International Political Economy (IPE)

1. Globalization, GDP Growth, and Distribution of Gains (Based very loosely on Lloyd Gruber's 2013 article in Politics & Policy, “Trade, Growth, Poverty, and Politics: Toward a Unified Theory”) International Political Economy (IPE) Prepared for Junior Int'l Polt. Class at NENU, Fall 2015

2. Is Free Trade (Globalization) Good or Bad for the Poor? • “The poor” = The Global South, Less-Developed Countries (LDCs), etc. • But... “The poor” also = poor people and families within states which may have high or low per-capita GDP • Stated formally, see Gruber's Figure 1, pg. 728 • TRADE → ? → “LONG-RUN CHANGE IN LIVING STANDARDS ENJOYED BY GLOBALIZING SOCIETY'S POOREST CITIZENS” • To answer the question, we should examine the basic principles of globalization, IPE theory, and empirical data!

3. Two Possible Answers • The Washington Consensus (Gruber, Figure 2, pg. 730): • TRADE → ECONOMIC GROWTH → GOOD FOR POOR “A rising tide lifts all boats” • Critics of Globalization: • FREE TRADE → WINNERS & LOSERS, UNEQUAL DISTRIBUTION OF GAINS → BAD FOR POOR “Globalization benefits some states/domestic groups more than others, so the rich and powerful will benefit and the poor will become relatively poorer.”

4. Empirical Facts • Trade increases GDP growth. “Free trade” increases GDP more than trade under “protectionism” • Free trade allows a state's most competitive industries and firms to take advantage of “economies of scale” (i.e. bigger markets for their goods and services, more stuff gets sold!) • The world has become more “globalized” since the 1990s (i.e. barriers to trade have been greatly reduced, under rules of the WTO and FTAs, free trade agreements) • Globalization causes disruptions in the domestic economy and society, as firms and industries which are not globally competitive are clearly “losers”. Winners thrive; Losers die out.

5. So, if the Global and Individual State Economies Were Cakes... • Globalization would make the world's cake bigger • Globalization would also make every individual piece of cake bigger. • BUT... Globalization also changes the portion size of each state within the world's “cake” and, domestically, how big a piece of cake each group gets to eat...

6. Distribution VS. Redistribution • The economy “distributes” cake to everyone, but far from equally! Equality and distribution of cake (wealth) is measured by the GINI Coefficient 基尼系数 • Your piece of your state's cake is your benefit in the economy. Even if the size of your cake stays the same, Globalization will change the percentage of the total cake, depending on whether you are a “winner” or “loser” from free trade. • With or without Globalization, “Welfare States” redistribute cake from those with big pieces to those who only have crumbs屑 • Redistribution is usually somewhat dependent on tax revenue, and many worry that Globalization reduces corporate taxes to keep MNCs happy and their factories in their countries.

7. Which Piece of Cake Is the Best? Your point of view will depend on your economic class AND which sector of the economy (color of the cake) you are in!!!

8. What Does It Mean to Be a “Winner” or a “Loser”? • From any change in the distribution (i.e. from Globalization), Winners get more cake (as a % of the whole); losers get less cake (as a % of the whole). • Note that if you are concerned with relative gains, when the % of the total cake (global or domestic) your cake takes up decreases, you are a loser from Globalization even if the absolute size of your cake increases. • To consider “winning” & “losing” in terms of Globalization, we can consider examples in terms of the economic “Factors of Production”, fundamental IPE theories about trade and development strategies.

9. The 3 Factors of Production • Land • Labor • Usually divided into “unskilled, semi-skilled, skilled, highly-skilled” • Capital • Each state has a natural “endowment” or socially-created “accumulation” of these factors in different proportions. • What a state has a lot of is an “abundant factor” • What a state has little of is a “scarce factor” • Goods may be described by which factor is needed most for its production as “land-intensive”, “labor-intensive”, or “capital-intensive”, though many products today need a lot of all 3!

