Topics in the Globalisation Debate 1: Competitiveness Immigration

1. Topics in the Globalisation Debate 1: Competitiveness; Immigration

3. Competitiveness: �A Typical Statement about International Economics� �We need a new economic paradigm, because today [our country] is part of a truly global economy. To maintain our standard of living, [our country] now has to learn to compete in an ever tougher world marketplace That�s why high productivity and product quality have become essential We need to move [our country�s] economy into the high-value sectors that will generate jobs for the future And the only way we can [achieve this is to] forge a new partnership between government and business�

4. The Need for a New Paradigm? M. Porter (1990): The Competitive Advantage of Nations �A new theory must explain why firms from particular nations choose better strategies than those from others for competing in particular industries� (p. 19) �A new theory must move beyond comparative advantage to the competitive advantage� (p. 20) �...the best measures [of competitive advantage are] (1) the presence of substantial and sustained exports to a wide array of other nations and/or (2) significant outbound foreign investment based on skills and assets created in the home country� (p. 25)

5. The Need for a New Paradigm? Krugman (1993) �probably the most important single insight an introductory course can convey about international economics is that it does not change the basics: trade is just another economic activity, subject to the same principles as anything else�

6. Competing in �an ever tougher world marketplace� President Clinton: each nation is �like a big corporation competing in the global marketplace� Some bestselling titles Lester Thurow: Head to Head. The Coming Economic Battle among Japan, Europe and America Jeffrey Garten: A Cold Peace: America, Japan and Germany and the Struggle for Supremacy Ira Magaziner & Mark Patinkin: The Silent War

7. Competitive Advantage: Firms Competitive advantage of a firm �competitive strategy is about taking offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment� (Value Based Management.net) if a firm is not competitive, it will go bankrupt Firm�s competitiveness can be measured trough profits / return on investment etc.

8. Competitive Advantage: Countries Countries are not companies while firms based in different countries sell products that compete with each other, in the country-level there are mutual benefits from trade Success of one country is likely to benefit other countries (more demand for imports) The only meaningful �offensive or defensive action� in the level of a country is strategic trade policy Imports are the purpose of trade ? exports / current account is not the �bottom line� of a country in a way profits are for a firm

9. Competing in �an ever tougher world marketplace� P. Krugman (1994): Competitiveness: A Dangerous Obsession. Foreign Affairs �While competitive problems could arise in principle*, as a practical, empirical matter the major nations are not to any significant degree in economic competition with each other�

10. What does �Competitive Advantage of a Nation� mean, anyways? Porter (1990): �the only meaningful concept of competitiveness at the national level is national productivity� Krugman (1994): �competitiveness� would turn out to be a funny way to saying �productivity� and would have nothing to do with international competition

11. �A Typical Statement about International Economics� �We need a new economic paradigm, because today [our country] is part of a truly global economy. To maintain our standard of living, [our country] now has to learn to compete in an ever tougher world marketplace That�s why high productivity and product quality have become essential We need to move [our country�s] economy into the high-value sectors that will generate jobs for the future And the only way we can [achieve this is to] forge a new partnership between government and business�

12. Why Productivity Matters? Example: productivity of a closed economy increases by 1 % ? the consumption possibilities increase by 1% productivity of country A increases by 1 %, and productivity of country B by 3 % ? A�s consumption possibilities increase by 1%, B�s by 3% (unless there is a substantial terms-of-trade effect*) That is, productivity is beneficial for its own sake, not because it helps us �to compete in the world marketplace�

13. High-Value Sectors� �Our country�s real income can rise only if (1) its labour and capital increasingly flow toward businesses that add greater value per employee and (2) we maintain a position in these businesses that is superior to that of our international competitors�

14. �High-Value Sector� in a Simple Ricardian Model England is more efficient in producing both products ? England�s wage rate will always be higher England has comparative advantage in producing cloth ? in free trade England produces cloth ? cloth is the �high-value� sector Does this mean that the Portuguese government should promote reallocating resources to produce cloth? Of course not.

