Academic journal article
By Krugman, Paul
Harvard International Review , Vol. 26, No. 2
While trade shouldn't be viewed as competitive because an increase in productivity means increased product for an entire market, will differences in growth rates lead to political competition that threatens free trade?
I do not think that the difference in growth rates is the issue. I do not think anyone is looking at Chinese growth and saying it is the problem. The specific jobs that are being shifted overseas spurs political debate; it is just not basically a growth rate issue.
Much media coverage has focused on exporting jobs and the transition to a service-based economy. Is this an accurate depiction of the future of the US economy and the balance of future economies of developed and developing nations?
No. Everything we know from theory and from history says that international trade is not going to lead to a net loss in jobs. It will lead to all other kinds of consequences, but overall employment will be just the same as it would have been without the trade. Overall, this is not going to be a net negative for employment; the problem is that we can not neglect the very real concerns of workers who lose their jobs.
Is international investment a stable method for growth and development, or is capital flight still a legitimate concern?
Capital flight is still a legitimate concern. Hot money that flows in and out of countries has been a big source of instability for the past decade. That has been a major negative and we can not dismiss it. For what it is worth, international investment has not been flowing where it should. We have not seen a situation where savings from advanced countries are being used to finance development in poorer countries. If anything, the flows have gone in reverse. A lot of people are rethinking international investment. There are still arguments for relatively unrestricted investment, but the big upsides have not materialized.
What would be the big upsides of international investment without the risk of capital flight?
The theory was that international investment was going to deliver capital to countries where capital was scarce. It was going to increase investment in productive capacity in places that were short of productive capacity. This just has not happened, anywhere. In both Latin America and Southeast Asia there were brief periods of capital flow, but it all dissipated. In fact, there was subsequent capital outflow as countries moved into current account surpluses. The whole idea that international investment was going to be a way to transfer savings from already developed countries to countries on the way up, for whatever reason, just has not happened.
Will regional trade agreements lead to economic growth or are they means to political ends?
Regional trade agreements have turned out to be not that important. If you were looking at the big story of US trade since 1990, NAFTA would not be a big part of the story. If you looked at the likely impact of the Free Trade Agreement of the Americas (FTAA), assuming one is possible, it would not be that big. Regional trade agreements turned out to just be a hypothetical story. These agreements are largely political gestures. They do offer some increase in trade between the parties that sign the agreement; they do cause some problems for multilateral trade because they distort the global system of trade. Ten years ago, regional trade agreements looked like they were going to be the big thing of the global economy, but this just has not panned out. It is not the big story.
What are the implications of the increasing internationalization of financial markets, including international investment, for third world countries? What do you see as some of the obstacles to achieving truly international finance markets?
Do that in reverse. The big obstacle is that international finance has, for the last 15 years, been a source of problems rather than solutions. …