Trade, Inequality, and Populism Caroline Freund Director of Macro, Trade and Investment Global Lecture The Vienna Institute for International Economic Studies October 1, 2018
Themes from research on trade, growth, and inequality Trade and Inequality Trade and poverty reduction Trade and the middle class Superstar firms, trade, and extreme wealth creation Backlash against globalization Policy Identity politics
Common narrative on trade and inequality Globalization allowed poor countries to export more labor intensive goods Less skilled workers in rich countries lost their jobs Bottoming out of the middle class and rise in inequality Leading to a backlash against globalization Suggests development of poor countries has come at the expense of low skilled workers in developed countries 3
True narrative is more nuanced Trade contributed significantly to drop in global inequality Trade helps poor countries grow, as resources shift to productive uses Less evidence that trade contributed significantly to increase in within-country income inequality Trade helped create a class of superrich, but also lowers prices disproportionately helping the poor Populism/Protectionism responds to confluence of factors, among which rhetoric on trade exceeds the reality 4
Trade helped poor countries grow 5
Trade and Growth Are Positively Correlated 5 4 3 2 1 Average Annual Growth Since 1995 Low and Middle Income Countries Countries more open to trade grow faster One percentage point increase in the trade/gdp increases income per person by at least one-half percent (Frankel and Romer 1999). But, not the only factor and need complementary policies 0 Low tariff high tariff Source: WDI 6
Period of Hyperglobalization 65 World Trade as a Share of GDP 60 55 50 45 40 35 30 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 7
Large Drop in Extreme Poverty Extreme Poverty Share of the World Population living on less than $1.90 a day (2011 PPP) 45 40 35 30 25 20 15 10 5 0 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2010 2011 2012 2013 Source: World Development Indicators 8
Convergence 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 GDP Per Capita at PPP/ US GDP Per Capita at PPP 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Chile China India Korea Mauritius Turkey Source: WDI 9
10 Elephant Curve Seemed to Support Narrative Growth Incidence Curve, 1988-2008 Income growth rate (percent) 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 Source: Lakner and Milanovic (2013) Percentiles of the global income distribution
But, the trunk is really about Japan and Soviet satellites 11
What about within-country inequality? 12
TUR MEX ESP GRC CHL HUN BEL IRL ITA UK CZE NLD NOR PRT NZL JPN OECD USA FRA AUT DNK ISR DEU CAN AUS FIN SWE 0.06 0.04 0.02 Different outcomes in different countries, despite similar exposure to trade and tech Inequality and Growth in OECD countries mid-1990s to mid-2000s Change in Gini (LHS) Per Capita GDP Growth @PPP (RHS) 1 0.9 0.8 0.7 0 0.6-0.02 0.5-0.04 0.4-0.06 0.3 0.2-0.08 0.1-0.1 Source: Freund 2016 0 13
The common narrative is Heckscher-Ohlin, but the evidence is not Heckscher-Ohlin & Stolper-Samuelson Trade raises inequality in labor scarce countries Trade reduces inequality falls in labor rich countries Inequality rises in developed and developing countries in response to liberalization (Goldberg and Pavcnik 2007) Change in the relative demand for skilled workers in developed countries has occurred across firms within sectors rather than across sectors (Katz and Murphy 1992 and Berman, Bound, and Griliches 1994) 14
The Role of Superstar Firms 15
16 US Japan Germany UK China India Russia Brazil Large Firms Promote Modernization Alfred Chandler Scale, R&D, and management. Allocative efficiency Firm heterogeneity and resources flow to most productive uses. Individual firms matter Communications and logistics technology enhance effect 350 300 250 200 150 100 50 0 Number of Top 500 Firms Advanced economies Emerging markets 1962 1993 2014
Allocative Efficiency Trade affects productivity through reallocation across firms As market access abroad expands, most efficient firms export more and grow As openness to imports expands, least efficient firms exit As countries trade and grow, superstar firms are created Increasing trades raises incomes, especially in poor countries, with inefficient allocation of resources Increasing trade also creates a class of superrich 17
18 Rich European countries have more employment in large firms percent 60 50 40 30 20 10 0 Large firm share employment Value added large firms Source: Eurostat 2010.
