Category Archives: Devlopment Policy and Management (DV441)

Trade Policy for Reversing Marginalization

THE BOTTOM BILLION

P. Collier

Chapter 10: Trade Policy for Reversing Marginalization

A Summary 

In a Nutshell

Trade is not the problem for the bottom billion; indeed export diversification should be their way out of poverty. Agricultural subsidies in the developed world should be reduced to give the developing nations a chance. Protection in the developed world only fosters inefficient industries and is used as a tool for rent-seeking, so it should be dismantled as it is competition that spurs on productivity growth, although he advocates a gradualist approach rather than big bang liberalization. OECD countries should reduce tariffs on developed world goods to a level below those from Asia to allow for Africa etc. to make use of their cheap labour advantage and diversify their exports. This would be only a temporary relief as the WTO is committed to reducing tariffs with Asia.

 Rich Country Problems

  • Agricultural subsidies take away the chance of the bottom billion to export.
  • Higher tariffs on processed goods relative to raw materials mean that bottom billion countries cannot advance productivity, technology, skills etc. associated with processing goods, and condemns then to being producers of low return agricultural products. Exports cannot be diversified because of this incoherence.

 Bottom Billion Problems

  • High tariffs protect parasitic companies. Higher domestic prices for low quality goods.
  • Competition produces productivity gains.
  • Big Bang liberalization will get rid of parasites, but it will not foster a diversified export sector. For this a whole range of other policies are needed.
  • Often tariffs used as patronage/rent-seeking.

 Aid

  • Aid makes things worse. Aid flows in in $ and to buy services the $ must be changed for local currency. This pushes the value of the local currency upwards, hurting exporters. Additionally the buyers of the $ only buy so that they can import, therefore if there a high import restrictions the demand for the forex will be lower, meaning that aid will not actually buy much in terms of services. Importers who need forex can either buy it from exporters or from the aid stocks. Therefore aid is in competition with export, meaning there is less need for export so their earning fall: this happens through the exchange rate.
  • Trade liberalization can help. The way to offset this problem is to increase the supply of imports. If imports become cheaper people want more, and the increased demand can soak up both the forex earned from export and the forex from aid.

 Fair Trade

  • Fair trade is good but it keeps people in low income industries. It is a tiny % of the total trade in even coffee. There is no push for diversification.

  Regional Integration

  • For regional integration to work there must be a club of rich and poor countries so that the poor can benefit from the research base industries of the rich, and the rich can benefit from the cheap labour of the poor. If everyone in the club is poor, you just have a poor regional club.
  • In the EU the external protection kept out labour intensive goods that allowed the poorer states to use their labour advantage to converge with the rich states. In a poor club, the external walls keep out skills based products meaning those will better skills (the already relatively richer states) will do better, so instead of convergence there will be divergence.
  • Good access to local markets is of course essential, but forming customs unions will not help.

 Export Diversification

  • Exporting leads to learning in the bottom billion (not so in the advanced world) so they need to export to get productivity gains. They need to expand exports into labour intensive products and services.
  • To make the most of the competitive labour advantage (that Asia had as it was the only industrializing low wage zone at the time, whereas Africa would now be directly competing against Asia) OECD tariffs need to be lowered below the levels of those good coming in from Asia.
  • The African Growth and Opportunity Act (US) and the All But Arms (EU) programs go some way. But in the former the time limit is too restrictive (3 years) to incentivize producers in Africa to invest in productivity as they know the benefits are strictly limited. The EU program is longer term but the Rules of Origin regulations are so complex and restrictive that it is barely used by African producers to get privileged access.
  • What is needed is one simple scheme and a 2015 phase out, so that industry has an incentive to increase investment in the medium term, but knowing that their advantage will be worn out by 2015.

 Bottom Billion in the WTO

  • The economies of the bottom billion have no place in a trade organization that proceeds by negotiation. They have no stance from which to negotiate. Whether the US has subsidies on cotton produced in the south gravely hurts Chad, but if Chad were to offer to give US access to its market, the US would be supremely uninterested as the potential for generating trade is tiny with such backward economies.
  • What is needed is a transfer round to begin each round of WTO negotiation where unreciprocated openings and gestures are made to the developing world in order to get their markets going.
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NATIONAL REGULATION IN THE GLOBAL ECONOMY

NATIONAL REGULATION IN THE GLOBAL ECONOMY

D. Vogel

Trading Up: Consumer and Environmental Regulation in a Global Economy pp. 1-23

 A Summary

In a Nutshell

Regulation is shaped by forces outside the state. Alliances between protectionist producers and NGO have become commonplace and are important sources of opposition to trade liberalization.

 The WTO has played an important role in preventing the use of unilateral trade restrictions for the purpose of promoting regulation both domestically and internationally. And whilst such agreements and treaties have limited the role of national regulations, trade liberalization can just as easily be achieved by forcing national with lower standards to raise them as it can by forcing countries with higher standards to lower them. The former is the consequence of what has been called the California effect where there is one wealthy green jurisdiction which promotes a race to the top amongst their trading partners. This is because stricter standards represent a source of comparative advantage to such states in part because their producers find it easiest to comply with the regulations. Such firms can compete against foreign competitors by increasing their standards. Thus exporters to such a state need in to raise their own standards, and there is a knock-on effect of their trading partners then needing to do so as well…. and so on.

 Such an effect is likely to be confined to product standards rather than standards that affect how goods are produced. Trade liberalization is most likely to strengthen consumer and environmental protection when a group of nations has agreed to reduce the role of regulations as trade barriers and the most powerful among them has domestic constituencies that support stronger regulatory standards.

 It is only recently that non-tariff barriers such as regulations have become continuing sources of conflict. This is due to the increased drive for economic integration, the growth in the amount of regulation, and the expansion of trade itself (by bringing new consumers into contact with foreign products, as well as the negative effects of the physical act of trade itself).

 

RULING THE WORLD

RULING THE WORLD

L. Gruber

Chapter 7 NAFTA and Beyond: Is Free Trade Contagious?

A Summary 

In a Nutshell

The developing world may be ambivalent about free trade but they have little room for maneuver, in that they have to join certain institutions in order not to be excluded from certain agreements. A hegemon does not need to coerce as it has go-it-alone power. Potential partners have to on the inside of a deal in order to avoid the costs of being outside it.

 The argument is that Mexico in making overtures to the USA to sign the NAFTA was not doing so because it was clearly pursuing its own advantage. Indeed there were many opponents to the plan within Mexico, and it provoked much violent opposition. Neither was Mexico forced into the deal as they were the ones that initiated talks. Rather, Mexico saw that it was the lesser of two evils given that Canada and the US had signed the FTA a few years previously. Mexico saw that if it was not included in the process it would become economically marginalized, and this would have had severe consequences as the US was by far and away its largest trading partner. This then was a “scramble for inclusion”. The cost of mitigating this economic marginalization was that they were forced to liberalize much more rapidly than they might otherwise have done meaning that structural adjustment repercussions were much more severe than had they pursued the process of gradual liberalization that had begun in the 80s.

 Likewise Canada had no real interest in signing NAFTA as the liberal government of the time (successors to the conservative government that signed the FTA) were not pro-fee traders and were critics of the FTA. Rather they saw that the US would use its “go-it-alone” power to make a bilateral agreement with Mexico which would threaten their economic position in the region.

