any changes on the horizon?

A social system in which makes own/control property, occupy the most important economic, political and moral roles, and have authority over women and children.
Some anthropologists suggest that patriarchy spread around the world beginning 6,000 years ago with the transition from hunter-gatherer to agricultural society. So it was the creation of agriculture that brought about patriarchy

Legal discrimination of women
According to survey, in 45 out of 128 countries women do not have the same legal capacity to act or to engage in economic transactions
In 49 out of 128 countries women cannot work in all industries
In 32 out of 128 countries, women do not have equal inheritance rights
Gender inequality in wages
Gender inequality in wages
Driven in part by job segregation
Significantly large differences persist within occupational groups and positions, even after controlling for education and experience
The ‘mommy’ penalty: part-time work and career progression interruption
Poverty among female headed households

Gender inequality in Wealth
Historically, driven by:
Low female labor force participation rates
Gender discrimination in pay
Patrilinear inheritance rules
Nowadays, the gap is narrowing due to two trends:
Greater female labor force participation rates
longer life expectancy for females given that most wealth is owned by people 50+ years

High networth individuals (millions) 2007 2008 2009 2010 2011 2012
N. America 3.4 2.7 3 3.4 3.4 3.6 Asia Pacific 2.8 2.4 3 3.4 3.45 3.6 Europe 3.1 2.6 3 3.1 3.2 3.4
Latin America .4 .4 .5 .6 .5 .5 Middle East .4 .4 .4 .4 .5 .5

Africa ,1 ,1 ,1 ,1 ,1 ,1
High net worth individuals wealth in trillion $ 2007 2008 2009 2010 2011 2012
N. America 12 9 11 11.7 11.7 12.5
Asia Pacific 9 7.5 9 11 11 12
Europe 11 8.5 9 10 10 10.5
Latin America 6 6 7 7 7 7.5 Middle East 2 1.7 1.7 2 2 2 Africa 1 1 1 1.3 1.2 1.3

Number of high network individuals (thousands) 2011 2012
USA 3,068 3,436 Japan 1,822 1,902 Germany 951 1,015 China 562 643
UK 441 465
France 404 430 Canada 280 298 Switzerland 252 282 Australia 180 207 Italy 168 176
Brazil 165 165
South Korea 144 160
One important factor is that women live longer than men
Female advantage in life expectancy
1950-1955 2010-2015 2100 World 2 4.5 4
More developed 5 7 5
Less developed .5 4 4

least developed 2 3 4 Population age 65+ by gender 2010 2015 2050
W 300 320 700 M 250 279 680 Less developed W 150 200 550 M 140 175 475 Least developed W 10 10 60
M 10 10 50 More developed W 110 110 200 M 90 100 150

More and more of the high net worth individuals will be women

The end of patriarchy? HNWI % women World 2008 24
World 2010 27

North America 37
Japan 31
Asia Pacific ex Japan 24
Europe 18
Latin America 18
ME 14
If trend continues, within 10-15 years, more than half of HNWI in US , China, Japan and India will be women

Why is this important?
In financial markets, women are from Venus and men are from Mars Concerned about:
In the USA M W
Ensuring retirement assets 54 66
Future of SSS benefits 59 76
Rising cost of chldren college education 44 56
Aging parent financial security 25 37

Women will be more conservative, less risk taking
Inequality is inimical to the middle class. And the middle class is very important web jot comes to consumer market and financial market.
More and more women holding wealth.
The world is changing very, very fast. The financial market and also the political system will change.
Video 4.1 The Global economy and financial architecture
We will cover The Global economy and financial architecture.
We will seek to understand global economic and financial dynamics from the viewpoint of how countries interact with one another.
We will also examine two crucial issue: The European crisis and the US/China relationship Balance of Payments
Balance of Payments 2012 in US $ billion US CHINA INDIA BRAZIL
Trade balance
in goods Xg-Mg -741 +321 -189 +19

Trade balance
services Xs-Ms +206 -89 +64 =41

Trade balance
goods &
services X-M -534 +231 -125 -21

Net income
from abroad INF-IFF +239 -42 -16 -35

Net transfers
from abroad Z -129 +3 +63 +2

Current account (X-M) + (INF-IFF)
+Z -440 +193 -78 -54

Net capital
transfers from
abroad F +56 -16 +67 +70

Net foreign
loan (reserve
change) SF -389 +96 -12 +18

Capital account F-SF +446 -113 +80 +51
discrepancy SD -5.9 -79.8 -2.4 +3

Balance of payments (X-M) + (INF-IFF)
+ Z + F -SF
+ SD = 0 0 0 0 0
Explanation of Current Account: X-M) +(INF-IFF)+ Z Two basic considerations:
If a country exports more than what it imports, it’s a surplus country
If it imports more, that’s a deficit country
If one country runs a surplus, that necessarily means that at least one other country runs a deficit.

Global imbalances (current account, % of global GDP)
Germany, Japan, China, EMA Oil exporters are Surplus OCADC, USA deficit
Compared to the 1990s, the magnitude of the imbalances in the 2000s have become larger, even 5X bigger
Surplus countries, 2013 Germany 16.7% of total China 13.5
Saudi 11.6

Kuwait 5.6 Switzerland 5.5 Holland 5.5 Norway 5.0 Russia 5.0 Qatar 4.3
Japan 4.3 Singapore 3.6 South Korea 3.0 Others 16.4

Deficit countries 2012 USA 40.4
UK 8.6
Canada 5.7

France 5.3 Australia 5.2 Brazil 5.0 Turkey 4.4 Indonesia 2.2 South Africa 2.2 Poland 1.6
Italy 1.4 Spain 1.4
If country experiences a deficit year in and year out, it cannot continue forever. it will need to borrow money from the surplus countries so that it can continue to buy from abroad that what it sells. when this happens, the deficit country must sell something to the surplus countries. when this happens, the deficit country must sell something to the surplus countries. The US has been selling all sorts of assets to foreigners especially to the Chinese, etc. By far the most important asset the US has been selling are government bonds, as way to fund its very large current account deficit
The largest net asset economies in the world In trillion $
In trillion $
2004 07 10 13 16 19 22 25

China .3 -5 1.5 3 5 7 9 10+ Japan 2. 2 3 3 3 3 3.5 4 ME .4 1 1.5 2 3 3.5 4 4+
Germany is also a surplus economy and a very important net asset country
Comparing advanced and merging economies, it is the emerging economies that are becoming net asset countries
In trillions $
2004 06 08 12 14 16 18 20 22 24
Emerging -1 0 1 3 4 9
Advanced -2 -3 -5 -5 -10 -11
Most of the advanced countries, except Germany and Japan, are becoming negative net asset economies.

Video 4.2 The changing geography of capital investments
The changing geography of capital investments
Three maps top show the evolution of capital flows at three points in time

1914 UK was at the centre of the network of capital investments
1967 Center of gravity has shifted to the US away from the UK; although the UK, France and Germany were important as well
2012 Largest sources of capital investments in the world are now the US, EU and also China and Japan. Remember, back in 1967, China wasn’t even on the map of capital investments of the world.
The US continues to be the largest economy in the world as measured by GDP US and China projection: GDP projection to 2020
Trillion $
1980 85 90 00 05 10 15 20

US 6 7 8 8.5 10.5 12 13+ 15 18
China .3 1 1 2 3 5 8 12 18
Assumes 7% growth rate for China and 3% for US. By 2020, the Chinese economy will be greater than the
Assumes 7% growth rate for China and 3% for US. By 2020, the Chinese economy will be greater than the US economy. By 2020, the US will no longer be the largest world economy
Manifestations of global power
1800-1914 1845-1990 2000s
Largest economy China untiL US US for now
1888, then China soon
Largest trading country UK US China in merchandise since 2007, since 2012 in both goods and services Largest navy UK US US
Dominant reserve
currency pound dollar dollar & euro

1500-1888 China was then largest economy 1888-Present US largest economy
2020 onwards China again
1840-1942 Western Europe as a bloc

US was biggest trader up to 2000 then Germany and then China became biggest trader
If we consider both the goods and services, the US continued to become the largest trading economy up to around 2014, then China became the biggest trading nation
So here’s the US dollar, the most important reserve currency Trust very important in considering acceptability of currency
Until when can the US get away with issuing dollar bills or government bonds which the rest of the world would like to buy.
Dali principle: Until when do you think Salvador Dali was able to enjoy a free lunch. The Chinese currency
When will stye world start replacing the currency of the largest economy toady with the currency of the largest trading economy and zoo to be the largest economy? At some point, there might be substitution between the two currencies. Right now, the Chinese currency plays no role in the global financial architecture from the
point of view of b wing a reserve currency. Chinese currency is not convertible. There are benefits to being the country that issues the dominant reserve currency:
There are benefits to being the country that issues the dominant reserve currency:
Lower transaction costs
Lower interest rates
Power and influence
You become an indispensable country Requirements:

