Presentation on theme: "Topics in International Development, Trade, and Culture"— Presentation transcript:
1 Topics in International Development, Trade, and Culture Scott Wentland
2 Introduction ESC Clermont: International Week About your instructor: Visiting Professor of Economics, Longwood UniversityLongwood University is located in Farmville, Virginia, USPhD in Economics from George Mason UniversityGMU is located in Fairfax, Virginia…just outside of Washington DCGMU hosts an outstanding economics department, with two Nobel Prize winning economists.Originally from Ohio, U.S.A.Born and raised in Toledo, OhioAttended Miami University of Ohio for Bachelors & Masters
3 Day 1: Lecture Outline World poverty & institutions Why do we trade? Why do some countries grow rich while others stay poor?Why do we trade?Specialization & Absolute AdvantageTheory of Comparative Advantage
4 Assessing World Poverty Looking at the world’s economies, we tend to ask three common questions:Why are some nations wealthy while others are poor?Why are some nations getting wealthier faster than others?Can anything be done to help poor nations become wealthy?
5 Assessing World Poverty Three Key FactsEveryone Used to Be PoorGDP per Capita Today Varies Enormously among NationsGrowth Miracles and Growth Disasters: some countries’ economies have grown at incredible rates while others stagnate.How do we explain this?
8 Growth Miracles & Disasters Two Growth MiraclesJapan:annual rate of real growth = 8.5%South Korea:annual rate of real growth = 7.2%Two Growth DisastersArgentina1900: one of the richest countries in the worldNow: per capita real GDP is 1/3 that of the U.S.NigeriaHas barely grown since 1950Poorer now than it was in 1974
9 Miracles and Resources Do these “growth miracles” simply have more resources?What do economists mean by “resources”?Labor, land, & natural resourcesPhysical capital: the stock of tools, structures, and equipment.Human capital: is the productive knowledge and skills that workers acquire through education, training and experience.Technological knowledge: knowledge about how the world works that is used to produce goods and services.
10 Miracles and Resources A country’s amount of available resources only tells part of the story.Why do some countries have more physical and human capital and use more advanced technology?Why do some countries obtain greater output from the resources they have than others?The answers lie in the institutions and incentives that countries adopt.
11 Institutions: A Natural Experiment A natural experiment - North and South KoreaBefore division after WWIIShared the same people and culture.Had similar levels of physical capital.Had access to the same technology.North Korea became a communist state with a centrally planned economy.South Korea adopted a capitalist free market model.The result 50 years later is dramatic as seen in the following photo from outer space.
13 Institutions and Incentives Institutions are the “rules of the game” that structure economic incentives.Institutions of Economic GrowthProperty rightsHonest governmentPolitical stabilityA dependable legal systemCompetitive and open markets
14 Institutions Property rights: the right to benefit from one’s effort. Provide incentives to work hard.If you can keep/sell what you make, then you will make more.Encourage investment in physical and human capital.Property rights are also important for encouraging technological innovation.Without property rights:Effort is divorced from payment → ↓incentive to workFree riders become a problem
15 Institutions Honest Government Property rights are meaningless unless government guarantees property rights.Corruption bleeds resources away from productive entrepreneurs.Corruption takes resources away from more productive government activity.Next is a list of the 10 most and the 10 least corrupt countries. Are you surprised to see who is or who isn’t on these lists?
18 Institutions Political Stability Changing governments without the rule of law results in uncertainty which leads to less investment in physical and human capital.If you are uncertain whether the next government will allow you keep your property, then you will have less incentive to produce goods now.In many nations civil war, military dictatorship, and anarchy have destroyed the institutions necessary for economic growth.
19 Institutions Dependable Legal System A good legal system facilitates contracts and protects property from others including government.Is property really yours if there is no legal system to defend it?Poorly protected property rights can result from too much government or too little government.The legal system in some governments is so poor that no one knows who owns what.Example: In India, residents who purchase land have to do so more than once because of lack of proper record keeping.
20 Institutions Competitive and Open Markets Encourage the efficient organization of resources.About half the differences in per capita income across countries is explained by a failure to use capital efficiently.Competition drives people to do more with the same resources.Example: One study found that if India used its physical and human capital as efficiently as the U.S., India would be four times richer than it is today.
