Topics in the Globalisation Debate 1: Competitiveness; Immigration

1
Topics in the Globalisation Debate 1
Competitiveness Immigration
This lecture draws mostly from Krugman (1993)
What Do Undergrads Need to Know About Trade? The
American Economic Review. Vol. 83(2)
2326 Krugman (1994) Competitiveness A
Dangerous Obsession. Foreign Affairs
73(2) Dustmann, C. and Glitz, A. 2005.
Immigration, Jobs and Wages Theory, Evidence and
Opinion. London, Centre for Economic Policy
Research. Lewis (2004) How Do Local Labor
Markets in the U.S. Adjust to Immigration?
Federal Reserve Bank of Philadelphia. Mimeo
2
The Globalisation Debate

• The term globalisation is so overused that it
  is not clear what it means.
• Economists would think about things like trade,
  factor mobility and diffusion of technology
• Other discussants (trade unions,
  environmentalists, development lobbyist, consumer
  groups, human right activists, religious groups,
  utopians) often seem to talk about (alleged)
  increased power of large companies and
  Americanization
• In the remaining two lectures we will take a
  brief look at some key issues discussion on how
  to enhance countrys competitiveness and impact
  of globalisation on the labour market.

3
Competitiveness A Typical Statement about
International Economics

1. We need a new economic paradigm, because today
   our country is part of a truly global economy.
2. To maintain our standard of living, our country
   now has to learn to compete in an ever tougher
   world marketplace
3. Thats why high productivity and product quality
   have become essential
4. We need to move our countrys economy into the
   high-value sectors that will generate jobs for
   the future
5. And the only way we can achieve this is to
   forge a new partnership between government and
   business

Paul Krugman (1993) What Do Undergrads Need to
Know About Trade? The American Economic Review.
Vol. 83(2) 2326
4
Competing in an ever tougher world marketplace

• President Clinton each nation is like a big
  corporation competing in the global marketplace
• Some bestselling titles
• Lester Thurow Head to Head. The Coming Economic
  Battle among Japan, Europe and America
• Jeffrey Garten A Cold Peace America, Japan and
  Germany and the Struggle for Supremacy
• Ira Magaziner Mark Patinkin The Silent War

See P. Krugman (1995) The Illusion of Conflict
in International Trade. Peace Economics, Peace
Science, and Public Policy (also in Pop
Internationalism)
5
The Need for a New Paradigm?

• M. Porter (1990) in The Competitive Advantage of
  Nations Yes
• A new theory must explain why firms from
  particular nations choose better strategies than
  those from others for competing in particular
  industries (p. 19)
• A new theory must move beyond comparative
  advantage to the competitive advantage (p. 20)
• ...the best measures of competitive advantage
  are (1) the presence of substantial and
  sustained exports to a wide array of other
  nations and/or (2) significant outbound foreign
  investment based on skills and assets created in
  the home country (p. 25)

6
The Need for a New Paradigm?

• Krugman (1993) no
• probably the most important single insight an
  introductory course can convey about
  international economics is that it does not
  change the basics trade is just another economic
  activity, subject to the same principles as
  anything else

7
Competitive Advantage Firms

• Competitive advantage of a firm
• competitive strategy is about taking offensive
  or defensive action to create a defendable
  position in an industry, in order to cope
  successfully with competitive forces and generate
  a superior return on investment (Value Based
  Management.net)
• if a firm is not competitive, it will go bankrupt
• Firms competitiveness can be measured trough
  profits / return on investment etc.

8
Competitive Advantage Countries

• Countries are not companies
• while firms based in different countries sell
  products that compete with each other, in the
  country-level there are mutual benefits from
  trade
• Success of one country is likely to benefit other
  countries (more demand for imports)
• The only meaningful offensive or defensive
  action in the level of a country is strategic
  trade policy
• Imports (NOT exports) are the purpose of trade
• ? exports / current account is not the bottom
  line of a country in a way profits are for a firm

9
Competing in an ever tougher world marketplace

• P. Krugman (1994) Competitiveness A Dangerous
  Obsession. Foreign Affairs
• While competitive problems could arise in
  principle, as a practical, empirical matter the
  major nations are not to any significant degree
  in economic competition with each other

e.g. the terms-of-trade argument and strategic
trade policy
10
What does Competitive Advantage of a Nation
mean, anyways?