Currency must be convertible
You need to liberalise capital flows in and out of the economy
Rule of law
large and liquid market for securities, so people can hold cash or bonds predictable government policymaking
Government is fiscally responsible

Heas led some leader sim China how long they think China will take to meet all the requirements. Their answer 20, 25 years.
Remember the spiderman principle:
With great power comes great responsibility
There are questions now on ability of US to meet the following:
large and liquid market for securities, so people can hold cash or bonds predictable government policymaking
Government is fiscally responsible
Currency allocation of reserves:

1995 1999 2012 US$ 60 70 61 Euro 19 25
Yen 8 7.5 5

RMB is nowhere to be seen because it lacks convertibility Gold accounts for around 4-3% of all the receives in the world
Video 4.3 Trade blocs and the global economic landscape
Trade blocs have become an important feature of the global economic landscape What are they?
What are their effects?
What’s the future of trade blocs?

Multilateralism: Negotiating certain things that would promote trade such as: Lowering tariffs
Removing other kinds of obstacles to trade

The GATT rounds
Start Duration countries Subjects Achievements Geneva Ap 1947 7 months 23 tariffs Signing of GATT Annecy Ap 1949 5 13 tariffs 5,000 tariff concessions
Torquay Sep 50 8 38 tariffs 8,700 concessions
Torquay Sep 50 8 38 tariffs 8,700 concessions 1948 Tariff reduced by 25%
Geneva 2 Jan 56 5 26 tariffs $2.5B in tariff reduction admission

Dillon Sep 60 11 26 tariffs $4.9 B concessions Kennedy May 64 37 62 tariffs Tariff concessions anti $40B
Tokyo Sep 73 74 87 tariffs $300 B trade
non tariffs
Uruguay Sep 86 87 123 Tariiffs Creation of WTO non tariffs
Doha Nov 01 7 141 Tariffs Round not yet concluded non tariffs

Over time, they tended to last longer and longer
159 members
Members dually represented by EU, participate as a bloc and as individual members Observers 27
Rest non members

Trade bloc
Group of countries that agree to one of more of the following

1. Reduce tariffs for certain goods (preferential trade areas) - The EU in 1950s was a Preferential Trade Area, included agreements about coal and steel
2.Remove internal trade barriers (free tare area)- like NAFTA was a free trade area: Canada, Mexico, US 3.Coordinate external trade barriers (customs union)

4.Allow free movement of capital
5.Allow free movement of labor
6.Coordinate indirect tax policy
7.Coordinate regulatory & competition policies
8.Coordinate macroeconomic policies (economic union)
9.Introduce a common currency (monetary union)
10.Merge treasuries and fiscal policies (fiscal union)
11.Merge banking supervision and resolution policies (banking union)

Common market:
Allow free movement of capital Allow free movement of labor

EU became a common market by the 1970s Single market
Allow free movement of capital
Allow free movement of capital
Allow free movement of labor Coordinate indirect tax policy
EU became a single market by the 1990 The EU meets criteria 2-7 and 9 (8?)

Trade blocs tend to include countries: At similar levels of development Geographically close or adjacent
with similar trade regimes

Share desire to organise regionally
How common are trade blocs”
First, 1834: Zollverein, first modern trade bloc German
There are presently 259 trade blocs in the world and registered with WTO 1990s: Trend towards continental size blocs

What are trade blocs really?
People are very excited about trade blocs
Officially, an attempt to enhance trade
But in reality, trade blocs destroy trade, divert and create trade in complex ways They can be an attempt to privilege insiders relative to outsiders
There has been a proliferation of these agreements over the last 15-20 years

Video 4.4 Why are trade blocs controversial?
Economic controversies
Competitive implications Economies of scale
Improved terms of trade (through either bargaining power or specialization)
Economic welfare implications: trade creation, diversion, and destruction, depending ion the characteristics of the bloc (FTA vs. CU, level of external tariffs, etc.)

From political point of view, there are always winners and losers when it comes to trade blocs.
Who is in favor and who against? Small vs. large firms, exporters (L or labor vs. K or capital-intensive), import-competitors, consumers, investors, etc.
Justification for unpopular adjustment policies, like cost reductions, or wage reductions
Pressures towards democratization )e.g., Span, Portugal, paraguay, etc)
Enhanced power in multilateral trade negotiations
Improved global governance
Extension of influence over weaker states

Video 4.5 Monetary Union
Monetary Unions
What are they?
Are agreements among a given number of countries that entail the removal of all of the individual national
Are agreements among a given number of countries that entail the removal of all of the individual national currencies and the introduction of a single currency that would be used by everybody in that monetary union. What are the effects
The example of the Euro Zone

Three type of monetary unions:
Internal: One or more countries unilaterally adopt somebody else’s currency (r.g. Nauru/Tuvalu/ Australia, Bhutan/Nepal/India, US dollar area)
Formal: Two or more countries agree to adopt a common currency, sometimes supplemented by issuing a local currency pegged to the common one (e.g. Singapore/Brunei, San Marino/Vatican/Eurozone)
Formal + common monetary policy: (e.g. EMU, CFA franc, CFP franc, East Caribbean dollar, Lesotho/Swaziland/Namibia/Soth Africa). This involves one single central bank. EMU is Economic and Monetary Union
How Europe came to the point of becoming a European Union
Since the end of World War 2, European countries have attempted

Building Europe
Bringing in more member countries
Scope of the Union
Depth of the Union
28 members of the EU
Eurozone: 18 member countries
EU in 1957 had 6 members: France, Germany, Netherlands, Italy, Belgium and Luxembourg
1973: Ireland, UK and Denmark became members
1981: Greece became 10th member
1986 12 members with Portugal and Spain
1995, 15 members: Austria, Sweden and Finland
2004 expansion to the East: 25 members
2007 27 members further into the Balkans
2013 28 members with Croatia
But there are only 18 countries that are members of the Eurozone
Why did they decide to adopt a common currency which is the Euro?
Began in 19702, 1980s she Europe went through several currency crises
Waves of speculative attacks on currencies
The European thought they could not fully integrate their economies if their currencies came under speculative attacks. When currencies change in values too quickly, it is difficult for decision makers to pal an and decide
In the 1980s and 1990s , there was big push by the new leaders of there EU specially by a Frenchman named Jacques Delors.
1985-96 Delors was at the helm of the European Commission
One of the lost important pieces of that policy was to think about a common currency
DogmaL Deepening of integration
Technocratic approach: Rules and standards for everything
To help the less developed countries in the EU grow
Subsidies for the peripheral countries
Structural fund
The euro subsidy
And then something happened. A G-7 meeting: leaders of US, Japan, Canada, UK, France and Italy and Delors the President of the EC. And then something happened: The fall of the Berlin Wall and unification of the two Germanies. This was in 1990. This changed the Balance of Power in Europe.
A key player in the negotiations leading to the reunification of Germany was France. At that time, Germany and France were the two largest economies in the EU. And together they driving they were driving the process towards integration. the prospect of the unification of Germany, which was almost equal to France, would start to tilt in favor of Germany. Mitterand of France said it would be okay for France if the two Germanies would get together as long as they gave up the Deutchmark which was at that time a symbol of

economic power of Germany but also a very important instrument for Europe from the monetary point of view because all of the central banks of Europe were mimicking the monetary poles of the Bundesbank of Germany. So that was the bargain: to accelerate the calendar for a single currency to make sure that a
Germany. So that was the bargain: to accelerate the calendar for a single currency to make sure that a unified Germany wouldn’t have too much power in EU.
So in the late 1990s, 11 countries of the EU agreed to create the Eurozone. They essentially agreed to remove their national currencies and to adopt a common currency: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain.

As of the year 2014, the Eurozone has 18 members with Latvia as the latest member.
Slovenia is considered to ba next to Greece, Portugal and ireland to be in crisis.
Austrian economy has been expanding although very slowly, unemployment is less than 5%. Austria is a small country with 10 million population. It is the answer to the question, does a country have to be big to do well economically. And the answer is no. There are large countries that are doing well like China and India and large con tries not doing well like Brazil.

