I. KEY ELEMENTS OF GLOBALISATION IN THE MACRO ECONOMY

1. The common myths

a. The internationalisation of the fi nancial markets (especially currency) means that governments have to follow ÔmonetaristÕ policies or are punished.

Implications:
- unemployment cannot be so high an objective for macro policy relative to inflation as it once could

b. The inter nationalisation of capital flows means businesses are very mobile and macro policy has to create the conditions they want

Implications
- low taxes, low public spending

c. The low skill countries are taking all our work

Implications
- m acro policy can do nothing - itÕs all about skills - we need to keep taxes and labour costs low so we have to keep public spending down

2. The truth

a. Increased globalisation (and IT) mean that financial and capital markets react much quicker to events. Therefore Ônon-sensibleÕ or ultimately inconsistent policies cannot be run for any length of time at all.

b. Capital is increasingly mobile. However we know it looks as much at skills, social infrastructure etc. as mere tax rates and rates of pay.

c. Markets are on the whole more concerned with the gap between spending and revenue, not the absolute amounts (within a range at least). Cannot run unsustainable deficits - this still gives a lot of latitude though.

3. Different schools of t hought on processes of globalisation

a. Happening very quickly: associated with a paradigm shift connected with IT as well. This approach tends to say that all former ways of doing things are now redundant. Can lead to very free market approach (eg. M ulgan).

b. ÔOlderÕ tradition as seeing the process working mostly through MNCs. These therefore are the key focus for policy rather than financial markets themselves (although that is not to say that they are optimistic of success - eg. Cowling).

c. Some doubt that this openness will last. Eventually nationalism or whatever will lead to the regaining of more national control (protectionism?). Indeed free trade and open market periods have historically only lasted short periods (I think!)

In ad dition excitement about emerging markets/SE Asia/China/E. Europe is just part of a long tradition in the UK of worrying about our failures, but is often less important - and less harmful - if not beneficial - than the hype suggests.

II. GLOBALISATION AND POLICY

1. ÔNormalÕ policy in this area

a. Interest rate adjustment (and other monetary policy)
b. exchange rate adjustment
c. tax changes
d. budgetary policy

2. How this is affected by globalisation

(See ÔmythsÕ above for s ome discussion)

a. any policies ruled out?

* None of these are ruled out in themselves. The question really is how much they can be used and how effective they become in the new situation.

* For instance, short run interest rates can still be moved to some degree, but there will be a link with what interest rates are presiding aboard, and what expectations are of future interest rate movements and exchange rate movements (ie. nobody will invest if you have lower interest rates than a rival cou ntry and there is an expectation of devaluation). In addition, long interest rates are not so susceptible to national policy (if at all).

* Crucially, exchange rate changes seem to have less power. This is partly a result of more openness to trade (si nce devaluation means a still bigger effective cut in real wages and so is likely to lead to wage rises offsetting competitive gains). One should also note that with floating rates, movements will be at the whim of markets and governments will find them h ard to manipulate (ie. they may still have big effects but are not controllable and may not be helpful)

* (Crude) Keynesian far more difficult to operate

* Credit control policies probably cannot work

b. New policies?

* Issues of fixed exc hange rate systems come more to the fore in this world (as do regional trade blocs etc.). In addition, monetary policy does become more powerful relative to fiscal (fiscal expansion raises bond yields pushing up the currency; monetary expansion may do the opposite).

* More emphasis on using macro policy for stability rather than fine tuning etc.

* Switch to eg. inflation/nominal GDP targets since monetary targets are arguably harder to hit when financial innovation is easier (this changes money de mand).

* To some extent trade balances problems - at least in the short or medium term - matter much less because of the ability to finance them internationally.

3. Different views (In descending order of severity)

a. The constraints put on ar e intolerable and we must take action to see the whole thing off.

b. Globalisation puts on massive constraints we just have to live with and accept our ambition must be less (Naive New Labour?)

c. It puts on some constraints but we can live with t hem and still achieve most of what we want (Thinking New Labour?)

d. We can ease some of these constraints by sensible policies (NEXUS?)

e. Really globalisation simply makes us do what we would have to do (should do) anyway - if a little quicker.

III. EASING THE POWER OF GLOBALISATION

1. Different views

a. ÔFundamentalistÕ: need to insulate so that national macro policy can work again. eg. import controls, trade restrictions, dual exchange rate systems.

b. ÔTinkeringÕ: see 2. below

2. The policies

a. Sand in the wheels etc.
- eg. Tobin tax to slow down impact of short termism in currency markets

b. EMU
- takes out power of currency markets. Likely to lead to more coordination within EU on fiscal policy (ÔforcedÕ or not). Likely to lead to more monetary stability. May make international coordination easier (as only 3 major currencies).

c. International policy coordination
- If major countries coordinate policy better, they will not be so inconsistent with each other (eg. competitive devaluations; world trade imbalances), will not put individual countries under such pressure etc. This is very hard to deliver in informal ways. Too many incentives to ÔcheatÕ etc.

- useful also to have some coordination o n tax harmonisation etc. to stop bidding down.

d. Capital/exchange controls
- almost a fundamentalist policy. However, were only relatively recently abolished in some EU countries (but unclear they can work today - too easily evaded)

IV. IS TH E UK DIFFERENT?

The UK is:

- small
- highly traded (products, capital, currency)
- financial services dominated
- very liberalised product market
- very affected by interest rates (especially short term)

Therefore, very much aff ected by all these things (relative to eg. USA or Germany etc.).

On the other hand, the Conservatives have kept down spending as a share of GDP (relative to trend in EU - though public finances are in terrible trouble), have cut company and personal t ax (to attract mobile capital), have put inflation above all else in macro policy etc. ie. some of the key ways of ÔcopingÕ have already been taken, even if they are not necessarily what one might have chosen in the first place.

Dan Corry
17/10/96