Globalization and Emerging Markets:With or Without Crash?
By P HILIPPE M ARTIN AND H′E L`E NE R EY*
We analyze the effects of?nancial and trade globalization on the likelihood of
?nancial crashes in emerging markets.While trade globalization always makes
crashes less likely,?nancial globalization may make them more likely,especially
when trade costs are high.Pessimistic expectations can be self-ful?lling and lead to
a collapse in demand for goods and assets.Such a crash comes with a current
account reversal and drops in income and investment.Lower-income countries are
more prone to such demand-based?nancial crises.A quantitative evaluation shows
our model is consistent with the main stylized facts of?nancial crashes in emerging
markets.(JEL F12,F32,F37,F41,O16)
Do emerging markets reap the bene?ts of ?nancial globalization,enjoying increased in-vestment and a better ability to diversify risk? Or do they face a higher likelihood of?nancial crash as more capital?ows in?The empirical literature supports both possibilities.On the one hand,a number of papers in?nance show that ?nancial opening in emerging markets leads to a decrease in the cost of equity capital and can have a positive effect on domestic investment.1 On the other hand,a voluminous literature sur-veyed by Joshua Aizenman(2004)emphasizes the risks of liberalization and the vulnerability of emerging market?nancial systems to capital mobility.Charles Wyplosz(2001)?nds that ex-ternal?nancial liberalization is considerably more destabilizing in developing countries than in developed economies.Graciela Kaminski and Sergio Schmukler(2001)show that stock markets become more volatile in the three years following?nancial liberalization but stabilize in the longer run.
Interestingly,recent empirical work shows that goods trade openness also in?uences the frequency of crashes in emerging markets,but in the opposite direction to?nancial openness. Eduardo A.Cavallo and Jeffrey A.Frankel (2004)?nd that trade openness(instrumented by gravity variables)reduces the vulnerability of countries to sudden stops.The Argentina of the1990s is often presented as a typical exam-ple of a?nancially open economy relatively closed to goods trade.It has suffered heavily from sudden stops(see Guillermo A.Calvo et al.,2003;Calvo and Ernesto Talvi,2004). These contradictory effects of?nancial and trade globalizations are illustrated in Table 1. We report the average number of?nancial crashes per year for developed and emerging economies,dividing each group along the di-mensions of?nancial and trade openness.2
*Martin:University of Paris1Panthe′on Sorbonne Economie,Paris School of Economics,106-112bd de l’Ho?pital,75647Paris Cedex13,France,and Centre for Economic Policy Research(CEPR)(e-mail:philippe. martin@univ.paris1.fr);Rey:Department of Economics and Woodrow Wilson School,307Fisher Hall,Princeton Uni-versity,Princeton,NJ08544,CEPR,and National Bureau of Economic Research(e-mail:hrey@https://www.doczj.com/doc/dd7833200.html,).We thank two anonymous referees for very helpful comments on a previous version,Daniel Cohen,Pierre-Olivier Gourin-chas,Gene Grossman,Galina Hale,Olivier Jeanne,Enrique Mendoza,Richard Portes,Lars Svensson,Aaron Tornell,as well as participants at many seminars.We also thank Gra-ciela Kaminsky and Sergio Schmukler for the stock market data.Rachel Polimeni provided excellent research assis-tance.This paper is part of a Research Training Network on “The Analysis of International Capital Markets:Under-
standing Europe’s Role in the Global Economy,”funded by the European Commission(Contract No.HPRN-CT-1999-0067).
1See,for example,Geert Bekaert et al.(2005),Peter Blair Henry(2000),and Anusha Chari and Henry(2002). The macroeconomic literature?nds more tenuous evidence that?nancial opening contributes to long-term growth.See Sebastian Edwards(2001),for example.
2More precisely,emerging markets are de?ned as those with GDP per capita equal or below that of South Korea.
The sample coverage for those countries starts at the earliest in1975and ends in2001.A crash is de?ned as a monthly drop in the stock index(in dollars)larger than two standard deviations of the average monthly change.We divided the sample into periods for which countries were?nancially 1631
Table 1suggests that opening to capital move-ments is very positively correlated with the fre-quency of crashes for emerging markets,but not for industrialized countries.Trade openness (whether measured by the trade-to-GDP ratio or following Jeffrey Sachs and Andrew Warner,1995),however,is associated with a large de-crease in the frequency of crashes for emerging markets.3Hence,according to Table 1,being an emerging market open to ?nancial ?ows while closed to goods ?ows maximizes the frequency of crashes.
The contribution of our paper is to present a general framework in which these contradictory effects of ?nancial and trade liberalizations can be reconciled.We can also make sense of the
differential impact of ?nancial globalization on emerging markets and developed economies.We emphasize the key role of demand and market size in driving both the positive effect of ?nancial integration on an emerging economy and its negative consequences.
In our model,the world consists of one emerging market and one developed economy which differ only in their productivity level.In both countries,entrepreneurs operating in mo-nopolistic goods markets decide whether to ?-nance risky ?xed-sized investments,sell shares of these investments on the stock exchange,and acquire shares in other risky ventures developed at home or abroad.Entrepreneurs may turn pes-simistic and expect low levels of aggregate in-vestment.Due to home bias in goods trade,negative prospects regarding investment trans-late into low expected income and demand for goods,low pro?ts,and hence low demand for domestic assets.This validates their pessimistic priors and deters them from developing risky investments.The home bias in ?nancial markets in turn implies that the fall in income in the emerging market also leads to a fall in domestic asset demand and prices.In this equilibrium,asset prices and investment collapse,income decreases,and a capital ?ight occurs since do-mestic agents buy shares in the developed coun-try stock exchange.The circular causality is magni?ed if trade costs are high,since ?rms’pro?ts and dividends in more closed economies are more dependent on the level of local de-mand.They are therefore more at risk when expectations turn pessimistic.
The likelihood of a crash is higher at an intermediate degree of ?nancial segmentation.When ?nancial markets are perfectly integrated,no ?nancial home bias exists and arbitrage equates asset prices,so that local income con-ditions do not alter the cost of capital in the
open and ?nancially closed,following Kaminsky and Schmukler (2001).Hence,among our 62countries (34emerging countries),31appear twice as they changed status during the sample years.We also classi?ed countries in terms of their openness to trade.We chose two widely used measures of trade openness:(a)The classi?cation by Sachs and Warner (1995)extended to the 1990s by Romain Wac-ziarg and Karen H.Welch (2003),who provide liberaliza-tion dates for a broad set of countries.This measure of openness is based on trade policies.Some countries have liberalized ?nancial and trade ?ows at different dates and hence appear in different cells of the table.(b)The average of exports plus imports over GDP during the period con-sidered.This measure of openness captures the degree of independence of the economy on local demand.We call open (respectively closed)a country whose openness ratio is above (respectively below)the median of its group.The trade openness ratio cutoff for ?nancially open emerging countries is 63percent of GDP.For the group of ?nancially closed countries,the trade openness ratio cutoff is 54per-cent.For more details,see the Data Appendix at http://team.univ-paris1.fr/teamperso/martinp/table.pdf.3
This is not the case for developed countries,for which the frequency of crashes is low overall.For developed economies,we use the ratio of trade to GDP as our measure of openness.According to the Sachs-Warner measure,only two industrialized countries are classi?ed as closed at some point,so we do not report the result.T ABLE 1—F REQUENCY
OF
C RASHES
AND
O PENNESS
Trade in goods
Emerging
Developed
Closed
Open
Closed
Open Financially closed 0.40a
0.35b
0.09a
0.15b
0.07b
0.09a
0.10b Financially open
0.78a
0.76b
0.55a
0.57b
0.05b
0.06a
0.14b
a Sachs-Warner measure of openness.b
Trade/GDP measure of openness.
1632THE AMERICAN ECONOMIC REVIEW DECEMBER 2006
emerging market.Symmetrically,if?nancial asset markets are very segmented internation-ally,emerging market agents have no choice but to invest at home.This rules out capital?ight and multiple equilibria,at the cost of inef?-ciency in capital markets.
In our setting,?nancial globalization in-creases asset prices,investment,and income in the emerging market,but only when interna-tional trade costs are low.When emerging mar-kets start opening their?nancial account but are closed to trade in goods,they are more prone to ?nancial crashes.This comes chie?y from their having a lower income than developed coun-tries and from their dependence on local de-mand due to market segmentation.The demand-based mechanism also implies that our model has the potential of generating quick recovery in the aftermath of crises.
Our work is related to the literature on?nan-cial crises in emerging markets and sudden stops.Calvo(1998)explores the role of credit frictions to explain sudden stops.Enrique Men-doza(2004)and Mendoza and Katherine A. Smith(2002,2004)show within an equilibrium business cycle framework that small productiv-ity shocks can trigger sudden stops in the pres-ence of credit constraints when an economy is highly leveraged.4Philippe Aghion et al.(2004) also use a model with credit frictions and?nd that countries with intermediate levels of do-mestic?nancial development and free capital movements are more prone to macroeconomic volatility.In contrast to these papers and most of the existing literature,however,a?nancial crisis in our model does not come from the existence of credit constraints on capital mar-kets and/or balance sheet effects.5Neither is it caused by moral hazard(as in Ronald I. McKinnon and Huw Pill,1999,and Giancarlo Corsetti et al.,2001).Instead,in our setup,the crisis is driven by a collapse in demand when goods and?nancial markets are segmented by trading costs and asset markets are incomplete. Our theory is therefore complementary to the existing literature on?nancial crisis.6Our model has multiple rational expectations equi-libria,like in Chang and Velasco(2001),for example,where internationally illiquid banks may be subject to a run.But in our setup, self-ful?lling expectations operate through investment behavior and endogenously incom-plete asset markets.Our framework has poten-tially important policy implications:only once emerging markets are well integrated in world goods markets should they increase signi?-cantly their degree of?nancial openness.We make this point in a formal model,where any degree of frictions on the goods and?nancial markets and their interactions can be analyzed. We present the model in Section I.Section II describes the properties of the equilibrium in “normal times,”while Section III investigates the conditions necessary for a?nancial crash to occur.Section IV performs a quantitative eval-uation of our model.Finally,we draw some conclusions in Section V.
I.Model
Ours is the only model known to us that analyzes jointly home market effects in goods and asset markets and their interactions.Firms sell a monopolistic good in international mar-kets where trade is costly.They also sell claims on their expected(risky)pro?ts on international stock markets segmented by?nancial trading costs.Our modeling strategy is simple enough to handle both types of frictions in a tractable way.
