Discussions of the King/King Reader MBA 628

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Discussions of the King/King ReaderMBA 628
2
The Doha Development AgendaAnne 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?

3
The Doha Development AgendaAnne 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.

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The Doha Development AgendaAnne 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

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The Doha Development AgendaAnne 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.

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The Doha Development AgendaAnne 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.

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The Doha Development AgendaAnne McGuirk Reading
6

• Where is the Doha Round at today?
• Has any progress been made?

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The Doha Development AgendaAnne 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 wouldnt do.
• And the meetings were over!
• Back to the drawing board.

9
Bridging The Trade-Environment Divide, Daniel
C. EstyReading 7

• Environmental view
• Increased trade increased manufacturing and
  economic growth environmental
  degradation.
• Policy prescriptions
• Stop trade and growth?
• Not formally. Impose trade sanctions!

10
Bridging The Trade-Environment Divide, Daniel
C. Esty

• Economic views
• Increased trade increased growth
  economic well-being

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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.

Developing Countries
Advanced Trading Countries
12
Economic Policy Prescriptions

• Policy Prescriptions
• 1. Find balance. Starving people couldnt 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.

13
Estys 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.

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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.

15
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?

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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?

17
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?

18
Labor Standards Drusilla K. BrownReading 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.

19
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?

20
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 familys
  survival. (p. 90)

21
ILO Or WTO?

• Does Estys 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?

22
The Two Faces of Labor Unions

• What are they?
• See p. 95.

23
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 cant borrow against the educated childs
  future income.)
• Elimination of discrimination of employment and
  occupation.

24
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?

25
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)

26
Trade and Wages (Stolper/Samuelson)

• The debate continues, but to this point the
  evidence supports the argument that skill-biased
  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)

27
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.

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Labor Standards Race to the Bottom

• Prisoners 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)

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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.

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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.

31
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.

32
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?

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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.

34
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.

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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?

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Labor Standards Fini
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Borders Beyond ControlReading 9
Jagdish Bhagwati

• Why does Bhagwati believe that immigration cannot
  be stopped?
• Would it be desirable to stem the flow of
  immigration?

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Borders Beyond ControlJagdish 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?

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Borders Beyond ControlJagdish 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?

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Borders Beyond ControlJagdish Bhagwati

• What is Bhagwatis solution to the problem?

41
WTO and Intellectual Property RightsPhilip 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

42
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)

43
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?

44

• 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.

45
King Pharmaceutical companies widely practice
differential pricing

• What are the implications?

46
Global Governance of TradeReading 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.

47
Global Governance of TradeReading 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.

48
Global Governance of TradeReading 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.

49
Global Governance of TradeReading 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)

50
Global Governance of TradeReading 12 Dani
Rodrik

• This paper presents a different view of
  development. Whats the view?

51
Global Governance of TradeReading 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.

52
Global Governance of TradeReading 12 Dani
Rodrik

• When isnt trade much of a factor in economic
  development?

53
Global Governance of TradeReading 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.

54
Global Governance of TradeReading 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)

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Global Governance of TradeReading 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)

56
Global Governance of TradeReading 12 Dani
Rodrik

• Does Rodrik condemn ISI?
• See p. 132.

57
Trade Liberalization vs. Development

• See the (p. 136) Viet Nam/Haiti comparison. What
  was the conclusion?

58
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?

59
Trade Liberalization vs. Development

• He and Rodriguez found a major gap between the
  policy conclusions typically drawn and what the
  research has actually shown

60
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)

61
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?

62
Then Whats the Key to Development?
63
The Key to Successful Development

• Innovative development policy (that cant turn
  its 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.

64
General Principles of an InternationalTrade
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.

65
General Principles of an InternationalTrade
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)

66
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.

67
Development-friendly Measures

• Require that all existing and future WTO
  agreements be fully costed outcondition the
  phasing in of these agreementson the provision
  of commensurate financial assistance.

68
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.

69
Economic Developments during NAFTAs First
Decade, Joanna Moss Reading 14
70
What led to the NAFTA?

• After President Madrids 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.

71

• 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.

72
What were the NAFTA side agreements?

• See p, 156
• Environmental Protocol
• Labor Protocol
• Snap-back Provision

73
How important is the US market to Canada and
Mexico?

• See Table 2, p. 160

74
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?

75
Its hard to separate NAFTA effects from other
developments

• What were these developments?
• Mexicos trade liberalization policies already in
  effect when they joined NAFTA
• The more open Mexican economy beginning in the
  1980s.
• The maquiladora program. What was that?
• The Peso crisis of 1994-95.
• What caused it?
• Did the bailout work?

76
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.

77
And Perots 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)

78
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)

79
What else needs to be said about NAFTA?
80
What Drives Large Current Account
Deficits?Coughlin PollardReading 19
81

• The U.S. currently has a huge current account
  deficit.
• Why do we have it?
• Is it sustainable?

82

• 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)

83

• 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.

84

• 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)

85

• 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)

86

• 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)

87
EMU at 1, Mark A. WynneReading 28
88

• 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.

89

• 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).

90

• 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?

91
What are some of the criticisms of the European
Central Bank (ECB)?
Are they valid? Why or why not?
92
European Labor Markets and EMU Challenges
AheadSoltwedel, Dohse, and Krieter-BodenReading
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

93
Costs of a currency union?

• A currency union member must relinquish
• Independent monetary policy, and
• Currency devluation

94
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.

95
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.

96
Why are asymmetric shocks a problem for EMU
countries? Belgium, Denmark, France and Germany
would probably see greater structural
unemployment in response to shocks.
97
Why are flexible labor markets important for the
success of the EMU?
98
Onset of the East Asia CrisisRadelet and
SachsReading 33
99

• 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

100

• 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

101

• Banks and moral hazard. What do Akerlof and Romer
  argue about the economics of looting?
• See top right, p. 371

102

• 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-of-last-resort
  activities.
• But see the bottom of p. 371 on the end of
  bubbles.
• Mexico, 1995, is the case (RS) of a panic
  requiring a lender of last resort (p.373, bottom
  left).

103

• 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.

104

• 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.

105

• The crisis gave little warning
• Asian prices were increasing, so there was
  depreciation of Asian currencies against the
  dollar.

106

• What were the banking problems?
• See p. 388. Borrowing to finance domestic
  investments in real-estate and other non-tradable
  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).

107

• 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

108

• 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 couldnt obtain working capital.

109

• 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

110

• 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.

111

• 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.

112

• An important RS 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)