## 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."