A.Technology and Trading Costs There are two countries,E(emerging)and I (industrialized),and two periods.All decisions are taken in the?rst period.At the beginning of the?rst period,L identical agents per country are each endowed with one unit of labor and one?rm.There are two sectors:a perfectly
4See also Mendoza(2002)and the survey of Cristina Arellano and Mendoza(2003).For a view of Asian crises based on implicit?scal liabilities,see Craig Burnside et al. (2001).Kiminori Matsuyama(2004)presents a model in which borrowing constraints interact with?nancial global-ization to produce an endogenous degree of inequality across otherwise identical countries.
5See Paul Krugman(1999),Ricardo J.Caballero and
Arvind Krishnamurthy(1998),Lawrence J.Christiano et al. (2004),Martin Schneider and Aaron Tornell(2004),Rob-erto Chang and Andres Velasco(2001),Bernhard Paasche (2001),and Luis Felipe Cespedes et al.(2004).
6We emphasize that the other channels studied in the literature may be important,as well,to explain emerging market crises.Our model is certainly compatible with all of them.
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VOL.96NO.5MARTIN AND REY:GLOBALIZATION AND EMERGING MARKETS
competitive constant returns-to-scale sector with zero trade cost,which serves as the nu-meraire,and a monopolistically competitive sector with iceberg trade costs?T.Transport costs and trade policies both affect?T.Each?rm corresponds to one variety,so that the total number of varieties in the world is2L.Both sectors use labor as their only input.The only difference between the two countries is labor pro-ductivity,which we assume is equal in both sec-tors and higher in the industrialized country than in the emerging market.Free intersectoral labor mobility,perfect competition,and free trade in the constant returns to scale good imply that wage rates w I(in the industrialized country)and w E(in the emerging market)are equal to the marginal productivity of labor.In the monopolistic good sector,labor productivity is also given by w I and w E,so that the marginal cost of production in numeraire units is equal in both countries.
In the monopolistically competitive sector,?rms earn operating pro?ts in the?rst period. To create a diversi?cation incentive at both the national and international level,we introduce a simple source of uncertainty.This will induce agents to diversify in equilibrium their owner-ship of?rms.7We assume that?rst-period prof-its of monopolistic?rms do not always materialize in dividends to shareholders in the second period.Without?rm-speci?c invest-ments,these pro?ts vanish,due,for example,to mismanagement at the?rm level.When invest-ment is performed by the?rm,pro?ts are dis-tributed to shareholders with some positive probability.The price of a share that is a claim to risky pro?ts is given by p E.The total cost of investment is F?1?2z E2Q,where z E is the num-ber of investments undertaken by a?rm in the emerging market and Q is the price of the in-vestment good.8The marginal cost of undertak-ing investments rises as the?rm decides to do more investments.In addition,a?xed cost F has to be paid to start investing.We assume that this ?xed cost is paid individually by each investor to all other agents in the economy so that ag-
gregate income is not affected by it.9The value
of a?rm is therefore the expected payoff of the
investment?E?p E z E?1/2z E2Q?F.The investment good is produced with a Cobb-
Douglas production function with a share(1?
a)for labor and a for the composite good made of all varieties of the monopolistic sector(see below).
In the second period,there are N exogenous
and equally likely states of nature,and the re-
alization is revealed at the beginning of that
period after all decisions have been taken.As in
Daron Acemoglu and Fabrizio Zilibotti(1997)
and Martin and Rey(2004),the technology im-
plies that each investment gives dividends(the
operating pro?ts of the?rst period)in only one
state of nature.In all other states of nature,the
operating pro?ts of the?rst period become zero.
The payoff structure is such that an investment
in country E yields d E if the corresponding state
of the world is realized,and zero otherwise.
Hence,investments in the two countries have ex
ante expected dividends,d E/N and d I/N.All
risky claims to operating pro?ts are traded on
the stock market at the end of period one,so that
each claim corresponds to an Arrow-Debreu
asset.This gives agents in both countries a
strong incentive to diversify and buy shares of
both foreign and domestic investments.We as-
sume that the number of states of nature N is
large enough so that N?Z w where Z w?L(z E?z I)is the total number of investments/ assets issued in the world.N?Z w is therefore the endogenous degree of incompleteness of ?nancial markets.No duplication occurs in equilibrium,so that each investment/asset in the world is unique.10This modelling introduces a simple incentive for agents to diversify their portfolios across?rms in an otherwise standard
7Foreign agents cannot operate production technologies in the domestic country;hence,there is no FDI in our model.They can,however,invest in claims to domestic risky pro?ts.
8Industrialized country agents face a similar investment cost function.We discuss in the working paper version (Martin and Rey,2002)how our results would be affected by a more general convex cost function.
9If the?xed cost has an impact on aggregate income,the main results of the model are unaffected.However,the results are analytically less tractable.
10This is because as long as some states of nature have not been covered,the price of an asset associated with these states will always be higher than if the agent were to replicate an existing investment/asset.This could obviously lead to some exercise of monopolistic power in the asset market,but we assume that investment developers do not exploit it.The issue of“?nancial”monopolistic competition in this type of framework is dealt with in Martin and Rey (2004),who show that it creates another source of?nancial home bias.
1634THE AMERICAN ECONOMIC REVIEW DECEMBER2006
monopolistic competition framework in the goods market.
At the end of the?rst period,consumption takes place and shares are sold on each of the stock markets.These shares can be traded internation-ally,but an agent in either country who wants to buy assets in the other market must pay a?nancial trading cost.This cost,essential for our results, may capture government regulations on capital ?ows,differences in regulations in accounting, banking and commission fees,exchange rate transaction fees,and information costs.The pres-ence of these costs translates into a home bias in asset transactions and holdings.11We denote the transaction costs on?nancial assets?F and assume that they take the form of an iceberg cost.This implies that the transaction fee is paid in shares. Agents have to buy(1??F)?1units of shares to receive one share.12We interpret?nancial glob-alization as a process through which these trans-action costs are reduced.
B.Utility and Budget Constraints
We assume that the utility of an agent in each country is given by the nonexpected utility func-tion introduced by Larry G.Epstein and Stanley E. Zin(1989)and Philippe Weil(1990).This allows the intertemporal elasticity of substitution(which we assume to be one for simplicity)to be different from the coef?cient of relative risk aversion1/?. In the emerging market,the utility of a represen-tative agent is given by:
(1)E?U E??ln?c EY1??C E1??
??ln??n?1N1N c E2(n)1?1/??1/?1?1/??,where c E
2
(n)denotes the second-period con-sumption in one of the N states of the world and E is the expectation sign.c EY is the consump-tion of the CRS good with a share1??in the utility function while?is the share of the com-posite good C E1made of all varieties produced in the world:
(2)
C E1???i?1L c Ei11?1/???j?1L c Ej11?1/??1/?1?1/??.
??1is the elasticity of substitution between goods,while c Ei
1
and c Ej
1
are the consumptions of domestic and imported varieties in period1. This composite good is used both for consump-tion and investment in projects.
The?rst-period budget constraint of an agent in E is
(3)
y E?c EY1??i?1L v Ei c Ei1??j?1L?1??T?v Ij c Ej1??k?1Lz E p Ek s Ek??l?1Lz I?1??F?p Il s El
?w E??E?T,
where y E is the emerging market per capita income of the?rst period,v Ei is the price of the i th variety produced in the E market,v Ij is the price of the j th variety produced in the I market, and?E is the investment payoff.Asset prices are denoted by p Ek and p Il,and s Ek and s El are demands for shares of risky investments devel-oped in the emerging market and in the indus-trialized country,respectively.T is the transfer (in equilibrium equal to F).The budget con-straint in the industrialized country is analo-gous.In period2,income and consumption come only from dividends of shares purchased in the?rst period.Hence,the budget constraint for an agent in E is:
(4)c E
2?
d E s Ek,if k??1,Lz E?;
d I s El if l??1,Lz I?;0otherwise.
11There is strong empirical evidence for home bias and for the role of such costs in generating at least part of the bias.See Richard Portes and Rey(2005)for the importance of information costs,and Mendoza and Smith(2004)for another model featuring trading costs on asset markets.
12Iceberg transaction costs are borrowed from the trade and geography literature.See Martin and Rey(2004)for a more precise description.This modelling allows the elastic-ity of substitution between assets to be the same for all agents,and does not require the formal introduction of an intermediation sector.Roger H.Gordon and Lans Boven-berg(1996)use a similar type of proportional transaction cost on capital?ows,and focus on the cost of acquiring information about foreign countries.1635
VOL.96NO.5MARTIN AND REY:GLOBALIZATION AND EMERGING MARKETS
We can therefore rewrite the utility of an agent in the emerging market as
(5)E?U E??ln?c EY1??C E1????ln
1
N1/?1?1/??
??ln??k?1Lz E(d E s Ek)1?1/?
??l?1Lz I(d I s El)1?1/?
?1/?1?1/??.
The utility and budget constraint of an agent in the industrialized country are sym-metric.In the second period,this utility func-tion is similar to the one introduced by Avinash K.Dixit and Joseph E.Stiglitz to represent preferences for differentiated prod-ucts.In fact,?can be interpreted as the elas-ticity of substitution between assets.In what follows,we impose??1to have?nancial home bias and realistic asset demands.13This restriction on?mirrors the standard assump-tion in the differentiated products literature that the elasticity of substitution between dif-ferent varieties?is greater than one.This restriction also implies that assets are substi-tutes rather than complements,as in Acemo-glu and Zilibotti(1997).14Imposing??1has the additional bene?t of ruling out any problem for the states in which consumption is zero in the second period due to market incompleteness.15 Agents in both countries choose consumption (c EY,C E1and c IY,C I1),and?rms choose invest-ment(the number of investments per?rm are z E and z I)at the beginning of the?rst period.They form expectations about the number of invest-ments in which other?rms will engage,since this will have an impact on the price of the assets they will sell at the end of the?rst period.As investments are ex ante symmetric,the de-mands for each asset in a given country are identical.16We call s EE(s EI)the demand for shares of a“typical”asset in the E(I)market by an emerging market agent.Similarly,we denote by c EE and c EI the?rst-period demand by an emerging market agent for a good produced in E and I,respectively.Because of symmetry, within each country,all assets have the same price,denoted by p E and p I,respectively.Since marginal costs in units of the numeraire are equal to one in both countries,and the elasticity of substitution between varieties?is the same for consumers and?rms,all?rms in the world choose the same price for the monopolistically competitive goods.That price,equal to the mar-ginal cost multiplied by the markup,is given by v E?v I??/(??1).For notational simplicity, we drop the expectational sign in what follows.