 Thus a cooperative agreement signed between A and B alters the strategic calculus of player C in deciding whether he wants to be part of the union. Likewise the decision of C to enter into A and B’s union alters the strategic calculus of D, another natural trading partner. This is why we have seen in recent history the formation of the American, EU and Asian trading blocs. Gruber particularly draws attention to the subsequent calls by LA states for trade integration: MERCOSUR etc. As painful as the deepening of north south integration will be for the LA economies, the alternative marginalization would be even worse.

 Background to NAFTA

  • PRI had been slowly liberalizing since mid-1980s, lowering tariffs and import licenses etc. Domestic response was ambivalent: ISI industries depended on protection, and agriculture was fragile. To remove agro support was to risk a mass migration from countryside to city. Inequality was serious and growing and trade liberalization was blamed.
  • The PRI was losing its grip on power, so increased liberalization was not predicted given the domestic climate and lack of strong government.
  • However, in 1990 the NAFTA was agreed and it went way beyond previous liberalizations. Why did this happen?

 Decision to implement NAFTA

  • An agreement with the US would mitigate the negative trade and investment discrimination that Mexico might otherwise experience as a result of its exclusion from the trading blocs. A desire “not to be shut out”. Mexico’s ties to US and Canada were very important – over 50% FDI came from US and profitability of export business dependent on US customers
  • The FTA agreement reduced Mexico’s access to the US market. Head to head competition with Canadian imports to the US was strong so they would lose from lowered tariffs between Canada and US.
  • The agreement was voluntary – no US coercion. It wasn’t needed. Although trade with US very important to Mex, trade with Mex accounted for 1% GDP for the US
  • The consideration were thus more defensive – the desire to mitigate losses from the FTA – rather than proactive on the part of the US (as suggested by realist interpretations).

 Assessing the Effects of NAFTA

  • Tariff removal increases trade – consumers benefit from lower priced goods, and comparative advantage generates productivity and efficiency gains.
  • There could be costs as consumers in Mex switch to low cost US/Canadian goods which they previously got from Japan, thus reducing revenues of government which would be made up by direct taxes on citizens. The overall effect depends on sign of TRADE CREATION – ADJUSTMENT COSTS – TRADE DIVERSION.
  • This was overwhelmingly +ve for Mex. Mex concentrates on labour intensive, US/Canada on research intensive. Mex already getting over 50% imports from US/Canada. Mex as smallest economy stood to gain the most.
  • However, side agreements such as harmonized labour and environmental standards could hurt Mex’s comparative advantage in the long run. Businesses may now set up in US to service larger US domestic market.
  • All else equal there would have been less political and economic upheaval had Mexico not been forced into NAFTA. A gradual transition as it was already doing would have been possible.

 Negatives

  • Strong response from fragile industries (textiles, trucking, procurement).
  • FDI did not increase due to continued domestic instability (Zapatista uprising in Chiapas).
  • Little protection for Mexico against US reneging (small opportunity cost of reneging for the US, whereas huge for Mex).
  • Much more aggressive liberalization.
  • Nearly all tariffs to be reduced in 10 years.
  • US showed little regard in helping to minimize transition costs which it knew would be huge as Mex was a developing county – higher initial barriers so more radical adjustment; low factor mobility; poor infrastructure; people living on subsistence cannot bear even small disruptions.

 Canada

  • Political climate not favourable to more free trade.
  • US would have signed anyway regardless of Canadian involvement. Canada would have been worse off had it not signed so it was effectively forced to do so.
  • Mex would have got same special treatment and access to US markets and this would dilute the Canadian advantage. The US would have been a hub of trade, and Canada merely a spoke so Canadian exports would have become less competitive and capital would flow to the US. Mex industry would have been able to get parts duty free from US and this could have made Canadian exports less competitive. So it would have all the disadvantages and no access to Mexican consumers.

INTERNATIONAL TRADE MEETS INTELLECTUAL PROPERTY

INTERNATIONAL TRADE MEETS INTELLECTUAL PROPERTY: THE MAKING OF THE TRIPS AGREEMENT

Kennedy School of Government Case Program NR15-02-1661.0

A Summary 

In a Nutshell

Nice example of how international cooperation happens.

Collective action problems overcome as the main beneficiaries were a small group of industries that were able to combine their influence to organize in favour of changing the status quo despite opposition from many quarters. This small group managed to make IP a moral issue. Many developing countries believed that IP protection was just a means of controlling the technologies that would allow them to develop, and that large companies should be compelled to license their technologies domestically. A number of countries were willing concede this point for better access to manufacturing/agricultural markets, and a non-traditional area such as IP probably would  not have been agreed upon had concessions in other areas not been available.

 In a nice example of a two level game, once the UR had broken down, Dunkel presented a draft agreement. Although he was ambivalent about IP he recognized that a proposal would not be successful if it did not take a strong stance on IP, and so he included it in the draft agreement.

American Trade Politics

THE OLD SYSTEM: PROTECTION FOR CONGRESS

T. Destler

Chapter 2 in American Trade Politics

A Summary 

In a Nutshell

Members of Congress realized in the recent post-depression years of the mid-thirties that the protectionism that had occurred after the onset of the depression, had exacerbated the problems. However, their constituent members would of course give priority to protecting themselves, and thus congressmen faced direct one-sided pressure from producer interests and this prevented them from making good the bad trade law. This is an example of the type of two-level game that Putnam discusses.

 The solution to the problem was the congress legislated itself out of making product specific trade law. This gave them political protection as the buck stopped somewhere else. This was achieved by linking tariff setting to international negotiations which was clearly an executive prerogative. Thus the President could negotiate to reduce tariffs by up to 50%. Yet there remained the belief that under exceptional circumstances American industries ought to have recourse to trade protection. Thus escape clauses were permitted whereby industries could apply for relief if they felt they were unnecessarily injured by US trade concessions. Trade Adjustment Assistance allowed specific workers or firms hurt by import, to apply for government financial, technical and retraining assistance including relocation allowances that would help firms to move to other lines of endeavor (Trade Expansion Act). This is an important example of how to correct the loses from trade, that perhaps we do not see enough of currently.

 Ultimately however, there were industries so badly hurt that rules of exception could not be sufficient. The most important special case was textiles, followed by certain agricultural products. The textile union had sufficient weight to threaten general trade policymaking unless specific interests were accommodated. Unless this key industry was appeased, Congress was unlikely to approve general trade-expanding legislation.

 The advantage of this system was the congressmen were free to make noise and introduce bills to favour certain constituents knowing that nothing was likely to result, thus avoiding final responsibility. They could avoid the choice between good politics and good policy.

 There has been a contraction of the system as the system has become a victim of its own success. This is because as tariffs have been reduced, their importance has diminished which has revealed no-tariff barriers to be impediments to trade. These are somewhat harder to define, and also more divisive and thus harder to remove (environmental regs etc.). Whilst the focus was on tariffs, states could be liberal on cross-border transactions but interventionist at home. But these domestic actions had consequences for trade which became more visible as tariffs reduced. This led inevitable to a re-focus on NTBs.

