Chancellor Mr. Alan Myers,
deputy Chancellor Jane Hansen
and Mr Paul Little, deans
and other senior leaders at the University,
distinguished guests,
ladies and gentlemen. Good evening,
and welcome to the 17th Annual Corden lecture.
My name is Duncan Maskell and I'm the Vice Chancellor here at the university.
I'd like to begin the evening by acknowledging the Wurundjeri people
of the Kulin nation,
the traditional owners of the land on which tonight's lecture
takes place,
and I pay my respects to the indigenous elders past
and present and any indigenous people here tonight.
I'm absolutely delighted to be here
with you all this evening as we hear from such a distinguished
and influential economist as Professor Paul
Krugman.
We are privileged to have with us Professor Krugman
and I very much look forward to his presentation
this lecture forms part of a wider program
of public lectures which are free
and open to all.
We welcome members of the public to sign up online,
to attend these public lectures
or to receive the videos once they are released.
Having said that I am extremely pleased to see so many live
warm bodies in the room tonight
and they send a very warm welcome to everybody.
A special welcome to the chair of the ACCC
Rod Sims
and the deputy chair of ASIC Karen Chester,
former Premier of Victoria John Brumby
and former deputy prime minister Brian Howe.
The Corden lecture series is named after one of Australia's
most distinguished economists,
Professor Max Corden.
Max is a graduate of the University of Melbourne
and has held positions at universities of Melbourne
and Oxford, Australian National University,
Johns Hopkins University
and the International Monetary Fund.
Max returns to the Department of Economics
at the University of Melbourne in 2003
and we are delighted that he is again here
with us this evening at the 17th Corden lecture.
Max is know internationally for his many
original and important contributions to the fields
of international trade
and macroeconomics.
That's just one illustration Professor Krugman has described
Max's book "Trade Policy
and Economic Welfare" as,
in quotes, "Still more than 50 years after its first
publication the best single guide to how
to think about trade theory".
Max's reputation also rests
on his long and extensive teaching career during which
he shaped thinking of many of today's leading economists.
The Department of Economics,
The Faculty of Business and Economics
and the University of Melbourne are honoured that Max Cordone
continues his long association
with us
and it's now my pleasure to call on Max
to introduce tonight's speaker.
Thank you.
Our speaker is a very important person.
He's an American economist highly
reputed as an academic,
and his fame these days is as a
journalist
and he writes regular columns in The
New York Times
and how America reads them.
And amazingly even a lot of an Australia reads
him, and that's why there's a big crowd here I mean you're not here for me
you're here for him.
And because of his outstanding
journalistic commentators
and so on.
Now.
Before I give you details
and introduce the speaker,
I'd like to make an interesting remark
- to me interesting remark.
It's well known that he has
a Nobel Prize.
Now I wondered myself I wonder why he got
a Nobel Prize.
Now. They could have given it to me,
but they didn't.
So I looked up.
I did what everybody can do
and you will all do tomorrow.
I looked up on the web his name
and see what it tells me under the name
and under the name,
of his his name which ever that
his.
It gives the details
and the details are that he's done
theoretical work in trade policy
but in particular in relation to
economic geography. Now I won't give the details
but he's interested in
and has written about issues which fall
between economic geography
and standard economics.
Now read through it a bit further
and suddenly something very interesting dawned on
me. I said may see here in Australia
in Melbourne we are very preoccupied
with the fact that we live in a city
with five million people.
That's an extraordinary number of people
and the whole state has six million
people.
So in other words we live in a city where there's one big
city we live in a country
or environment where there's one big city
in which most of us live
and then there's a whole lot of little places around the place
and this is often the subject for discussion
should we do something about it should be for example force
immigrants into these small places
and so on and should money be spent in
a different way.
Now what I conclude from all this is
that one day we will have a conference about it
and we would invite the world's greatest authority
on this general field
and that is our speaker today.
That's his specialty is the theory
related to location
of firms
and so on. So it is
a matter of great interest to us in our
current debates about
population.
In preparing for this,
I looked up a bit of references
and worked out.
We have now 5 million.
I didn't have to work it out I read it easily.
We have 5 million people in
in Melbourne
and I wonder what the population was when
I first came here and I came here as a
immigrant
and I was 11 years old just by the way.
And what was the population of
Melbourne then. And it was something of the order if
I remember rightly you know was somebody looked at have
with me something like 1 million!
And there's been a fantastic change in our
environment
and that involves economic issues
which are the ones that our speaker has
worked on. And so one day we'll have
a big conference
and of course we'll invite him to come
and give us the intellectual background to this
very important issue.
But this is not off center of this subject
but I thought it's curious.
We now know why he's,
and you going to look it up on the web,
why he got his Nobel Prize.
Now his subject is going
to be
"what did we get wrong about globalization?".
Now I might say, he says 'we' ...he speaks for himself.
So I'm not trying to be funny,
you know... I just...
can't help feeling
that I never get anything wrong.
But anyway, he
feels he got something wrong
and he's going to tell us why.
So that's my job is to having now
told you about his interest in economic geography
and other things,
he's world famous because he writes for a world famous
newspaper,
I was going to ask you another question
and maybe I should just ask it publicly.
Does he think that the president of the United
States reads his paper?
Or for that matter, even when we don't expect him to read
because we sincerely believe he doesn't read anything.
Do you think that the views that.
the speaker expresses every week,
and that they get into the White
House and are carefully considered,
and thought about what is in their
interests when he comes
and talks about this.
He couldn't tell it anyway.
That's my role. What did we get wrong about globalization?
And we have here someone who first of all,
has a high reputation as an academic
economist
and then made the big switch into journalism.
And of course being a good economist
is good for the reputation
but being a daily journalist
is a try twice a week
that that really is
something, thats why are you all here.
I mean why else would this vast number of people turn
up because of his journalism resume.
That I can assure you. He is also a first class economist.