Video 4.6 Why is Europe’s economic and monetary union not working?
Why is Europe’s economic and monetary union not working?
EMU economic and monetary union in Europe did not include a Banking Union: Supervision
Deposit insurance

NO fiscal union
Consequences of Monetary Unions
Member countries cannot print money to inflate their debt away
They cannot devalue the currency to regain competitiveness
In order for a monetary union to work:
Labor needs to be able to & willing to move around in search of opportunities. Move from one country to another
Fiscal union is advisable to cope with the effects of the business cycle.
A banking union may be necessary as well: supervision, resolution, and deposit insurance.
The architects of the Euro believed that a PIIGS like problem would not occur because financial markets would have punished countries with excessive debt by raising the cost of borrowing. They didn’t until the global financial crisis sorted.
The European Central Bank or ECB:
Prohibits loaning money to service national debts.
its no bail out clause discourages overspending. It did not.
Then Stability and Growth Pact should have prevented the situation from worsening:
Deficit/GDP <3 and="" br="" debt="" gross=""> It was not enforced, and in 2005 the rules were relaxed at the request of France and Germany. Germany needed to throw a lot of money at th Eastern part after the unification. This relaxation played a very important role in the case of Spain, Portugal and Greece.

Video 4.7 The European Crisis
The European Crisis
Started in the US and spread very quickly to Europe.
The Eurozone crisis started in 2010 or so.
Government saw their cost of borrowing go through the roof: Greece

Portugal Italy Spain
The first country that had to be bailed out was Greece. And then Ireland and then Portugal.

Italy and Spain came very close to the cliff. They were bailed out in a different way. Draghi decided to buy a vast amount of Italian and Spanish debt.
Normally, the analysis focuses on: Sovereign debt

The market knew that the health of a bank was very much linked to the situation in terms of government bonds. the reason is that most of the government debt in Europe at the beginning of the crisis was held by European banks
I wold like to bring to your attention other types of dynamic that also contributed to the crisis: Labor mobility
Labor unit costs

labor mobility is very important. For labor to move from one country to another. But that was not the case in the Eurozone.
Labor Mobility:
% Annual Population
USA, interstate 2.3
EU-15, cross border 0.2
EU-15, cross border ex 0.1 Luxembourg
EU new members, cross border 0.2 EU-15, cross border commuting 0.6 EU-15, within country interregional 1.0

Unit labor costs increased much faster in the problem countries than the rest of Eurozone
The affected countries (Greece, italy, Portugal, Spain, Ireland and France) had lost as much as 40% of their competitiveness in terms of labor costa increasing by around 130-140% compared to only 110% in the case of Germany, based on 2000 rates. Before the introduction of the Euro, these countries would have had a way out by devaluing their currency.
Eurozone unemployment
Spain 26.2 Greece 27.6 Portugal 16.5 Ireland 13.6 Euro area 12 Italy 12.2 France 11 Germany 5.2
Euro Zone GDP growth
Less than zero Ireland -1 Portugal -2
Portugal -2 Spain -2 Greece -5 Italy -2
Pattern of growth highly correlated for the above countries.
Italy’s debt is different because most of the debts are in the hands of Italian households

Video 4.8 The possible solution to the European crisis
What are some of the solutions?
Most of the debate right now has been about austerity.That is to say, the European economy will be able to recover to the extent that governments abandon their old ways, to the extent that there adjustments to the economy special wages and costs.
Professor believe that austerity measures can only go so far. And will be felt only after around five years. It must be emphasised that all these European economies are interconnected in terms of trade. If one of them, is doing poorly, it’s likely that the others will do poorly.
% Total exports EU 68 EUROZONE 48 NAFTA 48
Asia 49
Latin America 22

It’s relatively high for the other areas, but they do not have a common currency. they are dependent on other countries that are part of the union.
Here’s the issue. Over the last 12 years since the introduction of the euro, some countries, specially those in the south, have lost their competitiveness relative to some other countries, especially those in the north, in the central part of the union, in particular Germany. to what extent does Germany compete against those countries?
Export similarity index (30-70%) of those countries relative to Germany very high. Meaning they tend to export the same goods as the ones exported by Germany. For Italy and Spain, it approaches 60-70%. They will always found themselves competing against Germany. they have the same currency so they can’t devalue their currency.
What can be done?
Short term:
Surplus economies must
Provide stimulus
Increase wages
Allow marginally higher inflation, just a few tenths of a percent
Europe is running the risk of a deflation, prices continue to drop. Must allow for slight higher price increases, to encourage firms to invest and for consumers to buy. Higher inflation tend to help individuals, countries that

have a,lot of debt. Higher inflation will help stimulate the European economy as a whole. it might also help the debt burden that some of the European countries are now bearing.
In the medium run, if you want to save th Euro
In the medium run, if you want to save th Euro
Fiscal coordination or union - merging the different national treasuries in Europe
Banking union
A true European labor market. a single labor market. Policy makers should take into consideration language and cultural barriers.

Madrid Spain, The economy has been shrinking for the last there years. Real estate prices have gone down by 25%. But Ireland is worse cause realm estate prices went down 50%. Economists believe that real estate prices in spain are still15% overvalued. In Germany, over last 5 years, real estate prices went up 10% but that’s still undervalued because there is normal estate bubble inn Germany. Nearly half of all young people unemployed in Spain.
What should Germany and the rest of Europe do?
Europe must allow for a slightly higher inflation rate. Why? When you have a lot of debt, inflation helps you get out of the problem. Asking for .2% more inflation.
Germany should increase wages to help the southern states., Because Germany buys goods and services from the Southern countries, from spain, italy etc.

Germany should not balance its budget so early. Germany can borrow at negative interest rates, That includes the government.
it’s very important that for the next 10-15 years, we lay the foundations for a new financial architecture. to have several currencies, not just the dollar, play important roles

Week 5
Video 5.1 Global trends
Global Treands
Population Ageing
Fast population growth in Africa, South Asia, and the Middle East Growth of cities
Obesity epidemic
Increasing inequality within countries
Decressing inequalities across countries
women’s rise as wealth owners
Global financial imbalances

When it comes to geopolitical trends, 2001 was a pivotal year When did the 21st century begin?
Some historians, e.g., Eric Hobsbawm, argue that the both century ended in 1989 with the collapse of the Soviet Union.
I will argue that what happened in 2001 is even more important. the 21st century started in 2001.

In 2001, within one week, two major events took place, the world changed:
9/11: the terrorist attacks on the US
9/17: China finalised negotiations to enter the WTO. that changed the global economy.
Also, centuries start in years ending in 1, not 0.
Video 5.2 Political Regimes
Political regimes:
Few, if any, individual and group political rights are recognised and protected.
Little room or no room for participation and opposition
Little or no separation of powers
No free and competitive elections
Three types:
No individual or group political rigths are recognised
Does not allow any political participation or opposition
No separation of powers
Example North Korea or former Soviet Union
Allows for some limited forms of participation by certain groups like religious organizations or other civic associations, though the dictator cannot be voted out of power
Examples Spain under General Franco and south korea under General Park
Members of an extended family or clan run political affairs at the expense of formal institutions, without appealing to any particular ideology
Examples Saudi Arabia and Gulf States
individual and group political rights are recognized and protected.
opportunities or room for participation and opposition

separation of powers
free and regular elections to decide who rules
An incoherent political system with an odd combination of democratic and autocratic authority patterns

Data on countries around the world
Political Regimes, 1800-2012
1800 1850 1900 1950 1970 1990 2010
Democracies 0 3 10 20 35 75 95
Autocracies 19 23 10 20 90 50 20 Anocracies 3 30 33 28 30 49 52
In the 1920s and 30s, there was a backlash against democracies especially in Europe Anocracies have been growing since the collapse of the Soviet Union
Anocracies: Russia, Armenia, Bhutan, Sri Lanka, Cambodia, Venezuela, Algeria, Morocco, Mauritania, Sudan, Angola, Chad, Guinea, Zimbabwe, madagascar
Few countries in the world score higher as a dictatorship than Cuba: Swaziland, Turkemistan, Uzbekistan, Oman, UAE, Bahrain, Qatar, Saudi Arabia
Video 5.3 Failed States
Failed States:
Central authority is weak or nonexistent, that is, the government has lost clontroil over law and order in part or all of the country’s territory, cannot provide for minimal public services, and cannot interact with other states as part of the international community.
Measure: the Cneter for Systemic Peace calculates as complex scale taking into account ethnic and revolutionary wars, genociedes, politicizes, and breakdown of authority

Trends over last 20-25 years:
1995 2000 2005 2010 2012 Total 7971685552 Serious 34 45 33 28 22 High 25 28 23 18 22 Extreme 20 15 13 9 9
Decline in State fragility
This means that states in many parts of the developing world have been rebuilt and strengthened. Much of the improvement has to do with the end of civil wars.

