Discussions of the King/King Reader, II
MBA 628
Trading in Illusions
Dani Rodrik
Reading 15

Here is the Rodrik thesis again:
“Foreign trade and investment have
become the ultimate yardstick for
evaluating the social and economic
policies of governments in developing
countries.” (p. 184)
Trading in Illusions
Dani Rodrik
Reading 15

So the thesis is:
Global integration should not become a
substitute for a development strategy.
“Openness Does Not Deliver”
Says
Rodrik:
“The fastest growing countries are China,
India, and others in East and Southeast Asia.
Policymakers in these countries have also
espoused trade and investment liberalization,
but they have done so in an unorthodox
manner—gradually, sequentially, and only after
an intitial period of high growth – and as part of
a broader policy package with many
unconventional features.” (p. 185)
Standards for Development

The World Bank and others have
developed lists of prerequisites for
development (especially since trade
liberalization fails to produce hoped-for
results). These include pegging currency
or preferring the pure float, etc.
Development Opportunity Costs
“Most suggested reforms are quite
reasonable, but in the real world,
governments face difficult choices over
how to deploy their fiscal resources,
administrative capabilities, and political
capital.”
 But setting priorities to maximize
integration into the global economy has
real opportunity costs. (p. 186)

Development Opportunity Costs
To sign just three WTO agreements on
customs valuation, sanitary measures and
trade-related intellectual property rights
will cost developing countries $150 million
for implementation.
 That’s a year’s development budget for
many least-developed countries.

Development Opportunity Costs

The money could be spent for secondaryschool teachers or for primary education
for girls.
Development Opportunity Costs

The rules for admission into the world
economy reflect little awareness of
development priorities and are often
unrelated to sensible economic policy.
Development Opportunity Costs:
The Exchange Rate Regime
“How should developing countries choose their
exchange-rate regimes?
 During the last four decades, virtually every
growth boom in the developing world has been
accompanied by a controlled depreciation of the
domestic currency.
 Yet financial openness makes it all but
impossible to manage the exchange rate.” (p.
186)

Development Opportunity Costs:
The WTO often follows other priorities

“For instance, WTO agreements on antidumping, subsidies and countervailing
measures, agriculture, textiles, and traderelated intellectual property rights lack any
economic rationale beyond the
mercantilist interests of a narrow set of
powerful groups in advanced industrial
countries.” (p. 187)
Asian Myths

Does Rodrik deny that the Asian Tigers
developed on the basis of export drives?

“That these countries reaped enormous
benefits from their progressive integration
into the world economy is undeniable. But
look closely at what policies produced
those results.” (p. 188)
Asian Myths

South Korea and Taiwan developed mostly
in the 1960s and 70s, before global trade
rules were developed and invasive. They
had no pressure to open their borders to
capital flows.
Asian Myths
China also followed a highly unorthodox
strategy, violating almost all the traderegime rules. (No private property rights,
extensive protectionism, etc.)
 These countries could do their own thing,
which is not the case for developing WTO
participants today.

The Thesis Again
“The available studies reveal no
systematic relationship between a
country’s average level of tariff and
nontariff barriers and its subsequent
economic growth rate.
 If anything, the evidence for the 1990s
indicates a positive relationship between
import tariffs and economic growth…
countries dismantle their trade restrictions
as they grow richer.” (p. 189)

Conclusions?

Rodrik concludes:
“Unorthodox innovations that depart from
the integration rule book are typically part
and parcel of such strategies.
Conclusions?

Rodrik concludes:
Consider “some of the innovations that
have been instrumental in kick-starting
investment and growth in the past. None
came out of a Washington economist’s
tool kit.” (p. 190)
Conclusions?

Rodrik concludes:
 Public enterprises during the Meiji
restoration in Japan;
 Township and village enterprises in
China;
 An export processing zone in Mauritius;
Conclusions?

