International Trade, International Trade, Globalization and Globalization and Financial CrisisFinancial Crisis

Impacts on Scale, Distribution, Impacts on Scale, Distribution, Efficiency and DemocracyEfficiency and Democracy

What is Globalization?What is Globalization?

The integration of all national The integration of all national economies into one global market, economies into one global market, with one set of ruleswith one set of rules

Global market takes precedence over Global market takes precedence over national autonomynational autonomy

Supporting institutions are IMF, World Supporting institutions are IMF, World Bank, World Trade Organization Bank, World Trade Organization (WTO), NAFTA, etc.(WTO), NAFTA, etc.

What’s a legitimate alternative?What’s a legitimate alternative?

What are it’s defining What are it’s defining characteristics?characteristics?

Economic growth (increasing Economic growth (increasing material consumption) as sole material consumption) as sole desirable enddesirable end

Privatization and commodification of Privatization and commodification of public services, national and global public services, national and global commonscommons

Corporate deregulation and Corporate deregulation and unrestricted movement of capital unrestricted movement of capital across bordersacross borders

Increased corporate concentrationIncreased corporate concentration Cultural and economic Cultural and economic

homogenizationhomogenization

What has been the impact of What has been the impact of Globalization on:Globalization on:

Ecological sustainabilityEcological sustainability Distribution of wealth and incomeDistribution of wealth and income Economic outputEconomic output Economic stabilityEconomic stability DemocracyDemocracy The allocation of scarce resources The allocation of scarce resources

towards an improved quality of life for towards an improved quality of life for all peopleall people

The Theory Behind International The Theory Behind International TradeTrade

Comparative advantageComparative advantage

One country can be more efficient at One country can be more efficient at producing everything than another producing everything than another country, and still benefit from trade country, and still benefit from trade with the inefficient countrywith the inefficient country

Assumes that trade must be Assumes that trade must be advantageous or else countries advantageous or else countries would not participate. would not participate.

Numerical exampleNumerical example

6 rupiah3 pesosTotal resources

2 C4 rupiah1 pesoclothes

2 F2 rupiah2 pesosfish

Total outputIndonesiaPhilNO TRADE

6 rupiah3 pesosTotal resources

3 C3 pesosclothes

3 F6 rupiahfish

Total outputIndonesiaPhilTRADE

1 rupiah = 5 pesos: Philippines has absolute advantage

Impacts of comparative advantageImpacts of comparative advantage

More total output and freedom of More total output and freedom of choice in consumptionchoice in consumption

More specialization, and less freedom More specialization, and less freedom of choice in production (but only of choice in production (but only desirable end is consumption)desirable end is consumption)

Some sectors/regions within a Some sectors/regions within a country will lose out (but winners can country will lose out (but winners can compensate losers)compensate losers)

Global Markets are good for everyoneGlobal Markets are good for everyone Markets will end povertyMarkets will end poverty

““The real losers in Seattle”The real losers in Seattle” Markets will solve environmental Markets will solve environmental

problemsproblems Environmental Kuznet’s curveEnvironmental Kuznet’s curve Population growth and povertyPopulation growth and poverty

Economic growth is essentialEconomic growth is essential Humans are insatiableHumans are insatiable ““The Moral Consequences of Economic The Moral Consequences of Economic

Growth” (B. Friedman)Growth” (B. Friedman) Protectionism & ‘beggar thy Protectionism & ‘beggar thy

neighbor’neighbor’

Comparative or Absolute Comparative or Absolute Advantage? Advantage?

What if capital can flow between countries?What if capital can flow between countries? Indonesian capitalists will produce fish and Indonesian capitalists will produce fish and

clothes in the Philippinesclothes in the Philippines

Numerical exampleNumerical example

33 pesosTotal resources

11 C11 pesoclothes

11 F22 pesosfish

Total outputIndonesiaPhilCapital flows

6 rupiah3 pesosTotal resources

3 C3 pesosclothes

3 F6 rupiahfish

Total outputIndonesiaPhilNo capital flows

1 rupiah = 5 pesos

Absolute advantageAbsolute advantage

There will be more fish and clothesThere will be more fish and clothes What about employment in What about employment in

Indonesia? Can people flow across Indonesia? Can people flow across borders?borders?

Is efficient economic production all Is efficient economic production all that matters?that matters?

Can winners compensate losers?Can winners compensate losers? If trade is voluntary, how could this If trade is voluntary, how could this

happen?happen? e.g. Toxic waste in Abidjane.g. Toxic waste in Abidjan

The Facts Behind GlobalizationThe Facts Behind Globalization

What empirical results would we What empirical results would we expect under absolute advantage?expect under absolute advantage?

