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Global Institutional Economics

Global Institutional Economics. Part 2.3. Globalization Effects: Good or bad?. Jože P. Damijan University of Ljubljana. Discussion. Globalization: Good or bad?. Consider advanced countries • Jobs & wages: Manufacturing vs. services • Inequality, middle class, long-run demand.

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Global Institutional Economics

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  1. Global Institutional Economics Part 2.3 Globalization Effects: Good or bad? Jože P. Damijan University of Ljubljana

  2. Discussion Globalization: Good or bad? Consider advanced countries • Jobs & wages: Manufacturing vs. services • Inequality, middle class, long-run demand Consider developing countries • Trade, FDI, jobs • Poverty, inequality • Labor standards, child & women labor, environment

  3. Outline •Effects of globalization: • Open economies grow faster • Redistributional effects of globalization • Inter-country: Decrease of Global poverty & inequality • Intra-country: Increase of intra-country inequality • Labor market polarization • Stability sacrificed? • Shift in global power

  4. Openness & growth

  5. Open economies grow faster Opennes? and? growth,? 1973-1998? 8? 6? Average? annual? growth? rate? 1973-98? (%)? 4? y? =? -0.0001x? +? 3.6469? R²? =? 0.30419? 2? 0? 0? 2,000? 4,000? 6,000? 8,000? 10,000? 12,000? 14,000? 16,000? 18,000? 20,000? -2? y? =? -0.0002x? +? 0.3158? R²? =? 0.04919? Open? -4? Closed? Linear? (Open)? -6? Linear? (Closed)? -8? Ini al? GDPpc? in? 1973? • Average growth rate in open econ. bigger by 3.3 ppt Source: UNIDO

  6. Fastest growing open economies Average? growth? rates? of? open? economies,? 1973-98? (%)? 7? South Korea 6? Singapore Taiwan Average? annual? growth? rate? 1973-98? (%)? Thailand 5? Hong Kong Malaysia Mauritius Ireland 4? Sri Lanka Egypt Norway India Indonesia 3? Chile Tunisia Seychelles Puerto Rico Japan Portugal Turkey Jordan Austria Finland Italy USA Spain Belgium Germany Australia Dominican Rep. Morocco Denmark Canada Israel Netherlands UK 2? France Sweden Greece Mexico New Zealand Switzerland 1? 0? 0? 2,000? 4,000? 6,000? 8,000? 10,000? 12,000? 14,000? 16,000? 18,000? 20,000? Ini al? GDPpc? in? 1973? • Asian countries on top Source: UNIDO

  7. However, “What you produce/export matters” (Hausmann, Hwang & Rodrik, 2005)

  8. 8 Income content of exports GDP per capita

  9. 9 • Income content of exports is low and decreasing in Latin America, – But high and stable or increasing in East Asia

  10. 10 Growth rate of GDPpc 1992-2003 Initial level of income content of exports

  11. Benefits of globalization

  12. Benefits of globalization • Increased choice, lower prices • Greater potential for growth • Increase international economies of scale • Greater employment opportunities • Led to massive increases in wealth for many countries • World poverty decreased • World inequality decreased • Globally; what about within-countries inequality?

  13. World povertydecreased • % of people living in poverty decreased from 42% to 14% • # of people living in poverty decreased from 1.5 bn to 800 mn • However, mainly effect of China; Poverty increased in Sub-Saharan Africa Source: Worldbank/Poverty gap.

  14. New 2015 WB estimates … poverty line at $1.90 a day • Between 1990 and 2013 absolute poverty decreased by 1.1 bn people • Percent of people in absolute poverty down from 35% to 11% Source: Francisco Ferreira, World Bank (2015)

  15. World inequalitydecreased … but mostly due to China & India Concept 2: population-weighted Gini • After 1998, inequality decreased also due to countries other than China Source: Milanovic (2017)

  16. Who won and who lost with globalization?

  17. Distribution of gains from globalization Elephant curve: The most famous figure about globalization Source: Milanovic (2012)

  18. Distribution of global absolute gains in income, 1988-2008 (anonymous) 30.0 25.4 25.0 Distribution (in percent) of gain 19.4 20.0 16.0 15.0 10.0 8.5 5.3 5.0 0.20.4 0.5 0.6 0.7 0.81.01.11.31.51.92.32.73.5 3.63.2 0.0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 99 100 ventile/percentile of global income distribution • In absolute terms, top-10% account for 68% of total gains

  19. While global inequality down, within country inequality increased Source: Dabla-Norris, et al (2015)

  20. Within country inequality changes Source: Dabla-Norris, et al (2015)

  21. Off: Who benefitted from the recovery (US) The rich benefited after the crisis …but also the poorest The rich lost during the crisis (capital assets evaporated) …but also the poorest

  22. Other benefits (1) • Income inequality for the world as a whole is diminishing • Infant mortality has decreased in every developing region of the world • Life expectancy has almost doubled in the developing world since World War II • Hans Rosling: “200 years that changed the world”

  23. Other benefits (2) • Between 1950 and 1999, global literacy increased from 52% to 81% of the world. • female literacy as a percentage of male literacy has increased from 59% in 1970 to 80% in 2000. • The percentage of children in the labor force has fallen from 24% in 1960 to 10% in 2000. • Similar increasing trends toward electric power, cars, radios, and telephones per capita, as well as a growing proportion of the population with access to clean water.

