This presentation is made for the students of B.A. (H) economics, sem 6. This is from chapter 6 written by Abhijit Vinayak Banarjee, Roland Benabou and Dilip Mookerjee, in the book Understanding Poverty, Oxford University Press, 2006. This is a licensed material. http://creativecommons.org/licenses/by-nc-sa/4.0/

1. Globalization
and All That
chapter 6
Abhijit Vinayak Banerjee

2. Globalization
The world for which it was conceived is no longer the
world in which we live.
 Specialization in production.
 Protection for some industries.
 Unrestricted flow of commodities and ideas across
national boundaries.
 Unregulated movement of people.
 Rising income inequality.
 Suicidal attempts by the farmers.

3. The world of high trade theory
 The Samuelson-Stolper Theorem: Trade gives each
country a bigger market for the goods it is best
suited to produce with comparative advantage.
 Thus a labor abundant country should see an
expansion of its production of labor intensive
goods, with corresponding increase in the demand
for labor and its price.
 There are benefits of factor price convergence to
the poor as well as the rich countries.

4.  In the first half of the nineteenth century, international
trade was largely a matter of exchanging goods that had
more value than weight and a marginal part of life.
 Wages were growing fastest in the richest countries.
(England, the united states)
 The period ends with the California gold rush. The U.S. was
the biggest player, in U.K. also workers were finally getting
the benefits of decades of industrialisation.
 Some of the less favoured countries such as Spain and the
Netherlands were in slump.

5. Then suddenly the floodgates opened !
 In 1846, England repealed the corn laws, started a flow of
unilateral and bilateral lowering of barriers to trade all
across western and central Europe.
 In 1838, transatlantic steam shipping was introduced.
 In 1870, a series of innovation- the screw propeller, the
compound engine, steel hulls etc had made transporting
bulk freight by steam ships practical.
 In 1830, railways introduced.
 Between 1850 – 1870 mileage all over the world grew by
more than five times.
 In 1870 mechanical refrigeration started being used in
transporting of meat across the Atlantic.

6. Food price and wages
 The combination of these forces led to rapid expansion of trade.
The price gap of grains and meat shrank from nearly 100% to less
then 20% in many of the countries.
 The fall in price of food should have shrunk the gap in the real
value of wages between Europe and the new world- Argentina,
Australia, Canada and United States.
 There was faster wage growth in Europe over this period. Wages
grew by about 1% per year, in Scandinavia 2.5% in Ireland and
Italy 1.75%.
 In less developed countries in the new world wages actually grew
considerably faster.

7. Land price
 Prices for agriculture land rose by almost 400% in land
abundant Australia between 1870-1913.
 In United states, Denmark, Germany, and Spain land
prices went up. However declined in Britain, France and
Sweden.
 There were many other obvious reasons for rising wages
and land prices such as capital accumulation and
technological upgrading.

8. The period for extended trade for labor
abundant Europe led up to the first world war
 (1870 – 1913) during these years of growing xenophobia
and economic nationalism,
 Tariff barriers were raised and borders were closed to
immigrants.
 Inequality started to grow once again.
 (1921 – 1938) In the era of great depression poor were
greatly affected in Italy and France and the least
affected in Canada, Australia, and the United States.

9. Immigration and wages
 The pro-trade decades were also pro-immigration
decades. United States labor force would have not
been that high, there was not the flow of immigrants
from Europe to Americas over the previous four
decades.
 This drove wages up in the countries they had left
and down in the countries where they went.

10.  After the world war II, tread resumed, under the
supervision of the newly created guidelines of the world
trading system: the World Bank, the IMF, and the GATT.
 With decolonisation the poorest countries in the world
had a chance to make their own policies.
 Since the mid 1950s, trade barriers have been raised
and brought down many times in every corner of the
world.

11. The problem years
 Things started going wrong with the Mexican liberalisation
by reducing both the coverage of its import quota regime
and the average duty on imports during 1985 – 1987.
 Many countries had followed the same pattern,
Argentina (1990 - 1998), Colombia (1985 – 1992), Chile (1970),
Costa Rica (1980) and Uruguay (1990).
 Consequently over the rest of the decade, blue collar
workers lost almost 15% of their wages while their white
collar counterparts gained in the same proportion.
 Same correlation between liberalisation and increasing
inequality showed up in India and China.