21 Institutions: Conclusions and Questions “Growth miracles” had relatively good institutions“Growth disasters” had relatively bad institutionsEconomic growth would become more common if more countries changed their institutions.Where do institutions come from?Culture?History?Geography?Luck?Key research question in economics: Understanding institutions, where they come from and how they can be changed?
22 Open Markets and TradeWhy are open markets important for economic growth and prosperity?Doesn’t trade hurt us?Trade causes us to lose jobs from foreign competitors.Why pay foreigners for doing something we can do ourselves?So, how that make us richer?
23 Specialization Trade allows us to specialize Specialization allows us to focus on the work we do well. The people with whom we trade can focus on the work they do well.Collectively, the world produces more and the world is more prosperous.Above summarizes the main insights from Adam Smith’s theory of trade (sometimes called the Theory of Absolute Advantage)
24 Trade Example: Absolute Advantage Economists like to simplify examples, while maintaining the essence of the point. Suppose we are thinking about:Two countriesFranceItalyTwo goodsWineCheeseAssumption: the goods are of equal quality and basically the exact same products across countries.
26 Trade Example: Absolute Advantage France is best at producing wineFrance produces more wine per hour of work than Italy.France has an absolute advantage in wine production.Italy is best at producing cheeseItaly produces more cheese per hour of work than France.Italy has an absolute advantage in cheese productionCountryGoods (productivity)ItalyFranceWine (bottles per hour)12Cheese (units per hour)43
27 Specialization and Trade Specialization (again each still has 36 work hours)Italy: 36 hours 144 cheeseFrance: 36 hours 72 wineTrade (exchange 2 cheese for every 1 wine)Italy: 36 wine, 72 cheeseFrance: 36 wine, 72 cheeseCountryGoods (productivity)ItalyFranceWine (bottles per hour)12Cheese (units per hour)43
29 Benefits of Trade & Specialization Specialization and Trade make you richerWhy? You can focus your time on what you do bestShould we allow Italians to steal French cheese jobs?Yes! If it means that the French people are free to focus on what they do well. In this case, it is wine production.Result: BOTH COUNTRIES BENEFIT FROM TRADEWhat if we are not the best at anything?What if other countries are more productive and less costly?
30 Trade Example: Comparative Advantage Theory of Comparative AdvantageDavid Ricardo, British economist ( )He explained that a country being “the best” or “good” at producing something was irrelevant. Both sides can benefit from trade even if one side is better at producing everything.How do we know?We look at what economists call opportunity costs.
31 Trade Example: Comparative Advantage No trade (suppose each has 36 work hours)U.S.: 23 hours 184 wine13 hours 54 cheeseTotal: 36 hours 184 wine, 54 cheeseFrance: 18 hours 18 wine18 hours 54 cheeseTotal: 36 hours 18 wine, 54 cheeseCountryGoods (productivity)United StatesFranceWine (bottles per hour)81Cheese (units per hour)43
32 Trade Example: Comparative Advantage Now, France produces cheese relatively wellFrance has no absolute advantage in either good.But, for every unit of cheese it produces, it only has to sacrifice 1/3 of a bottle of wine (United States has to sacrifice more wine (2) to produce cheese)France has a low opportunity cost for producing cheese (i.e. they have to sacrifice less wine production to produce cheese than United States).
33 Trade Example: Comparative Advantage Now, United States produces wine relatively well.United States has an absolute advantage in both cheese and wine productionBut, for every bottle of wine it produces, it only has to sacrifice ½ unit of cheese. (France has to sacrifice more cheese, 3, to produce wine)United States has a low opportunity cost for producing wine (i.e. they have to sacrifice less cheese production to produce wine than France).
34 Specialization and Trade Specialization (again each still has 36 work hours)United States: 36 hours 288 wineFrance: 36 hours 108 cheeseTrade (exchange 1 wine for every 1 cheese)United States: 234 wine, 54 cheeseFrance: 54 wine, 54 cheeseCountryGoods (productivity)United StatesFranceWine (bottles per hour)81Cheese (units per hour)43
36 Comparative Advantage Both countries are richer!It did not matter that U.S. was more productive in everything (or, that they could produce more stuff with the same resources).Important: France does do something relatively well.Does David Beckham mow his own lawn?What if Beckham was great at mowing lawns AND soccer?Beckham pays someone to mow his lawn because each hour that he’s mowing his lawn, he’s not spending that time playing soccer.His time spent as an athlete is relatively more valuable.
