Martin Wolf's Virtual Symposium: The Political Economy of Globalization and Growth

Financial Times has restarted Martin Wolf's Economic Forum. I would like to see it succeed (even though I believe it is badly in need of women and people who live in cities of low average per-capita income (he says, wondering whether Tokyo is richer than the greater San Francisco out the window)). Here are some interesting things that came out of the last week:

Martin Wolf's forum: We must act to share the gains with globalisation's losers: Globalisation remains the great economic story of our era. It is also the great political story. The big question remains how likely is a reversal of our era's move towards a more integrated global economy. History suggests, alas, that the onward march towards integration is not inevitable: economics may propose, but politics dispose.... The need, [Bernanke] suggests, is to ensure that the benefits of integration are sufficiently widely shared...

Brad DeLong: Ben Bernanke said that the world will move forward with globalization only if policy makers "ensure that the benefits of integration are sufficiently widely shared." He is wrong: just making the benefits of integration widely shared isn't enough. After all, the benefits of globalization and increased economic integration are widely shared today--and yet forward progress on further globalization still hangs in the balance for politico-economic and politico-security reasons.... The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality...

O von Rein: Basically, globalisation increases returns on capital (in the developed countries) and gains are thus channeled towards shareholders. This readily ties back into recent studies showing the growing wedge in income growth.... I wonder what remedy follows? Here your commentary falls silent. Was that because you dare not mention the 'T' word? Progressive taxation almost imposes itself...

Martin Wolf: Brad is right, of course. The question is how to do this. There are four points here. First, as Mancur Olson would have said, ignorance is rational for the individual voter. Putting in the effort required to understand how trade and capital flows work is hard. Second, as Olson would also have said, there are concentrated interests against globalisation.... Third, the adverse effects of job losses are visible, while the benefits of greater trade are not. Finally, patriotism is the last refuge of the scoundrel and the first refuge of the protectionist...

Paul Seabright: The elephant in the living-room that Martin hasn't mentioned is migration. Distance matters much less than it did for the products of human ingenuity, most of which can now be sent across the world at a fraction of their former cost, but the capacities that underlie that human ingenuity still need proximity to others to be productive. If Tony Venables is right that "moving from a city of 100,000 to one of 10m raises the productivity of all factors of production by 40 per cent", the gains from moving labour into the world's leading cities dwarf any of the remaining gains...

Charles Wyplosz: This is a toxic mix. The problem is that public opinions and most policymakers do not think in general equilibrium terms, the sharpest get the partial equilibrium analysis right and there is no simple truths to dispell the fallacies that float around.... Designing adequate transfers is bound to be technically difficult and politically loaded, but there is no alternative...

Edmund Phelps: It is increasingly proposed that a nation must "share the gains" of globalization with the losers from globalization. But what does such "sharing" mean? Understood one way, sharing could create an unwelcome precedent. Understood another way, it could trigger an overdue improvement in economic policy.... [T]he idea that a nation ought to share with the losers the gains headed for the winners was clearly rejected in the standard welfare economics of Hicks, Kaldor, Samuelson and Arrow. Those losing from foreign trade, it was pointed out, don't have a monopoly on suffering. In that framework, those with the best claim to any windfall increase in the government's taxable capacity... thus those having low income, not in general those whose income has recently fallen...

Akio Mikuni: I would argue that there are gains in world trade as Asian countries have been willing to exchange their manufactured goods for mass-produced dollar notes. Here in Japan, we have seen many efficiently made high-tech products turned into commodities. However, Japanese farmers now nurture intensively peaches, melons, cherries, tomatos and so on with their individual names attached as brands. We choose and buy most tasty "commodities" directly from individual farmers, perhaps at much higher prices than at supermarkets. Nevertheless, we enjoy them...

C. Fred Bergsten: An Institute for International Economics team led by Gary Hufbauer recently quantified the impact of trade globalization on the United States. Using four different methodologies, it concluded that the US economy is about $1 trillion per year richer as a result of its integration with the global trading system over the past 60 years. This equates to about 10% of GDP or $10,000 per household.