We're both in the same broad field.
So I now hand over to
our brilliant American friend.
Am I being.. yes I am being picked up,
okay where we're,
we're miked up here, all-set,
I have my water. I also have this which ...
In case I need fortification.
Look it's a great honor, a great honor to be
invited to give this especially
a lecture in honor of the great Max Corden
and I'm going to say actually along the way I'm going to say a few
things about what made what makes Max great.
His role in this story.
I also want to say it
in a peculiar way.
This is kind of a homecoming.
Now I've actually never been to Melbourne before
and I've been to I've been to Sydney
a few times but not that many.
The truth is you are
a kind of a long way from the centre of
civilisation which is
which is of course the Upper West Side of Manhattan and.
Also being the lucky country you haven't had the kinds
of crises that that bring economic
ambulance chasers like me.
So I haven't been to Australia very much
but - story - when I go into international
trade which is now more
than 40 years ago.
So when I was a young person starting
in the field there were actually very few Americans
studying, doing international trade,
basically at that point
my compatriots had a hard time really believing
that the rest of the world existed
and so what the field was dominated by was
actually largely Canadians
and Australians.
It was just full
or so so there was
there was a feel that was full of Australia.
So I always have felt that I had some affinity
here by the way being a field full of Canadians
and Australians you know what that means in my
memory international trade theory is
closely associated
with beer lots
and lots and lots of it.
And what I want to do is I want to talk about how
the world has changed
since those days
and the ways since since the
1970s the way in which both
economic analysis changed
but then way the world changed because when I came in
international trade was still
there was a lot of protectionism in the world
and most of it went
away.
Actually Max Gordon played an important part in that
and we moved to a a world where there was
pretty much it seemed like a unstoppable
movement towards free trade.
And then
and we thought that we reached a kind of resting point
on that.
And now things are back in turmoil once again
where we're back in a world where at
least the possibility of widespread trade
war is widespread disruptions to trade seem possible.
What's happened so far.
Me You know we haven't done that much yet.
And when all is said
and done. But but certainly the issues are wide open.
And some of that at least has to do
with changes in the
world economy that have
undermined the kind of certainties
that we thought we had about how
how international trade worked.
That they have created some tensions now.
I'll raise some skepticism
and then some skepticism about my skepticism as
at the very end. But you'll see you'll see where I'm going eventually.
Time I do this in three parts.
First I want to talk about what
what we thought we knew about trade
in some several
decades ago are the ways in which then
secondly about the ways in which the world changed
and the impact that may have
have had.
And then finally about this for this
political economy of this moment that we're in right
now on trade.
So let me let me just plunge right
in and let's let's talk about about
the history of the world.
One of those great things you get to do on this thing you have
these these great broad sweet things
and some of you know how much how economists
and audience this is
but some of you may have seen this Fakher them
but show you this is showing the
world trade the ratio of world trade exports
plus imports which are in principle the
same although not exactly in the actual data.
The world GDP.
So it's trade as a share of the world economy
and it's what this
picture shows you is that there actually been
several periods of rising globalization.
We tend to sometimes to think of globalization as
being a brand new thing.
But there was a lot of globalization in the
period between the mid 19th century
and the
and World War One.
So it turns out that
steamships railroads
and undersea telegraph cables
allow you to have a pretty you can bring the world together
quite a lot and actually
there there's lots of anecdotes that can illustrate just
how globalized the world was already
before World War One.
The Navy is a weird example.
I was thought it was interesting if you if you ever
heard of him are shocked.
Who was the German architect on
sad to say of Hippias economy.
But the architect of German economic
policy in the thirties are his
full name was Helmar horas really shocked
because his father spent a lot of time in Chicago.
So I really was a unified world in many ways.
If you read the economic consequences of the peace
begins with this encomium about the economy
that he says is now gone
and the aftermath of the war
but about how you could a British gentleman could
could have breakfast in bed
and by telephone order products from all over the
world.
So you had this period which was a kind of Pax Britannica.
It went away. So one of the things you learn is globalization is not
new. Second this is not unstoppable.
We have a long period of inward turning retrogression.
The world became a bigger place.
Countries became more separated.
Then you had a big restoration of trade
for 40
years after World War 2 which
by the 1980s had actually
in terms of overall trade had we were only
about back to where we were in 1913
although it's actually as I'll say in a moment it was a very different
character of trade growth
and then something else happened after
late 1980s which is this extraordinary
new growth of trade.
And some people actually
Arvind Subramanian calls it hyper globalization
a Nazi and the hyper globalization is
this changing environment that in some ways
set the stage for the turmoil we're now experiencing.
So there's really three areas of trade growth
and I'm calling them the last
ones low whimsical isn't
really there's no la Pax coming out of China
with here.
But but these three areas one of which is the
is the the era of
the Pax Britannica a British lead on
free trade the second is the way the
global system the GATT
and all of that which is the global institutions
largely American created.
And then the third is this really dramatic growth that has
taken place since
these are really quite different
stories
and I'll get to them in a moment
but then actually before I do that let me talk a
little bit about where
where we work.
So as we look at the turmoil
that's happening now there is a widespread
I frequently encounter people who have
a story that they've heard the story
and I think they know what happened.
It's the economics and the story is that when economists
used to think that free trade was great for everybody.
But now they've learned that it's
that this actually has downsides as much more problematic.
It's a good story and it fits people's desire to see
the orthodoxy the establishment
receive it's come up it's it's almost exactly wrong.
It turns out that what actually happened
was that certainly in
the 70s and the 80s actually beginning
in the 60s we came
in. If you look at the state of international
economics what people believed it
was actually relatively NTIA trade.
There was a lot of defensive protectionism that was
carried on by the profession
up until about the time that I got into
international trade.
This was the era when
most of the developing world virtually all of it was
pursuing policies of import substituting industrialization
building up a manufacturing base behind protective barriers
basically third world countries
and Australia we're doing that.
