Category Archives: Globalization I (Societal Perspectives)

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.
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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.