Rich get richer, poor get poorerRich get richer, poor get poorer Headlines:Headlines: Number of Hungry Rising, Number of Hungry Rising,

U.N. Says U.N. Says By ELIZABETH BECKER By ELIZABETH BECKER Published: December 8, Published: December 8,

20042004 Number of hungry and number of poor at Number of hungry and number of poor at

record levels (though not when measured in record levels (though not when measured in percentage terms, especially if we include percentage terms, especially if we include China)China)

Income of poorest countries is falling Income of poorest countries is falling (World Bank statistics)(World Bank statistics)

Richest countries accumulating greatest Richest countries accumulating greatest share of new wealthshare of new wealth 1% of GNP growth in US = GNP of 24 poorest 1% of GNP growth in US = GNP of 24 poorest

nationsnations

How does a country get an How does a country get an absolute advantage?absolute advantage?

Race to the bottomRace to the bottom EnvironmentEnvironment Wages—Mexican wages 11% of US wagesWages—Mexican wages 11% of US wages

We would expect the countries with the We would expect the countries with the lowest wages and most lax environmental lowest wages and most lax environmental standards to exhibit economic growth and standards to exhibit economic growth and atrocious environmental degradationatrocious environmental degradation Headline 9/1/2004: Rivers Run Black, and Headline 9/1/2004: Rivers Run Black, and

Chinese Die of CancerChinese Die of CancerBy JIM YARDLEY, NYTBy JIM YARDLEY, NYT

How does a country develop domestic markets for How does a country develop domestic markets for domestic production?domestic production?

Unavoidable Environmental Unavoidable Environmental Costs of TradeCosts of Trade

• TransportationTransportation– Global warmingGlobal warming– Oceanic pollutionOceanic pollution– Dependence on fossil fuelsDependence on fossil fuels

• Spread of weed species (especially Spread of weed species (especially aquatic)aquatic)– Asian longhorn beetleAsian longhorn beetle– San Francisco BaySan Francisco Bay– Salmon bacteriaSalmon bacteria

NAFTA and the EnvironmentNAFTA and the Environment

Environmental side agreementEnvironmental side agreement Environmental Kuznets CurveEnvironmental Kuznets Curve Actual results in Mexico from 1985-Actual results in Mexico from 1985-

19991999Gallagher, GDAEGallagher, GDAE

Rural erosion increased 89% as small Rural erosion increased 89% as small farmers cultivated more in response to farmers cultivated more in response to decreasing pricesdecreasing prices

Municipal solid waste increased 108%Municipal solid waste increased 108% Water pollution—29%Water pollution—29% Urban air pollution—97%Urban air pollution—97%

NAFTA and the EnvironmentNAFTA and the Environment

Chapter 11Chapter 11 Metalclad corporationMetalclad corporation

Toxic dump site or natural protected area?Toxic dump site or natural protected area? MTBE, MMEMTBE, MME

WTO similarWTO similar Turtle excluder devicesTurtle excluder devices Marine mammal protection actMarine mammal protection act

NAFTA and the NAFTA and the EnvironmentEnvironment

Growing corn Growing corn exports from USexports from US

NAFTA and DistributionNAFTA and Distribution Who are poorest in Mexico?Who are poorest in Mexico?

22% of Mexico's labor force in small ag.22% of Mexico's labor force in small ag. What do we export to Mexico?What do we export to Mexico?

Corn prices dropped 45% in Mexico (US Corn prices dropped 45% in Mexico (US subsidies average $20,000/farmer/year)subsidies average $20,000/farmer/year)

Tortilla prices increased in MexicoTortilla prices increased in Mexico Mexican farmers produced more, not lessMexican farmers produced more, not less

What does Mexico export to US?What does Mexico export to US? What’s the impact on unions, wages?What’s the impact on unions, wages?

NAFTA and DistributionNAFTA and Distribution

Significant decline in real wages in Significant decline in real wages in Mexico (minimum wage down 23% Mexico (minimum wage down 23% under NAFTA)under NAFTA)

Number of households in poverty Number of households in poverty increased 80% between 1984-1999, increased 80% between 1984-1999, 75% living in poverty75% living in poverty

Over half of rural Mexico in extreme Over half of rural Mexico in extreme povertypoverty

Record increase in number of Record increase in number of billionairesbillionaires

NAFTA and Efficiency NAFTA and Efficiency

Exports up in Mexico, but imports up Exports up in Mexico, but imports up by moreby more

Rate of growth less than 1% per Rate of growth less than 1% per capita per year (1985-1999) vs. 3.4% capita per year (1985-1999) vs. 3.4% under import substitution under import substitution industrialization.industrialization.

