Topics in the Globalisation Debate 1:
Competitiveness; Immigration
This lecture draws mostly from:
Krugman (1993) What Do Undergrads Need to Know About Trade? The American
Economic Review. Vol. 83(2): 23–26
Krugman (1994): Competitiveness: A Dangerous Obsession. Foreign Affairs 73(2)
Dustmann, C. and Glitz, A. 2005. Immigration, Jobs and Wages: Theory, Evidence
and Opinion. London, Centre for Economic Policy Research.
Lewis (2004): “How Do Local Labor Markets in the U.S. Adjust to Immigration?”
Federal Reserve Bank of Philadelphia. Mimeo
The Globalisation Debate
The term “globalisation” is so overused that it is not
clear what it means.
•
o
o
•
Economists would think about things like trade, factor
mobility and diffusion of technology
Other discussants (trade unions, environmentalists,
development lobbyist, consumer groups, human right activists,
religious groups, utopians…) often seem to talk about (alleged)
increased power of large companies and “Americanization”
In the remaining two lectures we will take a brief
look at some key issues: discussion on how to
enhance country’s competitiveness and impact of
globalisation on the labour market.
Competitiveness: “A Typical Statement
about International Economics”
1.
2.
3.
4.
5.
“We need a new economic paradigm, because today
[our country] is part of a truly global economy.
To maintain our standard of living, [our country]
now has to learn to compete in an ever tougher
world marketplace
That’s why high productivity and product quality
have become essential
We need to move [our country’s] economy into the
high-value sectors that will generate jobs for the
future
And the only way we can [achieve this is to] forge a
new partnership between government and business”
Paul Krugman (1993) What Do Undergrads Need to Know About Trade?
The American Economic Review. Vol. 83(2): 23–26
Competing in
“an ever tougher world marketplace”
• President Clinton: each nation is “like a big
corporation competing in the global marketplace”
• Some bestselling titles
o Lester Thurow: Head to Head. The Coming Economic
Battle among Japan, Europe and America
o Jeffrey Garten: A Cold Peace: America, Japan and
Germany and the Struggle for Supremacy
o Ira Magaziner & Mark Patinkin: The Silent War
See P. Krugman (1995): The Illusion of Conflict in International Trade. Peace Economics,
Peace Science, and Public Policy (also in Pop Internationalism)
The Need for a New Paradigm?
M. Porter (1990) in The Competitive Advantage of Nations: “Yes”
• “A new theory must explain why firms from particular
nations choose better strategies than those from others
for competing in particular industries” (p. 19)
• “A new theory must move beyond comparative
advantage to the competitive advantage” (p. 20)
• “...the best measures [of competitive advantage are] (1)
the presence of substantial and sustained exports to a
wide array of other nations and/or (2) significant
outbound foreign investment based on skills and
assets created in the home country” (p. 25)
The Need for a New Paradigm?
• Krugman (1993): “no”
o
“probably the most important single insight an
introductory course can convey about
international economics is that it does not
change the basics: trade is just another
economic activity, subject to the same principles
as anything else”
Competitive Advantage: Firms
• Competitive advantage of a firm
o
“competitive strategy is about taking offensive or
defensive action to create a defendable position in an
industry, in order to cope successfully with competitive
forces and generate a superior return on investment”
(Value Based Management.net)
• if a firm is not competitive, it will go
bankrupt
• Firm’s competitiveness can be measured trough
profits / return on investment etc.
Competitive Advantage: Countries
• Countries are not companies
o while firms based in different countries sell products
that compete with each other, in the country-level there
are mutual benefits from trade
o Success of one country is likely to benefit other
countries (more demand for imports)
o The only meaningful “offensive or defensive action” in
the level of a country is strategic trade policy
• Imports (NOT exports) are the purpose of trade
→ exports / current account is not the “bottom line” of a
country in a way profits are for a firm
Competing in
“an ever tougher world marketplace”
P. Krugman (1994): Competitiveness: A Dangerous Obsession. Foreign Affairs
“While competitive problems could arise in
principle*, as a practical, empirical matter the
major nations are not to any significant
degree in economic competition with each
other”
* e.g. the terms-of-trade argument and strategic trade policy
What does “Competitive Advantage
of a Nation” mean, anyways?
