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This article starts by discussing the fact that David Ricardo’s theory of comparative advantage is no longer as applicable in today’s society. Such problems and more were raised in the recent Nobel economic conference in Lindau.
Professor Eric Maskin, who won the Nobel Prize in 2007, suggests an alternate version of Ricardo’s model. He states that man of the assumptions made in the old model are no longer justified. Such assumptions include labour mobility.
The article then discusses the nature of globalisation today and analyses how it can be improved. The problem with globalisation today is that it increases income inequality in a country (although the Gini coefficient between the countries themselves has been falling). One solution would be to subsidise education and healthcare, a model that Brazil has used successfully to decrease income inequality in its own economy. Professor James Mirlees, another Nobel Laureate quoted in this article, proposes a similar solution of subsidies in the UK to aid the poorer workers.
In response to criticism that such measures (subsidies) will destroy higher growth (the equity vs equality argument), Professor Joseph Stiglitz says that evidence contradicts this claim: it is with higher equality that growth thrives.
He also warns against a plutocracy, which is an inevitable consequence of income inequality.
To understand the article and the points made in the Lindau conference better, we must study a few things in more detail.
1) Why is the theory of comparative advantage becoming outdated? What assumptions no longer hold true? This very short press release by the Lindau Nobel Laureate Meetings itself should clear things up. The main reason why the theory of comparative advantage is coming under attack is because this theory, according to the press release, predicts that the income inequality between countries should decrease, when the exact opposite is happening.
Professor Maskin’s alternative model suggests that the reason why inequality is increasing is because the more skilled workers can now migrate to more economically advanced countries, where standard of living for themselves increase. Hence, inequality still persists.
2) What is the equity vs equality argument? The argument is that these two things cannot coexist: a country must lean towards one or the other. Equity is where people keep what they earn. Hence, those earning more keep more, and those earning less keep less. Resultantly, income inequality is persistent. Conversely, equality is where there are social safety nets created from the income of the rich (i.e. a progressive taxation structure) to provide a minimum standard of living for the poorer and/or unemployed. The reason why some people favour equity is because it is speculated that equality hinders growth: higher taxes on the rich and general government interference do not allow growth to blossom. In this Lindau conference, Professor Joseph Stiglitz dismisses this claim, citing statistics showing that the two work well hand in hand.
3) It is also important to know the different ways to subsidise. In the article, Pritchard discusses one of the three main ways, a tactic that Brazil used.
a. The first type of subsidy is a price subsidy on goods and services. This is the subsidy that most people think of. Examples of countries that use this are India, Indonesia and the U.S. with medicare. Generally, the problem with this type of subsidisation is that the money, in lower income countries, gets stolen along the way.
b. Direct cash transfers (handing people money directly). I do not know examples of countries that use this.
c. Conditional cash transfers, which is what Brazil used. As explained by the article, this is a cash transfer to people’s bank accounts, given that they send their children to school and invest in general healthcare for their children. In Brazil, this tactic was widely successful in increasing education levels and decreasing health problems, which, in turn, helped productivity.