[Implications

Using Putnam’s theory, and Destler’s examples, a new explanation of protectionism is revealed. This rejects purely societal or realist interpretations to show how trade policy is the result of domestic institutional conflicts. There is not merely one state actor, there are many, and they respond to different pressures in different ways. Thus the level and type of protection is dependent upon how political power is distributed amongst those different actors.

Power was delegated to the President. To a certain extent he stands above the individual distributional conflicts that pressure congressmen. He is concerned with getting re-elected, and the best way to do that is by improving the economy.]

DIPLOMACY AND DOMESTIC POLITICS

DIPLOMACY AND DOMESTIC POLITICS: THE LOGIC OF TWO-LEVEL GAMES

R.D. Putnam (1988)

DV441 LT4

 A Summary

In a Nutshell

Putnam wants to model how domestic politics affects international relations, thus leaving behind purely statist/realist perspectives. He starts from the assumption that international decision makers are concerned both with domestic and international pressures. Additionally, these decision makers, known formally as the “state” are not the unitary actors whose preferences do not change despite successive governments as in the realist formulation. Rather parties, social cleavages, elections etc. affect international relations not merely state actors and institutional arrangements. Central-executives mediate between domestic and international pressures.

 He models the process of international cooperation as a two level game. At the national level politicians win power by constructing coalitions of groups who pressure the government to adopt favourable policies. At the international level governments seek to maximize their own ability to satisfy domestic pressures while minimizing any unwanted consequences of foreign developments. Leaders appear in both games. What may be rational in one game may be irrational in the other.

  •  Level I:                 bargaining between the negotiators leads to tentative agreement
  • Level II:               discussions within constituents as to whether to ratify

 The agreement must be ratified by both sides, and it is either voted up or down, amendments cannot happen without re-opening the Level I discussions.

The wins set of the Level II constituency contains all the Level I agreements that will be ratified. There will be agreement when the Level I agreement falls in the Level II win-set, of both constituencies. The interaction of the two constituent win-sets determines the type of Level I agreement that is possible.

 Win-Sets

  • Larger win-sets make Level I agreement more likely. Small win sets imply a breakdown at the Level I stage. Although repeated action (Axelrod) can make voluntary defection less likely, win-set size determines the level of involuntary defection (from not being able to secure ratification). So negotiator credibility may be low due to inability to deliver on the promises, even if the costs of reneging are thought to be high in terms of repeated interaction theory. Involuntary defection can be as deadly as the fear of voluntary defection.
  • Relative size of respective Level II win sets affects distribution of joint gains from international cooperation. The larger the perceived win set of the other negotiator the more he can be pushed around. So a smaller win set can be a negotiating advantage. “A third world leader whose domestic position is relatively weak (Argentina’s Alfonsin?) should be able to drive a better bargain with his international creditors, other things being equal, than one whose domestic standing is more solid (Mexico’s de la Madrid?).”

 Determinants of the Win Set

  • Distribution of power, preferences and coalitions in the Level II constituents – costs of no agreement will affect different member of the constituency differently, and support may be generic (e.g. those always in favour/against of freer trade). The win set size will depend on relative power of those forces [collective action problems, cleavages predicting preferences, worker skills etc. etc.].
    • If there is homogenous conflict (everyone wants more of something e.g. oil allowances, but there are doves and hawks, so conflict divides how much to push for in international agreement) the negotiator can use implicit threat of hawks to push for better results. However chances of involuntary defection are higher.
    • If there is heterogeneous conflict there is no “more the better” principle. Sometimes cleavages will actually help in international agreement however, as there will be more alternatives in the win set that could get a majority support. It depends on the distribution of the cleavages.
    • It is not clear that all groups will participate in ratification (Gowa) especially when benefits/costs are more concentrated on large groups (monetary policy) rather than small groups (trade policy). Level II games will be much more important in the latter.
    • When negotiating on various proposals, negotiators can compensate losses of certain domestic groups (e.g. by getting access to foreign markets) even if they have to agree on other policies where they lose, and would not thus be possible to implement on a national only level.
    • Size of the win-set depends on Level II institutions – e.g. is two thirds majority needed etc. A large majority rule improves bargaining position but reduces likelihood of cooperation. Not all ratification processes are formal e.g. party discipline can increase win-set. The greater the autonomy of the decision maker from the constituents, the greater the size of the win-set (e.g. central bankers). However, the stronger the state, the weaker the bargaining position internationally as feigning lack of domestic support will be less credible e.g. authoritarian regimes.
    • Size of the win-set depends on the strategies of the Level I negotiators. Efforts to increase (pre-level I softening up of public opinion) or decrease (organizing strikes etc.) the win sets can affect the Level I negotiations. Side payments can be used, and often negotiators are colluding to get ratification in both constituencies. Good will is important and can in some instances expand the win-set. Popularity of each other negotiator is important and should be increased in order to increase the win-set of the other side.

 Uncertainty

  • Uncertainty about the other’s win-set increases concern regarding involuntary defection. Deals can only be done if both sides think the other has the capability to deliver.

 Reverberation

  • International pressures can reverberate into the domestic field to change public opinion and thus win-sets during the negotiation process. Messages from abroad can change minds.

 Role of Chief Negotiator

  • Until now he has been assumed to have no personal policy preferences. Principal-Agent theory reminds us this is unrealistic. His motives may include: enhancing his own standing by winning political resources or minimizing losses; shifting the balance of power at level II toward policies he prefers but might not otherwise be domestically possible (e.g. IMF deals in LA); pursue own conception of the national interest.
  • Even if a deal in in the level II win set if the negotiator is a head of state for example he may not agree at level I, and thus retains veto power. He may be caught in a pattern of policy that means even if a deal is in the Level II win-set; it may be too costly for him to build a new coalition away from the coalition based on previous policy.

BARRIERS OR BENEFITS?

BARRIERS OR BENEFITS?

D. Vogel (1997) pp 38-56

 A Summary 

In a Nutshell

The Krasner theory argues that there will be more cooperation when there is a dominant hegemon. We might question whether this hegemonic power distribution is good or bad for development. There are points to be made on either side.

  • Good:    Hegemon wants trade; trade leads to cooperation, ideas, peace; hegemon can overcome collective action problems by use of selective incentives.
  • Bad:       Hegemon can force openness too soon relative to development status; depends on identity of hegemon; free trade has different effects in different economies; can impose its own organizational structure on free trade (agriculture etc.) that maintains its interests but not the interests of the rest of the world.   

 A hegemon is not necessary for cooperation for Axelrod, what are needed are iterated interactions with an infinite horizon. The tit-for-tat interaction can make it more profitable to trade cooperatively with a partner than the defect strategy which appears more beneficial in a PD game with limited iterations. Institutions are not a necessary component of this type of cooperation.

 Yet institutions may provide the forum for the iterated interactions that make possible the type of cooperation that Axelrod proposes, and realists are skeptical about. They can help solve disputes as to the meaning of cooperation. This includes for example the trade dispute panel of the WTO.

 This text supplies examples which seem to show that in practice there is evidence to suggest that a hegemon is able to impose its own will upon the world trading system. If the developing, or indeed developed world opposes such a move they can use the institutionally arranged dispute settlement process, although in line with the realist prediction, there is no one that can compel the state to adhere to the rules.