State fragility index 2012 long arc of instability
Starts in Latin America with low levels of state fragility
Grows to high level and extreme level of state fragility in Africa, especially Sub Saharan Continues to be very high throughout the mIddle east and south asia
San improves again as we move further to the east.

What do countries affected by state failure have in common Fast population growth, young population
Occurrence of corruption
Very rich in natural resources such as energy, oil

Video 5.4 Armed Conflicts
In the 19th and 20th centuries, wars between states were the dominant form of armed conflicts. In the 21st century, wars are rare.
Armed conflicts, civil wars declining very sharply.
1945 1965 1985 2005 2014 Total 5 25 45 25 23 Interstate 1 8 10 5 3
Civil 3 20 34 22 20

2012 countries involved in active civil wars and conflicts Central African Republic
Congo Kinshasha

Ethiopia India Iraq
Mexico Mynamar Nigeria North sudan Pakistan Philippines Russia Somalia South sudan Syria Thailand Turkey Yemen

Dramatic increase in terrorism since 2001
Number of victims: Started in 2001 rose sharply and peaked 2007 then decline up to 2012. Rose from 100s before 2000 to 1000s after 2001
Countries: RoW, Nigeria, Sri Lanka, Russia, Afghanistan, India, USA, Pakistan, Iraq
Terrorism is a phenomenon that is highly localized in certain parts of the world.

Number of refugees: People who have been forced to leave their own countries.
Displaced are those people who have been forced to move from one part of the country to another part of the same country.

in 000
1960 1980 1990 2000 2010

Total 6000 9000 45000 31000 40000 Displaced 0 3000 18000 18000 26000 Refugees 6000 12000 18000 14000 14000
Increased over the last 25 years
Video 5.5 Somali Pirates
Piracy is a relatively rare event
But has become a major problem in the Horn of Africa with global implications
Somalia is the epicenter. With 10 million people, mostly Sunni Muslims, Independence in 1960

Ruled by Mohamed Siad Barre 1969-1990. Adopted marxist precepts.
In 1977, war broke out with Ethiopia after Barre annexed a Somali-populated area. Cuban and Soviet support for Ethiopia tilted the balance and Somali forces retreated. Barre turned to the US as an ally.
when his regime collapsed in 1991, Somalia plunged into chaotic conflict.
Politicla dislocation led to poverty

More than 25% of chldren underweight children under age 5. Subsistence agriculture ceased to provide even minimal resources. More than 75% below poverty line.
Ummeployemntn at 50%.
Ummeployemntn at 50%.
Weapns readily available .AKMs, RPG7, AK47, ETC.

Fishermen became vigilantes:
They were attempting to defend Somali waters from European and Asian ships which were dumping toxic wastes and illegally harvesting fish
This foreign threat to their livelihood exacerbated poverty
Eventually, they discovered the lucrative benefits of piracy and taking hostages. Piracy began in 2005.

Who are the pirates?
Gradually, piracy became a way of life, a viable economic option for Somali mariners
Somali pirates mostly young males
The average pirate makes about $30,000-$75,000 per haul. with a possibility of bonuses.
Regarded as heroes by some somalis
Piracy also requires on-shore accomplices for securing arms, processing ransom payments and providing cover.

Around 66,612 ships enter the high risk area
Several thousand vessels fired upon every year.
More than a 100 attempted boardings.
Ransom reached $176 M in 2010, 160 in 2011 and 32 in 2012 Since 2010, attacks, ransom paid on the decline. Why?

The most famous boarding on April 8, 2009, it was the first successful pirate attack in over 200 years of an American vessel the Maersk Alabama.
Costs of piracy 2013:
$5.7-6.1 Billion down from $6.8 B in 2011 Ransoms & recovery $63.5 Million
Miliotary operations $1.09 B
Seurity equipment and guards $1.65 - 2.06B Rerouting $290.5M
Increased speeds $1.53 B
labor hazard pay hostage compensation $471.6 M Prosecution and improisonment $14.89 M Insurance $550.7M
counter piracy organizations $24.08 M
IGO and NGO spending $24.08 M

Video 5.6 How should the world face the challenge of Somali piracy?
International cooperation
Collective patrolling and security efforts
Countries involved include the UK, US, japan, Germany, In the past, New zealand, Singapore, Spain, Korea and Turkey, and others.
Piracy attacks have declined dramatically over past severe years, but cost per attack is dramatically nigher.
Is patrolling the ultimate answer?
World Bank Report: The solution to Somali Priacy is first and foremost political
Somali Prsident and international experts released a statement in April 2013 calling for international help to develop the Somali economy in order to combat the root causes of the issue. Patrollig is costly, and will surely remain effective as long as it is sustained. How long can participating countries afford it?

Solution must turn toward shore
Ending piracy requires focus to shift away from perpetrators and toward the enablers... World Bank
In 2013, the Somali President Hassan Sheikh Mohamud has made an effort to address various aspects of Somali piracy
Somali piracy
Granted amnesty to pirates willing to turn away from practice

Utilized clan avenues and local leaders to negotiate end to piracy
Bolster economy, infrastructure and information sharing
In 2013, the UN Development Cooridnator for Somalia announced that the number of people under duress had halved in the previous year
Innovative method of aid distribution, favorable rainy season and improved political stability give Somalis reasons to hope for a better future

Gulf of Guinea: Since the summer of 2013, there have been more piracy attacks than around Horn of Africa. Most off the coast of Nigeria.
Video 5.7 The State of the State
We just saw what can happen in the absence of a working state apparatus.
And yet, states around the world have rarely been under so much criticism and stress.

In many parts of the world, the state is undergoing a legitimacy crisis. Even in some parts of the world where the state is technically strong.
Legitimacy crisis (started with Thatcher and Reagan in the 1980s). They proposed state action that undermined state capacity.
In Europe and the US, the state is under financial pressure: high levels of debt. Public Debt % of GDP
1990 2000 2010 2015
Advanced Economies 60% 68 90 109% Emerging & developing 40% 68 85 34 economies
Total Tax Revenue % GDP
China 4% 7 11
USA 12 8 10
High Income 15 13 13 Low income 10 13 World 16 13 14 Eurozone 19 17 17

Higher income countries tend to spend more on public spending (general government consumption)
Spending on education, old age pensions, unemployment benefits tend to be higher in the richer countries. Same for R & D.
Military spending % GDP
Military spending % GDP
1990 2000 2010 2014
US 5.5 3 4.8 4
High Income 4 2.5 2.9 2.8 World 3.8 2.2 2.7 2.5 China 2.6 1.9 2.2 2

Low middle 2.6 2 2.1 1.8 Eurozone 2.6 1.7 1.7 1.6
With exception of European countries, higher income countries spend more than lower income countries
Video 5.8 Good Governance and Institutional Quality
Good Governance and Institutional Quality
Two criticisms of the State:
It should be minimal
It doesn’t need to be big in order to do its job

What’s the proper role of the State?
Law and order
National security and defense
Economic management
Fiscal and monetary policy
International economic & financial relationships Conditions for entrepreneurship
Social welfare

Old-age pensions Unemplpyment benefits Safery nets

Good Governance
Poltical stability
Policy predictability - you want to be able to know what the government will do. You don’t want to be taken by surprise
Rule of law
Qualtiy of Regualtion - people around the world demand better regulation
Transparency, accountability, and lack of corruption
Enabling bureaucracy, little red tape
Protection of property rights

Rankings of countries World Bank
Transparency International Freedom House
Heritage Foundation
International cCountry Risk Guide
International cCountry Risk Guide World Economic Forum
Fraser Institute
And many, many others

You will notice that the higher rankings are always occupied by the countries like Singapore
Northeast Asia like South Korea
Scandinavian country like Denamark, Norway, Sweden UK
Western Europe
Low ranks:
Parts of Latin America
South Asia like Bangladesh
Central Asia, the former Soviet Republics
some countries in the Middle East
Many countries in Africa

Rankings as an Isomorphic Force
Governments seek to improve their ranking in order to enhance competitiveness, attract investors, and increase their status and legitimacy
Rankings provide a benchmark for policymaking
Adoption of similar institutions, a concept of isomorphism, Governments seek to optimize the indicators included in the rankings