And so Australia
is unique in being an advanced country that actually in some ways
have had trade policies that looked like a lot of the developing
world
and there was a lot of
economists offered quite a few rationales for that.
It is not as if economies just
suddenly discovered that markets aren't perfect.
People understood from way back that
markets could in fact be wrong
that there were important distortions
and that in some cases those distortions
could justify tariffs
could justify protectionist policies.
The big advance in international economics
some roughly 40 years ago
actually involved realizing
that those arguments for protectionism weren't very good.
There was actually a movement away from
defenses of protectionism towards appreciating
the virtues of free trade.
So it was actually the other way around
and there were just briefly because I do
want to talk a little bit about Maxim where WiMax comes
in. There were really
I would say at say three things
that happened two of which were crucially natural.
One of which was you could
make a lot of other things did trigger our economic dualism
of the ways that you have to pay workers
in the modern sector was much higher than
what the workers could earn in the traditional sector.
That sort of thing.
This could justify protectionism.
But how much
and did they actually justify what
you saw
and to do that to make that kind of judgment you had to
figure out how much protection you were actually giving
and it turned out it was realized the number of people realized
but really more than anybody else Max couldn't pull it together.
Looking at tariff rates just the
flat the nominal tariff rate was
a very bad guide to how much protection you were providing
that
that the protectionism.
The classic thing relevant here actually
was suppose you have a tariff on all my bills
but not on auto parts then
it's possible it becomes profitable to have a domestic
auto assembly industry using imported parts.
Even if the cost of that assembly is
several times you might have a 20
percent tariff but you might find that it's worth
assembling automobiles even if it cost
two or three times as much as it would to assemble automobiles
elsewhere. You need to calculate the effective rate of
protection on an activity
and when people actually start it's a max more
than anybody else pulled together the notion of effective
protection then when people start going out
and measuring effective protection.
It turned out to be really really high
beyond any reasonable
and anything that would reasonably justify
with even if you believe that markets were imperfect.
So there was a kind of quantitative empirical
debunking of the protectionism of the time.
The other was the hard thinking
about what I suppose that you think markets
are aren't perfect which they aren't.
What does that actually justify.
It turns out very rarely does it justify
a tariff.
If you have if there's a distortion in labor markets
you should fix the labor market distortions if there's a distortion
in the product market.
You should fix that
and said What.
What economic modelling I actually said is you should be
surgical you should be focused.
And again that's a
very much Max Corden thing.
The trade policy
and economic welfare.
Actually it's 45 years now since
the first edition really laid
that out and it's just a classic it's a I.
I realize these days just how much.
Almost everything I say about trade policy just draws on
that on that work.
So this was
and this was kind of a revolution in the field of international
economics so actually we we started
if you like with a stronger appreciation
of the case against free trade
and the case for it became much stronger in
in the in the
1970s
and then there was one other thing.
And this becomes an important part
of you know if you like where I came in
second place.
I keep on running into people who think that economists
believe that trade is good for everybody.
That's never been what the models say.
It's never been what economic analysis says the economic
analysis has always said the trade has
large effects on the distribution of income that
people who are in import competing industries
or fact people who if you have a large imports
of labor intensive products then workers without college
degrees are likely to be to be hurt.
So trade is actually typically has a large impact
on income distribution as not.
Well there are gains but okay they may be on the evenly distributed
growth in world trade.
Typically actually produces losers
perhaps substantial groups of losers.
And that was.
That standard stuff.
However what we started to
realize in the
really hard in the 70s
but then really pulling it together a few years after
that was that most of the growth of world
trade after World War 2
was actually of a kind that did not have large
Distributional Impacts.
That if you were trying to understand where
it was.
If you look at where trade was growing it was
growing within the European Common Market
at the time. Now the European Union it was growing between the United
States and Canada.
It was growing between countries that are quite similar.
And if you look at what they were trading at they look
the goods they're trading back and forth look quite similar.
It was intra industry trade among similar countries.
What was that about.
I actually think it was really very
hard for people to.
It was very hard for economists
with formal models to even
talk about that for a while
there. There was an advantage to not not being
not thinking too clearly because we didn't think too
clearly you could say oh yes obvious there's advantages
of large scale production in produce a smaller
number of products at large scale export
those import their stuff
but then comes with. But how do you model that in general.
Librium outway how do I handle the market structure I can't
do that so it must not exist.
Well actually we managed to pull that together.
That was the new trade theory of
the 1980s
or now as people call it the old nutri theory
which which made sense pulled
pulled. Why is observations together
and suggested that a lot of the growth
of international trade was in fact remarkably benign
produce gains in efficiency did not produce large effects
on income distribution.
It was all good stuff
and so we actually ended up
with 35 or 40 years ago
with a large development in economics that
suggested that trade was better
and less problematic than we had thought it was.
There is I believe this kind of
a law and economics probably
and other stuff as well as kind of a Murphy's Law
that says that as soon as you have a theory
that really kind of explains the way the world works
the world will change so as to make it that theory no longer
valid as sure enough no sooner
did we come up with this relatively benign view of
trade than trade changed
and that's that.
That last bit not the
shift from Pax Americana to Pax Sinica is
actually also a big change not just in the volume
but the character trade.
And I have a little comparison
I just viewless I used UK
because the UK has been you know done a lot of trade
for a very long time
and I happened to
May if the dates are good
enough to give you the picture.
So 1913
Britain did a lot of trade already
but the trade was very asymmetric.
Britain was a great exporter of manufactured goods
an importer of raw materials.
And partly because of that actually the trade was
was a lot of it was long distance.
It was British textiles
and machinery coming here in return for
you know for four wool
and mutton.
And
by then trade fell off a lot between
the war is protection.
There's some other factors.
And actually it is having submarines sinking your
freighters is a good way to reduce trade also.
Then there's a long recovery after World War 2.