 Auto Taxes

The Automobile Tax case where the legality of US environmental tax penalties for certain types of car was challenged by the EC at the WTO is a case in point. Although the ruling was largely in favour of the US regulations, one provision was held to be WTO inconsistent as it discriminated between domestic and imported goods. However, the US refused to change the provision arguing that it had no adverse impact on EU companies. This was a bone of contention in the EC who complained that it did not bode well for the future organization of the multilateral trade system.

 Tuna Dolphin

The Tuna and Dolphin case was related to a US law the banned imports of tuna that had been produced using fishing methods that did not comply with US regulations (enacted to protect dolphin). Mexico filed a complaint with GATT as import restrictions based upon how a product is produced are not permitted. The panel ruled against the US. This ruling outraged environmentalists. The EC and other trading partners were pleased, as they resented the frequent use of unilateral trade sanctions to influence the conservation practices of the US trading partners. The US refused to abide by the ruling.

 A second ruling was similarly ignored by the US. There was a lot of pressure at home from environmental groups – two level games (Putnam).

 Leg Hold Traps

The EC banned imports of fur from nations using leg-hold traps rather than more humane methods. This was response to an intense moral campaign at home. The ban outraged US/Canadians especially as most of the worst affected were indigenous peoples who relied solely on the sale of pelts for their income. The commission decided to postpone the ban in order to allow its partners time to find more humane methods. They were willing to wait for ISO standards (an 80 other countries had already banned them, so action was a lot less unilateral than the US actions on tuna etc.).

INTERNATIONAL THREATS AND INTERNAL POLITICS

INTERNATIONAL THREATS AND INTERNAL POLITICS: BRAZIL, THE ED AND THE US, 1985-1987

J. Odell (1993)

 A Summary

In a Nutshell

Within the context of trade policy and international negotiations Odell looks at when the use of threats and coercion is a valuable tool to influence other countries’ policy choices. Traditionally there have been two schools of thought a) that failure to use the power available to a state simply opens it to exploitation by others b) that coercion rarely pays as it breaks down the networks of trust and thus the beneficial mutual relationships that have been insitutionalised based on a foundation of cooperation and trust. Odell proposes a model that is more subtle and predicts the success or otherwise of coercive tactics on a case by case basis. He acknowledges that the tactics employed by the aggressor (country A) toward the target (country B) as well as the relative harm that can actually be inflicted by country A on country B are important in judging whether coercion could be successful. However he asserts that more important are two other variables: 

  1. Domestic situation in country A – if the constituents of the aggressor government or society do not agree with the threat they may persuade the government not to go ahead, or they may impose political costs if the government goes ahead. Country B knows of opposition within country A and this goes to the credibility of the threat. In this view “some fairly high degree of internal consensus is necessary in order to realise benefits of international power via coercion.”
  2. Domestic situation within country B – assuming the threat is credible, B will not comply with the demands if it faces greater net internal political penalties by doing so than from accepting the consequences on non-compliance. Threats can generate a climate of hostility within the target country (B). 

Application

  • He applies his model to two separate trade disputes. He goes in to a lot of detail regarding the different disputes which will not be summarised here. Only the main conclusions and general evidence seem interesting.
  • Brazil – Reagan in 1985 threatened to retaliate against Brazil if it did not change its program designed to promote domestic computer industries.
  • ED – Reagan in 1985 threatened the EC with trade sanctions if it did not remove feedgrain export barriers between US and Spain/Portugal
  • The results of the trade dispute were very different: the EC capitulated, Brazil did not. Why did the coercive strategy yield less from the weaker country and more from the EC? Brazil was 26 times more dependent on US trade wise as compared the EC, plus it was in the middle of a debt crisis so loss of trade would have been fatal!
  • Tactical differences aside (the threat to the EC was much more specific) how do his two variables explain the differences? 

Brazil

  • Domestic opposition to the threats in country A (USA): support was not large from US computer industry as many had subsidiaries inside Brazil and knew how to operate in the market, and did not want business to be disturbed. In fact the supposed beneficiaries of the Reagan assault were not pressing for coercion and may well have opposed actually carrying out the threat. The threat then was not hugely credible. Some firms even took steps to undermine Reagan and certainly sought to distance themselves from the policy.
  • Domestic opposition to capitulation in country B (Brazil) – there were strong political pressures to stand fast. Brazil refused to negotiate for more than 8 months. Brazilian imports of US computers was only 1% of the total world market and the law under question was merely a codification of existing practices. The program was supported by industry, political actors aligned with industry, the military (wanting to be less reliant on foreign technology) etc. Only once the US pulled back and said it would not go through with the threats did Brazil come to the table. The political costs of capitulation were too high! 

EC

  • Domestic opposition to the threats in country A (USA) – opposition was virtually non-existent. Feedgrain producers were united in furious protest. Joined by the farm lobby  etc. There were no actions taken to undercut Reagan’s credibility.
  • Domestic opposition to capitulation in country B (EC) – Initially the EC stood fast behind its belief that it was in the right. France was especially hard line (hahaha Amandine) as they stood to lose the most from the removal of the restrictions. However, a list of counter-retaliation restrictions was drawn up by the US which covered white wine, brandy, cheese, olives etc. meaning that many of the countries of the EC would have felt the adverse effects of a trade war with the US. Thus voices from Germany and UK etc. were heard in support of capitulation as a trade war would have been too expensive a price for them to pay for protection of French farmers who could be compensated in other ways. The biggest pressures on the commission to reach agreement was from industry. 
  • “In coercive distribution bargaining, if a substantial share of the constituents of threatening government A who stand to benefit from B’s compliance nevertheless oppose implementing the threat, and is state B is aware of tis internal opposition, the credibility of A;s threat will be undermined, other things being equal, even when A has much greater power resources and B is highly vulnerable to them. Second, even when one reading of B’s interests dictates complying, and even when the government executive prefers to do so, B will not do so if the executive faces greater internal political penalties from complying than from accepting no-agreement.”

ANARCHY AND THE LIMITS OF COOPERATION

ANARCHY AND THE LIMITS OF COOPERATION: A REALIST CRITIQUE OF THE NEWEST LIBERAL INSTITUTIONALISM

J.M. Grieco (1988)

A Summary 

In a Nutshell

Realism as pertaining to international relations means that international anarchy fosters competition amongst states that restrains their ability to cooperate with each other. During the 1950s liberal institutional theory emerged which said that problems in state cooperation (mostly caused by the ability/propensity to cheat) could be overcome by strong international institutions that could effectively police agreements, thus making cheating more costly and ensuring compliance. In other words, institutions can help states to cooperate. The tensions and conflicts of the 1970s in part swept away these ideas, however, the limited cooperation that still occurred in that decade spurred the rise in the 80s of the neo-liberal institutional theory (Axelrod etc.) [Nothing to do with neoliberal in the sense of trade liberalization etc.] This accepted some of the central tenets of the realistic view (anarchy, state centric policy etc.) but maintained that international cooperation could be achieved with international institutions as mediators.

 Grieco argues that the NLI theory does not in fact employ the same meaning of “anarchy” as the realist theory. NLI theory is based on the premise that states seek to maximize their absolute gains in international policy. Therefore they are in a sense indifferent to how much they gain relative to other players. The main obstacle to cooperation in this view (and hence the definition of anarchy) is cheating. The theory suggests that cheating can be overcome by institutions. The realist view on the other hand is that states are concerned with absolute and relative gains. They worry that their partners may gain more than they do, and so even in the absence of cheating a state may withdraw from an agreement if the other partners will gain more from it than they do, hence subverting existing power structures. The main reason for this worry is uncertainty over future intentions of parties that lead states to want to maintain their power vis-à-vis the world. In other words, this is the threat of war. NLI theory fails to consider the threat of war arising from international anarchy.

