Richard T. Ely Lecture

RICHARDT. ELYLE CTURE Globalizationand Its Challenges By STANLEY FISCHER* Istandhere with deeply con icting emotions. policyeconomists of our time. In his policy Iamhonored to be delivering this prestigious workhe displayedthe same rare talentas he had lecture.I amprofoundly sad that Rudi Dorn- inhis theoretical work, of being able to extract busch,who should have delivered the Ely Lec- theessence of a complicatedproblem and ex- ture,died in Julylast year and that I amhere in plainit in terms that made it seem simple. hisplace. So I wouldlike to start by talking Amonghis policy papers, the most famous is about Rudi. the1994 Brookings paper with Alejandro Rudiwas bornand grew upin Krefeld, Ger- Werner thatpredicted the Mexican peso crisis, many.He was anundergraduate at the Univer- butthat is only one of manyapplied papers that sityof Geneva and completed his Ph.D. at the repaysrereading. Universityof Chicago in 1971, which is where As hispolicy interests grew, Rudi’ s fame we met.He was astudentof Robert Mundell, spread.He was anindefatigableglobal traveler, andboth the subject matter (the development of speaker,and writer, and a frequentcolumnist. In theMundell-Fleming model) and the elegance hismorepopular articles, in hiscolumns, and on andinsights of his early work re ected Mun- thepodium, his wit and the speed of his mind dell’s inuence. He taughtat the University of madehim an exciting and formidable presence. Rochesterand at the University of Chicagobe- He was oneof the nestdebaters and polemi- fore acceptingan offer from MITin 1975. cistsin the profession. He was toughand did not In1976, soon after coming to MIT, Rudi shyaway from statinghis views, often in ways wrotehis most famous and in uential theoreti- thatre ected the advice of Keynes: “ Words calarticle, “ Expectationsand Exchange Rate oughtto be a littlewild for theyare the assault Dynamics.”As KenRogoff (2002 p. 1) saidin ofthoughtson theunthinking.”At varioustimes hiscelebratory lecture on the 25th anniversary hewas personanon grata to theauthorities in a ofits publication, “ The‘ overshooting’paper... numberof countries; it did not help that more marksthebirthofmoderni nternational oftenthan not he was right. macroeconomics.” Despitehis public persona, Rudi was an From thelate 1970’ s, Rudi became increas- excellentcon dential policy adviser. When I inglyinterested in policy issues. Within a de- was atthe IMF, I oftencalled him to discuss cade,he had become one of the outstanding adifcult situation. His advicewas always thoughtful,typically nuanced, and frequently providedinsights that no one else had seen— *Citigroup,399 Park Avenue, New York,NY 10022- andhe was willingto talk as long as it took. 4614(e-mail: [email protected]).This is arevised Rudiplayed a centralrole in the MIT Eco- versionof the Ely Lecture presentedat theAmerican Eco- nomicsDepartment. He was aspectacularly nomicAssociation meetings in Washington, DC, on 3 January successfulteacher, in the classroom, in super- 2003.The Ely Lecture was originallyto have been presented byRudi Dornbusch, who died on 25 July 2002. I am grateful visingtheses, and through his textbooks. But he toAndrew Balls, Olivier Blanchard, Vittorio Corbo, Angus didnot spoonfeed the students, sometimes po- Deaton,Peter Diamond,Jaewoo Lee, PrachiMishra, Chi sitioninghimself in frontof anunfortunate stu- Nguyen,Maurice Obstfeld,Ratna Sahay,Lyn Squire, Larry dent,asking a seriesof questions until he Summers, andJohn Williamson, and to my Citigroup col- leagues,Lewis Alexander,Eric Darwell, andDana Peterson, extractedan answer.Nonetheless he wonmany fortheir assistance andadvice. Views expressedare thoseof prizesfor teaching.Every outstanding Ameri- theauthor and not necessarily ofCitigroup. caninternational macroeconomist who has been 1 2 AEAPAPERS AND PROCEEDINGS MAY 2003 toMIT, among them Jeffrey Frankel,Paul Thedebate is untidy and ill-de ned, and one Krugman,Maurice Obstfeld, and Ken Rogoff, couldreact by saying that it has no place in a was aRudistudent. And there are outstanding professionalsetting like this one. But we cannot Rudistudents all over the globe, many of them affordto ignore it, for theviews and attitudes heretonight, many of them professional econ- expressedin itwill inevitably affect public pol- omists,some who became Rudi’ s co-authoron icy—and the issues are criticallyimportant for apaper,many who became policymakers. In the thefuture economic growth and well-being of richlydeserved devotion of this legion of stu- allthe people of theglobe. 