10. Scarce & Abundant Factors under Autarky (No Trade) • In a closed economy, those who own a state's “scarce factors” are relatively rich because they have something that's in short supply. • For example, think of someone who owned a lot of land in a small country (i.e. Singapore), a person with a very large family in a country with labor shortages, or most obviously, a person with a lot of money (or “standing wealth, liquid assets”) in a poor country. • In a closed economy, those who own a state's “abundant factors” are relatively poor, because there is only limited domestic demand for something that's in great supply. • For example, imagine if China depended only on domestic demand for its manufactured goods. Unemployment would rise because factories would not need so much labor.

11. Trade & Comparative Advantage • David Ricardo (1817) noted that gains from trade are greatest if each producer focuses on what it can produce most efficiently, compared to other producers. If a good can be produced at a lower cost than other producers, one has a comparative advantage in the production of that good. • Absolute gains from a more efficient economy go to all parties who trade what they have a comparative advantage in producing for what they have a comparative disadvantage in producing. • With trade, firms or industries with a comparative advantage in the production of goods (i.e. natural resources, textiles, cars, high-tech products, etc.) will benefit because their goods are competitive in the global market. Firms or industries with comparative disadvantages will lose and die out without protection because their goods are not competitive.

12. Stuck in the Production Chain? • The capitalist production chain describes the fact that most products today are highly specialized, made from materials and factors from many different countries. • At the top of the production chain are the designers & marketers who sell the product. They get the vast majority of the profits from selling the goods. • In the middle of the production chain are the laborers who make the product. They get some, but not much profit. • At the bottom of the production chain are natural resources and other commodities. These are very cheap in a globalized market, and their producers see very little of the profits.

13. “Value Added” in Global Capitalist Production • In other words, the stages in production which add the most value (i.e. account for the final price) are paid the most (i.e. a “skilled” designer should earn more money than a “semi-skilled” assembler or a “low-skilled” mine worker). This may, on the surface, seem fair, but... • The vast majority of a large corporation's often extremely large profits, whether it produces goods or provides services, goes to the CEO, the board of directors, and the shareholders who own stocks in the company. The ones with the most power (money) get the most profits (more money!).

14. Scarce & Abundant Factors under Free Trade • Two IPE theories with long names determine winners & losers from globalization and positions in the production chain. • Hecksher-Ohlin: Countries will export their abundant factors of production and import their scarce factors. • Stolper-Samuelson: Under Globalization, the value (and price) of abundant factors will rise. Owners of the scarce factors lose, while the owners of abundant factors win. • EXAMPLES: Singapore can invest its abundant capital in open financial markets abroad, including FDI for scarce land to build factories in other countries. States with high populations can either work in those factories or “export” their labor via emigration and remittances.

15. Intra-Industry Trade & Strategic Trade Theory (STT) • Krugman builds on H-O & S-S by pointing out the benefits of supplying components to a large MNC which makes a complex, highly profitable line of products. This is called Intra-industry trade. • If a state is “stuck” at the bottom of the production chain (or outside it altogether), the government may intervene, as in the East Asian Model, to make initial investments and other policies to attract FDI. • But, does this global competition create a “Race to the Bottom”? • Eventually, wages can't be pushed any lower, and labor conditions become dangerous!

17. Summary: Winners & Losers from Globalization CLEAR WINNERS: MNCs (profits rise as labor costs fall), Rich consumers (get wider choices of goods at lower prices), Neoliberal economists (Global GDP rises, global economy is more efficient) PROBABLE WINNERS: States following the East Asian Model of economic development, States with large working- age populations & natural resource endowments POSSIBLE WINNERS: Low-skilled laborers in developing countries, States helped by global warming PROBABLE LOSERS: Welfare states, Non-humans (plants & animals)/the environment, States hurt by climate change, middle & high-skilled laborers CLEAR LOSERS: Low-skilled laborers in developed countries, owners of domestically scarce factors, “infant industries” & other non-globally-competitive domestic firms