Reminder: Deadlines

1. Reminder: Deadlines • May 29: 4 page preliminary draft with references (of course) • i.e. 2,000 – 3,000 words (received only from Layal) • Marwa (June 5) and Mohamed: (June 3) • June 12-June 15: final paper (10 pages) • i.e. 7,000 – 9,000 words • Note: 12 point times new roman font. 2 cm margin. No more than double space. Correct references. No plagiarism.

2. Final Exam • June 19, 11 – 2 pm • Comprehensive • 25% of your grade

3. Assignment due today • Functional income

5. Globalization Chapter 18

6. Globalization: ‘efficient allocation’ • Is free trade ‘efficient’? • What are the conditions necessary for ‘free trade’? • Large # of nearly identical firms • Information relatively freely shared • Strong incentives to internalize costs

7. Competition? • Do we have perfect competition under globalization? Or do we have the power of transnational corporations with economies of scale? • WTO rules: cannot promote nat’l small businesses • Global mergers and acquisitions have been most intense in the areas of financial services and telecommunications – those economic sectors in which WTO agreements have been completed

8. Competition? • If 40% of a given market is controlled by 4 firms, the market is no longer competitive • Agriculture: top 4 agrochemical corporations control 55% of global market • Of the 100 largest economic organizations, more than ½ are corporations • So where does the money go? • 1/3 of the commerce that crosses national boundaries does not cross a corporate boundary • Is there any reason that central planning should work better for a large corporation that it does for a nation?

9. Information? • There are patents and monopolies • Globally: intellectual property rights are tied to trade • Remember the inefficiencies associated with patents: (1) information is a nonrival good; (2) patents = temporary monopolies • International patents - fairly recent (1947; 1980s) • Know box 18.1

10. John Maynard Keynes • One of the founders of the Bretton Woods Institutions ‘Ideas, knowledge, art, hospitality, travel – these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possibly, and, above all, let finance be primarily national.’

11. Internalizing cost? • Are producers paying the costs of production? Are they producing to the point where marginal costs are just equal to marginal benefits? Are they internalizing costs or leaving them as externalities? • What is the goal of the WTO? • To increase economic growth • To increase the transport of goods between countries • Significant externalities here… plus • WTO can over-ride national laws if declared a barrier to trade

12. Enticements? – standards lowering competition • Race to the bottom • Competitive advantage in international trade • More of world production shifts to countries that do the poorest job of counting costs – (thus reducing efficiency of global production) • As externalized costs ↑, +ive correlation between GDP growth and welfare ↓ • Solution? • Harmonization of cost-accounting standards across countries -> no incentive for mobile capital to move • Or measure costs according to national and not international values

13. Other consequences of globalization… • Specialization range of choices to earn a livelihood decrease; emigration • Range of choice in earning one’s income ignored; range of choice in spending one’s income exaggerated • Sustainable scale  a ‘successful’ trade regime will lead us beyond K • Can we learn from our mistakes?

14. Just (‘equal’) Distribution • Proponents: “world free of poverty” (goal of WB) • Absolute disadvantage • Standards lowering competition and labor • Food security and free trade in agriculture (your readings)

15. Absolute disadvantage • Capital mobility.  $ will flow to where ever there is an absolute advantage of production • Consequence? Evidence? • most developing countries have failed to raise their per-capita incomes • In the 3 decades prior to 1996, the share of income received by the world’s poorest 20% fell from 2.3% to 1.4% while the share going to the world’s richest 20% increased from 70% to 85%. Relative not absolute income. • Average increase in per-capita income from 1989 to 1999 for the 15 poorest countries: decreased by an average of 5.5%; w/o war, a 3.2% decrease; wealthiest countries: increase of 15.5%

16. We live together… on a finite planet • So? • Increase in income in wealthy countries fueled by nonrenewable resource consumption (and nonsustainable depletion of potentially renewable resources) • Can revenue from nonrenewable natural resource extraction be defined entirely as income? • No. Why not? • Income = amount you can consume in one period w/o affecting your ability to consume in subsequent periods

17. Food security and free trade in agriculture: Threat in two ways (1) Market system provides goods and services to those who have the money to purchase them. Thus: poor citizens of LDCs will be competing with rich citizens of ODCs for food. Why are there famines? • Famines are the result of a lack of entitlements to food not a lack of food • If agricultural markets are completely liberalized – easy to imagine Western nations importing food for their cattle from nations suffering from famine (2) Farmers are typically the most disadvantaged group in many LDCs. LDC costs of agricultural production tend to be higher than those of large agro-industrial farms in ODCs. So? Liberalization => lower food prices in LDCs. Result for farmers, the poorest group?

