Misthinking Globalisation Richard Baldwin Graduate Institute, Geneva & University of Oxford
Conventional view of globalisation Autarky to free trade, slowly. Several waves, but single process.
1870 1990: Globalisation Trade costs
1870 1990: Globalisation Trade costs 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.Falling transport costs 1913 2.Rising tariffs 1.9 Averge trade cost Global trade flow (right scale) 1950 1921 1938 3.Falling tariffs & transport costs 1990 15 15 14 14 13 13 12 12 11 11 10 Source: Gravity model based estimates of trade costs (Jacks, Meissner, Novy 2011).
Globalisation changed post 1990 80% 70% 60% 50% 40% 30% 20% 10% 0% G7 world GDP share 1820, 22% 1900, 46% 1990, 66% 2012 47% 1990
What changed globalisation? Follow the clues
Global GDP shares, 1960 2012 80% 70% 60% 50% 40% 30% 20% RoW 67% G7, 48% 10 gainers 27% Post 1990: G7 share loss goes to 10 developing nations. RoW see little change. 10% 0% 11% 1990
People in poverty (under $2/day) Millions under $2/day by national income class 1,600 1,400 1,200 1,000 800 600 400 200 - Lomiddle Hi- Middle Low 1993 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2010 1990 1980 1993 poverty: Rising in Low and Low middle income nations. Flat in High middle income nations.
People in poverty (under $2/day) Millions under $2/day by national income class 1,600 1,400 1,200 1,000 800 600 400 200 - Lomiddle Hi- Middle Low 1993 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2010 Post 1993 Hi middle poverty plummets. 650 million fewer poor! Others poverty keeps rising. 1990
Global manufacturing shares, 1970 2010 World manufacturing share 80% 70% 60% 50% 40% 30% 1990, G7 65% RoW 47% 7 losers. 7 risers. RoW = little change. 20% 10% 0% 1970 1975 1980 6 risers, 5% 1985 1990 China, 3% 3% 1995 2000 2005 2010 China, 18% 9% Source: unstats.un.org; 6 risers = Korea, India, Indonesia, Thailand, Turkey, Poland
Nature of trade: Vertical specialisation 4 3.5 3 Vertical specialisation index Asia ex Jpn 2.5 2 G7 1.5 1 0.5 0 LatAm Africa 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1990 Source: Amador and Cabral (2009).
Nature of trade changed: Intra industry trade (IIT) Intraindustry trade indices 80% 70% 60% 50% 40% 30% 20% 10% Germany -France US- Mexico Germany- Poland US- Mexico Japan- Thailand 0% 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 1990
Trade & investment policies Developing nations 250 200 150 100 50 BITs signed per year (right scale) World FDI ($ billion) 2500 2000 1500 1000 500 50 45 40 35 30 25 20 15 10 Applied tariffs (%) Middle East & North Africa East Asia Sub- Saharan Africa South Asia 0 1988 0 5 0 US, Japan & EU 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
What changed globalisation?
Clue #1: The change is: Clues Historic in size, Global in reach, Unevenly spread geographically. Clue #2: The change is: Related to manufacturing & trade in intermediates. Clue #3: Transformed developing nations views of trade & investment.
Buzzwords in lieu of analysis It s hyperglobalisation It s FDI It s FDI It s the East Asian miracle It s capital flows It s vertical specialisation It s Emerging Markets
Elephant = international movement of firm specific know how. It s FDI It s FDI It s hyperglobalisation GVC revolution Know how becomes: 1) Firm specific, not nation specific. It s the East 2) Rapidly combined with Asian South labour but only in miracle a few developing nations. It s capital flows It s vertical specialisation It s Emerging Markets
We need a new narrative for globalisation Globalisation as 2 processes, not 1
Globalisation: 3 cascading constraints High High High = Preglobalised world Steam revolution Low High High = 1 st unbundling Stage A Stage C Stage B ICT revolution Low Low High = 2 nd unbundling Stage A Stage B Stage C
Distance still matters Regionalization of supply chains Hypothesis: people still expensive to move. Face 2 face and Face 2 machine constraints.
Misthinking industrialisation: Spence growth commission (2008) Economy Period of +7% growth GDP/pop at start GDP/pop in 2005 Botswana 1960 2005 210 3,800 Brazil 1950 1980 960 4,000 China 1961 2005 105 1,400 Hong Kong, China* 1960 1997 3,100 29,900 Indonesia 1966 1997 200 900 Japan* 1950 1983 3,500 39,600 Korea, Rep. of* 1960 2001 1,100 13,200 Malaysia 1967 1997 790 4,400 Malta* 1963 1994 1,100 9,600 Oman 1960 1999 950 9,000 Singapore* 1967 2002 2,200 25,400 Taiwan, China* 1965 2002 1,500 16,400 Thailand 1960 1997 330 2,400
Misthinking globalisation = misthinking economics 1 st unbundling thinking: Y A F[ L, K ] Jpn Jpn Jpn Jpn 2 nd unbundling thinking: Globalisation changes technology in some developing nations. Know how flows directly in global value chains & indirectly via intermediates.
