Winners and Loosers of Globalization

OVERVIEW

 Last week: What is new about globalization?

 Today:
 Political economic processes during the „second unbundling“
 Who are the loosers of globalization?
 Loosing countries: Prebisch-Singer
 Loosing People: Stolper-Samuelson
 Globalization, populism and the threat to democracy
 Discussion: Are there only people or also places left behind by globalization?

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Learning outcomes

 Explain what neoliberalism is and how it complements the recent phase of

globalization

 Be able to explain how Prebisch-Singer and Stolper-Samuelson account for

countries and groups of people loosing from globalization

 Understand how the combined processes of globalization, neoliberalization and

skill-biased technological change generate rising inequality

 Understand what populism is, how it is related to globalization loosers and

why radical right populism in the current form is a threat to democracy

 Understand why the focus on helping individuals is insufficient for curbing the
current wave of radical right populism -> The revenge of the places left
behind

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Neoliberalization and Financialization
Political-economic changes complement ICT
revolution

Lower barriers encourage globalization

Increasing З perplexity, тому не факт, що

bargaining advantage over правильно
integration Increases power of MNCs vis-a-vis states and organized labor

of national Classical liberalism tends to

Free market
and advocate for minimal government
ideology, less intervention, while neoliberalism
regional
regulation supports targeted interventions to
economies promote economic efficiency and
Globalization Neoliberalization and control stability. Neoliberals also tend to
emphasize the role of the state in
protecting property rights and
promoting economic growth
through policies like deregulation
Financialization
and tax cuts
Shift of power Classical liberalism tends to
from prioritize individual freedoms and
productive to

и
the protection of individual rights,

ат
ив
financial while neoliberalism often prioritizes

р
зк
ро
economic efficiency and growth
capital; Share over social welfare.
holder value
thinking
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What is neoliberalism?

 „Neoliberalism is a philosophy in which the existence and operation of

a market are valued in themselves, separately from any previous
relationship with the production of goods and services, and without any
attempt to justify them in terms of their effect on the production of goods and
services; and where the operation of a market or market-like structure
is seen as an ethic in itself, capable of acting as a guide for all human
action, and substituting for all previously existing ethical beliefs.”
http://web.inter.nl.net/users/Paul.Treanor/neoliberalism.html
Неолібералізм — це філософія, в якій існування та функціонування ринку Neoliberalization is an ongoing process (but
оцінюються самі по собі, окремо від будь-яких попередніх відносин із probably slowing down with the political and
виробництвом товарів і послуг, і без будь-яких спроб виправдати їх з точки health crises that illustrate the limits of free
зору їх впливу на виробництво товарів і послуг. ; і де функціонування ринку або markets as sole arbiter of the “correctness” of
подібної до ринку структури розглядається як етика сама по собі, здатна decisions or “efficient” allocation of resources)
виступати в якості керівництва для всіх людських дій і замінити всі існуючі
раніше етичні переконання».

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Phases of implementation of neoliberal policies

theoretical concepts were developed and

 Proto-neoliberalism – test in Pinochet‘s Chile (1970s) tested in Chile
 Roll-back neoliberalism (1980s)– Thatcher and Reagan reduced state
intervention in UK / US economies through theories were implemented in larger scales
 Privatization
market took some roles from the government, e.g. комунальні послуги,
 Deregulation
прибирання сміття, мобільні оператори, теле- та радіоканали тощо
 Marketization
 Roll-out neoliberalism (since 1990s) – neoliberalism has become normalized
policy making being spread through international institutions such as the World Bank, IMF and WTO
 Extension of neoliberal principles throughout all aspects of society
 Transfer around the world through policy networks (Washington Consensus)
 In reality we really have to speak of neoliberalization and actually existing
neoliberalisms (Peck and Tickell 2002) as an ongoing processes with their own speed and degree

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Neoliberal globalization

 While international trade and cross-border financial flows in the 1950s and 1960s
were strictly regulated, this changed since the 1980s