Rodrik concludes:
 Generous tax incentives for priority
investments in Taiwan;
 Extensive credit subsidies in South
Korea;
 infant-industry protection in Brazil
during the 1960s and 1970s
New Wave of Globalization
World Bank
Reading 18
 What
was the first wave?
 What started it and what stopped it?
New Wave of Globalization
World Bank
Reading 18
 What
was the second wave?
 What started it and what stopped it?
 What is agglomeration?
New Wave of Globalization
World Bank
Reading 18
 What
is the third wave?
 What role have the developing
countries played in it?
 What are the downsides?
New Wave of Globalization
World Bank
Reading 18
 What
about capital flows?
 What about migration?
 What about poverty?
New Wave of Globalization
World Bank
Reading 18

From 1870 to 1915
Falling transport costs
 First wave of globalization.
 Nationalism and war stopped the process.
 Trade fell back to 1870 level.

New Wave of Globalization
World Bank
Reading 18

From 1945 to 1980, the second wave
 This
was a return to the pattern of the first
wave.
 Trade doubled relative to world income,
recovering the level of the first wave.
 The North-South pattern of trade was
restored, but didn’t restore movements of
capital and labor.
New Wave of Globalization
World Bank
Reading 18
Trade in the second wave was based not
on comparative advantage (differences in
factor endowments), but on cost savings
from agglomeration and scale.
 We reach the phase where alternative
trade theory has some explanatory power.

Economics of Agglomeration

“Firms cluster together, some producing
the same thing and others connected by
vertical linkages…The presence of a rich
network of manufacturing firms provides a
positive externality to each firm in the
system, allowing it to acquire inputs
locally, thus reducing the costs of
transport, of coordination, of monitoring
and of contracting…
Economics of Agglomeration

Clustering enables greater specialization
and thus raises productivity” (p. 212).
“But agglomeration economies, good news
for those in the clusters, …are bad news
for those left out” (Ibid.).
 For the industrial world, this was a global
age. For the developing world it was not.

New Wave of Globalization, post 1980

This wave has been distinctive.
A
large group of developing countries broke
into global markets.
 Others became increasingly marginalized.
 International migration and capital
movements again became substantial.
Developing Countries Broke into
Global Markets
Countries accounting for c. 3 billion people
harnessed their labor abundance to gain a
competitive advantage in labor-intensive
manufactures and services.
 80 percent of their exports were now
manufactures.
 Newly globalizing developing countries
improved their infrastructure, skills and
institutions that modern production needs.

Openness and Growth

Note the regression evidence of the
correlation between openness and growth
on p. 218.
Why are other countries marginalized?
Countries with about 2 billion people have
not integrated into the global industrial
economy: most of Africa and many of the
economies of the former Soviet Union.
 Per capita income here actually declined
during the third wave.

Why are other countries marginalized?
High transport costs to global markets and
poor infrastructure (ports, internal railroads,
highways and telecommunications).
 Poor economic policies that kept them from
joining the club.
 Some countries may make it in services later,
but won’t in industrialization. Service
markets are still far less integrated.

International Capital Flows
Total capital flows to developing countries
went from less than $28 billion in 1970s to
about $306 billion in 1997.
 Mergers and acquisitions were the most
important source of this increase,
especially in conjunction with privatization
of public companies.
 The top 12 emerging markets receive
most of the net inflows:

International Capital Flows

The top 12 emerging markets receive
most of the net inflows, including
Argentina, Brazil, China, India, Malaysia,
Mexico and Thailand.
Malaysia and Chile were most successful in
attracting FDI (of about $2,000 per
capita).
What are the Implications for
Migration?
How has this globalization affected
poverty?
Overall inequality has declined between
the new globalizers and the OECD
countries.
 Within-country inequality has increased
there, especially due to the rise of
inequality in China.

How has this globalization affected
poverty?
China started modernization with
extremely equal income distribution and
extremely high poverty.
 Intra-rural inequality in China has
decreased, but
 Inequality has grown a lot between the
rural areas and the rising urban
agglomerations, and between provinces
with agglomerations and those without.

How has this globalization affected
poverty?
Between 1993 and 1998 the number of people
in absolute poverty declined by 14 percent to
762 million.
 For them, the third wave of globalization is the
golden age. Poverty is predominantly rural.
 Average years of schooling and life expectancy
have improved to levels close or equal to levels
achieved by rich countries in 1960.

Five Wars of Globalization
Moises Naim
Reading 16

What are the five?
Drugs,
 Arms,
 Intellectual Property
 People
 Money

Five Wars of Globalization
Moises Naim
Reading 16
Who are the contestants?
 Governments vs. Resourceful networks
empowered by globalization.