At the same time, annual adjustment costs are estimated at $50 billion. About 200,000 workers are dislocated by trade flows each year and experience lifetime earnings losses that can range as high as 30-40%. The benefit : cost ratio for the country as a whole is a lopsided 20:1 but the costs are heavily concentrated.... [P]ublic attitudes toward further globalization are almost evenly split.... There was a single decisive variable: the level of education of the respondent. College graduates, and even those with only partial college training, welcome the opportunities afforded by globalization. But those with a high school education or less, which still account for almost half the US labor force, resist it due to their fears of being unable to compete. Hence there is at present a very unstable domestic political foundation for further globalization of the US economy despite its huge aggregate benefits (which we found could add $500 billion of further annual income benefits if the world could move to totally free trade).

Andrew Smithers: Rapidly growing economies have naturally rising real exchange rates (Balassa-Samuelson). This can be effected either by inflation rates which are above average, or by rising nominal exchange rates. The choice is, however, important. If, as China has chosen so far, the nominal exchange rate is pegged, then the route will be via higher inflation. The transmission mechanism is a rapid build up in foreign exchange reserves, which cannot be fully immunised and leads to rising inflation. The process is not without frictions and delays, so that the temporary impact is to lower inflation everywhere, improve the terms of trade of mature economies and increase liquidity....

The risks involved have been multiplied by two biases for which the Federal Reserve has been criticised, even by other central bankers. One is the belief that asset price inflation can safely be ignored; the other comes from the asymmetry of developing economies' influence on the inflation rates of mature ones. If their development pushes up raw material prices, including oil, relative to goods' prices, inflation indices which ignore one but allow for the other will underrate the risks of inflation.

Whatever the reasons, it seems clear that asset prices have moved out of line with incomes. Either nominal asset prices must fall or incomes must inflate. If the second is unacceptable to the Fed, its ability to manage the US economy as nominal asset prices fall will be a severe test. If they are successful, it will provide good evidence that ignoring asset prices and concentrating on "core inflation" are the correct policy guides for central bankers.

Martin Wolf: I will make just three points. First, it is indeed clear that many of the most important questions concerning the distribution of the gains are global.... Second, the arguments for redistribution or compensation at the national level are either political or ethical.... I have always felt that the argument for compensating those who are not necessarily particularly poor for suffering the consequences of a specific change (such as cheaper imports) is one of expedience rather than morality.... Finallly... migration. I have no doubt that world welfare would increase if migration were completely free. But I also think it could have devastating effects on the high-income countries.... I think countries have a right to defend their internal cohesion... some management of migration. So how is that to be done? That will be a subject of a future column...

Since it is a virtual symposium, let us drink Indaba Chardonnay akrateros. Those of us in California will eat completely ripe heirloom tomatoes and pity the rest of the guests, to whom globalization cannot ship these beauties.

K&L Wines: 2004 Indaba Chardonnay South Africa: Price: $8.99: According to the Wine Spectator: "Light, with lime and floral notes and a crisp, flinty finish. Pleasant, unadorned style. Drink now."

Comments

[save_the_rustbelt]

Globalization will go forward and those who are hurt will be largely left to their own devices and their own suffering.

Does anyone really think Wall Street will share the goodies? K Street? Academics? Politicians?

Ford just put $18.5M in the bank account of a new CEO who has never put a lug nut on a car but who can cut a workforce in half without blinking (none of this is performance based, there is even more $$$ for that).

[Ian Whitchurch]

Edumund Phelps wrote "[T]he idea that a nation ought to share with the losers the gains headed for the winners was clearly rejected in the standard welfare economics of Hicks, Kaldor, Samuelson and Arrow. Those losing from foreign trade, it was pointed out, don't have a monopoly on suffering."

If this was merely about the standard welfare economics of Hicks, Kaldor, Samuelson and Arrow, Phelps might be right.

It's not. It's about the political problem of how to prevent political opposition to globalisation from those who see themselves as the probable losers from derailing the whole project.

I'm a poster child for globalisation. My oil company - Northern Territory Oil (www.ntoil.com.au) - was set up with Australian and New Zealand money, and is partly invested in North Texas oil assets. Our exploration plan in the NT is driven by analysis done by Soviet petroleum geologists. We're expecting some Singapore and maybe substantial Korean money in our IPO, and maybe some out of the UK as well.

