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Discussions of the King/King Reader MBA 628 The Doha Development Agenda Anne McGuirk Reading 6 After the Seattle debacle in 1999, a new trade round in Doha was scheduled. It promised to show greater concern for the needs and interests of the developing countries. What was the Uruguay Round? The Doha Development Agenda Anne McGuirk Reading 6 Launched 15 years ago it resulted in tariff cuts covering a greater share of world trade than under any previous round, and it launched the WTO from GATT. The Doha Development Agenda Anne McGuirk Reading 6 But the world trade system still faces major challenges. What are they? High tariffs and trade-distorting subsidies in agriculture Other trade obstacles, e.g., industrial subsidies and intellectual property rights The Doha Development Agenda Anne McGuirk Reading 6 Many poorer countries feel they are bearing the burdens of earlier agreements (customs valuation, intellectual property rights) without enjoyed the benefits of better market access and without adequate technical and financial assistance. The Doha Development Agenda Anne McGuirk Reading 6 The Doha Development Agenda, adopted in Nov., 2001, called for a more coherent approach to trade and development. Hard bargaining established the scope of the agenda. See the table on p. 70. The Doha Development Agenda Anne McGuirk Reading 6 Where is the Doha Round at today? Has any progress been made? The Doha Development Agenda Anne McGuirk Reading 6 The WTO met in 2003 for only a very short time. The developing countries presented only modest concessions to begin the negotiations. The developing countries said they wouldn’t do. And the meetings were over! Back to the drawing board. “Bridging The Trade-Environment Divide,” Daniel C. Esty Reading 7 Environmental view: Increased trade increased manufacturing and economic growth environmental degradation. Policy prescriptions: Stop trade and growth? Not formally. Impose trade sanctions! “Bridging The Trade-Environment Divide,” Daniel C. Esty Economic views: Increased trade increased growth economic well-being “Bridging The Trade-Environment Divide,” Daniel C. Esty Slow Kuznets curve (environment improves about $5,000 – 8,000 per capita GDP environmental decline Increased trade increased growth economic well-being greater environmental concern and resources to respond to it. Economic Policy Prescriptions Policy Prescriptions: 1. Find balance. Starving people couldn’t care less about the environment. Note the deforestation of parts of the world where the forests are used to heat huts for the winter. 2. Some prefer letting trade people take care of trade. Take your environmental complaints to other specialists. Esty’s View Who is Esty? Environmentalist. Lawyer. Yale Professor. Whom is he addressing in this article? A functioning Global Environmental Organization, operating in parallel with the trading system, might be a “first-best” policy option in response to these challenges. But no such regime exists. Thus, the WTO along with regional trade agreements cannot avoid some shared responsibility. “Bridging The Trade-Environment Divide,” Daniel C. Esty Esty argues that “transboundary externalities” are a key issue in upcoming trade talks. What are “transboundary externalities”? See p. 75. “Bridging The Trade-Environment Divide,” Daniel C. Esty Give examples. Why do they matter? What institutions do you believe are necessary to deal with transboundary externalities? Have you all heard of the “economics” solution. Describe it? Will it work? “Bridging The Trade-Environment Divide,” Daniel C. Esty Why is NAFTA referred to as a “green” trade pact? How did that work? (p. 76) Why are trade advocates and environmentalists allies? How are they enemies? “Bridging The Trade-Environment Divide,” Daniel C. Esty Most environmentalists argue that, absent restrictions, free trade will lead to a “race to the bottom.” What do they mean by that? Give an example. Does Esty agree with this assessment? Does he see other issues in coordinating policies? “Labor Standards” Drusilla K. Brown Reading 8 What are the key labor issues that need to be addressed in trade talks? Universally accepted rights regarding working conditions. Protect labor interests by incorporating labor rights into international trade law. Opponents say that regulation of labor markets is a matter of national sovereignty and should be domestic policy. “Labor Standards” Drusilla K. Brown Of these which does Brown think are the most important? To analyze the arguments for coordinating labor standards internationally. Do labor policies for developing countries have adverse consequences for workers in industrialized countries? Should labor standards by introduced formally into the negotiations of the WTO? Labor Standards Justice Is it just to attempt to establish standards in all of these areas without regard for the level of economic development and cultural norms? Child labor practices depend on the level of development. For many families the income earned by their children is a matter of the family’s survival. (p. 90) ILO Or WTO? Does Esty’s non-existent “first-best” organization exist in the field of labor rights? See p. 90. Why then must the task of labor-rights enforcement fall to the WTO? The Two Faces of Labor Unions What are they? See p. 95. 