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Welcome to everybody for a packed house. I'm very pleased to welcome you to the James Mead Memorial Lecture. As most of you know, James Mead was a professor of economics at LSE and awarded the Nobel Prize in 1977. So we're now in the 30th anniversary of the award and the hundredth anniversary of his birth. So it's a fitting time to celebrate his. His achievements. As you know, James Mead made many fundamental contributions in international trade and international capital movements. I'm sure if he was here, he'd be delighted to have Paul Krugman professor of Economics at Princeton and amongst the world's most famous, perhaps if not the most famous, living economist. Paul, as you know, is famous for many things. He invented the new trade theory which has had a huge impact on economics and international trade and very much influenced many of the developments here at the LSC and the cep. Paul has won the John Bates Clark Medal for the best economist under 40, which I'm told by forecast is a leading predictor of winning the Nobel Prize. And harder to win, some people would say as well. But not only is Paul a kind of leading global intellectual, he's also deeply engaged in the political debate. So he's somebody who is extremely influential in terms of thinking about issues of our time. He's been described by the Washington Monthly as the most important political columnist in America. So we're extremely pleased to have him here. He's also well known as one of the most persistent and effective critics of the Bush administration. And I'm sure we might be hearing some more about that tonight. His title of his topic is Globalization Welfare. One of the most important issues which confronts us today. So I'll say no more, but just to welcome Paul Krugman.
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Well, thanks. I actually took this seriously when I was told with the Mead Memorial Lecture. And the title of this talk is actually a play on one of Mead's great books, which was Trade and Welfare. And it is in some ways an attempt to talk about where we are now. I suppose I could have tried to do this as a kind of celebratory all the things we've learned about trade. But maybe because of my other job, I am always now worrying about what are the controversial political issues right now. And as a result, this is really going to be about some of the problems and some of the puzzles that we have and in particular some of the dilemmas that now face people like myself who are pro globalization but also have other things that we worry about. Let me just say a word about Mead because in preparation for this talk I went back and read quite a lot of James Mead's work. And it's the best I can say about it is that it reminds me of what I once heard describing as someone who was a composer of more of what you might call new folk music. It's not worth following that, but it's further. But the description of it was somebody who had the ability to write songs that sounded as if nobody had written them. Things that became so much a part of the fabric of the way you. You heard music that they seemed as if they might have been there for time immemorial. That's actually what the Mead's work is like. Go back and read Trade and Welfare as I did for the first time since graduate school in preparation for this talk. And it's suddenly I realized where the catechism that we do in teaching international trade comes from. There's a sequence of things that you go through a whole way of thinking about, about the case for free trade, the criticisms of free trade, the analysis of protection, all of the ways that one might go through it, that it's just there. You don't think of it as being somebody's. And the answer, of course, the point is it's actually Meade. It's actually something that Mead created out of a very confused field in the 1950s, created this synthesis of how we think about trade and welfare. And I'm actually going to start with a little bit of where that comes from and then talk about how that relates not as well as we might hope to some of the things that advocates of free trade tend to say. So let me begin and be sure that we actually have this. Let me tell you, this talk is really going to be about being chastened. I'm not about to say, oh, I was wrong all my life and free trade is a mistake and not at all. But as someone who was very much a promoter, defender of increased globalization and if I go back 15 years ago, I was quite unalloyed in my enthusiasm I've had along with, I think, I hope, everyone who's paying attention some chastenings. The first is that the extremely optimistic view that many of us had about what globalization would do for growth, particularly in developing countries, is not looking as defensible. It's not to say that we've suddenly changed and decided that that the bad policies that we got rid of were the right thing to do, but that it doesn't look as good as for why we believed. The second, chastening is the whole issue of trade and distribution. Now, some of you may have seen I passed through and gave a talk about that here not too long ago. And some of that is going to be here again. But there's only a piece of this. The relative calmness that and others had a dozen years ago about the impact of international trade on income distribution in advanced countries is looking. It was right given the numbers then, but things have changed and the numbers are now in a range where it's no longer appropriate to be calm. And it might be right to be getting slightly hysterical. Not fully, but a little bit. I'll explain that in a bit. And the third is a genuine puzzle which is, well, you can see liberalizing appears to be at least associated in some cases ambiguously with things going the wrong way on the other side of the transaction as well. But I'll come back to that. So what did Mead say about trade? What he said is that made the case for free trade. And it's a very buttoned down, nothing extravagant, no hand waving, extremely buttoned down case. It's saying that free trade is the right thing because it gets the marginal conditions right. Because in a world of free trade, the cost of producing one more unit of a good is the same as the cost of importing that good. So you don't produce something when you ought to be importing it. You don't import it when you should be producing it at the margin you set it. So the cost is exactly equal. In free trade, the cost of consuming a good is the price which is equal to the cost of importing it, which is also equal to the cost of producing a unit. So all the marginals are put equal to each other. And so we have free trade in a. He actually uses the word utopian. In a utopian world, free trade is getting you to a position of efficiency. It's a good thing. Protectionism is a bad thing because it breaks that equality of marginal conditions. If you protect, you're going to be producing a good at a cost at the margin which is higher than the cost of importing it. And so that's inefficient. You're also going to have consumers paying a hard, a higher price than the cost of importing the good. So again, they're not facing the right marginal condition. So free trade is good, protectionism is bad. And that gives you a way to assess the costs of protectionism. The question that we need to ask is how important they are. And the reason we need to ask that there's not a lot In Mead about the political economy of trade, it really is the position of imagine yourself. As a disinterested manager setting out to do the best with an economy. And your charge from an unusually enlightened president or prime minister is to figure out the best thing and don't worry about where we can get the votes for it. That's in effect the stance of the position, which is a good thing to do. But in the real world, when we have a lot of cross cutting demands and concerns and in which also people are looking, there are people out there with other recipes, other proposals, we want to know what the theory says. And as I'll explain in a minute or two, one of the things that unfortunately happens, I think it's kind of a sin into which economists tend to fall, is that we have a theory that says free trade is good. Actually, very often we have a theory that says that free markets are good and then we treat that as a kind of a license to claim wondrous results from these free market principles that are not justified by the actual model. And we end up invoking all sorts of things that are not in that model and if, while they could be right, are no more plausible, no more justified by the evidence than claims that run in the opposite direction, that would make us want to have less free trade, want to have less free markets. So let me give you a kind of illustration of what it might look like. This is. Okay, I wanted to get some numbers that were more or less, that were not too complicated. And of course in reality is always. There's always an enormous amount of annoyance. Try and look at any actual protectionist regime. And it's never, there's always, every time. If you actually talk to the lawyers in