12. Correlation between liberalisation and
income inequality
 Most of the studies found that being open to trade either
increases inequality or has no effect at all. One study on
well being of poor finds that their income grows more
slowly when the economy is more open to trade, not just
in comparison with the rich but in absolute terms.
 These studies do show that it is not the trade
liberalisation itself but it is something that operates at a
similar timescale; such as the nature of technology and
the norms of society, foreign investment.

13. Tariffs and employment
 Prices fall In industries where the tariff cut was deeper,
confirming that the barriers to trade in these industries
were actually blocking imports.
 Absence of labor reallocation is a result of draconian labor
regulations that make it impossible to fire anyone.
 Manufacturing employment fell dramatically in Argentina,
Colombia and Mexico.
 Removal of protection hurt all workers and not just the
workers in the protected industries.

14. Rethinking Trade Theory
 Reputation: Reputation is like a fixed cost. Its advantage is
independent of how much you sell.
 Brand name: It gives the assurance of quality. The average
buyer is rich enough today to afford to pay something extra
for a brand name for the assurance of quality.
 Trust: Retailers pay more to trusted suppliers and
manufacturers want reliable suppliers.

15.  Firms with a brand name are reluctant to change the process of
production. Not necessarily because the new process are
inherently harder to control but because they are unfamiliar.
 The urge to capitalise on the brand name. To maintain the
quality of the brand name a lot of multinationals are headed for
the service sector and the skill premium goes up when the MNCs
come in.
 Choice of “from whom to buy”. It could take a long time before
cost advantages show up in the pattern of trade.
 Success in building a reputation will clearly be crucial in
determining exactly what it ends up exporting to the world.

16. The process to build the reputation is slow and takes
time. It is likely to be doubly slow because capital
markets in developing countries work very poorly.

17. What then?
Steps that a country can take to make reputation:
 Effective court system
 Developing trade relations with other developing
countries
 A public scoring system for buyers and sellers
 Creating friendly environment for the multinational
investors.
 Multinationals are also helpful as the intermediators.
 Improved capital markets

18. Is trade worth it?
 If the income gains to those who gain from trade are larger than
the losses to those who lose, trade is favourable. Gains can be
redistributed to make everyone better off. But identifying the
losers, taxing the winners, and making sure that the money does
not somehow get lost along the way is not easy due to corruption.
 The growing countries need technology and capital from abroad,
and to pay for these imports and to take full advantage they need
markets abroad. This is possible only with outward orientation.
 It does require a credible commitment to remain open for the
foreseeable future, to convince foreign investors that the country
will earn enough foreign currency to repay what it is borrowing
now.

19. Conclusion
Openness should go with a strong commitment to an acceptable guaranteed
minimum living for all.
 Guarantee should primarily take the form of a right to education and health.
For this an income support program combined with a negative income tax
program has the obvious advantage that helps the poor.
 Many of the biggest losers will be the owners of very small firms and farms
and workers in the organised sector, rather than the very poor. The
guarantees discuss above are not going to compensate them for what they
have lost. While in some ways they do have more to start with.
 Sharing of cost and benefits of trade fairly across countries. Every rich
country has a well established system of welfare that will automatically
compensate its losers. Every poor country will have to set up new mechanism
to do so and pay for them now.

20. Migration today is explicitly a system by which
rich countries raid the poor countries for talent.
Globalisation has made it more easier.
Given that rich countries are aging fast and need labor, a system of
quotas may work for immigration to rich countries that are open to
everyone in poor countries that agree to remain open. The quota
would be allocated by a lottery, and would allow one person between
the ae of twenty and thirty five to have a work permit in a rich
country for a fixed period, say five years.
His/her travel expenses and some resettlement costs would be paid
for and precautions would be taken to make sure that in most cases,
he/she did go bake, so that the home country would benefit from
his/her savings and skills he/she had acquired.