Note: This article covers more advanced topics – readers should have a basic understanding of macroeconomics to make sense of it.
The event took place over the weekend of 10-12 October and consisted of several panels and networking sessions. There were also two lunch panels that featured several renowned academics and economists. In this blog post, I will focus on these two panels:
Panel 1: “The Changing Paradigm in Global Markets”
Bruce Greenwald, Robert Heilbrunn Professor of Asset Management and Finance, and Director, Heilbrunn Center for Graham and Dodd Investing
Joseph Stiglitz, Executive Director and Cofounder, Initiative for Policy Dialogue and University Professor, Finance and Economics
For those not in the know, the panelists are major figures in the fields of Finance and Economics. Mr. Greenwald is a major authority on value investing, while Mr. Stiglitz is a Nobel Prize-winning economist.
Mr. Greenwald began the discussion with his thesis that the results of globalization around the world are uneven due to specific local conditions. In particular, local cultures that are friendly to innovation and foreign technology will do well.
He also highlighted that disappearing US manufacturing jobs in recent history were due to automation (ie, technological progress) rather than globalization. Mr. Stiglitz added that this was true in the ‘90s, but currently globalization is contributing to the loss of US manufacturing jobs, despite an increase in service-sector jobs.
Mr. Greenwald also spoke about globalization from a business perspective, which I found very interesting. According to him, large, global markets are impossible for a single business to dominate (an example is the automobile industry); what a firm can do instead is dominate a small, local market. He pointed to Microsoft as an example of dominating a niche market (computer operating systems).
Other topics discussed include China and US inequality, which I will address later in more comprehensive posts.
My take: The topic of Globalization was largely tackled by Mr. Greenwald. I agree with his assertion that local cultures that adopt foreign technology and innovate will do well economically, the key examples being East Asian countries such as Japan, Taiwan and South Korea. On the other hand, his argument in favor of small, local markets for businesses seems a bit simplistic. Going back to the example of Microsoft: yes, we could say that it dominated a niche market in computer OS, but this market is global in nature. To be fair, I haven’t read Mr. Greenwald’s writings, so his argument may be more nuanced than what was introduced during the panel.
Panel 2: Keynote Address Luncheon on China
Speaker: Michael Pettis, Senior Associate, Carnegie Endowment for International Peace, and Professor of Finance, Guanghua School of Management, Peking University
Mr. Pettis addressed what he refers to as the four stages of growth in China since 1978:
- First liberalizing period: The central government eliminated constraints to productivity, such as quotas on agriculture. This unleashed a wave of productivity gains – for example, agriculture output doubled.
- The “Gershenkron” period (named after economist Alexander Gershenkron): The population of developing countries such as China tends to have a low savings rate, for a variety of reasons. As a result, it was difficult for the Chinese government to use local savings (for example, by issuing local debt) to fund infrastructure investments. As a result, China used a series of indirect taxes on households:
- Undervalued currency – effectively a consumption tax on imports, since one renminbi could not purchase as much imported goods at it should be able to;
- Gap between productivity growth (faster) and wage growth (slower) – an implicit tax on worker income, for a variety of reasons, such as pro-business unions; and
- Financial repression tax – essentially, interest rates were kept low, so net savers were earning lower interest while net borrowers, who produce GDP, could borrow for cheap.
The resulting economic growth was was so strong that household income was brought up along with the economy, despite these indirect taxes.
- Investment Overshooting: The result of the previous stage of growth was concentration of wealth to an economic elite that continued to invest in less and less value-added projects – for example, too many airports – that was financed by more and more debt, leading to a very precarious situation. According to Mr. Pettis, China is currently in this stage.
- Second liberalizing period: Mr. Pettis recommends further reforms, such as a reformed legal system and increased domestic consumption (as opposed to investment) as a major source of growth.
My take: I’m no economist, so I have little resources to argue against Mr. Pettis’ thesis, which seems to me very credible. What interested me was that he mentioned that China’s series of indirect taxes follows the Asian model of growth, pioneered by Japan. I continue to wonder if, in practice, this sort of model is applicable to other developing economies.
The topics discussed in this post are a bit advanced, and we’ll go over the fundamentals in future blog posts. Stay tuned!
Ramon Rodrigo Cuenca, CFA
The Columbia Business School Pan-Asian Reunion 2014 (note: I’m not sure how long this site will be up)