New Economist

Globalisation: good for jobs?

Chris Giles summarises a new report on globalisation by the Ifo-affiliated European Economic Advisory Group in today's Financial Times: Globalisation ‘a blessing’ for west Europe

Increased trade, outsourcing and offshoring do not create unemployment but boost the number of jobs in advanced economies, a study of European labour markets says on Tuesday. The European Economic Advisory Group...argues that although globalisation can lead to a fall in demand for certain types of skill, it also tends to sweep away job-destroying rigidities in labour markets.

The evidence from the group’s work suggests the positive effects of globalisation outweigh the negative effects. Although the group concedes that its statistical work remains “crude”, the report concludes that globalisation is likely, if anything, to lead to long-term rises in employment. “If so, globalisation will not be a curse for employment in western Europe, it could instead turn out to be a blessing,” the report says.

The report in question is Chapter 3 of the EEAG's seventh report on the European Economy, Europe in a Globalised World, launched today in Brussels. It warns of "dark clouds" in the US, but no recession in Europe. The chapter, The effect of globalisation on Western European jobs: curse or blessing? (PDF 2.9Mb), comes to more qualified and tentative conclusions than the FT article suggests:

Our basic message is that we probably should not expect globalisation to have adverse effects on overall employment in Western Europe in the long run if one takes all effects into account. It is true that trade integration and factor mobility vis-à-vis low-wage economies are likely to cause unemployment if European labour markets remain rigid. But there is a good chance that globalisation will help reduce these rigidities. Politicians in some countries may try to swim against the tide and uphold or even strengthen regulations in the labour market, such as Germany is currently doing. But in the end, globalisation is likely to strengthen the incentives to deregulate. Therefore, the net result could be that employment is promoted.

If globalisation does not hurt employment, it will produce aggregate gains. There is a possibility that globalisation could eventually benefit almost everyone, although some will gain more than others. However, there is also a fair amount of evidence that economic integration with low-wage economies reduces the relative demand for less-skilled workers and their relative compensation. So, it is also possible that there could be a large group of losers.

But maybe that's the wrong way of looking at it? The authors suggest we should examine how effectively our institutions handle a more global world:

It makes more sense to recast the issue in the following way: are our labour market institutions and our welfare states designed well enough so that the gains from trade reform will be broadly shared? Or are they likely to breed opposition to these reforms?

The 34 page chapter ends with a useful discussion of the possible components of schemes to compensate the potential losers from the globalisation process. A thoughtful piece, deserving a wide readership.

Productivity vs employment growth: a zero-sum game?

All economists know productivity matters. But they also know it isn't easy to measure, nor to explain the often large and persistent productivity gaps between nations. A new paper by Harvard's Ian Dew-Becker and Northwestern University's Robert J. Gordon makes a provocative contribution to the productivity debate. Presented at a meeting of the NBER Program on Technological Progress and Productivity Measurement in Boston last week, the authors argue there is a "strong negative tradeoff between productivity and employment growth". The abstract from their paper, The Role of Labour‐Market Changes In the Slowdown of European Productivity Growth (PDF), continues:

We document this tradeoff in the raw data, in regressions that control for the two‐way causation between productivity and employment growth, and we show that there is a robust negative correlation between productivity and employment growth across countries and time. We simplify the task of explaining intra‐EU differences in the performance by reducing the dimensionality of the issue from the 15 EU countries to four EU country groups, chosen by geography.

We provide a comprehensive analysis of the role of policy and institutional variables in causing changes in productivity and employment per capita growth across these country groups. Using both a calibrated theoretical model and several reduced‐form regressions, we document the strong effects of European policies that raised labour costs, such as the tax wedge, employment and product market regulation, unemployment compensation, and union density, in causing employment to fall and productivity to rise before 1995, and for this process to be reversed after 1995.

