Pressures from globalisation: are trade restrictions the answer?
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Pressures from globalisation: are trade restrictions the answer?
L Alan WintersProfessor of Economics, University of Sussex
CEPR, IZA, GDN
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Manufacturing does matter for exports and productivity
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Manufacturing Share of Economy
$10K PPP, 1990
Share %
GDP pc PPP, 1990
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Share of Manuf. in Economy
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Share of Manufactures in Merch. Exports
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Competition: Global
• E.g. Wood and Mayer (2009)• China implied a 8-15% increase in world
unskilled labour abundance• Everyone else’s comparative advantage
changed• Their Manufactures/primaries ratios fell by:
• 7-10% for output• 10-15% for exports
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Who is affected?
• Consumers (Broda & Romalis)– Inflation for lowest 10% 6ppt lower than average – Correlates with imports from China
• Producers:– Competition for incumbents – static and dynamic
responses – Intermediates for all (incl. potential)– Outsourcing and value chains (new opportunities)– Aggregate output (growth)
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Conditional Effects
• Heterogeneity of country studies• Chang, Kaltani & Loayza (2009, JDE)
– Interactions of openness with
– Weaker effects in poorer countries; middle-income countries strongly positive effects
education financial depth inflationtelecoms governance lab mkt flex
firm entry flex firm exit flex
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Effects of Labour Market Regulation(Bolaky-Freund; JDE 2008)
Less regulated half More regulated half
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Productivity
• Selectivity• Competitive pressure • Imported inputs (Amiti & Koenings (2007,
AER) and AER P&P 2009 • Learning by Exporting (Fernandes & Isgut,
2005, WB; Blalock & Gertler, 2004, JDE)• Learning to Export (Iacovone, 2009, WB)
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Mexican Firms – Chinese Exports(Iacovone, Rauch and Winters – JIE 2013)
• Firm sales and existence• Huge growth of competition 1994-2004• Impact via both domestic and export markets• Effects strong but highly unequal
– At plant…as well as at product level – Larger (more productive) plants less hurt…“core”
products less impacted than “marginal” ones
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Heterogeneity of Competition Effects
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Why the Resistance?
• Trade is heavily redistributive– There will always be losers; as always – Even gains unevenly distributed – Losses may not be randomly assigned– Special interest groups
• Hence the politics are difficult– Time periods long– Distribution - internally and relative to foreigners– No guarantees → risks
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Where do we go from here?
• Vast majority of growth policy is not trade policy; don’t obsess about it
• But trade policy is relatively simple technically • Treat trade policy as decision, not a hypothesis
test– No guarantees, – Balance of evidence and priors– Costs of different errors– Cost of uncertainty
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Distribution of growth increments
Percent change in growth over liberalisation
02
468
1012
-2 -1 0 1 2 3 4 5 6 7More
percent p.a.
num
ber
Kneller et al (2008)
Sample of 47 events
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Cost of error
• ‘We know of no credible evidence … that suggests that trade restrictions are systematically associated with higher growth rates’
Rodriguez and Rodrik (2001, p.317)
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Industrial Policy: Traditional
• Support for specific sector• Initial losses balanced by future gains?
– Need super-normal profits in future– i.e. out-compete existing producers
• Why not private capital markets?– Capital market failure?– Product or factor market failure – i.e. an
externality
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Externalities• Dynamic (static externalities require
permanent policy not temporary relief)• Firms can’t appropriate benefits of: • Learning
– Others copy techniques (hard or soft), market research, export market development
• Training (firm-specific training excluded) – Workers, once trained, move to rivals
• Establishing national reputation
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Subsidies do not solve Externalities
• Increase incentive (speed and effort) to innovate but also to imitate – net effect uncertain
• Similarly for training workers• Does not reduce incentive to cheat on national
quality reputation• Information required huge for any intervention • Support relaxes pressure for scale (excess
entry) and/or efficiency
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Industrial Policy: Rodrik (2007)
• ‘stimulate specific economic activities and promote structural change’ ; ‘not about industry per se’
• Horizontal vs. vertical policies
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Aims
• Curing pervasive market failures e.g.– Credit markets (micro-finance)– Spillovers in technology adaptation– Agglomeration– Human capital policy
• Tradables hardest hit by these or institutional failures
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Practical Challenges of Industrial Policy
• Informational requirements• Rent-seeking, corruption
– distort decisions– waste resources
• But these afflict other policies too and we still pursue those -
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Guiding Principles for Industrial Policy
1. Knowledge about constraints and spill-overs is widely diffused
2. Business will ‘game’ any system3. Beneficiary is society, not government or
business
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Responses1. ‘Embedded autonomy’ for bureaucracy
– i.e. close relations with business, but independent– Processes of revelation and discovery required
2. Sticks and carrots– Performance/behaviour criteria; use market– Failures are natural; let them fail
3. Accountability– Of business to bureaucracy, bureaucracy to
politicians– Monitoring, transparency, autonomous agencies
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To sum up:
• Big changes are afoot• Openness boosts income on average• Productivity effects seem strong• Policy governed by balance of probabilities
and costs – no guarrantees• Traditional industrial policy – flawed• ‘Horizontal’ policies may be useful, but hard
to implement – politically and practically
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THANK YOU
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What’s special about now?
• Growth and consumption aspirations– Global media
• Cheaper trade → higher returns to success– Correspondingly lower to failure
• Global value chains– Trade is central– Competition to get investment
• Only very large can afford to stand aloof
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