The Unassuming Economist

From VoxEU post by Sergi Basco and Martí Mestieri:

“Trade in intermediates (or ‘unbundling of production’) and trade in capital have become increasingly important in last 25 years. This column shows that trade in intermediates generates a reallocation of capital across countries that exacerbates world inequality in both income and welfare. Unbundling of production hurts middle-income countries but helps those with high productivity. Trade in intermediates also increases within-country inequality, and this increase is U-shaped in the aggregate productivity level of the country.

Two remarkable facts of the globalisation process witnessed in the last 25 years are the large increases in both trade in intermediate goods and in capital mobility. Before the 1990s, trade in final goods accounted for most of the value of world exports and international capital mobility was relatively low. In contrast, after the 1990s, trade in intermediate goods, or ‘unbundling of production’, has become more prominent over time (see Figure 1) and global supply chains have emerged – a phenomenon termed ‘New Globalisation’ by Baldwin (2016). There has also been a sizable growth of both gross and net international capital flows (e.g. Lane and Milesi-Ferretti 2007). Some authors have blamed globalisation for the increasing inequality and loss of jobs in developed countries (e.g. Acemoglu et al. 2016). However, there has not been any theoretical analysis of the long-run effect of unbundling of production on inequality between and within countries.

 

Figure 1 International unbundling of production

 

A distinctive feature of intermediate goods, which we document in a recent paper (Basco and Mestieri 2019a), is that they are more heterogenous in capital intensity than final goods. Factor proportion (Heckscher-Ohlin) trade models emphasise that trade in goods which are heterogenous in capital intensity creates winners and losers from globalisation because trade alters the relative return to factors of production. Moreover, since capital can be accumulated, trade in intermediates can have dynamic effects through altering countries’ savings rate. In addition, capital mobility implies that trade in intermediates can affect the global allocation of capital. Changes in the global allocation of capital also affect returns to other domestic factors of production (e.g. labour), to the extent that capital and labour are complements in production. In sum, trade in intermediates (unbundling of production) has the potential to affect the redistribution of capital and labour between and within countries.”

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From Conversable Economist:

“There’s a well-worn conversation about the relationship between new technology and possible job displacement which goes something like this:

Concerned person: “New developments in information technology and artificial intelligence are going to threaten lots of jobs.”

Skeptical person: “Economies in developed countries have been experiencing extraordinary developments and shifts in new technology for literally a couple of centuries. But as old jobs have been dislocated, new jobs have been created.”

Concerned person: “This time seems different.”

Skeptical person: “Every time is different in the specific details. But there’s certainly no downward pattern in the number of jobs in the last two centuries, or the last few decades.”

Concerned person: “Still, the way in which information technology and artificial intelligence replace workers seems different than the way in which, say, assembly lines replaced skilled artisan workers or combine harvesters replaced farm workers. ”

Skeptical person: “Maybe this time will be different. After all, it’s logically impossible to prove that something in the future will NOT be different. But based on the long-run historical pattern, the evidence that new technology leads to shifts in the labor market is clear-cut, while the evidence that it leads to permanent job loss for the population as a whole is nonexistent.”

Concerned person: “Still, this current wave of technology seems different.”

Skeptical person: “I guess we’ll see how it unfolds in the next decade or two.”

The most recent Spring 2019 issue of the Journal of Economic Perspectives has a symposium on “Automation and Employment.” Two of the articles in particular offer a concrete arguments about how something is different with how the current new technologies are interacting with labor markets.

Daron Acemoglu and Pascual Restrepo discuss “Automation and New Tasks: How Technology Displaces and Reinstates Labor.” They suggest a framework in which automation can have three possible effects on the tasks that are involved in doing a job: a displacement effect, when automation replaces a task previously done by a worker; a productivity effect in which the higher productivity from automation taking over certain tasks leads to more buying power in the economy, creating jobs in other sectors; and a reinstatement effect, when new technology reshuffles the production process in a way that leads to new tasks that will be done by labor.”

From a new IMF working paper by William Gbohoui,W. Raphael Lam and Victor Duarte Lledo:

“Growing regional inequality within countries has raised the perception that “some places and people” are left behind. This has prompted a shift toward inward-looking policies and away from pro-growth reforms. This paper presents novel stylized facts on regional inequality for OECD countries. It shows that regional disparity in per-capita GDP is large (even after adjusting for regional price differences), persistent, and widening over time. The paper also finds that rising nationwide income inequality is associated with both rising within-region income inequality and widening average income across regions. The rise in inequality is related to declining incentives for interregional labor mobility, especially for poor households in lagging regions, which are estimated to reduce by as much as one-third in the United States. Against these facts, the paper proposes a framework to identify whether, how and by whom fiscal policies can be used to tackle regional inequality. It outlines conditions under which those policies should be spatially-targeted and illustrates how they can be complementary to conventional means-testing methods in mitigating income inequality.”

