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ECON 102 > Lectures 7&8 > Flashcards

Lectures 7&8 Flashcards

1
Q

The 2nd unbundling is reshaping which economic policies?

A
  1. Social policy
  2. Education policy
  3. Competitiveness policy
  4. Industrial policy
  5. Trade policy
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2
Q

Social policy

A
  • Growth requires changes, and changes require political support
  • Political support requires sharing of gains and pains of globalization (especially important as the social contract between labor and technology is being tested by the 2nd unbundling)
  • Today’s institutions and policies still crafted for 1st unbundling environments, with a sector and group focus on labour unions, industry associations, government departments, and economic policies for “sunset” and “sunrise” sectors
  • Protect workers, not jobs
  • Traditional education path assumes stable life-time employment
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3
Q

21st century social policies focus more on _________

A

Individuals

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4
Q

The 2nd unbundling suggests a typical worker will change jobs/occupations ________ in working life

A

Several times

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5
Q

Education policy

A
  • 1st unbundling globalization: Operates slowly and predictably
  • Education fosters adjustment and “upgrading”
  • 2nd unbundling globalization: unpredictable and sudden (workers change jobs more frequently, need to acquire new skills)
  • Learn how to learn (shorter, broader education, more focus on retain-ability)
  • Learning a combination of skills (psychology and marketing; computer science and economics; statistics and heath science, etc.)
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6
Q

Competitiveness policy

A
  • Competitiveness policies are policies promote economic growth
  • Competitiveness includes the set of institutions and factors that determine the level of productivity of a country
  • Increasing productivity in a country is key for output, income to grow, standards of living, well-being to improve
  • Competitiveness policies that are pro-growth must foster investment in human, physical, social and knowledge capital, and ensure the new capital is deployed wisely
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7
Q

Define productivity

A

The average amount of goods and services produced by a worker in a given amount of time

(A country’s standard of living depends on its ability to produce goods and services, and thus, on productivity)

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8
Q

How is productivity measured?

A

Often measured by evaluating GDP per hour worked

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9
Q

The increase of productivity is associated with the ________________

A

Increase in the stock of capital

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10
Q

What are several forms of capital?

A
  • Human capital
  • Physical capital
  • Social capital
  • Knowledge capital
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11
Q

Define human capital

A

Intangible aggregate resources possessed by individuals and groups within a given population

(These resources include knowledge, talents, skills, abilities, experience, intelligence, training, judgement, and wisdom possessed individually and collectively, the cumulative total of which represents a form of wealth available to nations and organizations to reach their goals)

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12
Q

Define physical capital

A

Tangible assets that assist in the production process

Eg. Buildings, machinery, office supplies, transportation and computers

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13
Q

Define knowledge capital (intellectual capital)

A

Intangible asset that represents valuable ideas, methods, processes, and other intuitive talents that belong to a company

(Knowledge capital largely depends on talent and expertise of employees - and thus on their human capital. This form of capital is important because it is what gives firms an advantage over other firms - this capital is hard to replicate.)

(Eg. Coca-Cola’s secret formula, next iPhone design, patents, trademarks)

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14
Q

Define social capital

A

Defined by the OECD as “networks (of families, friends, colleagues) together with shared norms, values and understandings that facilitate co-operation within or among groups”

(In short, human interaction that depends on trust and reliability - often based on unspoken and unquestioned rules/norms)

(Social capital is important because economic interactions require trust and the presence of a sense of social justice)

(Social capital varies significantly across countries)

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15
Q

Competitiveness policies - The policies chosen usually involved:

A
  • Promoting investment in knowledge capital with government-sponsored research, private-sector R&D subsidies, tax breaks, support for research-oriented universities and the like
  • Promoting investment in human capital with polices linked to education, training, retraining, etc.
  • Promoting investment in infrastructure and social capital
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16
Q

What should the key question for economic policy be? What should be the answer?

A

Question: Why is a government intervention (subsidies, tex credit, rules, direct action, etc.) needed?

Answer:

  • When the free market does not get it right
  • With a policy directly linked to the reason why the free market does not get it right

Thus, the focus should be on “spillovers” or externalities

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17
Q

Define externality

A

A side effect or consequence of a market activity (production or consumption) that is not reflected in the price or costs nor taken into account by the market

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18
Q

Externalities can be: ___________ or _____________.

A
  • Negative (external cost)

- Positive (external benefit)

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19
Q

(Externality) Define negative (external cost)

A

A cost that falls on people other than those that pursue the activity

(Eg. Smoking affects people around the smoker, pollution affects the quality of the air that everyone breathes, etc.)

