TRADITIONAL INSTITUTIONS MEET THE MODERN WORLD

TRADITIONAL INSTITUTIONS MEET THE MODERN WORLD: CASTE GENDER AND SCHOOLING CHOICE IN A GLOBALIZING ECONOMY

K. Munshi & M. Rozenweig

The American Economic Review, Vol. 96 No. 4  (2006) pp. 1225-52

A very short summary

 

In A Nutshell

Some groups have taken advantage of the opportunities globalization has offered whereas others have fallen behind. Part of the reason for this is that we often fail to take into account existing institutions and how they might react to the forces of globalization. In the case of Bombay, the labour market was traditionally organized along caste lines, with lower castes receiving education in the local language in order to enter lower class jobs, and the higher caste individuals receiving education in English such that they might enter university (all taught in English) and hence enter a professional organization. The liberalization that occurred in the 1990s saw a transition away from manufacturing industry to the service industry which meant that the returns to an English education increased greatly whereas return to a local language education were fairly stagnant. However, curiously, lower caste boys did not seem to be sorting into English speaking schools which would have enabled them to enter a more professional labour market. In other words they were taking advantages of globalization.

 

Using survey data for 20 cohorts of school children (before and after the liberalization period) they show that returns to education were rising for English speaking students. They theorize that network externalities were preventing lower caste boys from getting this education. As the demand for labour fluctuated widely informal labour market networks arose: as the quality of a new worker was hard to assess and performance contingent wages could not easily be implemented, recruitment often happened through the caste system whereby a “jobber” would lean on his network of family and caste in order to recommend the workers to the employer. This largely occurred in working class jobs. Participation in this network created a positive externality for the network and hence boys were shepherded into those jobs despite the availability of other professions and this created an intergenerational occupational persistence.

 

The implications of this analysis are that existing institutions, be they formal or informal, may effect incentives of individuals such that they respond in a way that is different than standard theory predict when faced with the opportunities and perils that globalization offers. It is not enough to rely solely on standard trade theory when designing liberalization policy, as this misses many of the interacting factors that may cause results to deviate from those that the theory predict.

TRADE, QUALITY UPGRADING, AND WAGE INEQUALITY

TRADE, QUALITY UPGRADING, AND WAGE INEQUALITY IN THE MEXICAN MANUFACTURING SECTOR

E. A. Verhoogen

Quarterly Journal of Economics (May 2008)