C.De?nition of Equilibrium
An equilibrium is de?ned by a set of good and asset prices[v E,v I,p E,p I],consumption and investment allocations[C E1,C I1,c EY,c IY,z E,z I, c E2(n),c I2(n)],and portfolio shares[s EE,s EI,s II, s IE]such that:
(a)[C E1,c EY,s EE,s EI,c E2(n)]maximize U E
subject to E’s budget constraints(equations
(3)and(4))taking prices as given.
(b)[C I1,c IY,s II,s IE,c I2(n)]maximize U I sub-
ject to I’s budget constraints(the analogue of equations(3)and(4))taking prices as given.
(c)[v E,v I,z E,z I]maximize pro?ts and the
investment payoffs of?rms taking prices and investment decisions of other?rms as given.A?rm invests if and only if its ex-pected investment payoff?i?p i z i?1?2z i2Q?F is nonnegative for i?{E,I}.17 (d)Asset markets clear:Ls EE?L(1??F)s IE?
1and Ls II?L(1??F)s EI?1.
(e)The world resource constraint is veri?ed,
which implies:L[c EY?c IY?Lc EE?
13See Section II.The demand for foreign assets de-creases with transaction costs?F for any?.But using
iceberg trading costs(paid for in shares)implies that the demand inclusive of transaction costs(which determines the equilibrium on the stock market)would increase with?F if ?were to be smaller than one.
14In Section IV,we review the existing empirical esti-mates for?:they range from1to12.
15When we introduce a safe asset(see Section IV),this issue of course does not arise any longer.
16In each country,agents are different in the sense that they hold different assets but they choose identical portfo-lios and consumption patterns.
17We focus on symmetric equilibria in which all or no ?rms in a country invest.Equilibria in which only a portion of?rms invest are studied in the working paper version of Martin and Rey(2002).
1636THE AMERICAN ECONOMIC REVIEW DECEMBER2006
Lc EI(1??T)?Lc II?Lc IE(1??T)?1
2 (z E2?z I2)Q(??a)/??d E?d I]?L(w E?
w I).18
(f)Expectations are rational.
II.When Things Go Well
We?rst solve the model in the optimistic case,when?rms of the emerging market expect others to invest in a positive number of projects. We de?ne q?p E/p I as the relative asset price, and d?d E/d I as the relative dividend.The budget constraints and the?rst-order conditions of an emerging market agent imply the optimal consumption demands:
(6)c EY??1???y E ?1???;
c EE?
????1?y E
L??1????1??T?;
c EI?????1?y E?1??T???
T?
;
s EE?
?y E
1??
1
Lp E?z E??F z I?q/d???1?;
s EI??y E?1??F????q/d???1
I?z E??F I?q/d???1?
,
where0??T?(1??T)1???1is a measure of trade openness and?F?(1??F)1???1is a measure of?nancial openness.The demand for foreign shares(s EI)decreases with?nancial transaction costs.
At the optimum,the marginal cost of invest-ing equals the marginal bene?t:z E Q?p E.19 The demands for shares s EE and s EI increase with income and decrease with the total number of investments/assets.Analogous conditions hold for the industrialized country.For all?rms in the economy to invest,the expected payoff must be positive:p E z E?1?2z E2Q?1?2p E2/Q?F. We normalize the number of shares so that the stock market equilibria in the two countries(in-clusive of shares that are used to pay the transac-tion costs)can be written for each asset as: (7)1?
1
p E
?
1???y E
z E?z I?F(q/d)??1
?
y I?F(q/d)1??
I?z E?F1??
?;
1?
1
p I
?
1???y I
z I?z E?F(q/d)1??
?
y E?F(q/d)??1
z E?z I?F(q/d)??1?.
There are L(z E?z I)such equilibrium condi-tions.In the parentheses,the?rst term repre-sents the demand coming from domestic agents and the second term foreigners’demand(inclu-sive of transaction costs).These equations im-ply a?nancial home-market effect:local income has a more important impact on the local asset market than foreign income,as long as?F is less than one,i.e.as long as some transaction costs exist.
The dividends of the second period are the operational pro?ts of the?rst period.Hence, they are equal to sales(to consumers and?rms) divided by the elasticity of substitution:
(8)
d E?
??y E?y I?T?
??1????1??T??
1
2
a?z E2??T z I2?Q
??1??T?;
d I?
??y I?y E?T?
??1????1??T??
1a?z I2??T z E2?Q
??1??T?.
These equations imply a trade home-market effect:local income and investment have a more important impact on sales and pro?ts of local ?rms than foreign income and investment,as long as?T is less than one,i.e.,as long as trade costs exist.Because our theoretical argument requires only one source of trade home-market effect,we assume from now on that a?0,so that the investment good requires only labor, Q?1,and pro?ts come only from sales to consumers.This allows us to derive all results analytically.We come back to the more general case with a?0in the quantitative section.
18We have used the cost minimization program of?rms to derive their demands for the investment good.
19Q?a?a(1?a)a?1[?/(??1)]a[L(1??
T )]?a/(??1)
is the price of the investment good.1637
VOL.96NO.5MARTIN AND REY:GLOBALIZATION AND EMERGING MARKETS
A.Equilibrium Relationship between Asset
Prices,Dividends,and Income Shares
As world income is?xed,20it proves conve-nient to de?ne s Y?y E/(y E?y I)as the share of the emerging market in world income.From the budget constraint and the optimal investment rule,we get the?rst equilibrium relation be-tween the relative income and the relative asset price q,which we call the yy schedule:
(9)s Y?s w?2???
2?1???
?
?
2?1????1?q?2?,
where s w?w E/(w E?w I)?1?2is the share of the emerging market wage income in the world wage income.The equilibrium yy relation im-plies that an increase in the relative asset price q generates an increase in relative income s Y. The reason is that emerging market investments are sold at a higher price and more investments are started.
Using the optimal investment rule,equation (7)of the stock market equilibrium gives
(10)q?s Y?1??F2??q?F?q/d?1????F2?F?q/d???1?q?s Y q?1??F2?.
If?F?1(zero transaction costs on asset trade), then q?d1?1/?.This implies quite intuitively that without any?nancial segmentation,the rel-ative price of assets depends only on the relative dividend and the elasticity of substitution but not on local demand.
Using(8),we can derive the relative dividend as
(11)d?
s Y?1??T???T
Y?1??T?
.
If?T?1(zero transaction costs on goods trade),then d?1.This implies,also quite intuitively,that in the case of perfect goods, market integration operating pro?ts and there-fore dividends do not depend on local incomes. An increase in the relative income of the emerg-ing market raises local demand more if there is home bias in goods.In turn,the surge in local demand increases relative operating pro?ts and dividends.Lower trade costs raise relative prof-its and d as long as s Y?1?2.
Together,(10)and(11)provide a nonlinear relation between the share of income in the emerging market s Y and the relative asset price q.We call this positively sloped relation the qq schedule.Two effects are at work:?rst,an increase in income raises demand(mostly)for locally produced goods due to home bias in trade(?T?1),thereby increasing pro?ts and dividends(trade home-market effect).This,in turn,increases the demand for assets and their relative price.Second,an increase in income in the emerging market leads to an increase in saving which,as long as markets are segmented (?F?1),falls disproportionately on domestic assets(?nancial home-market effect).This also increases the relative price of emerging market assets.
B.Globalization and Asset Prices
In this section,we show that trade and?nan-cial liberalizations may have very different ef-fects on asset prices and income.Whereas increasing trade openness is always positive, opening the capital account has an ambiguous effect.
In Figure1,we illustrate the equilibrium as the intersection of the yy and qq schedules.The relative price of assets q is less than one as long as the?nancial or goods markets are not per-fectly integrated(?F 1or?T 1)and s w?1?2.The difference in asset price is higher,the larger the differential in productivity.The two curves cross only once,so that only one“good”equilibrium exists.Trade integration(an in-crease in?T)is easily analyzed.As long as s w?1?2,the fall in trade costs implies a rightward shift of the qq curve(?s Y/??T?0for a given q along the qq curve).The yy curve,meanwhile, is unaffected.The effect,shown in panel A of Figure1,is an increase of the emerging market relative asset price and income share,for any level of?nancial integration.
Intuitively,lower trade costs increase pro?ts and dividends of?rms in the emerging market: from(11),?d/??T?0as long as s Y?1?2.This in turn increases the demand for emerging mar-ket assets and their relative price,which gener-ates a rise in relative income.Due to the
20From the stock market equilibria we obtain that
p E z
E?p I z I??(y E?y I)/(1??).Using the optimal
investment rule and the de?nition of world income,we
therefore have L(y
E?y I)?2L(1??)(w E?w I)/(2??).
1638THE AMERICAN ECONOMIC REVIEW DECEMBER2006
convexity of the investment cost function,the total number of assets is increasing in q .Hence trade integration also alleviates ?nancial market incompleteness,as measured by N ?Z w ,and therefore reduces the volatility of consumption in the second period.
In contrast,a fall in ?nancial transaction costs has an ambiguous effect on asset prices,relative income,and market incompleteness.In Appen-dix A we give the exact condition for which an increase in ?F (increase in ?nancial openness)leads to a rise in q .A suf?cient condition is that the relative return of the emerging market asset d /q is more than one.Interestingly,this will be the case for low enough trade costs.The condi-tion is veri?ed,for example,in the extreme case
of perfect goods market integration,as d ?1and q ?1(whenever ?nancial integration is not perfect).Intuitively,in that case,?nancial open-ing enables agents in the industrialized country to buy the cheaper emerging market assets.For high trade costs,however,the pro?ts of emerg-ing market ?rms are lower than in the industri-alized country,making emerging market assets relatively unattractive.The relation between asset prices and ?nancial liberalization is U -shaped,so that ?nancial opening may actually lead to a decrease in the demand for emerging market assets (capital out?ows),a decrease of their price,and more market incompleteness.Finan-cial liberalization with low trade costs has the same positive effects on asset prices and income as trade integration.It can also,there-fore,be illustrated by panel A in Figure 1.In contrast,when trade costs are high,?nancial liberalization leads to lower asset prices and income in the emerging market,as illustrated in panel B.
C.Globalization and the Current Account We now study the impact of globalization on the ?rst-period current account of the emerging market.The current account is the difference between the country’s production and the mar-ket value of investment and consumption:
(12)
CA E ?L ?
y E ?z E
2?y E
1??