Simplified procedures
The World Bank has been conducting studies on how easy or how difficult it e=is to launch a new business For instance, since 2003 the differences across countries have been reduced in terms of:
Time spent preparing and paying taxes
Time required to start a business
Cost to start a business

Political regimes:
Democracies on the increase
Anocracies on the increase
Dictatorships and autocracies on the decrease
State fragility
State failure
Debate on the role of the State
Paradox of good governance - people continue to ask the =government to be better at what it does

Week 6
Video 6.1 The Global quest of sustainability
Key drivers of sustainability:
Population growth in some parts of then world.
Growth of cities. Urbanization: cities are growing by 1.5 million a week.
Rise of the middle class: n30 trillion dollars worth of new consumption in 20 years.
Geopolitical hotspots: large reserves of not only fossil fuels and minerals but also arable land. Located in
Geopolitical hotspots: large reserves of not only fossil fuels and minerals but also arable land. Located in parts of the world where there is state failure and great instability.
Definition of Sustainability. Two definitions
Thomas Jefferson, 1789: “Then I say the Earth belongs to each generation during its course, fully and in its right no generation can contract debts greater than may be paid during the course of its existence.”
United Nations’ Brundtland Commission on Environment and Development (1987): “Meet the current needs without destroying the ability of future generations to meet theirs.”
Professor’s definition: “ sustainability refers to making decisions and adopting courses of action about the use of natural resources that support life on the planet at the present time without placing onerous limitations on the availability of those resources in the future.”

What’s at stake?
Quality of everyday life (e.g., air pollution). Sustenance (e.g. food scarcity, water contamination) Future of life (e.g. global warming)

Sustainability is controversial
There’s considerable debate about the kinds of changes required to achieve sustainability There’s also debate on whether we are reaching a point of no return
Much discussion involves the relative merits of market-based versus regulatory solutions Population and economic pressures pose formidable challenges

The most important aspect of sustainability has to do with the tradeoffs that everybody has to make. Not just policy makers but consumers, us, in our daily lives.
Sustainability involves fundamental tradeoffs:
Enjoyment of life today versus that of future generations

Short-run economic growth versus long-term sustainability
Think about the levers that we have to overcome sustainability challenges:
Technological breakthroughs,. Example, regarding use of natural resources or energy in particular A great number of incremental, innovative improvements
Cultural values and priorities in life
Cultural norms regarding behavior

it is also about fairness:
Fairness between generations Between poor and rich Between different countries
1972: Club of Rome’s the Limits to Growth report. It was billed as defeatist and elitist. warning about the future availability of natural resources and energy, put together by experts from the riches countries 1979: The US National Academy of Sciences linked greenhouse gases to global climate change
1984: Bhopa gas leask
1986: Chernobyl nuclear explosion
1989: Exxon Valdez oil spill
2011: Fukushima

Interest in sustainability
Ebbs and flows, losing momentum during times of economic malaise and becoming more salient in the wake of major environmental disasters
“The debate over climate change has become a big cultural process, almost like the Renaissance, the

Reformation org similar world-historical events.” Andrew hoffman, University of Michigan
Video 6.2 issues regarding Energy
Video 6.2 issues regarding Energy
Issues regarding Energy:
Renewability (e.g. wind vs. oil)
Greenness (e.g. solar vs. coal)
Carbon footprint (e.g. nuclear vs. fossil fuels) Rleiability (e.g. coal vs. wind)

Trade balance and foreign exchange National energy independence

Was he correct?
“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” Sheikh Ahmed Zaki Yamani, Oil Minister of Saudi Arabia, 1970s
Primary Energy Supply % 1973 2011
Oil 46 31.5
Coal/peat 24.6 28.8 Natural gas 16 21.3 Biofuels and waste 10.6 10 Nuclear .9 5.1

Hydro 1.8 2.3
Total (million tons equivalent) 6,109 13,113

Electricity generation by Fuel % Coal/Peat 38.3 41.3
Natural gas 12.2 21.9
Hydro 21.0 15.8

Nuclear 3.3 11.7
Oil 24.6 4.8
Other (geothermal, solar, wind, .6 4.5 etc.)
Total TWh 6,115 22,126

Oil production & Trade
Producers MT Net Exporters MT Net Importers MT Saudi Arabia 544 Saudi Arabia 353 US 500 Russia 520 Russia 247 China 251
US 387 Iran 122 Japan 177

China 206 Nigeria 121 India 172 Iran 186 UAE 114 South Korea 125 Canada 182 Iraq 108 Germany 90 UAE 163 Venezuela 93 Italy 77 Venezulea 162 Kuwait 89 France 84 etc.
Most of the largest oil exporters of the world are autocracies or anocracies. US forecast to become net oil exporter in next 20 years because of shale oil.
Natural Gas production & trade
Producers bcm Net Exporters bcm Net Importers bcm US 681 Russia 185 Japan 122
Russia 656 Qatar 120 Germany 70
Qatar 160 Norway 109 Italy 68

Iran 158 Canada 57 South Korea 48 Canada 157 Algeria 48 Turkey 45 Norway 115 Turkmenistan 37 US 43 China 107 Indonesia 37 France 43 Saudi Arabia 95 Netherlands 34 UK 37 Netherlands 80 Nigeria 27 China 36 Indonesia 77 Malaysia 21 Ukraine 32 Other 1149 Other 154 Other 283
The biggest exporters tend to be the ones affected by political instability and biggest importers tend to be rich countries or heavily industrialized countries.
Coal Production & Trade
Producers Mt Net Exporters Mt Net Importers Mt China 3549 Indonesia 383 China 278
US 935 Australia 302 Japan 184
India 595 US 106 India 158

Indonesia 443 Russia 103 South Korea 126 Australia 421 Colombia 82 Taiwan 65 Russia 354 south Africa 72 Germany 45 South Africa 259 kazakhstan 32 UK 44 Germany 197 Canada 25 Turkey 29
Poland 144 Mongolia 22 Italy 24 Kazakhstan 126 Vietnam 18 Malaysia 22 Other 808 Other 23 Other 213
Nuclear Energy production
Producers Twh Producers % of all electricity US 821 France 79.4
France 442 Ukraine 46.3
Russia 173 South Korea 29.8
South Korea 155 US 19
G]ermany 108 UK 18.9
Japan 102 Germany 17.9
Canada 94 Russia 16.4
Ukraine 90 Canada 14.7
China 86 Japan 9.8
UK 69 China 1.8
Other 444 Other 11.5

Germany has decided top phase out all of its nuclear reactors. Hydroelectric production
Producers Twh Producers % of all electricity

China 699 Norway 95.3 Brazil 428 Brazil 80.6 Canada 376 Venezuela 68.6 US 345 Canada 59
US 345 Canada 59
Russia 168 Sweden 44.3
India 131 Russia 15.9
Norway 122 China 14.8
Japan 92 India 12.4
Venezuela 84 Japan 8.7
Sweden 67 US 7.9
Other 1054 Other 13.6
Average cost projections for 2018 Cents per kWh
natural gas 6.71
Wind 8.66
Hydro 9.03
Conventional coal 10.01
Nuclear 10.84
Solar 14.43
Wind offshore 22.15
Per US Energy Administration, 2013

Wind power’s contribution to world electricity supply in %
1995 2000 2005 2010 2015 2020 0 ,2 .6 2.1 4.4 8
Video 6.3 Carbon Emissions and Global Warming
Carbon emissions and global warming The two biggest: US and China
Carbon emissions by region %
1973 2011
OECD Rich (more than half US) 66.1 39.4 China 5.8 25.5
Asia, excl China 3.1 11.1
Less developed Europe 16.2 8.7
Middle East .8 5.1
Latin America, excl mexico 2.6 3.5
Africa 1.8 3.1
Total (million tons) 15,628 31,342

Incremental Primary Energy Demand 2008-2035

Between 1/3 to 1/2 of the additional primary energy demand in the world will be accounted for by China. True in the cas elf coal, oil and other sources of energy
Efforts to reduce carbon emissions
European countries lead the world. But dome countries are reducing their commitments because they are now more focused on economic growth and job generation because of the economic crisis

The US and China are the key players, but they are not working as hard to revue their emissions: Cheap shale gas in the US may help considerably by phasing out coal-fired power plants
China has an incentive to reduce emissions so as to ameliorate air pollution in its biggest cities
The example of CFCs
Choloroflourocarbons were used as a refrigerant , propellant and solvent
CFCs were identified as contributing to the depletion of the ozone layer, which protects Earth from ultraviolet radiation
Prodcution peaked in 1990 at 1.2 Billion tons
within a decade CFC production reduced to less than 100 million tons
the ozone layer is to completely recover by 2050
‘What made this possible?
Montreal Protocol of 1987
The original protocol and amendments and additions ratified by virtually every country
scientific proof widely accepted
there were alternatives to CFCs
little behavioral change required

Carbon emissions not so easy. need oil, avoid damage to the economy
One final thought. The challenge ahead.
“The energy challenge of the 21st century will be to satisfy a dramtically larger demand for energy while producing dramatically less carbon. Yet, the availability of carbon-free energy on mass scale will to happen without significant technological developments.
Paul Roberts, The End of Oil (2004), p. 309

Video 6.4 The case of biomass in the developing world
Issue that affects poor countries.
The case of biomass in the developing world: firewood, charcoal, crop waste, animal dung, residues, etc.