So by 1990
Britain was treating as much
or maybe a bit more than it had before war one
but was very very different.
The trade was much more export manufacturing
but also import manufacturers raw materials were much smaller
part of it
and most of it was with similar countries.
Overwhelmingly Britain was in fact now trading
with its European neighbors who were very similar
to Britain
and that's the world that sort of 1992
picture is the one that I was writing about
on how long we were writing about.
And with this benign view of trade
and then just as we were you know getting
comfortable with with all of that the world changed
and we had this dramatic expansion of trade which
this time around was
yes it was manufactured goods
but
with very very different countries instead of
trade trade moved away from trading
with you with your neighbors
with advanced countries
with similar levels of wages to very low skilled
trade in manufactured goods
with countries that were much poorer
and much lower wages.
So suddenly when I suddenly over the course of
25 years you move from
Britain largely trading similar
goods with its European neighbors to Britain importing lots
of labor intensive manufactured goods from China.
And that's a that's a change
just like among other things it means that the distributional
issues that had seemed to be relatively benign
through the 60s 70s
and some ways into the 80s became
acute. And then there were some other things which I'll talk about
in a minute which which make it
even more problematic than you might have
thought up until now what caused
this change.
Why. If the first globalisation
first globalisation was was really about
steamships and railroads.
The second globalization was about
slowly dismantling those protectionist barriers
that we'd had at the end of World War 2
through globalization was probably
partly was a technological enabler
there is fancy stuff like Internet
and all that but that's probably way less important than the prosaic
thing which is containerization
the box which
both reduces shipping costs
but what it really does is it reduces transaction
and control costs.
You have a box that's a barcode on the side
it's hoisted right off a ship onto a truck
or a railroad car
and you know what's in it.
And so it makes parts of it possible to have this complex
production networks around the world.
But containerization is really the 70s thing
and the big take off and trade comes later.
Why didn't it happen right away.
Well because a lot of the countries that could have.
Gotten involved in these global production networks were still
shut off from the world.
And so what happens is the really decisive
day you need the enabling technology
but then you need the policy change which is the great
global shift towards free trade.
And so if you ask I actually go back we ask
you know what caused that last
bit. I i i i i blame Max
it was there was a
time when my shift to free trade really was very much
an intellectual change.
There were lots of reasons no
doubt political reasons so on.
But but the world became convinced
that the protectionist policies of the past particularly developing
countries which had tried to develop inward
looking into their own markets shifted they drastically
reduced their protectionist barriers they opened to the world.
And so one of the things that has an
enduring fact
insight of international trade is that
barriers to imports are barriers to exports.
If you try to shut yourself off from imports you will in
the end end up exporting less as well.
And so moving away from from
import substitution meant that countries were
prepared now to become major exporters
and become part of this growing world market.
It's just worth I always find it really
startling to look at
the numbers here to see just how much
policy changed.
And these are not easy.
Well this is not even effective protection
but just have right this look this is
India.
Look at what happened to the average tariff rate of
manufactured goods from India.
And it was in 1990.
It was still over 80 percent
and that means effective rates of protection.
There were 150 200 per cent for quite a few
manufactured goods.
And then.
You know it's almost trivial
by comparison now.
Drastic movement a huge shift in policy
not only developing countries where
of course China went from from communist
and autarchy almost completely cut off from
the world to what it is today.
Other countries change to the lovely
chart I found for where we are here.
Australia. Had not
Indian levels of protectionism
but pretty high levels of protectionism in the
in the late 60s early 70s
and moved radically away.
And all of this contributes to
a rapid growth in world trade
which is a new kind of trade not Australia
Australia now looks like it is.
Australia is a high wage country
and has been all along.
But for the first time.
You have really large scale imports of
manufactured goods
imports into advanced countries from low wage countries.
And that's that's different.
That's it's
it's a very good thing I should say.
On the whole from a global point of view
the rise of manufacturing exports from the Third
World. Has been
probably responsible for more human
progress than almost anything else that has happened
in world history.
It's really if you look at
the growth I mean actually diversion
here this wasn't what I prepared.
So I when I was in graduate school in
the 70s I had to choose
a subfield
and I thought that from the point of view
of human importance development economics
was clearly a place I should be working on the problems of
economic development.
I didn't because in the 70s it was
too depressing.
In the 70s development economics was basically non developing
economics. Why can't countries actually develop.
Why do poor countries stay consistently poor.
And there were there were really weren't.
Success stories out there
of course all that has changed now you have
extraordinary growth as not just China.
China is obviously the country we talk about most.
It's not even just China
and India although India is also a powerhouse.
But countries you don't think about as success
stories are relative to where they were
enormous success stories Bangladesh
which was economy on the edge of Malthusian
crisis in the 1970s.
It's still a desperately poor country
but per capita income has tripled since
then. And you know how do they do it.
It's clearly clearly linked to globalization
and in their case it's apparent.
Some might say that they
are not a banana republic they're pyjama Republic.
And without that without that ability to
participate globalization
they would probably almost literally
be sinking into the sea.
So this is a hugely good thing from a global
perspective but not
from the point of view of everybody.
So.
Growth of a new kind of trade
trade in which developing countries
with low wages are exporting
manufactured goods to advanced countries.
What does that do.
Oh one thing it does which we've known
since Stolpa and Samuelsohn in the 1940s
is it affects the overall distribution of income.
It's clear that that kind of trade is
a depressing factor on the wages
of workers with without
lots of formal education.
It's just bad economics to deny
that that's a factor.
The question has always been how important is it.
And in the 1990s we many
people myself included tried to estimate
the impact of this North-South trade on
income distribution and came up
with significant
but modest numbers of
something like maybe a 3 percent to
3 percent decline in real wages
of non college educated workers
caused by growth of international trade.
That's a that was
a great significant
but not central. We had rapidly rising income
inequality especially in the US.
This was only one
contributing factor serving out the top of the list
at that time.