 Removal of barriers and adjustment of national institutions now allow companies

to exploit smaller and smaller differences between countries and regions

 Together with improvements in transportation and ICT technologies this resulted

in the „second unbundling“ -> complex global value chains

 NOTICE: The ideas for a world without barriers and state intervention (other than
their support for global institutions de facto regulating what states are allowed to
do) was developed theoretically in the 1930s in Vienna and Geneva by Von Mises,
Lippmann, Röpke, Haberler, Hayek… (after breakdown of common market of
Habsburgian monarchy and colonial market areas). See interesing book by
Slobodian (2018) „Globalists“

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Distributional consequences CRITICISM:

закріплений
 In practice, neoliberalism means that „free“ market thinking are enshrined legally
in trade treaties (property rights, restriction of state intervention in economic
policy making, etc. in trade treaties)

 States are legally prohibited to intervene to generate jobs for their citizens
through industrial or employment policies (eg. EU competition rules; Eurozone
government debt rules)

 Neoliberal economic policy thinking means that state intervention in any form
should be reduced (includes welfare transfer payment, funding of social housing,
education, health programs)

 The negative impacts from skill-biased technological change and globalization on

certain occupations, regions, and industries are less likely to be dampened by
state welfare policies -> increased economic insecurity among those affected by
those changes EU competition: prevent from "discrimination" - preferring Viennese over immigrants

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Loosers of globalization
What does theory tell us about winners and
loosers?

 Standard trade theory tells us that globalization should result in higher global
welfare gains – if there are loosers than winners should compensate loosers

 But not uncontested

 Prebisch-Singer hypothesis of declining terms of trade for countries in the Global

South

 Stolper-Samuelson theorem (1941)

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Prebisch-Singer

 Two large regions: Global North produces and exports industrial products;
Global South produces and exports primary products (raw materials, fruit,
coffee,…);

 According to Ricardo that‘s OK – comparative advantage

 According to Prebisch-Singer declining terms of trade for primary products

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Prebisch-Singer: assumptions

 Low income elasticity of demand for primary commodities: Increasing incomes related to
disproportionally declining demand for those products
 High income elasticity of demand for industrial commodities (superior products): rising
income related to disproportionally increasing demand -> higher wages in Global South
result only in increasing demand for those commodities
 Primary goods are traded in competitive markets (homogeneity and substitutability /
Unique high-
specialization on one or a few of those products); less competitive markets for industrial tech products
products (more differentiated and less easy to substitute) will experience
 High price elasticity of the product (if exogenous shock (eg. draught) forces country to less pressure
increase price, it would be undercut by other primary good exporters) ЦІ ДВА НАВПАКИ on their prices
than primary
 Low price elasticity for industrial products (quality means quasi-monopoly) commodities
 Different implications of productivity gains: Productivity gains in primary commodity
production (given constant demand) results in lower costs passed on to Global North in
form of lower prices. On the other hand, productivity gains in industrial products are related
to improved quality resulting in higher prices and wages in the Global North
 The result is a worsening of terms of trade for countries of the Global South.
primary commodity prices fluctuate a lot and can actually increase substantially during periods of global economic growth
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Example: Brazilian Coffee versus German Cars

Jahr 2000 2015

Exportgüterpreisniveau 1 €/kg Kaffee 0,9 €/kg Kaffee
Importgüterpreisniveau 15.000 €/ Auto 20.000 €/ Auto
Terms of Trade F(x) = E/I = 15.000/1 F(x) = E/I = 20.000/0,9
Resultat 15.000 kg Kaffee = 1 Auto 22.222 kg Kaffee = 1 Auto

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 Empirical evidence / criticism

• Different periods and focus on different

products results in different empirical
outcomes (eg. Chinese demand for raw
materials will push up prices for primary
commodities)

• Economists were also sceptical about the

proof

• But: like any model it tells us something

interesting about reality and, overall, it
does seem to fit the record since the
1950s
• -BUT: what about second unbundling?
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Stolper-Samuelson (1941)

 There are strong re-distributive implications of free trade models

прослідковується
 Trace out the effects of price changes on the material well-being of different
groups
 In a 2 good, 2 factors of production, full intersectoral mobility of the factors,
owners of one of the two factors are made necessarily worse off with the
opening of markets
 The factor that is used intensively in the importable good must experience a
decline in its real earnings.
 The model establishes absolute losses, not relative losses.
 The model can be generalized (see Rodrik 2018, p. 3)
 For the US economy, crudely put, the model predicts that unskilled workers
are unambiguously worse off as a result of trade liberalization.