19 Rich European countries value added and employment shares are closer percent 60 50 40 30 20 10 0 Suggestive of allocative inefficiency Large firm share employment Value added large firms Bartelsman, Haltiwanger and Scarpetta (2013) measure covariance b/w productivity and size in US industry: US is more efficient than in the United Kingdom, Germany and France. In addition, the covariance between size and productivity was near zero (or negative) at transition in Eastern Europe and has since increased, i.e. allocative efficiency has improved sharply.
20 Growth in the US is driven by large firms gdp growth 6.0 growth in share of employment 1 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0.8 0.6 0.4 0.2 0-0.2-0.4-0.6-4.0 GDP Growth Growth in large firms' share of employment -0.8 Source: US Bureau of Labor Statistics Share of large firms increased from 49 to 53 percent over period.
The Fall of the Labor Share and the Rise of Superstar Firms Autor, Dorn, Patterson, Katz, and Van Reenen (2017) The ratio of wages to national income has declined in the last three decades in most developed nations Superstar firms with low labor shares are capturing an ever greater share of the market Industries with increasing concentration have fast TFP growth and patent growth. 21
Share Top 1%.2.4.6.8 Share Top 1%.2.4.6.8 1 1 Exporter concentration is increasing in level of development Share and per capita GDP at PPP Share of Top 1% of Exporters - lngdppc Share and per capita GDP at PPP Controlling for sector FE Share of Top 1% of Exporters - lngdp BWA BWA LAO MWI MLI TZA BFA KEN CMR SEN PAK NIC NER UGA YEM CHL PERZAF MEX MKD BGR MUS BRA CRI EGY COLIRN LBN MARJOR DOM SLV ECU GTM ALB NZL SWE ESP BEL EST NOR LAO NZL MWI MLI MUS BFA MKD TZA BGR CRI LBN JOR DOM MAR SLV KEN ECU CMR NIC SEN GTM NER ESTUGA ALB YEM CHL PER ZAF NOR SWE BEL COL EGY PAK IRN MEX ESP BRA BGD KHM 6 7 8 9 10 11 Ln GDPpc KHM BGD 23 24 25 26 27 28 Ln GDP Source: Fernandes, Freund and Pierola (2017)
23 Large Firms & Manufacturing Employment percent 90 80 70 60 50 40 30 20 10 0 Source: van Ark et al. 2010 % firms %employment % firms %employment China 2004 India 2007 number of employees 0-49 50-99 100-199 200-499 500+
Research confirms importance of large firms Cross country research: Average firm size increases with development: 10 percent increase in per capita income associated with a 2.6 percent increase in average firm size. (Bento and Restuccia 2014). The myth of the missing middle--large firms have higher average productivity and that the fraction of missing firms is increasing in firm size (Hsieh and Olken 2014). Developing countries export less because they are missing the largest superproductive firms the firm-size distribution is truncated at the top. Fernandes, Freund, and Pierola (2015). 24
Superstar firms are good for growth, but create extreme wealth The force of trade is present in North & South 25
Growth in Extreme Wealth total real net worth, billions 1996 USD 5000 4000 42 percent of World s billionaires are now from emerging markets. 3000 Given trends, by 2025 more than half will be from the South. 2000 1000 0 1995 2000 2005 2010 2015 World Advanced Economies Emerging Markets Sources: Forbes World s Billionaires and World Bank WDI.
27 Extreme Wealth & Mega Firms 25 percent 20 15 10 BRIC share of fortune global 500 BRIC share of billionaires 5 0 1995 2000 2005 2010 2015 BRIC countries include Brazil, Russia, China and India Sources: Forbes World s Billionaires and Fortune 500.