1998 ILO Declaration on Fundamental Principles Freedom of Association/ Right to collective bargaining. Elimination of forced or compulsory labor Poor workers must offer their own labor as collateral to obtain a loan. Abolition of child labor (Put the child to work if you can’t borrow against the educated child’s future income.) Elimination of discrimination of employment and occupation. Trade and Wages (Stolper/Samuelson) To what extent is the decline in the return to unskilled labor in the US in the last few decades the result of international trade with low-wage countries? To what extent is that trade the consequence of low labor standards? Trade and Wages (Stolper/Samuelson) “There is little evidence that the relative price of labor-intensive goods fell during the 1980s, as one would expect if imports from low-income countries were undercutting less-skilled US labor.” (p. 96) Trade and Wages (Stolper/Samuelson) The debate continues, but to this point the evidence supports the argument that skillbiased technological change is more important than trade as an explanation of wage inequality in the US, although rising levels of trade with low-income countries may have played a secondary role. (p. 97) Trade and Wages (Stolper/Samuelson) Empirical studies find the link from low labor standards in low-income countries to the wage of unskilled workers in industrial countries not especially strong. Labor standards are at most a secondary determinant of wages in low-income countries. Labor Standards “Race to the Bottom” Prisoner’s dilemma: Alone a country faces an incentive to adopt low standards. But all such countries together would benefit from a coordinated choice of higher labor standards. How does that work? (p. 98) Effect of Tightening World Labor Standards? Dong so will constrict the world supply of labor (fewer labor slaves, higher age of entry and less child labor, etc.) Wages worldwide rise, pushing up the price of labor-intensive goods exported by developing countries. The WTO and Labor Standards The WTO does not have an enforcement mechanism for low labor standards. Opponents of a “social clause” argue that negotiating trade and domestic policy simultaneously will create a morass. “Labor Standards” Drusilla K. Brown Should we use trade sanctions to force countries with low labor standards to comply with higher standards? Trade sanctions in the face of low labor standards are as likely or even more likely to harm workers as they are to improve working conditions. “Labor Standards” Drusilla K. Brown Why does brown argue that child labor laws might encourage economic growth? Maybe in the long term. What about a tax on products made by child labor? “Labor Standards” Drusilla K. Brown What about a tax on products made by child labor? Good if it means fewer children working and more getting educated Not so good if the newly unemployed children live with lower incomes, less nutrition, and otherwise diminished alternatives. The imposition of the tax will cause children who continue to work to receive a lower after-tax wage. “Labor Standards” Drusilla K. Brown Brown Concludes: “If trade sanctions are actually employed in pursuit of higher labor standards, the effect will often be to hurt precisely those who are the focus of humanitarian concerns.” “Labor Standards” Drusilla K. Brown Labor rights activists still favor some link between the ILO and the WTO on labor issues to provide the ILO with enforcement power. Such a link could slow the process of trade liberalization. But would the gains from improving the relatively inadequate labor standards be larger than the losses from raising the already close-to-optimal tariff levels? Labor Standards Fini Borders Beyond Control Reading 9 Jagdish Bhagwati Why does Bhagwati believe that immigration cannot be stopped? Would it be desirable to stem the flow of immigration? Borders Beyond Control Jagdish Bhagwati If the US tried to stem the flow, what do you think would happen? Are the developed countries against an inflow of skilled workers? Borders Beyond Control Jagdish Bhagwati How and why do most skilled workers come to this country? Are most immigrants to this country from Mexico and Latin American “walk-ons”? Borders Beyond Control Jagdish Bhagwati What is Bhagwati’s solution to the problem? WTO and Intellectual Property Rights Philip G. King What are TRIPS? Trade Related Aspects of Intellectual Property Rights How do IPRs differ from other types of property? Intangible Non-rival in consumption The WTO and Property Rights The TRIPS agreements specify how basic property rights principles should be applied, how protection of IPRs should be given and how the laws should be enforced. Explain the concern of developing countries about the lack of protection for traditional creativity as opposed to specific, new creative works. (p. 115) The WTO and Property Rights What is the issue with pharmaceuticals and property rights? Drugs are granted patents and protected. What does that do for AIDS in Africa? What about drugs for diseases like malaria? Are such drugs in some sense “public goods”? The World Bank estimates