Announcements

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Announcements

• Projects
• Remainder of class
• Globalization and Financial Contagion (this week)
• Policy Principles (1 lecture)
• Policy applications What do you want to study?
• Climate change? Energy/Peak oil? Biodiversity
  loss? Real estate bubbles? Financial
  crisis/stabilization/New Bretton Woods?

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International Trade, Globalization and Financial
Crisis

• Impacts on Scale, Distribution, Efficiency and
  Democracy

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What is Globalization?

• The integration of all national economies into
  one global market, with one set of rules
• Global market takes precedence over national
  autonomy
• Whats a legitimate alternative?
• Supporting institutions are IMF, World Bank,
  World Trade Organization (WTO), NAFTA, etc.

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What are its defining characteristics?

• Economic growth (increasing material consumption)
  as sole desirable end
• Privatization and commodification of public
  services, national and global commons
• Corporate deregulation and unrestricted movement
  of capital across borders
• Increased corporate concentration
• Cultural and economic homogenization

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What has been the impact of Globalization on

• Ecological sustainability
• Distribution of wealth and income
• Economic output
• Economic stability
• Democracy
• The allocation of scarce resources towards an
  improved quality of life for all people

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The Theory Behind International Trade
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Comparative advantage

• One country can be more efficient at producing
  everything than another country, and still
  benefit from trade with the inefficient country
• Assumes that trade must be advantageous or else
  countries would not participate.

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Numerical example
1 rupiah 5 pesos
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Impacts of comparative advantage

• More total output and freedom of choice in
  consumption
• More specialization, and less freedom of choice
  in production (but only desirable end is
  consumption)
• Some sectors/regions within a country will lose
  out (but winners can compensate losers)

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Global Markets are good for everyone

• Markets will end poverty
• The real losers in Seattle
• Markets will solve environmental problems
• Environmental Kuznets curve
• Population growth and poverty
• Economic growth is essential
• Humans are insatiable
• The Moral Consequences of Economic Growth (B.
  Friedman)
• Protectionism beggar thy neighbor

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Comparative or Absolute Advantage?

• What if capital can flow between countries?
• Indonesian capitalists will produce fish and
  clothes in the Philippines

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Numerical example
1 rupiah 5 pesos
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Absolute advantage

• There will be more fish and clothes
• What about employment in Indonesia? Can people
  flow across borders?
• Is efficient economic production all that
  matters?
• Can winners compensate losers?
• If trade is voluntary, how could this happen?
• e.g. Toxic waste in Abidjan

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The Facts Behind Globalization
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What empirical results would we expect under
absolute advantage?

• Rich get richer, poor get poorer
• Headlines Number of Hungry Rising, U.N. Says
  By ELIZABETH BECKER Published December 8, 2004
• Number of hungry and number of poor at record
  levels (though not when measured in percentage
  terms)
• Income of poorest countries is falling (World
  Bank statistics)
• Richest countries accumulating greatest share of
  new wealth
• 1 of GNP growth in US GNP of 24 poorest nations

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How does a country get an absolute advantage?

• Race to the bottom
• Environment
• WagesMexican wages 11 of US wages
• We would expect the countries with the lowest
  wages and most lax environmental standards to
  exhibit economic growth and atrocious
  environmental degradation
• Headline 9/1/2004 Rivers Run Black, and Chinese
  Die of CancerBy JIM YARDLEY, NYT
• How does a country develop domestic markets for
  domestic production?

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Unavoidable Environmental Costs of Trade

• Transportation
• Global warming
• Oceanic pollution
• Dependence on fossil fuels
• Spread of weed species (especially aquatic)
• Asian longhorn beetle
• San Francisco Bay
• Salmon bacteria

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NAFTA and the Environment

• Environmental side agreement
• Environmental Kuznets Curve
• Actual results in Mexico from 1985-1999Gallagher,
  GDAE
• Rural erosion increased 89 as small farmers
  cultivated more in response to decreasing prices
• Municipal solid waste increased 108
• Water pollution29
• Urban air pollution97

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NAFTA and the Environment

• Chapter 11
• Metalclad corporation
• Toxic dump site or natural protected area?
• MTBE, MME
• WTO similar
• Turtle excluder devices
• Marine mammal protection act

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NAFTA and the Environment

• Growing corn exports from US

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NAFTA and Distribution

• Who are poorest in Mexico?
• 22 of Mexico's labor force in small ag.
• What do we export to Mexico?
• Corn prices dropped 45 in Mexico (US subsidies
  average 20,000/farmer/year)
• Tortilla prices increased in Mexico
• Mexican farmers produced more, not less
• What does Mexico export to US?
• Whats the impact on unions, wages?

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NAFTA and Distribution

• Significant decline in real wages in Mexico
  (minimum wage down 23 under NAFTA)
• Number of households in poverty increased 80
  between 1984-1999, 75 living in poverty
• Over half of rural Mexico in extreme poverty
• Record increase in number of billionaires

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NAFTA and Efficiency

• Exports up in Mexico, but imports up by more
• Rate of growth less than 1 per capita per year
  (1985-1999) vs. 3.4 under import substitution
  industrialization.

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NAFTA and Efficiency

• Environmental impacts
• Financial costs of degradation from 1988-1999 10
  of GDP (36 billion/yr)Gallagher, GDAE
• Economic growth 14 billion/yr
• Distributional impacts
• Law of diminishing marginal utility

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Globalization and Stability Financial contagion

• What is contagion?
• Speculative flows
• 2 trillion per day
• Speculators are harmless as bubbles on a steady
  stream of enterprise. But the position is serious
  if enterprise becomes a bubble on the whirlpool
  of speculation. When the capital development of a
  country becomes the by-product of the activities
  of a casino, the job is likely to be ill-done.
• John Maynard Keynes

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Causes of Contagion

• Caused by freedom of capital to go where it wants
• Speculative bubbles
• Moral hazard
• Fundamentals wrong
• Overvalued exchange rates
• High current account deficits
• Excessive money creation

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Causes of Contagion

• Selling short
• Herd behavior, animal spirits, Reflexivity
• Multiple equilibria

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Examples of Contagion

• LA debt crisis (1982)
• Petro-dollars and Reagonomics
• Tequila crisis (1994)
• Asian flu (1997)
• Real estate bubble
• Financial speculation and devaluation
• Impacts of devaluation on debt
• Impacts on trade competitors
• IMF role
• Current crisis (2008)

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Impacts on Democracy

• Structural adjustment programs
• Brazils elections

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Policy Options

• Tobin Tax
• Speculation tax
• Restricting capital flows
• Higher marginal tax brackets and more equitable
  distribution