Robert Lawrence on Emerging Economies

Interviewed by Molly Lanzarotta on April 12, 2013

America historically has been a global leader in international trade – advocating agreements like GATT and NAFTA with the goal of improving the flow of goods and services, increasing national output, and enhancing employment. Today, both economists and the public alike are trying to understand America’s place in a rapidly changing globalized economy.
Robert Lawrence is Albert L. Williams Professor of International Trade and Investment at Harvard Kennedy School. He served on President Clinton’s Council of Economic Advisers from 1999 to 2001, and his research focuses on issues surrounding globalization and trade policy. His most recent book with co-author Lawrence Edwards is “Rising Tide: Is Growth in Emerging Economies Good for the United States?”

Q: You argue that rapid growth in emerging economies is part of the solution to economic problems in the U.S., while others often cite this growth as a dire threat. Please explain.

Lawrence: Many critics focus primarily on the job consequences relating to growing economies, particularly in countries like China or India. Most certainly these growing economies do generate more imports into the United States, and in fact some domestic workers are displaced. So that is one side of the story. That’s the cost side of the story.

In our research, we analyze not only the costs, but also the benefits that result from developing economies. These benefits occur through a variety of channels. One very important one is low-cost imports that provide savings and choices for American consumers. So that leads to gains across the board for those who buy the products.

At the same time we find that these developing countries are not yet competitors for American exports. So when they grow, they offer us greater opportunities to penetrate their export markets and to generate jobs and increase living standards and profits as a consequence of being able to sell to them. So it is a matter of balancing these costs and these benefits. But typically what we estimate is that for the average American, living standards rise by something on the order of a thousand dollars annually as a result of our imports of manufactured goods in general and we get about half of those benefits from our imports from these emerging economies.

Q: How do you respond to economists who say that trade’s impact on wages and jobs in the United States is substantial?

Lawrence: There are impacts on wages and jobs, but we find that there are other forces that are far more powerful. Our argument is not that there aren’t some costs – both in the form of dislocation and in lower wages, particularly for workers who lose their jobs – but these need to be viewed in perspective.

The most controversial area really relates to what’s been happening to manufacturing jobs in the United States. While trade has played a role, it’s nowhere near as large a role as that played by two other forces. The first is faster productivity growth, caused primarily by automation, which has led to lower prices for manufactured goods. The second is the fact that in response to these lower prices, Americans basically buy more services. Look at cell phones for example. The price of cell phones has declined over time, but, in fact, would you rather have the money you pay for your cell phone or the money you pay to Verizon for all the services that you buy when you use a cell phone? What’s been happening over time is that the demand responses to these cheaper prices of goods have not been sufficient to offset the productivity improvements, so on balance we’re losing jobs.

What’s been happening to manufacturing over the last few decades is basically the same as what happened to employment in agriculture over the 19th and 20th centuries. Over that time, say if you go back to 1900, almost 40 percent of Americans were working on farms. Over time, however, productivity improved in farming and food prices got relatively cheaper. Americans responded to these lower food prices by spending more of their incoming on things other than food. Basically that process led us to need fewer workers on the farms. It wasn’t that we were starving ourselves – and in fact it’s interesting because in farming we have a trade surplus – but nonetheless, today the share of workers employed in agriculture is around 1 percent.

Well, if you go back to 1960, you had roughly 30 percent of Americans working in manufacturing. Today, that share is less than 10 percent. And the phenomenon is basically the same: faster productivity growth and sluggish demand responses to those cheaper prices.

Q: Growing inequality in the U.S. has increasingly been a topic of discussion, and it’s a topic that you’ve looked at in your book “Blue Collar Blues.” How do the issues surrounding emerging economies and trade fit into this dynamic of growing inequality in the U.S.?

Lawrence: There are a variety of kinds of inequality that we’ve seen emerge in the United States. In the 1980s and 90s one big source of inequality was among American workers and it was reflected in the growing premiums that were earned by workers with higher skills. We saw that going to college became increasingly remunerative. In 1980 if you had a college degree and no experience, you earned about 40 per cent more than somebody with a high school degree, but by 2000, you were earning closer to 67 or 70 per cent more. So the returns-to-skill is one source of inequality and there is evidence that in the 1980s and 90s, trade with low-wage countries was contributing to that inequality. Economists differ as to how much but the kind of per cent of the growth in inequality in wages that you get are typically between 10 and 20 percent of the rise.