28 Wealth and Large Firms Go Together country share of billionaires (percent) 30 20 United States 10 Russia Brazil India China Japan Sources: Forbes World s Billionaires and Global 2000. 10 20 30 country share of Global 2000 firms (percent)
Where does extreme wealth come from? 29
30 Who are the Superrich? Inheritors Self-made Company founders Executives Politically connected/resource based Finance/real estate
31 Sources of Wealth 100 90 80 70 60 50 40 30 20 10 0 2001 2014 2001 2014 Advanced Countries Emerging Markets Resource related/politically connected Inherited Financial sector Company founder & executive
32 Wealth in Advanced Countries share of billionaires 100 90 80 70 60 50 40 30 20 10 0 1996 2001 2014 1996 2001 2014 1996 2001 2014 United States Europe other advanced economies inherited wealth self-made company founders self-made financial sector self-made owners and executives political connections and resource related
33 BRIC Source of Wealth 100 90 80 70 60 50 40 30 20 10 0 Distribution of billionaires, by source of wealth, 2014 Russia Brazil India China Inherited Political connections, privatization, resources Financial sector Company founders & executives
34 Wealth is growing faster than income in the North, but not in the South Growth in wealth of the 5 richest and GDP growth 2006-2012 Source: Author s calculations using data from Forbes World s Billionaires and World Bank WDI.
35 Policy Implications Promote entrepreneurship Property rights, free entry and openness to trade and foreign investment Limit cronyism Transparent privatization & government procurement, competition policy Tax more heavily less productive sources of wealth Inheritance & (some) finance
Why the backlash against globalization now? 36
The backlash can t be only about trade Inequality and jobs in advanced countries Same shocks, trade and technology, but inequality not up everywhere Timing trade surged from 1995-2005 and then stagnated Post financial crisis slowdown The rise of China New issues subsidies, investment, SOEs, technology
Other pressures on inequality in Anglo countries Policies: Tax cuts, deregulation, de-unionization, rise of finance, lower spending on labor adjustment Social: Assortative mating, private schools, tutoring Fear around immigration and terrorism 38
US occupational change: Tougher on less-educated men 0.2 0.15 0.1 0.05 0-0.05 Lowest 20% (High School or less) Source: Freund and McDaniel (2017) Second 20% (High school) Male occupations Middle 20% (Associates degree or some college) Fourth 20% (Some college or bachelors) Female occupations Top 20% (College or more) 39
Structural change is difficult Discontent among workers But, do workers really blame trade? 40
Views on Foreign Trade at all Time High 41
Worry about terrorism and immigration up worry about economy down 42
Moving Forward Education, skills and labor adjustment policies A backlash against the backlash against globalization may be coming Anti-Brexit rallies & pro-eu rallies, TPP 11, EU-Japan, Pacific Alliance etc. Media s negative bias is helpful Trade bashing raged in 2016, not so much now Export industries are organizing & gaining voice International organizations, think tanks and academics offer data and evidence Reforming WTO to handle new issues All countries should continue liberalization programs, avoid resorting to restrictions, and use the WTO or dispute settlement bodies of regional trading arrangements to bring disputes
Thank you! Follow me on twitter @carolinefreund 44
Extras 45
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Diversity in the Evolution of the Top 1% 0.4 Share of the Top 1% 0.35 0.3 0.25 0.2 0.15 0.1 0.05 Latin America Asia Sub Saharan Africa Europe Middle East World North America Source: World Inequality Database 46
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Diversity in the Evolution of the Bottom 50% 0.25 Share Bottom 50% 0.2 0.15 0.1 0.05 0 Latin America World Asia Sub Saharn africa Europe North America Middle East Source: World Inequality Database 47
Rapidly Rising Inequality is an Anglo Problem 0.25 Share of the Top 1 percent Pre-Tax 0.2 0.15 0.1 0.05 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Japan Germany Spain US United Kingdom France Denmark 48