I'm certainly a winner. You couldnt do what we've done in a world with tight finance, trade and capital controls.

But I see a lot of losers, and globalisation hits those losers hard.

If there is a program of looking after the losers - and Mr Phelps, Hicks, Kaldor, Samuelson and Arrow be damned, it is just and it is right that the winners from the process of globalisation should be the source of the capital to retrain, reskill and recapitalise the losers - then likely losers are more likely to co-operate with something that will make everyone better off.

Hell, we even have history on our side - the Hawke-Keating government in Australia managed globalisation ... the Button Car Plan, the Steel Plan and so on cushioned the impact.

Yeah, you cant do this with corrupt and incompetent governments, so I wouldnt recommend this in either Nigeria or the United States of George W Bush.

But where you have clean and honest government, and an ideology that the wagon train goes forward together, then it's your best hope.

Ian Whitchurch

[joan]

"The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality..."

At some point I learned that the efficiency of free markets came from the "knowlege of time and place". I think this is true for people's perceptions of globlization on their welfare. What they respond to is their own reality, not the big picture. GDP growth means nothing if your real income does not go up. The only way to change the perceptions, is to change the reality that many people live in.

[anne]

Ian is writing importantly and we would do well to attend to Australian experience.

STR is writing plaintively and obviously is heard.

[anne]

Brad DeLong:

"The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality..."

Joan:

"The only way to change the perceptions, is to change the reality that many people live in."

[otto]

The Wolff Forum is of high quality but needs to be much better focussed.

[joshb]

I'm not totally unfamiliar with the standard welfare economics analysis of Hicks, Kaldor, Arrow and Samuelson, but, I am not aware of the part where they state as a matter of policy that states shouldn't lean against inequality. could somebody enlighten me?

The sentence following this from phelps is a total non sequiter: nobody said that losers from globalization have a monopoly on suffering or should monopolize all government attention. Globalization is one more (and one big) reason why it's imperative for decent governments to fight against polarization.

I'll end by just wondering once again where all these esteemed economists get off by tossing the textbook out the window when it comes to evaluating the actual impact of globalization on the US economy. the textbook, you see, says that the losers from globalization are widespread, and, the gross losses very large relative to the net gains (the basic result of the Stolper-Samuelson Theorem).

What alternative theory is being cited here to justify the notion that it's only "perception" and not reality that globalization creates a lot of losers?

joshb

[bob mcmanus]

"Yeah, you cant do this with corrupt and incompetent governments, so I wouldnt recommend this in either Nigeria or the United States of George W Bush.

But where you have clean and honest government, and an ideology that the wagon train goes forward together, then it's your best hope." ...Ian Whitchurch

Can this be gamed by corrupt gov'ts so that benefits of other's efforts at redistribution can be siphoned or skimmed?

[JRoth]

I know you never tire of gloating about the bounty that massive water redistribution has created for California, Brad, but early September is really not the time to be bragging on "completely ripe heirloom tomatoes:" just this Saturday, I (a denizen of a Rust Belt inner city) bought a bunch of them from a farm located not more than 2 miles from my home - along with completely ripe peppers and cape gooseberries, not to mention onions, hardneck garlic, and big bunches of fresh herbs.

It's a harvest moon up in the sky, and we can all reap the bounty.

[Ponzi Q. Globalization]

When there is a single global labor pool, why use Americans?

Is the current relatively high standard of living in America -- which tends to make labor and thus production more expensive than many places -- really that attractive for investment?

Do relatively strict pollution control laws and the like in America -- which tends to make production more expensive -- help or hinder in the competition with other nations?

Is it that the executives of American corporations and investment houses are so patriotic that they would never ever screw their compatriots just to increase profits going to keep Americans near the top in the upcoming years?

Or is it just that the air in America is filled with IQ increasing substances that give us a comparative advantage when doing the high-level brain work that will be needed in the future?

What is it that makes so many think that the living standards of most Americans will not take a real hit if the current path of globalization continues to be followed?

