Report Read the article “How should governments help those hurt by international trade?” by Nina Pavcnik, published in The Economist in 2018. According t

Report Read the article “How should governments help those hurt by international trade?” by Nina Pavcnik, published in The Economist in 2018.

According t

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Report Read the article “How should governments help those hurt by international trade?” by Nina Pavcnik, published in The Economist in 2018.

According to the author, why should the government help the losers from free trade?

She also suggests five guiding principles on how the government should help. Briefly summarize each principle and share any thoughts or reactions about the article. 1

How should governments help those hurt

by international trade?
By Nina Pavcnik

May 9th, 2018

Before answering how governments should help the losers from free trade, it is

important to ask whether governments should help losers from free trade. The

argument for it does not have to invoke morality; it can rely on economic principles.

Freer trade raises aggregate living standards in a country, but it generates winners and

losers. Those hurt by international trade will likely oppose further liberalisation and call

for protectionism, jeopardising the economic benefits of trade to the society as a whole.

If governments want support for freer trade — which is potentially even more important

in today’s world of global supply chains — they need to help those who are left jobless.

So how should governments best help? The answer is obviously context-specific,

depending on the country’s level of economic development, flexibility of its labour

market, and the structure of its public finances. But several guiding principles are worth

keeping in mind.

First, government policy should support displaced workers, not jobs. Job churning is an

important component of a healthy economy, reflecting not just the forces of

international trade but also changing consumer tastes and technological advances.

Government policy should not discourage these dynamics. At the same time, this

churning increases economic uncertainty and hardship for workers and their families,

which needs to be addressed.

Second, government policy should protect displaced workers regardless of whether

workers are hurt by international trade or by other factors such as technological change.

Why? In practice, it is difficult to identify whether a particular worker loses a job due to

trade or technology. In fact, the two causes are often intertwined, at least in high-income

countries such as America.

Third, worker-specific policies should not have built-in incentives that discourage

employment. Take the case of America. A large share of transfers to American workers

displaced by Chinese competition came from long-term social-security disability

insurance, a policy that discourages workers from finding new jobs. Alternative policy

options, such as wage insurance or the earned income-tax credit, would not have this

adverse side effect.

Emerging economies too have experimented with a large range of active labour-market

policies aimed at increasing employment. These range from vocational training and


wage subsidies to employers, to interventions that are meant to facilitate job search,

including job fairs, providing public information about jobs in places with better

employment opportunities, and transport services.

To be sure, a recent survey finds that the costs of the programmes that have been tried

so far, especially vocational training and wage subsidies, often exceed the benefits to

workers. These programmes might not have been effective, in part, because the targeted

sectors and locations ultimately did not need workers. To that end, programmes that

offer individuals information about employment opportunities elsewhere (and covering

transport costs or other reallocation assistance) are potentially more promising.

Finally, governments should ensure that communities suffering from substantial job

losses receive funds to provide public goods, especially education. Educated individuals

tend to cope better with the challenges of globalisation and technological change.

Research suggests that the costs of international trade are highly concentrated in high-

income and emerging economies alike. In such a setting, it is important to ensure that

the negative effects of international trade on local labour markets do not spill over to the

equality of opportunity for children in these communities.

This lesson might be particularly relevant in countries where schooling is financed

mainly by local tax revenue, which can dry up in places suffering from extensive job loss.

Consider the example of American communities adversely affected by the rapid increase

in Chinese imports during the late 1990s and 2000s. The tax base in these communities

decreased and transfers from state and federal sources did not reverse this trend,

leading to declines in spending on education.

In this particular case, not only did the children there potentially have to bear the

consequences of lower family’s income, but they were also affected by a reduction in

local public goods. The government could have in part counteracted these declines in

spending on education with policies to improve the educational opportunities of

children there.

These adverse effects on education are more likely to occur in emerging economies,

where families live closer to subsistence and tax revenue is scarcer. Consider the case of

India after its 1991 import liberalisation reform. Trade reform adversely affected the

livelihoods of families in areas more exposed to import competition, many of whom

already lived at the edges of poverty. As families struggled to make ends meet, they

pulled children, especially girls, out of school to save on schooling costs. Targeted

government interventions that reduced the cost of attending school (such as paying for

lunch) helped counteract these trends.

To be sure, providing social safety nets is undeniably costly. But we run the risk of

reversing the gains from trade if we don’t address unemployment concerns seriously.

From The Economist

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