2.7 billion people burn biomass at home for cooking and heating, mostly in very poor countries. Costs less than coal, kerosene or gas
problem with biomass is that incomplete combustion releases hazardous smoke
inadequate ventilation adds to the problem

it affects more frequently women and small children
burning biomass kills as many as malaria or tuberculosis, and j=half as many as AIDS contributes to deforestation and carbon emissions

The different between wood fuel and charcoal
charcoal is produced by eliminating water and other substances from wood
demand for charcoal has increased because of the growth of cities: it is cheaper to transport, easier to use and releases less smoke
however, firewood is gathered on the roadside or outside forests, while charcoal is produced from forest resources
depending on the type of wood and the efficiency of the conversion process, charcoal may require 2 or 3 times as much wood to deliver the same amount of energy

link charcoal production to reforestation. Require companies that produce charcoal to plant new trees introduce better techniques for producing charcoal and better training for charcoal makers
create a trading system for charcoal makers

improve at point of consumption
improve stoves with:
internal secondary combustion of partially combusted smoke.
internal secondary combustion of partially combusted smoke. importance of training the user
Video 6.5 Are subsidies for Green Energy the Solution?
Are subsidies for Green Energy the Solution? Incentives?
What is the energy return for each energy source invested? This is the energy input-output balance.
Return Return
Oil and gas, 1930 100:1 Wind 18:1
oil and gas, 1970 30:1 Concentrated solar 1.6:1
Oil and gas, 2005 11-18:1 Photovoltaic solar 6.8:1
Shale oil 5:1 Sugarcane ethanol .8-10:1
Nuclear 5-15:1 Corn ethanol .8-1.6:1
Hydro 100:1 Biodiesel 1.3:1
To what extent should we rely on subsidies to bring down the cost of energy?

Subsidies for renewable and/or green energy may make sense, but only if:
They promote technological innovation as opposed to just production. better to allocate subsidies to technological innovation than to production.
They do not create perverse incentives
They do not create other adverse externalities
Most subsidies for solar & wind encourage investment in technologies that are not cost competitive with conventional sources
Wind expected to be competitive with coal in the next 4-5 years.

Believe it or not, oil is also subsidized in some countries. Subsidy at the pump.
“Global subsidies for fossil fuels are 12 times greater than green subsidies.
Above 50% in most ME countries., Iran,
Between 20-50% in some South American countries lie Argentina, Malaysia, Indonesia Below 20% in Russia, China, India, South Africa, Mexico, Venezuela, Thailand

Why subsidize? Mostly for political reasons.
Paradox in terms of energy subsidy: In the rich countries, subsidies are geared towards technological innovations. In the rich countries, governments are subsidizing electricity production that will never be competitive. In poor countries , we see governments subsidizing fossil fuel because they are afraid of social unrest.
Video 6.6 Are biofuels the solution to the energy Crisis?
Are biofuels the solution to the energy Crisis?
The US experience and Brazil experience Advantages of biofuels:
Advantages of biofuels:
Up to 90% lower carbon monoxide balance Job creation

Crop displacement
Upward pressure on food prices, corn and sugarcane. Also the prices of all kinds of food might go up Impact on water resources due to irrigation
Potential loss of biodiversity
Is it really green and sustainable?

Biofuel statistics
Rapid growth:
17 bn liters n 2000
85 bn liters in 2011
biggest producers: US with 62% of total and brazil 25% In US most fuel includes up to 10% ethanol

In Brazil it’s up to 25%, and they also have 15 million vehicles with flex-fuel engines. they can operate with 100% gasoline or 100% ethanol
Advantages of sugarcane based ethanol compared to corn based ethanol
sugarcane is 7 times the energy retuned on energy invested of corn-based ethanol

Sugarcane ethanol is competitive when oil prices are above $30 per barrel, while conn-based ethanol is competitive at $80 per barrel,
impact of sugarcane ethanol on global food prices is smaller. that’s because we use corn in the production of many food stuffs.

sugarcane introduced in 1530
Northeast slave labor plantations
1900s southeast, state of Sao Paulo
1975 Brazil launched ethanol program to address rising oil prices
1999 program deemed a success and government removed ethanol price controls 2003, they came out with the flex-fuel engines
2007 elimination of differential taxation for ethanol and gasoline
Brazil has the world’s most extensive biofuels economy

The debate continues in spite of Brazil success. Biofuels have pluses and minuses
They are a useful component of the energy matrix They will never completely displace fossil fuels

Gasoline gives you more than 30% more mileage than ethanol. Youn to multiply its price by .07 in order to compare its price to that of ethanol.
Video 6.7 Food and water
In the near future we will need to make some decisions on food and Water. Impact of:
Population growth
Urbanization: as people move to the cities, they start living farther away from the sources of water and food. The new global middle class. they will start consuming more food and water. They’ll start consuming certain types of food that requires more energy input.
types of food that requires more energy input.
Global food demand 1961=100 2010 2050
Meat 380 600
Dairy 260 390

Cereals 270 360 Starchy roots 190 280
Agriculture is the largest sector in poor countries and smallest in rich countries.
The growth of agriculture will put pressure on the supply of water. More than 70% of water usage is for agriculture. Just 10% is consumed directly by humans. The rest is form industrial use.
The agricultural sector of the rich countries uses water in a more efficient way compared to poor countries. Much of the water used in food is wasted.
irrigation can be massively improved.
urbanisation has exacerbated water shortages.

900 million people in the world lack access to safe water.
By 2030 the OECD projects that 4 billion people of 50% of the population will live in areas with serious water shortages.
Most of the water shortages will be in the BRIC countries. Severly affected will beChina and India. Not so much Brazil and Russia.
Panama Canal. You need a lot of fresh water in order to accomplish a transoceanic transfer.
Pressures on food production
Urbanization increases the pressure on food production

in the rural areas. Consumers in Lagos and Mombasa are competing for food supplies with those in Shanghai and Mumbai, according to Jack Godlstone, George Mason University
The new global middle class is changing its diet. animal proteins are more energy-intensive to produce.

How much more land can we allocate to agricultural production? Only 11% of the planet’s land area is suitable for agriculture.
LAND FOR AGRICULTURAL USE (MILLION HECTARES) Cultivated Uncultivated % of land < 6 hrs
1961 2007 away from market
World 1376 1554 446 59 Developed countries 385 360 51 48 Developing countries: 704 968 Sub-sharan Africa 148 221 202 47 Latin America 104 164 123 76 MENA 86 97 3 87
South Asia 191 205
East Asia 71 103 14 23

E. Europe & Central Asia 286 254 52 83
Most of the additional cultivated land was in the poor countries, developing world.
food price index 2005= 100 index includes cereals, vegetable oils, meat, seafood, sugar, bananas and oranges
1991 100
1995 100
2000 75
2005 100
2010 145
2013 190
2006-2007 introduction of subsidies for biofuels 2008-2009 great Recession

Increase in 2009-2011 due to weather disruptions, export restrictions, market speculation and dollar weakness; 2011 Arab spring
Agriculture is the biggest contributor to biodiversity losses. causes to biodiversity losses: loss to agriculture
loss to climate
loss to fragmentation and forests

loss to infrastructure loss to nitrogen
Video 6.8 Who should do what in the quest for sustainability?
Who should do what in the quest for sustainability? In all major issues there will be winners and losers
Business companies: They have then largest structural power in society. they were crucial in phasing out CFCs
The overpowering effect of the profit motive. Does it pay to be green? nodes it pay too innovate?
CSR corporate social responsibility

role of incentives and regulations
most are concerned about environment
yet they are noir willing to pay more for environmentally friendly or green products
the most successful experiences have to do with lighting and organic foods
need to redefine the relationship between consumption and happiness
Non profit organisations and NGOs
they can play a very important role in terms of information gathering and diffusion, exposing environmental abuses and encouraging positive change. Change consumption patterns.
Helo create collective will
need to ensure that the political process respects the interest of future generations
balance between regulation and markets
provide incentives for innovation and behavioural change
use sanctions and penalties
may create or destroy jobs and must provide alternatives, help those who lose their jobs or their profits promote effective global governance over demographic, economic, food and water issues.