NAFTA and EfficiencyNAFTA and Efficiency

Environmental impacts: Environmental impacts: Financial costs of degradation from 1988-Financial costs of degradation from 1988-

1999 10% of GDP ($36 billion/yr)1999 10% of GDP ($36 billion/yr)Gallagher, GDAEGallagher, GDAE

Economic growth $14 billion/yrEconomic growth $14 billion/yr Distributional impactsDistributional impacts

Law of diminishing marginal utilityLaw of diminishing marginal utility

AnnouncementsAnnouncements

4 groups turned in PS5, all have received 4 groups turned in PS5, all have received commentscomments

Remaining groups should consider Remaining groups should consider themselves to be failing the class themselves to be failing the class currently. I have no qualms about giving currently. I have no qualms about giving failing grades. failing grades.

Make an appointment to meet with me if Make an appointment to meet with me if you need to. you need to.

Participation counts. Many of you are Participation counts. Many of you are earning failing grades on participation: earning failing grades on participation: skipping class, not contributing in class=Fskipping class, not contributing in class=F

Don’t skip class on ThursdayDon’t skip class on Thursday

Globalization and Stability: Globalization and Stability: Financial contagionFinancial contagion

WWhhat is contagion?at is contagion? Speculative flowsSpeculative flows

2 trillion per day, vs. ~$36 Trillion global 2 trillion per day, vs. ~$36 Trillion global GNPGNP

What does speculation contribute to What does speculation contribute to economic output?economic output?

““Speculators are harmless as bubbles on a Speculators are harmless as bubbles on a steady stream of enterprise. But the position is steady stream of enterprise. But the position is serious if enterprise becomes a bubble on the serious if enterprise becomes a bubble on the whirlpool of speculation. When the capital whirlpool of speculation. When the capital development of a country becomes the by-development of a country becomes the by-product of the activities of a casino, the job is product of the activities of a casino, the job is likely to be ill-done.”likely to be ill-done.”

John Maynard KeynesJohn Maynard Keynes

Causes of Financial MeltdownsCauses of Financial Meltdowns Speculative bubblesSpeculative bubbles

Moral hazardMoral hazard ““Fundamentals” wrongFundamentals” wrong

High current account deficitsHigh current account deficits Excessive money creationExcessive money creation

NYT Headlines: Fed Plans to Inject Another NYT Headlines: Fed Plans to Inject Another $1 Trillion to Aid the Economy$1 Trillion to Aid the Economy

Overvalued exchange ratesOvervalued exchange rates Relative to what?Relative to what?

Causes of ContagionCauses of Contagion Freedom of capital to go Freedom of capital to go

where it wantswhere it wants ‘‘Hot’ moneyHot’ money Imperfect informationImperfect information

Herd behavior, animal Herd behavior, animal spirits, Reflexivityspirits, Reflexivity

Positive feedback loops Positive feedback loops and multiple equilibriaand multiple equilibria

Selling shortSelling short

Examples of ContagionExamples of Contagion

LA debt crisis (1982)LA debt crisis (1982) ISI and the energy crunchISI and the energy crunch Petro-dollars Petro-dollars ReagonomicsReagonomics Capital flight, exchange rate Capital flight, exchange rate

depreciationdepreciation Switch from ISI to Export promotion, Switch from ISI to Export promotion,

implementation of Washington implementation of Washington ConsensusConsensus

““The lost decade”The lost decade”

Tequila crisis (1994)Tequila crisis (1994) Clinton’s commentsClinton’s comments Uprising and assassinationUprising and assassination Political uncertaintyPolitical uncertainty TesobonosTesobonos Capital flight and devaluationCapital flight and devaluation

Asian flu (1997)Asian flu (1997) Real estate bubbleReal estate bubble Financial speculation, Soros Financial speculation, Soros

and devaluationand devaluation Impacts of devaluation on Impacts of devaluation on

debtdebt Impacts on trade Impacts on trade

competitorscompetitors IMF role: interest rates, IMF role: interest rates,

taxes, government taxes, government spending, bailoutsspending, bailouts

Malaysia’s responseMalaysia’s response

Impacts on DemocracyImpacts on Democracy

Structural adjustment programsStructural adjustment programs Brazil’s electionsBrazil’s elections

Current CrisisCurrent Crisis

OriginsOrigins Dot.com bustDot.com bust real estate boom real estate boom Exotic derivatives and imperfect Exotic derivatives and imperfect

informationinformation Financial speculationFinancial speculation From liquidity crisis to liquidity surplusFrom liquidity crisis to liquidity surplus

ContagionContagion

Policy OptionsPolicy Options

Tobin TaxTobin Tax Speculation taxSpeculation tax Restricting capital flowsRestricting capital flows Higher marginal tax brackets and Higher marginal tax brackets and

more equitable distributionmore equitable distribution