International Trade,
Globalization and
Financial Crisis
Impacts on Scale, Distribution,
Efficiency and Democracy
What is Globalization?
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The integration of all national economies
into one global market, with one set of
rules
Global market takes precedence over
national autonomy
Supporting institutions are IMF, World
Bank, World Trade Organization (WTO),
NAFTA, etc.
What’s a legitimate alternative?
What are it’s defining
characteristics?
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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
What has been the impact of
Globalization on:
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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
The Theory Behind International
Trade
Comparative advantage
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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.
Numerical example
NO TRADE
Phil
Indonesia Total output
fish
2 pesos
2 rupiah
2F
clothes
Total resources
1 peso
3 pesos
4 rupiah
6 rupiah
2C
TRADE
fish
Phil
Indonesia Total output
6 rupiah 3 F
clothes
Total resources
3 pesos
3 pesos
3C
6 rupiah
1 rupiah = 5 pesos: Philippines has absolute advantage
Impacts of comparative advantage
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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)
Global Markets are good for everyone
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Markets will end poverty
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“The real losers in Seattle”
Markets will solve environmental problems
Environmental Kuznet’s curve
 Population growth and poverty
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Economic growth is essential
Humans are insatiable
 “The Moral Consequences of Economic
Growth” (B. Friedman)
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Protectionism & ‘beggar thy neighbor’
Comparative or Absolute
Advantage?
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What if capital can flow between countries?
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Indonesian capitalists will produce fish and
clothes in the Philippines
Numerical example
No capital flows
Phil
fish
Indonesia
Total output
6 rupiah
3F
clothes
3 pesos
3C
Total resources
3 pesos
6 rupiah
Capital flows
Phil
Indonesia
fish
22 pesos
11 F
clothes
11 peso
11 C
Total resources
33 pesos
1 rupiah = 5 pesos
Total output
Absolute advantage
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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?
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e.g. Toxic waste in Abidjan
The Facts Behind Globalization
What empirical results would we
expect under absolute advantage?
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Rich get richer, poor get poorer
Headlines: Number of Hungry Rising, U.N.
Says By ELIZABETH BECKER Published: December 8, 2004
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Number of hungry and number of poor at record
levels (though not when measured in percentage
terms, especially if we include China)
Income of poorest countries is falling (World
Bank statistics)
Richest countries accumulating greatest share of
new wealth
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1% of GNP growth in US = GNP of 24 poorest nations
How does a country get an
absolute advantage?
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Race to the bottom
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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 Cancer
By JIM YARDLEY, NYT
How does a country develop domestic markets for
domestic production?
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Environment
Wages—Mexican wages 11% of US wages
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
NAFTA and the Environment
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Environmental side agreement
Environmental Kuznets Curve
Actual results in Mexico from 1985-1999
Gallagher, 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%
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NAFTA and the Environment
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Chapter 11
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Metalclad corporation
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Toxic dump site or natural protected area?
MTBE, MME
WTO similar
Turtle excluder devices
 Marine mammal protection act
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NAFTA and the
Environment
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Growing corn
exports from US
NAFTA and Distribution
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Who are poorest in Mexico?
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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
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What does Mexico export to US?
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What’s the impact on unions, wages?
NAFTA and Distribution
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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
NAFTA and Efficiency
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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.
NAFTA and Efficiency
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Environmental impacts:
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Financial costs of degradation from 1988-1999
10% of GDP ($36 billion/yr)
Gallagher, GDAE
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Economic growth $14 billion/yr
Distributional impacts
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Law of diminishing marginal utility
Announcements
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4 groups turned in PS5, all have received
comments
Remaining groups should consider
themselves to be failing the class currently. I
have no qualms about giving failing grades.
Make an appointment to meet with me if you
need to.
Participation counts. Many of you are earning
failing grades on participation: skipping class,
not contributing in class=F
Don’t skip class on Thursday
Globalization and Stability:
Financial contagion
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What is contagion?
Speculative flows
2 trillion per day, vs. ~$36 Trillion global GNP
 What does speculation contribute to economic
output?
 “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
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Causes of Financial Meltdowns
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Speculative bubbles
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Moral hazard
“Fundamentals” wrong
High current account deficits
 Excessive money creation
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NYT Headlines: Fed Plans to Inject Another $1
Trillion to Aid the Economy
Overvalued exchange rates
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Relative to what?
Causes of Contagion
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Freedom of capital to go
where it wants
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‘Hot’ money
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Imperfect information
Herd behavior, animal spirits,
Reflexivity
Positive feedback loops and
multiple equilibria
Selling short
Examples of Contagion
LA debt crisis (1982)
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ISI and the energy crunch
Petro-dollars
Reagonomics
Capital flight, exchange rate depreciation
Switch from ISI to Export promotion,
implementation of Washington Consensus
“The lost decade”
Tequila crisis (1994)
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Clinton’s comments
Uprising and assassination
Political uncertainty
Tesobonos
Capital flight and devaluation
Asian flu (1997)
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Real estate bubble
Financial speculation, Soros
and devaluation
Impacts of devaluation on
debt
Impacts on trade competitors
IMF role: interest rates, taxes,
government spending,
bailouts
Malaysia’s response
Impacts on Democracy
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Structural adjustment programs
Brazil’s elections
Current Crisis
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Origins
Dot.com bust real estate boom
 Exotic derivatives and imperfect information
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Financial speculation
 From liquidity crisis to liquidity surplus
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Contagion
Policy Options
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Tobin Tax
Speculation tax
Restricting capital flows
Higher marginal tax brackets and more
equitable distribution