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20
Q

(Externality) Define positive (external benefit)

A

A benefit received by people other than those that pursue the activity

(Eg. Vaccination reduces the probability of getting sick for other people, bee farming improves nearby orchard fields through pollination)

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21
Q

When the externality is negative (Eg. Pollution), the costs to society are _______ than the private costs

A

Larger

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22
Q

When the externality is positive (Eg. R&D), private returns are _______ than social returns

A

Smaller

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23
Q

When the market it unable to correct for certain externalities, the market outcome is inefficient; there is _______

A

Market failure

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24
Q

Market failure

A
  • The market outcome is too high (there is too much of it) when the externality is negative
  • The market outcome is too low (there is too little of it) when the externality is positive
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25
Q

What happens when there is market failure?

A
  • A policy is then called for whether through taxation/subsidization (= Pigouvian taxation) or other policies:
    — Activities that generate negative externalities are taxed (to reduce the equilibrium quantity)
    — Activities that generate positive externalities are subsidized (to increase the equilibrium quantity)
  • Competitiveness policies emphasize the role of positive externalities: Innovation, education, infrastructure because:
    — Innovation helps more than the innovator
    — Primary schooling helps the whole society
    — Infrastructure helps the whole society

(Easy to do with the 1st unbundling; more difficult with the 2nd unbundling)

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26
Q

Distinguish carefully between factors of production: _____________

A

Internationally mobile and immobile

(Both matter, both contribute to national income, but domestic taxpayers subsidizing something that leaves a nation is less obvious)

(Need to think about “stickiness” of factors in addition to positive externalities/spillovers benefits)

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27
Q

The more internationally mobile the target is, the ________ likely a country can ______________.

A
  • Less

- Capture the returns to the policy promoting it

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28
Q

Think of productive factors as having 2 features:

A
  • Positive spillovers (candidate for government promotion)

- Stickiness (will actually stay in nation promoting it)

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29
Q

True or false?

Even if there is a market failure, promoting basic science or financial capital is unlikely to affect local production

Explain.

A

True, because it goes wherever its reward is highest

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30
Q

Why is it better to coordinate high mobile targets at the international level?

A
  • Patent policy
  • Large basic science projects

(R&D subsidies are less obvious but probably still a good idea to promote at the local level)

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31
Q

Why does promoting technical education have a high return?

A

Because people with technical education are less mobile; highly-skilled labour is internationally mobile; the way to make it less mobile is to create industrial/high tech clusters/hubs in cities and around universities

32
Q

Why is human capital key?

A
  • People and skills are the most important factors of production regarding competitiveness policy associated with 2nd unbundling
  • Rich, diverse set of skilled workers is both sticky and has positive externalities especially when there is agglomeration of these workers
  • Skill-cluster is more than the sum of its parts: there are positive externalities (external economies of scale) -> Agglomeration effects create external economies of scale because there are positive externalities associated with agglomeration effects
  • Human capital is also flexible and can adapt to changing demands
33
Q

Competitiveness policy for 1st unbundling

A
  • National technology and factors created comparative advantage
  • On the same “team”
34
Q

Competitiveness policy for 2nd unbundling

A
  • “North tech” increasingly combines with “South labour”
  • Nationally optimal policies must be more nuanced -> R&D subsidies, tax breaks, etc. -> Consider “stickiness” of economic activity
35
Q

Industrial policy

A
  • The typical industrial policy of yesterday: promoting and manufacturing
  • Today, good manufacturing jobs without the manufacturing
    — Servicification of manufacturing implies that the good jobs in manufacturing are with the services related to manufacturing, not with production itself
  • “Compufacturing” implies the need for highly skilled jobs
36
Q

“Compufacturing” implies the need for ____________

A

Highly skilled jobs

37
Q

Lose some jobs or lose them all?

GVC competition among G7 nations

A
  • G7 manufacturing firms have to offshore to stay competitive with other G7 firms doing the same
  • Very hard to control or stop; even hard to define
38
Q

Cities as 21st century “factories”:

A
  • Urban clusters of talented diverse service workers may be the best response to new high-tech-low-wage competition
  • Cities are skill-clusters or brain hubs
  • Knowledge economy has an inherent tendency towards geographical agglomeration
  • Lower transportation costs
  • Large supply and demand for labour, lower search costs, faster matching
  • Knowledge spillovers between firms
39
Q

“Cities should not be thought of as mere collections of people, but rather as __________.”