 Central Features of Realism

  1. States are the major actors in world affairs
  2. The international environment penalizes states if they fail to protect their interests
  3. International anarchy is the force shaping the motives of states
  4. States in anarchy are preoccupied with power and security and often fail to cooperate even in the face of common interests
  5. International institutions affect the prospects for cooperation only marginally.

 New-Liberal Institutionalism

  • NLI broadly accepts 1-4 but says that institutions can help states work together.
  • A state may cooperate or defect. A state prefers CC to DD (CC>DD). But it prefers also to cheat so DC>CC. It also prefers mutual defection to being cheated upon (DD>CD). Overall then DC>CC>DD>CD. The equilibrium then is DD in the absence of some centralized authority that can bind states to their promises. NLI stresses that these forces do actually exist. Moreover if states operate on a tit-for-tat basis, and cooperate based on others’ cooperation (including iterative games) then combined with the costs of defection, mutual cooperation can be the best strategy. This is especially true when the benefits from cooperation are large compared with the costs of sanctioning cheaters and monitoring compliance (costs reduced by the actions of international institutions).
  • Regimes reinforce reciprocity delegitimize defection thus making it more costly.
  • One way of reducing monitoring costs is to keep the number of parties to an agreement small.

 Realism and Neo-Liberal Institutionalism

  • NLI says that states seek the greatest possible individual gain when playing the prisoner dilemma universe. The chosen strategy is the one that yields the highest score given what a state expects the other to do, and institutions ensure that the highest score is achieved by mutual cooperation. i.e. in iterated games, states choose cooperation solely out of a desire to maximize its individual long-term payoffs.
  • States do not gain or lose utility based on the utility gained/lost by other players.
  • Thus the major problem in the NLI world is cheating, and this is overcome by institutions.
  • Realists also think of cheating as a problem. For them, one source of failure to cooperate is the lack of central agency to enforce promises. Anarchy for realists is the absence of a common government in world politics. Therefore, although this includes the absence of an agency to prevent cheating, it also includes the absence of an agency to prevent other states from using violence or the threat of violence to destroy or enslave. Thus states may be driven by greed and ambition, but they are also driven by fear and mistrust.
  • Put like this, it is clear that utility maximization is not the overall goal, rather survival is their core interest. This means they are sensitive to any erosion in their standing or relative capabilities. They therefore are not interested in absolute gains, but in preventing others from achieving advances in their relative capabilities.
  • This is so strong that states may forego pacts which promise sizeable absolute gains, solely in order to prevent partners benefiting from relatively larger gains thus threatening their position in the world.
  • This is called the “relative gains problem”.
  • This is not necessarily an aggressive position. Generally it is defensive.
  • The problem is founded on uncertainty about the future intentions of partners and their relative future capabilities.

 Utility

  • For the NLI the utility of a state from cooperation is equal to its absolute value: U = V
  • For realists it is also a function of the partner’s payoff U = V – k(W-V) where W is the partner’s payoff and k is the coefficient that captures how sensitive a state is to relative payoff gaps. K will vary, but it will always be greater than zero. It is dependent on factors such as how long partners have been cooperating for, how predictable are the intentions, whether power is on the rise or decline, the particular issue area etc.
  • Faced with both cheating and relative gains problems states seek to ensure that others comply with agreements and that the collaboration produces balanced gains.
  • This balancing is a central part of diplomatic cooperation.

 [What does this mean in the context of globalization? This is presumably why we continue to see trade disputes. Assuming that politicians believe that an open economy is good for everyone (i.e. discounting the possibility that social cleavages, or non-economic state goals affect trade policy) then trade disputes should not arise. There would be no retaliation to unilateral measures by one county to restrict trade, as the unilateral measures in the long run only negatively affect the country that enacts them. However, if trade is part of the power play to retain influence in the world, as Huntington suggests, then allowing one state to gain advantage economically would not be permissible as it would threaten the power position of the other trading partner.

 Perhaps more critically it seems to me, if the realist view is correct then there is no real hope for globalization. Assuming the world opens up all its markets and the equilibrium is achieved whereby each produces subject to its competitive advantage, then states will simply have to accept the level of power which their advantageous industries afford them. This view seems highly unrealistic. States will continue to want to have industries that afford them economic and hence power dominance to maintain their position in their world i.e. technologies, military equipment, etc. and will be highly unwilling to allow another state’s competitive advantage to designate it as producer of products which give greater economic power.

 If the functioning of historical international trade/politics has meant that the USA has gained hegemonic power, and globalization would to some extent threaten that power, the realist theory should predict that they will not be willing to cooperate even if it would mean absolute gains for the USA, as it will necessarily produce potentially even larger gains for other trading partners, especially as the developing world ascends. Could we for example imagine the USA allowing China to achieve a position of dominance based on trade etc.?]

 

 

STATE POWER AND THE STRUCTURE OF INTERNATIONAL TRADE

STATE POWER AND THE STRUCTURE OF INTERNATIONAL TRADE

S.D. Krasner (1976)

DV441 LT2

A Summary 

In a Nutshell

Krasner develops a model of receptiveness to open trade based on the interests of states. This contrasts with last week’s readings which focus on societal cleavages that explain the openness to trade liberalisation. He sets up this model not to specifically refute other perspectives although presumably the superiority of his approach is implicit. He does specifically mention wishing to refute the idea that states open trade policy as the result of international elements beyond the control of any state or system created by states. His specific findings are that trade openness is most likely to increase when there is one dominant and ascending hegemonic power. However, states are not always able to act in their best interest due to past policy choice constraints, therefore often some large scale exogenous event is needed to act as a catalyst, to sweep away the previous policy environment.

 The Model

He calls his model the “state-power” model (SPM). It is trying to explain why we see policy that is not in line with neo-classical theory. Theory states that open trade maximises aggregate economic utility and this is what states are seeking to do. Why then do we see protectionism? The answer is that states are pursuing at least four separate goals, and their relative importance and how they interact with freer trade determines policy.

  1. Aggregate national income goal – greater openness leads to greater income. This is so for all states regardless of size or development, although it may benefit smaller states more as they have higher ratios of trade to national income.
  2. Social stability goal – greater openness means exposing domestic economy to the vicissitudes of the world economy. Social instability increases as domestic factors have to adjust to world pricing levels. This is less so in large states as they are less involved in the world economy. Additionally, more developed states are better able to adjust. Instability may be mitigated by increased prosperity.
  3. Political power goal – relative costs of closure are smaller for large states and more for developed states. So a large developed state will find its political power enhanced by an open trading system. [I don’t really understand this point].
  4. Economic growth goal – growth generally associated with openness in small states due to efficiency savings and access to world markets etc. This benefits countries with advanced technology that do not need to protect infant industries etc. Large states need to maintain technological needs if it is to survive the open competition to service its domestic market. It is hard to specify reactions by medium sized states – some say it retards development (ISI, dependistas) others say it spurs economic transformation.