37 Comparative Advantage Benefits from tradeTrade allows us to use our time wisely. Our time is better spent doing jobs we do relatively well.If France produces cheese relatively well, then more cheese production means more wine (if we trade cheese for wine).Why do we care about relative costs and not absolute costs?When you produce something, it means your time is spent not doing something else.When they trade together, France allows the US to produce what they produce relatively well. And, as a result, the US pays France more for their cheese (leaving France with more wine too)
38 Protectionist Pressures If trade is so good, why are so many against it?LosersFrench vineyards (in our last example)American and French autoworkers and other manufacturing employees lose jobs to foreign competitionPeople think all of the above “could be me”What to do?Organize and pass laws limiting trade?Tariffs: a tax imposed on imported goodsQuotas: a limit on the quantity of a good that may be imported in a given period of time
39 Protectionist Pressures Tariffs/quotas makes some people richerFrench wine industry (in our example)Manufacturing and other trade-sensitive industriesDomestic industries would have limited competition due to higher prices of importsMakes everyone else (i.e. consumers) poorerConsumers must pay higher prices for goodsEnd up with less overallDo the losers outweigh the winners?
40 Protectionist Pressures How do we know we’re poorer on net?Production (deadweight) lossesHigher cost domestic producers are unnecessarily using resourcesWith trade, some industries wouldn’t be wasting resources...so we would be producing more with lessConsumption (deadweight) lossesPeople pay more for goods and servicesBut, many mutually advantageous trades are not madeConsumers receive less and have fewer choices
41 Globalization, Wealth, and Trade Scott Wentland
42 Globalization, Wealth, & Trade What do economists mean by “globalization”?Is it here to stay?Do countries actually become wealthier from trade?
43 What is Globalization? Competition or Cooperation? Intentions vs. ends We tend to associate globalization with the increase in international trade and commerce.“Globalization is the advance of human cooperation across national boundaries.”Intentions vs. endsDo we intend to cooperate with one another?How do we achieve cooperation without intending to cooperate?
44 I, Pencil No single person makes a pencil Largely unplanned by Leonard Read (1958)No single person makes a pencilLargely unplannedPeople follow prices
45 Increasingly Global Globalization Figure 1.1 Similar story for the U.S. & France
46 Always an Increasingly Global World? No. Late 19th and early 20th centuries were quite globalized for their timeEngland & France traded more once they stopped warringAdam Smith & David Ricardo helped tooBack to warBetween WWI & WWII trade declined rapidlyHawley-Smoot (1930) tariff in the US increased tariff to very high ratesThe rest of the world responded by passing their own tariffs
47 Can Globalization Take a Step Back? Understanding globalization and international economics is key.Political rhetoric (particularly economic fallacies) has the potential to reverse globalizationHow do we reverse globalization?Encourage policies of self-sufficiencyMake foreign products more expensive and reduce trade.
48 Do We Really Want Globalization? Yes. But why?Globalization & trade makes us:WealthierMore reliant on others (Yes, this is actually a good thing…)More diversified
49 Wealth & Trade Very tight link between the wealth & (freer) trade Openness Wealth (Boudreaux’s Figure 2.1)Trade Openness Index:Most open = highest real incomes, highest growthLeast open = lowest real incomes, lowest growth(The graphs in the proceeding slides are from the book Globalization by Donald Boudreaux.