A

Complex work spaces that generate new ideas and new ways of doing things

40
Q

Why are cities more than ever the engine of growth?

A

Because spillovers are more important than ever - growth in employment, activities and incomes in Canada is heavily concentrated in its cities

41
Q

Cities vs. Rural areas

A
  • Policies are needed to make cities work (from physical to social infrastructure, affordability, training)
  • Because spillovers lead to agglomeration, it is more and more difficult to have thriving smaller cities and towns
  • Employment and growth within countries are regionally more unequal
  • Dilemma: Do you promote cities because productivity will rise through them or do you promote regions through re-distributive properties because you do not want these regions to fall behind?
42
Q

Trade policy

A
  • 20th century trade: goods crossing borders, agreements help firms sell goods
  • 21st century trade: factories crossing borders (goods, know-how, ideas, capital, and people); richer and more interconnected flows of goods, services, capital, IP, and technicians; agreements help firms make and sell goods
43
Q

Why does regionalism create issues?

A
  • Economic inefficiency from discrimination (trade creation and trade diversion)
  • Creates power asymmetries
  • Threats to support for multilateral liberalization
44
Q

GVCs are mainly ______

A

Regional

45
Q

True or false?
With the 2nd unbundling, it becomes less difficult to discriminate among source-countries. Discrimination has become more important

A

False!
With the 2nd unbundling, it becomes MORE difficult to discriminate among source-countries. Discrimination has become LESS important

46
Q

Discrimination is easy with ________, and technically difficult with other international aspects: _____________

A
  • Product trade

- Services, capital, patents, know-how

47
Q

True or false?

It is very hard to define nationality in this modern world (easy “circumvention” possible for most definitions)

A

True

48
Q

How do many recent RTA provisions dealing with discrimination tend to have non-discriminatory provisions?

A
  • They apply to everyone, not just to trade with members
49
Q

Basic nature of RTA bargain in the 1st and 2nd unbundlings

A

1st unbundling = exchange of market access

2nd unbundling = Northern factories for Southern reform

50
Q

True or false?

Trade agreements, especially bilateral agreements, have adjusted a lot to the 2nd unbundling

A

True

51
Q

Implications for developed countries

A
  • Northern know-how is “confined” in global value chains, and scattered over the globe
  • Rich nations policies have to be re-thought: industrial policy, trade policy, social policy, competitiveness policy
  • Stickiness and spillovers of factors should be considered for policy
  • Cities should be considered as 21st century factories
  • Focus on workers, not jobs. Focus on services around manufacturing, not manufacturing
  • Adapt to new changes, not resist them
52
Q

Mainline thinking about development has seen 3 waves:

A
  • Big Idea #1 - Big Push (1945-1982)
  • Big Idea #2 - “Washington Consensus” (1982-2002)
  • Big Idea #3 - “Surrender” (Dani Rodrik)
53
Q
  • Big Idea #1 - Big Push (1945-1982) (Post WW2)
A
  • Import Substitution Strategy (ISI) and thus protectionism; overcome coordination failures (lumpiness of industry)
  • Development is a virtuous cycle driven by external economies
  • Underdeveloped countries have failed to get the virtuous cycle going
  • The job of policy makers is to get the virtuous cycle spinning
  • “Big Push”: reserve the local market to local productions by raising tariffs; India, Korea, Taiwan (before 1950)
  • “Import Substitution Industrialization” strategy
54
Q
  • Big Idea #2 - “Washington Consensus” (1982-2002)
A
  • Free market and free trade
  • Many tried, few succeeded (“puzzling” success of Asia, especially China. In particular, Latin America countries tried and might have failed because of factors internal to the countries, not compatible with the pro-market reforms)
  • “Washington Consensus” embraced the same virtuous cycle groundwork but relied more on free markets and free trade as the cycle starters
  • All sorts of pro-market reforms and opening with complementary domestic policies on education, etc.
55
Q
  • Big Idea #3 - “Surrender” (Dani Rodrik)
A
  • Dani Rodrik: “Maybe the right approach is to give up looking for ‘big ideas’ altogether”
  • There is one economics, but many ways to apply it
  • What has proved successful in a mixture of free-market politicized and export-oriented policies, not big ideas on how to develop
  • Maybe failure of development economics is at least in part due to the changed nature of industrialization
56
Q

Industrialization’s touchstone: Lumpiness

A
  • Nation has a comparative advantage in manufacturing but is stuck in a “bad” equilibrium
  • Key idea: There are 2 equilibria:
    — Much industry -> Wide industrial base -> Nation is competitive in industry (=good)
    — Little industry -> No industrial base -> Nation is not competitive in industry (=bad)
57
Q

True or false?