particular and you say, so I understand this is what they always say. No, no, that's not right. There's always something else. But I think I can produce what's kind of a stylized case. And what I wanted was a case of a country that really has changed trade policy a lot. And there have been quite a few of those. We've had a remarkable change in the third world in trade policy. So look at the case of India. Now, those of you who are the actual trade people in this room know that what I'm doing here is, you know, just as the lawyers would say, well, that's not quite right. Any comments would say that's not quite right either. This is partial equilibrium. It should be general, but it actually doesn't make a whole lot of difference to the point. So here we Think of sliding down the demand for imports. And this is a, as I say, it's stylized. India. If you look in India, the nominal rate of protection on manufactured goods in the late 1970s was about 120%. So this is, you know, we're not talking about the small protectionist things that, that the UK or the United States or the European Union or the United States do. We're talking about really majorly protective policies that has now been liberalized. And of course liberalized. India is still a far more protectionist country than the United States has been since the Smoot hauly tariff. I mean, it's much liberalized. It's also a country that's been opened to trade quite a lot. And so the share of imports has risen from around 6 to around 12% of GDP, which is still rather low in today's world. Although given the size of the country, unless it starts to become a Chinese style sort of assembly platform for the world, you wouldn't expect it to be an enormous share of imports and gdp. How do we assess the costs? Well, it's the marginal stuff. The cost of importing a good is the world price, the value of that good to the Indian economy. The value of the import either in freeing up resources from domestic production or in consumption is the domestic price. So if you import just a little bit of imports beyond where they started, it actually would have been worth domestically 2.2 times the world price. If you ask, take a little bit more, it drops. And at the end, as you're getting up to the current situation, $1's worth of imports is worth only about $1.30 in the Indian economy, although it's still worth more than it actually costs India to get it. So your average would be, well, it turns out that's 175. So the average of those additional imports that have taken place, and this is attributing all of the growth in imports to the change in trade policy, which by itself be an exaggeration, would be about 75% of the world price. So if we've got imports that are now around 12% of GDP, that's telling us that the extra imports were adding to the Indian economy around 4.5% of GDP. That's not small stuff. For what it's worth. The latest estimate for the United States, the International Trade Commission does an estimate of the costs of measurable trade restrictions for the United States. And the most recent is now down to I think about $4 billion. That's in a 12 trillion dollar economy. 13 trillion, whatever we are now. So this is, it's risible in the United States now, but in the case of India, the effects of liberalization are a pretty hefty chunk. 4.5% of GDP is nobody's idea of something that doesn't matter. But it's not the kind of thing people have in mind when they really talk about the gains from liberalization. So if we look at the India story now, India, this is one of those really happy stories in the world. It's something where after a very long period of extreme disappointment, something started to go right. And now it actually, as Danny Rodrick at Harvard has pointed out, actually started to go right about 10 years before the big reduction in tariff rates. But all right, we can play games with that one way or another. So we see India going from the infamous Hindu rate of growth just a little bit ahead of population growth to something about 2 percentage points higher for really now 25 years. That's 50% bigger and still continuing. And a lot of people say, well that shows you what free trade does. But problem is that's, and that's poor John Williamson, who actually coined the phrase Washington Consensus and it was really a very modest set of reasonable propositions but, but he doesn't control it. And it becomes this view that free markets do wondrous things. So the Washington Consensus said free trade does fabulous things for you. As it happens, the acceleration in Indian growth is just about as big as the acceleration in growth that in the 1980s the World bank said came from having outward oriented policies. That report has been savaged by wave after wave of subsequent research. But that's the kind of thing that for a while people believed you could get 2 percentage point faster growth for an extended period of time from outward looking policies. But that could be true, could be true. But if so, it's for reasons that have nothing to do with the textbook case for free trade. And that's my point that we say that there are these wonderful things that will happen as a result of free trade and those seem to be grounded in textbook international economics. Because textbook international economics says that free trade is a wonderful thing. But in fact to make sense of those, you have to invoke something that's very, very different from the textbook stuff. You have to be talking about some kind of external economies or spillovers or international transmission of information or increase in, well, something, something that is ill specified. Create models. You can create a model under which free trade will do wondrous things to economic growth. But I think one of the Things we've learned since we started doing imperfect competition and endogenous technology is that a smart graduate student can produce a model that will justify any proposition. So it's really a. What we thought, basically it came down to this people read of history was that there was this look, Latin America was very protectionist. East Asia, well actually if you looked at tariff rates, it wasn't that clear a difference. But they were certainly much more open economies, much more trade. And those newly industrializing economies in particular really took off. And you looked at this expansion, this is East Asia minus China. They really did much, much better in Asia. And that in people's minds seemed to be the justification for the belief that free trade or freer trade, trade liberalization, outward orientation did wonderful things for growth. And it was a kind of a read based on people's perception of historical experience. Now there's actually, there's a huge economic literature trying to, which basically is trying to test whether that perception is really right. If you actually try to do a regression where you have a bunch of stuff and you include some measure of trade policy, is there actually a clear proposition that says that open trade leads to much faster growth? I would describe the history of that literature as being back and forth. People keep on finding results that do say that outward orientation does great things for growth. And then careful looking at it shows that that was actually very sensitive to specifically how you formulated it. So for example, that infamous World bank study classified countries as outward or inward oriented without quite explaining how they did it. And if you started to use objective measures, the whole thing went away. But back and forth and you know, some of it really hard work. But it's as if people know what the answer is there. They know there must be, you know the old joke, there must be a pony in there. They keep on digging through the horse manure trying to find the pony and claim they found it and won't take no for an answer. And the truth is that in the end the stuff isn't really, you know, might be there, but it's not really clear. And what's interesting is that's really no different from the way people used to justify the import substituting industrialization policies after World War II. It was for a period of about 20 years. Everybody just knew that developing countries by protecting their manufacturing from competition were going to that that was the route to development. And what they said, you asked, well, how do you know that? And there were various models out there that were not terribly persuasive, taken on their logic, but they Said that's what the lesson of history is. And actually it turns out that the history lesson of history might well have been taken to be that. Borrowed this from Jeff Williamson at Harvard, who's done a lot of interesting work on the history of trade policy and growth. And if you took a bunch of countries, you can see them if you've got good eyesight. If you looked at the countries that were had very high tariff rates, which would at that point have been Argentina and the US they were actually also the fastest growing countries in per capita gdp. So it really was true that there was. And you can't actually, by the way, do get an equally clear picture post war. It is true