[ralph]

I can't agree enough about what C. Fred Bergsten says. He gets it. "About 200,000 workers are dislocated by trade flows each year and experience lifetime earnings losses that can range as high as 30-40%. The benefit : cost ratio for the country as a whole is a lopsided 20:1 but the costs are heavily concentrated...."

anne, I think, mentions this, too. The problem is that current political configurations are created by economic and therefore demographic impacts of the past. Economic organization can change very rapidly relative to social change, the result being that new economic realities come up against political ones that suited what had gone before.

If the new economic structure is to be useful and sustained, it needs to recognize that those "heavily concentrated" losers must be provided with new tools and therefore new opportunities. To fail in this means that they will be "Olson-rational" and oppose the new economic realities.

[Jon Fernquest]

Martin Wolf: "I have no doubt that world welfare would increase if migration were completely free. But I also think it could have devastating effects on the high-income countries.... I think countries have a right to defend their internal cohesion... some management of migration. So how is that to be done? That will be a subject of a future column..."

For a sobering story of free flowing immigration in the British Empire on the eve of of World War II read the panoramic:

FORGOTTEN ARMIES: The Fall of British Asia 1941-1945 (2004) Bayley and Harper

Massive Indian immigration into Burma overwhelms local population displacing them with cheap labor. In the agricultural sector money lenders foreclose and seize land, the Japanese invade, the Indians flee, and there's already a dependence on Burmese rice to the tune of 15% in Bengal which contributes to a famine, 3 million people die, who had specialized in jute production before the war.

What are the implications for this era of relative peace? Can one fully predict exogenous shocks like the Japanese invasion? The pre-empire social formations were probably more resilient to this sort of thing.

[anne]

There is every reason from 25 years of experience to believe that modern economies and markets are more resilient and adaptable than ever before.

[Larry]

I am impressed that Brad knows that an 'indaba' is a symposium. And an excellent choice of wine.

[Ponzi Q. Globalization]

"C. Fred Bergsten: An Institute for International Economics team led by Gary Hufbauer recently quantified the impact of trade globalization on the United States. Using four different methodologies, it concluded that the US economy is about $1 trillion per year richer as a result of its integration with the global trading system over the past 60 years. This equates to about 10% of GDP or $10,000 per household."

I just reread this. Over the *past 60 years*!? That's since 1946! It must have been a Herculean effort to find out just how much of the increase can be attributed to the "integration with the global trading system" over the past 60 years.

Many of these bankers and economists seem to be nothing but salesman peddling the neo-liberal brand of globalization. With production of all kinds shifting overseas to cheaper places full of equally talented people who, thanks to international investment and technological innovations, will become equally productive, I think Messrs. Bergsten and Hufbauer and their ilk are going to find it much harder in the future trying to convince Americans that they are benefiting from the existing global trading system. Better keep talking about the past. You know, how we in America kicked economic ass when competing with a world devestated by war and misguided Communism..

[save_the_rustbelt]

"...This equates to about 10% of GDP or $10,000 per household."..."

Averages are, of course, often wildly misleading. Some have much more, some much less.

[save_the_rustbelt]

Foreclosures soar

35,000 Metro Detroiters lose homes so far this year

Metro area 6th in foreclosures
Foreclosure business booms
Defaults soaring in state
Borrowers fret as more foreclosures loom

David Coates / The Detroit News

Metro Detroit homeowners are skidding into foreclosure at nearly three times the rate as they were last year as a slumping economy, falling home values and risky mortgages leave more household budgets in the red.

[Ponzi Q. Globalization]

ralph writes:

"If the new economic structure is to be useful and sustained, it needs to recognize that those "heavily concentrated" losers must be provided with new tools and therefore new opportunities."

The best tool is a lower standard of living.

[joshb]

I'd argue that Bergsten doesn't "get it" at all, rather, he's just peddling some very bad economics.

the IIE study that purports to show the $1 trillion gain to US GDP from trade is just plain shoddy. it's a chapter from a book called "the united states and the world economy: foreign economic policy for the next decade".

there's no original research done (which in and of itself isn't a sin, of course), it's just IIE's interpretation of 4 previously undertaken studies - *none of which claims anything remotely like a a $1 trillion gain to US GDP through trade*.

one of them, in fact, is a simulation model, not an estimation.

another shows that even in IIE's dubious interpretation trade liberalization added $0 , yup, zero, to US GDP since 1982, and, subtracted $12 billion since 1997.

this is a wholly unreliable number that bergsten is floating.

joshb

[Karlsfini]

I suppose you'd have to be in the profession even to understand the title of this symposium: "The Political Economy..."