But since 2000, we’ve been seeing a different kind of inequality. By and large what’s been happening are two types of inequality. The first, you can talk about as a “super rich” type of inequality. The earnings of the top 1 per cent, the most highly paid and wealthiest Americans, have seen an increase in their share of income. And the second is a growing share of profits relative to wages. By contrast, the wages of both skilled and unskilled workers in the United States haven’t been rising very rapidly at all. And when you look at that second type of inequality, the type that’s more pervasive recently, there’s much less evidence that it’s trade with these emerging economies that’s causing that type of inequality. There are deeper reasons for the rise in inequality but it’s not the trade with these emerging economies.

Q: While policy makers in Europe struggle to keep the Euro viable, the leaders of Brazil, Russia, India, China and South Africa (BRICS) met recently to strategize about continuing the growth of emerging markets. Are global dynamics permanently changing and will global financial institutions need to change with them?

Lawrence: I think there’s no question that global markets are changing. What we’ve seen in the past decade is that an increasing share of growth in the world is coming in emerging economies. That’s especially true of the large BRIC countries, China and India. And, yes, as a consequence of that, global governance and the participation of those countries in global governance has to change to reflect their growing importance in the world economy.

Doing that is not easy, particularly dealing with China. China has two attributes. One, it is very large, and that leads it natuarally to have to assume a growing importance in world affairs. But the second feature of China is that it is still poor. And developing countries like China expect to be treated more generously by the global system. So this creates immense tensions. We’ve seen that emerging in the trade negotiations where we’ve had trouble concluding a multilateral agreement and I think it really reflects the fact that it’s been very hard to persuade the emerging economies like China and India to open their markets to a greater degree than they have. So in the trading system we’ve been unable to reach a multilateral agreement.

In the financial area, China in particular has accumulated trillions of dollars worth of financial reserves and as a consequence expects to play a bigger role in global financial affairs. So the real challenges in the construction of effective global governance looking out over the next decades is going to be how we absorb those BRIC countries and other emerging economies into the global system so they not only participate but they also begin to lead.

Q. Public perception of globalization is often negative in the U.S. What can you say about the future that provides a positive context for looking forward?

Lawrence:It’s really quite natural, given the poor performance of the U.S. economy over the last decade – the fact that we’ve actually lost 6 million jobs in manufacturing and that we’re currently experiencing a very slow recovery in employment – that from the point of Americans, the global engagement of the economy looks very threatening, because they associate it with the experience they’ve just gone through. In our view, though, the problems of the United States economy, particularly when it comes to things like high unemployment, were really not due to something happening as a consequence of the global economy, but were basically made in America. Let’s recall that the first big recession we had after 2000 was the bursting of the “dot com” bubble. That was a technologically and financially driven bubble which was U.S. made.

Similarly, the current deep recession we’re going through is attributable to what happened in our housing market. Again, not a global phenomenon, but rather an American one. So, in that framework, people are looking around for explanations and they’re focusing on the global. But in fact the good news in the global economy is that over the period countries like China and India have been able to sustain rapid economic growth. And the central message of our study is that by and large that growth is very complementary to growth in the United States. And so if we look out into the future, for the next two decades or more, it is likely that an important source of help for our economy is going to come from their economic growth.

Think about the challenges that the U.S. faces today. The first is of course restoring the economy to full employment. And, as the federal government becomes more constrained in its ability to stimulate the economy, one obvious place for us to look for economic growth is through exports. So we need big export markets in order to generate more employment in the United States, and I think these are the economies that can offer us those opportunities.

One vulnerability we’ve had in the past is high oil prices and part of the reason for those high oil prices is the growth in India and, particularly, China, which has becomes a bigger consumer. What’s been happening in the U.S. recently is that our domestic production of oil has been increasing dramatically, which puts us in a much better position to sustain higher oil prices in the world. So I’m quite optimistic looking out over the next decades, if these emerging economies are able to sustain their economic growth, they will help in America’s adjustment challenges.

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