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Pressures from globalisation: are trade restrictions the answer?

Pressures from globalisation: are trade restrictions the answer?. L Alan Winters Professor of Economics, University of Sussex CEPR, IZA, GDN. Manufacturing does matter for exports and productivity. Manufacturing Share of Economy. Share %. GDP pc PPP, 1990. $10K PPP, 1990.

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Pressures from globalisation: are trade restrictions the answer?

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  1. Pressures from globalisation: are trade restrictions the answer? L Alan Winters Professor of Economics, University of Sussex CEPR, IZA, GDN

  2. Manufacturing does matter for exports and productivity LAC-EU ECONOMIC FORUM 2013

  3. Manufacturing Share of Economy Share % GDP pc PPP, 1990 $10K PPP, 1990 LAC-EU ECONOMIC FORUM 2013

  4. Share of Manuf. in Economy LAC-EU ECONOMIC FORUM 2013

  5. Share of Manufactures in Merch. Exports LAC-EU ECONOMIC FORUM 2013

  6. Competition: Global • E.g. Wood and Mayer (2009) • China implied a 8-15% increase in world unskilled labour abundance • Everyone else’s comparative advantage changed • Their Manufactures/primaries ratios fell by: • 7-10% for output • 10-15% for exports LAC-EU ECONOMIC FORUM 2013

  7. Who is affected? • Consumers (Broda & Romalis) • Inflation for lowest 10% 6ppt lower than average • Correlates with imports from China • Producers: • Competition for incumbents – static and dynamic responses • Intermediates for all (incl. potential) • Outsourcing and value chains (new opportunities) • Aggregate output (growth) LAC-EU ECONOMIC FORUM 2013

  8. Conditional Effects • Heterogeneity of country studies • Chang, Kaltani & Loayza (2009, JDE) • Interactions of openness with • Weaker effects in poorer countries; middle-income countries strongly positive effects LAC-EU ECONOMIC FORUM 2013

  9. Effects of Labour Market Regulation(Bolaky-Freund; JDE 2008)Less regulated half More regulated half LAC-EU ECONOMIC FORUM 2013

  10. Productivity • Selectivity • Competitive pressure • Imported inputs (Amiti & Koenings (2007, AER) and AER P&P 2009 • Learning by Exporting (Fernandes & Isgut, 2005, WB; Blalock & Gertler, 2004, JDE) • Learning to Export (Iacovone, 2009, WB) LAC-EU ECONOMIC FORUM 2013

  11. Mexican Firms – Chinese Exports(Iacovone, Rauch and Winters – JIE 2013) • Firm sales and existence • Huge growth of competition 1994-2004 • Impact via both domestic and export markets • Effects strong but highly unequal • At plant…as well as at product level • Larger (more productive) plants less hurt…“core” products less impacted than “marginal” ones LAC-EU ECONOMIC FORUM 2013

  12. Heterogeneity of Competition Effects LAC-EU ECONOMIC FORUM 2013

  13. Why the Resistance? • Trade is heavily redistributive • There will always be losers; as always • Even gains unevenly distributed • Losses may not be randomly assigned • Special interest groups • Hence the politics are difficult • Time periods long • Distribution - internally and relative to foreigners • No guarantees → risks LAC-EU ECONOMIC FORUM 2013

  14. Where do we go from here? Vast majority of growth policy is not trade policy; don’t obsess about it But trade policy is relatively simple technically Treat trade policy as decision, not a hypothesis test No guarantees, Balance of evidence and priors Costs of different errors Cost of uncertainty LAC-EU ECONOMIC FORUM 2013

  15. Distribution of growth increments Kneller et al (2008) Sample of 47 events LAC-EU ECONOMIC FORUM 2013

  16. Cost of error • ‘We know of no credible evidence … that suggests that trade restrictions are systematically associated with higher growth rates’ Rodriguez and Rodrik (2001, p.317) LAC-EU ECONOMIC FORUM 2013

  17. Industrial Policy: Traditional • Support for specific sector • Initial losses balanced by future gains? • Need super-normal profits in future • i.e. out-compete existing producers • Why not private capital markets? • Capital market failure? • Product or factor market failure – i.e. an externality LAC-EU ECONOMIC FORUM 2013

  18. Externalities • Dynamic (static externalities require permanent policy not temporary relief) • Firms can’t appropriate benefits of: • Learning • Others copy techniques (hard or soft), market research, export market development • Training (firm-specific training excluded) • Workers, once trained, move to rivals • Establishing national reputation LAC-EU ECONOMIC FORUM 2013

  19. Subsidies do not solve Externalities • Increase incentive (speed and effort) to innovate but also to imitate – net effect uncertain • Similarly for training workers • Does not reduce incentive to cheat on national quality reputation • Information required huge for any intervention • Support relaxes pressure for scale (excess entry) and/or efficiency LAC-EU ECONOMIC FORUM 2013

  20. Industrial Policy: Rodrik (2007) • ‘stimulate specific economic activities and promote structural change’ ; ‘not about industry per se’ • Horizontal vs. vertical policies LAC-EU ECONOMIC FORUM 2013

  21. Aims • Curing pervasive market failures e.g. • Credit markets (micro-finance) • Spillovers in technology adaptation • Agglomeration • Human capital policy • Tradables hardest hit by these or institutional failures LAC-EU ECONOMIC FORUM 2013

  22. Practical Challenges of Industrial Policy • Informational requirements • Rent-seeking, corruption • distort decisions • waste resources • But these afflict other policies too and we still pursue those - LAC-EU ECONOMIC FORUM 2013

  23. Guiding Principles for Industrial Policy • Knowledge about constraints and spill-overs is widely diffused • Business will ‘game’ any system • Beneficiary is society, not government or business LAC-EU ECONOMIC FORUM 2013

  24. Responses • ‘Embedded autonomy’ for bureaucracy • i.e. close relations with business, but independent • Processes of revelation and discovery required • Sticks and carrots • Performance/behaviour criteria; use market • Failures are natural; let them fail • Accountability • Of business to bureaucracy, bureaucracy to politicians • Monitoring, transparency, autonomous agencies LAC-EU ECONOMIC FORUM 2013

  25. To sum up: • Big changes are afoot • Openness boosts income on average • Productivity effects seem strong • Policy governed by balance of probabilities and costs – no guarrantees • Traditional industrial policy – flawed • ‘Horizontal’ policies may be useful, but hard to implement – politically and practically LAC-EU ECONOMIC FORUM 2013

  26. THANK YOU LAC-EU ECONOMIC FORUM 2013

  27. What’s special about now? • Growth and consumption aspirations • Global media • Cheaper trade → higher returns to success • Correspondingly lower to failure • Global value chains • Trade is central • Competition to get investment • Only very large can afford to stand aloof LAC-EU ECONOMIC FORUM 2013

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