Monday, November 17, 2008

Gains from Globallization roundup

I've been sitting on some bookmarked blog entries on globalization that I wanted to pull together to summarize and I came across this (which I wish I had thought of) pretty much says it all:
.. globalization is not the main cause of developing countries' problems, contrary to the claim of critics of globalization -- just as globalization is often not the main solution to these problems, contrary to the claim of overenthusiastic free traders.

That was from Pranab Bardhan's Does Globalization Help or Hurt the World's Poor in SciAm (April 2006).

Dani Rodrik in Is Export Led Growth Passe echoes the sentiment that increased protectionism need not necessarily spell disaster for developing economies:
Nothing works as potently to inflame protectionist sentiment as large trade deficits. According to a December 2007 NBC/Wall Street Journal poll, almost 60% of Americans think globalization is bad because it has subjected US firms and workers to unfair competition. ... If globalization has acquired a lousy reputation in the US, the external deficit deserves much of the blame. ... None of this implies a disaster for developing countries. Long-term success still depends on what happens at home rather than abroad. What is moderately bad news at the moment will become terrible news only if economic distress in the advanced countries – especially the US – is allowed to morph into xenophobia and all-out protectionism; if large emerging markets such as China, India, and Brazil fail to realize that they have become too important to free ride on global economic governance; and if, as a consequence, others overreact by turning their back on the world economy and pursue autarkic policies. Absent these missteps, expect a tougher ride on the global economy, but not a calamity.

Moreover, the computed gains from trade are really not that large. From Dani Rodrik's The Globalization numbers game:
The Bradford et al. study argues that removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household (or 3.4-10.1% of GDP). ... I do have a big quarrel with the kind of numbers presented by Hufbauer and company. They seem to me to be grossly inflated. ... So how come Bradford et al. get wildly different numbers? Some of the difference is due to Bradford et al.'s attempt to take into account liberalization in services as well as in merchandise trade. But that is only a small part of the story. The real action is in the non-standard methodological choices made by Bradford et al.--choices which are designed to generate large numbers.

What puzzles me is not that papers of this kind exist, but that there are so many professional economists who are willing to buy into them without the critical scrutiny we readily deploy when we confront globalization's critics. It should have taken Ben Bernanke no longer than a few minutes to see through Bradford et al. and to understand that it is a crude piece of advocacy rather than serious analysis. I bet he would not have assigned it to his students at Princeton. Why are we so ready to lower our standards when we think it is in the service of a good cause?

Josh Bivens (via Economists View) concurs and adds:
I also disagree that empirical research shows no (or a trivial) role for trade flows in influencing income distribution. The more immediate point, however, is that we have time to get this debate and our response to globalization right ...

The gains from globalisation that Rodrik and Bivens refers to are summarized in this VoxEu piece:
The Peterson Institute calculates that the US economy was approximately $1 trillion richer in 2003 due to past globalisation – the payoff both from technological innovation and from policy liberalisation – and could gain another $500 billion annually from future policy liberalisation (Bradford, Grieco, and Hufbauer 2005). Past gains amounted to about 9% of GDP in 2003, and potential future gains constitute another 4%.

They rebut Rodrik and Bivens:
So why do our estimates differ so much from Rodrik and the World Bank? First, both Rodrik and the World Bank authors disregard services, which account for a substantial share of total US trade and therefore a large part of the globalisation story. ... If forces like monopolistic competition, economies of scale, and productivity gains are left out of the mix, the Peterson Institute calculations would approach the Rodrik and World Bank estimates, but that would be less than half of the globalisation story. ... A key point worth emphasising is that, in the Peterson Institute estimates, policy liberalisation was not the only or even primary driver of the estimated gains. Rapidly falling transportation and communication costs are perhaps more important features of the globalisation story.

A nice roundup of various CGE models (which does not include the Bradford et. al. model) is in How Much Will Trade Liberalization Help the Poor? Comparing Global Trade Models:
The traditional argument in favor of a positive relationship between liberalization and poverty reduction focuses on the first two linkages. A large proportion of poor people work in the agricultural sector, where trade distortions are particularly high. Liberalization could lead to higher world agricultural prices and raise activity and remuneration in this sector in developing countries. The same beneficial outcome could occur in the textile and apparel sectors, where protection remains high and developing countries have a comparative advantage.

But openness can also have negative effects. First, government transfers can shrink as liberalization cuts the government's receipts of trade-related taxes. Second, terms of trade can deteriorate as liberalization affects world prices. Third, liberalization can impose adjustment costs and raise short-run risk owing to competition from imports and reallocation of productive factors.

The paper shows that estimates of gains from trade have been declining over the years - more recent studies tend to show smaller benefits. The reason?

Trade pessimism comes first from data on market access. The research community now acknowledges that simulations of full trade liberalization need to completely account for preferential schemes and regional agreements. These agreements have changed the global picture of trade protection, making average world protection lower than previously thought.

