Polisci110G Week 1 notes
Polisci110G Week 1 notes Polisci110G
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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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