that after that there is a slight negative correlation between tariff rates and growth in the period since World War II, but it's much less striking actually than the clear positive correlation that was there before World War I. Now we can think of lots of reasons, probably mostly the causation ran the other way. I mean, the truth is that those high growth, high protection countries were Canada, Argentina, US Basically those are what at the time they called the zones of recent settlement, which were also the place that received lots of capital inflows. That's I guess a more modern, more honest description is those were the places where white people were moving in and slaughtering the natives. And those were the places that grew fast. But you know, there's a kind of association. Now there was some other stuff. Amazing how many times you will find people older literature saying and Germany had lots of protection and grew behind protectionist barriers. And it actually turns out not to be true. Germany was not highly protective. Bismarck talked about it and he had a few highly conspicuous laws. But the actual reality was it wasn't very protectionist. But people lumped that in, just as in the high tide of the Washington Consensus, any country that was doing well was ended up being classified as outward oriented, even if it really wasn't, as far as you could tell by any clear measure. And the fact of the matter is that we made a. Well, there was some reason to believe, I believed it too, that it looked as if outward orientation was really certainly associated with growth. And I would say there's a little residual bit of that even in me now, which is to say that all of the success stories, all of the really amazing success stories have involved outward orientation. But what we've learned, South Korea, ultimately South Korea and China now, are the stories that justify your faith that good things can happen from globalization. But if you asked me or lots of people in the early 90s, we would have said that if other countries that are currently very closed will do the same thing, they can experience maybe not quite South Korea type reforms. They can experience wonderful results. Well, that has turned out not to be, certainly not to be reliably true. And I'm sorry I'm here, but my view of these things tends to be somewhat US centric. So I tend to be focused on the countries that play a big role in our political debate. And here's the one that pops up immediately. Mexico. Mexico had a truly dramatic, truly dramatic change in policy. Was very inward oriented, very protectionist. Was a country that pretty much exported oil and, and beaches in 1980 and became a country that is primarily a manufacturing exporter now. Interestingly, by the way, most of the liberalization took place before NAFTA was really something that took place in the mid-80s. And particularly since we standard trade theory says that cutting a tariff rate from 25 to 10 is a lot more important than cutting it from 10 to 0. Roughly speaking, the standard costs tend to be the square of the tariff rate than that. The big stuff already happened before. And if you had, if we believed that openness was really the key to growth, we would have expected very good things to happen in Mexico. What actually happened was this. You know, you can tell stories. There have been. After 1995, there have been no more crises. Some things in Mexico have gotten much better. The phones work. It's become a lot easier for a high income gringo to visit. Life has gotten very much easier if you're up at the upper end. But per capita GDP has actually fallen a bit relative to the US and although the data are lousy, real wages appear to have not done very well. Appear to have fallen. It's just not. It certainly hasn't been anything like an East Asian style takeoff. And that despite enormous success actually in trade growth, the Mexican success at becoming a manufacturing exporter has actually surpassed expectations. The Mexican economic payoff has fallen very short. It's not catastrophic, but it's just kind of a little bit sad. And that's a big disillusioning factor. Lesson I take from this, I think, is that we oversold and oversold to ourselves. I don't think it was dishonest. I think it was that we wanted to believe that there were good things from free trade. We wanted to believe that the East Asian successes were replicable everywhere. And we fell into what was almost a pun or a kind of a positive version of guilt by association. Trade theory says free trade is good, therefore what we think we see in the experience which says that free trade yield wonderful results is more respectable than the old view that said that protectionism yields wonderful results because it accords with trade theory, but actually didn't. Had nothing to do with. With the real trade theory argument, with the one that was. That comes from Mead. And so you gotta be chastened now. Now again, I should say this is not to say that there are no gains from trade. And it's certainly not to say that there are not some countries that depend desperately on relatively open world markets. And in fact, these days my case for relatively free trade rests less on the hope for more South Koreas than it does on the how do we keep Bangladesh's head above water argument. But in any case, the point is that we got ourselves a little bit trapped. Let me turn to my second theme. One of the things that Mead was quite frank about is the role of trade in affecting the distribution of income. And there's a very clear discussion of this. It's really. It's Stolper Samuelson, but it's done in Mead's own way instead of being done in terms of ingenious diagrams that make. That most human beings can't. I mean, they're actually wonderful if you get into it, but they're not the way that most people can get close to thinking. So he did it in terms of numerical examples, tables, and here's the little table that is actually on Mead, page 303. So he envisages one thing that is actually kind of almost refreshing from a modern point of view is that there's no hint of an attempt to sex up the documents to make it seem contemporary by throwing in things that sound like the events that are actually happening. You take a look at what the world was like in 1955. There was wild stuff, there was dollar shortage and all of these things that had been taking place during the period that the book would have been written. But his it's a book for the ages and it's sort of nice and abstract. So he envisages an economy that produces apples which are land intensive and blankets which are labor intensive, and says what happens if there's a rise in the relative price of blankets? And points out very standard in the textbooks, that what has to happen actually is this kind of dance of the factors of production. What a horrible image anyway, in which obviously land and labor have to flow into the blanket industry. But since blankets are more labor intensive, the only way you can release those resources is if both industries shift towards using less labor and more land per unit of output. So you have to have this kind of simultaneous movement of factors and change in the factor proportions. And as a result, because in both industries, labor is working with more land per laborer, the marginal product of land, of labor goes up and so the real wage of labor is going to rise in terms of both goods, more in terms of apples, which have gotten relatively cheaper, less in terms of blankets. And conversely, land is going to have a lower marginal product in terms of both goods. And so the real rental rate on land is going to fall in terms of both goods, although much more so in terms of blankets because the price has risen. Okay, that's clear cut. But of course, call those labor and capital rather than labor and land. Make it be, or better still labor and, and highly skilled labor and make it be not a rise in the price of blankets, but a fall in the price of labor intensive manufactured goods due to the emergence of industrializing Asia. And you're starting to talk about something which is actually fairly explosive, namely that some broadly defined group, some broadly defined factor production, like not especially highly skilled labor, is not just losing in relative terms, but losing in absolute terms. And that's actually its standard. It's one of those odd things. It's some of the discussions we have on trade. Now. People who are economists, who are not particularly imbued in the trade field are coming back and making the arguments that Stolper and Samuelson basically demolished 65 years ago. They're saying, well, you know, sure, there's going to be some relative loss, but this increased trade because it lowers prices has got to be good for people. You're going to have, sure, unskilled workers may be hurt a bit relatively, but the lower prices at Walmart are going to more than make up for that. And what this is saying is. No, actually it doesn't. It actually makes people worse off. Now if things looked okay on the distributional front, then we wouldn't make such a big deal out of this. All through the period From.