Principal Research Question and Key Result	If liberalization leads to increased exports is there evidence that there is subsequent quality upgrading within firms that export and that this leads to increased employment opportunities for higher skilled workers? If so does this explain why inequality seems to increase when south-north trade is liberalized despite the H-O model predicting that low paid workers as the abundant factor, will be the greatest beneficiaries of liberalization?
Theory	Plants are heterogeneous in productivity and there is a cost to entering the export market such that only the more productive firms so enter. Products are differentiated by quality and consumers in developed world countries have a greater willing ness to pay than the consumers in the developing world (origin) countries. This means that in order to enter the export market firms produce at a higher quality than they do for the home market and in order to do so they need better trained workers who must be paid better wages than their blue collar counterparts. Thus there is differential quality upgrading across plants. Because the plants that are able to export were already higher productivity plants (thus paying higher wages) the effect of this quality upgrade (and subsequent worker upgrade) is to increase inequality.
Motivation	The Heckscher-Ohlin (HO) trade model predicts that in countries such as Mexico where unskilled labour is the abundant factor of production, wage inequality will decrease as a result of integration with a country such as the US whose abundant factor is skilled labour. However, this is not what is observed; wage inequality rose substantially in Mexico during its period of liberalization.
Data	The setting is Mexico. During the peso crisis the cost of imports to US fell as dollar appreciated so exports from Mexico rose, as demand at home contracted due to the recession. There is a brief case study of Volkswagen Mexico, who started exporting the better quality cars they produced, as the lower quality domestic car market shrank. This induced the firm to hire more skilled workers who knew how to operate the robots etc. that produced the better cars. These workers typically had three years education whereas the workers on the regular car line would only have finished high school. Data are in an annual panel for 3263 plants (excluding maquiladoras) in the years 1993-2001 and a smaller number of plants for 84-2001. He has various plant surveys which give information employment, wages, technology and training as well as info on ISO9000 certification (generally a sign of international quality).
Strategy	Wants to test whether existing firms with higher productivity differentially quality upgrade with the consequent rise in wages for higher skilled workers etc. for plants that were more productive than their counterparts before the peso crisis began. However, productivity is unobserved so he uses proxies, his preferred one being log(domestic sales) as it is well measured and should capture something about the productivity of the firm. The dependent variables are variously: export share, white collar wage, blue collar wage, capital intensity, ISO9000 certification. Changes in these values are regressed on fixed effects and the measure of productivity. He estimates separately for the different years (peso crisis, non-peso crisis) and compares coefficients on the productivity measure. Theoretically he hopes to find that β1993-1997 > β1997-2001 i.e. that there was more exporting, white collar wage etc. during the peso crisis.
Results	Table II shows that the initial log domestic sales for the period are associated with higher/lower values of the dependent variables in 1993-97/1997-01. The effect is such a plant that is 10% larger in terms of domestic sales had on average a 0.72% greater wage increase than a smaller plant for the peso crisis period.
Robustness	Using the longer panel (with fewer plant observations) he conducts the same analysis for a similar period of devaluation in 1985-87 and the subsequent recovery period, and again for the same periods as above and finds similar patterns in the coefficients i.e. productivity coefficient larger in times of devaluation. Changes the independent variables to be ISO9000, average schooling, formal training etc. and finds positive correlations, adding evidence for the quality upgrading hypothesis. He also uses alternative proxies for initial productivity such as log(employment), predicted export share etc. and finds very similar patterns of coefficients. The Maquiladora sector was not affected by the devaluation in the same way, as they already were compelled to export 100% of their output. So no such effects should be detectable in those industries. He runs the same analysis for those firms and finds no significant relationships.
Problems	The paper does not seem to add any control variables at all. There are time and fixed effects, but so much was changing in Mexico during this period that could have been correlated with both the devaluation period and the export market, that not to add other controls seems rather optimistic. The paper only deals with export potential that is derived from currency devaluation. Whilst the theory may be generalizable to other forms of reduced trade costs, in reality a number of interacting factors may occur that change the results. For example, one of the key factors in this story is that domestic demand was greatly dampened due to economic contraction at home. If the reduction in trade costs is due to tariff removal rather than devaluation, this may not be the case, and plants may make different decisions about entering the export market, and quality upgrading.
Implications	Whilst the effects of decreasing barriers to entry may in some circumstances be beneficial, this will not always be the case. Specifically the structure of the domestic market and domestic production will determine how firms react to export opportunities. In other words the HO model is not sophisticated enough for its implications to be relied upon in all policy settings. Specifically it does not account for the possibility of quality upgrading within firms that can lead to higher inequality even when the model would predict otherwise.  The identity of the integrators is important, as if consumers have different willingness to pay for quality traits, then there may be incentives for the southern country to upgrade its production quality which may mean that the effects of liberalization are felt by the few rather than the many. The theory developed may help to a priori identify different groups of winners and loser from integration, such that the integration process can be structured so as to be more inclusive, perhaps through additional training for lower skilled workers to enable them to transition through the labour market.

 

 

