US Federal Reserve Chairman Ben Bernanke's speech at the Annual Economic Symposium of the Federal Reserve Bank of Kansas City last week was on a topic somewhat removed from the day-to-day concerns of a central banker.
His priorities are typically related to the performance of the economy over the next few weeks and months and what he needs to do to ensure that it stays on track. The policy instruments at his command may have long-term consequences, but his main interest in using them is that they will help him achieve his objectives sooner rather than later.
By contrast, the title of his speech, which reflected the theme of the symposium, was "Global economic integration: what's new and what's not?" In it, he describes the broad forces that have shaped the ebbs and flows of globalisation over the centuries, compares and contrasts these with the forces shaping the current wave and concludes with some suggestions for national policymakers on how to reinforce and consolidate on the benefits to the global economy arising from this wave.
The historical perspective on globalisation is based on the inter-play between the forces of technology and the impact that global shifts in production have on domestic resources. Fundamental changes in technology -- in transportation, communication, financial intermediation or anything else -- have preceded and driven successive waves of global economic integration because they have facilitated arbitrage; the constant search for less costly ways to fulfil needs.
The changes that these forces have imposed on production systems and the consequent devaluation of previously prized resources, however, have always provoked resistance. Cyclical turns would take place when harm caused to the interests of a few, significant and visible, took precedence over the diffused benefits realised by many.
Whether it was landlord farmers in the 19th century or industrial workers in more recent years, most countries inevitably gave in to demands by powerful domestic groups to protect their interests and imposed barriers of one kind or another to stop the process. Its resumption would have to wait until a new set of technological developments opened up a new set of arbitrage opportunities.
Dr Bernanke argues that the current phase of globalisation has several characteristics in common with previous ones. The boom in the services trade, for example, of which India is perhaps the largest beneficiary, has been facilitated by communications technology (along with serendipitous English language skills) and is clearly in the general interests of the typical consumer in the US and other countries.
However, it has, like in previous instances, given rise to protectionist demands, which will, in all probability, translate into higher, if not insurmountable, barriers in the course of time.
But, he also highlights a number of critical differences between earlier phases and the current one. First, the significance of global transactions is far greater now than it was even at the peak of previous cycles. Add to this the increasing significance of the services trade and capital movements and the degree of integration and interdependence is even greater.
Second, the nature of transactions has changed dramatically from the "colonial" pattern. In that era, the capital-rich countries imported raw materials and exported manufactured goods to the poor countries. In turn, their balance of payments surpluses were used to fund investments in these countries.
Now, the less affluent economies of Asia are the predominant exporters of manufactured goods to the affluent West and use their balance of payments surpluses to fund the budget deficit of the US. Third, this phase is characterised by enormous magnitudes of cross-border financial flows, to and from both affluent and emerging economies.
Dr Bernanke's speech concludes with the message that the current momentum of globalisation can only be sustained if governments make concerted efforts to spread the benefits of globalisation as widely as possible. They should, for example, look at ways to train displaced workers with new skills, allowing them to exploit other opportunities being provided by globalisation.
He stresses that the future benefits of increasing global integration are large, but they will be realised only if governments are successfully able to offset the costs to various groups within each country.
The speech did not explore the macroeconomic consequences of global integration, a set of issues that flows directly from the magnitude of international capital movements, particularly in the form of purely financial investments. To my mind, this is a critical dimension of the current phase of globalisation and particularly so, when viewed from a central banking perspective.
The high degree of mobility that characterises many of these flows, given the wide variety of investment choices now available globally, has led many people to believe that most countries have simply lost effective control over their monetary systems.
This is, of course, not a new situation. From 1944 to 1973, under the Bretton Woods agreement, the global monetary and exchange rate system was built around the US commitment to preserve a benchmark of $35 per ounce of gold. The system broke down when rising domestic inflation in the US made the maintenance of this parity impossible. Countries went their own way on monetary management for some decades, but in recent years, like it or not, the global financial system has come back to revolving around the US dollar.
This is not the result of any conspiracy or manipulation; it simply reflects the increasingly dominant role of the US in the global economy, with the other centres of affluence, Europe and Japan, having effectively retired from the race.
The most dynamic economies of the world, mostly in Asia, have in no uncertain terms hitched their currencies to the dollar; whether by means of a formal peg or an informal band is a matter of detail. From a macroeconomic perspective, the world is, in effect, back to a Bretton Woods type arrangement, the only difference being that the US has not committed itself to any explicit parity. The robustness of the system depends on the US ability to keep its economy growing reasonably fast and with reasonable stability.
In this sense, globalisation has come full circle. Dr Bernanke's distant predecessors were de facto central bankers to the world economy, a role that returned to the US Federal Reserve under Dr Greenspan. But, there is a difference. The status is based on trust and credibility alone, without the support of a formal benchmark, as in the past. The persistence of this trust will be an important factor in determining the next "downturn" of globalisation.
The author is chief economist, Crisil. The views here are personal.