Economics of 2 nd unbundling 2 ways of recombination hi tech & low wages: Direct: North know how moves to South labour (offshoring). Indirect: North know how moves to South in components. (trade in parts & components). NB: Comparative advantage becomes a multicountry concept.
1 st unbundling: euros D S S S euros euros D N P T XS S N P -T MD Quantities World trade Quantities
1 st unbundling: Trade costs fall North industrialises; South de industrialises euros D S S S euros euros D N P T XS N produces & exports more S N P FT P FT S produces less & imports more MD P -T Quantities World trade Quantities
2 nd UB Direct recombination of North tech with South labour euros D S S S euros euros D N XS S N P FT P 2UB S exports S S MD MD Quantities World trade Quantities XS N exports P FT P 2UB
Trade in parts can switch comparative advantage euros South euros D Z South S Z D Y S Y P W Z S Z P Y MC Z P P Y Q Y Q Y Quantity, parts Q Y =Q Z M Z X Z Quantity, final goods
Basic economic difference 1 st unbundling globalisation: Exploit comparative advantage by producing more at home & exporting. 2 nd unbundling globalisation: Sources of comparative advantage move internationally.
Rethinking impact of globalisation The death of production functions? Y A F[ L, K ] Jpn Jpn Jpn Jpn Globalisation works with a finer degree of resolution. Need IO work to track its impact. Old, bold approaches need more detail. Open up the blackbox of production functions.
Key difference for policy 1 st unbundling = UB Slow, predictable, controllable (tariff cuts). By sector and skill group. 2 nd unbundling = 2UB Sudden, individual, unpredictable. Globalisation with a finer degree of resolution.
GVC revolution: Policy rethinks necessary 1. Social & education policy. 2. Industrial policy. 3. Urban policy. 4. Trade policy & Global trade governance.
#5: Development policy Traditional industrialisation = build a supply chain (e.g. Korea). After 2 nd unbundling, industrialisation = join a supply chain (e.g. Thailand). Some key points: Industrialisation is easier but less significant. 2 nd unbundling killed import substitution. North tech + South labour unbeatable.
Development paths changed Holmes Lopez Gonzales curve 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Importing to export: Rising then falling with income - 10,000 20,000 30,000 40,000 50,000 Per capita GDP (2000 $s)
END Thank you for listening. Please continue developing Int l IO tables and the like. World of 2 nd unbundling needs finer ganularity! Unpaid avert: please visit: www.voxeu.org Research based policy analysis and commentary by leading economists
Extra slides for Q&A
1UB w/w* e EU exports Postwar tariff liberalisation z x Nontraded Non traded Job creation Job destruction z m Globalisation s impact is: 1. Slow & controlled. Mainly tariff liberalisation 2. Predictable. Sunset sectors like those already lost. Sunrise Foreign goods sectors in Home like those already exporting. A(z) 3. Globalisation s impact felt at level of sectors & skill groups. Home goods in Foreign EU imports z, sectors
2 nd unbundling: Industrialisation easier, but less meaningful 2UB: External economies with GVC wage SVMPL M (ISI) M Social Value Marginal Product of Labour in Manufacturing A U U VMPL A L M L M L L M 39
Supply chain trade by industry All services Food & related Manufacturing, Leather & Machinery, nec Transport equip Textiles & related Elect & Opt'l equip Ag & related Fuels Chemicals & Paper & related Rubber & Plastics Wood & related Basic metals & Mining Non-metallic World final share, '09 World final share, '95 0% 20% 40% 60% 80% All services Food & related Manufacturing, Leather & Machinery, nec Transport equip Textiles & related Elect & Opt'l equip Ag & related Fuels Chemicals & Paper & related Rubber & Plastics Wood & related Basic metals & Mining Non-metallic Total world export shares '09 0% 10% 20% 30%
I2P trade: Bilateral intermediate imports as % of global flows, 2009 UK Germany France Itlay NL Belgium Austria Poland Czech Denmark Spain Portugal Finland Greece Ireland Turkey Sweden Brazil Russia India Indonesia Australia Taipei China Japan Korea US Mexico Canada RoW I2P '09 UK 0% 0% 0% 0% 1% Germany 0% 1% 0% 0% 0% 1% 0% 2% France 0% 1% Itlay Factory 1% NL 1% 0% 0% Belgium 0% Europe Austria Poland Czech Denmark 0% Spain 0% Portugal Finland Greece Ireland 0% Turkey 0% Sweden Factory 0% Brazil 0% Russia Asia 1% India 0% Indonesia 0% Australia 1% 0% Taipei 1% 0% China 1% 0% 1% 1% 2% 4% Japan 1% 0% 0% 2% Korea 1% 1% US 0% 0% 0% 1% 0% 1% 1% 4% Mexico 1% Canada 2% RoW 1% 1% 1% 1% 1% 0% 0% 0% 1% 0% 0% 0% 4% 2% 1% 3% Facto NorA
2 nd unbundling: Differences for policymaking Misthinking globalisation = misthinking policy. 2 nd unbundling: 1. Less predictable. Globalisation changes national comparative advantage. 2. More sudden. Not controlled by tariff cutting. 3. More individual. Not by sectors or skill groups.