Week 7
Video 7.1 The concept of global power C The global powers of the 21st Century
What is a global power?
A state recognized as having the ability to influence affairs on a global scale, even against the opposition of smaller powers
Foundations of global power:
Demography is a very important foundation of global power
Economic strength
military might
diplomatic capabilities
soft resources

Global powers in history
The first term to be used was “great power”
Coined in the post Napoleonic period, when Austria, Britain, France, Prussia and Russia emerged from the Congress of Vienna (1815) as the great powers
Subsequently. other countries enjoyed that status for certain periods of time: Italy, Germany, Japan, the USSR, the US, and more recently, China

Who will rule the 21st Century? One single power? Who? Multiple powers? Which?
What kinds of new models for global governance would we have to tackle the big issues confronting us? Historical patterns of the rise and fall of powers:
“History is not just one damn thing after another”
Ian Morris, Why the West Rules - For Now (New York: Farrar, Straus and Giroux, 2011 p. 560 There are patterns to history
Patterns of rise and decline of global powers seem to repeat themselves

Repetition of history:
“History repeats itself, first as tragedy, second as farce.” Karl Marx

Professor does not really believe that history repeats itself. he prefers this: “History does not repeat itself, but it often rhymes.”
Mark Twain

The historians:
Hegel and Marx: The dialectic of history.
The reasons why empires come and go is because there is a dialectic. There usually two or more forces that are working one against the other.
Oswald Spengler wrote a book: The Decline of the West (1918-23): civilizations as living organisms. Civilzatiojs are like living organisms so they go through cycles, rise and decline.
Arnold Toynbee, A Study of History (1934-61): Cycles of challenge, response, and suicide driven by moral & political decay

Paul Kennedy, The rise and Fall of the Great Powers (1987), Imperial overstretch. Acquiring too many obligations made global powers vulnerable
Jared Diamond, Collapse (2009): Malthusian abuse of natural environments. Civilizations came and went as a result of their relationships with the environment
Niall Feguson, “Complexity & Collapse” 2010: It happens fast. Punctuated equilibrium:
“Great powers and empires are... complex systems, made up of a very large number of interacting components that are asymmetrically organized... Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting.
But there comes a moment when complex systems ‘go critical’. A very small trigger can set off a ‘phase transition’ from a benign equilibrium to a crisis... When things go wrong in a complex system, the scale of disruption is nearly impossible to anticipate... a relatively minor shock can cause a disproportionate - and sometime fatal - disruption.”

Classic examples of collapse:
Rome: 5th C
Aztecs, Mayas and Incas, early 16th C
Ming China, 17th C
French Monarchy, late 18th C
Spanish Empire in the wake of the Napoleonic invasions
World War 1 when the Hapsburg, ottoman and Romanov empires collapsed Undoing of the British Empire after World War 2
Soviet Union following Afghanistan and Chernobyl
The 21st century: The US after Afghanistan, Iraq and the global financial crisis?

Causes of Decline and collapse. Internal and external drivers.
Fiscal crisis
Social & political fragmentation External:
Abuse of physical environment External threats

Video 7.2 Let’s do the numbers
Largest populations over the last 2,000 years India largest country until 1520
China since 1520
by 2030 India will become the largest

Biggest economies 1-1500 India 1500-1888 China 1888 US to present 2020 China
The UK was never the largest economy. It was the second largest 1820-1872. Before 1820 France was bigger, and after 1872, the US was bigger. Germany became bigger than UK in 1908
Western Europe as a bloc was the largest economy 1840-1942

Biggest economies by % world total, using purchasing power parities
1980 1985 1990 1995 2000 2005 2010 2015 USA 23 23 23 24 24 23 20
China 2 2.5 3 5 7 8 14

EU 29 27 26 25 25 24 21 Eurozone 22 220 19 18 18.5 16 15 Japan 7 7 8 8 7 6.5 6
India 2.5 3 3 4 4 4.5 6
Brazil 4 2.5 2.5 3 2.5 2.5 2.5
Brazil 4 2.5 2.5 3 2.5 2.5 2.5 Russia 5 3 2.5 2.5 2.5
Richest economies, 1870-2008 GDP per capita
1870 1890 1910 1930 1950 1970 1990 2010
Western Europe 4000 4500 4000 10000 15000 22000 US 2500 3000 5000 6000 10000 15000 20000 32000 China 1000 1000 1000 2000 6000
Japan 1000 1000 1500 2000 1500 12000 20000 24000 Russia 7000 9000
India 1000 1000 1000 1000 1500 2000 3000

Video 7.3 Power Resources
Power resources: Joseph Nye
Hard power: territory, population, economy, finance. military force. Soft power : knowledge, technology and culture

Nye’s Indicators of Power Resources, 2012
Indicator World USA China Japan EU Germany Brazil Russia India Basic
million sq km 148 9.8 9.5 .378 4.3

Population 7,000 313 1,300 127 509 Literacy 84 99 95 99 99 99 90 99 53
Nuclear WH 4400 2150 250 0 450 0 0 1800 110 Expenditure $B 1742 682 166 59 274 45 33 90 44 Expediture % world 100 39 9.5 3.4 15.8 2.6 1.9 5.2 2.6 % gdp 4 2.5 2.5 4

GDP T$ PPPs 86 15 12.4 4.4 17 3.3 2.3 3.3 4.7 Per capita $000 12.2 49.9 9.2 35 33 40 11.9 23 3.8 Internet users
per 100 35 81 42 79 75 84 49 53 12

Ranked in top
100 100 30 3 6 32 3 0 0 0
Films produced 819 584 441 1512 212 99 140 1255 Foreign students
000 685 72 142 1215 201 15 130 22

Territory & Population
US and China are approximately of same size, but:
2/5 of China affected by ethnic strife(Tibet and Western provinces)
The US has unimpeded access to two-three oceans. china only one.
Russia has twice as big as the US or China. but has less than half the population of the US.
.357 8.5 17.0 3.2 81 198 143 1200
Russia has twice as big as the US or China. but has less than half the population of the US.
Economy & Finance:
The US and China are of approximately the same size economically
TheUS continues to be the largest financial power in terms of capital markets and foreign investments China’s financial importance growing quickly
China doesn’t have a convertible currency

The US and Russia are the two nuclear superpowers
The US is the only power wight the ability to project military force around the globe
China’s military is large but technologically weak, and it cannot project force beyond its territory

When it comes to the global economy, navies happen to be very important.
Through naval power, countries can project their power beyond their territory. It is through naval power that countries can have an influence over trade routes and trading relationships around the world.

Largest navies
USA Russia China Japan UK Aircraft carriers 11 1 1 0 1
Missile sub 18 16 6 0 4
Attack subs 53 32 52 18 8
Total warships 341 282 239 109 100 Toral personnel 324 140 250 46 37

R & D budget as % GDP
Israel 4.7 Finland 3.7 Sweden 3,7 Japan 3.4 Korea Rep 3.4 Switzerland 3.0 Denmark 2.9 US 2.8 Germany 2.7 Austria 2.7 Singapore 2.7 Iceland 2.6 Australia 2.3 World 2.1 France 2.1 Belgium 2.0 Canada 1.8
UK 1.8 Netherlands 1.8 Slovenia 1.7 Norway 1.6 Luxembourg 1.6 Portugal 1.5

China 1.5 Brazil 1.1 Russia 1.0 India .8
Balance of Payments Royalties and Fees $ Million
Country Receipts Payments Balance US 105,583 33,450 72,135
Japan 26,680 18,768 7,911
France 10,407 5,558 4,848

UK 14,284 9,676 4,608
Sweden 5,168 1,382 3,785 Germany 14,384 13,050 1,334 Israel 849 859 -10
Chile 63.1 496 -432
Brazil 397 2,850 -2,453
India 128 2,437 -2,308
Russia 625 5,066 -4,441
South Korea 3,145 8,964 -5,818 China 830 13,039 -12,209 Singapore 1,866 15,857 -13,990