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Rodrik‘s economic arguments for populist
backlash (Rodrik 2018)

 Stolper-Samuelson: There are loosers from trade; Winners need to

compensate the loosers; Redistribution of income is the flip side of the gain
from trade (p. 7)
збивати
 The redistributive effects of liberalization get larger and tend to swamp the
net gains as the trade barriers in question become smaller lowering trade barriers implies higher economic growth which
implies redistribution effect. це відбувається спіраллю

 If politicians go after the remaining, low barriers, then trade agreements

become more about redistribution than about expanding the economic pie
(gains). (p. 7) easier to compensate when pie grows. but if it stays the same, what are the sources fro compensations
 There are plenty of empirical studies that support those hypotheses

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Going after remaining low barriers becomes
more about distribution than increasing the pie

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 Source: Baldwin 2016

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 What tasks are outsourced and replaced by
technology?

skill rate = wage rate here

Source: Autor and Dorn 2013
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- ліворуч буде робота, яка не вимагає осбливих знань, переважно ручна робота, але яка часто
змінюється, а отже не може бути механізована.
- посереденині - щось повторюване і механічне, що може виконуватися роботами або китайцями
- праворуч - "креативна" робота, де треба думати, аналізувати, якісь
знання, чого не можеть роботи роботи і (поки що) ШІ
Empirical studies

 NAFTA: modest effects for US workers but „important minority“ suffered

substantial income losses
 Effect strongest for blue collar workers, high school drop outs
 Workers in regions and cities more exposed to competition with Mexico had an
8% slower wage growth than workers in regions not affected
 Workers in industries affected had 17% lower wage growth (Habokyan and
McLaren 2016)
 Given the small overall benefit of NAFTA on the U.S. economy (welfare gains
estimated at 0.08%) these losses are large. (Romalis 2007)

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Empirical studies

 Impact of China: Work by Author, Dorn and Hanson 2013; 2016)

 Compared commuting zones strongly with commuting zones weakly affected
by Chinese import competition
 They find strong negative effects on manufacturing jobs and wages

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Generating inequality : Between countries

GDP/Capita differences;
Weighted by population size

GDP/Capita differences

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 Generating inequality: Between People, globally:
Global income growth, 1988-2008

Source: UNCTAD, Trade and Development Report 2017, p. 24 (based on Branco Milanovic)
24

http://harvardpress.typepad.com/hup_publicity/2016/06/branko-milanovic-elephant-chart-brexit.html
 Generating inquality: Between People in countries:
Income distribution, United States

https://wid.world/country/usa/
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Political consequences of globalization
RODRIK‘S TRILEMMA

 Dani Rodrik (2011) argues in

The Globalization Paradox
that we cannot live in a
world where we have
Hyperglobalization National
Sovereignty and Democratic
Princples (at the nation state
scale) simultaneously
 One of the three goals needs
to be sacrifized

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Possible configurations
One of the three goals needs to be sacrificed

 Restrict (national) democracy

 Eg. constraint of the gold standard

has not been existing so

 Globalize democracy connected with populism far and hardly to emerge
набирає зараз обертів in th future
 Eg. global governance, withering
away of the nation state

 Restrict hyperglobalization
(unconstrained economic
globalization)
 Eg. Bretton Woods compromise
after WWII after WW2
national government were
the ones who implement
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Rodrik‘s trilemma: Restrict democracy

 Hyperglobalization plus Nation-states

 Open borders and legal protection of business interests
 National governments assure investors by following international rule and
protect international property and investment, if necessary against the
interest of a large share of the (national) population (the electorate).
 For instance, to maintain exchange rate, inflation targets, government debt/GDP
ratios, etc.
 Examples:
 Gold standard until 1931
 Structural adjustment programs of the IMF and World Bank in the 1980s and 1990s
 Eurozone regulations