The developing countries that were
really big players in this were mostly
relatively small economies.
It's become a much bigger deal since then
with with
with with the rise of China
and to some extent in the case of the US the rise
of Mexico as an exporter.
Even so those numbers have gone up.
They have gone up quite as much as you might think because
all of those exports from
this tremendous amount of exports of goods from China
are but they have a high content
a large part of the
value of Chinese exports is actually Japanese
or South Korea.
It's actually imported components so the
labor intensive component of those exports
is less than the face value.
But still no question that we've seen income distribution
effects that are larger
substantially larger than what we were talking about
25 30 years ago.
That however is not I think what underlies
this protectionist backlash.
If we are trying to think about what's going on
it's not probably
this sort of broad aggregate effect
but rather the more localized
effects the effects on specific groups
of workers. And there's also in a moment specific locations
some.
The thing that is
really dramatic noticeable
as the title of the song is what did we miss.
And I think one of the things that we missed was we
missed how important pace of change
was so when
when people like myself were working on
trade and wages in the 1990s we
tended to think in terms of
what will happen to wages once
everything settles down.
You have an expansion of trade everything
you know is going to shift the demand for
four different types of labor.
What will this do to wages once everything has reached equilibrium.
Ah maybe that's the wrong question.
If you see really rapid changes in trade
so here's a picture of.
Chinese imports from China into the United States.
I didn't try to break out manufactured goods
but it's almost all manufactured goods.
This is not the long run.
Impacts of spending 3 percent
of your GDP on goods from China are significant
but the impact of going from one to three
and the space really only a few years is probably
a much more dramatic effect.
You see the pace of change is really rapid.
So there's a now famous paper I saw that
your next speaker here is David Authur paper
by author Dorian Hansen called
the China shock which
argues now.
It argues that imports from China
from the late 90s to about
2007 the eve of the financial crisis
displaced about a million jobs in the United States.
That's a net no
claim that that's debt.
They don't claim that they had every net overall
unemployment by a million people.
But the point is that the other no doubt
a million jobs were created elsewhere
but they weren't the same million jobs.
You're displacing a million people over a relatively
short period of time.
And even in an economy the size of the United States
that's something that people will notice becomes a much
bigger deal than if it were to happen gradually
over the course of 30 years.
That's part of what we missed.
The other thing we missed and this is something again where
alter during a handsome they're trying to shock really get
cited as something that does come back to
one of the themes of my research
and it's just a very I think a very important observation
in general so
let's talk about economic geography.
How does how does economic
geography location stuff within
a country fit into these trade
stories.
Well the answer is that there is actually a very powerful
tendency of production of
particular herds
were particular related sets
of goods to end up clustered.
This has been somebody who can fight this.
This is not new.
You can find out a really wonderful
discussion of localization
of industry and Alfred Marshall from 1880.
So you can find this going on.
And he was talking about things like the cutlery industry
in Sheffield.
You can find it in the US the than 800
census had a wonderful sort of supplement
with all of these local localised industries
in the US.
I guess everybody's favorite is the Troy
New York small town near Albany which
was the detachable collar
and cuffs and of the world.
And today in China
there are there's a cigarette lighter city
there's a motorcycle city there's an underwear
city right there are these things tend to be very
localized for reasons that we understand pretty well there's
specialized suppliers of specialized inputs
labor force with specialized skills you get a thick market
in those people
and spillovers of knowledge which lead to localization
and industry.
The question is what happens when
one of these localized centres of industry
hits a is hit by a flood of imports
of things that were previously not treatable when
it didn't previously had to have international competition
and then suddenly does face it.
Case in point that I like to use to illustrate
this is the furniture industry
until roughly 2000
the United States basically
didn't import furniture.
You could know you could go
and buy a rack
and lawn furniture
or something a pure one but you basically
furniture was a domestic industry serving
the domestic market.
And then the Chinese came in
really mass stuff I think it really is the combination of
Chinese drive
and containerization which makes it possible to keep track
of all the stuff and not have too much breakage on
the way. So furniture
imports went from nothing to very large
and had a really major negative
impact on us domestic employment
and furniture.
They say Okay but how big an industry is furniture.
And the answer is not very clear.
So from an Irish point of view the job
displacement was not very large.
However furniture is
or was a lot of is gone now.
The furniture industry was very geographically concentrated
so little.
This is the.
There was a decline in furniture employment.
That was almost entirely
actually pretty much entirely a import driven.
What was one of those cases where there was a lot of other factors
technology or something.
Here are the percentage changes
in the change
and the decline in furniture employment as a share
of total employment
for the United States are
for the state of North Carolina
and for the city of Hickory North Carolina
which was really the center of the US furniture industry.
So for the US the impact
of a couple hundred thousand
lost jobs in
in furniture America is a very big
country 800000 jobs
is within rounding error.
A much bigger deal for the state of North Carolina
absolutely devastating for this center
and that's what. So it turns out that although
there really is no case that that
growing trade cost the US jobs
there are a lot of places in theU.S. that really were devastated
by this surge in imports particularly from
the late 90s onwards which does
explain in some ways why there's
so much backlash against globalization
explains how we got.
It's not really it's not about.
Some kind of deep failure of trade theory.
It's not that economists were wrong about the
about how international trade works
and it's not that we were
wrong about the
overall impact even on income distribution.
I think the general conclusion
that the effects of trade on the aggregate
amount of inequality are real
but modest still mostly holds true
but we just weren't thinking about we're in paying attention
to the amount of disruption that can be caused
by rapid growth in trade.
And that is explaining I
think a fair bit of the political economy of
the backlash against trade their people.
And partly it's that there are people who are really hurt as practical
stories always matter
for public opinion more than aggregate numbers.
If you there there are plenty of stories
of places that were devastated by rapid growth
in trade. And those stories
warrant if you go back to the 1970s
if I found it hard to find that
but now it's not not at all hard to find those kinds of stories
and that probably play some role.
