Transcript The reform of EU institutions: Time for a radical re

Broken Levees:
Europe’s Answer to the Global
Changes in the Division of
Labour
Richard E. Baldwin
Professor of International Economics, Graduate Institute of
International Studies, Geneva
Munich, 5 May 2006
Access to new markets
• Market opening  new opportunities  adjustment.
• 2 broad types of adjustment:
– #1. Cross-sector specialisation (North-South).
– #2. Within-sector specialisation & scale economies.
• Pains & Gains from trade.
– Winners win more than the losers lose, but …
• Adjustment more difficult politically for #1
– Higher ratio of pains/gains.
New markets
• Former Soviet bloc nations.
• India & China.
• Look at size & how different.
10 New Member States
GDP, current prices, 2004
UK
D
F
L
I
E
Mal
Est
Lat
Cyp
Lith
Sl
SR
Hu
Cz
Pol
NL S B A DKFin Gr P Ire
China & India
Output & income
US
Population
EU
India
China
0%
20%
Japan
40%
60%
80%
100%
World Share
US
EU
Japan
China
India
Latin America
SE Asia
RoW
EU export pattern
100
Non EU15 Europe
Asia
80
60
40
Industrial nations
20
0
1980
1985
1990
1995
2000
Western Hemisphere
Middle East
Europe
Asia
Africa
Industrial Countries
Opportunities on Production Side
“Unbundling”
• Old days: ‘national systems’
– Skilled & unskilled labour + capital, management &
technology.
• Cost of moving people, goods & ideas 
– People , goods , ideas .
• New Century way: fragment production.
– European technology & managers re-bundled with labour
& capital in Central Europe, Asia.
– Trade in productive factors.
Pains & gains
• Old days: Bundle  artificial reward to labour,
capital and technology.
• Unbundling  winners & losers, but winners win
more than losers lose.
• Wages of unskilled labour especially cheap in China
& Central Europe.
– Low productivity but even lower wages.
• … but, shortage of other talents.
• Potential for mutually beneficial exchange.
Europe’s answer
• Europe’s companies: responded well.
• Europe’s governments: responded badly.
Economic malaise
• Unbundling: Europe’s low & medium skilled
workers were overpriced.
– High productivity, but higher wages.
• Implied:
– 1. Price adjustment (relative wages fall)
– 2. Quantity adjustment (unemployment)
Winners & Losers
Share of unemployment by education
Tertiary
Secondary
Italy
Primary
Germany
Finland
Canada
0
20
40
60
80
Government failure
• Mass unemployment:
– Short-run vs permanent.
– Tax burdens, disincentives, social exclusion.
• Traffic jam:
– Insiders vs Outsiders.
– Failure to see big picture, what Europe could be.
Passing Parade Parable
End
• Thank you for listening.
http://www.hei.unige.ch/baldwin/
EU manufactures trade share
100%
80%
60%
Exports (Manufactures as % of /total)
40%
Imports (Manufactures as % of /total)
20%
0%
1980
1985
1990
1995
2000
Ireland
Belgium
Finland
France
Sweden
Luxembourg
Netherlands
Germany
United Kingdom
Austria
Denmark
Italy
Spain
Portugal
Greece
Hungary
Poland
Czech Republic
Slovakia
GDP per hour
worked (1997
US$)
0
20
40
60
80
100
120
World: Very Regional
Regional Trade Matrix, 2004
2,500
2,000
1,000
Afr
ME
LA
NA
0
Asia
Eur
500
Afr
ME
LA
NA
Asia
Eur
$ Billions
1,500