 Next he imagines different international makeups to see which would lead to openness.

  1. Lots of small advanced states – likely to want open structure due to income and growth goals. Instability is mitigated by growth and no loss of power as all in same boat.
  2. Large unequally developed states – likely to want closed structure. Only modest income gains, more instability in less developed countries as well as loss of power.
  3. Hegemonic system – one single state much larger and relatively more advanced than its trading partners. Hegemonic state wants open structure to increase income and growth (when it is ascending – i.e. technological lead is increasing). The open structure increased its power and instability is mitigated by high factor mobility due to skills and technology. Small states likewise will want to be open. Medium states are hard to predict, it depends on the ways the hegemonic state uses its power. Symbolically the hegemonic state stands as an example of successful policies even if they would not be appropriate for all [Washington consensus?]. It can use its resources to create an open structure. It can offer positive incentives (access to market and cheap exports) and negative ones (withholding grants etc. [IMF stabilisation?]). The author states this is the type of situation when we are most likely to see openness increasing.

 Testing the Theory

He looks at tariffs, trade as a proportion of income, and the concentration of trade within specific trading blocs to define periods from 1870-1970 into periods of expanding/contracting free trade. I will not go into all the detail other than to point out the following contradictions highlighted by Krasner:

  • 1945-46 is well explained by the theory. USA was in ascendency and the international trade structure became ever more open. This was the time of the GATT, lowered tariffs, rising trade proportions, and extensions of trade away from traditional blocs (USSR aside). USA used leverage to force Britain to end its imperial preference system. Bretton-Woods revolutionised the monetary system. Behind the economics the USA military stood as protectors of other industrialised market economies – a big incentive for them to accept free trade.
  • 1960 to 1976 is not well explained by the model. The size and development level of the US had fallen but there was no return to protectionism as the model would envisage. This was the time of the Kennedy Round of international tariff cuts. This was a time of increased openness but the SPM predicts a downturn or faltering in these indicators as American power waned.

 Amending the Model

  • Krasner notes that Britain’s free trade commitment lasted well beyond the time when its position in the world declined, and USA’s commitment to openness started many years after it began its rise to hegemonic dominance and continued during its period of decline. So changes do not move in step with state interests.
  • This is because policies are “sticky” (institutions live longer than the environments in which they are created, social groups benefitting from policy have access to lobby etc.) Once they are adopted they are pursued until some event shows them to be no longer feasible. [Presumably this is also a function of needing to placate the new winners and losers that are made by a change in policy]. States become locked in prior policy choices and have to wait until catalytic events allow for dramatic moves of policy to align them with state interests.

WHY INTERNATIONAL PRIMACY MATTERS

WHY INTERNATIONAL PRIMACY MATTERS

S.P. Huntington

International Security, Vol. 17 No. 4 (Spring, 1993) pp. 68-83

 A summary

In a Nutshell

Primacy means a government is able to exercise more influence on the behavior of more actors with respect to more issues than any other government can. With respect to this kind of power, absolute levels (or gains) of power are meaningless. An actor gains or loses power only with respect to some other actor. A state wants international power, partly for ego reasons, but mostly to protect its security and prevent, deflect or defeat threats to that security. It may also promote its values abroad.  This primacy is also a means of achieving one’s international goals without recourse to war.

 Economic primacy in particular is important. To economists, absolute gains are important, but to politicians and states it is relative gains. Economic prosperity is not only a means of increasing well-being, but a means of increasing power. Thus the realist theory of international relations, whereby international politics is anarchic and in order to ensure security states must maximize their power indicates that economic development is another tool for attaining power.  As such decisions about international economics, trade etc. need to be made bearing in mind the relative gains to be made. Thus even if a trade agreement increases substantially economic prosperity in all signatory states, it would not be in the interest of a state to be party to that agreement if it meant losing some economic power relative to another state such that its primacy was challenged.

 In the context of the rise of Japan as an economic superpower, Huntington argues that loss of primacy to Japan would be highly damaging. Thus the US needed to adopt a power maximizing strategy to prevent Japan exploiting the openness of the US economy and to induce Japan to open further its markets.

CLASS NOTES

CLASS NOTES

Globalization (Realist perspective)

If globalization is such a neat solution to the problem of finding prosperity why do we not see more of it? Realists, answer that it is because politicians are in charge not economists, and politicians are only concerned with attaining power. Their policy choices are concerned with capturing and retaining power.

 Globalization and Power

Societal perspective says trade policy will be based on societal cleavages assuming the interested groups can apply sufficient pressure on the government. In a democracy the politicians cater to the interests of the voters, or the ruling elite in an autocracy.

Gowa notes that societal preferences may not end in policy given collective action problems. Certain groups have difficulty voicing their preferences. Why? – Regime, electoral process, voting being a noisy signal, electoral salience, collective action, group characteristics.

 Realism

Long intellectual history, but in 20th century particularly Krasner, Huntington and Waltz.

When times are hard people look to realism.

 3 Assumptions:

  1. International Politics is Anarchy: states are the actors in international politics so there is no need to describe the domestic societal cleavages. Domestically the officials wield power and have monopoly over the means of coercion. Internationally there is anarchy, as there is no world government. There may be institutions such as the UN, but they are delegated retractable power and have no right to use force. Ultimately there is no higher authority than the state, and this is seen as if there was a violent attack on a country there is no one that could be called upon who is guaranteed to offer assistance.
  • True – even though war in Iraq was no approved at UN, resolutions were sought, so which is it? Repeated games may give a sense of security.
  1. States act rationally – If they do not then they will be severely penalized and possibly eradicated.
  2. States have a preference for security. A state may have many goals, but without security none of them are achievable.

 Realism and Protectionism

When faced with mutual gains from trade, states that care about security are compelled to assess how the distribution of the gains fall. Who gains more? (Griego).

CLASS NOTES

CLASS NOTES

Globalization (Societal Perspective)

 Globalization

  • The removal of barriers to movements of goods, services, capital and ideas.
  • Often thought to be a panacea to the problems of underdevelopment (Wolf).
  • Some argue that globalization promotes democracy
    • No: whilst others point to rising inequalities from trade that makes populism etc. more likely as outcomes.
    • Other critics note a race to the bottom – harder for countries to have standards of their own, as lowest standards attracts FDI
    • Yes: accelerates transition from authoritarian to democracy – as labour unions and the left lose power, the right wing is less afraid of eradication so may allow a transition to democracy. As countries get richer there is less tension between the differing societal cleavages (assuming no rising inequality).
    • It thus appears that the democratic and developmental merits of trade will depend upon the benefits trade can bring, and who those benefits accrue to.
    • The upshot of this was the great “double movement” (Polyani) whereby as the market spread itself around the world there was a countervailing movement to check its power. It is the government who may push back against the forces of the market by erecting protectionist barriers.
  • [Ultimately the compromise that needs to be made is one called “embedded liberalism” whereby market processes and entrepreneurial and corporate activities are surrounded by a web of social and political constraints and a regulatory environment that sometimes restrains but in other instances leads the way in economic and industrial strategy. The degree of state involvement could potentially depend upon the level of development of the state in question {of course LDCs may not have the institutional capacity to manage a process of embedded liberalism.} The government can provide the public goods such as infrastructure, R&D and education as well as the social insurance needed to protect the losers of globalization, and help them to reduce labour market frictions through training etc. This is outward looking trade policy with social protections.] 

