1. Globalization: An Economic Perspective Professor Peter Brews Kenan-Flagler Business School, University of North Carolina at Chapel Hill World View Global Education Leaders' Program 23 June 2011

2. Globalization has many facets/dimensions: Historic...first globalization of peoples; then globalization for resources (scramble for Africa...) Most recently: economic globalization Discussion today pertains to economic globalization, which relates to the explosion of productivity experienced over the past three hundred years or so

3. Economic Globalization: Relates to understanding differences between pre-industrial, industrial, post industrial contexts, and what drives competitiveness in the last two Pertains to knowing which factors/resources/competencies are available/becoming available in other parts of the world, and then knowing what to do/focus on to compete in this widening productivity/resource/competence availability Requires knowing the difference between market and supply seeking, and to what happens to consumption/PPP as nations get in the game

4. IndustrialPost Industrial Main factors of production Land Labor (physical) Capital Land Labor (mental) Capital Key work units Urbanized, vertically integrated, hierarchically controlled factories Small/large, centralized/de- centralized, local/global, vert. de- integrated/IT integrated networks Capability of Capital Dedicated, inflexible, electro- mechanical processors, supported by dedicated humans; hands and machines Flexible, ‘smart’ programmable processors, operating with little human intervention once programmed; minds and machines Marketing challenge Meeting demands of unsophisticated consumers with little choice Meeting demands of informed consumers with much choice; services and solutions intensive Principles of production High volume, low variety leads to high quality/low cost; specialization, standardization, mass production/distribution Automation, specialization, high/low vol., high variety, speed, flexibility, mass customization, continuous innovation/advantage upgrading The Industrial and Post Industrial Worlds

5. IndustrialPost Industrial Physical capital dependent; asset and labor intensive Intellectual capital dependent; fewer ‘smarter’ people Physical/tangible product basedIntangible, high value added services/solution based Employs many, mostly in the factoryEmploys fewer, on the campus, at home, anywhere Balance sheet orientationIncome statement orientation Low net income per personHigh net income per person Scale constraintsEasily scaleable Low market value per person (MVP)High MVP Slow wealth creation dispersed to outside suppliers of capital; few inside shareholders Fast wealth creation more dispersed to inside suppliers of knowledge; more inside shareholders Industrial versus Post Industrial Organizations: A Summary

6. The industrial to post industrial shift profoundly effecting: Role of humans in productive work Structure, scope, speed, operational performance of firms and Nature/complexity of goods and services (and solutions) on offer All organizations and workers around the world are currently adjusting to the effects of this structural change

7. Why is Economic Globalization important to the state/citizens of North Carolina? First, economic globalization for Americans was a supply seeking enterprise; consumers in America greatly benefitted Over the 20 th Century America was consumer of last resort to the global economy Economic globalization will now become more a market seeking enterprise for Americans; instead of selling only to 300 million at home the potential market is billions of consumers elsewhere…go where the money is! Can producers in America offer products/services/solutions others in the world will want?

8. At the leading edge innovating faster than those behind can replicate is best route for competitive survival (remember Solow’s tfp as the major source of US economic growth) Political, community, and education leaders must ensure North Carolinians are ready to compete in this post industrial, globalizing, fast moving world… And that NC is an attractive location to invest in in the ongoing struggle for productivity, as well as an attractive place to live in, holiday in, and retire in…

9. What must educators do? Prepare American human capital for knowledge intensive, creative work, so we can innovate at a rate faster than others can replicate; here, high level math and science skills are table stakes Discipline and deferred gratification must be instilled in students so they make the educational investment and learn how to THINK, problem solve, research, imagine, create, connect dots etc. Schools, Community Colleges, and Universities must develop curricula that prepare workers for 21 st Century, high value creative work, or for working with smart machines and systems delivering smart goods, services, or solutions NC K-12 schools must give world class grounding in basic subjects across the spectrum, instill strong work ethics, sensitize students to global issues and cross cultural differences My contract with my children…

