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The Politics of Globalization

Kreuter, Helena (2019) The Politics of Globalization. Advisor: Riccaboni, Prof. Massimo. Coadvisor: Czarnitzki, Prof. Dirk . pp. 139. [IMT PhD Thesis]

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Abstract

Over the past three decades, trade with low-wage countries - in first place China - has grown dramatically. Economic theory has long recognized that trade liberalization, though enlarging the overall economic pie, also produces strong redistributive effects: while it increases aggregate productivity and benefits consumers through lower prices and a wider range of available goods, at the same time it is also associated with substantial adjustment costs in the labour market. As the gains are diffuse but the costs concentrated, the lack of appropriate compensatory mechanisms is likely to drive a backlash against the ongoing economic transformations. The present dissertation aims at providing further understanding on the consequences of trade globalization for developed countries. Specifically, our focus is on the political dimension of the phenomenon. Indeed, ballot boxes represent a litmus test of economic changes with profound social effects and policymakers are called upon to offer adequate responses to the citizens’ requests. In chapter 2, we study empirically the role of low-wage import competition from China in shaping electoral outcomes in Italy over the period from 1992 to 2013. Given the unequal growth of Chinese exports across sectors, we compare the voting pattern at the national parliamentary elections in about 8,000 municipalities differently exposed to the trade shock according to their ex-ante industry specialization. The model is estimated in first differences and Italian imports from China are instrumented by Chinese exports to other highincome countries. We find that China’s trade liberalization has favoured the spread of populism in Italy. This result is robust to a large number of sensitivity checks as well as to concurrent shocks that may have contributed to spur a populist reaction in the Italian electorate - immigration, the introduction of the Euro and fiscal austerity. Moreover, we show that import competition from China has triggered also other forms of protest vote, namely invalid ballot papers and abstentionism. In line with the predictions of economic theory, the channels at work turn out to be labour market adjustments. If trade globalization is a key determinant behind the recent wave of protest vote across the Western World, how can policymakers meet the challenges associated with it? This dissertation assesses the desirability of three distinct economic policies, one intervening directly on the labour market and the other two acting, respectively, at the trade and fiscal level. In chapter 3, we present a novel approach to analyse the employment growth effects of the introduction of a national minimum wage (€8.50 per hour of work) in Germany on January 1st 2015. Thanks to our access to household survey data and proprietary firm-level data, we compare firms in heavily affected sectors to similar firms in de facto unaffected sectors. Industry vulnerability is determined according to the share of eligible workers with pre-treatment hourly wage below €8.50 - computed separately for East and West Germany. Treated units are linked to control units matching on past employment and forward looking credit ratings. We detect only very small negative employment effects in East Germany (0.05 percent of overall employment, 22000 jobs lost), mainly concentrated among small firms. The lack of a significant occupational impact still holds when we use different thresholds for treatment assignment or alternative minimum wage bite measures. To explain our finding, we provide evidence that, in West Germany, the minimum wage introduction has also induced positive effects on turnover and a deterioration of credit ratings, while, among treated firms in East Germany, turnover remains stable and credit ratings actually improve. Thus, ex-ante fears for dramatic job losses seem not justified and minimum wage policy may actually help to mitigate inequality in major industrial economies. In chapter 4, we develop a simple theoretical framework that allows us to investigate the macroeconomic consequences of sector-specific tariffs on imported intermediates in the presence of input-output linkages among industries. Our model features a large open economy with multiple perfectly competitive sectors and exogenous market power. Each industry specializes in the production of a distinct good according to a nested Cobb-Douglas-CES technology; its output sales (net of national imports of the same good) meet final demand by a representative household with Cobb-Douglas preferences and intermediate input demand by other sectors. Under wasteful government spending, we establish that a positive sectoral input tariff shock entails a loss in aggregate value added, by lowering output not only of the protected industry’s immediate customers but also of its customers’ customers and so on. Assuming next that a given share of each industry’s total output is sold on foreign markets, our model can also be used to evaluate the macroeconomic implications of the introduction of border-adjustments into sector-homogeneous corporate profit taxation. We show that a shift to a destination-based regime induces a change in aggregate value added that results from the net effect of border-adjustments’ two key components, the impossibility to deduct the costs of imported inputs from the corporate income tax base but the ability to exclude export sales from it. For low sectoral export shares, the network propagation triggered by the implicit import tax is more powerful than that triggered by the implicit export subsidy, leading to a contraction of overall economic activity. Thus, in today’s highly vertically integrated advanced economies, the unilateral adoption of both import tariffs on intermediates and borderadjusted corporate taxes may turn out to be counterproductive for the imposing country even before retaliation is considered.

Item Type: IMT PhD Thesis
Subjects: H Social Sciences > HB Economic Theory
PhD Course: Economics management and data science
Identification Number: 10.6092/imtlucca/e-theses/274
Date Deposited: 31 Jul 2019 14:41
URI: http://e-theses.imtlucca.it/id/eprint/274

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