I drove down to the university on a glorious spring evening to hear Ernesto Zedillo, the former president of Mexico, discuss globalization with Tim Kehoe of the U’s Economics Department. The event was held in the Ted Mann Concert Hall, and by the time it got underway the auditorium was largely filled. There were a few very boring introductions, during which, for example, we got to hear the entire curriculum vitae of the College of Liberal Art’s new provost, whose name I forget. Everyone in the audience was fidgeting, looking up at the lights on the ceiling, or playing games on their computer.
Once the speakers got going, things improved. Kehoe had a few slides suggesting that the employees of US firms who engaged in exporting either their product or their services made roughly 15% more in wages than their counterparts feeding domestic consumption. He went on to produce a few charts and graphs to help him explain why the Mexican financial crisis of 1994 lasted only 6 weeks, whereas the current European crisis is entering its third year, and shows no signs of easing.
The reason? Mexico succeeded in making the adjustments required to redress the balance-of-payments issue that arose when investors suddenly pulled out their cash. In Europe, they’re finding it impossible to do that, because adjustments need to be made within the EU zone—between Spain and Germany, for example—and the single currency makes it difficult to do that.
That was the theme of the entire evening—everyone on the stage thought globalization was an obvious good. In fact, it’s been going on for two-hundred years at least. The challenge lies in redressing the imbalances it creates.
Ernesto Zedillo, former president of Mexico and currently a professor at Yale, pointed out that such rebalancing, in the end, is a political rather than an economic issue. In the United States, for example, real wages haven’t risen in twenty years—not because of globalization, he adds, but because of advances in technology. This needs to be fixed. Similarly, in China more emphasis needs to be placed on domestic consumption, to improve China’s trade balance and reduce tensions caused by the weird accumulations of capital in that country.
Indeed, throughout the evening China was the elephant in the closet. Kehoe observed, at the start of the presentation, that investors consider the United States, rather than Europe or China, to have the most potential for future growth—a remark which called to mind something I’d read in the Economist not long ago: for every foreign dollar that’s invested in China today, $2.50 of foreign funds are invested in the United States.
And when someone asked why Mexico isn’t experiencing the same growth rate that China is, Kehoe replied that China, after all, is still a very poor country. (It ranks 131st in the world in per capita income. I looked it up.) Mexico is twice as wealthy, and has already been through the phase of growth China is now experiencing, which looks so impressive, coming as it does from such a low base.
Another member of the audience questioned Zedillo on how globalization has affected organized crime, with obvious reference to the drug wars going on in Mexico today. Zedillo suggested that the drug wars have little to do with globalization per se. They were fueled by President Nixon’s War on Drugs, initiated in 1969, which drove the price of controlled substances sky-high and filled the drug-lords' coffers. Kehoe added that the U.S.'s antediluvian policy on the sale of semi-automatic weapons has also had a profoundly deleterious effect on that situation.
The image we often get of economists in the media today is of grasping, conniving insects hustling to fill their own larders to overflowing before the next dust bowl arrives. I left Ted Mann Concert Hall last night with the impression that if our politicians were as reasonable and humane as these two economists seem to be, we’d be more than halfway to solving some of our biggest problems.
We’ll leave it to China and Germany to solve the other half.