What did we miss about globalisation? In an early 2019 lecture, American
economist Paul Krugman presented his views on several characteristics about
globalisation that we have observed and missed over time. Krugman emphasises the
need for greater discourse on globalisation in relation to the dynamics of
change, short run effects, social and distributional impacts, and the
interactions with the political economy. A brief outline on some of his views
are summarised as follows:
What were we learning about globalisation?
Cycles and levels: We can think about several major eras of
globalisation: (1) Introduction of steamships and railroads for global trade;
(2) The disentanglement of protectionist policies and attitudes; (3)
Technological enablers that reduced transaction and control costs; and (4)
Integration of new entrants over time, such as China and Bangladesh. Krugman
highlights Bangladesh in particular as an interesting case study, noting that
the country was once at the brink of a Malthusian crisis before its integration
with global markets. The world was actually quite globalised prior to World War
I but declined between World War I and World War II. A big revival took place
afterwards, but not without significant cyclical swings. Trade policies appear
to cycle between free trade and protectionism depending on popular and political
attitudes at the time (evident today too in our current political climate).
Distributional effects: Trade was expected to have large effects
on distribution and income, as trade should produce winners and losers.
Surprisingly, global trade effects after World War II had less distributional
impacts than expected. This reflected the advantages of scale and suggests that
the efficiency gains did not impact distributions negatively. However, a law or
observation in economics and finance is that once you explain how the world
works – the theory will likely change . For instance, the rise of US
manufacture export and import levels from 1913-1992, and reversal from 1992-2016
has had high distributional impacts. Trade between low and high wage countries
can affect the distribution of income, particularly for those without education,
due to reallocation of trade, capital and income flows. The income distribution
effects of trade are now larger.
What did we miss about globalisation?
Impact of pace change: Infrastructure, policy and related levers
of economic production often did not keep pace with globalisation or change in
general. Economists will most likely never know how reality might settle in
equilibrium. The impact of change is often more dramatic, interesting and
important than the ‘final’ level. Job displacement effects were large and the
downsides larger than anticipated. Governments and economists did not think
deeply about the dynamics and transitions from rapid change.
Economic geography: Trade theory often did not think about how
the location of activities fit within the narrative of trade. Production tends
to cluster and localise due to specialisation benefits, spillovers and
production costs. Clusters create isolated risks to natural disasters, policy
shocks and other discrete events. While the aggregate effect of free trade is
usually positive, the variance in regional and local experiences can be positive
or negative. Short term, large-scale disruptions help explain the political
economy backlash to globalisation and trade today. Stories matter more than
numbers.
Fragility of trade: History demonstrates the impact that one or
several groups of leaders can have on market confidence, firm production and
trade flows. The economics of world trade might look to protect itself more from
the whims of individuals in the future. A lot of diplomacy is involved in the
arrangements of free trade agreements. It is sometimes less about economic
prosperity and more about political objectives (e.g. establish new alliances,
suppress competing political institutions, etc.). Government views on policy
often do not derive from coherent economic analysis.
Herd mentality: United States public opinion data for example
shows that republicans have swung between pro- and anti- stances towards free
trade on numerous occasions. It suggests that the public has no real opinion on
international trade policy and that they are following the directives of their
preferred candidate. It suggests as well that effective communication of
economic and policy decisions (and its tradeoffs) is critical to building
thoughtful public concensus.
Subtle case: The case for free trade is usually more subtle and
political than originally thought to be. Global trade benefits from comparative
advantages, economies of scale, and increasing returns afforded through
international and technological specialisation. However, while trade is not a
zero-sum game, it also does not imply that free trade is optimal policy. This is
because market imperfections and distortions exist. At the same time, public
intervention might not necessarily be any better. Optimal trade policy is
difficult to achieve due to the complexity of market structures and
participants, and the strategic responses of governments involved. The
opportunity cost and trade-offs between efficiency, effectiveness and equity are
not always clear. Do we truly experience a net gain from trade-wars?
Reference
Krugman, P. (2019). What did we miss about globalisation? Corden Public Lecture, The University of Melbourne.
Krugman, P. (1993). The narrow and broad arguments for free trade. American Economic Review, 83(2), 362.