On a warm Tuesday afternoon, the 19th of March, Eric Maskin gave a lecture in celebration of the 25th anniver- sary of the magistère. As an introduction, Jean Tirole, who wrote his thesis at MIT under the direction of Maskin, gave a brief history of the Magistère programme and paid tribute to Jean-Jacques Laffont, one of the Magistère’s creators.
Then Tirole provided the audience with some background information on Maskin and his work. Maskin received his PhD at Harvard in the 1970's and is currently a professor at Harvard University. He has received many awards, most notably the 2007 Sveriges Riksbank Prize in Economic Sciences in Mem- ory of Alfred Nobe for his research in the area of mechanism design. He is currently a member of the TSE Scientific Council.
Maskin justified his choice of the conference topic by referring to one of Jean-Jacques Laffont’s main fields of research: de- velopment economics. The goal of the lecture was to pres- ent a model which explains why global markets have not reduced inequalities, particularly in poor countries. Over the past few decades, globalization has changed the face of the world; Maskin made specific note of increases in foreign exchange of goods and services, larger diversity of goods available in markets, and an internationalization of production processes. He cited declines in transportation costs, communication costs and the removal of trade barriers as the main causes of this phenomenon. Proponents of glo-balization often argue that it has allowed some countries to experience rapid economic growth (for instance China and India) and should decrease inequalities in these countries, but empirically, this is not the case.
Maskin briefly reviewed David Ricardo’s theory of comparative advantage. He argued that this model worked well to explain international trade and global exchanges during the 19th and 20th centuries, however, since globalization’s onset, the model has struggled to describe reality. Indeed, according to Ricardo’s theory, inequalities should have been reduced within poor countries.
Maskin illustrated this through an example of Heckscher and Ohlin’s modern form of the theory. First, according to this the-
ory, differences in production patterns are due to different endowments in labour and capital inputs. Let’s suppose that there are two countries, one rich and another poor,and two types of workers, low-skilled and high-skilled. The rich country is wealthier than the poor country due to its human capital advantage. As a result, the poor country has a comparative advantage for producing labour-inten- sive goods (for example, rice) whereas the rich country has a comparative advantage for producing capital-intensive goods which require higher worker skill levels (for example, software).
In the first scenario, the trade is not possible. In order to respond to the demand for both rice and software, the two countries themselves have to produce the two kinds of goods. However, the poor country is more suited to pro- duce rice and the rich country is more suited to produce software. In the poor country, the demand for low-skilled workers decreases due to the software sector’s need for high- skilled workers. Consequently, the wages of low-skilled workers are artificially low.
In the second situation, let’s suppose that now trade is pos- sible between the two countries. The poor country specializes in rice production and the rich country in software produc- tion. In the poorer country, the level of wages of low-skilled workers will increase as a result of the higher demand for their labour, whereas the level of the salaries of the high- skilled workers will fall from decreasing demand. Thus, the model predicts that inequalities in wages should decrease due to trade in poor countries. This theory also predicts that countries which have completely different skill advantages should increase trade between themselves to decrease inequality. But as mentioned, this theory does not seem to hold true, one only needs to look at the relatively low levels of trade between Africa and Europe.
In order to move past this difficulty and explain the recent globalization, Maskin introduced an alternative model (a sim- plified version by Michael Kremer) which focuses on labor rather than on capital. His goal was to show that the Ricardian theory’s predictions about the cut in inequalities cannot be proven right in real life. The main point is to focus on the internationalization of the production process.
Let’s suppose now that we have four levels of skills for work- ers (A, B, C, D, the skill level declining from A to D) and the output is defined by the following production equation: Y = M2 S. Here, M is the level of managerial skills which are more important in the output process and S is the skill level of low- skilled workers, which proves less important for the final out- put level.
The rich country is composed of solely A and B-workers, while the poor country is composed of solely C and D-workers. We have different possibilities of matching the workers. Let's say that we have two C-workers and two D-workers. There is the crossing pattern (a matching of different-skill workers) and the homogeneous pattern (a matching of same-skill work- ers). A maximization of output level determines the pattern the firm will choose.
In general, the cross-matching pattern is better because managerial skills have more influence on output level than the low skills. However, if the differences in skills are too big, the homogeneous pattern can be shown to be more suitable for the situation.
Maskin intended to compare the situation before and after globalization became possible. Initially, it is not possible for companies to hire workers from foreign countries. The A and B-workers remain in the rich country and C and D-workers in the poor country. Thus, to produce maximum output, workers would be cross-matched patterns in the pre-globalization scenario.
In the post-globalization era, the situation has changed. The A-workers and D-workers will homogeneously be matched whereas B-workers and C-workers will be cross-matched. The productivity of high skilled workers increases the productivity of low skilled workers. Consequently, the wages of Co-workers will rise whereas the D-workers will find their salaries stagnate or even fall which in the end will enlarge the gap between the two types of poor country workers.
One of the solutions to solve this problem is to develop educa- tion and training of the lowest-skilled workers. Nevertheless, it has a cost and we have to ask ourselves who will pay. Maskin suggested that ideally, companies could pay, but questioned this idea’s practicality, as firms have no real incentives to be- have like this. Indeed, if they invest in training programmes for their workers, firms will have to pay higher wages to the better educated workers. Another mentioned solution would be to ask A-workers to share the benefits of the globalization with the D-workers.
Here, we have to be careful. As a matter of fact, even if glo-balization has not reduced inequalities in poor countries, it has increased the average income in these countries. There- fore, Maskin sees the responsibility for education lying in the hands of governments and organizations like the UN which have stronger incentives to train the workers.