Five Wars of Globalization
Moises Naim
Reading 16

Governments fighting these new wars with
the old police enforcement tools are
losing. Why can’t they win?

How can multilateralism help?
Five Wars of Globalization
Moises Naim
Reading 16

Will continued globalization processes help
or hurt the war against illicit trade?
Analysis of intellectual property
See slides 48 and 49
Analysis of Trade in Vice Markets
See slides 66 to 70
Five Wars of Globalization
Moises Naim
Reading 16
Victory may not be possible, but we must
try to reverse recent, dramatic gains.
 Are these law enforcement problems?
 No, they are a global trend that shapes
the world as wars formerly did.
 We need law enforcement officials, but
they alone won’t do. Many types of skilled
personnel and new ways of thinking about
the problems are needed.

Five Wars. I. Drugs
In 1999 the illicit drug trade was at $400
billion worldwide, about 8 percent of world
trade.
 The US spends between $35 and 40 billion
each year on the war on drugs, most for
interdiction and intelligence.

Five Wars. II. Arms Trafficking
In20% of total small arms trade is illicit
trade, generating over $1 billion annually.
 Small arms helped fuel 46 of the 49
largest conflicts of the nineties and were
responsible for c. 1,000 deaths a day.
Over 80% of the victims were women and
children.

Five Wars. III. Intellectual Property
Piracy costs the United States an
estimated $9.4 billion in 2001.
 Piracy rate of business software in Japan
and France is 40 percent, in Greece and
So Korea about 60 percent, and in German
and Britain around 30 percent.
 How does one stop it in China?

Five Wars. III. Intellectual Property
Discuss Pigou.
 Price discrimination is standard, routine,
normal practice in domestic industries and
services.
 How is it in international trade?


Notice Naim’s statement on p. 194
Five Wars. IV. Alien Smuggling
This involves the illegal copying,
manufacturing, and distributing of highend, brand-name products.
 It’s a $7 billion a year enterprise and the
fastest growing business of organized
crime.

Five Wars. IV. Alien Smuggling
Each year between 1 million and 2 million
people are trafficed across borders, most
of whom are women and children.
 200,000 children are enslaved per year.

Five Wars. IV. Alien Smuggling

Traffickers tempt victims with jobs across
borders or with adoption of children in
wealthier countries. Then they “keep the
victims in subservience through physical
violence, debt bondage, passport
confiscation, threats of arrest, deportation,
or violence against their families back
home.”
(p. 194)
Five Wars. V. Money Laundering
Money can be hid from governments,
creditors, business partners, or even
family members.
 It may come from tax evasion, gambling,
and other crimes.


Between two and five percent of the
world’s annual gross national product, or
between $800 billion and $2 trillion.
Five Wars. V. Money Laundering
And what is money laundering?
 “’Dirty’ funds can be electronically
morphed into legitimate assets” (p. 195).


How is money laundering done?

Get it across the border and into a
“legitimate” account there. It can later be
transferred anywhere.
Why can’t governments win? (p. 195)

Technology available to criminal networks
and governments, but the latter must
cope with tight budgets, bureaucracies,
media scrutiny, and electorates.
Why can’t governments win? (p. 195)

Trade will continue to grow, providing
cover for the expansion of illicit trade.
Why can’t governments win? (p. 195)

International migration will likewise grow,
from which new recruits and victims will
come.
Why can’t governments win? (p. 195)

The spread of democracy will permit
criminal cartels to manipulate weak public
institutions by corrupting police and
bribing politicians.
Why can’t governments win? (p. 195)

The spread of international law and its
embargoes, sanctions, and conventions
will offer criminals new opportunities for
providing forbidden goods to those on the
wrong side of the international community.
The five kinds of warriors could win
They are not bound by geography and can
occur anywhere.
 They defy traditional notions of
sovereignty. They have no national
allegiance. They are often highly paid,
hypermotivated and resource rich.
 They face strong incentives to overcome
government-imposed limits to trade.

The five kinds of warriors could win

They face strong incentives to overcome
government-imposed limits to trade.