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II up until the circa 1980, distribution of income by most measures was highly stable in the U.S. and to the extent we have the data everywhere else. So there was no. The idea that trade could in principle have effects on income distribution was not something you worried about a whole lot in practice. Since then, I guess, as everybody knows, the United States to a very large extent, the UK to a somewhat lesser, considerably lesser extent, but still there and faint echoes in other English speaking countries have seen a really noticeable increase in inequality Actually, it turns out I've been learning more. I thought I knew everything about this, but I'm learning more than before. It's actually worse even than the standard numbers suggest because many of the numbers we look at don't look at workers by age. And because the workforce has been getting older and moving towards higher earning years, the aggregate numbers tend to look better for the typical worker than the reality. So, so here's what the numbers look like for the US for the earnings of standardized. We're looking at sort of prime working age, the age when people in general are trying to raise a family. And we're looking at men because there's a women. Discrimination against women has diminished some, so they've done better relatively, although absolutely, they're still much worse. And here's what you see. It's actually one of those classic things, right? The median is up. Sorry, the mean is up. Average wages are up, though not all that much over that period, but they're up around 10%. But the median earnings of prime age American men are down significantly, despite the fact that it's a more productive, richer economy. Everything is, you know, and this is of course typical when inequality rises, right? If Bill Gates walks into a bar, the mean wealth rises, but the median doesn't. And so what you're seeing is this situation where the large income gains at the top are not being reflected in the median. And in fact the distribution is worsening so much because that's a value judgment anyway. It's worsening so much that the typical worker is actually worse, worse off. Just side note, for the US These data don't really show you how much the mean is really going up because US, the data on which this is based are top coded so that incomes above 999,000 a year are truncated. And believe it or not, that actually makes a significant difference to the US data because, well, it. George Soros, who I see has done some. About to do another one here. George Soros is a poor guy because I think he's well down in the ranking of the hedge fund managers because he made a little bit under a billion last year. So anyway, okay, just to give you a sort of related. This is not just about education, but this is where the trade issue tends to be. We think a lot about education. This is just the U.S. the college, high school wage ratio, pretty much inexorable upward march since the late 1970s. Okay, this is pretty serious stuff. Now the thing is that upward march does correspond roughly to the period when for the first time we start to get large scale exports of manufactured goods from developing countries. And ever since the late 80s there's been a lot of discussion about how big a role is that, how big is the effect of those imports. And again there were a lot of people who just did not want to believe that there could be any. That's a position that some people still hold. But you know, James Mead would have told us different. It certainly could be in principle there could be an increase in, in income equality arising from trade. Now I said there's going to be some chastening here. So let me tell you about my own chastening. I was, I did not the most detailed studies, but I did some back of the envelope calculations and was a heavy consumer of studies that tried to assess the impacts of trade on distribution during the 1990s. And at that time what I felt was the right position was not to say nothing can't be. Not to say trade must be good for everybody because that's actually not what the theory says. But rather to sort of crunch the numbers and come up with the conclusion that it had to be fairly modest. And so we got numbers. I came up with 3%. Some other people, Bill Klein with the sort of last of that sequence came up with 6% on the wage differential. They were fairly modest numbers. The reason they were modest was that although there had been this explosion.
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Of.
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Exports of manufactured goods from third world countries, it was still quite small compared with the first world economies. So this is the US imports of manufactured goods from, from developing countries, they were still under 2% of GDP in 1990. And so working with data around in the early 90s, you put that through and it did not seem to be a really huge effect. These are what the estimates actually looked like. So Vorhas, Katz and Friedman came up with quite small numbers, although their numbers were affected. Technical stuff about the trade deficit. I said 3%. Bill Klein the dates on here are not the dates of the papers but the days of the data. So the. Bill Klein, although it was actually published in 97, he had trade data through 93 and it looked. That's significant. That's certainly not something you would just wave away as being nothing. But it's not at the core, not something you could say. That's a secondary issue in the story of trade and distribution. And again, just go back here for a second. This is because this is what the trade numbers looked like. Time has marched on. These are, I've been trying. It's pretty, I don't quite haven't quite managed to put it together, but this number would be above 5 now the imports, well this is mainly China driving this. It's some other countries as well, even India by the way, although the, the cutting edge, the thing that caught everybody's attention was the service exports, the manufactured exports are coming along and of course we're missing the new outsourced service issues. So it's starting to look, well, it's much bigger than it was. If you just did this in the most straightforward way, you would have to be saying that the impact on distribution is two plus times bigger than the estimates that people had in the 90s. So if we took the Klein estimate, we'd be saying 12, 15% might be worse than that. And the reason is that the new kid on the block, the new player China is not just huge but also much further down in terms of wages, much more labor abundant than the previous players. So in 1990, the newly industrializing Asian economies, which were what everybody thought of as the trade as the source of increased inequality, had wages that were about 25% of the US level at this point. The Bureau of Labor Statistics has now started to try to put together China estimates which they never did before and they are estimating China at about 3% of US level on terms of wages. By the way, that does not mean that China is super competitive, that it's not true that the Chinese are as productive as we are and they pay 3% of wages. For the most part that is offset by low productivity. But the point is that the kinds of goods, the low wage is a sign of a very labor abundant, still quite skill scarce economy that is going to be exporting goods that very much compete at the low end do in effect displace low wage labor in the US and in the EU and therefore do tend to exacerbate the income inequality. And you can no longer say in a, you know, you can no longer credibly say look, yes, I agree in principle, but quantitatively it's not a big deal. That's just not a, I don't think that's now a tolerable argument. I'll come back in a little bit to what, what do you do about that? Given that we now got a problem. But I think that's pretty clear I should say also, I'm not trying to give you a chart for it, but that I had two tricks, two more lines of defense back in the mid-90s against worries about the impact of trade on inequality. The first was to say, well look, these countries that are exporting may grow and they may export more, but they'll also be moving up the skill ladder themselves. That as South Korea becomes an even bigger economy, will also become a richer, more skilled economy. And therefore its exports will place, although they may be larger in quantitative terms, will actually place less downward pressure on unskilled wages in the U.S. and that's true. There's actually been a dramatic upskilling of the exports of the original Asian tigers. The trouble is along comes China and that's where you come back. Instead of getting these exports from upskilling South Korea, now we get huge imports from China, which is far lower wage relative to the advanced countries now than South Korea has been since the early 1970s. So the China emergence undermines that argument. The other argument that I had was, and this is very straight median trade theory was well, this median with an A in it, not middle of the distribution. It was that there's eventually you run out of labor intensive industries to lose that you in terms of the trade theory that you get full specialization at that point, no further effects on income distribution. Well, what's turned out is that the range of labor intensive industries keeps on expanding because we can break up the production process, because we can fragment the industries. So that to take an example, I was just looking at a bit to try and just get some real world anecdotes. The semiconductor microprocessors are undoubtedly a skill intensive high tech thing. But at this point intel has broken up the production process. The fabs which produce the actually get the circuits onto the disks of silicon are all in high wage advanced countries, mostly in the us, Ireland and Israel. But the actual cutting of those disks into individual chips and the testing is all done in China, Malaysia and the