??L ?1???
w E ?w I q 2
1?q 2
?
.
The current account deteriorates as the relative asset price in the emerging market increases.Hence,trade integration (an increase in ?T )always implies an increase in the current ac-count de?cit.Financial integration (an increase in ?F )also leads to a current account de?cit if trade costs are not too high.In that case (see previous section),liberalizing capital move-ments generates net capital in?ows in the emerging market as agents in the industrialized economy take advantage of the lower asset prices in the emerging market.If trade and ?nancial transaction costs are suf?ciently
low,
F IGURE 1.L IBERALIZATION
IN THE
E MERGING M ARKET
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VOL.96NO.5MARTIN AND REY:GLOBALIZATION AND EMERGING MARKETS
the emerging market current account is in de?cit
in normal times.
III.Self-Ful?lling Expectations and Financial Integration:When Things Go Wrong Until now,we focused on the equilibrium in
which there is positive investment in both coun-
tries.The decision to invest depends,however,
on the expected price of assets at the end of the
period,and therefore on the strategies of all
other?rms.We now investigate under what
conditions a crash driven by self-ful?lling ex-
pectations can occur.We de?ne a crash as an
equilibrium in which no single?rm has an in-
centive to invest,given that no other?rm is
investing.The condition for this to happen is E(?Ec)?E(p Ec z Ec?1?2z Ec2?F)?0,where the index c denotes the crash equilibrium.In
that case,the expected asset price is low enough
that no?rm deviates from the zero-investment
equilibrium.21
Expected aggregate income in the emerging
market in a crash is E(Ly Ec)?Lw E,since
expected?nancial wealth is zero.This affects
the expected relative demands for assets in the
emerging and industrialized https://www.doczj.com/doc/dd7833200.html,ing
the stock market equilibrium(7),we show that
the expected relative asset price in crash is (13)q c
??s w(2??)??F?1??F??2(1??)?F?1/?d c1?1/?,
where we drop the expectation operator from now on.The relative price decreases with?nan-cial globalization at low levels of?F and then increases with globalization for higher levels of ?F.The relative dividend is given by
(14)
d c?s w?2????1??T??2?1????T
2?1????s w?1??T??2???.
In a crash,the emerging market relative div-
idend increases with lower trade costs on goods
markets and with labor productivity in the
emerging market.
A crash occurs if the expected payoff of
investing is negative:
(15)?Ec?
?
2??
?w E?w I?q c2?F?0.
The investment payoff is U-shaped as a function
of?F.Inequality(15)can therefore be satis?ed
for intermediate levels of?nancial transaction
costs.
Multiple equilibria exist if and only if q c2?
q2/(1?q2).This guarantees that,for a given set
of parameter values,a“good”equilibrium ex-
ists whenever z E?0and a crash equilibrium
exists whenever z Ec?0.22,23For this condition
to be veri?ed,the fall in price during a crash
must be large https://www.doczj.com/doc/dd7833200.html,ing(13),it can be
checked that the crash equilibrium cannot occur
in the absence of capital?ows(?F?0),as q c
goes to in?nity because agents can save only by
buying domestic assets.24This puts a?oor on
the demand for domestic assets and on their
expected price since capital?ight is impossible.
At the other end,in a situation without frictions
(?F??T?1),q c?1,so arbitrage implies that
agents in the industrialized country would rush
to buy assets in the emerging market in the
event of a crash.This rules out the possibility of
a crash in the emerging market altogether.
Hence,a crash is possible only for intermediate
levels of the?nancial frictions and for high
enough levels of trade costs.
Circular causation is at work.If?rms believe
that other?rms will undertake no investment,
then they expect aggregate income in the
emerging market at the end of the period to be
low.Lower expected income entails lower sav-
ings and a lower demand for assets.When?-
21z
Ec in this condition is the investment that would be
made by a single“pessimistic”?rm if it anticipates that no other?rm will invest.The optimal investment rule z
Ec?E(p Ec)still applies.This?rm is small(L is large)so that its
decision does not affect aggregate income or investment.
22As mentioned before,we are limiting our analysis to symmetric equilibria in which all investors in each country behave similarly.
23In the absence of an equilibrium selection device,our model has nothing to say about the transition between equilibria.We also cannot perform meaningful welfare comparisons.These drawbacks are common to all multiple equilibrium models.
24This also implies that an equilibrium where both coun-tries are in crash is not possible.
1640THE AMERICAN ECONOMIC REVIEW DECEMBER2006
nancial markets are segmented and assets are imperfect substitutes,this fall in demand for assets affects local assets disproportionately. This in turn generates a low relative asset price in the emerging market(?nancial home bias effect).Trade costs magnify this effect since a crash that lowers income in the emerging mar-ket also lowers demand for goods.This falls more than proportionately on goods produced in the emerging market,so that expected operating pro?ts in the emerging market also fall.This home bias in trade in goods also contributes to the fall in dividends and asset prices.
Is the emerging market more vulnerable to a
?nancial crash than the industrialized economy? We can compare the payoff level of a single “pessimistic”investor in the emerging market (z Ec?0)given in equation(15)to its analogue in the industrialized country(z Ic?0).We?nd that?Ic??Ec as long as?T or?F?1.The
“pessimist”payoff function of the industrialized country is always above the emerging market one.Due to the dual home bias(in trade and ?nance),the demand for assets in the rich mar-ket,even when depressed by pessimistic expec-tations,is always higher than in the emerging market.This implies a higher price for assets even when bad times are expected:the indus-trialized country can never be as pessimistic about its own demand—and therefore its asset prices—as the emerging market.Hence,if the productivity differential is suf?ciently high,the industrialized country can never experience a crash.The negative relation between income per capita and the vulnerability to crashes ap-pears only when countries are suf?ciently open to capital movements,a fact that accords well with Table1.
The analysis of asset prices in a crash also shows that countries more open to trade in goods(larger?T)are less vulnerable to?nancial crashes.Indeed,these countries’operating prof-its and dividends(equation(14))are less depen-dent on local income and therefore less affected by the crash.Hence,the crash itself is less likely.This implies that the set of parameters for which a crash occurs is smaller for countries more open to trade.We therefore?nd a funda-mental asymmetry in the effect of trade and ?nancial openness on the vulnerability of coun-tries to?nancial crashes.Whereas trade open-ness unambiguously decreases this vulnerability,?nancial openness may increase it.
Figure2depicts payoff functions in crash as a function of?nancial openness?F.Crashes can occur in the area below the zero line,whose exact position depends on the level of F.For a given level of trade openness,countries with higher levels of productivity(higher wages)are less vulnerable to crashes.For a given level of productivity,countries that are more open to trade in goods are less vulnerable to crashes. A?nancial crash in the emerging market is characterized by low asset prices,investment, income,and consumption(both in?rst and in second periods).The total number of assets at the world level decreases since it is an increas-ing function of q.Hence,both market incom-pleteness and the volatility of second-period consumption are higher.It can be shown that per capita income in the emerging market is lower in a?nancial crash(w E)than in autarky. Contrary to what occurs in the“good”equi-librium,the emerging market experiences a cur-rent account surplus given by Lw E/(1??).In a crash,agents can only buy foreign assets from the industrialized country to save and diversify risk,so that capital?ight occurs.
IV.Quantitative Analysis
This section assesses the potential of our de-mand-based theory of?nancial crisis to match key stylized facts of emerging market crashes, such as a drop in asset prices,income collapse, and current account reversal.Table2(taken from Mendoza and Smith,2004)reproduces data for four emerging markets,Argentina,Ko-rea,Mexico,and Russia.Table3presents the parameter values used in the calibrations.Panel A of Table4provides the quantitative implica-tions of the exact model we described in
the
F IGURE2.C RASH AND T RANSACTION C OSTS
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VOL.96NO.5MARTIN AND REY:GLOBALIZATION AND EMERGING MARKETS
previous sections.We call it the“stylized model.”And,indeed,since our model is quite stylized,we augment it by adding two realistic features to get our“baseline model”(panel B of Table4):(a)Agents have access to a safe low return technology that gives a payoff in a frac-tion?of the states of nature covered in normal times,i.e.,without a crash.We experiment with different degrees of international tradability of this technology.We interpret our safe technol-ogy as any alternative way used by agents to save their income during?nancial crises,such as purchases of durable goods or cash hoard-ings.(b)We allow for limited participation in the stock market.Neither of these two new features alters signi?cantly the qualitative prop-erties of our model,nor do they change the fundamental mechanisms presented in the pre-vious sections.But they notably improve the quantitative properties of our model.Appendix B provides the key equations of this augmented model.25
A.Calibration
The most important parameters of our model are the trade costs?T,?nancial costs?F,ratio of wages w E/w I,elasticities of substitution for goods ?and assets?,and the share of households
participating in the stock market which we de-note as?.The interaction of trade costs and
25They are not analytically solvable,unlike their coun-terparts of Sections II and III,but carry the same effects and intuitions.This is why we chose to discuss the more stylized model in the core of the paper and present this more general version in the quantitative section.The programme used to solve the model is available from the authors.
T ABLE2—C RISES IN F OUR E MERGING E CONOMIES
Real equity prices (percent change)
Current account/GDP
(percent points change)
Ind.production
(percent change)
Argentina(94.4–95.1)?27.82 4.05?9.26 Korea(97.4–98.1)?9.7910.97?7.20 Mexico(94.4–95.1)?28.72 5.24?9.52 Russia(98.3–98.4)?59.379.46?5.20 Notes:Real equity prices are de?ated by the CPI,except Russian equity prices which are in U.S.dollar terms.The change in the current account to GDP ratio for Argentina corresponds to the second quarter of1995.Industrial production for Korea and Russia are annual rates (Mendoza and Smith,2004).
T ABLE3A—P ARAMETERS
Wages
w
E /w
I
Subst.
goods
?
Subst.
assets
?
Discount
?
Risk
premium
Safe
?
Manuf.
share
?,a
Base case1/5550.99 1.0510.4 High1/3108— 1.10—0.6 Low1/8430.95 1.020.10.3
T ABLE3B—F RICTIONS
Financial cost ?F percent Trade cost
?T percent
Participation
?percent
No crisis Base case54036
High108050
Low12010
Crisis Base case65036
High121050
Low 1.22510
1642THE AMERICAN ECONOMIC REVIEW DECEMBER2006
?nancial costs is key to getting plausible quan-titative results.A period is a quarter.The values of the parameters we use are discussed below and summarized in Table3.