Now that's
my skepticism that I think is what we missed.
However I do want to overlay
some skepticism on my skepticism here
which is the question because we've learned
now that there the downsides
there national threat of rapidly changing international trade
are bigger than we fully had taken
on board. We were really not thinking about
having been a participant in
a lot of the debates about trade
and wages in the 90s.
I can say certainly about my style as
an artist as you speak for yourself.
I certainly missed. I wasn't thinking at all about the dynamics
of rapid change
and I think I can say with a fair degree of
confidence that basically nobody was
that this was just not the way that economists were thinking
about the issue we were thinking about in terms of long run equilibrium
models which was which was
seemed reasonable
but was actually missing a lot of what was going
on and that's why when we went when
Oughtred or Dawn Hansen came along
with the China shot paper it was not
it was it was a shock.
The China shock shock was a shock to many of us he said.
My God why didn't we think about this.
Why weren't we noticing it.
That was a big deal.
And so
we did really did miss something important about globalization
of course. If you go back a little bit further we just didn't see
that this was possible.
I'm old enough to remember
when we would look at the growth of exports from
Taiwan or South Korea
and say okay well that can happen
but you know there's no obviously no wind anything like that can
happen to China.
And boy it did.
So it turned out that the simply the possibilities
for a rapid expansion of globalisation
were much bigger than we had imagined.
Okay all of that said
we we have a clearly
a backlash against globalisation
clearly has done. But how how
deep how widespread how deep are the roots of this
how big a deal is it in the end
or how big a deal must it be.
Is this something that we've really fundamental
and I have latterly
to have my doubts wondering
if if in all of there you would do a lot
of Colpus a lot of self flagellation
over having the downsides of globalisation
did we maybe overdo that.
And what strikes me
is looking at
the US so this week I have a much better
grasp on the political economy in
the US than I do elsewhere.
And also we have a lot more.
Public opinion data.
So is there a great public backlash against
globalization in the United States.
The funny thing is I'll show
you this as I just pulled this off this is Pew has been
doing surveys where they ask are Are Free Trade
Agreements good or bad.
There's other polling that comes along similar lines
but I think it's useful so if you look at
this. So the left part there
first is just showing aggregate public opinion.
Do you think free trade agreements are are
a good thing or a bad thing.
And you know up through 2016
actually people thought they were a good thing.
Now suddenly most people thought they were a bad thing.
Suddenly.
But temporarily like Ray racing
right back to previous numbers.
And if you ask what's driving that.
It's overwhelmingly Republican
leaning voters who abruptly
decided that they
were actually very pro free trade
and then became very Anthi free trade
and
and now reverted mostly back
to so.
Okay.
We have always been a trade war
with East Asia.
This is clearly the leader.
And if you ask the question
what do people what do people really think about international
trade policy.
The answer surely is people don't think about
their national trade policy
in general. We know those of us who study
policy issues are
lost to believe that
the general public approaches them in the way that we do
and most people don't.
The political scientists tell tell
me that by
and large people choose an affiliation they
choose a political tribe
and then they find out what views you're supposed
to have if you're part of that local tribe
and adapt to it.
And they see the political tribe itself as a leader who
who leads the party
and you know wildly seesawing policy
views a lot of voters
say they follow that as well.
And so for a while
there people became very Anthi free
trade because
because of Trump said he was very anti free trade
as anything what's going on since then is a little bit unclear
although part of it may be that since he's pronounced
declared that he's had this wonderful victory in
trade negotiations with Mexico are
in fact in fact he's produce this agreement that is
is basically the same as the previous agreement
with a few new irritants.
But it is. But since he's probably
people who support him
for other reasons say Oh so now that's
a good free trade agreements.
I'm good. I'm I'm pro so it's not at all
clear actually that there's that much backlash
if we actually look at what's what's driving
this these threats of trade war
with China right now.
What's remarkable is how much it's a personal thing.
It's really just one.
One man wants a trade war
with China one man
and the people he's chosen to represent
him. There doesn't seem to be a really broad
popular demand for it.
We may have overstated how
big a deal all of this is.
What's the what's the lesson here.
Not that well if people want the
to be honest don't know anything
and I don't think that's right. In fact what I think
we've actually on the whole
international trade economics is has done pretty well at tracking
what happens and even
when we do find things that we missed we
we can sort of say that okay this
was something that we were just failing to pay attention
to. Not a fundamental failure of the model.
I think we really did miss something we really
need to think about in future in
economics.
We don't think enough about about the dynamics
of change.
We really do tend to irrational
trade particularly I think has this problem of
focusing on the long run
how everything settles down.
We there are some good reasons for that
but the kind of model you want to
think about why though why do countries export
different things which tends to be a long
run model is actually quite poorly suited
to thinking about the human
impact. And through that the political economy
of rapid changes in trade takes
time may take many years for
for people to transition.
Individuals may not be able to transition at all
so rapid growth in trade that wipes out your furniture industry
even if it creates some other set of jobs.
That's not much consolation to the people who are lost.
I can talk all we can talk a lot about what we ought to
do ideally to create a
economy that insulates people from the
worst of those kinds of shocks
but that's really not my mission here today.
We missed so we missed
the dynamics of change
but we think that's probably the biggest
economic failure.
Oh and the last thing to say is what we missed
is we fail to understand
how much even something like international
trade which is bound by agreements
and is subject to
paper with lots of rules how fragile
it all is in the face of just one
leader.
Who just doesn't follow
the rules.
And it's possible that we will have
a major crack up of the international system
not because the
economics that was used to justify
this system was wrong because
we have a lot of power in the hands of one guy who really
doesn't like it
and how that will all play out.
Find out in the next couple of years.
I think thanks open for questions.
I think you're
right.
Thank you to all for a fascinating lecture.
My name is David Harris. I'm the head of the department
of economics here.