the revenue implications of the current TRIPS agreements. How do they look? They will increase revenues to the US by about $19 billion. The developing countries cost will be $7.5 billion. King: “Pharmaceutical companies widely practice differential pricing…” What are the implications? Global Governance of Trade Reading 12 Dani Rodrik Rodrik is a very independent thinker and a good economist. He is Rafiq Hariri Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University. He is affiliated with the NBER. Global Governance of Trade Reading 12 Dani Rodrik He is a deep thinker and surprises the reader by taking positions that seem untenable at first glance. But he then very persuasively defends those positions. Global Governance of Trade Reading 12 Dani Rodrik This article is too full of material to make a complete discussion of the issues he addresses possible. So I will just refer to a few concepts he addresses for discussion. He starts by quoting a WTO statement: “The surest way to do more to help the poor is to continue to open markets.” He notes that this view is backed up by a voluminous empirical literature. Global Governance of Trade Reading 12 Dani Rodrik What does he find wrong with this? It confuses ends and means. “Trade becomes the lens through which development is perceived rather than the other way around.” (p. 126) Global Governance of Trade Reading 12 Dani Rodrik This paper presents a different view of development. What’s the view? Global Governance of Trade Reading 12 Dani Rodrik It questions the centrality of trade and trade policy, emphasizing instead the critical role of domestic institutional innovations that often depart from political orthodoxy. Global Governance of Trade Reading 12 Dani Rodrik When isn’t trade much of a factor in economic development? Global Governance of Trade Reading 12 Dani Rodrik Opening up the economy is hardly ever a key factor at the outset. The initiating reforms instead tend to be a combination of unconventional institutional innovations… requiring local knowledge and experimentation for successful implementation. Global Governance of Trade Reading 12 Dani Rodrik “There is no convincing evidence that trade liberalization is predictably associated with subsequent economic growth.” “The problem is not trade liberalization per se, but the diversion of financial resources and political capital from more urgent and deserving developmental priorities.” (P. 128) Global Governance of Trade Reading 12 Dani Rodrik “First, the trade regime must accept, rather than seek to eliminate, institutional diversity along with the right of countries to ‘protect’ their institutional arrangements.” (p. 128) Global Governance of Trade Reading 12 Dani Rodrik Does Rodrik condemn ISI? See p. 132. Trade Liberalization vs. Development See the (p. 136) Viet Nam/Haiti comparison. What was the conclusion? Trade Liberalization vs. Development The literature is replete with cross-national studies concluding that growth and economic dynamism are strongly linked to more liberal trade policies, but those studies are flawed, says Rodrik. How are they flawed? Trade Liberalization vs. Development He and Rodriguez found a major gap between the policy conclusions typically drawn and what the research has actually shown… Trade Liberalization vs. Development A common problem has been the misattribution of macro phenomena (e.g., overvalued currencies or macro instability) or geographical location (e.g., in the tropical zone) to trade policies. Once these problems are corrected, any meaningful relationship across countries between the level of trade barriers and economic growth evaporates. (p. 137) Outward-Oriented Industrialization This involves governmental policies supporting the direction of investment funds, etc., as in Korea. The techniques involved are now largely barred by WTO rules. Why? Then What’s the Key to Development? The Key to Successful Development Innovative development policy (that can’t turn it’s back on trade and foreign investment contributions) focuses on promoting investment, growth and poverty alleviation. It achieves trade and global integration as a by-product. Trade liberalization alone is not necessarily productive of development. General Principles of an International Trade Regime That Puts Development First Trade is a means to an end, not an end in itself Trade rules have to allow for diversity in national institutions and standards. Non-democratic countries cannot count on the same trade privileges as democratic ones. General Principles of an International Trade Regime That Puts Development First Countries have the right to protect their own institutions and development priorities. But countries do not have the right to impose their institutional preferences on others. (See pp. 142-145) What are Development-friendly Measures? Greatly restrict the use of anti-dumping measures in advanced industrial countries when exports originate from developing countries. Allow greater mobility of workers across international boundaries. Development-friendly Measures Require that all existing and future WTO agreements be fully costed out…condition the phasing in of these agreements…on the provision of commensurate financial