10. Potential Jobs in the Future ? New goods, services, or solutions (post industrial creative work); Building, maintaining, operating, and improving machines that perform physical work (post industrial mechanical work); Helping industrial organizations negotiate the transition to post industrial status by finding more efficient ways to organize and produce existing products, services, or solutions (post industrial transformational work); and Performing manual tasks machines do not do, or manually assisting machines in work they do (post industrial manual work)

11. All must aspire to join Creative Core of organization they work for, and become post industrial entrepreneurial capitalists Know how to join Creative Core: technical/scientific vs. industry/ business knowledge route; where are opportunities for high value added human work in your industry segment Big question for all 21 st Post Industrial workers: Do you have any ideas that are worth funding????

12. Rebalancing and Innovating: America in the Post Meltdown World Professor Peter Brews Kenan-Flagler Business School, University of North Carolina at Chapel Hill World View Global Education Leaders' Program 23 June 2011

13. Why Rebalancing and Innovating… America is out of balance, this will be remedied one way or the other... While rebalancing is accomplished America must innovate to resume economic growth, retain its primary position in the global economy

14. The US is in worst shape it has been in for generations: 25 years living beyond means have finally caught up Economically, out of balance both publically and privately Politically divided, facing legislative gridlock with little convergence at center Some core industries in trouble (banking, automobiles, construction, retail) while important support industries face serious funding issues (healthcare, education, military…)

15. Not really credit crisis but over-consumption/living beyond means crisis: credit symptom, not cause Two propositions: Americans could cut consumption by 20% and probably wouldn’t notice: 20% smaller houses, 20% smaller cars; 20% less food; 20% less clothing etc. In face of global imbalances and global competition/scramble for resources, 2006/7 American consumption levels unsustainable

16. US Political Economy: Public Sector Imbalances

17. . US Federal Gross Debt as % of GDP: 1940-2009 Source: zFacts.com

18. US Gross Federal Debt is now around 100% of US GDP Source: http://www.usgovernmentspending.com/downchart_gs.php?year=1792_2010&view=1&expand=

19. Source: CBO http://www.cbo.gov/ftpdocs/108xx/doc10871/BudgetOutlook2010_Jan.cfm, Historical Budget Data.xlshttp://www.cbo.gov/ftpdocs/108xx/doc10871/BudgetOutlook2010_Jan.cfm

20. Source: CBO http://www.cbo.gov/ftpdocs/108xx/doc10871/BudgetOutlook2010_Jan.cfm, Historical Budget Data.xls. CBO expects Federal Public Debt to reach 62% of GDP by end of 2010, highest since WW IIhttp://www.cbo.gov/ftpdocs/108xx/doc10871/BudgetOutlook2010_Jan.cfm

21. Even before the Credit Crisis: Social Security/Medicaid surpluses raided to balance federal budget Federal government borrowing to meet expenditures; foreign savers meeting some of need…Japan, China, Saudi Arabia etc.

22. CountryNov 2008Nov 2009Jan 2011 China681.9798.91,154.7 Japan577.1751.5885.9 United Kingdom360.0249.3278.4 Caribbean Banking Centers220.8171.7166.5 Oil Exporters129.6185.3215.5 Brazil78.1144.9197.0 Total Top Six2047.52,301.62,898.0 Total Foreign Holders--4,453.4 MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES (in billions of dollars) Source: Department of the Treasury/Federal Reserve Board, March 2011

23. US Political Economy: Private Sector Imbalances

24. Source: http://www.econ.yale.edu/~shiller US Macroeconomic data: Home prices, building costs, interest rates, population

25. Graph constructed by Professor Christian Lundblad, Kenan-Flagler Business School, University of North Carolina at Chapel Hill. Consumption and GDP data from the Bureau of Economic Analysis (BEA). Mortgage equity withdrawals are measured as the year-over-year change in mortgage debt (from the Federal Reserve Flow of Funds) minus 70 percent of residential investment spending (from the BEA). (Source: L. Josh Bivens, Economic Policy Institute) US Macroeconomic data: Consumption and Mortgage Equity Withdrawals