My one consolation is that none of the participants seem to know what the others are talking about either.

Akio Mikuni's comments on Japanese agricultural products are simply opaque, and C. Fred Bergsten's contention that only Americans "with a high-school education or less" are worried about globalization or suffer much from it, overlooks the current rate of unemployment (and anxiety)of college grads.

I suppose the luxury of contemplation of what-if worlds is the prerogative of theorists, but to discuss globalization without taking into account the political and ecological "disturbances" likely to play a rôle, is, well, academic.

Rather let's consider, if the water temperature in the North Atlantic was 80-degrees instead of 28-degrees, what time would the Titanic have docked in NY and how would that have affected...

Sorry Brad, but on this occasion, except for the real-world thinking of save the rustbelt, the comments on this are much brighter and better over at MaxSpeak.

[Karlsfini]

Ponzi and joshb, I hadn't seen your comments when I posted. They're also good.

[anne]

Brad DeLong:

"The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality..."

Oh dear, the more I think of this passage, the less I understand. The implication seems to be that all is fine in this finest of global economic worlds other than that some few benighted souls fail to perceive the fineness. So, beat these souls thoroughly till they see how happy they should already be feeling. Oh dear :)

[Cranky Observer]

> The implication seems to be that all is
> fine in this finest of global economic
> worlds other than that some few benighted
> souls fail to perceive the fineness. So,
> beat these souls thoroughly till they see
> how happy they should already be feeling.

Another implication seems to be that the standard economist's take on globalization requires the termination of representative government in general and voting in particular.

Cranky

[anne]

Cranky, you are a visionary :)

[save_the_rustbelt]

Anne, Cranky:

"The floggings will continue until morale improves."

[piotr]

Anne: "Brad DeLong:

`The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality...'

Oh dear, the more I think of this passage, the less I understand"

It reminds me of "Croesus, by crossing the Halys River, will undo a huge state." Upon getting this answer from Delphi, Croesus crossed the Halys River and started a war against Persia, which finished his kingdom, half of Asia Minor at the time, as an independent state. Croesus, being Croesus, had a good retirement plan and the victorious King Cyrus was gracious enough to let now ex-King Croesus enjoy it. This is the first instance of a "golden parachute" in recorded history.

I must admit that I did not even understand if the passage in question represents the thoughts of DeLong, or of Bernanke. Or was it merely a paraphrased utterance of Bernanke who, a former professor that he is, what giving a synopsis of thoughts of yet another person? Who, in turn, was just giving an example to explain the notion of "sarcastic"?

Once we put our perceptions in doubt, there is no telling where it may end.

[piotr]

A possible explanation of the above passage: it is futile to change this reality, but we could at least change the wrong perception that "free trade" is the summum bonum.

Impression of an illiterate (economically) but a numerate person: comparing one trillion in gains versus 50 billions in losses was strange at best.

Given that one trillion is ca. 10% of the current GNP, it is implausible that the suggeestion was that this was the gain, year after year, over the last 40 years. After dividing by 40 the gain seems to amount to 25 billions per annum, and it is hard to claim that 25 billions make 50 billions look "paltry". Thus the claim itself sounds totally underwhelming as stated. Perhaps in the most recent years the gain was not the average one of 25 billions but several times larger?

The second strange part was the calculation of losses: 200k persons loosing jobs and thus ca. 30% of lifetime income which is in the ballpark of 1M, which would make it 60 billion. Given that you need to throw in some assumptions of the current value of the lifetime losses, 50 billions is pretty much the exact result. So what is strange? The dog that did not bark.

It is like that: if we like the impact to be big, we can see a cascade of indirect causality, adding secondary and tertiary effects, and if you are particularly hell-bent on getting the imact to be big, you model its mushrooming effects till the infinite time horison. But if you want the effect to be small, it is what it is.

If 200k person loose jobs, their coworkers and other workers may be intimidated to accept a much lower wages. This may affect millions. When the job losses are concentrated, they depress local real estate market thus making ALL local residents loose a substancial part of their life savings. As the economic refugees crowd in the few remaing healthy job markets they sell their depreciated real estate and bid for scarce reao estate in these markets, moving the rents and house prices out of the reach of the lower income people in those areas. Etc. etc.