assistance. Development-friendly Measures Strengthen the rewards to the successful dispute settlement claims of developing countries. Provide legal assistance for WTO dispute settlement to developing countries. “Economic Developments during NAFTA’s First Decade,” Joanna Moss Reading 14 What led to the NAFTA? After President Madrid’s decade-long economic reforms, Mexico joined GATT in 1986 then wanted to join the 1989 Canadian-U.S. Free Trade Agreement. Pres. Salinas proposed a “North American Free Trade Area in 1990, which went into effect January 1, 1994. The main provisions were that goods and services eventually be exchanged without tariffs or non-tariff barriers. Free trade in ag to be phased in over a 15-year period. Cross-border investment liberalized. What were the NAFTA side agreements? See p, 156 Environmental Protocol Labor Protocol Snap-back Provision How important is the US market to Canada and Mexico? See Table 2, p. 160 Has NAFTA been a success? Advocates believe it has been a tremendous success as NAFTA has boosted Mexican exports and foreign investment in Mexico. Critics find fault. What does Moss add to the discussion? It’s hard to separate NAFTA effects from other developments What were these developments? Mexico’s trade liberalization policies already in effect when they joined NAFTA The more open Mexican economy beginning in the 1980’s. The maquiladora program. What was that? The Peso crisis of 1994-95. What caused it? Did the bailout work? What happened to trade with NAFTA? U.S. export growth to Mexico is c. 16.3% higher per year under NAFTA. U.S. imports from Mexico grew on average about 16.2% higher per year. Canadian trade did not appear to be significantly affected by the NAFTA agreement. And Perot’s “giant sucking sound”? “Predictions of widespread displacement of workers in the United States were not entirely untrue, the number of people affected was nowhere near the predicted numbers and most of those individuals received adjustment training so that they could get other jobs.” (Moss, pp. 167-68) Trade affects unemployment far less than do cyclical effects in the U.S. The reality is that the effect of NAFTA is small when compared to even the normal turnover of the U.S. labor market. In a boom year like 1999, with unemployment at a 30-year low, the US economy displaced 2.5 million workers. This means that these workers were laid off due to closure or substantial restructuring of a plant. Suppose that the most pessimistic estimate is correct – an adverse NAFTA impact of 110,000 jobs lost annually, the figure comes to less than 5 percent of total annual displacement in the labor force and much less than annual gross job creation.” (p. 171) What else needs to be said about NAFTA? What Drives Large Current Account Deficits? Coughlin & Pollard Reading 19 The U.S. currently has a huge current account deficit. Why do we have it? Is it sustainable? The current account balance is the difference between domestic saving and domestic investment. If domestic saving falls, the US must borrow from abroad to finance domestic investment… US foreign indebtedness is not necessarily bad if foreign funds are used towards investment. (p. 231) Repayment of the debt is potentially a problem if foreign funds are used to purchase consumption goods since future generations will bear the burden of debt. Poole presents evidence that the rising current account deficit is associated with rising domestic investment, and a significant share of foreign investment in the US is equity investment which does not have to be repaid. He concludes that the US does not have a current account disorder.” (p. 231) Poole reminds us that a “capital and financial account surplus is identical to a “current account deficit” because their dollar values are identical by the rules of accounting. (p. 236) If a foreign firm builds a production facility in the US, the capital and financial account surplus increases, which, in turn, means that the U.S. current account deficit would increase. (p. 236) The rising current account deficit in recent years has been accompanied by a rising rate of U.S. domestic investment. (p. 237) “EMU at 1,” Mark A. Wynne Reading 28 Introduction What were the Maastricht rules? Control inflation, reduce national debts, reduce budget deficits. Accomplish this for several years before being permitted to receive the Euro. Krugman says, “Is this like hazing?” Countries are asked to become good at managing monetary policy before giving it up? They were also asked to learn fiscal responsibility. They were asked to become accustomed to give up monetary sovereignty (living by EU rules instead). For what purposes do countries hold foreign exchange? i. to finance imports ii. to finance foreign debt iii. to intervene in foreign currency markets Is the Euro in demand for that purpose? For what purposes is the dollar in demand outside the United States? What are some of the criticisms of the European Central Bank (ECB)? Are they valid? Why or why not? “European Labor Markets and EMU Challenges Ahead” Soltwedel, Dohse, and Krieter-Boden Reading 30 Benefits of a currency union? Reduction of exchange rate uncertainty Reduction of transaction costs (foreign exchange and hedging) Stimulation of