Trade Costs.—We base our estimates of trade costs?T mainly on James E.Anderson and Eric van Wincoop(2004).According to these authors,“the pure international component of trade barriers,including transport costs and bor-der barriers but not local distribution margins,is estimated to be in the range of40–80percent for industrialized countries.”The estimate is based on both direct evidence and indirect evi-dence stemming from the gravity literature. This estimate roughly breaks down as a21-percent transportation cost,an8-percent policy barrier,a7-percent language barrier,a14-per-cent currency barrier,a6-percent information cost barrier,and a3-percent security barrier.We pick20percent as the low estimate of our trading costs on the goods market;this roughly corresponds to the pure transport cost estimate of Anderson and van Wincoop.We choose80percent as our upper estimate and40percent as our base case.
Crises are accompanied by the collapse of trade credits,increased exchange rate uncer-tainty,information asymmetries and higher in-surance costs.All these elements are exogenous to our model.Unfortunately we do not have any reliable estimates of the increase in trade costs in crisis time to calibrate our model precisely.26 We assume in our stylized model of Table4 (panel A,lines1–3,5)that trade costs are in-variant between normal and crisis times.Then, in the baseline model of Table4,panel B,and in panel A,line4,we assume that trade 26Zihui Ma and Leonard Cheng(2005)document the disruption of trade during a?nancial https://www.doczj.com/doc/dd7833200.html,ing a gravity equation framework,they?nd a signi?cant decline in trade ?ows,even after controlling for economic fundamentals. Their analysis does not allow a precise quanti?cation of the effect,however.In the narrower case of sovereign defaults, Andrew K.Rose(2005)and Jose′V.Martinez and Guido Sandleris(2004)also document a decrease in trade?ows, even after controlling for fundamentals.
T ABLE4—Q UANTITATIVE R ESULTS
Panel A
?q
Asset price
percent
change
?CA E/y E
Current account
percent point
change
?y E
Income
percent
change
1Stylized model?22.8?46.2?30.7 2With safe technology?22.4?36.5?30.7 3With limited participation?12.1?19.7?13.1 4With trade disruption?29.5?46.2?30.7 5With?nancial disruption?23.2?46.2?30.7 Panel B
6Baseline model?20.5?15.4?13.1 7Tradable safe asset?20.1?8.8?13.1 8High?F?20.8?13.9?12.7 9Low?F?20.2?16.8?13.5
10High?T?18.9?8.1?6.9 11Low?T no crash
12High?T(on imports)?22.2?17.1?14.4 13Low?T(on exports)no crash
14Low w
E /w
I?21.1?20.3?15.8
15High w
E /w
I?20.0?11.7?11.5
16High??20.9?13.0?11.8 17Low??18.3?19.1?15.6 18High??17.1?5.9?5.0 19Low??18.5?19.0?16.3 20High?,a?20.5?15.4?13.1 21Low?,a?20.6?15.5?13.1 22High participation?23.1?20.8?17.5 23Low participation?14.1?4.6?3.91643
VOL.96NO.5MARTIN AND REY:GLOBALIZATION AND EMERGING MARKETS
costs,both on imports and exports,increase in crisis time by25percent from their base value ?T in normal times.We call this the trade dis-
ruption case.
Financial Costs and Limited Participation.—The choice of an estimate for?nancial transaction costs is more dif?cult,as there is no consensus in the literature.Financial costs should include the cost of government regulations on capital?ows, the cost of differences in regulations in account-ing,banking and commission fees,foreign ex-change transaction fees,and,most importantly, information costs between emerging markets and industrialized countries.Reviewing the literature, John Heaton and Deborah J.Lucas(1996,p.467) argue that for the U.S.equity market,“transaction costs as high as5percent are reasonable.”Given the lack of precise data for emerging markets,we choose again a wide interval of transaction costs ranging from1percent to10percent,with a base case set at5percent.
During crises,however,volatility on the for-eign exchange market increases,and there is more information asymmetry and adverse selec-tion.International?nancial transaction costs are therefore also likely to increase.27We take this possibility into account and call it the?nancial disruption case.In that scenario,?nancial costs go from our baseline case of5percent in normal times to6percent.We also allow for the case of joint?nancial and trade disruption,where both ?nancial and trade costs increase during a crash. Data on limited stock market participation are not available for emerging markets.For the United States,Annette Vissing-Jorgensen(2002) documents household participation rates in the stock market of36percent in1994.We pick this number as our baseline case.
Elasticities,Relative Wages,and Manufac-turing Shares.—We pick an elasticity of substi-tution for goods of5in the base case,in the middle of the range of the estimates of the trade literature.We experiment with values of4and10, thereby covering the estimates surveyed in Ander-son and van Wincoop.We calibrate the elasticity of substitution between assets using Jeffrey A. Wurgler and Ekaterina V.Zhuravskaya(2002). They report the results of several studies,as well as their own estimates,for U.S.stocks.The elas-ticity ranges from1(Andrei Shleifer,1986)to their own:6,8,and12depending whether stocks have close substitutes or not.Given that the im-portant elasticity in our context is the one between equities of the emerging market and equities of the industrialized country,which are less substitutes than domestic ones,we choose a rather low elas-ticity for the base case,i.e.,5.We also experiment with8and3.
We calibrate the wage ratio w E/w I between the emerging market and the industrialized country at1/5.The Bureau of Statistics of the U.S.Department of Labor(2002)reports hourly compensation costs for production workers in manufacturing for a selected group of countries. For Mexico and Brazil,these were12percent of those of the United States.For Korea,these amounted to42percent and for Asian newly industrialized economies,34percent.We ex-periment with1/8in the low case and1/3in the high case.
We choose?and a,the share of the manu-factured good in the utility function and in the production function of the investment good,to be equal to0.4.This number is usually the one picked in the trade literature for the share of the manufacturing sector.We also experiment with higher(0.6)and lower(0.3)values.28
Safe Technology.—We set?to1in the base case,implying that agents are able to use the safe technology to save during the crash for all states of nature covered in a noncrash equilib-rium.We also experiment with low levels of?(0.1),implying that the“safe asset”gives a dividend in10percent of the states of the world covered in normal times.We also vary the
27For example,for the forex market alone,the1998 International Monetary Fund(IMF)International Capital Markets report mentions that:“Prior to the crisis,bid-ask spreads on these(Asian)currencies had been similar,per-haps modestly higher,than those for the major currencies. Following the crisis,these spreads widened by factors of between6(ringgit)and13(rupiah),implying,for example, a hefty1.7-percent average cost of carrying out a rupiah-
dollar transaction on the spot market since the crisis,rising on occasion to as much as10percent.Higher volatility and transaction costs were also associated with a drying up of liquidity.”
28The other constraint is that the nonmanufacturing sec-tor should always exist in both countries.This requires that ?and a not be too large.
1644THE AMERICAN ECONOMIC REVIEW DECEMBER2006
degree of tradability of the safe asset,from nontraded to a transaction cost as for the other assets.We set the discount rate?to0.99in the base case.We calibrate the safe technology parameters in order to match the risk premium at5percent(annualized).The latter is de?ned as the expected difference in return between a risky asset in the emerging market and the safe technology.The return of the safe technology is low enough that agents who have access to ?nancial markets have no incentive to use it in absence of a crash.
B.Results
We are interested in the change in three vari-ables summarizing the state of the economy: equity prices in dollars,the current account rel-ative to income,and income.29
We start with a calibration of the exact styl-ized model described in Sections I to III.There is no safe technology and no limited participa-tion.All parameters are set to their base value of Table3A.Furthermore,trading costs and?nan-cial costs are equal in normal and crisis times. The only difference is that the investment sector uses manufactured goods so that a is not equal to zero.Results are displayed in Table4(line1). The stylized model has qualitatively correct predictions.High enough trade costs insure that the emerging market asset dividends are depen-dent on local conditions,which in turn makes possible self-ful?lling demand collapses.Con-versely,when trade costs are reduced to20 percent,for example,the possibility of a crash is eliminated.Also,multiple equilibria do not ex-ist whenever?nancial costs are higher than60 percent.These results con?rm the interactions between trade and?nancial costs we put for-ward in the theoretical section. Quantitatively,the model is able to generate large drops in asset prices(?22.8percent)but produces far too large a drop in income(?30.7 percent).The reason is that,in the crash,the entire?nancial wealth of the emerging market is wiped out.Since all our agents participate in the stock market,this generates a dramatic drop in aggregate income.The stylized model generates
capital in?ows into the emerging market in tran-
quil times and out?ows in crisis times.But it
produces too large current account reversals
(from?11.7percent of GDP in normal times to ?34.5percent in crisis times).This comes,in particular,from the absence of a safe technol-
ogy:during the crisis,emerging market agents
can save only by purchasing foreign risky as-
sets,implying large capital out?ows.In lines2
to5of Table4,we alter the stylized model by
adding each time only one of the following
features:safe technology;limited participation;
increase in trade costs during the crisis(trade
disruption);increase in?nancial costs during
the crisis(?nancial disruption).
If we add the safe technology(line2),we do
not change much the drop in asset price nor the
collapse in output;but the swing in the current
account is lower,which helps bring the model
somewhat closer to the data.30Adding limited
participation to the stylized model(only36per-
cent of households participate in the stock mar-
ket)decreases the effect of?nancial wealth on
the economy(line3).The drop in asset price is
smaller because,in this case,64percent of the
economy is effectively insulated from the crash.
In contrast,if we introduce trade disruption
(line4),we are able to match the data as far as
the drop in asset price is concerned(?29.5
percent)but the drop in output and the current
account reversal are still too extreme.This dra-
matic effect on the asset price comes from the
decrease in pro?ts of the emerging market
?rms,which have to rely even more on domes-
tic demand in crisis times.The ensuing decrease
in dividends is magni?ed by the income effect
and creates a sharp drop in the emerging market
asset price.The same type of mechanism,i.e.,
an increased reliance on domestic demand to
sell assets in crisis times,explains the effect of
?nancial disruption on asset prices(line5),but
quantitatively the effect is much smaller.
29Quarterly data on GDP are not available for these countries.Industrial production is therefore used as a proxy for income.In our model,income and consumption are perfectly correlated due to the log utility,so we do not report changes in consumption.
30Adding a safe technology makes possible the exis-tence of crashes in autarky,since it may not be worthwhile for agents to invest in risky assets if everyone else coordi-nates on the safe technology.This does not,however,alter the logic behind the existence of multiple equilibria for intermediate levels of?nancial costs.Emerging market agents now invest both in foreign risky assets and in the safe asset during crashes.In this experiment,the safe technology is nontraded.