26. Private sector imbalances: Private consumption expenditure sustained by freely available low cost capital, tax cuts, real estate asset bubble/boom, credit card debt World’s largest ponzi scheme ever operating between US consumers and PRC US private savings rate also very low/even negative over past decade 1990s dot.com boom was investment bubble; in 2000s cheap finance sustained consumption bubble; prosperity was borrowed

27. Immediate credit crisis result of many factors accumulating over last decade or so: Securitization of financial instruments/misalignment of incentives Poor financial market oversight/regulation Political desire to increase home ownership through Freddie Mae/Mac Expansionary US fiscal and monetary policy Real estate asset bubble that developed over 00s All led to Borrow and Spend

28. Adjustments needed: < 5 - 10 % in US Consumption as % of GDP > in US Gross Savings to 5 - 10% of GDP > in US taxes 3 - 5 of GDP % < 20% in average US body weight i.e. we all must save more, consume less, adjust consumption expectations, de-lever Note: Note: 2010 QIV Personal Consumption Expenditure was estimated to be just under 71% of GDP, but personal savings rate now over 5%

29. Key contingencies Where/when will US housing market bottom be reached? At what level will more careful, de-leveraged Americans spend? (Consumption as % of US GDP: 1953 – 1983, 61- 64%; 1995 67.5%; 2003 beyond >70%) How will US Administration/Congress act To what degree/how quickly will others step in to replace lost American consumers (i.e. what is the Growth story?)

30. Future US Scenarios: Party On, Dude To Tighten Belts

31. Party On, Dude Bailouts continue/budget deficits grow, pandering rather than pain: no pay as you go imposed Government borrowing increases, private investment/GDFI crowded out, welfare grows - corporate and consumer Protectionist impulses lead to closing of American economy to buffer against foreign competition/protect US jobs World eventually becomes nervous of US$/Economy, dumps US$, status of world reserve currency lost to Euro or Rmb US descends into second class status, paying off today’s debt through inflation, debasing currency into Mickey Mouse money This is worst case scenario, unlikely but possible; if we don’t discipline ourselves the market eventually will…the US could be Greece in five year’s time

32. Tighten Belts: Take the Pain, Adjust, Emerge.. After stabilization, tightening occurs: interest rates rise to encourage savings/counter inflation, budget deficit stabilizes, federal govt. > discipline; adjustments at State and Local levels also probably required Short to near term economic growth moderate, unemployment structural, Americans reduce consumption, increase savings to de-lever balance sheets, increase savings/cushions After initial adjustment US economy resumes growth based on ongoing productivity gains, clean tech/high tech/innovation, local and export led growth China, Brazil, India, others become locomotives of global growth, lasting well into the 21 st Century, consumption model evolves US evolves from last Superpower to First Among Equals

33. Either way Americans must reduce consumption/living standards to match productivity/income; and prepare for the additional overhead of healthcare, baby boomer retirement costs, and for clean energy development costs We cannot borrow, grow, vote, cut our way out of the current mess; painful adjustment will be required More than likely, both future entitlement expenditure as well as living standards of the average American will have to be curtailed Cuts in govt. expenditure as well as tax increases will probably be required

34. For the sake of our children/grand children we must deal with our current economic imbalances (short term), as well as with Global Warming/Climate Change (long term) We are currently mortgaging their futures, economically and environmentally… BIG TIME

35. But don’t go from irrational exuberance to irrational depression It is only a question of balance...

36. Whether US declines or revitalizes depends upon political choices/leadership, and willingness of all to confront reality and adjust accordingly And remember end of world not nigh, it could be far worse… You could be an Icelander, or in Ireland, or Mexico, or Zimbabwe US economy still envy of the world, flexible, innovative, open for business, productive While recovering from our party and hangover, we must all work to keep it that way!!!!