Unformatted text preview: The Global Economy and World Politics
Professor Edward Weisband Lecture 11: The Benefits of Openness: International Trade and Efficiency Standards The IGOs of Geneva Geneva, Switzerland is home to a number of Intergovernmental Organizations that provide institutional mechanisms in economic governance that seek to compensate against the deficit of international economic governance that plagues the contemporary world The United Nations (the old League of Nations building) International Labor Organization International Intellectual Property Organization World Trade Organization World Health Organization United Industrial Development Organization The International Migration Organization Take the number 5 bus from Cornavan... The Core Argument of Open Trade Liberalism Open international trade Allows national economies to specialize In what is most efficient for them to produce And to trade in exchange for goods and services that are least efficient for them to produce To "lend" through exports (specialization) Open trade fosters "lending" in the form of exports and "borrowing" in the form of imports in ways that enhance sectoral diversification with synergies This grounds notions of specialization coordinated by open international heteronomous markets The Benefits of Increased International Trade Specialization ("lending") and interdependence ("borrowing") linked to increased international trade creates new jobs in new sectors As economies pursue competitiveness in international markets Up scales of value addedness International trade also promotes GDP growth So that trade promotes income And income promotes demand For both traded but also for nontraded goods and services Economists refer to the dynamic of specialization ("lending") and interdependence ("borrowing") in terms of comparative advantage International Trade and Sectoral Diversification: Comparative Advantage Comparative advantage encourages national economies To produce and export what is most efficient ("to lend") And to purchase and to import what is least efficient ("to borrow") To export (lend) what they have in order to import (borrow) what they don't Rather than to rely on selfsufficiency (autarchy) By specializing in terms of comparative advantage National economies may use specialized capital inputs on the most efficient basis By relying on other economies to supply what is least efficient In order to support the production of outputs in the most efficient ways Comparative Advantage: Specialization Across National Borders Like all efficiency standards Comparative advantage refers to the degree to which specialized capital inputs "Borrowed" or "lent" from abroad via trade Contribute to the national production of GDP outputs At higher levels of value addedness across and within diversified sectors fueled by sectoral synergies Comparative Advantage and Openness Comparative advantage represents a way of using The specialized capital inputs generated in other economies As mechanisms to enhance domestic efficiency It operates only to the extent to which national economies are open to each other And willing to accept the risks of interdependence That attend the dynamics of greater trade From Ricardian Notions of Comparative Advantage to Eli Heckscher and Bertil Ohlin (H-O) Theory of Factor Proportions Theories of comparative advantage Originate with David Ricardo's emphasis on specialization Based on national or regional differences In specialized capital inputs And the economic efficiencies of international trade Successive generations of economists have attempted to explain How national economies can use international trade As an engine of economic growth OR how can national economies use international trade to defeat poverty? In the 1920's Eli Heckscher and Bertil Ohlin developed a Theory of Factor Proportions The H-O Theory of Factor Proportions or "Intensity" According to the HO Theory of Factor Proportions National economies that export and import On the basis of "abundant factors" Become more efficient and competitive In producing GDP outputs up scales of value addedness The measure of abundance is factor proportions or intensity Intensity is a thus measure Of specialized capital inputs Into GDP outputs The Original Conception of Efficiency Based on Capital and Labor Intensity Capital intensity measures The amount of capital available within a national economy as a form of specialized capital input Capital intensive economies produce capital intensive goods for consumption and international trade Labor intensity measures The amount of labor available within a national economy as a form of specialized capital input Labor intensive economies produce labor intensive goods for consumption and international trade Intensity, Comparative Advantage, and International Trade According to the H-O Theory High capitalintensive products are cheapest to produce where capital is most abundant In capitalintensive economies Labor intensive products are cheapest to produce where labor is most abundant In laborintensive economies Capital abundant economies will export capital intensive goods and services Labor abundant economies will export labor intensive goods and services And both will import the reverse Intensity and Structural Position Capital intensive imports and exports Tend to be positioned higher up scales of value addedness Than labor intensive imports and exports And are thus more expensive But generate greater profitability In principle, economies that export capital intensive products Will generate higher profits Than economies that export labor intensive products Thus structural position tends to "advantage" capital intensive economies while "disadvantaging" labor intensive economies The question becomes: are trading partners with labor intensive factor proportions doomed forever to remain labor intensive? Are poor economies doomed to remain poor? Regulation and Development Open free trade theory suggests the possibility of a leveling effect focused on factor price equalization if open trade is properly regulated by means of neomercantilist policies that use export promotion as an engine of economic growth Market openness allows national economies to become more efficient by "borrowing" resources from other national economies BUT gains from interdependence ("borrowing") and specialization ("lending") must be channeled by government regulatory policies in ways that promote diversification with synergies up scales of value addedness Particularly in developing economies (China) Factor Price Equalization Theory Efficiencies generated through open trade permit both capital and labor intensive national economies to move up scales of value addedness By enabling neomercantilist regulatory policies to promote sectoral diversification with sectoral synergies In ways that allow labor intensive economies to generate sufficient capital To move from labor to more capital intensive forms of production Factor Price Equalization and Diversification As labor intensive and capital intensive economies trade with each other and benefit from factor price equalization The surplus income generated Can contribute to greater efficiency and labor productivity AS WELL AS diversification into capital intensive sectors As in the case of Dubai where surplus income from the petroleum sector has been invested in diversification into new and expanding capital intensive sectors The Challenge of Wealthy Economies As poor economies become increasingly competitive Wealthy economies must face the challenge of competition to established economic sectors and industries (the Heartland Problem) The key to factor price equalization is that As poor economies become wealthier, wealthier economies must become more competitive The call to competitiveness forces wealthy economies to grow efficiently up scales of value addedness through entrepreneurial applications that are innovative and inventive Neo-Mercantilism NOT Protectionism The Heartland Problem cannot be solved via protectionist policies That protect uncompetitive, inefficient, and obsolete industries Regardless of the political support for such policies Ultimately the heartland can only be protected through the promotion of new innovative and inventive applications in the production and delivery of goods and services based on research and development Neomercantilist regulatory policies can ease the transition from the "old" economy to the "new" but efficiency standards will win out against protectionism in the end ...
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This note was uploaded on 03/30/2008 for the course PSCI 2064 taught by Professor Eweisband during the Spring '08 term at Virginia Tech.
- Spring '08