Transcript Is Distance Dead Oct.. - Oxonia - The Oxford Institute for Economic

Is Distance Dead?
Nick Crafts
Globalization
• Integration of markets from falls in
transport/communication costs and
reduction of policy barriers to trade and
foreign investment
• Gains from trade potentially significant
• Re-deployment of labour central to this
• Requires sectoral and spatial adjustment
World Trade/World GDP (%)
18
16
14
12
10
8
6
4
2
0
1820
Source: Maddison (2001)
1913
1950
1973
2000
FOREIGN ASSETS/WORLD
GDP%
2000
1980
1960
1945
1930
1914
1870
0
20
Source: Obstfeld & Taylor (2004)
40
60
80
100
Death of Distance: Implications
• Transport and communications costs melt
away
• Economic activity disperses
• Cheap labour on your doorstep
• Jobs offshored
• Race to the bottom
Employer Wage Costs, 2003 ($ per hour)
35
30
25
20
15
10
5
0
Germany
BLS (2004)
United
States
UK
Czech R.
India
China
Race to the Bottom
• Welfare state developed in immobile
capital era
• High welfare spending and mobile capital
is unprecedented
• Tax competition and death of distance
would undermine big government
Social Transfers in Old OECD
(%GDP in median country)
25
20
15
10
5
0
1910
1930
Source: Lindert (2004), OECD (2005)
1960
1980
2001
Transport/Communication Costs
• VERY HIGH: activity is dispersed
• VERY LOW: activity is dispersed
• INTERMEDIATE: agglomeration with
feedback effects based on large markets
and linkages
Factors in Industrial Location Decisions
• Market Access
• Unit Costs
• Human Capital
• Institutional Quality
Agglomeration Benefits
(Venables, 2001)
• External economies of scale
• Lots of the right people in the same place
• Productivity advantages of bigger cities
• Cannot easily be replicated
Taxing Capital
Average OECD Corporate tax rates have fallen
since early 1980s by about 15% points (statutory),
10% points (effective) (Devereux et al., 2002)
BUT
No downward trend in corporate tax revenues
which in any case are only about 3% GDP
AND
Continuing importance of agglomeration and
market access underpins Europe’s ability to carry
on taxing capital (Baldwin and Krugman, 2004)
Changes in World Economic
Geography
• Industrialization and de-industrialization
• Concentration of world manufacturing
production and, even more so, exports
• Changes in location influenced by transport
costs and agglomeration benefits
• Not steady convergence of poor to rich but
rapid transition of select few
World Manufactured Exports (% Shares)
UK
Rest W. Europe
North America
Japan
S + SE Asia
60
50
40
30
20
10
0
1880
Source: Crafts and Venables (2001)
1913
1955
2000
China
Economic Geography and International
Inequality (Redding and Venables, 2004)
• Most (60-70%) cross-country income variation
accounted for simply by location relative to other
countries
–market access (export demand)
–supplier access (import supply)
• Move 50% closer to trading partners would raise
income by about 25%
More Results from Redding & Venables
• Moving Sri Lanka and Zimbabwe to
Central Europe would raise income by
67% and 80% respectively
• Making Sri Lanka and Zimbabwe ‘open
economies’ would raise income by
21% and 28% respectively
• Other variables do affect income levels
including institutions
Steam Power and Industrial Location
• Reduced transport costs for goods rather
than services both on land and at sea
• Industry moved closer to natural resources
• Manufacturing cities proliferated in Europe
and North America
• Centralizing not dispersing
Mass Production and Mass Distribution
(Chandler, 1977)
• Developed in a subset of American
industry in late 19th century
• Based on integration of the market
following completion of main rail
network
• Changed American industrial geography
…. centralizing rather than dispersing
Lancashire Textiles and Globalization
(Leunig, 2005)
• Lancashire a high wage industry: 6 x India and Japan
in 1910
• But continued to dominate world trade (60% world
market share in cottons in 1910)
• Unit costs lower than India or Japan even before
adjusting for output quality
• Lancashire flourished because of agglomeration
benefits ..... its productivity exceeded other British
locations by 33%
Distance Still Matters for Trade
• CIF-FOB margin has halved since 1960 (Clark
et al., 2004)
• Elasticity of trade with respect to transport
costs at least -2 (Limao and Venables, 2001)
BUT
• Gravity coefficient implies distance impeded
trade 24% more in the 1990s than in the 1960s
(Didier and Head, 2004)
• Trade costs have fallen less than transport costs
and have fallen fastest among nearby countries
(Novy, 2006)
Economic Interactions and Distance
Trade
FDI
120
100
80
60
40
20
0
1000km
Source: Venables (2001)
2000km
4000km
8000km
UK Bilateral Trade Costs: Tariff Equivalent (%)
(Novy, 2006)
1960
2002
Germany
57.7
38.9
France
64.7
41.6
USA
60.3
54.1
Australia
44.5
66.9
Canada
47.5
67.8
Japan
81.8
70.9
Average Trade Costs: USA, 1999
(Anderson & van Wincoop, 2004)
• Policy barriers to trade now quite low but
other costs still high
• Tariffs and NTBs equivalent to import tax
of 8%
• Total barriers to international trade
equivalent to import tax of 74%
Gravity Models
• Empirical models to explain volume of
trade flows
• Bilateral trade flows explained by incomes
and population and distance as
explanatory variable that reduces trade
ceteris paribus
• Augmented gravity models can be used to
estimate impact of other variables such as
common language, common currency etc.