60 Wealth & Trade (continued) DisastersHaiti (2010) – 7.0 Magnitude, 200,000200,000+ people deadOf a population of about 10 millionSan Francisco (1989) – 7.0 Magnitude67 people deadOf a population of over 7.4 million peopleWhy such a difference?Haiti: GDP per capita $793San Francisco Bay: GDP per capita $33,000+
61 Wealth & The Environment Industrialization Pollution, right?Yes & No.Environmental Kuznets Curve (Figure 2.12)Pollution rises until about $8,000 per capitaSome estimates put it at $5,000 per capitaPollution falls thereafterWealthier countries can afford to care about the environmentHave higher environmental performance scoresHave higher levels of environmental sustainability
63 Wealth & InequalityAll boats rise in a rising tide…the poor benefit as everyone else doesDollar & Kraay (2001), study published in the American Economic ReviewConcluded: poor countries actually have more income inequality than rich countries
64 Reliance & Trade Hong Kong Singapore, Japan, Paris or any major city covers 422 sq. mi. and has 16,580 people per sq. mi.5% or 21 sq. mi. is arable landper capita annual income of $32,900…compares to:Belgium $31,400, Switzerland $ 32,300, and France of $29,000, Sweden $29,800, Germany $30,400.Singapore, Japan, Paris or any major cityReliant is another word for specialized
65 Diversification & Trade Suppose Haiti was an isolationist countryIf all your eggs are in one basket…Suppose your bank only lent locallyGood results?Investing, Buying/selling goods globally reduces riskReducing risk is what diversification is all about
67 A dynamic economy: Technology, Outsourcing and Jobs
68 New technology What if we invented a new X-ray analysis machine It can analyze more basic X-rays, for cheap
69 New Technology & Jobs Radiologists lose (part of their) jobs Price of (some) X-rays fall, consumers are better offRadiologists are free to do more productive thingsLike analyze more complicated X-raysSome radiologists may need to get more schooling
70 New Technology & JobsSuppose your grandfather has been in a coma for 30 years. He walks into a modern electronics store to buy a television:He will likely be shocked by the advancement of televisions size, clarity, efficiency, etc.New technology is probably the most noticeable sign of progressHistorically, some have resisted technology in fear of change, but modern generations have embraced it
72 OutsourcingWhether technology or foreigners replace our labor, we have progressMenial tasks or non-menial tasksThe ends are the same whether a foreigner completes the task or a machine doesTechnology and trade can save labor AND make us better offWe (and the next generations) are free to do other, better thingsJust as the type-writer repairman is free to pursue a career in Information Technology
73 Some ConclusionsTrade is mutually beneficial (both individually and internationally)David Ricardo’s Theory of Comparative AdvantageSpecialize in low opportunity cost itemsOutsourcing and trade is like technologyEasy to see how it makes us better off with this analogyLike technology, it lowers our own costsLike technology, it frees up our time to do other, more productive jobs
74 What is Ahead: Why do people in poor countries accept these jobs? Many jobs Western Europe and the U.S. outsource are low-paying jobs that a menial or tediousNext: we will look at why poorer countries takes these jobs and the nature of the labor market.
75 Poverty, Development, and Global institutions Scott Wentland
76 Globalization & Poverty Is globalization rigged?Are greedy corporations simply exploiting the poor for profit?Shouldn’t the poor countries have better working conditions and labor standards?Are globalization organizations pawns in this capitalist conspiracy?Do globalization organizations really alleviate poverty?
77 Exchange Thank You – Thank You Money is a medium, not an end. Both sides benefit from each transactionBoth driven by self-interestFor example, buying a carton of milkMoney is a medium, not an end.
78 Globalization & Labor Labor is a mutually advantageous exchange Laborer values the wage more than the time & effortEmployer values the time & effort more than the wageExploitation implies that someone is getting a bad dealSomeone is usually getting a bad deal if they are coerced into taking that dealIf the poor are coerced, then your disagreement is not with capitalism or free trade…it’s with the government & institutions the permit coercionEconomists look at choices & tradeoffsMay not approve of X, but defend the choice
79 Wage = Marginal Product * Price Globalization & LaborMarket forces set the wageWorkers and employers (via competition) set wagesRemember, employers willing to pay:Wage = Marginal Product * PriceWage (W) is the cost of employmentWhat if W > MP * P?Producers lose money, and must fire some workers or exit industryWhat if W < MP * P?Producers make profit, and must hire some workers or more producers will enter the industryThey bid up wages, bid down priceThe most productive are hired first, the next workers are less productive (bringing MP down)We can also think of Wage = money wage + benefits
80 Labor Example #1 – How Markets Work W = MP * PSuppose a worker can make 10 cloth per hour, MP=10Suppose the world price of cloth is $1, or P = $1W = $10 in a competitive marketWhy?If W < $10…say $5, more producers see profit to be made in this industryExisting factories expand, hire more workersMore entrepreneurs enter industry, bid up wagesIf W > $10, say $12, producers take losses and end up leaving the industry exit or fire workersbids down wages until W = $10
81 The Emergence of Labor Standards What I mean by labor standards or working conditions:Any non-wage benefit to a worker that is also a (non- productivity-enhancing) cost to the employerExamples: working conditions (air conditioning, comfortable chairs, etc.), healthcare, safety equipment, other fringe benefits
82 The Emergence of Labor Standards Where labor standards come from:Some are imposed by “experts” in governmentMany labor standards come from lawsuitsWith lawsuits: employers take measures as a result of or to avoid liability.A very useful reform might be aimed at reforming legal systems in countries that have a poorly functioning one.Most other standards arise out of mutually agreeable negotiationsShould we improve poor countries’ labor standards through trade policy?
