Tuesday, August 12, 2008

Debates on globalization

The ongoing commodity and energy price spikes and the recessionary pressures facing developed economies, has generated an intense debate about globalization and global free trade. The atmosphere of unqualified acceptance of globalization that prevailed in the nineties and early part of this decade, has given way to a more nuanced view. There is enough evidence to indicate that the outcomes from two decades of globalization and falling trade barriers may have been mixed, and may even have contributed to widening inequality across the world. This debate has been the subject of previous posts in this blog here and here.

Dani Rodrik neatly sums up the growing body of critical opinion against any unrestrained acceptance of globalization. He writes, "So we have Paul Samuelson, the author of the post-war era's landmark economics textbook, reminding his fellow economists that China's gains in globalisation may well come at the expense of the US; Paul Krugman, today's foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality; Alan Blinder, a former US Federal Reserve vice-chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labour force; Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, writing of his disappointment with how financial globalisation has turned out; and Larry Summers, the US Treasury chief and the Clinton administration's "Mr Globalisation", musing about the dangers of a race to the bottom in national regulations and the need for international labour standards."

A few months back, University of California's Graduate School of Business (GSB) professors, Christian Borda and John Romalis, had argued in an NBER working paper that trade with China may have had the impact of lowering the prices paid by the poorer Americans for their daily consumption needs, thereby mitigating the effects of widening inequality. They wrote, "Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports".

This and an NYT column by Tyler Cowen, reiterating his belief that globalization produces net benefits for everyone, triggered off an interesting debate in the blogosphere. Cowen had argued that the pace of globalization should not be linked to issues like strengthening social safety nets etc. He wrote that instead of worrying about globalization America should focus on getting its schools, health care and banking systems right.

Mark Thoma differed by claiming that the net impact of globalization and increased trade on the middle- and lower-income households is more negative than is commonly projected. He also wrote that "maintaining political support for increased openness will require that the gains from trade and technological change be shared more equitably, and that economic risk be dispersed across a much broader swathe of the population through risk transfer mechanisms such as enhanced social insurance".

Brad DeLong waded into the debate by claiming that globalization and trade were bit players in reasons for widening inequality within the US, and argues that the conclusions of Stolper-Samuelson hypothesis may be not correct.

Dani Rodrik has consistently argued that the benefits of free trade may have been wildly over-estimated. Using standard models, he claims that the net benefits from free trade may be less than 1% of GDP for the US economy.

The theory of comparative advantage claims that free trade lowers relative prices and not the general price level. Therefore, when a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up! If the consumption basket of the majority of people are weighted in favor of the importables, the consumers are better off. But if the basket is in favor of exportables, then the consumers are worse off.

However, none of the leading opponents of unfettered globalization, including the most extremist voices like Jospeh Stiglitz, are against turning back on globalization. What they want is the creation of new institutions and compensation mechanisms – domestically and internationally – that will render globalisation more effective, fairer, and more sustainable. But their appears no single universally acceptable consensus about what sets of policies to follow to achieve these objectives and make globalization more acceptable. As Dani Rodrik writes, at a time of extreme global economic uncertainty, the world economy desperately awaits the new Keynes.

1 comment:

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