Discussions of the King/King Reader, II MBA 628

1. Discussions of the King/King Reader, IIMBA 628

2. Trading in IllusionsDani Rodrik Reading 15 • Here is the Rodrik thesis again: “Foreign trade and investment have become the ultimate yardstick for evaluating the social and economic policies of governments in developing countries.” (p. 184)

3. Trading in IllusionsDani Rodrik Reading 15 • So the thesis is: Global integration should not become a substitute for a development strategy.

4. “Openness Does Not Deliver” • Says Rodrik: “The fastest growing countries are China, India, and others in East and Southeast Asia. Policymakers in these countries have also espoused trade and investment liberalization, but they have done so in an unorthodox manner—gradually, sequentially, and only after an intitial period of high growth – and as part of a broader policy package with many unconventional features.” (p. 185)

5. Standards for Development • The World Bank and others have developed lists of prerequisites for development (especially since trade liberalization fails to produce hoped-for results). These include pegging currency or preferring the pure float, etc.

6. Development Opportunity Costs • “Most suggested reforms are quite reasonable, but in the real world, governments face difficult choices over how to deploy their fiscal resources, administrative capabilities, and political capital.” • But setting priorities to maximize integration into the global economy has real opportunity costs. (p. 186)

7. Development Opportunity Costs • To sign just three WTO agreements on customs valuation, sanitary measures and trade-related intellectual property rights will cost developing countries $150 million for implementation. • That’s a year’s development budget for many least-developed countries.

8. Development Opportunity Costs • The money could be spent for secondary-school teachers or for primary education for girls.

9. Development Opportunity Costs • The rules for admission into the world economy reflect little awareness of development priorities and are often unrelated to sensible economic policy.

10. Development Opportunity Costs:The Exchange Rate Regime • “How should developing countries choose their exchange-rate regimes? • During the last four decades, virtually every growth boom in the developing world has been accompanied by a controlled depreciation of the domestic currency. • Yet financial openness makes it all but impossible to manage the exchange rate.” (p. 186)

11. Development Opportunity Costs:The WTO often follows other priorities • “For instance, WTO agreements on anti-dumping, subsidies and countervailing measures, agriculture, textiles, and trade-related intellectual property rights lack any economic rationale beyond the mercantilist interests of a narrow set of powerful groups in advanced industrial countries.” (p. 187)

12. Asian Myths • Does Rodrik deny that the Asian Tigers developed on the basis of export drives? • “That these countries reaped enormous benefits from their progressive integration into the world economy is undeniable. But look closely at what policies produced those results.” (p. 188)

13. Asian Myths • South Korea and Taiwan developed mostly in the 1960s and 70s, before global trade rules were developed and invasive. They had no pressure to open their borders to capital flows.

14. Asian Myths • China also followed a highly unorthodox strategy, violating almost all the trade-regime rules. (No private property rights, extensive protectionism, etc.) • These countries could do their own thing, which is not the case for developing WTO participants today.

15. The Thesis Again • “The available studies reveal no systematic relationship between a country’s average level of tariff and nontariff barriers and its subsequent economic growth rate. • If anything, the evidence for the 1990s indicates a positive relationship between import tariffs and economic growth… countries dismantle their trade restrictions as they grow richer.” (p. 189)

16. Conclusions? • Rodrik concludes: “Unorthodox innovations that depart from the integration rule book are typically part and parcel of such strategies.

17. Conclusions? • Rodrik concludes: Consider “some of the innovations that have been instrumental in kick-starting investment and growth in the past. None came out of a Washington economist’s tool kit.” (p. 190)

18. Conclusions? • Rodrik concludes: • Public enterprises during the Meiji restoration in Japan; • Township and village enterprises in China; • An export processing zone in Mauritius;

19. Conclusions? • Rodrik concludes: • Generous tax incentives for priority investments in Taiwan; • Extensive credit subsidies in South Korea; • infant-industry protection in Brazil during the 1960s and 1970s

20. New Wave of GlobalizationWorld Bank Reading 18 • What was the first wave? • What started it and what stopped it?

21. New Wave of GlobalizationWorld Bank Reading 18 • What was the second wave? • What started it and what stopped it? • What is agglomeration?

22. New Wave of GlobalizationWorld Bank Reading 18 • What is the third wave? • What role have the developing countries played in it? • What are the downsides?

23. New Wave of GlobalizationWorld Bank Reading 18 • What about capital flows? • What about migration? • What about poverty?

24. New Wave of GlobalizationWorld Bank Reading 18 • From 1870 to 1915 • Falling transport costs • First wave of globalization. • Nationalism and war stopped the process. • Trade fell back to 1870 level.

25. New Wave of GlobalizationWorld Bank Reading 18 • From 1945 to 1980, the second wave • This was a return to the pattern of the first wave. • Trade doubled relative to world income, recovering the level of the first wave. • The North-South pattern of trade was restored, but didn’t restore movements of capital and labor.

