Globalization is Good

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Globalization is Good

• First Lecture for International Relations
• Craig Parsons
• 2007

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What is Globalization?

• To economists it typically means an increase in
  international transactions in markets for goods,
  services, and some factors of production (some
  capital and some labor, i.e. migration)
• Plus the growth and expanded scope of
  institutions that straddle national borders-
  including firms, governments, international
  institutions, and non-governmental organizations
  (NGOs).

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For some, globalization is disagreeable

• At the most basic level globalization is the
  growth of international trade,
• but also growth in MNCs, integration of world
  capital markets, and the resulting financial
  capital flows (in and out), the extraterritorial
  reach of government policies.
• Such rapid growth in these areas has made some
  people experience an increasing sense of
  helplessness. Perhaps small countries have
  always had to confront this. But now big
  countries (such as the US, and EU) are
  confronting it for the first time. For many, this
  sense of helplessness is disagreeable.

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Has globalization really increased?
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What has caused these dramatic increases over 50
years or so?

• Overall GDP growth has increased total trade
• Technology
• Policy (freer trade)
• One paper estimates that income growth accounts
  for 67 of total growth in trade 25 due to
  tariff rate reductions 8 to technology
  (transportation cost declines.)

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Increase in Foreign Assets
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Average Tariff Declines
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Trade Whom does it help? Whom does is hurt?

• There are static and dynamic effects of trade.
• Also, while it has been shown in many ways both
  in theory and empirically that countries that
  trade more do better than those who do not,
• Often the people hurt, get hurt soon, while the
  benefits, while much larger, take a longer time
  to take effect.
• (According to Huber (1971), post-Meiji Japans
  income grew by 65 (!) in 15 years following the
  end of the sakoku policies.)
• Thus, we see the bad effects before the good
  effects.

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The fundamental case for trade and globalization
is that it raises the average persons standard
of living.

• However, the benefits are typically not evenly
  distributed.
• In wealthy countries such as the US, Japan, and
  the EU, capital are the relatively abundant
  factors. Thus, with more free trade, the static
  effect is that capital owners (and those with
  lots of education) have the most to gain.
• Labor, especially low-skilled labor, the scarce
  factor in wealthy countries may lose from free
  trade, at least in the short run, if the
  government doesnt help them out. (Which they
  often do help out.)
• Conversely, LABOR should BENEFIT more than owners
  of capital in in LDCs.

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In the long run, we all gain

• However, in the longer run, old industries will
  shrink and die and new ones will appear and
  existing ones that remain competitive will
  expand.
• In the long run, there will be more jobs and
  better jobs at higher salaries for the next
  generation.
• Thus, in a very real sense, in the long-run,
  everyone gains from freer trade, and there are no
  losers. This is because total average income
  rises with more trade and growth.

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Growth is Good for the Poor (part I)

• When America sneezes, the world catches a cold.
• Some estimates find that a fall in US GDP by 1
  causes a 3 fall in the GDP of developing
  countries.
• Certainly as the second largest economy, the link
  between Japanese growth and the world is also
  important.
• Therefore, prosperity for Japan and the US
  implies, prosperity for the poor countries in the
  world as well.

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Growth is Good for the Poor (Part II)

• According to several studies including Dollar and
  Kray (2000)
• Poor countries that do NOT trade become poorer
  countries that trade converge
• Growth increases income of the poor about the
  same as the rich within poor countries.
• Of course many other conditions are necessary for
  raising the income of poor countries, namely
• Rule of law property rights
• Stable Macro policies
• Lower inflation

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Next Lecture

• Effects of a Tariff (Krugman Obstfeld handout,
  in Japanese)