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Our baseline model incorporates all these fea-tures.Panel B of Table4(line6)presents the model when the safe technology,limited partic-ipation,trade,and?nancial disruption are all present at the same time.All the parameters have been set to their base value of Table 3A and3B.As before,the only difference be-tween the emerging market and the developed economy is their productivity level.This base-line model is closer to the data.Asset prices drop by20.5percent,income drops by13.1 percent,and the current account goes from?4.1 percent in normal times to?11.3percent in crisis times,i.e.,a reversal of15.4points of income.We have checked that the industrial-ized country cannot be subject to a crash with these parameters.
We now subject the baseline model to sensi-tivity experiments.If the safe technology is internationally tradable,the current account re-versal becomes smaller.For example,if30per-cent of the safe projects are internationally tradable(with the same transaction costs as other assets),then(see line7)the current ac-count reversal is only8.8points of GDP be-cause the emerging market sells these assets to the industrialized country.The drops in asset price and income remain similar because the international tradability of the safe asset leads the industrialized country to buy less of both risky assets in a crash so that their relative price does not change much.
In lines8to13,we perform some sensitivity analysis of the magnitude of the frictions.Varying ?nancial costs(high and low cases in Table3B) affect the magnitude of the current account rever-sal.If??1(the safe asset gives in less than100 percent of states of nature covered in a noncrash equilibrium),then increasing?nancial costs suf?-ciently eliminate the possibility of a crash.Chang-ing trade costs alter both the domain of existence of multiple equilibria and the magnitude of the crash.Because(symmetrically)higher trade costs in the goods market generate lower asset prices and income in both the no-crash and the crash equilibria,they may lead to a smaller crash(line 10).Lower trade costs,however,always make the domain of multiple equilibria smaller:with trade costs at20percent,a crash is not possible(line 11).But we can also investigate the impact of asymmetric trade costs.For high import costs(due to higher tariffs or less ef?cient port facilities,for example),the crash is more pronounced(?22.2percent,line12)because the asset price in E is
higher in the no-crash equilibrium.Protectionism
increases pro?ts of?rms in the good equilibrium
when domestic income is large.It does not,how-
ever,sever the link between asset prices and pes-
simistic expectations affecting domestic demand.
Hence,protectionism does not decrease the
likelihood of a?nancial crash.On the other
hand,lower export costs make sales of E
?rms more dependent on world income,
which is more stable than domestic income
and therefore weakens the circular causality
mechanism at the origin of a crash.When
export costs are down to20percent,the pos-
sibility of a crash is eliminated(line13).
A higher productivity differential between the
rich country and the emerging market exacerbates
all the characteristics of the crash since our mech-
anisms are based on demand:a relatively poorer
emerging market will experience,ceteris paribus,
a sharper drop in asset prices and income and a
larger current account reversal(lines14and15).If
the difference in wage between the emerging mar-
ket and the industrialized country is small enough,
the possibility of a crash disappears.This is the
case if w E is only50percent smaller than w I.This
con?rms that our mechanism is able to explain
why emerging markets are more prone to crashes
than high-income countries.
A high elasticity of substitution across as-
sets tends to increase the extent of the crash
(lines16and17).Since the transformations
of the?nancial costs?F?(1??F)1??and of the trade costs?T?(1??T)1??are the effective measures of?nancial and trade
openness in the model,an increase in?is like
an increase in?F.An increase in?is analo-gous to a increase in?T,but it also decreases pro?ts in the monopolistic sector and there-fore the role of demand on dividends.Hence, the effect of?on the magnitude of the crash is ambiguous(lines18and19).
In lines20and21,we check that the manu-
facturing sector share does not change the re-
sults.We have also checked that changing the
risk premium,the discount factor,or the number
of states covered by the safe technology,?,does not alter our results.In lines22and23,we?nd that higher participation in stock markets,which can be interpreted as a higher dependence of the economy on?nancial wealth,leads to larger crashes,income drops,and current account reversals.
1646THE AMERICAN ECONOMIC REVIEW DECEMBER2006
Overall,our baseline model matches the stylized facts of Table2reasonably well.In order to get a smaller current reversal,we would need some degree of international tradability of the safe technology(see line7).There are differ-ent plausible mechanisms to get a larger drop in asset prices with similar drops in income and current account reversals.First,a larger trade dis-ruption(trade costs increasing from40percent to 60percent in crash)would generate a26.9-percent crash in asset prices.Similarly,a high degree of ?nancial disruption(transaction costs increase from5percent to15percent in crash)also gener-ates a larger crash(?23.7percent).The model is ?exible enough to allow for domestic trade costs on goods markets.If we assume that those trade costs go from0to20percent in crisis time,this alone would generate a crash of?25.8percent.Domestic trade and international trade disruptions reinforce each other so that we can generate a sharp drop in asset prices with relatively small levels of trade dis-ruption in domestic and international markets. The assumption that all assets give dividends in only one state of nature(as opposed to sev-eral)is immaterial for the results on relative asset prices.But relaxing the assumption that the risk of assets is identical in the two countries and/or across the no-crash and crash equilibria is interesting.If E assets are riskier(they give dividends in fewer states of nature),then the crash is less pronounced:the price of the asset in normal times is lower so that the difference between no-crash and crash is also lower.31If, however,during a crash assets become more risky in the sense that the number of states they cover is10percent lower than in the no-crash equilibrium,then the drop in asset price is more pronounced(?28.6percent).The introduction of a?xed cost in the production of goods also makes the crash more pronounced.If the?xed cost is proportional to wage costs(at around10 percent of the value of sales),this increases pro?tability in the E market,and the magnitude of the crash becomes larger at?26percent.
V.Conclusion
Our model puts forward a demand-based mechanism of crisis in emerging markets where segmentation of the goods and asset markets plays a key role.Our framework is the?rst one, to our knowledge,that analyzes jointly home market effects in the?nancial and goods mar-kets and their interactions.Relatively high trade costs on the goods market make pro?ts and dividends very dependent on domestic demand. Financial globalization makes coordination on capital?ight possible.Emerging market income itself depends on investment,which is affected by asset prices,in turn dependent on domestic income and demand.This circularity makes our demand channel quantitatively powerful.Our mechanism of?nancial crisis is very general, since it is at work whenever there is a sizable difference in income between countries and there are trading costs in goods and?nancial markets.
We see our approach as complementary to existing views on the links between?nancial globalization and crises.So far,the literature has emphasized that?nancial globalization,by making borrowing on world?nancial markets easier,strengthens market failures prevalent in emerging markets.In particular,moral hazard and credit constraints have been shown to facil-itate the advent of?nancial crises.Our paper suggests that such market failures are not a necessary condition for emerging markets to become vulnerable to a crash when capital?ows are liberalized.Trade costs on international trade in goods and assets will themselves gen-erate that vulnerability.
Both the potential bene?t of globalization (in terms of cost of capital,investment,and income)and the higher vulnerability of emerging markets to a crash come from the same factor that differentiates emerging mar-kets and industrialized countries in our model:their productivity and income level. The higher vulnerability is not necessarily due to bad institutions,bad incentives(bail-outs),or bad exchange rate regimes.This is not to say that these problems do not consti-tute important channels through which?nan-cial globalization can make emerging markets more vulnerable to a?nancial crisis.32The existing literature has logically recommended
31For example,if the number of states covered by E assets is10percent lower than in I,then the crash is18.8percent.
32The inclusion of credit constraints on investment in our model would certainly reinforce the possibility of a crash,as the fall in asset prices would reduce the value of collateral.
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VOL.96NO.5MARTIN AND REY:GLOBALIZATION AND EMERGING MARKETS
policies addressing the informational and insti-tutional frictions at the origin of the credit market imperfections it describes.More trans-parency,better information,and better banking regulation have been advocated.Similarly,cur-rency mismatches in?xed exchange rate re-gimes are listed as prime suspects to explain crises of these countries.Our paper shows that these policies and institutional changes may not be suf?cient to prevent crises in intermediate-income countries and that?nancial crises may be a more general phenomenon for those econ-omies.A possible policy implication of our model is that trade openness has a bene?cial role,since it mitigates the dependence of the emerging market on domestic demand and de-creases the domain of existence of multiple equilibria.This also suggests that emerging markets should liberalize their trade account before their capital account.Although such a prescription is sometimes heard in policy cir-cles,we believe our paper is the?rst analytical work giving an economic rationale to support it. Ultimately,to analyze precisely policy implica-tions on the timing of reforms,it would be necessary to quantify a dynamic in?nite horizon version of the model.This would require,how-ever,an equilibrium selection mechanism to pick the crash or no-crash equilibrium.We leave this for future work.
A PPENDIX A:T HE E FFECT OF F INANCIAL L IBERALIZATION ON E MERGING M ARKET A SSET P RICES
An increase in?
F affects only the qq curve.It will lead to an increase in q if the intersection point of the
qq curve and the YY curve shifts right when?
F
increases.This will be the case if
?s Y
??F q?q??
q??q/d???1??q/d?1????2?F?1?s Y?
?1?q2??1??F2?????1??F?q2?q/d?????q/d???
?1??T2?
?1?s Y?1??T??2
?0.
A suf?cient condition for this is that q/d?1.
A PPENDIX B:K EY E QUATIONS OF THE M ODEL U SED IN THE Q UANTITATIVE S ECTION
The model includes a safe asset which gives a dividend in a share?of the states of the world covered in normal times,and has a return r.We also introduce a parameter?describing the extent of participation in the stock market(only1??households participate).The stock market equilibrium with limited participation in normal times becomes
p E?
?
1???y E??w E
(1??)z E?(1??)z I?F(q/d)??1
?
(y I??w I)?F(q/d)1??
(1??)z I?(1??)z E?F(q/d)1??
?;
p I???y I??w I
I?(1??)z E?F1??
?
(y E??w E)?F(q/d)??1
E?(1??)z I?F??1
?.
Income in the emerging market in normal times is now given by y
E?w E?(1??)p E2/2.
In crash,the stock market equilibrium becomes
p E
c???(1??)w E
E E c E c
??1?(1??)z Ic?F c c??1?
(y Ic??w I)?F(q c/d c)1??
Ic?; p Ic?
?
1???y Ic??w I
(1??)z Ic
?
(1??)w E?F(q c/d c)??1
(1??)?z E(rp E
c
/d E
c
)??1?(1??)z Ic?F(q c/d c)??1?.