[anne]

Terrific comments, and Piotr is a fine story teller, King Croesus, and aphorism spinner, "Once we put our perceptions in doubt, there is no telling where it may end."

[Doug K]

"The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality."

why are the perceptions of the rest of the world so disconnected from the economist-perceived reality ? It appears you need to be an economist to see the benefits of globalisation. Those of us who are finding ourselves subject to the iron law of wages as a result of globalisation have a different perception: saying that we don't perceive reality, and advising a nice drink of South African chardonnay, is a little insulting in this context.

Certainly we get cheap widgets from China, and cheap software from let us say India. However China's comparative advantage consists mostly in the absence of labor and environmental laws: India's, in a caste system not easily distinguishable from apartheid, which supports a small caste of programmers inter alia, at its apex. The long-term costs of these advantages may yet prove larger than the benefits we get from them.

[Ralph]

The ultimate fate of globalization I contend will eventually be determined by nature. We already know that one of the perils of agricultural globalization has been the spread of diseases like bird flu.
The cheapness of transportation has made petroleum king of the energy sector with the perils of political instability in the Middle East a consequence. There is also the unknown factor of global warming whose effect on human and ecological stability is largely unforecastable.

[piotr]

A disquieting thing about globalization is the increase in alienation. This is a Marxist concept, which means that (a) there is something to it, (b) there is a lot of garbage written using that notion (or, say, obsolete writings) and (c) we would do well to reinspect this phenomenon with the contemporary perspective.

In good old days, before alienation, food was raised, animals husbanded, artifacts were crafted and the economic exchanged was performed in a context that had a lot of personal meaning to the participants. Say, a lord squeezing his peasants to the last dreg of their surpluss, peasants resisting with pitchforks etc. Or the lord giving peasants a keg of beer to drink to his health on the account of the day of his patron saint.

Enter industrial evolution and transformation of the exchange of goods and labor into purely monetary transactions.

Even so, it used to be that we were buying mostly products made be people that we perhaps did not know but we knew about them. Similarly, producers had some idea about their customer, and service providers had personal contact with the customers as well. People could be proud that their product is used with pleasure by some people.

There is an anegdote that Fritz Mondale, as he was running for President, visited a factory of paper goods where he had a chat with the workers, and one of them gave him a sample of their product -- they were making toilet paper -- and told Mondale "squeeze it". Mondale gasped for air, suspecting that some nasty incident is brewing, but a manager quickly explaied that "squeeze it" is their slogan and that the workers are proud of their product, the softest on the market.

I am not sure if workers toiling for 16 hours a day somewhere in Indonesia or Guandong are proud of anything, definitely not on the day when the production is moved to Vietnam or Bangladesh where other workers will also work for 16 hours a day, but with a pay that would be smaller by 0.5 cent per unit product. Luckily, I do not need to know anything about them, and perhaps even more luckily, they have no idea who I am.

Some revolutions in worldwide productivity are annoying on more concrete level, like the discovery that useless customer advice can be offered with utter incompetence not merely from Omaha, but, yet cheaper, from Hyderabad. The idea that someone could actually SEE the printer or some such was probably contemplated by marketting gurus, calculations were made and the idea was discarded.

Just think about it: people would have to be trained, paid enough to stay with the company for a while after the training, and it would be hard to exchange them on moment noticed with somewhat cheaper labor performed in yet another corner of the world. It sounds so, so, 20th century. It is just not done.

An extemally trivial example -- American market of kitchen utensils underwent total uniformization. There are roughly two brands, everything made in China of course, and if you want a type of garlic press, can opener or whatever that you know from slightly less global era when slightly more shopping chains were operating, tough. (I suspect that once the consolidation reached a certain level, the design teams were fired as unnecessary.)

By the way of contrast, a short walk in a center of a middle-sized German town will let you find at least 5 different types of all these utensils (well, not all, German seem to have some morbid fascination with cutting things and correcpondingly, the selection of knives and scisors is bewildering). I was so disalienated that I had to take the first flight back to the country of rugged individualists.