And before we move to questions
I'd just like to offer a couple of
thanks on behalf of the department.
First of all thanks to Max who was
instrumental in being able to
attract such a prestigious speaker
for the lecture tonight.
So first of all thank you very much to Mark.
Thanks to Jenny Williams
and Emily Otari CEO from
the faculty advancement unit who've done
a great job in organizing everything to do
with this lecture tonight.
So I'm very grateful to them.
So thank you to them.
And finally to Max's nephew
Simon for his help to the department
in organizing your lectures.
So happens very grateful for his assistance
as well.
All.
Right so we have some time for questions
for Paul so I invite questions.
Now there are two microphones
are going to be one here and one on the back there.
So if you
raise your hands if you have some questions please don't
ask the questions until you have the microphone in your hand
and indicate in introduce
who you are and will
take the first question.
So you.
Are saying to people I want to ask you talked
a lot about the losers from globalization
but you haven't talked about the winners
and it seems like a lot of the
concerns that people had certainly in the early 2000s
were about the winners the winners were
the large multinational corporations
and their shareholders who lent
large the people in the top
1 percent of the income distribution
and that people's concerns
with globalization were not just
some people lost
but the gains went almost entirely
to that small group of people.
Okay I'm glad you asked that.
So I know I now sit by the way at the
at the Stone Center for the Study of socio economic
inequality at the City University
of New York and one of my
colleagues is Branko Milanovich.
One of the world's most interesting economists
and Bronco has did something
quite remarkable.
He pulled together
data on the distribution of income within
countries and pulled them out so as to create
global income distribution measures
and how they change.
And he has this chart
that shows since late night during
this period of hyper globalization changes
in income at every percentile of
the global income distribution
and it looks like
it's not. It's not there
because of the elephant gratify.
Quite often they were there.
There is a there is there is this there is a global
elite that has really pulled away
with with extreme gains
but there is also a hump in the middle
which is the
developing country middle classes
or even below the working class.
It's the it's China.
It's it's much of India.
It's some even a Bangladesh.
There are.
Probably a billion
and a half people who have benefited
enormously.
People who were initially very poor who have benefited enormously
and those are the biggest beneficiaries.
It's also true that there's a few people at the top
who have done very well in this environment are
the problem. One way to think about the political economy
is that there is the Sagen between
the advanced country working class has been
kind of left behind by these developments.
How much of this way the elephant graph is a
description it doesn't is not a causal
it's not proof of causality.
How much of that is actually driven by globalisation
which is driven by technology other factors
this is still very much up in the air.
But I think that's the way to think about it.
Yes there are a few global
us you know
malefactors of great wealth who are doing very well out of this.
But there's also a huge number of people who
for whom this has been almost
literally a lifesaver
and you don't know that's
one thing that the anti globalization stuff
always seemed to me to have a element of
callous sentimentality kind of
like you know let's let traditional people leave their traditional
lives where they're actually suffering from massive malnutrition.
That's that's. This is not this is this
the whole globalisation has been a
very good force for humanity.
But with some important downsides
and I think that's the way to think about it.
Yes Paul.
I'm wondering what are the ecological
impacts of globalization
because I'm thinking about all of the ships
and airplanes that are going back
and forth across the globe using
a lot of oil diesel fuel
jet fuel emitting greenhouse
gases.
Is this another aspect of globalization
that at least the mainstream economists are
missing although my radical economist
I think are quite aware of it.
Yeah
I don't think I think a fair number of mainstream
economists are aware that there have
been some
whilst there's certainly some estimation
of what how if the price of oil
affects global trade flows
and it is a negative so higher prices.
So if we're going to put prices on fossil fuels
it is going to restrict globalisation
not eliminate it because there's a lot of stuff that will still
be worth doing but
I think a place where really it's going to
kick in this is air travel.
If you actually ask what in terms of the amount of trade
the amount of oil Schickel damage done for
you to trade in a shipment of stuff by air
is probably would not be happening
if we put the appropriate price on on
greenhouse emissions so the kind of
the airplanes picking up.
Vegetables in Africa so they can be
on the shelves of London supermarkets is
is probably not a good thing to be doing even
though it has some important upsides for the countries.
But yeah it
just stepping outside trade the thing that always
is really striking however when you talk about
greenhouse emissions is that the
biggest culprit
and the thing that we could get rid of
easily is not is just plain
coal burning power plants you know
and after we've after we've stopped burning coal
to generate electricity then we can talk about
other stuff and transportation is a big issue.
But even there globalisation is going to be a much smaller
factor than just plain people driving cars.
So it's there definitely if we if we were doing
this right this would restrict globalisation
but probably not drive it back to anything
like 1950s levels
of trade.
Will you explain
what effect so governments
decide to embrace free trade
and terrorists removedetc.
What effect does government industry policy have
on those countries that then remove
barriers. How important is government industry
policy in terms of
encouraging the growth of
exports in various different ways.
Oh wow that's actually
a hard one because it's
very hard to to measure
the industry.
Industrial policies.
I mean the most important question would be China
and the problem
with China is that
those of us who aren't China experts have
a very hard time figuring out what's going on
and so you can find a China expert
to tell you what's going on
and then find another try an experts will tell you something completely different.
And so it's always been very difficult to know.
So I think in many cases
the and the industrial policies
are less important that
they're not a crucial thing.
If you actually ask how did
how did Bangladesh get its
its rapidly growing Bangladesh
is rapidly becoming an apparel powerhouse that
wasn't really a government policy that did that.
We ask how did India
get to India has is
very important. I mean it's a flawed success story
but it is just a story which is unique
there the first developing country to become a large
scale service exporter.
Was that a.
I don't think anybody in the Indian government even envisioned that
happening just the day they woke up
one day and discovered that they were doing a lot of of
technology related service exports.
Bangalore as a call center it was nothing that anybody
would have.
It would have seemed too.
Mundane for it.