The dividends are given by equation(8)adjusted for limited participation and its symmetric in a crash.The value of the emerging market demand of the safe asset in a crash is
?w E 1??
?rp Ec???1
?1????z E?rp E c???1??1???z Ic?F?p E c d Ic/p Ic???1.
1648THE AMERICAN ECONOMIC REVIEW DECEMBER2006
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Globalization 全球化 A fundamental shift is occurring in the world economy. We are moving rapidly away from a world in which national economies were relatively self-contained entities, isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; and by national differences in government regulation, culture, and business systems. And we are moving toward a world in which barriers to cross-border trade and investment are tumbling; perceived distance is shrinking due to advances in transportation and telecommunications technology; material culture is starting to look similar the world over; and national economies are merging into an interdependent global economic system. The process by which this is occurring is commonly referred to as globalization. 世界经济正在发生着根本性的改变。我们正迅速地远离这么一个世界，在这个世界里国家经济实体都曾经是相对自给自足，彼此孤立的，就其原因或是设置跨境贸易和投资的壁垒所致，或是因距离、时差和语言的缘故所致；或是因政府监管、文化和商业体制上的的国家差异所致。与此同时，我们正在走向另外一个世界，在这个世界里，跨境贸易和投资的壁垒正在摇摇欲坠，原来感知到的距离因为交通和电信技术上的进步而正在缩小；物质文化在全世界开始看起来都很相似；各种经济实体正融入一个彼此依赖的全球经济体制中。而正在发生的这一个过程，人们通常把它称为全球化。 Correspondent: Globalization has been one of the most important factors to affect business over the last twenty years. How is it different from what existed before? Companies used to export to other parts of the world from a base in their home country. Many of the connections between exporting and importing countries had a historical basis. Today, to be competitive, companies are looking for bigger markets and want to export to every country. They want to move into the global market. To do this many companies have set up local bases in different countries. Two chief executives will talk about how their companies dealt with going global. Percy Barnevik, one of the world’s most admired business leaders when he was Cha irman of the international engineering group ABB and Dick Brown of telecommunications provider Cable & Wireless. Cable & Wireless already operates in many countries and is well-placed to take advantage of the increasingly global market for telecommunications. For Dick Brown globalization involves the economies of countries being connected to each other and companies doing business in many countries and therefore having multinational accounts. 记者: 过去20多年以来，全球化已经成为影响业务的最重要因素之一。那么，现在的全球化与以前有何不同呢? 过去的公司都是把在本国生产基地的商品出口到世界其他各地。进出口各国之间都有着千丝万缕的联系，其中许多联系都有其历史基础。当今，要想具有竞争力，各个公司都在寻求更大的市场，都想把产品出口到每一个国家，都想迈入全球化市场，为此，许多公司都在不同国家建立了本土化基地。今天我们请来两位总裁，让他们来谈谈他们的公司是如何应对全球化的。一位是珀西·巴恩维克，在担任国际工程集团ABB主席一职时，曾是世界上最令人羡慕的商界领袖之一；另一位是迪克·布朗，来自英国大东电报局（Cable&Wireless）的电信提供商。 大东电报局已经在许多国家营运起来了，而且定位很准，充分利用电信业上的日益增长的全球化市场。对迪克·布朗来说，全球化包括彼此联系的各个国家经济实体和在许多国家做生意的、从而拥有跨国账户的公司。 Dick Brown: The world is globalizing and the telecommunications industry is becoming more and more global, and so we feel we’re well-positioned in that market place. You see currency markets are more global tied, economies are globally connected, more so nowadays with
G l o b a l i z a t i o n的参考译文(2013.11)
Globalization A fundamental shift is occurring in the world economy. We are moving rapidly away from a world in which national economies were relatively self-contained entities, isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; and by national differences in government regulation, culture, and business systems. And we are moving toward a world in which barriers to cross-border trade and investment are tumbling; perceived distance is shrinking due to advances in transportation and telecommunications technology; material culture is starting to look similar the world over; and national economies are merging into an interdependent global economic system. The process by which this is occurring is commonly referred to as globalization. Correspondent: Globalization has been one of the most important factors to affect business over the last twenty years. How is it different from what existed before? Companies used to export to other parts of the world from a base in their home country. Many of the connections between exporting and importing countries had a historical basis. Today, to be competitive, companies are looking for bigger markets and want to export to every country. They want to move into the global market. To do this many companies have set up local bases in different countries. Two chief executives will talk about how their companies dealt with going global.Percy Barnevik,one of the world’s most admired business leaders when he was Chairman of the international engineering group ABB and Dick Brown of telecommunications provider Cable & Wireless. Cable & Wireless already operates in many countries and is well-placed to take advantage of the increasingly global market for telecommunications. For Dick Brown globalization involves the economies of countries being connected to each other and companies doing business in many countries and therefore having multinational accounts. Dick Brown: The world is globalizing and the telecommunications industry is becoming more and more global, and so we feel we’re well-positioned in that market place. You see currency markets are more global tied, economies are globally connected, more so nowadays with expanded trade, more and more multinational accounts are doing business in many, many more countries. We’re a company at
全球化的利与弊Economic globalization 全世界都在谈论全球化，有的人认为它是本世纪的发明，有的人看到它的负面影响。 经济上的利与弊： 随着电子货币的到来，投资变得很方便，只要点击一下，大量货币就会从一个国家流通到另一个国家。这就开辟了个人投资的新渠道。 提高了劳工的流动性，因此开辟了前所未有的就业和培训前景。 激烈的竞争促使价格下降和服务的改进，例如送货上门和售后服务。 全球化导致产生统一市场，从而使那些不在这个市场中的国家受到更多的剥削。 仅仅３００家公司就占全球产值的三分之一，占国际贸易的一半。而食品生产则由１２家公司控制。 贫困的劳工群体越来越被排斥在外。不稳定性在增加，１９９７年在欧洲抛售黄金储备的传闻就使南非５万矿工失业。这就是多米诺骨牌效应。 All over the world about globalization, some people think that it is the invention, some people see its negative effects. Economic advantages and disadvantages: With the arrival of electronic money, it's very convenient for investment, click, a lot of money from one country to flow into another country. It opened up new avenues of personal investment. To improve the labor mobility, and thus opened an employment and training. Competitive price and service to the improvement, such as door-to-door and after-sales service. Globalization leads to a single market, so that the market in the country is more exploitation. Only 300 companies is one-third of global output, accounting for half of the international trade. While food production is controlled by 12 companies. Poverty and labor group is excluded. Instability in 1997 in Europe, selling gold reserves rumours that South Africa is 5 million miners unemployment. This is the domino effect. 统一供应的危险性在增长，忽视了市场上产品的多样性。 Supply risk in growth, has neglected the diversity of products on the market. 社会上的利与弊： 在政治上，欧盟和联合国等组织的权力在扩大，这可以在全球决策的舞台上抵消多国公司的作用。媒体的跨国力量有助于控制不公正现象，有助于各国的言论自由。 南北差距在扩大。贫困世界在全球收入中只占１·４％，１０年前占２·３％。 最严重的社会后果是犯罪全球化，对贫困国家劳动力的剥削有增无减。非法移民在增加。 文化上的利与弊： 文化的传播更快了，政治和知识产权的障碍减少了，谁也不能阻止一种文化产品在其国内的传播。“逆殖民化”在加强：例如美国迈阿密和洛杉矶的拉丁化。 亚洲和非洲繁荣城市人口的增长成为文化传播的新的推动力。 最近一份联合国人文发展报告显示，全球文化只朝着一个方向传播：从富国向穷国，而不是从穷国向富国。 在文化生产上，商业利润至上，质量和多样性被忽视。 Politically, the European Union and the United Nations organization such as power in the world, which can be expanded in the decision on the stage of the multinational corporation offset. Multinational force helps to control the media injustices, helps countries freedom of speech.
表1：全球化的定義 項 次 人名或機構定義 1 David Held et al.當代社會生活的所有層面（包括文化、犯罪、金融、宗教精神等），在整個世界的相互聯繫上，已經日益擴張、深入和加速。 2 Ulrich Beck 跨國行動者從權力、取向、認同和網絡等各種面向穿透 和侵蝕主權國家的過程。 3 R. Cohen and P. Kennedy 時空概念的變化、文化互動的增長、世界所有居民都面臨共同問題的增加、相互聯繫和相互依存的增強、跨國行為體的發展和跨國組織網絡的擴展，以及全方位的一體化。 4 A. G. McGrew 組成當代世界體系的國家與社會之間的聯繫和相互溝通 的多樣化，是世界某個部份發生的事情、決定和活動能 夠對全球遙遠地方的個人和團體產生重要影響。 5 Barbara Parker (2005: 49) 對傳統界限，例如國家、時間、空間等等日漸增加的穿透性。 6 喬治?索羅斯 (2002: i) 全球化等於資金的自由流動，而國家也愈來愈受到全球金融市場及跨國企業的主導。 7 Kenich Ohame 國與國間貿易界限或障礙的消弭。 8 Peter Dicken 為傳統國際生產、投資及貿易形式上的轉變。 9 Douglas Kellner (2002) 高度複雜、矛盾和模糊的制度與社會關係，以及牽涉商 品、勞務、想法、科技、文化形式和人的流動。 10 卡爾?海因 茲?巴奎 全球化係以貿易聯繫的密切程度為基準，國際貿易額佔 全球生產的比例越高，世界經濟全球化的程度就越高。 11 Richard C. Longworth 全球化可視為全球經濟體系的形成，使企業家能夠在世 界任何地方籌募資金，藉著這些資金，利用世界任何地 方之科技、通訊、管理和人才，在世界任何地方製造商 品，賣給世界任何地方的顧客。 12 Richard G. Harris (1993) 經濟學者通常將全球化視為生產、分配和商品行銷的國 際化。 13 Christopher Chase-Dunn et al. (2000) 全球化通常意指通訊和運輸科技的改變，資本流動和商 品貿易日增的國際化，以及經濟競爭的主戰場從國內市 場轉移到世界市場。
Globalization in my eyes Globalization has penetrated into all aspects of our life around the world. We can see it everywhere and anytime. It benefits our life a lot. In view of going out to play, globalization in economy makes it convenient for people to travel all over the world and enjoy wonderful scenes in different places. Besides, globalization in food gives eating lovers chances to taste different foods easily. And globalization in industry creates more wisdom and has deep influence on the development of industry, etc. However, there are also disadvantages during the process of globalization. On the one hand, more and more Chinese people are used to the foreign lifestyle, and they usually celebrate foreign holidays instead of our traditional ones. On the other hand, globalization has a great impact on our national products. There is a sense among people that foreign goods are better than goods made in China. Last but not least, it enlarge the distance between the developing countries and the developed countries, which is bad for the global harmony. In my eyes, globalization is a two-edged sword. If we master it validly, we can create a new world, or what wait us is destroy.