Philippines. So that's in effect created a new labor intensive industry that can be moved abroad. The whole business about outsourcing of services is really just best, I think seen as part of the same phenomenon. You now take the non physical parts of production and get to shift them back and forth internationally. And that means both taking labor intensive stuff and moving it to the third world and in some cases taking skill intensive stuff and moving it to the first world, which also has the effect of enlarging the range of possible income distribution effects. So that Lenovo, the Chinese computer manufacturer actually has its executive headquarters in North Carolina. But again that's a process of further expanding the range of trade. So you know, it's, we're now in a position where textbook trade theory applied to the real world data can easily justify a belief that international trade has widened the skill differential in the United States by 15%, maybe higher than that, and still rising with no obvious end in sight. Again, if we were some of us, I think I was a little bit less sinning than others. But we fell into the trap of thinking that trade must always be good for everybody. Because that's kind of what chapter two of the book says. But it's not true once you go beyond that. Let me turn just briefly to my third chastening, which is question about trade and the third world. And it's interesting because the passions on trade, I would say that the political debate on trade is really two pieces. There's one which is actually fairly pragmatic and probably is the one that matters most for electoral politics, which is what does it do to workers in first world countries? What does it do to workers who by a global standard are actually doing quite well. But that's not easy enough for fairly well paid academics to say. But if you like, if I want to be concrete, from my point of view, the political problem is what do I say to the workers of Ohio? Or more directly, what do I say to Senator Sherrod Brown, who's a good guy and I share a lot of values with. But how do I answer his concern that trade is hurting his constituents when the reality probably is that it is. But the passions, the real passions of trade are about what happens to third world countries, what happens to the poor. And that's where actually my passionate and only slightly chastened advocacy of globalization is not about believing that it does wonderful things for the US or the European economy, but about believing that's the only hope for Bangladesh, that's the only hope for the really poor nations of the world. And that hope is a bit diminished, but it's still the reason I believe so much. On the other hand, the anti globalization advocates are, again, they're not. They may have some concern about the wages of blue collar workers in Ohio, but mostly they're concerned about the belief that globalization is doing terrible things to the poorest of the earth. Now there's no hint that in anything I've seen that globalization is a bad thing for growth in the third world. It may not be as good a thing as some of us were temporarily able to believe, but there's no sign that it's negative for growth. There is some evidence that there are problems of distribution. And so, for example, this is not the, this is. Well, even the Wall Street Journal noticed this. Okay? Actually the Wall Street Journal has two papers of Course, one quite good and one bat crazy. But anyway, unless Rupert Murdoch buys it, in which case it becomes one paper again. So what they noticed is that in Mexico the Gini coefficient has gone up since liberalization, although not since nafta. It's really that early phase of liberalization that's really associated with increased inequality. And of course China has become gone from being quite egalitarian, if highly repressive society to one that is now reaching or surpassing Latin American levels of inequality. Now in the case of China, of course, there's lots of things going on. So it's not just trade. In the case of Mexico, it mostly is trade. What about that? And the evidence is, I'm not sure this is a picture of skill premiums. It's sort of corresponding to the American one, but it's actually done by. This is the Inter American Development Bank. They've just taken points of liberalization. They've chosen a year, which they believe is the sort of center of gravity of the liberalization. And by and large, though not everywhere there have been increases in inequality. Mexico tends to that Mexican experience in the 80s is the clearest cut case. There's a substantial increase in Chile and Colombia as well. Not enough to say that it looks on average, though not everywhere, as if inequality is actually rising in Third World countries. Now there's a temptation to say that that's contrary to economic theory. The same theory that says that liberalization ought to be raising wages in the first World countries, raising inequality and ought to be diminishing it in the Third World. There are actually ways around that comes back to the. Any smart. Actually this was beyond, I think smart graduate students. It took some smart associate professors to come up with this one. But you can come up with stories particularly this fragmentation of production offers some opportunities because it's not just like a reduction in tariff. If you make something that wasn't tradable, you can get some interesting effects. In particular the story with Mexico. There's a fair bit of evidence that what's actually happened is sort of intermediate range goods, goods that are moderately labor intensive have shifted production from the United States to Mexico. And those are goods that are more labor intensive than most of what the US Is producing. So they're actually making the US more unequal, but they're actually somewhat less labor intensive and more capital and skill intensive than what Mexico is producing. So they're actually also raising the. It's a little bit like the, you know, the. I'm trying to think of a department. I hate the guy who moves from Princeton to Chicago and raises the average in both places. Sorry, I don't actually have anything against Chicago. Not as it is now, as it was once. The evidence on trade and poverty is mixed also, but certainly not uniformly encouraging. We certainly have in Mexico, again especially into some some extent Colombia, evidence that trade has actually. That globalization, trade liberalization has actually worsened poverty. I'm not sure I regard it as an intellectual puzzle. I did for a while, but the more I look at it, I think we can more or less make sense of it partly because the picture is sufficiently mixed, but it's another reason. Now if you had asked me, I think I'm actually on paper saying this in 1990 I was quite sure that trade liberalization would equalize income in developing countries, that it would actually be good on all accounts. It would not only promote growth and I thought would do these wonderful things for growth that we all believed at the time trade liberalization did, but it would also be equalizing because I thought it would increase the demand for labor relative to capital and it would have all these favorable distributional effects. And the picture is in fact at best mixed. It has not uniformly had favorable effects. The original Asian economies again, excessive faith in the power of historical experience is a big part of the story. The original Asian industrializing economies did have a remarkable combination of growth with equity. In the early phases things went very well both in terms of income distribution and of course in terms of growth. That experience has not been replicated anyplace else. And in some cases, as you can see, it appears to have gone wrong. So again, my third chastening. So in this kind of apologetic mood, what do we do now? And let me say again the. I don't actually think we're on the verge of a wholesale return to protectionism. Very hard for me to see another Smoot hauling. It's been interesting that even in countries that have very vocally rejected the Washington Consensus and there has not been anything like a return to import subsidies substituting to the bad old policies of the seventies. Argentina certainly had some pretty stiff rhetoric, but not the whole not back to Peronism. So I don't think that's a likely prospect. But in any case, let me just say that I think a pretty open global trading system is a very important thing to maintain, not because it's terribly important to the economy of the United States or Western Europe. The fact of the matter is that even a full out trade war would make the United States or the European Union a few percent at most poor. It's just not that big a deal. But because there are very large numbers of people who are very poor and depend desperately on the ability to export based on really no advantage other than low wages. So I always think when somebody says, well, shouldn't we roll back globalization? I always say, think of Bangladesh. What do you expect them to do if they can't export apparel based on wages at 30 cents an hour? What else can they do in that country? So that's the core reason. And then as a secondary thing, some lingering hope that we may well not lingering hope because we do see it, that we may see more South Koreas, that we may see more things like India. It's not clear that globalization was essential to what happened. But do you really want to chance taking away that possibility? But what do we do as a political matter? So we have now a very difficult situation in, in politics. And here it gets a little, it gets really quite American in orientation. Can't help that. It's the place I know better. I don't have any sense of what the balance looks like on this side of the Atlantic. We had in the United States a kind of hiatus in the globalization debate. And well, no, I did do a lot of Bush bashing. And I will say that one of the things that George Bush did do for us was in effect to give us a vacation from arguing about