Globalisation and inequality Flashcards
Explain the principles of the Hecksher-Ohlin model of trade
- countries produce goods that use resources abundant in that country
- owners of abundant (scarce) resource will win (lose), which is known as the Stolper-Samuelson effect
Why is trade policy politically tricky?
Rodrik
- each dollar of aggregate gain involves approx $5 dollars of redistribution
- so, trade policy reform likely to take place when less politically costly, eg. after a regime change
- noteworthy that this doesn’t necessarily impact income inequality; depends on initial distribution
Tosini and Tower
- self-interest dominates: proportion of textile workers explains voting for a bill tightening textile quota
Other
- People act on beliefs, rather than actual consequences
- Considerable loss aversion
- Small number of more active people can determine policy
Economic and political consequences of ISI
Bhagwati and Kruger
Low duties on capital goods, high tariff protection for import-competing goods, fixed exchange rates > more government spending than tax > inflation > overvalued exchange rate > import demand increase, export earning decrease > forex shortage
Forex shortage > restrict import licenses > “cascade of petitions” > increased complexity, premium to import licenses increase, returns to legal department increase
Economic consequences
- resource misallocation
- import licensing competition
- exporting less attractive
Political consequences
- political connections were the key determinant
- eg. connected businessman, bureaucrats, smugglers
Political decisions CREATED supporters of the political decisions by making the decisions
INSTITUTIONS created exacerbated the misallocation, and were most costly over all
How does old-style trade literature explain rising inequality in the face of globalization?
Hecksher-Ohlin
- unskilled labour is abundant in poor countries
- so poor countries should produce goods using unskilled labour as liberalization and globalisation increases
- thus inequality decrease from between-sector reallocation
So it must be due to other factors.
Skill-biased technological change
- Autor: technology is a complement to higher-skilled workers but replaces medium-skilled jobs, hollowing out
- Kijima: wage inequality in India driven by increasing returns to tertiary education, in contrast to previous wage inequality driven by increase in skill quantity
How does new-style trade literature explain rising inequality in the face of globalization?
- offshoring
- matching
- labour market frictions
Explain how offshoring can increase inequality
Feenstra and Hanson
- Continuum of tasks ranked by skill intensity
- Firms allocate jobs below a cutoff point to poorer countries, as skilled workers are cheaper in the rich country and unskilled workers are cheaper in the poor country
- If it becomes easier to offshore, firms will offshore more unskilled jobs, pushing up the cutoff point
- BUT, the “unskilled” labour in poor countries is still more skilled than previously
- So wage inequality increases in both countries
Zhu and Trefler
- Same mechanism but for traded goods
Grossman and Rossi-Handberg (other hand)
- Feenstra and Hanson could actually increase wages of unskilled workers in rich countries, as they can focus on more productive tasks, given offshoring of low-skill tasks. This “productivity effect” in contrast with “labour supply effect”
Explain how matching can increase inequality
Melitz
- requires firm and worker heterogeneity
Becker
- assortative matching with marriage
- the value of a marriage for a woman, stemming from an increase in the man’s quality, is higher for a woman of higher quality
- this can increase inequality in and of itself as the 1% become more insular: if marriage was random gini coefficient would fall from 0.43 > 0.34
Kerr
- spatially concentrated migration
- global collaborative teams
Sampson
- inequality of wages even among similarly skilled workers due to log supermodularity, or increasing returns to finding the right match
Explain how labour market frictions can increase inequality
Pavcnik
- costly to move
- minimal social security
- search frictions
- housing costs
Topalova
- In India, mobility is worst in poorest households, and this was worse during liberalization in 1991
Egger and Kreckermeier
- When trade costs falls > more productive firms survive > more productive firms expand workforce (Melitz)
- But when people care about fair wages, wages among the employment are even more heavily weighted to high-wage, high-prod firms
- unemployment increases
What explains the different regional effects of trade policy?
Autor
- regions most affected by Chinese import competition > lower wages and employment
Topalova
- regions more exposed to liberalization experienced a smaller poverty decrease
Dix-Carneiro and Kovak
- regions more affected by trade liberalization show lower wages and unemployment 20 years on
- surprising because economic theory would suggest that impacts would be short-run, wages would adjust in the long-run to equilibrium levels, increasing employment
- – agglomeration, negative spillovers
- – slow movement of capital away from hard-hit areas
Besides globalisation, what else explains rising inequality?
Burnstein and Vogel find that globalization is only responsible for 5.1% of inequality increase, on average
Other explanations
- skill-biased technological change
- matching (Becker)
- superstar firms (Autor)
- winner-take-all markets (Frank, Krueger)
- rank order and power laws (Gabaix)
- – small differences in talent at the top can result in massive pay differences
- financialisation (Mazzucato, Stieglitz)
Is globalisation good for the poor?
Mixed evidence
- Increases inequality through mechanisms above
- Many reliant on it
- – Fajgelbaum and Khandelwal, if trade borders close, bottom 10% incomes reduce by 61%, compared to 28% decrease for higher income, as poorer people buy relatively more imported goods