Video 7.4 China as a Global Power
China as a Global Power?
Largest population until 2030
Second largest economy - can become no. 1 by 2020 Leading trading partner
Largest current account surplus
Largest foreign reserves
Increasingly important source of foreign direct investment

China’s limitations:
Growth of cities - food and water
Population aging - one child policy; population not replacing itself
Gender imbalance, also due to one child policy; shortage of women, 8-12 million
Environmental degradation - desertification, degradation of air
Loss of cost competitiveness - wages going up due to economic successes
Fragile banking system - fragile and not up to standard when it comes to risk management
Transition to a consumer economy - China has been growing primarily by exporting. It must transition form high investing, high exporting to a consumer-driven economy
Issue of currency convertibility
Rampant corruption’
Income inequality on the rise
Political legitimacy of the government and the communist party
Internal ethnic strife in the western provinces and in Tibet
Conflicts with neighboring countries

China is surrounded by a large number of countries. China has border disputes or other kinds of territorial disputes with most of its neighbors
South and East China Sea, disputes with Japan, the Philippines, Vietnam

Issue of Taiwan
Issue of Taiwan
Be aware of China’s geostrategic location on the map
China lacks direct and open access to the oceans
There is a first island chain then a second island chain that make it difficult for China to have unimpeded success to the open ocean
The US has deployed a number of bases in the area
Diego Garica
South Korea
China does not enjoy the geostrategic advantages that Russia and the US possess

US vs. China
The US is still head and shoulders above China in terms of financial, military and cultural power and influence However the US is not hegemonic
No topic of global significance can be discussed without the US and China sitting at the table:
Global trade
Global financial architecture
Climate change
Exception: localized conflicts (US VS. RUSSIA)

Pax Sinica?
Key books:
Martin Jacques, When China Rules the World (2009)
Arvind Subramanian, Eclipse: Living in the Shadow of China’s Economic Dominance (2011) Arvind Panagariya, India:The Emrging Giant 2011

Remember Japan?
Vogel, Japan as Number One,. 1979
Ouchi, Theory Z 1981
Imai, Kaizen: The Key to Japan’s Competitive Success 1986 Crichton, Rising sun 1992

The skeptics
Joseph Nye, Soft Power (2004) and The Future of Power (2011): US still on top, but cannot accomplish everything by itself
Jared Diamond, Collapse: How societies choose to fail or succeed (2005): China face numerous challenges Aaron Friedberg, A Contest for Supremacy (2011): US can benefit from China’s Rise
John Ikenberry, “The future of the Liberal World Order.” Foreign Affairs (May-June 2011): China does not want to undermine the global liberal economic order, but to become more influential within it

Chinese Views on China’s Global Ascendancy
China’s rise will be peaceful and focused on development and cooperation :
Justin Yifu Lin, Demistifying the Chinese Economy (2011)
Hu Angang, China in 2020: A New Type of Superpower (2011)
Wang Jisi, “China’s search for a Grand Strategy” Foreign Affairs )March -Apri; 2011)
Zhu Feng: “China’s Rise will be Peaceful (20080
More militant:
Shen Dingli, “Sino-American Relations: Mutual Accommodation. “International Studies (2009)

Henry Kissinger, On China, 2011
“The question ultimately comes down to what the United States and China can realistically ask of each other. An explicit American project to organize Asia on the basis of containing China... is unlikely to succeed - in part because China is an indispensable trading partner for most of its neighbors. By the same token, A Chinese attempt to exclude America from Asian economic and security affairs will similarly meet serious
Chinese attempt to exclude America from Asian economic and security affairs will similarly meet serious resistance from almost all other Asia States.”’
Video 7.5 Global Governance
Projection: No single country will be hegemonic in the 21st Century. This means a number of global powers will need to share the stage. What then are the appropriate global governance structures that we need to put in place? To make it a fluid and beneficial sharing?
Flow of capital investments:
1914: From UK
1967: Mostly from the US, some form UK. The US was clearly the dominant financial power in the world. 2012: Situation much more complex. Multipolar. US, Europe, and China, Japan.

Showed London courts. Protective of investments. Administers justice in a predictable way. Built in the 19th century. so investors of all sorts went to the UK in the 19th century. Bank of England, founded in 1694. Made London a safe haven for investors. The second central bank of the world after the Swedish Royal Bank. Develpped a reputation for monetary policy making for preserving the value of the pound sterling. London Stock Exchange.
Many ways to manage global affairs:
United Nations:
Climate Change Peacekeeping
Human rights, refugees, etc International Monetary Fund Financial matters

World Bank
Poverty reduction
World Health Organization
G6, G7, G8, G20...
G6 and G7: US, Japan, German, UK, France, Italy and Canada
The largest market economies at that time. First met in 1975 as G6 without Canada which joined one year later.
Held a total of 22 summits.
The biggest one was in 1985. The G5 (US, Japan, Germany, UK and France) reached the famous Plaza Accord, which brought down the value of the US dollar in an orderly way to revue American external trade deficits.
G8 in 1998 which included the seven largest market based economies plus Russia. US, Japan, Germany, UK, France, Canada and Italy. G8 had 16 summits.], with additional countries and multilateral organizations occasionally invited.
The most recent attempt at Global Governance started in 1999. Included the largest market based

economies: US, Japan, UK, France, Italy, Canada and Russia. And EU as a bloc. South Africa. Asia Pacific: China, India, South Korea, Indonesia and Australia. LatAm: Argentina, Brazil and Mexico. Middle East: Saudi Arabia and Turkey.
Heads of State of the G20 countries met 8 times since 2008.
Question: is the G20 effective in managing global economic, political affairs?
Most experts agree that the G20 is a nice forum that helps keep channels of communication open.
It is too small because it does not represent all of the different emerging regions of the world
But too large form the point of view of decision making. Research indicates that the optimum size of a group is about 5.
That’s why the G20 tend to conclude with no important agreements
View of professor: Ultimately, 4-5 powers will make the big decisions. Most likely those powers will be the US, China, India, EU as a bloc and Russia if geopolitical issues are taken up.

It will be a multipolar world
G-zero world (Roubini and Bremmer). it is unlikely that this small group of big powers will reach an important decision.
No single power can impose its will on others.
Joseph Nye, “The Futire of American Power: dominance and Decline in Perspective,” Foreign Affairs, 2010. “The problem of American power in the twenty first century, then, is not one of decline but what to do in light of the realization that even the largest country cannot achieve outcomes it wants without the help of others.”

Video 7.6 Global Tensions
We are going to witness many global tensions.
Chart showing Economic, Geopolitical, Socio Demographic and Political tensions called the Four Institutional Gearboxes Shaping Global Dynamics in the Twenty First Century.
Social Demographic:

Population aging
Shifting demographic centers of gravity around the world: Africa and South Asia will grow in demographic importance
Growth of cities
Income inequality
Implications of these drivers:
Fiscal crisis
Political unrest
Shifting geopolitical balance of power
Race for natural resources: energy, water, and food
Growth of emerging economies, which already represent more than half of the global economy
Global trade and financial imbalances in the world
Implications of those drivers:
Competition for natural resources
Geopolitical frictions’
Skills gap
Income inequality
Shift in geo-economic balance of power way from US and Europe. there is no doubt that China and India will gain geopolitical and economic power.

Failed states
New forms of violent conflict, terrorism prominent among them Implications:
Governance problems (G-zero world)

Crisis of the state: fiscal and legitimacy
Disillusionment with democracy
Proliferation of anocracies
Diminished state capacity to act: Governments have less ability to intervene because (1) they are facing a fiscal crisis and (2) because of a legitimacy crisis
Social unrest
Political protests: US, Europe, Arab world, Eastern Europe Ukraine

Video 7.7 What kind of World should we Expect
What kind of world should we expect?
The century will be filled with tensions and frictions, many of them systemic in nature
Driven by socio economic forces, economic forces, by political variables and also by the shift in geopolitical balance of power.

Three very important characteristics of the world: Complexity:
Multipolar world
Unanticipated interactions

Tight coupling
Within countries and across global system Little room for error
The new normal
Potential for systemic disruption

Epitomizes some of the problems of the world
Rapidly aging population
Accumulating large surpluses, large reserves
Exemplifies the case of anocracy: neither democracy nor autocracy home to many natural resources: energy and water

Growth of populations in Africa and South Asia, even Middle East. will result in rebalancing of thee global economy and society. Problems of failed states and rise of middle class. Sustainability. And the global powers of the 21st century.

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