International Trade, Globalization and Financial Crisis

1
International Trade, Globalization and Financial
Crisis

• Impacts on Scale, Distribution, Efficiency and
  Democracy

2
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
• Supporting institutions are IMF, World Bank,
  World Trade Organization (WTO), NAFTA, etc.
• Whats a legitimate alternative?

3
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

4
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

5
The Theory Behind International Trade
6
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.

7
Numerical example
1 rupiah 5 pesos Philippines has absolute
advantage
8
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)

9
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

10
Comparative or Absolute Advantage?

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

11
Numerical example
1 rupiah 5 pesos
12
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

13
The Facts Behind Globalization
14
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, especially if we include China)
• 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

15
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?

16
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

17
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

18
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

19
NAFTA and the Environment

• Growing corn exports from US

20
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?

21
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

22
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.

23
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

24
Announcements

• 4 groups turned in PS5, all have received
  comments
• Remaining groups should consider themselves to be
  failing the class currently. I have no qualms
  about giving failing grades.
• Make an appointment to meet with me if you need
  to.
• Participation counts. Many of you are earning
  failing grades on participation skipping class,
  not contributing in classF
• Dont skip class on Thursday

25
Globalization and Stability Financial contagion

• What is contagion?
• Speculative flows
• 2 trillion per day, vs. 36 Trillion global GNP
• What does speculation contribute to economic
  output?
• 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

26
Causes of Financial Meltdowns

• Speculative bubbles
• Moral hazard
• Fundamentals wrong
• High current account deficits
• Excessive money creation
• NYT Headlines Fed Plans to Inject Another 1
  Trillion to Aid the Economy
• Overvalued exchange rates
• Relative to what?

27
(No Transcript)
28
Causes of Contagion

• Freedom of capital to go where it wants
• Hot money
• Imperfect information
• Herd behavior, animal spirits, Reflexivity
• Positive feedback loops and multiple equilibria
• Selling short

29
Examples of Contagion
30
LA debt crisis (1982)

• ISI and the energy crunch
• Petro-dollars
• Reagonomics
• Capital flight, exchange rate depreciation
• Switch from ISI to Export promotion,
  implementation of Washington Consensus
• The lost decade

31
Tequila crisis (1994)

• Clintons comments
• Uprising and assassination
• Political uncertainty
• Tesobonos
• Capital flight and devaluation

32
Asian flu (1997)

• Real estate bubble
• Financial speculation, Soros and devaluation
• Impacts of devaluation on debt
• Impacts on trade competitors
• IMF role interest rates, taxes, government
  spending, bailouts
• Malaysias response

33
Impacts on Democracy

• Structural adjustment programs
• Brazils elections

34
Current Crisis

• Origins
• Dot.com bust? real estate boom
• Exotic derivatives and imperfect information
• Financial speculation
• From liquidity crisis to liquidity surplus
• Contagion

35
Policy Options

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