Globalization Good

  1. Gains from exchange
  2. Comparative advantage
  • There are strong theoretical arguments for free trade. But how benefits devolve, and particularly the lag in time between liberalization and the materialization of benefits, mean that there will be important domestic forces that oppose globalization. The structural shifts that take place upon liberalization can take a huge amount of time to provide employment for the masses, and moreover it should not be assumed that comparative advantage will mean whole new industries springing up upon liberalization without the support of targeted R&D and some sort of industrial policy. 

Societal Perspectives

  • Societal perspectives looks at why we see differing support for trade policy based on domestic societal cleavages and interests.
  • Stolper & Samuelson showed how there are winners and losers from trade liberalization. This is not an argument for protection as a Pareto improvement can be made with trade + redistribution. However, in reality we rarely see such compensatory redistribution.
  • Reich argues that the winners and losers do not feel like they operate in the same economy, and as such the winners have no duty to help the losers. Trade and redistribution are part of the same ideal and this is not currently recognized.

Winner and Losers

  • The H-O trade model posits that countries specialize in producing goods that utilize the abundant factor, and import goods produced by its scare factor. In this model workers can switch easily between industries and sectors. Stolper-Samuelson describes the distributional consequences of this model in that the abundant factors are winners and want open trade whereas the scare factor is protectionist. Rogowski uses this model to predict preferences as well as cleavages and alliances based on the structure of the economy. All he needs to know is the factor endowment. 
  • The Ricardo-Viner trade model suggests that industries that are competitive in a global market, and homeowners in an area with dense units of such industry, as well as workers in those industries, will support free trade, whereas the non-competitive ones will be protectionist. This is also called the specific factor model. This may be more useful for short-term analysis in the type of timeframe that capital and labour are not particularly mobile.
  • So which works best? Sheve & Slaughter find that people with more skills prefer free trade meaning that they can mobilize their labour and switch sectors i.e. the H-O model.

 Alternative Explanations

  • Realist (see next set of summaries)
  • Ideology
  • Technology
  • Interest group ease participation – Gowa argues that monetary policy is a public good, whereas trade policy is not, meaning that collective action problems prevent coordination in the former.

GLOBALISATION AND THE PERCEPTION OF AMERICAN WORKERS

GLOBALISATION AND THE PERCEPTION OF AMERICAN WORKERS

Sheve and Slaughter

Chapter 3: Cleavages in Public Preferences about Globalisation

 A Summary

In a Nutshell

The authors seek to predict who might oppose measures to open up trade based on the assumptions that individuals are self-interested, that individual welfare is dependent on income, and that the individual knows how trade policy affects his income. They expect that those whose income suffers as a result of more open trade will oppose freer trade policy. They largely focus on the Heckscher-Ohlin (HO) framework of factor mobility where workers can move costlessly from sector to sector and across industries. Thus wages differ not by industry but by type of worker. They posit that this model better reflect long term horizons as compared with the Ricardo-Viner (RV) framework whereby workers cannot move across all industries, so wage differences are due to type of work rather than type of worker.

 They run empirical models to test the hypotheses they derive from the model, which is that those less skilled workers will be more opposed to trade liberalization than highly-skilled workers. Their data analysis confirms this. It also seems to suggest that the type of industry that employs a worker is not particularly relevant in predicting if he will be anti-free trade measures. Other important variables prove to be race (in certain circumstances), membership of a union and political awareness. However, these variables do not significantly alter the coefficients of the skills variable. Surprisingly political affiliation is not significant in predicting if a person will be against free trade policy.

 Theory

  • Trade policy affects factor incomes by changing a country’s product prices.
  • An industry enjoying a rise in product price post liberalisation will earn +ve profits, and if product price is falling the reverse is true. Optimising firms earning +ve profits increase production so economy wide demand for different types of labour changes i.e. demand for labour in expanding sectors will rise relatively. For equilibrium to be restored the wages of the two industries must adjust. 
  • The HO model says that trade protection is extended to sectors that employ factors of production in which the country is relatively poorly endowed as these are the workers who lose income in the move from autarky to free trade. So the types of workers who are abundant support free trade, and those that are scarce support protectionism. E.g. US tariffs were higher in less skill intensive industries in 70s and 80s (as they have a greater proportion of skilled workers). 
  • The RV model says income is linked to sector of employment not the type of worker. So sectors whose prices fall post free trade (ones with comparative disadvantage) realize income loss for their workers, and thus they are opposed to free trade. i.e. those workers who work in protected industries should oppose trade liberalisation.
  • Trade policy affects regional economic performance, and so if it acts to shrink industries with less comparative advantage, then areas with a lot of such industries will see demand for housing fall and thus housing prices fall. So in areas with a greater concentration of activity in sectors with weak comparative advantage, homeowners will tend to oppose free trade.

 Data Analysis

They do statistical analysis of National Election Studies surveys of samples of the US population. I will not describe the data nor the regressions, just summarise the findings reported.

  • There is little statistical evidence to suggest that the person’s industry of employment influences policy preferences. This counters the RV model.
  • However, the coefficients on the skills variable (measured in terms of years of education) is significant and means that if you take a high school dropout and give them a full education they are 25% more likely to be in favour of free trade. So, in support of the HO model, it is the individual’s skill level that matters most for probability  of supporting free trade measures. This indicates that intersectoral labour mobility is high in the US over the time horizons in which people are evaluating trade policy.
  • They perform a robustness check by including other variables, such as political party identification, ideology, race, gender etc. and find that the coefficients in the skills variable is not significantly affected. However the check reveals that there is another important variables as trade union membership appears to be a determinant of opinions regarding free trade. Also, a small effect is found in those supporting environmental causes in being against free trade.
  • They also conclude that political awareness is a factor. Those who are more attentive an knowledgeable about politics are less likely to support new trade restrictions.
  • The confirm their hypothesis regarding home ownership.

COMMERCE AND COALITIONS

COMMERCE AND COALITIONS: HOW TRADE AFFECTS DOMESTIC POLITICAL ALIGNMENTS

R. Rogowski

Excerpts

A Summary 

In a Nutshell

Rogowski created a framework where he categorises countries into one of 4 broad categories based on the relative abundance of the factors of production, and whether the country is an advanced economy or a backward economy based on how capital rich they are. He assumes that beneficiaries of change try to perpetuate that change, and at the same time those who gain extra wealth will seek to expand their political influence and in fact they will be able to overcome the specific collective action problems they face.

 The Stolper-Samuelson theory that owners of factors of production who exist in societies where that factor is relatively sparse (i.e. the society is poorly endowed with that factor), will benefit from protectionist trade policies. So freer trade in a society rich in labour and poor in capital will benefit the labour and hurt the capital. He uses this theory and the framework of countries to predict what political cleavages will emerge in domestic politics as a result of either trade policy or exogenous events that act like trade policy (the lowering of transport costs reduced the cost of trade in the same way a tariff reduction might).

 What seems important about this piece is that it starts from a position that there are winners and loser from globalisation, so the story is not as simple as Martin Wolf makes out. In some societies the losers (at least in the short term) could even be a majority of the population.