15. �that will generate jobs for the future Krugman: �level of employment is a macroeconomic issue depending in the short-run on aggregate demand in the long-run natural rate of unemployment with microeconomic policies like tariffs having little net effect�

16. �A Typical Statement about International Economics� �We need a new economic paradigm, because today [our country] is part of a truly global economy. To maintain our standard of living, [our country] now has to learn to compete in an ever tougher world marketplace That�s why high productivity and product quality have become essential We need to move [our country�s] economy into the high-value sectors that will generate jobs for the future And the only way we can [achieve this is to] forge a new partnership between government and business�

17. A New Partnership between Government and Business? Robert Gilpin (2001): Global Political Economy: Understanding the international economic order. Princeton University Press. p. 210-214 �Governments can and do have an important and even decisive role in promoting their own national firms in international markets� �a government can take a long-term perspective and establish policies that foster a favourable domestic environment for those sectors most likely to be competitive in international markets�

18. A New Partnership between Government and Business? = infant industry argument Remind yourself of Lecture 8: Key assumption: market failure (due to externalities, imperfect capital markets etc.) Problems identifying the right industries Time consistency: will the protection eventually become permanent?

19. Partnership between Government and Business? Krugman (1993): �the main competition going on is one of U.S. industries against each other, over which sector is going to get the scarce resources� �there are reasons, such as external economies, why a preference for some industries over others may be justified. But this would be true in a closed economy, too�

20. The Dangers on Obsession on International Competitiveness Wasteful spending of government money Inefficient allocation of resources resources from nontradables to tradables Possibility of protectionism & trade wars Indirect impact on the quality of economic policy making in general

21. Impact of Immigration revisited Variation of model discussed in Lecture 5 One output Three factors of production: capital, skilled and unskilled workers unlimited amount of capital available from the international market at fixed price native labor force fixed, but not perfectly inelastic (some will not work if wages are too low) All immigrants are low-skilled workers If immigrants have the same skill-mix as the natives, the economy expands but nothing happens to wages

22. Impact of Immigration: Theory Immigration leads to decrease in low-skilled wages and increase in low-skilled unemploy-ment High-skilled workers win more than low-skilled lose ? immigrant surplus LN0: Initial native employment LN1: Post-immigration native employment w0: initial wage w1: post-immigraiton wage

23. The Challenge of Empirical Work Constructing the counterfactual First step: descriptive analysis. Is the data consistent with the models? More challenging question: �if everything else stays constant and immigration increases by X percent, how much does production, wages etc. change?�. Problem: we never observe what would have happened if there had been a different amount of immigration. Hence, we need to construct the counterfactual using theory or a natural experiment. Understanding the role of the models The models we have studied are caricatures. That is, it does not make sense to ask are they �true� or �false�. Instead, the question to ask is: to what extent are they explaining what we are observing?

24. Estimating the Impact of Immigration Most studies estimate the equation yjt = ?rjt + Xjt� + ujt where y is the outcome in labour market j at time t, r is the share of immigrants in this labour market, X is a set of relevant controls and u summarizes the unobservable factors affecting the outcome. The parameter of interest is ? Q: Why some labor markets attract immigrants? If this is due to unobserved factors (e.g. positive demand shocks increasing wages), we say that r is endogenous and standard (OLS) estimates of ? will be biased upwards Solutions: (a) Natural experiments, (b) Instrumental variables

25. Summary of results Most studies find small or no effect of immigration on native wages and employment Current research aims to understand, why? Possible explanations Endogeneity bias Native out-migration Changes in product-mix Changes in technology

26. Spatial correlations approach: critique Most studies define labor market as a geographical area essentially compare wage growth in cities (inside one country) with different immigrant inflows (due to reasons unrelated to wage growth) Borjas: not valid, immigration will affect all areas internal migration and capital flows changes in product-mix

27. Impact on product mix: theory Immigration increases labor force in one area ? production of low-skill intensive products increase in this area ? other areas increase production of high-skill intensive products ? more trade between areas inside countries Price of low-skill intensive product decreases ? low-skilled wages decrease also in areas where no migrants went

28. Impact on product-mix: empirics Lewis (2004) and Glitz and Dustmann (2007) study the impact of immigration in US and Germany, respectively Both conclude that the impact on product-mix is modest. However, both find large effect on within-industry worker mix suggesting that firms seem to alter their technologies as a response to changes in labor supply This is not what the HO-model predicts. However, it is consistent with a modification of the HO-model, where �goods� are just relabelled as �techniques