globalization because lots of people who might have different views on that were united in the sense that something really bad was happening. And so we can. In fact, there was an extended period when if I would write about international economics for the New York Times, I would actually get a barrage of mail from loyal readers saying we're not interested, go back to bashing Bush. So we have. But now we're somewhat, we're emerging from that. We have a change in the United States in power in the Congress, reasonable, though not certainly the change in the executive at the end of next year. And the debates are, and there are debates now that are between people who broadly share the same values. They all share reasonable concern for the state of the world. They're all concerned about incomes of working people in the United States. There's no fundamental difference in world in what I and the protectionist wing of the Democratic Party care about. But there is a difference in weight and in particular, they have to answer to constituents who are reasonably actually on the losing end of some of what's been happening. So here's what does a chastened globalist do? So, three things. First, I think it's really important to be Honest. If you go out and try to claim that there are marvelous, wonderful things as a result of trade liberalization and no harm is done, all you're going to do at this point is just lose credibility. You'll be missing, people will say, you know, you're just not in touch. So being pretending that it's still 1990 and none of these chastening experiences have happened is not due. Don't waive off the concerns. Don't claim that there are no concerns effects. And you have to offer some kind of way of compensating the losers from the process. If you want to preserve this, there has to be something to waive off the losers. Right now the favor proposals are things that will not work. They might buy you some time because people think they will work, but they won't. Labor standards. That's the current, the current view of the people who want to go about doing trade negotiations is that we're going to go and we're going to negotiate labor standards. We're going to have things that rule out slave labor. We're going to right to organize. So on down the line, why won't that work? It won't work because the reasons for the income distribution problem are fundamentally linked to the comparative advantage of the countries involved. Even if we have full rights of organizing in China, China is going to be a labor abundant country exporting labor intensive goods and it's not going to go away. Maybe we'll get rid of some of the more outrageous things that happen, but we won't deal with the fundamentals. So the only way labor standards can actually be effective is if they become what the critics of labor standards accuse them of being, which is just a backdoor route of protectionism. You know, go out there and try and impose a $2 minimum wage on Bangladesh and that will work because it'll just destroy Bangladesh's export industries. But that's not what you want. Trade adjustment assistance. It's the other thing that people talk about. Let's help the workers who are displaced by jobs by trade, give them temporary cash training. But if it's really stopper Samuelson broad income distribution, that's not the problem. I mean, sure, fine, but it's not going to actually. The real problem is a broad pressure on the relative wages of different skill levels of labor. It's not the world where the problems are just transitional. I mean, I guess in the very long run you're going to have new generations that are more highly educated and won't be exposed to these pressures. But this is not. You're not going to be able to take the 40 year old man whose job has been lost to imports and, and train him as a. I'm trying to come up now with a high wage occupation that's not possibly threatened by competition. I can't even come up with one. Right. Train him as a software engineer. Whoops. So that's not going to do it. Things that might work, things that involve strengthening social insurance while making the tax system more progressive. I think you want to think of this as being really. The distributional impacts are hitting a substantial part of the lower part of the wage distribution. If you can have any policy measures that broadly help that part of the wage distribution then that's a partial offset. Now you could argue that these are things you should do anyway regardless of whether trade is causing problems on inequality. But the case becomes more acute. And if you want something that is more specific, we have this thing which has now been emulated in the uk, the Earned Income Tax credit, which is a wonderful way of actually saying we are going to reward work at lower wage rates in a way that helps offset income inequality. The problem with, in the US is that it's clearly at this point, from the point of view of dealing with these problems, it's pitched way too low. The tax credit tops out at, I think on current numbers about 15,000 a year and fades out completely by the time you get to the mid-30s in income. And that's below the point if I believe what we're seeing. It is actually the median worker is actually being somewhat hurt by trade. So an EITC that actually disappears before you even get up to the median is not adequate. So you need something bigger and that's again part of where you can offer some compensation. It's going to be really difficult. I'm not going to be able to defend free trade with the same kind of cheerfulness. I was about to say clean conscience. I think my conscience is clear, but my attitude is a little more depressed, a lot more depressed than it used to be. Be that it's going to be much, much harder to make this case honestly, but it's going to have to be done. The fact of the matter is that the last 15 years have been, to go back to my word, a pretty chastening experience for free trade advocates. We haven't been proved wrong, but things have turned out to be not nearly as easy, not nearly as good, not nearly as uniform in their benefits as we hope to be. And if I were going to sum it up I'd say that the world is actually not a simple place that requires just a few slogans. It's a place that requires detailed, careful analysis. Sort of thing that James Mead wrote once upon a time. Thank you.
- [65:13]
A
Well, thanks very much, Paul, for extremely stimulating and interesting talk. We now have some time for some questions. So there are roving mics, I believe, around the hall. So if you identify yourself, then we'll start off the questions. Okay, so let's start off with Danny, the first front.
- [65:38]
C
Thanks. Danny kwa, Economics Department, lse. I wonder if the chastenings that you've taken upon yourself are a little bit more severe and a little bit more subtle than a different reading of the facts might suggest. I'm thinking in particular of the chastenings that you refer to as the increasing income inequality in the developed countries. Your point number two. And then. Sorry, in the developed countries. And then in the developing countries, number three. Now, your evidence for saying why inequality has risen and is a bad thing for the developed countries hinges on, among other things, the behavior of this median worker. Not. But not to get too technical, the median is just one part of an income distribution. And we know that an income distribution is a very complicated thing. It can do weird things in different parts of it. So, for instance, from the perception of the outside world, while the median worker has had their income fall, the bottom 40% of the income distribution in the United States has actually seen real incomes rise despite the share of national income has fallen, but real income falls for the bottom 40% has actually risen. Now, it might be that by marshaling different facts about the income distribution in the rich countries, the United States and elsewhere, we can come up with a more nuanced, less chastening version of your point number two. Similarly, your point number three, which has to do, and the way I've read your presentation, the strongest piece of evidence there is what happened in Latin America post trade reform. But Latin America is not, I think, what one might naturally immediately point to as where the strongest effects of opening up to trade have occurred. You've made mention of China several times in the presentation, but your single piece of evidence on China, if I understand, was this increase in the Gini coefficient. But we know that that increase in the Gini coefficient in China came at the same time as a dramatically rapid increase in per capita income. And as far as I can tell, all the literature that's tried to mesh those two pieces of evidence have actually said that China has succeeded in removing from states of poverty hundreds of millions of people over this time. So I might suggest that your points 2 and 3 might be more subtle than you seem to want to want us to believe. And then let me conclude with what seems to be a 500 pound gorilla sitting in the room that you've alluded to, but that you don't make very much more of. And this is that you've talked about inequality within the developed countries within the United States and inequality within Latin American countries and you've said how? Well, to bring Bangladesh along, we do need globalization. But the Bangladeshes of the world, the Chinas of the world, the cross country income inequality dynamics of the world, that's the 500 pound gorilla that's experiencing these waves of impact from globalization. And there the evidence seems to be that we do see a convergence from the very rich, from the very poor parts of the world to converge towards the very rich parts of the world even as inequality within those two parts of the world continue to increase.
- [69:04]
B
Okay, let me actually, on the last part I agree completely.
- [69:08]
A
From the.
- [69:09]
B
Is this on?
- [69:10]
D
I doubt that it is.