 The Framework

3 Factor model: land, labour, capital, and the land/labour ration tells us about the distribution of those two factors. An economy is advanced if capital is abundant.

 

High Land/Labour Ratio

Low Land/Labour Ratio

Economy

Advanced

ABUNDANT:

Capital

Land

 

SCARCE:

Labour

ABUNDANT:

Capital

Labour

 

SCARCE:

Land

Economy

Backward

ABUNDANT:

Land

 

SCARCE:

Labour

Capital

ABUNDANT:

Labour

 

SCARCE:

Capital

Land

Political Effects of Increasing Trade

Upper right

Advanced capital rich country endowed with labour not land. Increasing trade results in urban-rural conflict, as trade benefits capitalists and workers but not landowners. Workers and capitalists will argue for free trade and will seek to expand their political influence. They will most likely want a diminution of the gentry based elite.

Bottom left

Backward land rich economies. Land is abundant so will gain from trade. Capital and labour both lose. So farmers etc. will expand their influence in some anti-urban populist movement.

 Bottom right

Backward labour rich economies. He we see class conflict as labour pursues free trade and seeks more power including a possible workers’ revolution. Landowners/capitalists etc. unite to support protection, imperialism and politics of exclusion [LA! Especially with reference to ISI].

 Top left

Advanced land rich economy. Capitalist and landowners support free trade. Labour will resist.

 Political Effects of Declining Trade

Upper right

Renewed urban-rural conflict. Agriculture is the only winner so will seek to expand its influence.

 Bottom left

Agriculture is on the defensive. Labour and capital benefit from trade contraction. Urban sectors unite to demand more political control.

 Bottom right

Labour suffers and is threatened politically.

 Top left

Class conflict due to newly aggressive working class as they are the ones who benefit from contracting access to international trade.

 Two Other Cases

Land and labour abundant, economy backward

Labour and agriculture unite as trade benefits farmers and workers but harms capitalists and gentry. The masses will look for free trade, disempowerment of capital. If trade were to contract this would only benefit the capitalist and as such it would either end in capitalist dictatorship or an anti-capitalist revolution.

 Land and labour scarce, economy advanced

Green and Red once again unite but this time in support of protectionism as free trade only benefits capitalists. We see either capitalist dictatorship or a more participatory but economically retrograde government.

 Possible Objections

  • The results of this investigation vary with the dependence of foreign trade as a percentage of GDP. E.g. Belgium where trade accounts for 1*GDP will be much more affected than the USA in the 60s where trade accounted for 0.1*GDP. This seems logical but in fact the Stolper-Samuelson result holds at any margin claims the author.
  • Given that comparative advantage always arises from trade the gainers could compensate the losers and trade will still be Pareto superior. This is perfectly possible but does it ever really happen. Yes in places like Sweden where the state is compassionate and honest.
  • Why should cleavages persist where factors of production are mobile? People would simply disinvest from losing factors e.g. farming in Britain. This is true, but trade can expand/contract rapidly thus frustrating rational expectations.  Also elite capture can mean that privileged access to politics makes easily won protection easier than adaption. However, as technology transfers more rapidly making factors more mobile, this theory will become less useful.
  • A worker who lives 50% on income from work and 50% from investments will react differently to one who only relies on 10% investment income. Same for capitalists that employ mostly labour relative to machinery.

 Renewed Expansion of Trade, 1948 to Present

  • Peace time boom post 1945. Best decade 1963-73, trade grew at 9.1% p.a. Trade grew more rapidly than output. Transportation improved, Bretton Woods made multilateralism easier, GATT introduced etc.
  • Different regions were affected differently. Manufactures traded rose by 93% but primary products only 34%, so more advanced economies benefitted more probably due to their growing wealth and shift away from primaries to luxuries and consumer durables.

 Factor Endowments

Land

Taking world average in the period Asia, Europe (except Ireland) the Caribbean and the Levant were all poorly endowed in land. USSR, Southwest Asia and North/South America are land rich. Africa and Central America are divided by region.

Capital

US, Canada, Oz, NZ and Northern Europe (after war recovery) all abundant in capital. All Asia, Africa, Caribbean and Central America are capital poor. South Am and other parts of Asia were divided by region.

 Labour

Areas abundant in land are poor in labour (Americas, Oceania, most of Africa) and ones scarce in land are abundant in labour (East and South Asia, Europe, Caribbean etc.)

 Abundance of Labour and Capital;

Scarcity of Land

  • What we expect: Northern and central Europe and soon after 60s Japan and Italy too.
  • We expect to see and ‘end to ideology’ as the free trading alliance between labour and capital puts age old tensions between classes to rest. Further reduction in transport costs may give this effect even greater momentum.
  • What we see: a “far-reaching reconciliation of labour and capital”.

Abundance only of Labour;

Scarcity of Capital and Land

  • Southeast EU, continental East and South Asia and parts of Africa.
  • We expect: growing militancy of labour, possible peasant revolutions. Trade benefits labour, but elites will capture the initial gains until the labour has begun to gain political influence.
  • What we see: e.g. Vietnam. Vietnam had been inserted into world economy in colonial time particularly for rubber and rice crops. A trade increased benefits accrued toward farmers but the elite landlords captured the gains for themselves. Peasant associations formed to defend property rights and permit legal defenses that would allow peasants to produce independently of the landlords. So much collectivism was needed to break the old ties of dependence in gaining access to the markets. The author tells a similar story for China.
  • What about India where similar inequalities exist, but peasant movements are much weaker? The author says British rule set limits on the elites removing their monopolies on credit and marketing, and the postcolonial legal system was better allowing for execution of contracts. I.e. things were not as bad as in china/Vietnam.

 Abundance only of Land;

Scarcity of Labour and Capital

  • Virtually all of South America, mex, much of Africa, Ireland.
  • What we expect: trade ignites urban-rural conflict, leading free trade landowners to oppose a protectionist coalition of labour and capital. So in Latin America we expect resumption of free trade to break down populist alliances of labour and capital.
  • What we see: in the LA economies there were populist experiments during the depression and war years but landowner power was re-asserted crushing capital and labour once exports were once again pursued. So this would explain how ISI came into being during the years of depression and was maintained in the inter-war years. Once peace came to the world in 1945 and trade resumed the ISI model broke down, and the capital-labour alliances were broken. The Rogowski model does not explain Raul Prebisch and the genesis of his thought as he was not producing with the land. However, it might well go some way to explaining how his ideas came to prominence in the ISI period.
  • Populists still preferred protection and they accepted inflation and poor products as the price of this policy. Wealth was transferred from the landowners to the capital and the labour, especially urban labour. To agriculture and resources this policy was anathema – the overvalued currency made exports uncompetitive and capital imports expensive.
  • Since 1945 we see Latin American countries turn to military dictatorships that imposed “anti-populist” measures to halt inflation, curb wages and unions and reduce tariffs and quotas. However, they were not merely tools of the abundant factor (land). Indeed they often pursued once again export lead growth models thus allying themselves with capital, which is something the model does not necessarily predict and thus makes the authoritarianism unique in being “bureaucratic-authoritarianism”.
  • How does Rogowski explain this difference? Countries near the threshold of capital abundance may try to “jump” a stage of development by suppressing wages and borrowing heavily from abroad to act as though they were rich in capital. This scheme would collapse if the credit dried up. As it did.