• Porter (1990)
• the only meaningful concept of competitiveness
  at the national level is national productivity
• Krugman (1994)
• competitiveness would turn out to be a funny
  way to saying productivity and would have
  nothing to do with international competition

11
A Typical Statement about International
Economics

1. We need a new economic paradigm, because today
   our country is part of a truly global economy.
2. To maintain our standard of living, our country
   now has to learn to compete in an ever tougher
   world marketplace
3. Thats why high productivity and product quality
   have become essential
4. We need to move our countrys economy into the
   high-value sectors that will generate jobs for
   the future
5. And the only way we can achieve this is to
   forge a new partnership between government and
   business

12
Why Productivity Matters?

• Example
• productivity of a closed economy increases by 1
• ? the consumption possibilities increase by 1
• productivity of country A increases by 1 , and
  productivity of country B by 3
• ? As consumption possibilities increase by 1,
  Bs by 3 (unless there is a substantial
  terms-of-trade effect)
• That is, productivity is beneficial for its own
  sake, not because it helps us to compete in the
  world marketplace

In this case, one would expect the prices of
the goods B is exporting to decrease (due to
increase of supply). That is, As consumption
possibilities would increase by more than 1
13
High-Value Sectors

• Our countrys real income can rise only if (1)
  its labour and capital increasingly flow toward
  businesses that add greater value per employee
  and (2) we maintain a position in these
  businesses that is superior to that of our
  international competitors

Ira Magaziner and Robert Reich (1982) Minding
Americas Business. p. 4
14
High-Value Sector in a Simple Ricardian Model
Cloth Wine
England 1 hr. / yd. 3 hrs. / bbl.
Portugal 2 hr. / yd. 4 hrs. / bbl.

• England is more efficient in producing both
  products ? Englands wage rate will always be
  higher
• England has comparative advantage in producing
  cloth ? in free trade England produces cloth ?
  cloth is the high-value sector
• Does this mean that the Portuguese government
  should promote reallocating resources to produce
  cloth? Of course not.

15
that will generate jobs for the future

• Krugman level of employment is a macroeconomic
  issue depending
• in the short-run on aggregate demand
• in the long-run natural rate of unemployment
• with microeconomic policies like tariffs having
  little net effect

Paul Krugman (1993) What Do Undergrads Need to
Know About Trade? The American Economic Review.
Vol. 83(2) 2326
16
A Typical Statement about International
Economics

1. We need a new economic paradigm, because today
   our country is part of a truly global economy.
2. To maintain our standard of living, our country
   now has to learn to compete in an ever tougher
   world marketplace
3. Thats why high productivity and product quality
   have become essential
4. We need to move our countrys economy into the
   high-value sectors that will generate jobs for
   the future
5. And the only way we can achieve this is to
   forge a new partnership between government and
   business

17
A New Partnership between Government and Business?

• Robert Gilpin (2001) Global Political Economy
  Understanding the international economic order.
  Princeton University Press. p. 210-214
• Governments can and do have an important and
  even decisive role in promoting their own
  national firms in international markets
• a government can take a long-term perspective
  and establish policies that foster a favourable
  domestic environment for those sectors most
  likely to be competitive in international markets

18
A New Partnership between Government and Business?

• infant industry argument
• Remind yourself of Lecture 8
• Key assumption market failure (due to
  externalities, imperfect capital markets etc.)
• Problems
• identifying the right industries
• Time consistency will the protection eventually
  become permanent?