83 Globalization & Labor Standards Money wage + benefits = Marginal Product * PriceWhat if rich countries believe that all countries should have our labor standards?Money wage decreases, benefits increaseIf the workers wanted this, why didn’t they negotiate this before the U.S. imposed this?Rich countries might believe that poor people should eat steak too…Labor standards are like other normal goodsPoor people usually prefer a higher wage, so they may decide not to negotiate for better labor standards
84 Labor Example #2 – Labor Benefits W + benefits = MP * PMP & P same as last example…MP = 10, P = $1If benefits cost the employer, say $2, then the wage will have to be reduced by the same amount$8 (wage) + $2 (benefits) = 10 units * $1 per unitThe worker “buys” the labor standardsThis may not be a tradeoff the worker was willing to make…the worker may be worse offThe worker, if in poverty, may just rather have the $2Just as the worker may not choose to buy steak dinnersBy imposing benefits, you are removing choices
85 Labor Example #3 (monopsony) What if W + benefits < MP * P ?Some poor workers do not have many choices because they have few optionsIf a sweatshop is the only employer around, that may be the worker’s best alternativeSay W = $5, benefits = 0Rich countries could demand that workers get higher benefits and labor standardsNow, benefits = $2, what will likely happen to W?Should go down $2, because the monopsonist will still want to pay a total compensation of $5Or, perhaps some other unintended consequences…
86 Globalization & LaborIn either competition or monopsony, when standards or benefits go up, employers compensate lessIf for some reason total compensation is raised (by, say, a minimum wage law), thenLabor looks relatively less attractive (it is now more expensive)These employers may substitute labor for more capitalSome poor people will lose their jobs again, lose choicesThe low wage workers may lose part of their comparative advantageMakes US workers and other rich countries relatively more attractiveGood for US workers, and some poor people will lose their jobs
87 Globalization Results What if the free market produces bad results? We then must ask:Why do they choose to work there?Remember, labor is an exchangeEven monopsonists have competition…What are their alternatives?Farm labor (which is no picnic)Scavenging (garbage dumps, forests)CrimeProstitutionSometimes “saving” workers from bad jobs means that they have to turn to worse alternativesRaising wages/benefits fewer jobs
88 Globalization Results If there is monopsony or collusion, what is the answer?Monopsony & collusion aren’t really free marketsEncourage competition so wages can be bid to equilibrium levels and ensure that workers get what they are worthWhat if workers aren’t worth that much?Education & raising productivityWorkers earning wages now may help put kids through schoolInstitutionsGood institutions will facilitate this processFor example: rule of law & well-defined property rightsWell-functioning, stable (non-invasive) government
89 How Can We Help the World’s Poor? Top-down approachTry to figure out what countries should do, and tell them to do itOr, give them a monetary incentive to do itWorld BankIMFBottom-Up approachLet individual countries and individuals figure out what they should doPromote individual choice
90 World Bank Founded at Bretton Woods in 1945 Bretton Woods agreementGoal: get the world economy going again after WWIIAlso, establish a global fixed exchange rate regimeInternational Bank for Reconstruction and DevelopmentFund creditworthy governments rebuild infrastructureInternational Development Association (est. 1960)Fund poor countries, with various strings attached
91 World Bank The World Bank is more known for the IDA Provides low interest and interest free loans to poor countriesProvides outright grants to poor countriesHas provided $2.3 trillion (along with other organizations and countries) to poor countriesMoney is supposed to go to infrastructureIn return, they’d like to be paid backSo they have strings attached…
92 World Bank Why is this controversial? Strings attached (some people don’t like these):Freer trade policiesLooser regulations and less red tapeSound monetary and fiscal policyCorruption (everyone doesn’t like this)Corrupt governments may squander loans“New” governments refuse to pay back old loansOfficials give infrastructure projects to their buddiesTop-downRecipients are skeptical of WashingtonThey don’t always know what’s best: e.g. empty schools
93 World BankHas it worked? Here are some results from studies by economists:Peter Bauer: aid reduces growth b/c it props up corrupt governmentsBurnside & Dollar in 2000 A.E.R.: aid good for sound governments, bad for unsound governmentsEasterly, Levine, Roodman said aid has no impact, others agree or say negative
94 International Monetary Fund Conceived at Bretton Woods, the IMF was set up to facilitate global fixed exchange ratesIf a government was short on funds that it would need to fix its exchange rate, the IMF could loan them moneyWe will return to fixed exchange rates in a couple weeksThis was supposed to bring exchange rate stability like the gold standard did1971 the global fixed exchange rate regime endsWhat is the IMF to do?