trade, investment, growth and employment Costs of a currency union? A currency union member must relinquish: Independent monetary policy, and Currency devluation What are asymmetric shocks? Macro-economic shocks (business cycle effects, or shocks like 9/11 was on the US economy). They affect some countries or regions in a currency union, but not others. They can put pressure on national labor markets and may increase unemployment. What are asymmetric shocks? Which countries are affected most by asymmetric shocks in the EU? See p. 345. Finland, Greece, Ireland, Italy, Portugal, Spain, Sweden, and the United Kingdom. Not so bad in Austria, Denmark, France, Germany and the Benelux Countries. Why are asymmetric shocks a problem for EMU countries? Belgium, Denmark, France and Germany would probably see greater structural unemployment in response to shocks. Why are flexible labor markets important for the success of the EMU? Onset of the East Asia Crisis Radelet and Sachs Reading 33 Who are the crisis culprits according to these authors? Corrupt and mismanaged banking systems Lack of transparency in governance Shortcomings of state-managed capitalism. Yes, but also… The International Financial System What did the collapses of Mexico (‘95) and Korea (‘97) have in common? Collapse followed a prolonged period of market euphoria and an inflow of capital that could not be sustained Banks and moral hazard. What do Akerlof and Romer argue about “the economics of looting?” See top right, p. 371 What is the correct response to panic (where viable economic activities are destroyed by a sudden and essentially unnecessary withdrawal of credits)? Protect the economy through lender-oflast-resort activities. But see the bottom of p. 371 on the end of bubbles. Mexico, 1995, is the case (R&S) of a panic requiring a lender of last resort (p.373, bottom left). What were the IMF programs to the end of 1997 for the panic. (p. 377) Immediate bank closures, restoration of minimum capital-adequacy standards (to recapitalize strapped banks), tight domestic credit, high interest rates on central bank discount facilities, fiscal contraction, and non-financial sector structural changes. These probably heightened the panic. The crisis gave little warning: Domestic savings and investment rates were high across the region Current account deficits were large, but capital inflows were even larger, so foreign exchange reserves were growing The US economy, the export target for Asia, was booming, but There was a rapid expansion of commercial bank credit and growing short-term foreign debt. The crisis gave little warning: Asian prices were increasing, so there was depreciation of Asian currencies against the dollar. What were the banking problems? See p. 388. Borrowing to finance domestic investments in real-estate and other nontradable activities. Borrowing in foreign exchange and lending in local currencies (exposure to risk of foreign exchange losses from a depreciation). Banks borrowed offshore in short-term maturities and lent onshore with longer payback periods (exposure to the risk of a run). What were the causes of capital flight? Bank and finance company failures in Thailand Corporate failure in Korea Political uncertainty with potential for a change in government Contagion. Sudden loss of government credibility throughout the region What were the causes of capital flight? International interventions. The IMF, on this occasion, sent a signal to creditors of impending crisis, leading to accelerated outflow of foreign funds. The IMF recommended immediate suspensions or closures of financial institutions, which increased the panic. The withdrawal of funds set off a liquidity squeeze and a sharp rise in interest rates. Even profitable firms couldn’t obtain working capital. What were the IMF programs? Funds were granted to the stricken countries in order to: Prevent default on foreign obligations Limit currency depreciation Limit inflationary pressure Rebuild foreign exchange reserves Restructure the banking sector Reform the domestic non-financial economy Preserve confidence and creditworthiness Limit the decline of output What were the IMF programs? Fiscal contraction was the “heart” of the program. Tight monetary and fiscal policies were to be maintained to defend the exchange rate. Funds were provided to inject into the financial system. Effect? See p. 402. Bank closures. In Thailand, 58 of 91 finance companies were immediately suspended. In Korea, 14 of 30 merchant banks were suspended. Effect? Loss of confidence. With no deposit insurance, a run on the banks was assured. What were the IMF programs? Full payment of foreign debt obligations through “bailout funds” of the IMF. Non-financial structural change. Reduce tariffs, open sectors for foreign investment, reduce monopoly powers. While this happened the crisis continued. An important R&S conclusion; “We do not believe that such a vicious crisis was necessary, nor that its depth should be interpreted as an indication of the extent of the underlying economic problems in the region. Instead, we believe that a much more moderate adjustment would have been possible had appropriate steps been taken in the early stages of the crisis.” (p. 403)