The policy implications of their research are stark:

The strong evidence that we find for a productivity‐employment growth tradeoff changes the questions that European policymakers should be asking. They should no longer ask how they should boost productivity growth or raise employment growth. Most policies will push productivity and employment in opposite directions, and we have shown that these offsetting effects make the effects of policies on growth in output per capita ambiguous. Our new policy framework suggests that policy changes be assessed as much on their effects on government budgets as on productivity or employment, since the productivityemployment tradeoff causes some policy changes to have a negligible effect on growth in output per capita.

I'm not sure I'd necessarily agree with the authors 'zero sum' conclusions. There are for example some economies which perform better on both productivity and employment growth than others; so it's not always such a direct trade-off. One implication - that higher employment rates or higher productivity in large part reflect different national preferences - has certainly been argued before. But if their general 'zero-sum' argument proves to be more the rule than the exception, it has profound implications for policy makers throughout the OECD - especially in Europe.

What was special about Europe?

Gregory Clark's new book A Farewell to Alms is not the only recent take on the emergence of the industrial revolution. Dartmouth's Meir Kohn has a forthcoming work too. Titled The Origins of Western Economic Success: Commerce, Finance and Government in Pre-Industrial Europe, the book manuscript is available online. As Kohn explains in Chapter 1, his work has a Smithian focus on commerce and markets, seeing the creation and expansion of markets in pre-industrial Europe as the key to economic growth:

The can-opener in the Ricardian theory of economic growth is the market. The market is simply taken for granted: it plays no explicit role in the Ricardian theory. But in the real world, markets cannot be taken for granted. Contrary to the Ricardian view, it is not technological progress but rather the creation and expansion of markets that drives economic growth. Technological progress is a consequence, not a cause. It is a lack of well-functioning markets—not a lack of resources or of technology—that explains the stagnation of the less-developed world and the problems of the transition economies.

The economic success of the West is explained, not by its cultural superiority or by the wisdom of its governments, but by its greater success in developing markets. Of course, the obvious question is, Why do markets develop more successfully in one place rather than in another? Answering that question is a primary goal of this book.

This is a detailed and fascinating work, written in a clear prose. I look forward to its publication and the ensuing debate.

Does another China trade row loom?

First we had bra wars. Then shoe wars. Is yet another China-Europe trade row brewing? The Economist certainly thinks so. The China trade syndrome explains why Europe's next big globalisation row will be over trade with China. It gives this analysis of the reasons:

Three linked China problems are now causing big ructions.

The first is one of sheer scale. Low-key policies that seemed adequate a couple of years ago have struggled to keep pace with the explosive growth of trade. Two-way trade between the EU and China expanded by over 20% last year to a total value of €254 billion ($319 billion), and the trade balance has swung sharply in China's favour. Compared with America, the EU has shunned confrontation, preferring dialogue with China over such concerns as the deficit or intellectual property. But this calm approach may be a harder sell when the bilateral trade deficit with China is running at an average of €15m an hour.

The second problem is that China ignores gentle hints to stick to commitments it made when it joined the World Trade Organisation. The charges are numerous: there are perennial (and hard to prove) accusations about state subsidies and a failure to guard against the theft of intellectual property. A bleak report by the EU Chamber of Commerce in China notes a fresh threat: the unequal treatment of foreign companies by newly muscular Chinese regulators. Chinese officials are even accused of diverting EU energies into “process”—endless argument over when and with whom meetings will take place. It does not help that many commissioners fall for this nonsense, tripping over each other in their eagerness to visit China and meet the right officials. The 27 member countries are worse, eagerly undermining agreed positions in a quest for national advantage.

The third problem is China's currency, the yuan, which has lost about 40% of its value against the euro since 2000, making Chinese exports ever cheaper. President Nicolas Sarkozy of France loudly argues that euro-area governments should join forces with the European Central Bank (ECB) and back American demands for the Chinese to let their currency appreciate (it is still loosely pegged to the dollar). But the sad reality is that any finger-wagging by the Europeans might serve only to expose their impotence. Noting the euro's steady rise against the yuan, several American analysts conclude that the Chinese have taken a deliberate decision to allow Europe to foot the bill for any small concessions they may offer to America on the yuan.

Reversing Poland's brain drain?

