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 StatesGDP, current prices, 2004

I

F

UK

IrePGr

L

EstMal

E

D

FinDKSNL B A

Lat

PolCzHuSRSl

LithCyp

China & India

US EU Japan

0% 20% 40% 60% 80% 100%

Population

Output & income

World Share

US EU Japan China India Latin America SE Asia RoW

China India

EU export pattern

0

20

40

60

80

100

1980 1985 1990 1995 2000

Western Hemisphere Middle East Europe Asia AfricaIndustrial Countries

Industrial nations

Asia

Non EU15 Europe

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 & LosersShare of unemployment by education

Primary

SecondaryTertiary

0 20 40 60 80

Canada

Finland

Germany

Italy

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

0%

20%

40%

60%

80%

100%

1980 1985 1990 1995 2000

Exports (Manufactures as % of /total)

Imports (Manufactures as % of /total)

0 20 40 60 80 100 120

SlovakiaCzech Republic

PolandHungary

GreecePortugal

SpainItaly

DenmarkAustria

United KingdomGermany

NetherlandsLuxembourg

SwedenFranceFinland

BelgiumIreland

GDP per hourworked (1997US$)

World: Very Regional

AfrME

LANA

AsiaEur

AfrM

ELA

NAAsi

aEur

0

500

1,000

1,500

2,000

2,500$ B

illion

s

Regional Trade Matrix, 2004