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Broken Levees: Europe’s Answer to the Global Changes in the Division of Labour

Broken Levees: Europe’s Answer to the Global Changes in the Division of Labour. Richard E. Baldwin Professor of International Economics, Graduate Institute of International Studies, Geneva Munich, 5 May 2006. Access to new markets. Market opening  new opportunities  adjustment.

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Broken Levees: Europe’s Answer to the Global Changes in the Division of Labour

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  1. Broken Levees: Europe’s Answer to the Global Changes in the Division of Labour Richard E. Baldwin Professor of International Economics, Graduate Institute of International Studies, Geneva Munich, 5 May 2006

  2. Access to new markets • Market opening  new opportunities adjustment. • 2 broad types of adjustment: • #1. Cross-sector specialisation (North-South). • #2. Within-sector specialisation & scale economies. • Pains & Gains from trade. • Winners win more than the losers lose, but … • Adjustment more difficult politically for #1 • Higher ratio of pains/gains.

  3. New markets • Former Soviet bloc nations. • India & China. • Look at size & how different.

  4. 10 New Member States

  5. China & India India China

  6. EU export pattern Non EU15 Europe Asia Industrial nations

  7. Opportunities on Production Side

  8. “Unbundling” • Old days: ‘national systems’ • Skilled & unskilled labour + capital, management & technology. • Cost of moving people, goods & ideas  • People , goods , ideas . • New Century way: fragment production. • European technology & managers re-bundled with labour & capital in Central Europe, Asia. • Trade in productive factors.

  9. Pains & gains • Old days: Bundle  artificial reward to labour, capital and technology. • Unbundling  winners & losers, but winners win more than losers lose. • Wages of unskilled labour especially cheap in China & Central Europe. • Low productivity but even lower wages. • … but, shortage of other talents. • Potential for mutually beneficial exchange.

  10. Europe’s answer • Europe’s companies: responded well. • Europe’s governments: responded badly.

  11. Economic malaise • Unbundling: Europe’s low & medium skilled workers were overpriced. • High productivity, but higher wages. • Implied: • 1. Price adjustment (relative wages fall) • 2. Quantity adjustment (unemployment)

  12. Winners & Losers

  13. Government failure • Mass unemployment: • Short-run vs permanent. • Tax burdens, disincentives, social exclusion. • Traffic jam: • Insiders vs Outsiders. • Failure to see big picture, what Europe could be.

  14. Passing Parade Parable

  15. End • Thank you for listening. http://www.hei.unige.ch/baldwin/

  16. EU manufactures trade share

  17. World: Very Regional

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