95 International Monetary Fund Describes its goals as:Monitoring economic & financial developmentsGives policy adviceFinancial crisis prevention & aidLoans and policy adviceLike the World Bank, policy advice is intended to help the country pay back the loan
96 International Monetary Fund Why is it controversial?Many of the same reasons as the World BankTop-down micromanagement is unpopular, often ineffectiveSometimes confused with the cause of financial crisesIt is politically easy to blame creditors
97 What Should We Do?Would free market economists (like David Ricardo) prescribe?1. Rich nations should open their borders (to trade…and immigration helps too)2. Stop trying to create good economies in nations with bad governments (World Bank & IMF…we’re looking at you!)3. Reward reforms after they take place4. Encourage microlending
98 Microlending“extending very small loans to those in poverty designed to spur entrepreneurship”Microlending allows individuals in poor countries to become entrepreneursHelps an economy build from the bottom upHow is this different from simply “foreign aid” or aid from international organizations like the World Bank and IMF?Microlending is lending directly to individual entrepreneurs, while the organizations tend to lend to governments in an effort to let wealth trickle down to the general population.
99 Microlending You can take an active role yourself! Visit: You can view microlending as charity (with good incentives) OR a profitable opportunityEither way, both the lender and borrower win.
100 Institutions as a Recipe Economists understand the ingredients in good institutions that foster development, but they have a difficult time figuring out the correct recipe.You may know what is in a croissant, but baking a perfect croissant requires a lot more knowledge.You can think of the interaction between the economy and institutions as an incredibly complex recipeEconomists and governments are far from perfecting economic development and institutions.Do we have hope?Absolutely. People interacting within markets tend to improve their circumstances over time.
102 Free Trade vs. Fair Trade What if free trade is unfair to workers and small farms?Can we be socially responsible and help them out by purchasing “fair trade” products?Up for discussion:Problem of free trade vs. Solution of fair tradeAn example using the coffee bean industryAll-pay auction & rent-seekingEconomics of fair trade licensing
103 Unfair trade?Problem: farmers and other low wage workers are in poverty in developing countriesCoffee bean industryThese farmers allegedly have:Poor working conditionsChild labor (under 18)Poor environmental conditions (including “unsustainability”)Very low pay/profit
104 Fair Trade Products...are they fair? Solution: establish voluntary requirements and a certification that will allow these producers to receive a premium for their productConsumers pay a higher price for coffee in exchange for knowing that those who receive it:Are paid moreHave better working conditionsHave higher environmental standardsThis sounds fantastic.It is completely voluntary.These consumers are better off.Fair trade producers feel better off too.
105 Economics of (Coffee) Production Suppose the world price of coffee = $1/lbUnder “free trade,” coffee producers will produce coffee so long as: marginal cost ≤ $1/lbIf (average) cost ≥ $1/lb, they’re losing moneyStop growing it, or plant/do something elseSuppose average cost is 95 cents per poundProfit = 5 cents per pound
106 Economics of (Coffee) Production Suppose the fair trade price = $3/lbUnder “fair trade,” coffee producers will produce until: marginal cost ≤ $3/lbThese higher standards have compliance costsEnvironmental and labor standards have costsWith these costs, suppose average costs = $2/lb, about $1.05 more than the free trade farmers$1 profit per pound now
107 Free Trade vs. Fair Trade Free Trade: razor thin $0.05 per pound profitFair Trade: much larger $1.00 per poundLook how great fair trade isThese farmers have:More moneySafer productionCleaner, more green production
108 All-Pay Auction Bid for 5 euro Rules: 1. The highest bidder wins 2. You pay your bid regardless, whether you win or lose.