“Import Substitution Industrialization” was a success.

A

False; it was a failure!
- It succeeded in establishing light manufacturing but it failed to get the virtuous cycle going (except Korea starting in 1962)

58
Q

Government policy _____________ into industry (Subsidies, tariffs, mandates, etc.)

A

“Pushes” resources

59
Q

What happens if the push is big enough?

A

Then the good equilibrium is achieved and stays even after the big-push policies are removed
- i.e. The nation is industrialized

60
Q

What happens if the push is too small?

A

The push will fail

61
Q

Traditional 1st unbundling development strategy (conventional development ladder)

A
  • Old strategy: Build own industrial base (Korea, Taiwan, US, Germany, Japan)
  • Thinking focuses on final goods (“under one roof” production mind set was typical of the 1st unbundling)
62
Q

Explain the “Flying Geese” pattern

A
  • Lead goose: Japan. With accumulation of competences comes an increase in wages -> Reduction in competitiveness
  • Opens the door for the next geese in line: the “Four dragons” (Hong Kong, Singapore, Taiwan, and Korea)
  • Next wave: the “Four Tigers” (Thailand, Philippines, Indonesia, Malaysia)
63
Q

Taiwan climbing the development ladder, export pattern from 1952-1976

A
  • Import substitution policy ending in the 1950s
  • Then promoted the exports of unskilled-labour intensive manufactured goods
  • First by textiles then by clothing and footwear, electrical machinery, non-electrical machinery and transport equipment were on the rise by the mid-1970s
  • Taiwan is now a power-house exporter of high-tech, high-precision goods, especially electronics like Acer computers
64
Q

With the 2nd unbundling, what changed the development strategy? How?

A

GVCs changed the development strategy by using a “Flying starlings” pattern of development instead of “Flying Geese” pattern: a lot more random/uncertain

65
Q

What does less lumpiness mean?

A

Easer comparative advantage

66
Q

Why are there many more possibilities of exporting with the 2nd unbundling?

A

Because parts can be exported on top of finished products

67
Q

GVCs: “Big Push” in many “Small Nudges”

A
  • No longer a need to build an entire industrial base because there is no longer an industry entirely based in one country
  • It reduced the size of necessary “minimum critical effort”
68
Q

What is the old industrialization strategy vs. the new one?

A

Old industrialization strategy:

  • Build own industrial base (Korea, Taiwan, US, Germany, Japan)
  • Build a supply chain (Eg. Korea and Malaysia)

New industrialization strategy:
- Join a supply chain (Thailand) and then “move up the value chain”

69
Q

Intra-factory flows -> International commerce

A
  • De-nationalized comparative advantage
  • Create “nexus” of cross-border flows and thus “nexus” of necessary disciplines
    — Competitiveness involves mix-and-match comparative advantages
    — National performance depends upon non-national factors
  • Regional comparative advantage matters now more for developing countries than in the past
  • Cities matter almost as much as in developed countries, but distance still matters due to face-to-face costs
70
Q

Why does distance still matter?

A

Because face-to-face is costly

71
Q

Trade and development policy must be _________. Give examples.

A
  • “Packaged”

- Eg. Goods, services, capital, key personnel, training, education, infrastructure (Costa Rica and Intel, for example)

72
Q

Development and policy refocus: look at parts, not sectors

A
  • It is not necessarily from agriculture to manufacturing to service. India is showing the way with services.
  • Local content restrictions and Special and Differential Treatment (WTO clause that favours developing countries treatment)
  • GVCs killed import substitution industrialization (Brazil can’t do it the old way since China is doing it the new way)
73
Q

GVCs killed _____________.

A

Import substitution industrialization

74
Q

Income per capital convergence may be __________

A

Slowing

75
Q

Will it work? Growth of emerging/developing countries

A
  • Yes, the share of emerging/developing countries in total world GDP has now surpassed the share of developed countries for the first time in about 100 years
  • This convergence is coming from some countries in specific regions; it is not general across all countries and regions
  • One additional problem is that progress seems to be stalling: the next 30 years may not be as good as the last 30 years for most emerging/developing countries. This is coming from the impact of new production technologies on economic development

ECON 102 (6 decks)

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