• Porter (1990):
o
“the only meaningful concept of
competitiveness at the national level is national
productivity”
• Krugman (1994):
o
”competitiveness” would turn out to be a funny
way to saying “productivity” and would have
nothing to do with international competition
“A Typical Statement about International
Economics”
1.
2.
3.
4.
5.
“We need a new economic paradigm, because today
[our country] is part of a truly global economy.
To maintain our standard of living, [our country]
now has to learn to compete in an ever tougher
world marketplace
That’s why high productivity and product
quality have become essential
We need to move [our country’s] economy into
the high-value sectors that will generate jobs for
the future
And the only way we can [achieve this is to] forge a
new partnership between government and business”
Why Productivity Matters?
• Example:
productivity of a closed economy increases by 1 %
→ the consumption possibilities increase by 1%
o productivity of country A increases by 1 %, and
productivity of country B by 3 %
→ A’s consumption possibilities increase by 1%, B’s by
3% (unless there is a substantial terms-of-trade effect*)
o
• That is, productivity is beneficial for its own sake,
not because it helps us “to compete in the world
marketplace”
* In this case, one would expect the prices of the goods B is exporting to decrease (due to increase
of supply). That is, A’s consumption possibilities would increase by more than 1%
High-Value Sectors…
• “Our country’s real income can rise only if (1)
its labour and capital increasingly flow toward
businesses that add greater value per employee
and (2) we maintain a position in these
businesses that is superior to that of our
international competitors”
Ira Magaziner and Robert Reich (1982): Minding America’s Business. p. 4
“High-Value Sector” in a Simple
Ricardian Model
• England is more efficient in
producing both products →
England’s wage rate will always be
higher
• England has comparative
advantage in producing cloth →
in free trade England produces
cloth → cloth is the “high-value”
sector
• Does this mean that the
Portuguese government should
promote reallocating resources to
produce cloth? Of course not.
Cloth
Wine
England
1 hr. /
yd.
3 hrs. /
bbl.
Portugal
2 hr. /
yd.
4 hrs. /
bbl.
…that will generate jobs for the
future
• Krugman: “level of employment is a
macroeconomic issue depending
o
o
in the short-run on aggregate demand
in the long-run natural rate of unemployment
• with microeconomic policies like tariffs having
little net effect”
Paul Krugman (1993) What Do Undergrads Need to Know About Trade?
The American Economic Review. Vol. 83(2): 23–26
“A Typical Statement about International
Economics”
1.
2.
3.
4.
5.
“We need a new economic paradigm, because today
[our country] is part of a truly global economy.
To maintain our standard of living, [our country]
now has to learn to compete in an ever tougher
world marketplace
That’s why high productivity and product quality
have become essential
We need to move [our country’s] economy into the
high-value sectors that will generate jobs for the
future
And the only way we can [achieve this is to]
forge a new partnership between government
and business”
A New Partnership between Government
and Business?
Robert Gilpin (2001): Global Political Economy: Understanding the international economic order.
Princeton University Press. p. 210-214
• “Governments can and do have an important
and even decisive role in promoting their own
national firms in international markets”
• “a government can take a long-term perspective
and establish policies that foster a favourable
domestic environment for those sectors most
likely to be competitive in international
markets”
A New Partnership between Government
and Business?
= infant industry argument
Remind yourself of Lecture 8:
• Key assumption: market failure (due to
externalities, imperfect capital markets etc.)
• Problems
o identifying the right industries
o Time consistency: will the protection eventually
become permanent?
Partnership between Government and
Business?