109 Rent-seeking “the socially costly pursuit of wealth transfers” A simple example: theftYou had the $5The thief gets the $5Any time, effort, resources spent by the thief = deadweight loss to societyThe thief could be using his time doing something productive. Instead of $5, the society could have a $10 if the thief spent his hour, say, making something worth $5.How is this relevant to fair trade products?
110 Fair Trade & Rent-Seeking Rent-seeking…spoiler of idealism Fair trade products offer a premium, which is a transfer from consumers to producersA win-win for someBut, plays out much like our all-pay auction
111 Fair Trade and Rent-seeking Fair trade certification cannot go to everyone (just as everyone can’t win the auction)Not everyone is willing to pay the premiumQuantity Demanded: fair trade < normal tradeGrowers prefer more profit to lessQuantity Supplied: more people want to sell at $3Fair trade certifiers can only certify part of the market and buy the amount demanded at the $3 price, even if everyone technically complies
112 What Actually Happens?Suppose the world only demands a third of their coffee to be fairtradeIt’s actually a much smaller fractionOne out of three farmers can get the $3 priceThe other two have to sell at the world price ($1, possibly even less)
113 What Actually Happens?Rationally, each might select fair trade: avg cost $2One of them gets $3/lb, profit = $1per poundThe other two sell at $1, lossing $1 eachOverall, the coffee farmers are poorer!
114 Fair Trade…sigh. Summary: The premium offered to the potential farmer is a rent (in the way economists define a “rent”)Producers spend resources in order to get this premiumSimilar incentives exist when the government hands out quota trade licencesProducers end up wasting real resources , and they can either be poorer overall or at least no better off, collectively.
115 Silver lining?But, if they comply with fair trade standards, that’s good right?The losers take real losses.They’re better off doing nothing (or something else)What’s more environmentally friendly than fair trade?Growing nothing is more environmentally friendly!Toyota Prius vs. walking
116 Why Buy Fair Trade Products? Everything about it sounds good......except the rent-seeking partWe see who we help.Gordon Tullock’s experience in China, an example.Quotas & tariffsFair trade farmers
117 So, what now?Development is tricky...there is no silver bullet or cure-all solution.You would think paying poor people more would be straightforward and would make them better off.But, incentives and unintended consequences interrupt our plans.Next: economic development
119 Is Globalization Unfair to Culture? We may be wealthier from trade, but money/wealth isn’t everything...What if we lose some of our culture to global forces?Will the world be some unified Western/Americanized culture?If so, should we (or the world) try to stop this?
120 Cultural Aspects of Globalization With wealth comes more cultureMuch of what we call culture is a luxuryAncient Greeks were relatively wealthy & culturedCulture is not just for the wealthy anymoreIf the poor & middle class have money, they can fund culture (music & arts)Technology’s role in expanding culture
121 Cultural Aspects of Globalization Isn’t global culture just more commercialized?What does that mean?Commercial culture is more responsive to consumersCommercial culture is more dynamic, always changing
122 Cultural Aspects of Globalization Globalized culture = homogeneous culture?Paris, Texas feels more culturally similar to Paris, FranceDiversity used to be across georgraphic space moresoNow: we have more local diversity
123 Cultural Aspects of Globalization How does this affect travel?With more local diversity, you don’t have to travel to Texas to eat barbeque or Tex-Mex foodBut, if you have local French-Texas food, you may be inspired to try it in TexasIf you eat French-Italian food, you may desire to travel to Italy to eat more authentic Italian food
124 Cultural Aspects of Globalization We may lose some of our culture to competition from other culturesWhat do we get?In a market-oriented economy, we only get what we want...If we don’t want, say, Texas barbeque, then the restaurant goes out of business.If you want Thai food, then the restaurant thrives and stays.We get more diversity locally, allowing us to get a flavor of more culture than ever before.Both of the above can be seen as a strength of globalized culture.
125 Summary Trade and globalization deliver: Wealth and prosperityMore culture locallyHow do we help the world’s poor?Trade and improving their institutions (as best we can)International organizations (like the World Bank and IMF) have very limited success in this area“Fair” trade products only have very limited success, given its rent-seeking incentive structure.
126 Summary (continued) Do we have hope for the future? Yes! The most success has been through marketsChina, South Korea, India, Singapore, etc.Outsourcing (sometimes called off-shoring) also helps rich countries and poor countries streamline their labor forces and create a more efficient, more prosperous world.Expanding individual choice allows the global economy to be more dynamic and efficient, as wealth continues to reach to more places around the world.
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