Good morning, everyone! I am deeply honored to give this speech, today, what I want to say is the impact of globalization and the attitude we should hold. 我深感荣幸做这次演讲，今天，我想说是全球化的影响以及我们应该持有的态度。 In most people’s minds, globalization refers to the unimpeded flows of capital, labor and technology across national borders, the world is gradually becoming a whole,connected and indivisible. Globalization is the inevitable trend of the development of human society, and it is changing the world. 在大多数人心目中，全球化是指资本、劳动力和技术不受阻碍的跨国界流动，世界正逐渐成为一个整体，相互连接、不可分割。全球化是人类社会发展的必然趋势，它正改变着世界。 In the era of economic globalization, cross-border transactions are everywhere. Many people engage in abroad business, as a result, some people’s national awareness gradually turns to be very weak. There are even some people saying that national identity makes no difference for them. I don't agree with this idea at all.There is a saying that businessmen feel at home wherever they are.However,as a matter of fact,each businessman has only one home,the place where he was born and grew up.Cite an example,a Chinese who has been working overseas for many years can't lose his sense of national awareness to China because of the long time stay in the overseas.Working abroad gives him the material life he wants,but his roots are still in China,which is his emotional attribution.He is a Chinese wherever he is,this sense of belonging can’t be lost. 在经济全球化的时代，跨境交易无处不在。很多人从事于国外业务，其结果是，一些人的国家意识渐渐变成是非常薄弱。甚至有些人说国家认同对他们来说没有什么影响。我根本不赞同这种观点。有一种说法说：商人四海为家。然而，实际上，每个商人有只有一个家，那个生他养他的地方。举个例子，一个长期在海外工作的中国人不能因为长时间呆在海外而失去了国家意识。在国外的工作给他想要的物质生活，但他的根还在他的情感归属地——中国。无论身在何方，他都是一个中国人，这种归属感不能丢失。 As borders and national identities become less important, some find that threatening and even dangerous.Harvard Professor Samuel Huntington describes Davos Man as an emerging global superspecies and a threat in an essay. He says that these people have little need for national loyalty,view national boundaries as obstacles.As far as I am concerned,endorse a global outlook does not mean erasing national identity.On the surface,they left their country, in fact, they not only drove the development of their own national economy, but also made a huge contribution to the development of the world economy.This has largely reflected their patriotic feelings. 随着国界和对国家的认同变得不那么重要，有些人将此当成威胁，甚至危险。哈佛大学教授塞缪尔·亨廷顿在一篇文章中将达沃斯人描写成新兴的全球超级物种和威胁。他说那些人不需要什么对国家的忠诚，将国界视为障碍。在我看来，对全球观表示赞同并不意味着去除对国家的认同。表面上，他们离开自己的国家，事实上，他们不仅带动本国经济的发展，还对世界经济的发展造成巨大的贡献。这也充分地反映了他们的爱国情怀。 The process of globalization is accompanied by opportunities and challenges .It promotes the development of human society, but also brings some disasters to the world.The terrorist attacks on the United States on September 11,2001 ,which is considered an example of the disaster of globalization,brought huge losses to the United States, and brought a warning to the world. Globalization fatigue is still much in evidence in Europe and America,while in places like China and India,globalization has brought a huge opportunity for their development. 全球化进程被伴随着机遇和挑战。它促进了人类社会的发展，但也给世界带来一些灾难。2001年9月11日
Unit 3 Word Pretest: For each italicized word or phrase, choose the best meaning below. 1.The collection is characterized by a mélange of bold graphics, statements and exotic Indian motifs that are both classic and contemporary. A.style B. feature C. mixture D. separation 2.The weather is one variable to be considered. A.something that is subject to change B. something of great importance C. key point D. necessity 3.You'll be biased to put extra weight on the cases that support your theory and diminish the cases that refute it. A.prove B. disapprove C. violate D. maintain https://www.doczj.com/doc/dd7833200.html,st week the government unveiled a media sector review intended to spawn a bit more competition. A. abolish B. destroy C. go beyond D. engender 5.Their latest computer outstrips all its rivals. A.surpasses B. defeats C. follows D. modifies 6.All the children are lumped together in one class, regardless of their ability. A.taken care of B. watched over C. put together D. brought up 7.As a journalist, she refuses to gloss over their faults or silence their critics. A.set up B. take over C. cover up D. get over 8.We can foresee a new paradigm in the global market in the 21st century. A.pattern B. problem C. scenario D. prospect 9.This kind of sedentary lifestyle costs you in more ways than you might think. A.tending to follow fashion B. tending to do much exercise C. tending to sit D. tending to move about https://www.doczj.com/doc/dd7833200.html,ck of time precludes any further discussion. A.speeds up B. slows down C. includes D. excludes Global Mélange Globalization and culture is not an innocent theme. The intervening variable in
Nowadays we can enjoy the same films, fashions, brands, advertisements and TV channels. The evident difference between countries is disappearing. To what extent do you think the disadvantages overweight the advantages of this? Globalization creates conditions for widening international exchanges, strengthening mutual understanding between nations, expanding cultural, educational, and scientific cooperation between nations and countries, enjoying the cultural achievements of people around the world which encourages the process of modernization and the enrichment of national culture. However, these conditions also create the possible danger of diminishing the national culture with a negative impact on the pre123vation of national identity. Through globalization and an open door policy, erroneous concepts and a lowering of ethical standards, a selfish and individualistic lifestyle and harmful cultural products can easily be imported into the country. At present, modern information technology which in the main is controlled by US is hourly and intensively disseminating US ideology, way of life, culture and films across the world. Even US food is promoted so that some people consider globalization as global Americanization. During the process of economic globalization, inequality between developed and developing countries has been increasing and the gap between the rich and the poor has become wider, most of the result of globalization go to assist developed countries. Globalization does not pose equal interests and risks to all nations. With an overwhelming advantage compared to most of the developing countries in terms of finance and the level of science and technology, developed ca123alist countries control the situation of economic globalization. For these reasons, globalization is a fierce and complicated struggle in both cultural and ideological fields. We take the initiative in international economic integration but also have to take the initiative in fighting to keep our distinct culture resisting pro-foreign and cross-bred phenomena, and overcoming the psychology of preferring money over ethical values. 雅思高分倒装句 1. But unpopular as red has been in the past, at the moment it is a favorite hair dye. 结构：全句有2个谓语动词：has been和is.其中，as引导的让步状语从句是一个部分倒装句，按照正常语序应该是Although red has been unpopular in the past.句子可被拆分为， 1). Red has been unpopular in the past. 2). But at the moment it is a favorite hair dye. 翻译：尽管过去红色不怎么流行，现在却是一种备受欢迎的染发颜色。 2. Only when he has lost his way does he realize that he wasn't careful enough to make sure that he really did understand. 结构：全句有4个谓语动词：has，does realize，wasn't和did understand..其中主句的是does realize.本句话是以only开头的强调句，其所强调的是when引导的条件状语从句。第一个that 引导的是realize的宾语从句。第一个that引导的是make sure的宾语从句。
大学英语作文 globalization Just as we know, the development of globalization brings tremendous positive effects to the whole world. It gives a chance not only for developed countries but also developing countries. Particularly,it brings the large favor for the world’s poor. To begin with, globalization makes capital and labor mobility greater than before. The poor, who live in the developing countries, can choose to work in some foreign corporations which can pay the higher salaries for them. They will improve the situations of their lives and make their children enjoy better education than ever. As capital and labor become more mobile, international tax competition rises.So many governments have to cut tax rates. As a result, tax systems around the world become more efficient, economic output and incomes will rise.
First of all, it has been asserted that globalization provides the increasing of productivity and life standard of societies. To begin with productivity is indeed increased as it can be seen that the population of the world is rising rapidly even uncontrollable and more people means that there is a need of more product too. Thus Globalization responds the needs of 7 billion people. Moreover the standards of life is a lot better than 50 years ago as they are more machines and systems invented in developed countries supporting all world. However there is another side of the facts. Globalization causes the poor citizens having more requirements. Secondly cultural intermingling is enlarging with globalization which lets the people from all over the world able to communicate easier. On the other hand sharing traditional behaviors cause them fading as boundaries are disappearing. The most important disadvantage of globalization is the increasing number of the loafer. After the industrial revolution, industry gravitated some particular countries. Because of that, these countries became a power in industry. However production decreased and so unemployment was raised in the other countries. Another reason of the unemployment rise is that the need of less manpower. As stated at Wikipedia, many workers found themselves suddenly unemployed, as could no longer compete with machines which only required relatively limited work to produce more product than a single worker. Another major damage of globalization is that some cultures are getting lost. The cultures of the countries that have more economic power are more dominant than others. Because, wealthy countries produce many things that can affect cultures, for example, clothes, movies and technologic products. According to Ikerd, while the global community is increasing, more and more people have became ignorant about social, ethical and moral values which are various in defining groups. (2002) Therefore, globalization damages small cultures which are in risk of being extinct. Big disadvantages. The final significant effect of globalization is the difficulty of competition. With globalization, trade between the countries has been started to remove limits. This situation of enterprises has prepared the ground to be in constant competition with not only national competitors but also international competitors. Therefore, business requires being in a more rigorous and challenging competitive atmosphere to maintain continuity and development. Rising of monopole companies and trough among production costs are the main effects of this hard competition in business. As pointed in Global Policy Forum, undeveloped countries choose to use foreign capital for their improvement however it disposes the equality and stability instead. In conclusion, unemployment, social degeneration and difficulty of competition are the killer disadvantages on people life that based on globalization. In my opinion, people must be aware of this exploitation. Globalization is a one-way tale. 首先，它一直宣称，全球化提供了增加生产力和社会生活的标准。要开始与生产力的确是，因为它可以看出，世界人口增长迅速，甚至无法控制和更多的人增加，意味着有需要更多的产品。因此，全球化响应7亿人的需要。此外，生活标准是很多比50年前，因为它们是在发达国家支持世界所有发明更多的机器和系统更好。然而，事实的另一面。全球化导致的贫困公民有更多的要求。其次，文化的交织是扩大它可以让