RAILROADS OF THE RAJ

RAILROADS OF THE RAJ: ESTIMATING THE IMPACT OF TRANSPORTATION INFRASTRUCTURE

D. DONALDSON (2010)

Principal Research Question and Key Result	Did the railroads built in the Raj reduce trade costs, increase trade flows, and increase welfare in the process? The results of the analysis indicate that…
Theory	In a Ricardian trade model with many regions and many commodities trade occurs at a cost (transportation etc.) As different regions have different levels of productivity across products, they have incentives to trade in order to exploit comparative advantage. A new rail link (where the previous transportation options was mainly bullock by road) reduces the bilateral trade cost allowing consumers to buy goods from the cheaper producing district and focus more on producing to their comparative advantage. This model delivers four predictions which are then taken to the data: If a commodity can be made only in one district but is consumed in other districts then the difference in price for the commodity in those two districts reflects trade costs. This is used to then predict the cost of trade in pre and post railway India. The gravity equation form of bilateral trade flows indicates that as trading costs decline bilateral trade flows should increase. Railroads raise real income levels such that when a district is connected to the railroad real incomes should rise. This could occur through a number of channels It is claimed that the share of autarky (how much a district purchases from itself) is a sufficient statistic for estimating the welfare improvements as being the consequence of lower trading costs.
Motivation	Projects aimed at development are often directed at installing infrastructure in order to reduce the costs of trading in order to improve welfare. However, there is a lack of robust empirical analysis that examines the effects of such projects.In terms of the globalization debate, infrastructure can be thought of as one tool for reducing trade barriers. In the case of this paper infrastructure facilitated trade within the country. Often trade debates are about international trade, whereas most trade still occurs within countries and so only to focus on international trade is to miss much of the picture.
Data	Data sources are very varied and will be described in the strategy section.
Strategy	There were several homogenous types of salt produced in Indian districts e.g. Kohat salt which only came from the Kohat mine although it was consumed throughout India. Annual data on 8 types of salt for 124 districts for 70 years is regressed on a variable that lowest cost route effective between the origin of the salt to the destination. This variable is normalized to 1 for railroad, and then values for road, river and coast are estimated using a shortest path algorithm. Uses the estimates in (1) as for salt, and applies to all commodities.  The regresses the value of exports, on the cost of the lowest cost effective route (the salt estimates). He uses trade flow data with over 1.3 million observations. Regresses a measure of real agricultural income per acre by district on a rail dummy that equals 1 in all years when some part of the district is connected to the rail network. A change in autarky in any given district (i.e. how much trade a district does with itself) is driven in this theory by the presence of railroads. If this is the case, then including a measure of autarky in the regression in (3) should induce the coefficient on the rail variable to fall to zero as the effect on agricultural incomes because of rail operates through the openness of a district.
Results	The results indicate that the relative costs of the types of transport being compared to rail are all more expensive per unit distance than rail. In general the elasticity of price to transport distance is 0.135 (1% significance), and the mode specific elasticity is 0.247 (1% significance). Roads appear to be the most expensive presumably as they were the slowest. This is evidence that transportation costs were indeed driving a wedge between the price at origin and the price at destination. Results indicate that trade flows fall as cost of transport increases. Indeed the coefficient on the log of lowest distance is -1.141 (1% significance).  This is very large. He interacts the distance variable with a variable that measures the value of the cargo and one that measures the weight of the cargo to see if the findings are being driven by some quality of the specific goods being delivered. The coefficient on the distance variable is very similar, and there is no significance on the coefficients on the interaction terms. This is evidence that trade flows increased with decreasing transportation costs. The log real income increases by 0.164 log points when the dummy equals 1, indicating that agricultural incomes increased when the railroad arrived in the district. This indicates that the impact of trade increasing was welfare increasing. However, this could have occurred through a number of mechanisms, hence why we move on to (4). When the autarky measure is included the rail coefficient falls to 0.023 and is insignificant, and the autarky coefficient is close to minus 1 and is significant at the 1% level. This is pretty good evidence that the change in agricultural incomes occurred due to changes in openness caused by railroad building.
Robustness	In order to get unbiased estimates the railroads need not to have not been built in areas districts that were particularly promising in terms of trade or agricultural development otherwise spurious correlations would be found. In order to test this he uses planned railroad networks proposed by four different organizations/places, and finds no significant relationship between them and agricultural incomes. The Kennedy plan was a particularly interesting test, as it was proposing to build railroads in the most geographically accessible parts which could also have been the parts best suited for trade/agricultural development.
Problems	I’m going to skip this section as the paper is very detailed and I did not really understand all of it. No doubt there are problems. External validity is always an easy one to mention.
Implications	The immediate implications are that connecting areas within a nation can be important for improving welfare by allowing regions to purchase more cheaply what it is costly for them to produce, and to produce more freely what they are better at producing. Under the conditions examined real incomes rose and as such trade could be a good tool in the fight against poverty.Innovation/investment not addressed by this paper. The context is highly historical and probably not generalizable to the world today. The globalized trading system today could interact with any infrastructure programmes such that we do not see the benefits outlined in this paper. For example, assuming that tariff levels are zero, connecting a port to the interior by rail could reduce the cost of imports such that the interior districts no longer purchase goods from other interior (or similar) districts, thus decreasing incomes in those losing districts (at least in the short term). Perhaps in the long run this exposure to international competitive advantage will increase productivity and efficiency, but it would almost certainly create losses in the short run, and if these occur in an LDC with very low capacity to transition through the production markets, these losses may become structural and permanent. The paper only looks at agricultural incomes as this was the overridingly dominant form of industry at that time in India. In the modern context it is not clear that we would see similar results in a diverse economy producing a number of different goods.