• Krugman (1993):
o
o
“the main competition going on is one of U.S.
industries against each other, over which sector
is going to get the scarce resources”
“there are reasons, such as external economies,
why a preference for some industries over others
may be justified. But this would be true in a
closed economy, too”
The Dangers on Obsession on
International Competitiveness
1. Wasteful spending of government money
2. Inefficient allocation of resources
o
resources from nontradables to tradables
3. Possibility of protectionism & trade wars
4. Indirect impact on the quality of economic
policy making in general
P. Krugman (1994): Competitiveness: A Dangerous Obsession. Foreign Affairs
(also in Pop Internationalism)
Impact of Immigration revisited
Variation of model discussed in Lecture 5
o
o
o
o
o
One output
Three factors of production: capital, skilled and
unskilled workers
unlimited amount of capital available from the
international market at fixed price
native labor force fixed, but not perfectly inelastic (some
will not work if wages are too low)
All immigrants are low-skilled workers

If immigrants have the same skill-mix as the natives, the
economy expands but nothing happens to wages
Impact of Immigration: Theory
Low-skilled
Wage
LS
•
LS 1
0
Change in low-skilled
native wages
Immigration
•
w0
Transfer from low- to
high-skill workers
w1
Low-skilled
Natives’ wage
Immigrant
surplus
Immigrants’
wages
LD
LN1
LN0
Change in low-skilled
native employment
Amount of lowskilled Labor
Immigration leads
to decrease in lowskilled wages and
increase in lowskilled unemployment
High-skilled
workers win more
than low-skilled
lose → immigrant
surplus
LN0: Initial native employment
LN1: Post-immigration native
employment
w0: initial wage
w1: post-immigraiton wage
The Challenge of Empirical Work
• Constructing the counterfactual
o
o
First step: descriptive analysis. Is the data consistent with the models?
More challenging question: “if everything else stays constant and immigration
increases by X percent, how much does production, wages etc. change?”.
 Problem: we never observe what would have happened if there
had been a different amount of immigration. Hence, we need to
construct the counterfactual using theory or a natural experiment.
• Understanding the role of the models
o
The models we have studied are caricatures. That is, it does not make
sense to ask are they “true” or “false”. Instead, the question to ask is: to
what extent are they explaining what we are observing?
Estimating the Impact of
Immigration
• Most studies estimate the equation
yjt = γr jt + Xjtβ + ujt
where y is the outcome in labour market j at time t, r is the share of
immigrants in this labour market, X is a set of relevant control variables and
u summarizes the unobservable factors affecting the outcome. The
parameter of interest is γ
• Q: Why some labor markets attract immigrants?
o
o
If this is due to unobserved factors (e.g. positive demand
shocks increasing wages), we say that r is endogenous and
standard (OLS) estimates of γ will be biased upwards
Solutions: (a) Natural experiments, (b) Instrumental variables
Summary of results
• Most studies find small or no effect of
immigration on native wages and employment
• Current research aims to understand, why?
• Possible explanations
o
o
o
o
o
Endogeneity bias
Native out-migration
Changes in product-mix
Changes in technology
Increase in demand (by the immigrants)
Spatial correlations approach: critique
• Most studies define labor market as a
geographical area
o
essentially compare wage growth in cities (inside
one country) with different immigrant inflows
(due to reasons unrelated to wage growth)
• Borjas: not valid, immigration will affect all areas
o
o
internal migration and capital flows
changes in product-mix
Impact on product mix: theory
force in one area →
production of low-skill
intensive products increase
in this area → other areas
increase production of highskill intensive products →
more trade between areas
inside countries
• Price of low-skill intensive
product decreases → lowskilled wages decrease also in
areas where no migrants
went
Paper
• Immigration increases labor
Clothes
Impact on product-mix: empirics
• Lewis (2004) and Glitz and Dustmann (2007) study the
impact of immigration in US and Germany,
respectively
• Both conclude that the there is an impact on productmix, but it is not sufficiently large to explain the
absence of wage effects. However, both find large
effect on within-industry worker mix suggesting that
firms seem to alter their technologies as a response to
changes in labor supply
o
The standard HO-model assumes constant technology and cannot
thus predict this. However, one can simply modify the HO-model,
by relabeling “goods” as “techniques”