SubscribeLEO: The President's gonna read this W.B.O. revenue analysis and say- that his Council of Economic Advisors were put on the planet to make astrologers look good.
ECONOMIST #1: Talk to the man at Treasury.
LEO: Luther. Ball park. One year from today. Where's the Dow?
ECONOMIST #2: Tremendous. Up a thousand points.
LEO: Fred. One year from today.
ECONOMIST #1: Not good. Down a thousand.
LEO: A year from now, one of you is gonna look pretty stupid.
LUTHER: No doubt about that.
Stiglitz is perhaps best known for his unrelenting assault on an idea that has dominated the global landscape since Ronald Reagan: that markets work well on their own and governments should stay out of the way. Since the days of Adam Smith, classical economic theory has held that free markets are always efficient, with rare exceptions. Stiglitz is the leader of a school of economics that, for the past 30 years, has developed complex mathematical models to disprove that idea. The subprime-mortgage disaster was almost tailor-made evidence that financial markets often fail without rigorous government supervision, Stiglitz and his allies say. The work that won Stiglitz the Nobel in 2001 showed how "imperfect" information that is unequally shared by participants in a transaction can make markets go haywire, giving unfair advantage to one party. The subprime scandal was all about people who knew a lot—like mortgage lenders and Wall Street derivatives traders—exploiting people who had less information, like global investors who bought up subprime- mortgage-backed securities. As Stiglitz puts it: "Globalization opened up opportunities to find new people to exploit their ignorance. And we found them."Yup, imperfect asymmetry is profiteable for some. Very much so.
There are really two key points here: the rise of China, and the growing fragmentation of production.Yup, the comparative advantage model, in a version that is still taught in schools as a basic example, consideres the goods that are produced in each country and the relative efficiency of each country at producing the good. Clearly, each country can reap the benefit of its own specialization from exporting goods and importing goods coming from other specialized countries, so that everyone is better off thanks to international trade.
First, thanks to the rise of China, OECD imports of manufactured goods from developing countries have continued to rise rapidly since the early 1990s. Cline’s estimate of income distribution effects was based on data from 1993, when US imports of manufactures from developing countries were approximately 2% of GDP; now that number is close to 5%, and rising rapidly.
At the same time, the rise of China has prevented, for the time being, a development that I and others expected to mitigate the effects of trade on income distribution: up-skilling by the developing country exporters. “As newly industrializing countries grow,” I wrote in 1995, “their comparative advantage may shift away from products of very low skill intensity.” And that’s exactly what happened – for the countries that were the major exporters of manufactured goods to the OECD then. As John Romalis has shown, the exports of the original group of Asian newly-industrialising economies have shifted dramatically away from labour-intensive toward skill-intensive products.
But along has come China, which is far more labour-abundant now than the NIEs were then. A simple indicator is relative wage rates: in 1990, according to the US Bureau of Labor Statistics, the original four Asian NIEs had hourly compensation costs that were 25% of the US level. Now the BLS estimates that China’s labour costs are only 3% of US levels.
In 1995 I also believed that the effects of trade on inequality would eventually hit a limit, because at a certain point advanced economies would run out of labour-intensive industries to lose – more formally, that we’d reach a point of complete specialisation, beyond which further growth in trade would have no further effects on wages. What has happened instead is that the limit keeps being pushed out, as trade creates “new” labour-intensive industries through the fragmentation of production.
For example, the manufacture of microprocessors for personal computers is clearly a highly sensitive, skill-intensive process. Intel’s microprocessor production, however, now takes place in two stages: the “fabs,” which print the circuits on disks of silicon, are all located in high-wage advanced countries, but the assembly and testing, in which those disks are cut into individual chips and tested to be sure that they work, is conducted in China, Malaysia, and the Philippines.
Outsourcing of services, in both directions, adds to the possibilities of unequalising trade. The skill-intensive pieces of production processes that mainly take place in the third world are often now located in the OECD – for example, Lenovo, the Chinese computer company, has its executive headquarters in North Carolina.
What all this comes down to is that it’s no longer safe to assert, as we could a dozen years ago, that the effects of trade on income distribution in wealthy countries are fairly minor. There’s now a good case that they are quite big, and getting bigger.
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Now: the Tens? Fuggetabout it. The teens. Period.
Thanks for all the links. Just wanted to get the nomenclature thing straight first.
posted by kozad at 5:14 PM on November 14 [1 favorite has favorites]