IV. The overall results of globalization
A. Theoretical FAQs

Q1: Does unskilled labor necessarily lose in DCs?
    No--Why not?

    Offsetting consideration #1: more variety
        --wider range of goods might offset the fall in purchasing power.

Offsetting consideration #2: wages might grow faster after convergence     Time path     1. closed     2. liberalization         convergence     3. open         endogenous growth     Over time, it is possible for all to gain from globalization     But it is not a sure bet

    Offsetting consideration #3: DC and LDC unskilled labor might not compete directly

    Ex.1: A DC imports low-skill products that are not made domestically
    --> more variety, lower import prices without affecting products made by unskilled labor in DCs 

    Ex.2: Immigrant labor takes different jobs than US unskilled labor
    --gardening, housecleaning, crop harvesting, etc.
    --> more variety and lower output prices without putting downward pressure on wages for US unskilled labor
    --> a 2011 NBER study found that immigrants help move natives into supervisory positions => domestic and immigrant labor are complements rather than substitutes

Q2: Does unskilled labor necessarily gain in LDCs?

    No--Why not?

    Offsetting consideration #1: technology
    (1) Production technology tends to be labor-saving, replacing workers with machines. It might be so efficient that it is worth adopting even in L-abundant countries
    (2) Higher incomes --> more demand for high-tech goods --> global production shifts from B to A.
    The SS theorem applies when production shifts for any reason, not just trade.

    Offsetting consideration #2: factor abundances other than unskilled labor

    Suppose the two key factors for a country are labor (L) and land (T <-- "terra firma")
    Asia is labor-abundant
    Latin American is land-abundant

    How does globalization affect the real wages of labor in (1) Asia and (2) Latin America?

    This can also be true for countries with abundant natural resources:
    The "curse of natural wealth"
    Oil or diamonds--owners of resources gain
    The rest of the economy can languish

Q3: Does national welfare necessarily rise with globalization?

    No--Why not?

    Offsetting consideration #1: footloose factors (mobile)
    Trade developments can harm industry-specific resources in contracting industries

    Example 1: Transition costs
    Short-run transition costs might exceed long-run gains

        Application: The Dutch disease

    Netherlands produces established tradables

    Another sector expands: natural gas discovery in 1970s
    --> upward pressure on input prices
    --> cost squeeze for established tradables

    Two types of factors:
    (1) mobile Ex: young, skilled labor which shifts to the expanding sector
    (2) industry-specific Ex: Older, less skilled labor and capital which stay but earn less now
    Industry-specific factors of production suffer a decline in income when other factors leave.
    With a slight variation, also happened to Great Britain when it discovered North Sea oil in 1970s.

    Responses: 
    (1) Gradualism
    (2) Trade Adjustment Assistance (TAA)
        2002: tripled in US to 1.2B per year

    Ex.2: capital flight to avoid domestic taxation
    2012: in the news as Pres. Obama proposes to cut the corporate profits tax

    the gain from an investment that capital owners receive = net (after-tax) earnings
    the gain from an investment to society as a whole = gross (pre-tax) earnings
    If gross earnings at home > net earnings abroad > net earnings at home: capital flight occurs and national welfare falls.
    To avoid this, the government should tax net foreign earnings at the same rate as domestic gross earnings, but that often doesn't happen.

    Ex.3: the brain drain
    High-skilled workers--preferred by DCs.
    Why so, given that they might compete with domestic high-skilled labor?
    LDC trains the workers
    DCs gain from hosting the workers

    Ex.4: immigration motivated by domestic social programs and public goods
    Ex: strain on local health and education services
    Evidence suggests that the US gains, but border states such as CA and TX may lose.

    Offsetting consideration #2: poor governance

    Ex.1: misusing potential trade gains
    Spending on military goods instead of health and education
    Fighting over the distribution of the gains (oil in Iraq)

    Ex.2: ignoring social welfare
    Environmental damage from natural resource industries
    Logging in Indonesia; oil in Ecuador
    If governments are influenced by corruption or special interests, the general population lacks a voice and the general good can suffer

    Overall result: The actual impact of globalization on a country is an empirical question
    Theory cannot predict with certainty

B. Empirical FAQs

Q1: What has been the relationship between globalization and growth?

    Part 1: ISI vs. ELI debate

    Part 2: Asian tigers: Hong Kong / Singapore / South Korea / Taiwan
    Argument at the time: a few small countries could succeed, but it would fail to hold when many and large countries tried to replicate it.

    Part 3: Post-1980 globalizers
    Examples: China and India
    In early 1950s, India's GDP/cap was higher than China's -- almost 30%
    Now: China's = 2x India's

    China and India Powerpoint
    Handout: Late boomers: China and India