For that ever to have been a target of policy
and yet there it is.
So there's something I mean that China
and the question is how much of Chinese success
is is being driven by government policy.
My uninformed guess is less
than the Chinese government imagines.
I've never been able to track it down.
There's something so it must be true because I wanted to
be true bribe remember having read something about
Lee Kuan Yew as something by
a statement by the Queen knew he was trying to.
So why. Why has Singapore is so obvious.
Why have they been so successful.
And you would think he was sad because of the great leadership of people
like me
and what he actually said it was if I remember
correctly it was he said it's the inner dynamism
of East Asian man which I think that
it helps to be ethnic Chinese.
But anyway it just was just there there's
a lot of a lot of this is really the government's
case for people and particularly infrastructure investment enabling
investment can be really important
but government targeting industry is probably
a lot less of the story than we than people would like to imagine.
Okay.
So if it was a little bit quiet
but there was a to what extent freedom of capital flows
contribute to the tree first
there's really there are two issues there.
One is how
how much.
It's difficult to have.
Really strict capital controls without
mucking up trade
and goods as well.
If everything requires a license then
then that gets in the way of trade.
But if the question is how how much
has international
capital mobility
really contributed.
That's extremely dubious
at this point.
First of all a lot of international capital flows
have gone in the wrong direction
and the overall flow of money for
for two decades has been largely
from developing countries to develop countries
that's been capitalized
and has been moving perversely rather than feeding development
and secondly international capital mobility
has is such a
there's so much wreckage
from from the flows of hot money
it's just hard to
think of. There are
there have been you know just repeated.
Actually this is funny the same the same
period of time they talked about in terms of the evolution of trade
is also the evolution of opening of
global capital markets.
And the story of opening global capital markets
is one wave of crises
after another.
The a group of countries become
fashionable.
Money flows in.
Then capital
decides this is not so great anymore in their sudden stops
and so there is a from the Latin American
debt crisis of the early 80s to the Asian crisis
of the late 90s to the euro crisis
which is largely a capital flows crisis.
So its hard to make the case that capital
mobility per say has been a
positive factor in all of this.
If anything the the main argument
for not restricting capital is that its hard to
restrict capital flows very effectively
without screwing up trade as well.
But capital has not
and has it
just has not been a positive force.
Capital flows have not been a positive force in
the world economy in any way that I can see.
We have a growing
well thank you very much for
a very great lecture was even approachable
for a medic so thanks
Mike you talked about capital mobility
and of course goods mobility knowledge mobility.
To what extent has the opening up of
knowledge. We are here at a university.
We educate people from all over the world.
How much has that played a role
in this manufactured goods trade.
That's a really good question
and there's actually a
I mean I'm not sure obviously
being in a place like this and being people like we are we'd like
to believe that the universities are crucial in all of this
and no doubt it's a good thing.
But actually in some ways
the Republican Party
has been arguing very strongly that the really important thing
about this new form
of globalization that we've seen since since around 1990
which has these value chains is that it actually
aside from the sort of cost efficiencies
that it diffuses knowledge that by having
that when countries become parts of these global production
that they also start to a greatly
accelerates the diffusion of.
First world technology to these countries
and that that's what really drives in
and that's I think that's a hard story to prove
but it's it seems plausible.
And yeah the world certainly.
Has become easier
to spread knowledge although
that's.
Always want to go back and think about what the world was like a
hundred ten years ago.
There were a lot in many ways there was more personal
mobility across the world then than there is
now there were fewer immigration restrictions there was
there were lots of people going back
and forth so you shouldn't.
It's not that we just discovered that you can carry knowledge
across borders. That was something that
that our great great grandfathers already knew.
Maria Sandole I think my question relates
to the first question and also what capital flows.
Globalization has been good
and bad for industrialized nations
or developed nations but also for emerging economies
or these galloping countries that are exporting more.
Body in terms of trade
and or a capital. And these trade agreements
would have negotiated of
the larger economies didn't see some benefits
to them.
So I think going back to the Ricardian
approach of like increasing trade is
going to allow people
or countries to focus on their comparative
advantages
and free up the allocation of resources to something
different. In this case if it's labor
intensive goods that are being traded
then this will lead to capital
intensive goods
and like the reallocation of
the owner contrary to capital intensive goods.
So I wonder if there is also a question of
why is it not working.
Should also we were talking about
labor ownership capital ownership
and the access to human capital like free
education.
Okay.
The funny thing is that capit physical
capital seems to have just played a much smaller role
in determining trade patterns.
We just don't find that a really a very clear story
of human capital or education levels are
a better deal.
And that's quite what the.
There is truth there too I'm not
entirely sure what the question was
but my question is why isn't capital
moving to low
wage countries and that's
something we've puzzled about quite a lot.
We really don't see much of that
I guess.
That's right.
The question actually about why why do
advanced countries powerful countries why
why have they gone along
with this.
And that's.
The one thing I think you want to say is
that or two things you want to say is that there's a
lot of diplomacy involved.
Right. The the US advocacy of free trade
after World War Two didn't come mostly
out of some belief in the abstract virtues
and a global welfare function came
from the notion that somehow that would help us fight
communism
and a lot of stuff that's happened since it is
driven that way and then
don't.
And the other thing to say
on this is that if you want to ask why country why
governments do what they do.
Mean I say up here you know people don't have views on on
on policy.
Our governments do have views on policy
but the notion that those are necessarily derived
from any kind of coherent economic analysis is another
kind of thing that people like me would like to believe
but it's probably mostly not true.
I think that's a good start.
And
I'm afraid we're out of time for questions.
So can you will join
with me
or more time in thanking professor.
Paul Krugman for
okay so that concludes tonight's lecture as
some polls already help us to advertise.
We have another public lecture coming up soon that will
be the downing lecture on the 17th
of April which will be presented by Professor
David Autor from my team.
So we hope to see a lot of you there.
Thank you. Good evening.