19
Partnership between Government and Business?

• Krugman (1993)
• the main competition going on is one of U.S.
  industries against each other, over which sector
  is going to get the scarce resources
• there are reasons, such as external economies,
  why a preference for some industries over others
  may be justified. But this would be true in a
  closed economy, too

20
The Dangers on Obsession on International
Competitiveness

• Wasteful spending of government money
• Inefficient allocation of resources
• resources from nontradables to tradables
• Possibility of protectionism trade wars
• Indirect impact on the quality of economic policy
  making in general

P. Krugman (1994) Competitiveness A Dangerous
Obsession. Foreign Affairs (also in Pop
Internationalism)
21
Impact of Immigration revisited

• Variation of model discussed in Lecture 5
• One output
• Three factors of production capital, skilled and
  unskilled workers
• unlimited amount of capital available from the
  international market at fixed price
• native labor force fixed, but not perfectly
  inelastic (some will not work if wages are too
  low)
• All immigrants are low-skilled workers
• If immigrants have the same skill-mix as the
  natives, the economy expands but nothing happens
  to wages

22
Impact of Immigration Theory
Low-skilled Wage

• Immigration leads to decrease in low-skilled
  wages and increase in low-skilled unemploy-ment
• High-skilled workers win more than low-skilled
  lose ? immigrant surplus
• LN0 Initial native employment
• LN1 Post-immigration native employment
• w0 initial wage
• w1 post-immigraiton wage

LS0
LS1
Immigration
w0
Transfer from low- to high-skill workers
Change in low-skilled native wages
Immigrant surplus
w1
Low-skilled Natives wage
Immigrants wages
LD
LN0
LN1
Amount of low- skilled Labor
Change in low-skilled native employment
23
The Challenge of Empirical Work

• Constructing the counterfactual
• First step descriptive analysis. Is the data
  consistent with the models?
• More challenging question if everything else
  stays constant and immigration increases by X
  percent, how much does production, wages etc.
  change?.
• Problem we never observe what would have
  happened if there had been a different amount of
  immigration. Hence, we need to construct the
  counterfactual using theory or a natural
  experiment.
• Understanding the role of the models
• The models we have studied are caricatures. That
  is, it does not make sense to ask are they true
  or false. Instead, the question to ask is to
  what extent are they explaining what we are
  observing?

24
Estimating the Impact of Immigration

• Most studies estimate the equation
• yjt ?rjt Xjtß ujt
• where y is the outcome in labour market j at
  time t, r is the share of immigrants in this
  labour market, X is a set of relevant control
  variables and u summarizes the unobservable
  factors affecting the outcome. The parameter of
  interest is ?
• Q Why some labor markets attract immigrants?
• If this is due to unobserved factors (e.g.
  positive demand shocks increasing wages), we say
  that r is endogenous and standard (OLS)
  estimates of ? will be biased upwards
• Solutions (a) Natural experiments, (b)
  Instrumental variables

25
Summary of results

• Most studies find small or no effect of
  immigration on native wages and employment
• Current research aims to understand, why?
• Possible explanations
• Endogeneity bias
• Native out-migration
• Changes in product-mix
• Changes in technology
• Increase in demand (by the immigrants)

26
Spatial correlations approach critique

• Most studies define labor market as a
  geographical area
• essentially compare wage growth in cities (inside
  one country) with different immigrant inflows
  (due to reasons unrelated to wage growth)
• Borjas not valid, immigration will affect all
  areas
• internal migration and capital flows
• changes in product-mix

27
Impact on product mix theory

• Immigration increases labor force in one area ?
  production of low-skill intensive products
  increase in this area ? other areas increase
  production of high-skill intensive products ?
  more trade between areas inside countries
• Price of low-skill intensive product decreases ?
  low-skilled wages decrease also in areas where no
  migrants went

Paper
Clothes
28
Impact on product-mix empirics

• Lewis (2004) and Glitz and Dustmann (2007) study
  the impact of immigration in US and Germany,
  respectively
• Both conclude that the there is an impact on
  product-mix, but it is not sufficiently large to
  explain the absence of wage effects. However,
  both find large effect on within-industry worker
  mix suggesting that firms seem to alter their
  technologies as a response to changes in labor
  supply
• The standard HO-model assumes constant technology
  and cannot thus predict this. However, one can
  simply modify the HO-model, by relabeling goods
  as techniques