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Announcements

Announcements. Projects Remainder of class Globalization and Financial Contagion (this week) Policy Principles (1 lecture) Policy applications: What do you want to study?

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Announcements

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  1. Announcements • Projects • Remainder of class • Globalization and Financial Contagion (this week) • Policy Principles (1 lecture) • Policy applications: What do you want to study? • Climate change? Energy/Peak oil? Biodiversity loss? Real estate bubbles? Financial crisis/stabilization/New Bretton Woods?

  2. Impacts on Scale, Distribution, Efficiency and Democracy International Trade, Globalization and Financial Crisis

  3. What is Globalization? The integration of all national economies into one global market, with one set of rules Global market takes precedence over national autonomy What’s a legitimate alternative? Supporting institutions are IMF, World Bank, World Trade Organization (WTO), NAFTA, etc.

  4. What are it’s defining characteristics? Economic growth (increasing material consumption) as sole desirable end Privatization and commodification of public services, national and global commons Corporate deregulation and unrestricted movement of capital across borders Increased corporate concentration Cultural and economic homogenization

  5. What has been the impact of Globalization on: Ecological sustainability Distribution of wealth and income Economic output Economic stability Democracy The allocation of scarce resources towards an improved quality of life for all people

  6. The Theory Behind International Trade

  7. Comparative advantage One country can be more efficient at producing everything than another country, and still benefit from trade with the inefficient country Assumes that trade must be advantageous or else countries would not participate.

  8. Numerical example NO TRADE Phil Indonesia Total output fish 2 pesos 2 rupiah 2 F clothes 1 peso 4 rupiah 2 C Total resources 3 pesos 6 rupiah TRADE Phil Indonesia Total output fish 6 rupiah 3 F clothes 3 pesos 3 C Total resources 3 pesos 6 rupiah 1 rupiah = 5 pesos

  9. Impacts of comparative advantage More total output and freedom of choice in consumption More specialization, and less freedom of choice in production (but only desirable end is consumption) Some sectors/regions within a country will lose out (but winners can compensate losers)

  10. Global Markets are good for everyone Markets will end poverty “The real losers in Seattle” Markets will solve environmental problems Environmental Kuznet’s curve Population growth and poverty Economic growth is essential Humans are insatiable “The Moral Consequences of Economic Growth” (B. Friedman) Protectionism & ‘beggar thy neighbor’

  11. Comparative or Absolute Advantage? What if capital can flow between countries? Indonesian capitalists will produce fish and clothes in the Philippines

  12. Numerical example No capital flows Phil Indonesia Total output fish 6 rupiah 3 F clothes 3 pesos 3 C Total resources 3 pesos 6 rupiah Capital flows Phil Indonesia Total output fish 22 pesos 11 F clothes 11 peso 11 C Total resources 33 pesos 1 rupiah = 5 pesos

  13. Absolute advantage There will be more fish and clothes What about employment in Indonesia? Can people flow across borders? Is efficient economic production all that matters? Can winners compensate losers? If trade is voluntary, how could this happen? e.g. Toxic waste in Abidjan

  14. The Facts Behind Globalization

  15. What empirical results would we expect under absolute advantage? Rich get richer, poor get poorer Headlines: Number of Hungry Rising, U.N. Says By ELIZABETH BECKER Published: December 8, 2004 Number of hungry and number of poor at record levels (though not when measured in percentage terms) Income of poorest countries is falling (World Bank statistics) Richest countries accumulating greatest share of new wealth 1% of GNP growth in US = GNP of 24 poorest nations

  16. How does a country get an absolute advantage? Race to the bottom Environment Wages—Mexican wages 11% of US wages We would expect the countries with the lowest wages and most lax environmental standards to exhibit economic growth and atrocious environmental degradation Headline 9/1/2004: Rivers Run Black, and Chinese Die of CancerBy JIM YARDLEY, NYT How does a country develop domestic markets for domestic production?

  17. Unavoidable Environmental Costs of Trade Transportation Global warming Oceanic pollution Dependence on fossil fuels Spread of weed species (especially aquatic) Asian longhorn beetle San Francisco Bay Salmon bacteria

  18. NAFTA and the Environment Environmental side agreement Environmental Kuznets Curve Actual results in Mexico from 1985-1999Gallagher, GDAE Rural erosion increased 89% as small farmers cultivated more in response to decreasing prices Municipal solid waste increased 108% Water pollution—29% Urban air pollution—97%

  19. NAFTA and the Environment Chapter 11 Metalclad corporation Toxic dump site or natural protected area? MTBE, MME WTO similar Turtle excluder devices Marine mammal protection act

  20. NAFTA and the Environment Growing corn exports from US

  21. NAFTA and Distribution Who are poorest in Mexico? 22% of Mexico's labor force in small ag. What do we export to Mexico? Corn prices dropped 45% in Mexico (US subsidies average $20,000/farmer/year) Tortilla prices increased in Mexico Mexican farmers produced more, not less What does Mexico export to US? What’s the impact on unions, wages?

  22. NAFTA and Distribution Significant decline in real wages in Mexico (minimum wage down 23% under NAFTA) Number of households in poverty increased 80% between 1984-1999, 75% living in poverty Over half of rural Mexico in extreme poverty Record increase in number of billionaires

  23. NAFTA and Efficiency Exports up in Mexico, but imports up by more Rate of growth less than 1% per capita per year (1985-1999) vs. 3.4% under import substitution industrialization.

  24. NAFTA and Efficiency Environmental impacts: Financial costs of degradation from 1988-1999 10% of GDP ($36 billion/yr)Gallagher, GDAE Economic growth $14 billion/yr Distributional impacts Law of diminishing marginal utility

  25. Globalization and Stability: Financial contagion What is contagion? Speculative flows 2 trillion per day “Speculators are harmless as bubbles on a steady stream of enterprise. But the position is serious if enterprise becomes a bubble on the whirlpool of speculation. When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done.” John Maynard Keynes

  26. Causes of Contagion • Caused by freedom of capital to go where it wants • Speculative bubbles • Moral hazard • “Fundamentals” wrong • Overvalued exchange rates • High current account deficits • Excessive money creation

  27. Causes of Contagion • Selling short • Herd behavior, animal spirits, Reflexivity • Multiple equilibria

  28. Examples of Contagion • LA debt crisis (1982) • Petro-dollars and Reagonomics • Tequila crisis (1994) • Asian flu (1997) • Real estate bubble • Financial speculation and devaluation • Impacts of devaluation on debt • Impacts on trade competitors • IMF role • Current crisis (2008)

  29. Impacts on Democracy • Structural adjustment programs • Brazil’s elections

  30. Policy Options • Tobin Tax • Speculation tax • Restricting capital flows • Higher marginal tax brackets and more equitable distribution

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