- [69:12]
B
Okay, I agree completely that from the point of view, from a ruthless cosmopolitan point of view, what matters most of all is the income of the poorest in the world. And so the growth, this convergence of parts of the third world, rapid growth in there, which narrows global inequality is the most important thing. The world as a whole is a much better off place than it was in the 1970s. It was one of. I could give you my globalization sermon, which really comes back to people look back to the world before globalization looked back to the world around the time that I was in grad school. And they imagine it as this kind of happy place of self sufficient economies and cheerful peasants singing their songs. And it's nothing like that. It was a desperate feeling of hopelessness in the world. So this is a very important thing. But the problem is again, we have a number of disappointed countries. In effect, I'm taking that as a given and saying, but what do I say to the Latin Americans who say to me, you people from Washington came down and gave us all these promises and they didn't deliver. What do I say to the senator from Ohio who says, what do my constituents say? So it is at some level, it's a political economy problem rather than a global values problem. About the inequality. I actually don't think that if you look, certainly if you look at the distribution of earned income, if you look at the distribution of wages, there's any ambiguity, it's clear cut and it's been falling at the bottom and it's a. There really, there could in principle be complicated things happening to income distribution, but in practice it's pretty much univariate. And so, I mean there's a long. I could get too far into this, but I'd even say, look, median family income in the United States is up, although the earnings of the median prime age worker are down. And then we get into all kinds of questions about if you have higher income because of increased female labor force participation and so on with how do we evaluate the welfare. The fact of the matter is that the inequality is clearly increasing and it's a problem and it's a real, it's again, it's in global human welfare terms it may not look that large. But in terms of how do I defend a basically free trade position when talking with a group of senators or congressmen that basically I agree with on most things? That's where my problem is.
- [72:14]
A
Adair Turner and then gentlemen, behind.
- [72:20]
B
Yes.
- [72:20]
D
Adair Turner, among other things, until recently I was chairman of the UK Low Pay Commission, which sets our minimum wage. And we were very aware in setting that minimum wage that the, as it were, pre intervention level of wage inequality was increasing with both the upper end moving away from the median and the median moving away from the lower end. And that's well documented. The question I wanted to ask was this. You said that one of the arguments that you used to believe to say that the quantitative size of these effects was either small or limited was that we'd reach a point where everything in which other countries had a comparative advantage had moved over there already because there'd be a limit to the traded sector of the economy and a limit to the areas which were based upon low skilled labor and therefore would move, and that that limit has been moved by the phenomenon of the disaggregation of the value chains, that you can outsource particular slices of what overall looks like an untraded good or a good where the UK or the US actually has comparative superiority and you can trade that. The other thing that you used to argue, and I also argued it as well, is that it was limited because quite a lot of the economy isn't traded at all. There's a non traded, face to face service bit of the economy. You know, having a haircut, buying a coffee off somebody. But of course that is effective by globalization, not by free trade, but by immigration. And you could have drawn a simple relationship between the rising inequality of the last 25 years in the US that from 1980 onwards not only did you have a dramatic increase in the extent to which there was trade into the US but it was also a turning point in the immigration. There was a length of period of time in the middle of the 20th century when there wasn't much immigration into the US and that turns around in the 80s and 90s. So my question is, what's your take on the immigration side of globalization argument? Is that also one of the things that's driving increased inequality?
- [74:36]
B
Okay, yeah, as you probably know, this is, this is a hot issue. Let me say it's actually, it's a hot issue in a slightly enjoyable way. Because what's interesting is that both sides of the political spectrum in the US are split over the issue. But on the progressive side the split tends to be individual agonizing. You're concerned about possible increase in inequality, you're concerned about political economy of having large numbers of disenfranchised voters. But on the other hand, you actually like the immigrants and like to see people making these gains. And it tends to be the same person experiencing both those, both those feelings. And on the other side of the political spectrum there is a division between the people who like cheap labor and the people who dislike brown people. And it's been been kind of enjoying to watch them tear themselves apart over that. Now there's a real academic debate, serious people on both sides about the impact of immigration on wages in the US We've had the immigration is very low education levels. So we're getting immigrants primarily from Mexico and Central America who are well short of a high school degree. And if you just treat them as being equivalent to native born workers with the same skills, then it ought to be a quite substantial negative wage impact, circa 8% negative real wage impact from the immigration. There is an argument that says that they are not actually close substitutes, that the immigrant workers are working in very different fields and that they are highly imperfect substitutes, which lets you bring that number way down. I go mostly with my old student Gordon Hanson, who works on these issues and tells me that he thinks the methodology of some of those low estimates is flawed. And so he's more on the 8% negative side. So that's where I would fall at the moment, but not from any independent judgment. I mean the presumption probably is you get a lot of low education workers coming in. Unless it's very special circumstances, it is going to be a negative and it is a source. I think that quantitatively it's smaller than the trade issues and it's also immigration. We do have restrictions on immigration and the real question is only about exactly how we're going to go about trying to make them more or less actually binding. And terrible debate about that, but it's not. We're not going to be tearing down a system. Whereas the concern on trade is we essentially have global free trade on everything but agriculture. And the question is about backsliding and that's a very different issue. So. But yes, the immigration thing, you know, if we had. If we were like the United States in 1919 with very, very open immigration policies and we're having this problem, then it would be a comparably agonizing debate but also impossible to stop the restrictionist position. So anyway, yeah, it's. I'm having enough problems on trade.
- [78:09]
D
Easy question.
- [78:10]
A
I'm going to take a couple of. Lots of people their hands up. So I'm going to take a couple of of questions and then give Paul a chance to answer. So there's a gentleman at the back there who's been waiting a while.
- [78:24]
E
My name is Raju. I'm a London Metropolitan University student who doing international economics. My request is that I'm sure Professor Krupman have been writing so many articles in economics. Of course his contributions very great to global wealth. But what I my humble request is that why not the next article should be disabled people's economic development in the developing country and developed country. Why not you write some article on. So this will boost our profile in the global world. Because I think we also facing a lot of unequality.
- [78:59]
B
I think I'm not quite sure I got what the question was.
- [79:02]
E
The question is that it will time for professor to write disabled people economic development.
- [79:08]
B
Disabled people. Yes. Oh my.
- [79:11]
E
I'm reading a lot of your article.
- [79:12]
B
That's a good point. Wow. Okay.
- [79:16]
E
Can you give us some chance as well?
- [79:18]
B
Yeah.
- [79:20]
A
Do you have your hand up at the back there? Yes, you can wait too long. A lady at the back.
- [79:26]
F
Hi, my name is Anna, I'm a journalist. I'd like to know your view on fair trade. Is it just an adjustment that won't work or is it something good?
- [79:34]
B
I'm sorry, on fair trade. On fair trade, yeah.
- [79:37]
F
What's your view on that?
- [79:40]
B
Here's the position. I think there are certainly there are rents in the system, there are margins. It's not true that what the market gives you is exactly what has to happen. So it's not the kind of total skeptical view on fair trade that says nothing can be done that things like certification of treatment of laborers or certification that farmers receive a reasonable price for their output is meaningless. That's the hard line view. I think that that's wrong. I think they certainly don't want to be dismissive or hostile, but it is going to be at the margin. I mean, the fact of the matter is that the reason wages are low and working conditions are terrible in a Bangladeshi apparel factory is not ultimately that there is mistreatment by the employer, although there may well be and that may be making things worse. It's the fact that the opportunities for those workers elsewhere are so poor and there's not. So there's a limit on what you can do. You can certify that, that all of the. That your T shirts and your shoes and all of the many consumer goods that come from the third world are.
