Pressures from globalisation: are trade restrictions the answer?

Pressures from globalisation: are trade restrictions the answer?

L Alan WintersProfessor of Economics, University of Sussex

CEPR, IZA, GDN

Manufacturing does matter for exports and productivity

January 2013 2LAC-EU ECONOMIC FORUM 2013

Manufacturing Share of Economy

$10K PPP, 1990

Share %

GDP pc PPP, 1990


Share of Manuf. in Economy


Share of Manufactures in Merch. Exports


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

9

Effects of Labour Market Regulation(Bolaky-Freund; JDE 2008)

Less regulated half More regulated half

January 2013 LAC-EU ECONOMIC FORUM 2013


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)

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

11January 2013 LAC-EU ECONOMIC FORUM 2013

Heterogeneity of Competition Effects


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



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


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


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)


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


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


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


Industrial Policy: Rodrik (2007)

• ‘stimulate specific economic activities and promote structural change’ ; ‘not about industry per se’

• Horizontal vs. vertical policies

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



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 -


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


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

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



THANK YOU

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


Documents

Pressures from globalisation: are trade restrictions the answer?