TCA Srinivasa-Raghavan: Music for the Marxists, and Jairam

OKONOMOS

Globalisation must be accompanied by more, not less, government spending.

"Are markets and governments substitutes or complements?" ask the authors in the first line of this paper*. Their results, they say, "provide microeconomic evidence... that the state and the market are complementary".

Of course, this does not mean that bureaucrats should pretend to be businessmen or that planning commissions and industrial policy should thrive.

Instead, it means that governments should provide safety nets because individual attitudes to globalisation are determined by the risks they perceive as being inherent in it.

Anna Maria Mayda, Kevin H O'Rourke and Richard Sinnott try to establish a point that will be music to the ears of the Congress party and the Marxists. This is that "government spending can bolster support for globalisation by reducing the risk associated with it in the minds of voters".

The Marxists can use it for justifying greater government expenditure and the Congress can use it for justifying more globalisation. It's called win-win.

The authors have used international survey data to establish the point. It is the Asia-Europe Survey (ASES) covering nine east and south-east Asian and nine western European countries.

I would strongly urge the economists in the CPI(M) and my good friend Jairam Ramesh to read at least this section because it comes up with extraordinarily counter-intuitive examples that would flummox both right and left wingers. It will be most useful for the next speech (or letter) that they write.

The authors reach two major conclusions. The first is that "risk aversion is associated with anti-trade attitudes" (although I would have put it the other way around). The second, more relevantly, is that "this effect is smaller in countries with greater levels of government expenditure".

Ergo, if the government spends a bit more it can get voters to accept more open markets.

They quote Dani Rodrik, the Harvard economist, in support. It seems he "showed" in 1998 that "more open economies have greater exposure to the risks emanating from turbulence in world markets" and further that government expenditure can perform "an insulation function, insofar as the government sector is the 'safe' sector in terms of employment and purchases from the rest of the economy relative to the other". Long live DGS&D.

That also sounds suspiciously like the good Keynesian identity "" you know, that old C+I+G+(X-M) thing. So I looked at the bibliography to see if the old codger had been referred to. But illai, no.

There are many other data-based gems in this paper.

One is about the attitude to more openness to trade of skilled and less-skilled workers. Thus, if an economy uses skilled and unskilled labour as the two main inputs, "in skill abundant countries skilled workers should favour trade liberalisation while unskilled workers should oppose it". Right, yes?

No, completely wrong. It seems it is the other way around. "In skill scarce countries, the more educated an individual is, the smaller the probability that he or she is in favour of free trade."

They again quote Rodrik and a clutch of others. "Skilled workers welcome trade liberalisation only if they are in skill-abundant countries while, in skill-scarce countries, it is the less educated who are stronger promoters of free trade." (emphasis added) Come on, don't pretend you knew this.

Another gem: women hate globalisation more than men. "We also find a pronounced gender effect, with women being more protectionist than men, other things being equal."

But, alas, no discussion follows because the authors say that isn't the primary focus of the paper. Clearly, discretion is the better part of valour.

*Risk, Government and Globalisation: International Survey Evidence, NBER Working Paper No. 13037, April 2007