- [81:00]
E
Being.
- [81:02]
B
Produced in as best conditions as you can reasonably hope for. But it's going to be marginal. It's going to be a few percent here and there. And that's so I'm not opposed to it. This is again. Well, I've also made a kind of decision that being scornful and hostile towards people who are worried about globalization is not a productive strategy at this point. So I'm all for making some. You know, I'm looking for what can be made of it. But don't expect. It's like the labor standards issue. Should we be making sure that union organizers are not shot? For sure. And that's not entirely abstract. Right. But will that solve the problems?
- [81:49]
G
No, it won't.
- [81:51]
A
We have a question here, please. Could we, given time, could we try.
- [81:56]
B
My question short accumulating maybe.
- [81:58]
A
Well, never mind.
- [82:00]
B
Thank you. While one could imagine that the inequalities in the developed countries can be managed because they have fairly strong and efficient governments. But in developing countries, which are what you call, characterized by what you call Uyghur governments and also the pressure from the market of race to the bottom, how do they manage their inequalities? Thank you. Oh boy. First of all, that's an enormous subject. Secondly, it's something that really you take a better expert in. I mean, I mean, I think the point on all of these, the general attitude we have to have now is that there are no perfection is so far out of reach. You just look for little things that can be done. And the thing I've always about developing countries is that because so many people are so poor, quite small things, quite small amounts of money can make a huge difference. And so you do what you can. I mean, I don't think. It's certainly not true that it makes no difference what the governments try to do. The difference between third world governments that do try to do something for the poor and those that don't is quite substantial. That's not a very good answer. And you really want people, there are people who devote their lives to trying to out figure, figure out those small interventions that can really make a big difference. And I'm not one of them.
- [83:32]
A
Okay, we really will try and accumulate a few now. So there's a lady at the back who's been waiting for a long time.
- [83:39]
F
Rua Biji. I'm an alumna of the school you only touched briefly at the end on the issue of political will in all of this. And I acknowledge it's the Mead lecture, so it's very much based on kind of trade patterns and comparative advantage. But there's a number of issues I think, where, you know, political will and government action are actually fueling inequality. So for example, the Bush administration with a very regressive social tax policy, developing countries that would subsidize or incentivize developed country multinationals to invest in their countries at artificially low rates if you like, rather than investing in their homegrown industries, which would encourage high skilled industries as opposed to subcontracting of kind of very labor intensive simplistic industries. Also successive meetings of the World Trade Organization which don't support developing economies as they should, which the fair trade question touched upon. To what extent do you see that political will shifting to address global inequality? Or is it just going to have to be a question of civil society placing that pressure on governments? Thank you.
- [84:46]
A
Okay, and a question here.
- [84:57]
H
Just where it would have been interesting and I'm terribly glad that I don't have to deal with your senator from Ohio. But what might you say if you gave him a tranquilizer and can and try to deal with him non emotionally. I think you would have to go into detail about the tax and social insurance deals that you mentioned and especially the earned Income Tax credit. You say it would be very much bigger and I'm inclined to agree. But on this side of the pond, which you rather quickly dismissed, the best thing that Chancellor Gordon Brown has done has been to introduce tax credits which would directly model on the eitc. And yet it's the least popular thing he has done, judging by a lot of the discussion. But it isn't only a political issue. If you were to ask those economists who don't like these devices for a reason, why they would say that the tax and transfer rates you would need would have a substantial disincentive effect on willingness to work and might reduce the GNP to such an extent that it would offset the advantage from having free trade. Now, I don't know whether you think that or not, and I don't actually think this matters very much for the total of human happiness, but I'd very much like what you said in the earlier part of the lecture is not all that controversial if you really think of it. The difficult part is the last two lines and I wish you would enlarge.
- [86:44]
A
Okay, we'll take one more and then you've been waiting a little while.
- [86:48]
B
So.
- [86:55]
G
So my name is Dmitry. My question is about your data that you use for illustrating the effect of reforms in Latin America and the income inequality in Latin America after reforms. Do you think if there is a effect of political action or inaction on the part of the local government in terms of ineffective anti corruption measures and failing redistributive policies, what can the first of all do in order to incentivize these countries to adopt the more effective policies and abide by them?
- [87:33]
B
Thank you.
- [87:36]
H
Okay.
- [87:38]
B
The political will issue or just the politics of it? I mean, it's. I guess this is what happens at a certain point in your career. You start to think a lot about. So I think a lot about the fact that unfortunately the way that the world works is not as Mead might have envisaged to me, not that he really believed this, but just his way of doing it. That there's a council of wise men deciding what you should do and making those decisions. There are in fact political interest groups that are struggling. And in the. I wouldn't quite characterize it as a problem of political will. There's a problem of there are quite strong political wills trying to accomplish ends that are not those that I share and in some cases quite nefarious ends. So. And I have a book coming out about all of most of the US centered but with some international about that. So in the US we clearly have something that we call movement conservatism. It's not a movement that lacks the will to fight inequality. On the contrary, it's a movement that's very strong willed and well organized to promote inequality. And that's a long story. And to some extent that's part of why I'm trying to think so much about my senator from Ohio, because I'm trying to think about he's somebody who's on my side of that fight, but he's got a problem with trade. So what do I do? How Do I give him some answer? Samuel Britton. In a perverse way, the US has an advantage because we start from such a so much smaller a welfare state that the incentive issues are at this point quite small. So that we are if we did everything that was on my wish list we would still have a public sector that was 7 or 8 percentage points of GDP smaller than the UK's. So it's of course then my wish list would expand but at this point the fact is that we are so that may be more of a problem here now I understand that and I am looking some at Gordon Brown's efforts and they are they do carry lessons for the US and they do say that there are good things you can do but it's not that easy. This is in some ways the Blair Brown government pursued a program on the domestic side that looked like much of what a progressive administration in the US might try to do, although starting from again a much the British welfare state at the end of the Thatcher era was far more comprehensive than the United States has ever had. So it's starting from a very different base but and it does show that you can do things but it's not that easy and by all means, I mean I think you probably want someone else to give that lecture but you're right, those will be the hard things. But first there are some hurdles to cross boy creating incentives for developing countries to do the right thing. We have not been notably successful successful in that, I think and particularly I have to say in the whole Washington Consensus era. Again, my thoughts are mostly about Latin America, which is and it's an old joke that's been recycled in various versions but now it's very current among the Latin Americans. What's the scariest words you can hear? I'm from Washington and I've come here to help you so this is I think they're going to have to reach their own way on this.
- [91:47]
A
Well, we could really carry on talking for many more hours but unfortunately I have to bring this to an end so I'd just like to thank Paul once more for a really excellent and really stimulating thank you very much.