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Polisci110G Week 1 notes

by: Erica Evans

Polisci110G Week 1 notes Polisci110G

Erica Evans
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Notes from 1/07/2016
Governing the Global Economy
Kenneth Scheve
Class Notes




Popular in Governing the Global Economy

Popular in Political Science

This 4 page Class Notes was uploaded by Erica Evans on Friday January 8, 2016. The Class Notes belongs to Polisci110G at Stanford University taught by Kenneth Scheve in Fall 2016. Since its upload, it has received 33 views. For similar materials see Governing the Global Economy in Political Science at Stanford University.


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Date Created: 01/08/16
Polisci110G     Class  2     1/07/2015       Trading  States  in  the  World  Economy  II       Review:     Why  some  countries  trade  more?  Why  countries  regulate  more?     • Because  they  are  different  and  have  different  opportunity  costs/different   income  gains  from  specialization  and  trade.     • What  about  empirical  evidence?     • Static  gains  are  clear.  There  are  gains  when  a  country  liberalizes.  But  what   about  dynamic  gains?  Do  they  grow  more  over  time?  Well…  there  is  a   correlation  between  free  trade  and  economic  growth.  But  is  it  causal  or   spurious?  Our  class  said  causal  when  we  raised  our  hands.     • But  let’s  look  closer.  Like  social  scientists.  What  kind  of  selection  problems   might  we  have?     • South  Korea  vs.  North  Korea  example:  One  difference:  S.  Korea  is  open  to   trade  and  N.  Korea  is  not.  But  there  are  many  other  differences  too.  Property   rights,  market  vs.  planned  economy,  democracy  vs.  authoritarian  regime.     • Countries  that  adopt  free  trade  policies  are  likely  to  adopt  other  policies  as   well  that  make  them  richer.     • Richer  countries  also  build  infrastructure  that  makes  trade  and   transportation  easier.  This  shows  the  causal  relationship  going  the  opposite   direction.  More  rich  à  more  trade.     • Richer  countries  raise  taxes.  In  developing  countries  infrastructure  for   income  tax  is  hard,  so  they  rely  on  trade  taxes  more.       Existing  literature:     • Frankel  and  Romer  1999:  Distinguish  between  trade  that  is  a  function  of   government  policies,  vs.  trade  as  a  result  of  geography.  They  look  at  trade   caused  by  geography:  1%  increase  in  trade  is  associated  with  2%  increase  in   per  capita  income.     • Rodriguez  and  Rodrik  (2001)  Criticism:  geography  may  be  correlated  with   higher  incomes,  but  maybe  not  through  trade.  Climate  and  terrain  and  other   factors  may  affect  trade.  Another  point:  trade  that  is  geographically   determined  may  cause  growth,  but  policy-­‐spurred  trade  might  not  induce   growth.       If  evidence  shows  trade  is  so  good,  why  is  there  so  much  trade  protection?     (video  about  WTO  negotiations  protest  in  Seattle)     • 1999  battle  of  Seattle.    Protests  stopped  the  WTO  negotiations.       Reasons:     • Infant  industries  –  a  country  may  want  to  focus  on  improving  a  certain   product.  Ex:  Brazil  and  its  shoe  industry:  we  could  be  really  good  at  this,  but   we’re  not  right  now.  Problems:  once  you  have  a  trade  protection,  it’s  hard  to   get  rid  of.  Also,  it’s  hard  to  predict  if  the  industry  you  are  protecting  will  ever   take  off  and  be  successful.     • Winners  and  Losers  –  Trade  is  only  good  on  aggregate.  But  there  are  winners   and  losers  internally.  If  the  losers  are  good  at  mobilizing  and  have  political   power,  they  will  sway  policy  because  they  have  ever  incentive  to  do  so.  We   must  understand  who  are  the  losers?  And  who  will  win  in  the  political   process?  Why  don’t  they  just  compensate  the  losers  with  aggregate  gains?     • There  could  be  an  national  security  element     • Simple  models  are  wrong.  Perhaps  protectionism  is  beneficial  (theory)     • Balance:  Countries  don’t  want  trade  deficits.  The  way  to  get  a  trade  surplus  is   to  reduce  the  imports  –  we  can  do  this  by  protectionism   • Spillover  effects  –  having  a  strong  computer  industry  might  have  other   effects  that  are  beneficial.    So  we  should  protect  the  computer  industry.     • Optimal  Tariff  idea:  Only  applies  for  large  countries  –  effect  on  world  price   may  change  incentives     • Strategic  trade  policy:  protection  can  alter  terms  of  competition  to  favor   domestic  over  foreign  firms  and  shift  excess  returns  in  monopolistic  markets   from  foreign  to  domestic  firms     • Cultural  values:  people  worry  about  losing  their  domestic  culture.  Don’t  just   want  to  import  everything,  want  to  foster  lively  domestic  culture.       Winners  and  Losers:     • Let’s  look  at  the  economic  model  and  political  model:     • Who  are  the  actors?  What  are  their  resources?  How  the  economy  works?   How  the  political  process  works?     • Two  countries:  Home  and  Foreign.  Before  trade,  the  price  of  a  good  is  higher   at  home.  If  they  trade,  foreign  exports  will  come  into  home  country.     • Downward  sloping  import  demand.  Upward  sloping  export  supply.     • Intersection  equals  world  price     • When  we  add  a  specific  tariff  –  this  generates  a  wedge  between  what  the   foreign  supplier  gets  and  home  consumer  pays.  The  tariff  means  a  difference   between  a  price  in  the  foreign  country  and  price  in  the  home  market     • When  a  country  is  small,  it  will  not  affect  world  price  for  the  rest  of  the  world     • Consumer  Surplus:  difference  between  what  people  pay  and  with  they  would   be  willing  to  pay.  Area  below  demand  curve  and  above  the  price  line.     • Producer  Surplus:  difference  between  what  they  would  be  willing  to  sell  it   for  and  the  price.  (the  opposite  of  consumer  surplus  –  when  one  goes  up,  the   other  goes  down)     • How  does  a  tariff  affect  the  consumer  surplus,  the  producer  surplus  and  how   much  is  the  government  revenue?  These  are  the  three  factors  we  need  to   look  at!     • Winners  are  domestic  producers.  Losers  are  consumers,  and  the  government   gains  some  as  well.     • Most  trade  bills  have  people  that  benefit  and  others  that  are  harmed.       Majoritarian  Model  of  Trade  Policymaking   • We  assume  there  is  a  referendum  over  each  tariff  –  aka  a  vote  over  every   good  and  tariff.  Or,  a  referendum  over  free  trade  in  general.  Or,  think  about  it   as  an  election  where  this  is  the  main  issue.     • Assume:  individuals  have  a  most  preferred  tariff  rate,  or  an  ideal  point.   “single-­‐peaked”    Everyone  has  a  different  preference.     • Assume:  there  are  2  political  parties  and  they  only  care  about  the  tariff.  The   political  party  closest  to  the  most  ‘peaks’  will  win.  So  the  parties  will   eventually  get  closer  and  closer  until  they  converge.  There  is  a  hypothetical   equilibrium  policy  that  is  the  median  of  all  these  preferences.  Median  voters   determine  policy.     • The  public  is  influential  on  policy.     • Consumers  are  the  median  voters  –  they  are  more  of  them  and  they  are  the   losers  in  our  model.  So  they  will  dictate  the  policy.       Cooperation  Problems   • Lobbying  –  can  influence  the  process.     • People  getting  together  with  a  common  objective  –  this  is  a  cooperation   problem.  What  determines  which  groups  are  more  or  less  successful?     • Prisoner’s  dilemma:  2  people  who  face  the  same  problem,  trying  to  achieve   the  common  objective.  2  farmers  are  better  off  if  the  marshland  is  drained.   