1. NS4540 Winter Term 2017 Class Discussions February 8, 2017
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Overview
Three papers that look at shifts in the global economy and draw implications for Latin America
Frida Ghitis, Why Trump’s Rise is Sending Latin America into China’s Arms” World Politics Review Feb 2, 2017
Martin Wolf, Donald Trump’s tough talk will not bring US jobs back, Financial Times February 1, 2017
Robert Looney, How global shifts are putting Costa Rica’s economic model under stress, World Politics Review December 7, 2016

3. Trade and Manufacturing Jobs I
Martin Wolf, Donald Trump’s tough talk will not bring US jobs back, Financial Times February 1, 2017
At heart of US debate on trade policy is story of jobs in manufacturing
Manufacturing jobs have declined from about 30% of total employment in 1950s to 8% by end of 2016
Main explanation rise in employment elsewhere
In 1950 employment in manufacturing 13 million resut of economy 30 million
By end of 2016 it was 12 million and 133 million respectively
Between 1950 and 2016 output rose by 640% while employment fell by 7%
Even between 1990 and 2016 output rose by 63% while employment fell by 31%

4. Trade and Manufacturing Jobs II
Explanation is rising productivity
Yet no one proposing to stop this
Problem is productivity’s recent stagnation and a slight increase in manufacturing employment
A bad outcome – need rising productivity for rising standards of living
Big declines in manufacturing employment not related to trade deficit but recessions in the early 2000s and
What was effect of NAFTA and China’s entry into the WTO ?
Estimate at Berkley puts their effect at modest, while
MIT puts it at 10% of jobs lost in manufacturing
At most 2% of total employment lower because of NAFTA and China

5. Trade and Manufacturing Jobs III
Problem – job loss concentrated geographically
Best response
combination of helping affected communities generate new sources of employment and
Assisting workers gain skills and so new jobs
Maintaining aggregate demand close to potential output to ensure that new jobs replace old ones
Unfortunately moving to protectionism will make matters worse
Economy will slow and new job creation decline
Higher prices of imports will hit the lower income groups proportionately
Trump fiscal policy likely to be pro-cyclical prone to periods of insufficient demand

6. Costa Rican Model I
Robert Looney, “ How global shifts are putting Costa Rica’s economic model under stress, World Politics Review December 7, 2016
Traditionally, Costa Rica a Latin America success story
Good governance and economic policies allowed country to thrive in a dangerous part of the world
Country grew at 4.7% in 2000s and 4.3% between 2010 and 2015
Development model last several decades – focused on FDI inflows and high-tech exports
Started with Intel in mid 1990s $300 million investment
Strategy based on Porter’s cluster theory with Intel attracting other high-tech firms

7. Costa Rican Model II
However in 2014 Intel decided to move most operations to Asia
Intel decision not a reflection on Costa Rica – just a shift in global strategy – consolidation and cost reductions.
Even before Intel some doubts over strategy
Increased income inequality
Dual economy with high wage high-tech sector and more traditional activities
Widening income gap between highly profitable export sectors such as high-tech industries and lower skilled sectors such as agriculture and tourism
A two track economic structure created with widening disparities
Few linkages from high tech sectors pulling up wages in traditional sectors

8. Costa Rican Model III
In recent years unemployment increasing even as wages rose
Investment as also been falling in recent years
Government unprepared for these changes
Government deficits increasing and a large increase in government debt rising from 28% in 2010 to 45% in 2016
Government borrowed $4 billion from
Now constraints on further borrowing due to lack of fiscal reforms -- bonds at junk status
Approached China for a 1$ billion bond issue, but turned down ch

9. Costa Rican Model IV Country’s plight reflects changing world economy
No longer possible for small countries like Singapore, Hong Kong and Mauritius to enjoy rapid increases in international trade
While Costa Rica’s macroeconomic stability, opening up to international markets and FDI brought prosperity this is no longer sufficient
Dual structure still dominated by small, low productive firms in sectors outside high tech
Growth will not be as fast as the more inclusive models of East Asia
Government trying to change the model
Signed an agreement with China to extend trade and investment

10. Costa Rican Model V
World Bank assistance trying to address many of the problems of smaller firms outside of high-tech sector
Hopefully initiative will put economy on a more sustainable path.
For now Costa Rica small open economy will suffer from
the stagnation of world trade,
reduced inflows on FDI, and
increasingly inward focused U.S. its largest trade partner especially if a renegotiation of CAFTA-DR .