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Monday, May 14, 2007

Helping the Losers from Globalization

This continues with the theme of the day, the winners and losers from international trade (and continues a more general discussion on this issue). This is Nobel laureate in economics Michael Spence along with vice-president of the World Bank Danny Leipziger writing in the Financial Times:

Globalisation’s losers need support, by Danny Leipziger and Michael Spence, Commentary, Financial Times: The modern globalisation debate deals with many important issues... None is more important, however, than who benefits and who loses, absolutely and relatively, in both advanced and developing countries.

Sustained high growth is expanding in the developing world ... and is made possible by the ... growing integration of the global economy. So there is a lot at stake. Income inequality often rises in the growth process, however, and domestic policy is needed to mitigate the negative impacts on those who lose.

In China, the bottom 10 per cent of the income distribution has seen its income rise by 42 per cent in the past 10 years. The middle has grown by 115 per cent and the top 10 per cent by 168 per cent. ... Everyone has benefited but not equally. Similar patterns can be seen in other rapidly growing countries such as India.

A slightly different but related income distribution phenomenon can be seen in the US. In the past 20 years, productivity and real incomes have risen in the US, but the middle of the distribution has gained less than the lower tail and especially the upper tail. The middle grew at 0.4 per cent annually while the upper end grew at 1.25 per cent; small numbers that add up to large changes over a decade or two.

In the case of the US and other advanced economies, not all of this is due to globalisation. There is a shift in the industrial mix ... enabled by the global economy. But there are other drivers. Tax policy is one. Information technology is another. Some aspects of IT are labour saving – a domestic phenomenon that has little to do with outsourcing..., but which hurts some wage earners. A more recent phenomenon is ... services, where labour can be supplied without geographic proximity...

In developing and advanced countries there are growing protectionist voices. They must be controlled because the cost of disengaging..., especially among the poorer countries of the world, is simply too high. It is far better policy to capture the benefits of global markets and to look for domestic policies that reduce the costs in these distributional dimensions...

If we are to continue to have a highly efficient, flexible and innovative economy, there will be creative destruction and churn. That kind of dynamism needs to be underpinned by two legs: programmes that help individuals make employment transitions, and solid safety nets and assured access to basic services such as education and healthcare.

This access must not vary with the ebb and flow of economic activity and personal circumstances. To have an open economy we may need a more protective one than we have had in the recent past. It is a trade-off. The art in policy-making is to design these protections with minimal adverse impacts on mobility and efficiency, the underpinning of the job-creation engine. ...

We need to accommodate a rapidly changing economic mix as a result of technology and global market forces and to balance that with policies that make the growth and distribution of the benefits inclusive.


Dani Rodrik comments on Paul Krugman's NY Times article:

The point that trade policy cannot substitute for an adequate social policy is perfectly sensible. So is the argument that the need for social policy becomes greater when globalization exerts downward pressure on wages and creates new risks and anxieties. ...

Krugman's argument leaves unclear what the right trade policy should be. The questions of the day are not whether the U.S. should increase tariffs against Bangladesh, India, or Mexico (the three countries cited by Krugman), but whether it is a good idea for the U.S. to enter into new free trade agreements (with countries such as Panama and Peru), and whether Doha, with its current agenda, is worth the trouble.

Kevin Drum has a suggestion:

Trade Agreements....Jared Bernstein writes today about global trade deals that hurt (some) workers and tries to answer the $64,000 question: "What would you tell some guy who just lost his good, middle-class, union, high-wage and benefits job? What's your program to help him?"

Here's what I'd say to the guy in the question:

"We can't stop globalization, but we can take its benefits and plough them back into repairing the damage it has done to you. That includes access to quality health care for you and your family, expanding and keeping your pension safe, and some serious retraining.

This will mean letting the Bush high-end tax cuts sunset ... and using that revenue to help you. It will also mean major health care reform.

We'll also work to behind the scenes to pushback on the downsides of trade. We'll push the Fed to maintain truly tight labor markets, we'll put enforceable labor standards in our trade deals, and we'll pushback against countries that manage their currencies to keep our exports out."

Roughly speaking, this sounds great. I don't want to stop trade, which is fundamentally a good thing. I'd just like to make sure that we don't have one group that gets all the benefits while another group pays all the price.

My only problem with Bernstein's answer, then, is this: It's more or less the same answer we've been hearing for the past 15 years. Unfortunately, in case after case, after we end up voting for trade agreements based on promises of relocation assistance, retraining, etc., everyone somehow loses interest in the promises. ...

So, free trade supporter or not, I'm increasingly of the view that I'd like to see us fulfill some of these promises first, and then pass the trade agreements afterward. We've tried it the other way around for a long time, and it doesn't seem to work out so well.

Update: One more on this topic from today. From Project Syndicate, "Helping the Free-Trade Losers" by Etienne Wasmer and Jakob von Weizsacker discusses these issues in the context of the EU.

    Posted by on Monday, May 14, 2007 at 12:42 PM in Economics, Income Distribution, International Trade, Policy, Social Insurance | Permalink  TrackBack (0)  Comments (21)


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