They pit bureaucracies against networks.
They have too many flexible resources to
be caught and too few resources to
command a sustained and focused
(national) government opposition.
Naim’s suggestions

Develop more flexible notions of
sovereignty. Sovereignty is not
compromised by other, seemingly
threatening nations states, but by
stateless networks invading in pursuit of
trade.
Naim’s suggestions
Strengthen existing multilateral
institutions.
Governments acting alone are not likely to
succeed.

Naim’s suggestions

Devise new mechanisms and institutions.
We can no longer rely on the traditional
legal frameworks, military doctrines,
weapons systems, and law enforcement
techniques.
Naim’s suggestions

Move from repression to regulation.
How are these wars like U.S. experience
with prohibition?
 Note the costs of repressing or trying to
eliminate trade by making it illegal.

What happens to price and quantity
in illegal markets?
Supply with added risk premium
Supply, normal
Demand
Two gospel principles
would seem to apply

Joseph Smith: “We teach them correct
principles and let them govern
themselves.

Possible implication. Teach Church
members to practice self-restraint and
refuse to participate in debilitating
markets. Let the others consume.
Two gospel principles
would seem to apply

Mutual theme:
“I stand for prohibition.”

Notice the higher quantity of consumption
with normalized supply. After it is legal
and available, will some of the greater
number of consumers be our children?
Two gospel principles
would seem to apply

Why not try to work for a more prudent
society with reduced demands for the
products of vice markets?

How? Through repression or regulation?
Fini
The Euro

Many have seen problems with the
adoption of the Euro.
 The
Martin Feldstein prophecy
 Krugmann’s “hazing” in the EMU.
The Euro

Many have seen problems with the
adoption of the Euro.
 Critics
area:
 Low
say the EMU is not an optimal currency
labor mobility
 Varying financial structures across European
nations
 Non-synchronized business cycles.
EMU at 1
Reading 28
Mark A. Wayne

This article looks at some of the technical
questions related to the adoption of a new
currency system.
 The
shaky introduction of the Euro, it’s decline
to $.88 and its recovery.
 Measuring and controlling inflation.
 Seignorage, which will be significant for the
Euro.
EMU at 1
Reading 28
Mark A. Wayne

The ECB doesn’t publish its minutes and
votes. Why not?

They want to take off the pressure on
council members to vote along national
lines rather than in the interests of the
euro area as a whole.
EMU at 1
Reading 28
Mark A. Wayne

Review the growth and stability pact of
the Maastricht Treaty, p. 318. The
German and French dilemma.

Fiscal problems of the future and the
Euro. Pensions and the graying of
European society are an example.
Creation of Euro and Role of $
Reading 29
P.S. Pollard
All currencies serve as unit of account,
store of value and medium of exchange.
 The dollar also serves as an international
currency. What is that?

Creation of Euro and Role of $
Reading 29
P.S. Pollard

Governments hold reserves for three main
puposes:
 To
finance foeign debt,
 To finance imports, and
 To intervene in currency markets to manage
the exchange rate.
International Functions of the $ and Euro
The long-term debt of developing
countries is most commonly denominated
in U.S. dollars. Euro area currencies are
the next preferred choice.
 The global petroleum industry is
denominated in dollars.

Shifts in reserve currencies

If there is major shifting away from dollars to
Euros as a reserve currency,
sharp drop in the dollar’s value,
 increase in value of the Euro,
 i rates would rise in U.S.
 i rates would fall in Europe.


If European financial markets prosper and grow,
the increase in investment options would benefit
both us and Europe.
European Labor Markets/EMU Challenges Abroad
Reading 30
Soltwedel et al

Currency unions reduce foreign exchange
transactions costs, which stimulates trade,
investment, growth and employment.

But there are also costs for member states



No independent monetary policy
No currency devaluation
Asymmetric shocks will likely put pressure on
national labor markets and may boost
unemployment rates in affected areas.
European Labor Markets/EMU Challenges Abroad
Reading 30
Soltwedel et al
EU asymmetric shocks in the EU are much
more pronounced on a regional than on a
national level.
 Eurosclerosis, labor market rigidity
remains a big problem in Euroland.
 Especially England and Holland increased
flexibility and their economies have
improved.
