Topics in the Globalisation Debate 1: Competitiveness; Immigration This lecture draws mostly from: Krugman (1993) What Do Undergrads Need to Know About.

Topics in the Globalisation Debate 1: Competitiveness;

ImmigrationThis lecture draws mostly from:

Krugman (1993) What Do Undergrads Need to Know About Trade? The American Economic Review. Vol. 83(2): 23–26Krugman (1994): Competitiveness: A Dangerous Obsession. Foreign Affairs 73(2)

Dustmann, C. and Glitz, A. 2005. Immigration, Jobs and Wages: Theory, Evidence and Opinion. London, Centre for Economic Policy Research. Lewis (2004): “How Do Local Labor Markets in the U.S. Adjust to Immigration?” Federal Reserve Bank of Philadelphia. Mimeo

The Globalisation Debate• The term “globalisation” is so overused that

it is not clear what it means. o Economists would think about things like trade,

factor mobility and diffusion of technologyo Other discussants (trade unions,

environmentalists, development lobbyist, consumer groups, human right activists, religious groups, utopians…) often seem to talk about (alleged) increased power of large companies and “Americanization”

• In the remaining two lectures we will take a brief look at some key issues: discussion on how to enhance country’s competitiveness and impact of globalisation on the labour market.

Competitiveness: “A Typical Statement about International Economics”

1. “We need a new economic paradigm, because today [our country] is part of a truly global economy.

2. To maintain our standard of living, [our country] now has to learn to compete in an ever tougher world marketplace

3. That’s why high productivity and product quality have become essential

4. We need to move [our country’s] economy into the high-value sectors that will generate jobs for the future

5. And the only way we can [achieve this is to] forge a new partnership between government and business”Paul Krugman (1993) What Do Undergrads Need to Know About

Trade? The American Economic Review. Vol. 83(2): 23–26

Competing in “an ever tougher world marketplace”

• President Clinton: each nation is “like a big corporation competing in the global marketplace”

• Some bestselling titleso Lester Thurow: Head to Head. The Coming

Economic Battle among Japan, Europe and America

o Jeffrey Garten: A Cold Peace: America, Japan and Germany and the Struggle for Supremacy

o Ira Magaziner & Mark Patinkin: The Silent War

See P. Krugman (1995): The Illusion of Conflict in International Trade. Peace Economics, Peace Science, and Public Policy (also in Pop Internationalism)

The Need for a New Paradigm?

M. Porter (1990) in The Competitive Advantage of Nations: “Yes”

• “A new theory must explain why firms from particular nations choose better strategies than those from others for competing in particular industries” (p. 19)

• “A new theory must move beyond comparative advantage to the competitive advantage” (p. 20)

• “...the best measures [of competitive advantage are] (1) the presence of substantial and sustained exports to a wide array of other nations and/or (2) significant outbound foreign investment based on skills and assets created in the home country” (p. 25)

The Need for a New Paradigm?

• Krugman (1993): “no”o “probably the most important single

insight an introductory course can convey about international economics is that it does not change the basics: trade is just another economic activity, subject to the same principles as anything else”

Competitive Advantage: Firms

• Competitive advantage of a firmo “competitive strategy is about taking offensive

or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment” (Value Based Management.net)

• if a firm is not competitive, it will go bankrupt

• Firm’s competitiveness can be measured trough profits / return on investment etc.

Competitive Advantage: Countries• Countries are not companies

o while firms based in different countries sell products that compete with each other, in the country-level there are mutual benefits from trade

o Success of one country is likely to benefit other countries (more demand for imports)

o The only meaningful “offensive or defensive action” in the level of a country is strategic trade policy

• Imports (NOT exports) are the purpose of trade → exports / current account is not the “bottom

line” of a country in a way profits are for a firm

Competing in “an ever tougher world marketplace”

P. Krugman (1994): Competitiveness: A Dangerous Obsession. Foreign Affairs

“While competitive problems could arise in principle*, as a practical, empirical matter the major nations are not to any significant degree in economic competition with each other”

* e.g. the terms-of-trade argument and strategic trade policy

What does “Competitive Advantage of a Nation” mean, anyways?

• Porter (1990): o “the only meaningful concept of

competitiveness at the national level is national productivity”

• Krugman (1994): o ”competitiveness” would turn out to

be a funny way to saying “productivity” and would have nothing to do with international competition

“A Typical Statement about International Economics”

1. “We need a new economic paradigm, because today [our country] is part of a truly global economy.

2. To maintain our standard of living, [our country] now has to learn to compete in an ever tougher world marketplace

3. That’s why high productivity and product quality have become essential

4. We need to move [our country’s] economy into the high-value sectors that will generate jobs for the future

5. And the only way we can [achieve this is to] forge a new partnership between government and business”

Why Productivity Matters?• Example:

o productivity of a closed economy increases by 1 %

→ the consumption possibilities increase by 1%o productivity of country A increases by 1 %,

and productivity of country B by 3 % → A’s consumption possibilities increase by 1%,

B’s by 3% (unless there is a substantial terms-of-trade effect*)

• That is, productivity is beneficial for its own sake, not because it helps us “to compete in the world marketplace”* In this case, one would expect the prices of the goods B is exporting to

decrease (due to increase of supply). That is, A’s consumption possibilities would increase by more than 1%

High-Value Sectors…

• “Our country’s real income can rise only if (1) its labour and capital increasingly flow toward businesses that add greater value per employee and (2) we maintain a position in these businesses that is superior to that of our international competitors”

Ira Magaziner and Robert Reich (1982): Minding America’s Business. p. 4

“High-Value Sector” in a Simple Ricardian Model• England is more efficient

in producing both products → England’s wage rate will always be higher

• England has comparative advantage in producing cloth → in free trade England produces cloth → cloth is the “high-value” sector

• Does this mean that the Portuguese government should promote reallocating resources to produce cloth? Of course not.