18. Chapter 20: General Policy Design Principles

19. Policy requires… • 2 philosophical presuppositions: (1) nondeterminism (real alternatives); (2) nonnihilism (real criterion of value to guide our choices) Plus • 6 general design principles • (yes, I want you to know these 6 principles and the 2 presuppositions)

20. (1) Economic policy always has more than 1 goal; each independent policy goal requires an independent policy instrument • Only 1 goal => technical problem, not economic • 3 basic goals in e.e.: sustainable scale, just distribution, and efficient allocation • “for every independent policy goal, we must have an independent policy instrument” (Jan Tinbergen) • With only one instrument: forced to choose between efficiency or equity

21. (2)Policies should strive to attain the necessary degree of macro-control w/ the minimum sacrifice of micro-level freedom and variability • What does that mean? • What is limited? • Eg: capacity of the atmosphere to absorb carbon dioxide; capacity of the environment to sustain x# of people; consequently? • In general – opt for the least mirco-restrictive way of attaining the macro-goal

22. (3) Policies should leave a margin of error when dealing with the biophysical env. • Uncertainty… irreversibility… -> safety margin • Example?

23. (4) Policies must recognize that we always start from historically given initial conditions • No blank slate • Present institutions – reshaped • Can they be abolished?

24. (5) Policies must be able to adapt to changed conditions • Change is an ever-present reality • Some policies may differ in implementation than in theory • Adaptive management  changing our policies as conditions change and as we learn more • Eco eco…

25. (6) Domain of the policy-making unit must be congruent with the domain of the causes and effects of the problem with which the policy deals • Principle of subsidiarity -> deal with problems at the smallest domain in which they can be solved • Problems – addressed by institutions on the same scale as the problem

26. Which policy instrument for which goal? • 3 basic goals – so we need 3 basic instruments • Goal of efficient allocation  instrument of the market (for excludable and rival goods) • Goal of sustainable scale  social or collective limit on aggregate throughput • Goal of distributive fairness -> socially limited range of inequality imposed on the market • In the sequencing of policy instruments, the market comes third • So: scale (1st); distribution (2nd); efficiency (3rd) • Why?

27. Controlling throughput • At which end of the throughput flow should we impose macro-level constraints? • Restrictions at the output end (pollution) • Restrictions on the input flow from nature (depletion) • Outflow may be more easily controlled by limiting the inflow • Still cannot ignore outflow

28. Price vs. quantity as the policy variable • 2 ways to limit throughput: (1) raising prices through taxation to reduce demand; (2) limiting quantity directly through quotas and letting prices adjust • What are the effectiveness of these approaches? Do we try to control quantity and let the market determine price, or control price and let the market determine quantity? • Remember: demand curves are uncertain and shift. -> where is it least painful to experience errors, as price changes or as quantity changes?

29. Source vs. Sink • Sources – generally owned; not sinks • Directly controlling sources involves more interference w/ existing property rights than controlling sink access • How to reconcile the principle of intervening at the depletion w/ the difficulty of private property rights? Revolution? Property as a ‘bundle of rights’? – scale of extraction is limited, no longer a free good • Or – market in sink permit, capped at an aggregate scale • Or fix prices through taxes and allow the market to set the corresponding quantity. Tax – administrative simplicity

30. Policy and Property Rights • “policy is concerned w/ creating, redefining, and redistributing property rights” • Remember.. • Property rights and excludability are not inherent properties of goods and services • Property rights are a 3-way relationship between 1 individual, other individuals, and the state • 3 types of property rights: • ->property rule • ->liability rule (free to interfere but must pay compensation) • -> inalienability rule

31. Remaining Chapters. • Chapter 21: Sustainable Scale • Chapter 22: Just Distribution