Distributional Effects of Globalization

1. Distributional Effects of Globalization Devashish MitraSyracuse University & NBER

2. I will focus on what I consider the main component of globalization, namely freer trade. • the predicted effects of trade on income distribution depend on the assumptions we make about intersectoral factor mobility • in the presence of costly intersectoral factor adjustments, the popular support for trade liberalization depends on • the degree to which people discount their future • on their perceived uncertainty about the future. • How the support for reforms actually gets translated into actual reforms depends on the political process.

3. The Heckscher-Ohlin model • perfect, intersectoral factor mobility • perfect competition in all markets • constant returns to scale in production • Trade in this model helps abundant factors, and hurts scarce ones (Stolper-Samuelson theorem). • trade will hurt unskilled workers in rich countries but will benefit them in poor countries. • Owners of capital (human and physical) will benefit from trade in rich countries, while trade will hurt such factor owners in poor countries.

4. The Specific Factors Model • The only change in assumption relative to the Heckscher-Ohlin model is the one relating to factor mobility. • Some factors are sector-specific and their fortunes are positively correlated with the relative prices of goods produced in their respective sectors • Thus freer trade will be opposed by owners of specific factors employed in import-competing sectors, while it will be supported by specific factor owners in the export sectors.

5. Which of the above models is the right one in the context of the political economy of trade policy? • In the long-run, factors should be intersectorally mobile (Heckscher-Ohlin), while in the short run they are not (Specific factors). • The two models can also be viewed as polar cases of a model with adjustment costs in factor mobility.

6. Unless a person’s horizon is very short and/or adjustment costs are very high (or negligible), both these models must be complementary • Starting from long-run disequilibrium, the present discounted value of a person’s income stream will consist of • initial incomes that depend on his/her initial industry of employment • and then over time consist of incomes that are increasingly dependent on the factor type. (consistent with recent studies based on survey data)

7. In addition to asking the standard questions, I suggest the following survey questions: For workers • Are your skills transferable to other industries without any significant training? If yes, what are those industries? • Are there any additional industries to which your skills might be transferable with less than a couple of years of training? If yes, what are those industries? • In order to move to the alternative forms of employment you mentioned above, what do you expect the monetary training costs to be (including foregone income during training)?

8. For firm owners/managers: • What is the value of your total capital stock? • What proportion can be moved to production of a different product, if needed? • What proportion of your capital stock gets used up every year? In other words, what are your capital replacement costs arising from depreciation (wear and tear) and obsolescence?

9. While trade policy is a redistributive device, the government’s desire and its ability to redistribute income will be a function of the economy’s asset distribution, eg, the Heckscher-Ohlin version of Mayer’s (1984) median-voter model • We need detailed information on asset distribution. • Questions to individuals about the value of their financial assets, education (human capital) and land ownership will be very useful in this regard. • Firms can be asked about the distribution of their share ownership • asset inequality measures will be useful not only for testing median-voter type political economy models, but also for investigating lobbying models as the extent of the free rider problem in lobbying depends to a great deal on asset inequality.

10. Another determinant of redistribution is the ideology of voters and the government: policies skewed in favor of capitalists (right wing), pro-labor (left wing) – political valence – part of something broader that I call “ideology”. • In our surveys, we should try to ask a country’s citizens who they believe the constituents of the various political parties are. • We should also ask the representatives of the parties questions about their economic ideology and their constituents.

11. Persson and Tabellini (2000) • the importance of other kinds of ideology, such as religious and social, in economic policy determination. • if one of two or more political parties in a country is much closer to the majority of citizens in their religious and social beliefs, it has much more flexibility in choosing economic policies – the distributional impact of policies is no longer important. Therefore, we also need to collect information on the religious, social, political and economic ideology of citizens and political parties.

12. The variety effect of trade weakens its distributional impact. • In our surveys, we need to find out how much consumers value additional varieties, and how much firms value a larger variety of high quality inputs (available due to globalization). • If important, this weakens the distributional effects of globalization • It means it is relatively easier for small countries to open up and sustain this openness?

13. We need to test standard models of political economy of trade policy (Grossman & Helpman, Mayer etc) - requires data that are not easily available - data on political organization and trade (import-demand and export-supply) elasticities. • Questioning firms in detail about their political affiliations and connections, and whether they have supported any specific political parties or politicians might be useful. • Another sub-project that this project could sponsor is the estimation of import-demand and export-supply elasticities – also essential for calculating the welfare costs of deviations from free trade

14. Fernandez and Rodrik (1991). Individual-specific uncertainty about post-reform identity ex ante there is not popular support for trade reforms, but if forced by a dictator (or an international financial institution), ex post we will see strong support for them. • Questions: • Were you for or against trade reforms prior to their announcement? • After the reforms, are you for or against them? • How different is your situation after reforms as compared to what you believed before the reforms would be your post-reform situation?

15. Rodrik (1997): Trade makes the demand for labor more elastic which in turn leads to • larger employment and wage shocks as a result of given vertical shifts in the labor-demand curve (arising from shocks to productivity or to output demand). • the erosion of the bargaining power of labor vis-à-vis capital in the sharing of supernormal profits, • labor bearing a larger burden of the impact of non-wage labor costs

16. Therefore, we need to use our surveys to find out • whether workers face more uncertainty in their wages and employment now as compared to the pre-globalization period. • whether globalization has eroded their bargaining power. • If the answer to at least one of these questions is “yes”, then we need to know whether they consider this an important element of the costs of globalization they face.

17. CAUTION: • In our surveys, we need to control for the fact that different reform packages and compensation schemes may be offered in different countries. • Depending on the package that was offered in every country, the survey respondents should be asked to what extent each of the components of the package was crucial in their support for or opposition to reforms.