Download And so are other markets?

Globalization and
development
Sergei Guriev
Globalization
• Not a new phenomenon, but a crucial
factor in modern world
• A lot of controversy
– Though almost none in the economics
profession
• What arguments are hypocritical and what
are the real issues?
• Why/why not free trade and capital
mobility
Trade as free as it used to be
Source: Bordo, Eichengreen, and Irwin (1999)
So is finance
Source: Obstfeld and Taylor (2002)
And so are other markets?
• Labor markets and migration? Not at all:
– US % foreign born is now below before WWI
(10% vs 15% in 1991)
– Immigration into the US is only 0.4% per year
(used to be 1.1%)
– Emigration from Ireland/Italy: >10% within
decade before 1913
• Information/technology
– Much freer, but international intellectual
property rights protection remains a problem
Implications of differential
mobility
• Huge differences in unskilled wages
• High returns to skills
• Synergies and increasing returns:
concentration of R&D in OECD, digital
divide
• Capital and technology move to the
countries with low labor cost
Why protests?
• Globalization increases poverty and
inequality?
• Kills culture and environment?
• Undermines nation states?
• FDI result in inhumane working conditions
(sweatshops)?
• Financial liberalization leads to crises?
Protesters and their interests
• Blue-collar workers in OECD
– Losing competition to cheap labor in poor
countries
– Even though immigration is constrained,
capital mobility rewards cheaper labor (even
given all the institutional problems in nonOECD countries)
• Government in non-OECD
– Losing authority to market
– Becoming more accountable through Tiebout
competition
• An (imperfect) substitute to democracy
Real challenges
• How to provide “global public goods”
– Security
– Basic research
– International law
– Global antitrust
– Financial stability
• How to avoid “race to the bottom”
• Diversity
• The migration problem
Global governance?
• International organizations and treaties
– Usually very well intentioned but lack enforcement
mechanisms
• US/OECD-led organizations
– IMF: monetary stability
– Worldbank: poverty reduction and development
• WTO:
– Began with trade liberalization agenda
– But now has produced more and more rules on
related issues
– The most ‘democratic’ organization: one-country-onevote
– Enforcement is based on reciprocity/retaliation
Why free trade: Economics 101
the case of small open economy
p
World price
Domestic
supply
Tariff
demand
q
But…
• Small open economy benefits from
unilateral liberalization but
– Terms of trade externality
– Political economy
• Interest groups
• Costly redistribution
– Dynamic effects:
• Infant industry argument
Import substitution
• Promote development of high value added (manufacturing) sector
– At the expense of primary sectors and consumer welfare
• The intervention must be temporary
– Once the manufacturing sector matures and can compete, open up
• Must be an industry that can catch up relatively fast through
learning-by-doing (dynamic economies of scale); domestic market
should be sufficiently large
• But…
– … the choice of infant industries is influenced by politics
• Larger, mature, dying industries get protection while smaller, growing
industries are unlikely to do
– … the policy is not credible:
• Protection creates rents and fosters inefficient monopolies
• Who use rents to capture political power
• Hence “temporary” protection becomes very hard to dismantle
• Case studies: Brazil and India
Protection and real exchange
rate
• If tariffs are very high
– Domestic currency becomes more valuable,
effective exchange rate increases
• If exchange rate is overvalued (e.g. due to
fixed regime), domestic producers have
harder time to
• Keeping exchange rate low encourages all
exports (not selectively)
Export promotion
• Export subsidies
• Subsidized interest rates to exporters
• Crucial difference form import substitution:
– Exporters are subject to fierce competition (in
the global market) and have incentives to
increase productivity
• Case study: Korea
– export promotion + well-administered narrowmoving-band import substitution
Trade liberalization and
growth
• Cross-country evidence: positive but not
robust
• Case studies: very convincing (India and
China)
• Anecdotal evidence:
– No country has developed successfully by
turning its back on trade liberalization and
long-term capital flows (Rodrik)
A panacea: FDI?
• Developing countries need capital
• Efficient financial markets require strong
institutional environment
– Otherwise vulnerable to fraud and crisis
• FDI are less vulnerable to crises
• Even though most FDI happens within OECD,
some poor countries manage to attract FDI
successfully
– China
• Still, takes certain institutional preconditions
– Protection of property rights
– Political stability/credibility
Concentrated
in a few countries