Young Polish workers have flocked in the hundreds of thousands to the UK, Ireland and Sweden to find work since Poland's EU entry in 2004. Now Poland is faced with a serious lack of skilled workers and Warsaw wants to entice them back home, reports Der Spiegel Online: Poland Tries to Woo Its Young Back Home

Learning the lessons from Sweden's budget crisis

In the early 1990s Sweden's long-lived economic recession posed a crisis on three fronts: an exploding budget deficit, high interest rates and record-high levels of unemployment. While other countries may have balked, Sweden implemented the painful foscal measures required - and they paid off.

In a new Breugel essay Jens Henriksson, a senior official in the Swedish Finance Ministry at the time, draws on his experience of one of the most dramatic consolidation episodes of the post-WWII period. In 10 Lessons about Budget Consolidation, Henriksson gives a truly fascinating and informed first-hand account. Here are the first two paragraphs:

In its Economic Outlook of December 1994 the OECD projected that the Swedish public debt would explode. By the year 2000 the public debt was expected to hit a record 128 percent of GDP2. Today we know that the gross debt for 2000 turned out to be less than half that figure at 53 percent. And within a few years the budget deficit, from a high of over 11 percent of GDP, turned into a large surplus.

But getting there was not an easy task. During the consolidation of public finances, I had the opportunity to work in close contact with different ministers of finance in Sweden. This paper relates what this experience taught me about the political economics of budget consolidation.

There are lessons here for all countries facing budget problems - not just those intent on he cutting back the sizxe of the state. As he notes:

It is not a paper about how to get rid of the welfare state. On the contrary, it is about how to strengthen the economic foundations for whatever kind of social model that is preferred. The budget consolidation in Sweden was dramatic but it preserved,preserved, and in many ways modernised and improved, the
welfare system.

Previous post
* The joys of fiscal consolidation, 25 May 2007

UPDATE: See also a new Cleveland Fed discussion paper by O. Emre Ergungor, On the Resolution of Financial Crises: The Swedish Experience (PDF)

Sweden was one of the Scandinavian countries experiencing a severe financial crisis In the late 1980s and early 1990s. I review the policy choices and external factors that pushed the country’s financial system over the edge and then examine the steps the government took to make its resolution of the crisis one of the most successful in the past 30 years.

New European portal: VoxEU

Good news for those on this side of the pond - about two dozen leading European economists have decided to set up their own 'policy portal' group blog: VoxEU.org The organisers explain:

VoxEU.org is a policy portal set up by the Centre for Economic Policy Research (www.CEPR.org) in conjunction with a consortium of national sites, including the Italian site LaVoce (which provided inspiration for the idea and help from the start, www.LaVoce.info), the French site Telos (www.telos-eu.com), and the Spanish site Sociedad Abierta.

Vox aims to promote research-based policy analysis and commentary by leading scholars. The intended audience is economists in governments, international organisations, academia and the private sector as well as journalists specializing in economics, finance and business.

Although it has only been up-and-running for a few weeks, there are already a dozen or so new posts and about two dozen older pieces (often translations).  Here's a sample:

* Should Europe care about global imbalances? by Philip Lane and Gian Maria Milesi-Ferretti

* Migration and welfare, byTito Boeri

* The US-Europe income gap: Is it for real? Alberto Alesina, Guido Tabellini

* The fuss about foreign exchange reserves accumulation, by Charles Wyplosz

* Is enlargement unlimited? by Richard Baldwin

This is a very welcome initiative. Thanks CEPR!

Those missing migrants

I'm not the only one wondering what happened to the hoards of Bulgarians and Romanian migrants who were supposedly headed for British shores. Bulgarian journalist Nikolai Chavdarov also asks about the Missing migrants at the Guardian website:

Do you recall the live broadcasts from London airports on January 1? Reporters were desperately looking for hordes of Bulgarians and Romanians arriving in Britain as the tabloid press stirred up alarm about hundreds of hungry immigrants supposedly pouring from planes on the day the two countries joined the EU.

"How many more can Britain take?" asked Sir Andrew Green, chairman of Migration Watch UK, writing in the Daily Mail. "Are we about to see another wave of East European immigration? Will Bulgarian builders be hot on the heels of Polish plumbers?"