Breakdown of Trade Costs
Border-Related Costs
1.08 (Tariffs & NTBs) x 1.07 (language) x 1.14
(currency)
x 1.06 (information) x 1.03 (security) = 1.44
Transport Costs
1.08 (direct) x 1.09 (time) = 1.21
Total Trade Costs
Border-related x transport = 1.44 x 1.21 = 1.74
Offshoring: Evidence
• 14 million US service sector jobs “vulnerable” (96 million
not) (Garner, 2004)
• Offshoring of business services will increase 20-fold in
five years to 2007; typical cost savings 20%-40% (UNCTAD,
2004)
• Payroll services, IT services, transaction processing,
software development, telemarketing etc. etc.
• Offshoring works for activities that are routine, where
performance is easy to verify, for impersonal rather than
personal services (Blinder, 2006)
Top 10 Offshoring Locations
Source: A. T.Kearney (2005)
1. India
6. Thailand
2. China
7. Czech Republic
3. Malaysia
8. Chile
4. Philippines
9. Canada
5. Singapore
10. Brazil
Offshoring: Evaluation
• It is win-win when markets work well
• Social gain of 17 cents on each $1
spent by US (McKinsey, 2005)
• Re-employment of displaced workers
less likely in France and Germany so
offshoring much less attractive
Service Offshoring and Productivity
Amiti & Wei (2005)
• Service offshoring raised American
manufacturing labour productivity by 34.5% between 1992 and 2000
• Represents about 1/8th productivity growth
• Adverse effects on employment at micro
but not macro level
London as a Financial Centre
• Agglomeration where size matters
• Benefits from thick labour markets and
importance of proximity for deal-making
• Clerical jobs will increasingly be offshored
• This will strengthen the core business
UK Asset Management: Core Business
OXERA (2005)
Importance
Score
Financial
Infrastructure
4.00
3.96
Size of Labour Pool
3.96
4.24
Quality of Life
3.77
3.36
Market Liquidity
3.69
4.29
Regulatory Regime
3.69
3.40
UK Asset Management: Back-Office
OXERA (2005)
Importance
Score
Total Labour Cost
4.00
2.74
Size of Labour Pool
3.92
4.08
Flexibility of Labour
Market
3.89
3.22
Property Rentals
3.59
2.11
Financial
Infrastructure
3.42
3.85
Vacancy rate
The Beveridge Curve
UV2
UV1
Unemployment rate
Beveridge Curves
(Nickell et al., 2001)
• Shift out everywhere in 1970s, 1980s
• This has been reversed in UK but not in France
or Germany
• Reflects labour market institutions especially
those important for search and matching
efficiency in context of globalization
• Geographic mobility, regional wage flexibility,
ALMPs help
Long Term Unemployment Rate, 2004
(% unemployed 1 year or more)
6
5
4
3
2
1
0
EU15
Source: OECD (2005)
USA
FRANCE
GERMANY
UK
Distance is Still Alive and Well
• ICT is rearranging geography not abolishing it
• Race to the bottom fears are countered by
agglomeration benefits and advantages of
proximity
BUT
• Those who benefit most from globalization will
be the most successful at re-deploying labour