From a VoxEU post by Markus Eberhardt:

“Recent evidence suggests that a country switching to democracy achieves about 20% higher per capita GDP over subsequent decades. This column demonstrates the sensitivity of these findings to sample selection and presents an implementation which generalises the empirical approach. If we assume that the democracy–growth nexus can differ across countries and may be distorted by common shocks or network effects, the average long-run effect of democracy falls to 10%.

In a recent paper, Acemoglu et al. (2019), henceforth “ANRR”, demonstrated a significant and large causal effect of democracy on long-run growth. By adopting a simple binary indicator for democracy, and accounting for the dynamics of development, these authors found that a shift to democracy leads to a 20% higher level of development in the long run.¹

The findings are remarkable in three ways:

1. Previous research often emphasised that a simple binary measure for democracy was perhaps “too blunt a concept” (Persson and Tabellini 2006) to provide robust empirical evidence.
2.  Positive effects of democracy on growth were typically only a “short-run boost” (Rodrik and Wacziarg 2005).
3. The empirical findings are robust across a host of empirical estimators with different assumptions about the data generating process, including one adopting a novel instrumentation strategy (regional waves of democratisation).

ANRR’s findings are important because, as they highlight in a column on Vox, there is “a belief that democracy is bad for economic growth is common in both academic political economy as well as the popular press.” For example, Posner (2010) wrote that “[d]ictatorship will often be optimal for very poor countries”.

The simplicity of ANRR’s empirical setup, the large sample of countries, the long time horizon (1960 to 2010), and the robust positive – and remarkably stable – results across the many empirical methods they employ send a very powerful message against such doubts that democracy does cause growth.

I agree with their conclusion, but with qualifications. My investigation of democracy and growth (Eberhardt 2019) captures two important aspects that were assumed away in ANRR’s analysis:

• Different countries may experience different relationships between democracy and growth. Existing work (including by ANRR) suggests that there may be thresholds related to democratic legacy, or level of development, or level of human capital, or whether the democratisation process was peaceful or violent. All may lead to differential growth trajectories.²
• The world is a network. It is subject to common shocks that may affect countries differently. The Global Crisis is one example, as are spillovers across countries (Acemoglu et al. 2015, in the case of financial networks).”

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From Branko Milanovic:

“To think correctly about globalization one needs to think of it in historical context. This means seeing today’s globalization and its effects, positive and negative, as in many ways a mirror-replay  of the first globalization that took place from the mid-19^th century to the First World War.

That globalization, underpinned by the Industrial Revolution in Western Europe, transformed the economic map of the world by making Europe much richer and politically and militarily more powerful than any other part of the world. It allowed European countries, and later the United States, to conquer most of Africa and significant parts of Asia, which even when they were not formally ruled by Westerners were subjected to their strong influence in terms of economic policy (opening to trade, control of custom revenues), or even juridical extraterritoriality for European citizens.

Advanced European countries became much richer, so that by 1914 the ratio of per capita income, according to the Maddison project database, between the UK and China was 8 to 1 compared to 3 to 1 one century earlier. (The figure below shows the reverse of this ratio: Chinese, Indian and Indonesian GDP per capita as percent of comparable West European GDPs per capita. It thus highlights the recent rise of Asian countries.) Moreover, the fruits of industrialization and globalization began to be spread across Western countries’ income distributions thus making even the poor people there richer than almost all Africans and most Asians. European dominance allowed it to “export” its surplus population and to blunt the edge of the incipient class  conflict.

This very short sketch of the well-known effects of the first globalization allows us  to remind ourselves of both its positive and negative sides: huge technological progress as against exploitation, increased incomes for many vs. grinding poverty and exclusion for others, European mastery of the world vs. a colonial status of Africa and much of Asia.

In what ways should it inform our thinking about the current globalization? First, in making us realize that broad historical movements cannot bring only benefits to everybody. Some will inevitably lose, others gains; and at times the loss of some is a condition for the gain of others. Second, thinking of the past enables us to see how the current globalization is in many respects a mirror-image of the first—but shorn of its more brutal effects of conquest and exploitation.”

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