Two days later, the same paper reported fears that "a tidal wave of poorly skilled workers" from Bulgaria and Romania "could overwhelm Scotland's schools, NHS and council services".

Meanwhile, the Daily Star announced: "An army of 600,000 Romanian and Bulgarian immigrants will start entering Britain on Monday - and they won't even have to show a passport."

None of this actually happened. Officially, only 8,000 Romanian and Bulgarian migrants came to work in Britain in the first three months of this year and it is clear now that there will be no "tidal wave".

Why didn't they come? One reason is that at present Bulgaria and Romania are enjoying relative economic stability. The economic growth in both countries is still above the average compared to that of western European economies.

Also, the main wave of emigration from these countries had already occurred. In 18 years after the fall of the Berlin wall more 800,000 Bulgarians in their twenties, thirties and forties had gone. The shrinking population doesn't provide enough manpower to continue this trend now.

Besides all that, the UK is not the most preferred destination for Bulgarian workers with low qualifications - Greece, Spain and Italy are. The United States also provides opportunities for immigration. I remember a friend who told me that he would always prefer the United States. One of the main reasons was that when you say "I am from Bulgaria" in the United States, the next question usually is: "Where is that?" When you say "Europe", most Americans think "Ah, Europe - Paris", great. And no further questions asked.

...Bulgarian or Romanian beer is not going to be served in London pubs in the foreseeable future. Now is the time for the UK's home secretary to drop the restrictions on Romanian and Bulgarian migrants. This will send a clear message to rest of the EU member-states and make the labour market more flexible.

UPDATE: Even Madelaine Bunting has something sensible to say; see: The language of fear

Invasion? What invasion?

Last year's hysteria over a potential flood of Bulgarian and Romanian workers sweeping into the UK have not been realised, according to Home Office statistics published today. New Bulgarian and Romanian Accession Statistics found that in the first three months after the two counties joined the Eurepean Union, there were only 9,305 applications for registration certificates. A press notice by migration minister Liam Byrne states:

...between January and March 2007, 7,935 applications were approved. Of these:

• 5,075 allowed to access the full labour market
• 2,6690 registered as self-employed
• 200 registered as self-sufficient
• 2,425 joined the seasonal agricultural working scheme

...Mr Byrne said that, while it's early to assess the full impact of the accession of Bulgaria and Romania to the EU, early indications are that the policy of restricting access to the labour market is helping to ensure that only those with something to offer the country are being allowed to work here. 'It is clear that workers from the accession states are filling skills and labour gaps, but the restrictions we introduced were right,' he said.

Of course, had there not been restrictions imposed, more Bulgarian and Romanian workers would have arrived. But even so, it is hard to imagine we'd have seen hundreds of thousands, as some of the more rabid British tabloids had speculated last year.

Previous posts:
* Bulgaria and Romania to join EU in 2007, 26 September 2006
* Above all, Bulgaria needs time! 22 August 2006
* Immigration: more confusion, 11 August 2006
* UK migration: The Bulgarians are coming, 1 May 2006
* Who’s afraid of EU enlargement? It's time to welcome the 'Polish plumber', 7 September 2005

The rise of the euro

Conclusion: the euro will for the foreseeable future be by far the most important alternative to the dollar.

So writes Deutsche Bank economist Werner Becker in a new paper, Euro riding high as an international reserve currency (PDF). The euro's share of global foreign exchange reserves rose from 18% at the start of 1999 to around 25% by the end of 2003. Becker cites four factors why DB expect the euro share of global foreign exchange reserves to rise to 30-40% by 2010.

The vulnerability of the US dollar given the huge current account imbalances, the changes in exchange rate regime (e.g. changeover from a dollar peg to a basket of currencies with the euro as a core element as in the case of China), the central banks’ growing investment requirements and the increasing focus on returns.

But after 2010 the outlook is more murky. We could see a dollar renaissance. As for the yuan, don't hold your breath: while it has the potential to become an international currency, this will not be "until well after 2010."