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Racing to the Top:
How Global Competition Disciplines
Public Policy
Remarks to the Dallas Friday Group

Richard W. Fisher
President and CEO
Federal Reserve Bank of Dallas

Dallas, Texas
April 11, 2006

The views expressed are my own and do not necessarily reflect official positions of the Federal Reserve System.

Racing to the Top:
How Global Competition Disciplines Public Policy
Richard W. Fisher
The thought of speaking to such an august assembly in April was difficult enough. Then you
invited me to address the Friday Group on ... a Tuesday. You know, this could get downright
confusing. I am happy to see so many of you managed to show up on the right day. One of the
great pleasures of speaking in Dallas is seeing so many familiar and friendly faces.
I was a member of this group when it was less august and when we always met on Fridays. I
remember one particular session some 20-odd years ago, when Ted Strauss introduced his
brother Bob. They were vintage performances by both Strausses: Ted gave an intro that was
longer than Bob's speech and, being an erudite fellow, was all over the map. In fact, Ted' s
introduction was so long that Ambassador Strauss said, "I hadn't realized Ted was going to
provide a (expletive deleted) travelogue, so in the few seconds remaining, I better just get to the
point and tell you what I came here to say."
Gray Mayes has provided a nice introduction, yet kindly kept it short. But I still think I' II keep to
Bob Strauss' form and just get down to what I came here to say. I will speak, as always, only for
myself and not for any other senior official at the Fed or for my colleagues on the Federal Open
Market Committee.
We cannot fully understand the U.S. economy without appreciating how it interacts with the rest
of the world. We live in an era of globalization, and policymakers in both the political and
monetary realms must come to grips with this if we are to fulfill our mandates and do what is
expected of us.
Globalizing economies are increasingly open to movements of goods, services, capital, people
and ideas across borders. Citizens and companies do not seek to do business in far-away places
for the sheer adventure of it. They do it because it makes them better off. This is the natural
process of capitalism, constrained by the cost of transport and information and accelerated by
technologies that make it cheaper to move goods, services and ideas. Globalization will proceed
apace unless or until the governmental authorities intervene to stop it.
A few numbers tell the story of the world's march toward globalization:
• Trade as a percentage of gross world product has risen from 15 percent in
1986 to nearly 27 percent today.
• In the past two decades, the stock of foreign direct investment assets has
nearly quadrupled as a percentage of gross world product, and the stock of
portfolio investment assets has increased by a multiple of eight.
• More people than ever are crossing national borders-for business and
pleasure. On average around the globe, countries received just one foreign
visitor for every 100 people in 1950. By the mid-1980s there were six, and
since then that number has doubled to 12.