Cloth Wine

England1 hr. / yd.

3 hrs. / bbl.

Portugal2 hr. / yd.

4 hrs. / bbl.

…that will generate jobs for the future

• Krugman: “level of employment is a macroeconomic issue dependingo in the short-run on aggregate

demando in the long-run natural rate of

unemployment• with microeconomic policies like

tariffs having little net effect”

Paul Krugman (1993) What Do Undergrads Need to Know About Trade? The American Economic Review. Vol. 83(2): 23–26

“A Typical Statement about International Economics”

1. “We need a new economic paradigm, because today [our country] is part of a truly global economy.

2. To maintain our standard of living, [our country] now has to learn to compete in an ever tougher world marketplace

3. That’s why high productivity and product quality have become essential

4. We need to move [our country’s] economy into the high-value sectors that will generate jobs for the future

5. And the only way we can [achieve this is to] forge a new partnership between government and business”

A New Partnership between Government and Business?

Robert Gilpin (2001): Global Political Economy: Understanding the international economic order. Princeton University Press. p. 210-214

• “Governments can and do have an important and even decisive role in promoting their own national firms in international markets”

• “a government can take a long-term perspective and establish policies that foster a favourable domestic environment for those sectors most likely to be competitive in international markets”

A New Partnership between Government and Business?

= infant industry argumentRemind yourself of Lecture 8:• Key assumption: market failure

(due to externalities, imperfect capital markets etc.)

• Problems o identifying the right industrieso Time consistency: will the protection

eventually become permanent?

Partnership between Government and Business?

• Krugman (1993): o “the main competition going on is

one of U.S. industries against each other, over which sector is going to get the scarce resources”

o “there are reasons, such as external economies, why a preference for some industries over others may be justified. But this would be true in a closed economy, too”

The Dangers on Obsession on International Competitiveness

1. Wasteful spending of government money

2. Inefficient allocation of resourceso resources from nontradables to

tradables

3. Possibility of protectionism & trade wars

4. Indirect impact on the quality of economic policy making in generalP. Krugman (1994): Competitiveness: A Dangerous

Obsession. Foreign Affairs (also in Pop Internationalism)

Impact of Immigration revisitedVariation of model discussed in Lecture 5

o One output o Three factors of production: capital, skilled

and unskilled workerso unlimited amount of capital available from

the international market at fixed price o native labor force fixed, but not perfectly

inelastic (some will not work if wages are too low)

o All immigrants are low-skilled workers If immigrants have the same skill-mix as the

natives, the economy expands but nothing happens to wages

Ch

an

ge i

n l

ow

-skil

led

n

ati

ve w

ag

es

Change in low-skilled native employment

Impact of Immigration: Theory

• Immigration leads to decrease in low-skilled wages and increase in low-skilled unemploy-ment

• High-skilled workers win more than low-skilled lose → immigrant surplus

LN0: Initial native employment

LN1: Post-immigration native

employment

w0: initial wage

w1: post-immigraiton wage

LS0 LS

1

LD

Immigration

Amount of low-skilled Labor

Low-skilledWage

w0

w1

LN0LN

1

Transfer from low- to high-skill workers Immigrant

surplus

Low-skilled Natives’ wage

Immigrants’wages

The Challenge of Empirical Work• Constructing the counterfactual

o First step: descriptive analysis. Is the data consistent with the models?

o More challenging question: “if everything else stays constant and immigration increases by X percent, how much does production, wages etc. change?”.

Problem: we never observe what would have happened if there had been a different amount of immigration. Hence, we need to construct the counterfactual using theory or a natural experiment.

• Understanding the role of the modelso The models we have studied are caricatures. That is, it

does not make sense to ask are they “true” or “false”. Instead, the question to ask is: to what extent are they explaining what we are observing?

Estimating the Impact of Immigration• Most studies estimate the equation

yjt = γrjt + Xjtβ + ujt

where y is the outcome in labour market j at time t, r is the share of immigrants in this labour market, X is a set of relevant control variables and u summarizes the unobservable factors affecting the outcome. The parameter of interest is γ

• Q: Why some labor markets attract immigrants?o If this is due to unobserved factors (e.g. positive demand

shocks increasing wages), we say that r is endogenous and standard (OLS) estimates of γ will be biased upwards

o Solutions: (a) Natural experiments, (b) Instrumental variables

Summary of results• Most studies find small or no effect of

immigration on native wages and employment

• Current research aims to understand, why?

• Possible explanationso Endogeneity biaso Native out-migrationo Changes in product-mixo Changes in technologyo Increase in demand (by the immigrants)

Spatial correlations approach: critique

• Most studies define labor market as a geographical area o essentially compare wage growth in

cities (inside one country) with different immigrant inflows (due to reasons unrelated to wage growth)

• Borjas: not valid, immigration will affect all areaso internal migration and capital flowso changes in product-mix

Impact on product mix: theory• Immigration increases

labor force in one area → production of low-skill intensive products increase in this area → other areas increase production of high-skill intensive products → more trade between areas inside countries

• Price of low-skill intensive product decreases → low-skilled wages decrease also in areas where no migrants went

Clothes

Pap

er

Impact on product-mix: empirics• Lewis (2004) and Glitz and Dustmann (2007)

study the impact of immigration in US and Germany, respectively

• Both conclude that the there is an impact on product-mix, but it is not sufficiently large to explain the absence of wage effects. However, both find large effect on within-industry worker mix suggesting that firms seem to alter their technologies as a response to changes in labor supplyo The standard HO-model assumes constant technology

and cannot thus predict this. However, one can simply modify the HO-model, by relabeling “goods” as “techniques”