When preferences and regional agreements are not accounted for, agriculture has an average
world protection rate of 26.8 percent. When these trade regimes are taken into account, it is only 19.1 percent. Second, trade policies from industrial countries appear less anti-development than
previously believed. In fact, they are not regressive, as once thought, but slightly progressive, in the sense that the poorest countries are facing lower average duties on their exports than richer countries. On average, world protection is 5.6 percent. It is 5.7 percent for developed countries’
exports and only 4.9 percent for least developed countries’ exports.

Despite all these differences, Brad DeLong is Making the case for Globalization:
In the neoclassical Heckscher-Ohlin-Vanek framework, freeing up trade is good for owners of "abundant" factors of production in the trading country and bad for owners of "scarce" factors. The efficiency gains from trade--the increase in the size of the pie--goes roughly with the square of the differences in factor proportions between countries, but the redistributive gains and losses go roughly linearly with the differences in factor productions. Thus for freeing up trade to be bad for the greater part of the citizens in the country, two things must all be true:

(1) The bulk of the people must have little "ownership" of the abundant factors which reap the gains from freeing up trade--their income must depend overwhelmingly on the returns to the "scarce" factors of production.
(2) The differences in factor proportions that generate the possibility of gains from trade must be small in order to make efficiency gains small relative to redistributional shifts.

The argument as applied to the United States cannot be that differences in factor proportions are small: differences in capital-labor ratios across the U.S. in China are on the order of 20-to-1. So the argument must be that the abundant factors of production are things like capital, organization, and technology, which have concentrated ownership. The scarce factor of production is labor. Hence free trade will be bad for the majority of voters because their incomes depend only on returns to the "scarce" factor--and those returns will drop with free trade. ...

But in actual fact to argue that the incomes and living standards of the bulk of Americans depend on the real wages of raw labor and of raw labor alone seems to me to be equally implausible. A very large number of factors give Americans a substantial stake in the returns to--a degree of "ownership" of--the "scarce" factors. First there is the government, which is the property of all but which raises its money by disproportionately taxing the incomes of the "scarce" factors (for that is, after all, where the money is). Second, there are all the degree of formal and informal cross-ownership institutions like labor rent sharing, efficiency wages, local monopolies, and other deviations from perfect competition that give all stakeholders rather than formal equity owners alone a share in the value of the capital, the technology, and the organization: we are all stakeholders in Wal-Mart, if only through the pressure its competition exerts on other businesses' prices.

Bhagwati rails against the so-called traitors of free trade:
Episode 1. The Rise of Japan: Krugman and Tyson
The protectionists who had celebrated Krugman [and his writings on monopolistic competition] as their icon were disappointed, even furious: Kuttner would write fierce critiques of Krugman, for instance, for years. But the truth of the matter is that, even as these economists came back to the fold on free trade, Japan ceased to be a threat and the hysteria over Japan, thick as a dense fog, subsided. Free trade as our choice policy option was back in business.
Episode 2. The Rise of India and China: Paul Samuelson
Although Samuelson had been careful that this did not mean that the United States should respond with protection, the protectionists thought that they had another icon, this time the arguably greatest economist with Keynes of the 20th century and a longtime proponent of free trade in their camp! ... only an unsophisticated economist (and Samuelson is right that there are some, though not necessarily the ones he cited) would rule out the logical possibility that the rise of China and India could harm the United States.
Episode 3. India and China and Fear of Outsourcing: Alan Blinder
I described the basic distinction between service transactions that required physical proximity and those that did not, whereas Sampson and Snape brilliantly sub-divided the former into those where the provider went to the user and the other way around. Blinder, who does not appear to have known all this when he wrote his celebrated Foreign Affairs article any more than I know about the relevant intricacies of macroeconomics where he holds the comparative advantage, has been wrong therefore to think only of Mode 1.

And on Baumol and Gomory, Bhagwati continues:
... these authors make one important but familiar point, with little policy relevance as I argue now. ... sufficiently increasing returns would imply multiple equilibria and that this in turn implied (among other things) that there could exist a better free trade equilibrium than the one we may be in. But when translated into policy prescription, all it could mean was that industrial policy, buttressed Tyson-style by appropriately tailored trade policy, could nudge us towards the “better” equilibrium. But neither author managed to do this, as far as we know. So, paraphrasing Robert Solow on externalities, one might say: yes, if scale economies are important, there could be multiple equilibria and we could use trade and industrial policies to choose a “better” equilibrium; but, alas, who can plausibly compute this better equilibrium? Besides, it is hard to imagine today that, with world markets so large due to the death of distance and extensive postwar trade liberalization, there are any industries or products left where the scale economies do not pale into modest proportions. Baumol and Gomory, a brilliant pair indeed, therefore do not carry any policy salience, in my view.

And what now for globalization? According to Rogue Economist (Part 2 here):
...once growth comes back in the world, and consumers in the developing world reverse the demand destruction happening right now, many of them will again want to buy goods manufactured in the developed countries. Whether because of better research, design, or innovation, products from the US for example, remain coveted status symbols in much of Asia.Once the financial markets get through with their current panic, product innovation rather than financial innovation will be the focus of investments in the developed world. The growth in the financial markets will likely swing back to venture capitalists and private equity, while hedge funds will probably scale back.

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