Farmer  A  or  B  would  produce  this  benefit  for  both  farmers  if  he  drains  the   marsh  on  his  own.  Value  of  drained  Marsh  is  2.  Work  on  their  own  is  3.  If  they   work  together,  cost  is  only  1.  But  ideal  would  be  0  effort  and  benefit  of  2.   Classic  box  model.  Nash  equilibrium:  both  choose  the  optimal  strategy  for   themselves,  so  neither  will  drain  the  marsh.   • Cooperation  is  possible  with  repeated  interactions,  if  they  learn  the  benefits   of  cooperation.  The  cumulative  benefits  outweigh  the  benefits  of  defecting  in   a  single  period.     • Back  to  lobbying:  Two  firms  that  want  the  same  trade  policy,  if  one  lobbies,   they  all  benefit.  No  one  wants  to  do  the  work.  Some  industries  will  be  able  to   solve  the  cooperation  problem  and  others  will  not.  Groups  most  likely  to   contribute  to  the  common  effort?       Collective  Action     • What  about  larger  groups?  More  than  just  2  firms.     • Multi-­‐person  prisoner’s  dilemma:  each  decides  to  contribute  to  the  greater   good  or  not.  The  benefit  is  bigger  than  the  cost.       • Question:  How  many  contributors  are  necessary  to  make  the  outcome   possible?  Do  we  need  3  lobbyers  or  10?  If  the  group  goal  is  obtained,   everyone  benefits.     • How  does  an  individual  firm  decide  to  contribute  or  not?  You  see  how  many   people  are  already  contributing.  Scenario  1)  Are  there  enough  if  I  contribute?   Even  if  I  contribute  we  will  still  not  get  it.  So  no.  Scenario  2)  There  are   already  enough  people  contributing.  There  is  no  need  for  me.  So  no.  Scenario   3)    The  only  case  I  will  contribute  is  when  we  need  exactly  one  more   contributor  to  win  –  so  my  vote  is  decisive.       • Equilibriums:  either  no  one  contributes  anything,  or  exactly  the  right  number   of  people  contribute.     • How  close  is  the  number  of  contributers  needed  to  the  number  of   contributers?  If  we  need  everyone,  then  everyone  is  decisive.  If  there  are  a  lot   of  members,  and  you  only  need  a  few,  no  one  will  volunteer.     • Relative  benefits  to  the  cost  –  another  factor.     • Mancur  Olson’s  Logic  of  Collective  Action  –  size  of  group  is  important.  In  a   large  group,  individuals  feel  less  responsibility  to  cooperate.  He  calls  these   large  groups  ‘latent’  Example:  the  unemployed  do  not  organize  very  often.   They  are  large  and  dispersed.  Large  group  anonymity  –  difficult  for  them  to   forge  a  group  identity.    Groups  may  enforce  some  kind  of  punishment  to   generate  incentive.  In  large  groups  it  is  hard  to  punish,  takes  more  effort  than   it  is  worth.     • Small  groups:  more  identity,  more  decisive,  easy  to  punish.  Small  groups   have  a  better  chance.     • Olson:  Asymmetry  within  groups  matters.  If  some  firms  in  an  industry  are   big,  and  some  are  small,  this  is  an  advantage.  There  is  a  focal  point.  The  large   member  has  such  an  incentive  to  provide  the  group  good,  and  have  the   power  to  do  it  themselves.  Their  benefit  is  disproportional.     • Olson:  By-­‐product.  Selective  incentives  to  members  that  contribute  may   induce  contributions.       Applications  to  Trade  Policy   • Combine  economic  model  and  lobbying  model     • It  is  much  easier  for  producers  to  mobilize  and  lobby  for  their  interests  than   for  consumers  to  do  so.  That’s  why  there  is  trade  protection.     • Across  different  industries,  furniture  makers  in  the  US  and  car  makers  in  the   United  States.  –  Car  makers  are  going  to  be  better  at  lobbying  because  there   are  fewer  of  them  and  they  are  bigger.     • More  complex  example:  Steel  production.  Car-­‐makers  are  the  consumers,  so   there  will  be  two  sides  to  the  lobbying.              


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