2 dentsto theirteacher and friend lies the greatest Here isthe message: Globalization, the complimentto his teaching and mentoring. ongoingprocess of greater interdependence Ihadthe good fortune and pleasure of amongcountries and their citizens, is complex collaboratingwith Rudi in the writing of two andmultifaceted. Many of theproblems that the textbooksand several articles. Our textbook criticsof globalization point to arereal. Some of Macroeconomics ,whichhas sold well over a themrelate to economics. Others relate to non- millioncopies worldwide, has given me as economic,but no lessimportant, aspects of life. muchsatisfaction as anything else I havedone Andwhile some of theproblems do stem from inmy professional life. And I knowRudi felt theprocess of globalintegration, others do not. thesame way. As far aseconomics is concerned, the big Rudiwas avitaland positive personality, challengeis poverty, and the surest route to wholit up any group in which he participated. sustainedpoverty reduction is economic growth. He was amongthe most talented of men, and Growthrequires good economic policies. The amongthe warmest, the most generous, with his evidencestrongly supports the conclusion that timeand himself, available for hisstudents and growthrequires a policyframework thatprom- hisfriends whenever they needed him. When inentlyincludes an orientation toward integra- theycalled or visited, Rudi would say “ Tell tioninto the global economy. This places meeverything” and then give them his sympa- obligationson threegroups: those who are most thy,his understanding, and his unsentimental responsiblefor theoperation of theinternational advice. economy,primarily the governments of thede- We willmiss Rudi deeply, including tonight, velopedcountries; those who determine the in- for hisincisive mind, the brilliance of his in- tellectualclimate, which includes this audience sights,the exuberance of his writing, and his butalso government and nongovernment orga- challengesto conventional thinking— but most nizationsand individuals; and the governments ofall,for hisfriendship and the pleasure of his ofthedeveloping countries who bear the major company. responsibilityfor economicpolicy in their countries. I.The GlobalizationDebate Letme startby discussingthe historical back- ground,the protagonists, their views, and the Thedebate over globalization is lively, often passionate,and has sometimes been violent. At 1 leastuntil recently, it has been intensifying. throughthe use ofthe Google search engine,and typing in“ anti-globalization”brings up 80,000 links. Type in globalizationand inequality, and there are almost 500,000 1 Duringthe 1970’ s theword “ globalization”was never references; 700,000references toglobalization and environ- mentionedin the pages of TheNew YorkTimes. Inthe 1980’ s ment;almost 200,000links to globalization and labor theword cropped up less thanonce a week; inthe rst half standards;50,000 references toglobalization and multina- ofthe1990’ s, less thantwice aweek; andin the latter half tionals;and 70,000 references toglobalizationand cultural ofthe decade, nomore thanthree times aweek. In2000 diversity.A search ofglobalization and the IMF yields there were 514stories in the paper that made reference to 180,000suggestions. “globalization”; there were 364stories in 2001, and 393 2 Fora comprehensivereview ofthe economic issues, references in2002. Based onstoriesin TheNew YorkTimes, see theextremely usefulpaper by Franc¸oisBourguignon et theidea ofbeing “ anti-globalization”was notone that al.(2002), which covers many of theissues inthis lecture existedbefore about 1999. Turning from the newspaper to (see alsoInternational Monetary Fund, 1997; World Bank, theinternet, “ globalization”brings up 1.6 million links 2002a). VOL. 93 NO. 2 RICHARDT. ELYLECTURE 3 issues.Economic globalization, the ongoing tries(the more developed and larger developing processof greater economic interdependence countries)increased, the impossible trinity once amongcountries, is re ected in the increasing againasserted itself, and in a seriesof crises, amountof cross-bordertrade in goods and ser- countryafter country was forcedto give up its vices,the increasing volume of international peggedexchange rate and allow the currency to nancial ows,and increasing ows oflabor. oat. As iswell known to our profession, economic Bynow, the gross volume of international globalizationthrived in the period before 1914, capital owsrelative to globalGDP far exceeds butwas setback by thetwo World Wars andthe thelevels reached in the period just before Great Depression. 3 Theinternational nancial 1913,though net ows offoreigndirect invest- orderthat was establishedat the end of World menthave not yet attained the extraordinary War IIsoughtto restore the volume of world levelsof the decade before World War I. 5 trade,and by 1973,world trade as a percentage Itis generally believed that, with respect to ofworldGDP was backto its 1913 level, and it migrationand labor ows,the modern system is hascontinued

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