Globalization and development

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Globalization and development

• Sergei Guriev

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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

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Trade as free as it used to be
Source Bordo, Eichengreen, and Irwin (1999)
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So is finance
Source Obstfeld and Taylor (2002)
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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 gt10 within decade
  before 1913
• Information/technology
• Much freer, but international intellectual
  property rights protection remains a problem

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Implications of differential mobility

• Huge differences in unskilled wages
• High returns to skills
• Synergies and increasing returns concentration
  of RD in OECD, digital divide
• Capital and technology move to the countries with
  low labor cost

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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?

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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 non-OECD countries)
• Government in non-OECD
• Losing authority to market
• Becoming more accountable through Tiebout
  competition
• An (imperfect) substitute to democracy

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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

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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-one-vote
• Enforcement is based on reciprocity/retaliation

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Why free trade Economics 101the case of small
open economy
Domesticsupply
p
Tariff
World price
demand
q
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But

• Small open economy benefits from unilateral
  liberalization but
• Terms of trade externality
• Political economy
• Interest groups
• Costly redistribution
• Dynamic effects
• Infant industry argument

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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

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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)

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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
  narrow-moving-band import substitution

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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)

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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

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Concentrated in a few countries
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