  24. The flip side Developing countries • Unregulated power of large, multi-national corporations, which damage • the democratic rights of citizens, • the environment, particularly air quality index and rain forests, • as well as national governments sovereignty to determine labor rights • right to unionize for better pay, and better working conditions • women and child labor

  25. What happened to advanced countries?

  26. The flip side Advanced countries (1) • De-industrialization trends • Offshoring and the shift to service work: the low cost of offshore workers enabled corporations to move production abroad. • the laid off unskilled workers are forced into the service sector where wages and benefits are low, but turnover is high. • widening economic gap between skilled and unskilled workers. • The loss of these jobs has also contributed greatly to the decline of the middle class which is a major factor in the increasing economic inequality • Economic instability

  27. US manufacturing employment & import share 2001: China’s entry into WTO 2001-2008: - 3.5 mn empl - 5.7 mn China shock: after 2001 3.5 mn manufacturing jobs lost between 2001-2007

  28. EU-15 manufacturing employment & import share 2001: China’s entry into WTO 45.0% 34.0 40.5% 40.0% 32.0 31.3 35.0% 30.0 2001-2008: - 3.6 mn empl 30.0% 27.5% 28.0 25.0% Total: - 7.2 mn empl 20.0% 26.0 14.8% 24.5 15.0% 24.0 10.0% 22.0 5.0% 0.0% 20.0 Share of Total imports of goods and services Share of Imports from third countries Manufacturing employment (mill) China shock: after 2001 3.6 mn manufacturing jobs lost between 2001-2007

  29. The flip side Advanced countries (2) • Effects on employment in US (BLS study, 2011) • 6 million jobs lost in U.S. manufacturing between 1979 and 2007 (from 19.6 to 13.7 million), • more than half of it after 2001 (trade liberalization with China) • Effects of globalization on wages in US (BLS study, 2001) • in the period 1979-1999, 31% of those who lost a job due to trade were not fully re-employed. • only 36% of the displaced workers were able to find a new job with matching or higher wages, • 55% were at best working for 85% of their former wages, • and 25% were working for 70% or less of their former wage

  30. Explanation • “China shock” (Autor, Dorn & Hanson, 2013, 2016 ) • Rising imports from China cause higher unemployment, lower labor force participation, and reduced wages in local labor markets that house import competing manufacturing industries • 1/4 of aggregate decline in U.S. manufacturing employment is due to the rise of Chinese import penetration • Similar findings for Spain, Germany, Norway and Denmark • Donoso et al. (2014), Dauth et al. (2014), Balsvik et al. (2013), Keller & Utar (2016) 31

  31. Importing political polarization • Economic polarization seems to affect political polarization: • Autor et al (2016b) show that in regions more severely hit by Chinese shock political polarization rises (“importing political polarization”) • Congressional elections 2010: in trade exposed districts voters vote more extreme – i.e. moderate representatives removed by Republican or liberal democrats • Matched with other trends (increased inequality, austerity, migrations) it gave rise to popular discomfort and populist movements • Syriza, Trump, Orban, Kaczynsky, Brexit, AfD, NF, 5* … • Policy implications • Dealing with globalization redistribution effects: • Strengthening social, welfare and active labor market policies to compensate the “losers” and help finding jobs with matching wages • What about globalization per se ? 32

  32. Other consequences Stability undermined

  33. The flip side Advanced countries (3) • Global imbalances in trade and capital flows starting in the latter half of the 1990s • These imbalances reflected a chronic lack of saving relative to investment in the US and other industrial countries, • combined with an extraordinary increase in saving relative to investment in many emerging market nations. Ben Bernanke (2009)

  34. Global imbalances China Oil exporters US Caballero et al, 2015 • Increased after 1991 Oil exporters, China, other Asia •

  35. The flip side Advanced countries (4) • In turn, • the increase in excess saving in the emerging countries (resulted from rapid economic growth reduced investment rates, • large buildups in foreign exchange reserves, and substantial increases in revenues by exporters of oil and other commodities) … • resulting in large capital inflows for more than a decade in the US and some other advanced • … made the foundations of the current global financial crisis Ben Bernanke (2005)

  36. Global imbalances and crises A more complete picture Capital flows Trade Outsourcing surplus (FDI) ASIA US Foreign reserves Capital flows (After 1997 crisis) (portfolio) Capital flows Financial bubble Deregulation … Contagion of Lehman Brothers Stagnant wages Rest of the world Cheap liquidity after 9/11 (Fed) Housing bubble

  37. Shift in global political power

  38. Global shift • Has globalization shifted global political powers? • From US to China? • Chinese Professor Ad: "Now They Work for Us"

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