Paul Krugman: What did economists get wrong about globalisation?

By Sophie Thomas

Earlier in the year, Nobel-Prize winning economist and New York Times columnist, Professor Paul Krugman, delivered the annual Corden Lecture and explored the various consequences economists didn’t predict when it comes to globalisation.

The lecture is held every year in honour of eminent Australian economist and Professorial Fellow at the University of Melbourne, Max Corden.

Following the lecture, I caught up with Professor Corden, and his colleague Professor Phillip McCalman, Chair of Economics at the University of Melbourne, to reflect on Krugman’s talk.

Australians leading the way

Professor Krugman reflected on the fact that, from the 1960s through to the 1980s, the field of international trade economics was dominated by Australians and Canadians.

He referenced Professor Corden’s seminal book, Trade Policy and Economic Welfare, and his influential work on trade protection and the “Dutch disease” model.

Professor Corden says Australia’s involvement in the development of international trade theory makes sense.

“Unlike Europe and the United States, we were a young country. And unlike the developing countries, we were more advanced. So, we were something in between, we were developing ourselves and therefore interested in new industries and possibilities.”

A new kind of trade

Professor Krugman’s lecture explored the history of world trade after World War II and how we came to reach the levels of “hyper-globalisation” we see today.

Professors Max Corden and Phil McCalman.

“For decades, there seemed to be an unstoppable movement toward increased free trade. But now we’re in a period of turmoil, and widespread international trade wars are a possibility,” he said.

Before the truly global trade we see today, trade mostly occurred between similar countries. The US traded with Canada and Europe, and the goods they traded back and forth had similar characteristics - it was intra-industry trade among similar countries.

In the 1980s, economists saw the growth in this kind of international trade as having very few negative impacts.

“I believe there’s a law in economics: once you have a theory that explains the way world works, the world changes,” Professor Krugman said.

“Just as we were getting comfortable with this benign view of trade, it changed.”

Suddenly, manufactured goods were being traded on a large scale between very different countries.

Following a reduction of protectionist policy around the world, for the first time, large-scale imports of manufactured goods were flowing from low-wage countries into developed countries.

The dynamics of rapid change

“When economists were thinking about international trade a few decades ago, we missed how important the pace of change can be,” Professor Krugman said.

He said it was the rapid take up of trade between advanced economies and developing economies that caused huge disruption.

Professor McCalman agrees.

“Economists are often thinking about transitions occurring slowly and in a relatively smooth way. But the reality is, when it comes to global trade, changes can often be quite discreet and very abrupt,” he said.

All three professors reflected on the significance of China’s rise to the global trading environment.

“The long-term impact of spending three per cent of your GDP on goods from China are, of course, significant, but the impact of going from one to three in the space of only a few years has a much more dramatic effect. That is an extreme pace of change, and we didn’t see this as a possibility before it happened,” Professor Krugman said.

The globalisation backlash

Professor Krugman said the loss of jobs in manufacturing hubs in advanced economies like the United Kingdom, the US and Australia has contributed to a public backlash against free trade and globalisation.

Both Professor Corden and Professor McCalman believe the United States, in particular, did not have adequate policies in place to handle the ‘China Shock.’

“The US made some big mistakes,” Professor Corden said.

“If you’re going to have changes in trade, you’ve got to have robust social welfare policies in place to support the population impacted by the labour market shifts – as is the case in Europe and Australia.”

Professor McCalman says the US is a much harsher place for people who lose their jobs than Australia.

“People displaced and out of work due to the outsourcing of their jobs overseas need access to healthcare and education – they need to be able to afford to keep their kids in school. This all aids in their potential transition back into the workforce in a different industry or capacity,” he said.