26. New Wave of GlobalizationWorld Bank Reading 18 • Trade in the second wave was based not on comparative advantage (differences in factor endowments), but on cost savings from agglomeration and scale. • We reach the phase where alternative trade theory has some explanatory power.

27. Economics of Agglomeration • “Firms cluster together, some producing the same thing and others connected by vertical linkages…The presence of a rich network of manufacturing firms provides a positive externality to each firm in the system, allowing it to acquire inputs locally, thus reducing the costs of transport, of coordination, of monitoring and of contracting…

28. Economics of Agglomeration • Clustering enables greater specialization and thus raises productivity” (p. 212). • “But agglomeration economies, good news for those in the clusters, …are bad news for those left out” (Ibid.). • For the industrial world, this was a global age. For the developing world it was not.

29. New Wave of Globalization, post 1980 • This wave has been distinctive. • A large group of developing countries broke into global markets. • Others became increasingly marginalized. • International migration and capital movements again became substantial.

30. Developing Countries Broke into Global Markets • Countries accounting for c. 3 billion people harnessed their labor abundance to gain a competitive advantage in labor-intensive manufactures and services. • 80 percent of their exports were now manufactures. • Newly globalizing developing countries improved their infrastructure, skills and institutions that modern production needs.

31. Openness and Growth • Note the regression evidence of the correlation between openness and growth on p. 218.

32. Why are other countries marginalized? • Countries with about 2 billion people have not integrated into the global industrial economy: most of Africa and many of the economies of the former Soviet Union. • Per capita income here actually declined during the third wave.

33. Why are other countries marginalized? • High transport costs to global markets and poor infrastructure (ports, internal railroads, highways and telecommunications). • Poor economic policies that kept them from joining the club. • Some countries may make it in services later, but won’t in industrialization. Service markets are still far less integrated.

34. International Capital Flows • Total capital flows to developing countries went from less than $28 billion in 1970s to about $306 billion in 1997. • Mergers and acquisitions were the most important source of this increase, especially in conjunction with privatization of public companies. • The top 12 emerging markets receive most of the net inflows:

35. International Capital Flows • The top 12 emerging markets receive most of the net inflows, including Argentina, Brazil, China, India, Malaysia, Mexico and Thailand. Malaysia and Chile were most successful in attracting FDI (of about $2,000 per capita).

36. What are the Implications for Migration?

37. How has this globalization affected poverty? • Overall inequality has declined between the new globalizers and the OECD countries. • Within-country inequality has increased there, especially due to the rise of inequality in China.

38. How has this globalization affected poverty? • China started modernization with extremely equal income distribution and extremely high poverty. • Intra-rural inequality in China has decreased, but • Inequality has grown a lot between the rural areas and the rising urban agglomerations, and between provinces with agglomerations and those without.

39. How has this globalization affected poverty? • Between 1993 and 1998 the number of people in absolute poverty declined by 14 percent to 762 million. • For them, the third wave of globalization is the golden age. Poverty is predominantly rural. • Average years of schooling and life expectancy have improved to levels close or equal to levels achieved by rich countries in 1960.

40. Five Wars of GlobalizationMoises Naim Reading 16 • What are the five? • Drugs, • Arms, • Intellectual Property • People • Money

41. Five Wars of GlobalizationMoises Naim Reading 16 • Who are the contestants? • Governments vs. Resourceful networks empowered by globalization.

42. Five Wars of GlobalizationMoises Naim Reading 16 • Governments fighting these new wars with the old police enforcement tools are losing. Why can’t they win? • How can multilateralism help?

43. Five Wars of GlobalizationMoises Naim Reading 16 • Will continued globalization processes help or hurt the war against illicit trade?

44. Analysis of intellectual propertySee slides 48 and 49

45. Analysis of Trade in Vice MarketsSee slides 66 to 70

46. Five Wars of GlobalizationMoises Naim Reading 16 • Victory may not be possible, but we must try to reverse recent, dramatic gains. • Are these law enforcement problems? • No, they are a global trend that shapes the world as wars formerly did. • We need law enforcement officials, but they alone won’t do. Many types of skilled personnel and new ways of thinking about the problems are needed.

47. Five Wars. I. Drugs • In 1999 the illicit drug trade was at $400 billion worldwide, about 8 percent of world trade. • The US spends between $35 and 40 billion each year on the war on drugs, most for interdiction and intelligence.

48. Five Wars. II. Arms Trafficking • In20% of total small arms trade is illicit trade, generating over $1 billion annually. • Small arms helped fuel 46 of the 49 largest conflicts of the nineties and were responsible for c. 1,000 deaths a day. Over 80% of the victims were women and children.

49. Five Wars. III. Intellectual Property • Piracy costs the United States an estimated $9.4 billion in 2001. • Piracy rate of business software in Japan and France is 40 percent, in Greece and So Korea about 60 percent, and in German and Britain around 30 percent. • How does one stop it in China?

50. Five Wars. III. Intellectual Property • Discuss Pigou. • Price discrimination is standard, routine, normal practice in domestic industries and services. • How is it in international trade? • Notice Naim’s statement on p. 194