1. Pressures from globalisation: are trade restrictions the answer? L Alan Winters Professor of Economics, University of Sussex CEPR, IZA, GDN

2. Manufacturing does matter for exports and productivity January 20132LAC-EU ECONOMIC FORUM 2013

3. Manufacturing Share of Economy $10K PPP, 1990 Share % GDP pc PPP, 1990 January 20133LAC-EU ECONOMIC FORUM 2013

4. Share of Manuf. in Economy January 20134LAC-EU ECONOMIC FORUM 2013

5. Share of Manufactures in Merch. Exports January 20135LAC-EU ECONOMIC FORUM 2013

6. Competition: Global E.g. Wood and Mayer (2009) China implied a 8-15% increase in world unskilled labour abundance Everyone else’s comparative advantage changed Their Manufactures/primaries ratios fell by: 7-10% for output 10-15% for exports LAC-EU ECONOMIC FORUM 2013January 20136

7. Who is affected? Consumers (Broda & Romalis) – Inflation for lowest 10% 6ppt lower than average – Correlates with imports from China Producers: – Competition for incumbents – static and dynamic responses – Intermediates for all (incl. potential) – Outsourcing and value chains (new opportunities) – Aggregate output (growth) January 20137LAC-EU ECONOMIC FORUM 2013

8. January 2013LAC-EU ECONOMIC FORUM 20138 Conditional Effects Heterogeneity of country studies Chang, Kaltani & Loayza (2009, JDE) – Interactions of openness with – Weaker effects in poorer countries; middle-income countries strongly positive effects

9. 9 Effects of Labour Market Regulation (Bolaky-Freund; JDE 2008) Less regulated half More regulated half January 2013LAC-EU ECONOMIC FORUM 2013

10. January 2013LAC-EU ECONOMIC FORUM 201310 Productivity Selectivity Competitive pressure Imported inputs (Amiti & Koenings (2007, AER) and AER P&P 2009 Learning by Exporting (Fernandes & Isgut, 2005, WB; Blalock & Gertler, 2004, JDE) Learning to Export (Iacovone, 2009, WB)

11. Mexican Firms – Chinese Exports (Iacovone, Rauch and Winters – JIE 2013) Firm sales and existence Huge growth of competition 1994-2004 Impact via both domestic and export markets Effects strong but highly unequal – At plant…as well as at product level – Larger (more productive) plants less hurt…“core” products less impacted than “marginal” ones 11January 2013 LAC-EU ECONOMIC FORUM 2013

12. Heterogeneity of Competition Effects January 2013LAC-EU ECONOMIC FORUM 201312

13. Why the Resistance? Trade is heavily redistributive – There will always be losers; as always – Even gains unevenly distributed – Losses may not be randomly assigned – Special interest groups Hence the politics are difficult – Time periods long – Distribution - internally and relative to foreigners – No guarantees → risks January 2013LAC-EU ECONOMIC FORUM 201313

14. January 2013LAC-EU ECONOMIC FORUM 201314 Where do we go from here? Vast majority of growth policy is not trade policy; don’t obsess about it But trade policy is relatively simple technically Treat trade policy as decision, not a hypothesis test – No guarantees, – Balance of evidence and priors – Costs of different errors – Cost of uncertainty

15. January 2013LAC-EU ECONOMIC FORUM 201315 Distribution of growth increments Kneller et al (2008) Sample of 47 events

16. January 2013LAC-EU ECONOMIC FORUM 201316 Cost of error ‘We know of no credible evidence … that suggests that trade restrictions are systematically associated with higher growth rates’ Rodriguez and Rodrik (2001, p.317)

17. January 2013LAC-EU ECONOMIC FORUM 201317 Industrial Policy: Traditional Support for specific sector Initial losses balanced by future gains? – Need super-normal profits in future – i.e. out-compete existing producers Why not private capital markets? – Capital market failure? – Product or factor market failure – i.e. an externality

18. January 2013LAC-EU ECONOMIC FORUM 201318 Externalities Dynamic (static externalities require permanent policy not temporary relief) Firms can’t appropriate benefits of: Learning – Others copy techniques (hard or soft), market research, export market development Training (firm-specific training excluded) – Workers, once trained, move to rivals Establishing national reputation

19. January 2013LAC-EU ECONOMIC FORUM 201319 Subsidies do not solve Externalities Increase incentive (speed and effort) to innovate but also to imitate – net effect uncertain Similarly for training workers Does not reduce incentive to cheat on national quality reputation Information required huge for any intervention Support relaxes pressure for scale (excess entry) and/or efficiency

20. January 2013LAC-EU ECONOMIC FORUM 201320 Industrial Policy: Rodrik (2007) ‘stimulate specific economic activities and promote structural change’ ; ‘not about industry per se’ Horizontal vs. vertical policies

21. Aims Curing pervasive market failures e.g. – Credit markets (micro-finance) – Spillovers in technology adaptation – Agglomeration – Human capital policy Tradables hardest hit by these or institutional failures January 201321LAC-EU ECONOMIC FORUM 2013

22. January 2013LAC-EU ECONOMIC FORUM 201322 Practical Challenges of Industrial Policy Informational requirements Rent-seeking, corruption – distort decisions – waste resources But these afflict other policies too and we still pursue those -

23. January 2013LAC-EU ECONOMIC FORUM 201323 Guiding Principles for Industrial Policy 1.Knowledge about constraints and spill-overs is widely diffused 2.Business will ‘game’ any system 3.Beneficiary is society, not government or business

24. January 2013LAC-EU ECONOMIC FORUM 201324 Responses 1.‘Embedded autonomy’ for bureaucracy –i.e. close relations with business, but independent –Processes of revelation and discovery required 2.Sticks and carrots – Performance/behaviour criteria; use market – Failures are natural; let them fail 3.Accountability – Of business to bureaucracy, bureaucracy to politicians – Monitoring, transparency, autonomous agencies

25. To sum up: Big changes are afoot Openness boosts income on average Productivity effects seem strong Policy governed by balance of probabilities and costs – no guarrantees Traditional industrial policy – flawed ‘Horizontal’ policies may be useful, but hard to implement – politically and practically January 201325LAC-EU ECONOMIC FORUM 2013

26. January 2013LAC-EU ECONOMIC FORUM 201326 THANK YOU

27. What’s special about now? Growth and consumption aspirations – Global media Cheaper trade → higher returns to success – Correspondingly lower to failure Global value chains – Trade is central – Competition to get investment Only very large can afford to stand aloof January 2013LAC-EU ECONOMIC FORUM 201327