•The world communicates much more and in whole new ways. Since 1991,
international telephone traffic has more than tripled. The number of cell
phone subscribers has grown from virtually zero to 1.8 billion- 30 percent
of the world population-and Internet users will soon hit 1 billion.
Globalization generates controversy. It unleashes competition and accelerates the forces of
creative destruction, to borrow the term coined by economist Joseph Schumpeter. In this
turbulent sea of change, there are challenges and opportunities. Business leaders confront them
every day. The men and women who manage America's businesses-the busy fingers of Adam
Smith's fabled invisible hand-work 24/7 to hone their companies' productivity and
competitiveness. They get it: They understand that America's workers and businesses cannot
prosper by shrinking from the demands of globalization or hiding behind protectionist barriers.
Many analysts highlight the benefits of globalization to the private sector-not only the strength
that competition builds but also the gains from trade, specialization and productivity that come
with expanding markets. This is so widely written about now that it is almost old hat. I did not
come to speak to you today about this dimension of globalization. You already know it because
you practice it. Instead, I thought I would speak to you today about globalization and the public
sector.
Today, the Dallas Fed is issuing its 2005 annual report. It includes some data that will give you a
good fix on some of what we do. In addition to supervising and regulating banks, we processed
almost a billion checks worth $900 billion last year and paid out and received 5.4 billion in
circulating notes worth $92 billion. Money is the economy's lifeblood. Federal Reserve Banks
are critical to maintaining the payments system and keeping the capillaries, veins and arteries of
the economy's cardiovascular system operating efficiently.
I want to draw your attention to a punchy essay in the annual report that analyzes the interplay of
globalization and public policy. Its title gives away our conclusion: Racing to the Top: How
Global Competition Disciplines Public Policy. In short, we found strong correlation between
increasing globalization and measures that promote faster growth, lower inflation, higher
incomes and greater economic freedom.
The economic logic is straightforward. Competition brings benefits to the public sector the same
way it does the private sector. Because factors of production are increasingly mobile in an era of
globalization, governments vie to gain and hold onto them. Mobile factors will flee economies
that burden them with high taxes, excessive regulation and capricious administration. They
gravitate toward countries that offer the best opportunities to increase profits or paychecks. The
economic benefits of productive factors give nations strong incentives to maintain or adopt better
economic policies.
Our study uses the globalization index devised by A.T. Kearney and Foreign Policy magazine,
which ranks roughly 60 countries from the most to least globalized. It includes cross-border trade
and investment as well as measures for technologies that shrink the world, people-to-people
connections and government participation in the global community. The United States is the
fourth most globalized country in the world, behind Singapore, Switzerland and Ireland. Iran
comes in last.
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We looked at how the countries in the A.T. Kearney/Foreign Policy index fared on 18 measures
of public policy, all from such well-respected sources as the World Bank, the Fraser Institute of
Canada, the Heritage Foundation, Harvard University and Transparency International. The
mashing of all these numbers yielded some interesting results that shed light on the debate about
globalization.
Overall, we found a strong correlation between globalization and better policies. As nations
become more globalized, they tend to be more open to international trade, maintaining lower
tariffs and reducing other barriers. They are more open to foreign capital, allowing foreigners to
participate in their economies as direct and portfolio investors. Increasing globalization is
associated with fewer and better-administered regulations, a more favorable corporate tax
environment and policies that stimulate innovation.
In countries with a higher degree of globalization, you also find policies supporting more
accountability in the private and public sectors. These nations are more likely to maintain courts
that recognize property rights and enforce the rule of law. Their governments are more effective
and less corrupt. Policies in these more globalized countries tend to be more stable, an important
consideration for the long-term planning needed for business.
As a central banker, I am particularly interested in our study ' s implications for monetary policy.
Inflation is the central banker's nemesis-the Lex Luthor of the monetary realm. It robs money
of its purchasing power. It cripples the poor and destroys the purchasing power of the elderly and
others who live on fixed incomes. It erodes incentives to work and save. And it debases
investment. Let inflation get out of control, and in no time, a dollar invested becomes a quarter
earned.
Today, money is probably the most mobile factor of production. In a nanosecond, it can scurry to
any part of the world with just a squeak of a computer mouse. Nations that fail to control
inflation will find they cannot retain their own capital or attract money from other countries,
except at high interest rates. They end up not only with high inflation but also with lower
investment, higher interest rates and slower growth.
Most countries want to avoid these outcomes. They want to retain capital and attract it from
other countries. Low inflation helps them do so. Over the past 30 years, there has been a marked
decline in inflation across the world-particularly among the nations most integrated into the
world economy. We found that inflation descended in stair-step fashion in the period from 2001
to 2003. It averaged I 0 percent among the least globalized quarter of nations in our study, then
fell to 6.2 percent for the next quartile of globalized nations, 3.1 percent for the third quartile and
2.3 percent among the most globalized quartile.
Not every government policy has improved with globalization. For example, our study found no
evidence of increasing globalization and fiscal restraint. Governments tend to get bigger as
nations become more interconnected to the world economy. Public transfers and subsidies
increasingly pervade nations as they globalize, and personal income taxes become more
burdensome as well. Why does fiscal policy respond little to globalization? We do not have a
definite answer, but perhaps it is because these nations are richer and have the means to spread
those riches through their societies.
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Government labor policies also seem sticky, if not quite immune, when it comes to dealing with
the forces of international competition. Except for the top quarter of globalized nations, labor
market flexibility does not generally improve as economies open up to the rest of the world. As
long as workers refuse to acknowledge they are competing in a global economy, they will
petition wealthy governments to protect their jobs. Labor market rigidities slow job growth and
raise unemployment, in tum creating a greater demand for expensive and expansive safety nets
for idle workers.
The recent demonstrations in France show the political difficulty of enacting even relatively
modest changes in regulations that hamstring hiring and firing, raise costs and increase
unemployment. Yesterday, the French government yielded to those protests, withdrawing the
proposed reforms. Perhaps it is an overly optimistic view, but I am encouraged that the French
government recognized that restoring competitiveness requires loosening of the country's labor
laws. And not all French youths were protesting the proposed new law. Some of them were in
other countries-at jobs that are not available in France. Boris Mollereau, just 27 years old and a
business school graduate, moved to London to find work, making him a mobile factor, if ever
there was one. Listen to what he had to say in this morning's Financial Times: "Here, I might
lose my job more easily, but I can find another job just as easily. French people don't realize that
a robust job market is in itself a form of job protection."
Could it be said any better?
Other countries, including Germany, have also come to realize the importance of nimble labor
markets in today's ever more connected world. They are beginning to enact reforms. You cannot
stop firms from seeking the best workers for the money, wherever they may be found, especially
as advances in telecommunications and transportation and inventory and supply chain
management bring the world closer together. Labor's best option in a globalized world is to
adapt, compete and get stronger.
With the important exceptions of fiscal and labor policies, our study concludes that globalization
is associated with better policies. Of course, there is a chicken-and-egg problem in discerning
whether globalization improves public policy or whether nations that improve their policies
succeed in becoming more globalized. It is probably both. We should celebrate, not denigrate,
globalization. In general, it is associated with better government policies, ones that lead to higher
living standards and greater economic freedom.
Thank you.

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