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Rodrik‘s trilemma: Globalize Democracy

 Hyperglobalization plus (global) democracy

 Global governance as form of global federalism
 Global regulatory framework established, monitored and protected by global
institutions (UNO, WTO, International Court,…)
 National legal frameworks are replaced by international ones
 Democratization of Global Governance in a second step (after rules are
established).
 Elimation of national souvereignity, political institutions
 „World Government“, Expansion of UNO to global parlament
 It would mean that Chinese and Indian workers would get more weight in political
decisions – Austrians would have little weight, but Austrian workers could align with
Chinese and Indian workers,…
 Attractive for cosmopolitans, but not very realistic at the moment

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Rodrik‘s trilemma: Constrain Hyperglobalization

 Nation state plus (national) democracy

 Multi-polar world order with strong UNO and some general rules to enable and
regulate international engagement of nation states but that maintain national
democratic decision making
 Acknowledges and maintains diversity of national economic systems (China is not
the USA and the EU is not NAFTA – different policy interventions required)
 Countries have the right to protect their citizens and economies from the
effects of hyperglobalization
 Regulation of cross-border (financial) capital flows
 Trade barriers and social/environmental regulations to protect infant economies in
the Global South or social/environemental dumping; exists for agriculture, for
instance.

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Trilemma, current situation and politial backlash

 At the moment, we see a movement towards hyperglobalization with nation

states rapidly loosing control over their own national economies (international
treaties constrain the economic policy space of nation states)

 This leads to increasing inequality and economic hardship for an increasing

share of the electorate

 According to Karl Polanyi, this leads to a counter-movement, a political

reaction фашизм в минулому як приклад

 For Rodrik, this political counter-movement manifests itself in a rise of

populist parties, issues and canditates

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The rise of populism

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Populism

 Anti-elitism: Claim to represent the „true“ people and defend them against
elites Elite is corrupt

 Nativism Prioritizes the interests and well-being of native inhabitants over those of immigrants

 Authoritarianism (strong leader, who knows better than „corrupt elites“ what
the true people want)

 Is Kurz a populist?
 Is Strache a populist?
 Is Kogler a populist?

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Danger to democracy?

 Hyperglobalization means that governments often follow rules and design

economic policies that harm a large share of the population

 Populists thus argue that the „political elites“ no longer represent the will of
„the people“ and are kept in power through deceipt and the support of corrupt
media
що саме по собі вже не демократично
 On the other hand, an authoritarian leader knows what people „really“ want –
rather than accept the outcome of elections (which are rigged by the elites
and their institutions), the authoritarian leader obtains legitimacy by his (and
it usually is a man) understanding of and policy making for the „silent“
majority – democratic principles and institutions are therefore unnecessary….

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Solutions….

 In general, solutions focus on individuals (better skills training,….)

 This is then supposed to remove the disadvantage and allow people to take
advantage (rather than become victims) of skill-biased technological change
and globalization

 However, as Rodriguez-Pose (2018) shows it is not only people but whole

regions, cities, communities that are left behind
покращити загальну економічну ситуацію
покращити рівень життя таким чином люди не будуть почуватися забутими, відчуватимуть,
медицину, освіту, інфраструктуру що про них піклуються, менше жалітимуться на поточну владу

і тим самим менше впадатимуть в популізм

ще я би від себе сказала, що освіта може допомогти. мовляв, освічені, розуміні

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люди розумітимуть, чому популізм - це не вихід
Places left behind

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 Source: Rodriguez Pose

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Take home points

 Globalization produces winners and loosers

 Main points of Prebisch-Singer
 Main points of Stolper-Samuelson

 What is Rodrik’s trilemma?

 What is populism and why might it be dangerous to democracy?

 Why should we also focus on the places left behind and not only on people
left behind?

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References

 Key reference
 Rodrik, D. (2018). Populism and the Economics of Globalization. Journal of
International Business Policy.

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 Discussion: Rodriguez-Pose (2018)

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Questions: Rodriguez Pose

 Why did we not worry more about inequality?

 What are we supposed to do about it?

 What does a regional perspective add?

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