Essays on globalization and economic policy

In this doctoral thesis, I analyze the influence of different dimensions of globalization on the economic policy of an economy. I concentrate on globalization that takes the form of migration and international trade. This research investigates to what degree such globalization can be welfare enhancing for an economy and how policy should react to different globalization related problems. Methodologically, I answer these questions in each chapter by proposing theoretical models of open economies and analyze, using comparative statics, how indicators like welfare, income, the level of education and public expenditure react to an increase in the degree of globalization, and whether limiting further integration can be beneficial. In the first chapter of this thesis, ''Choosing between Protectionism and Free Trade in an Uncertain World'', I investigate whether restricting international trade can make sense from a national point of view if increased market integration leads to a higher aggregate level of volatility. I propose a 2 country, 2 factors, 2 goods model, where, in the short-run, one factor is mobile and the other fixed. The output of one good is assumed to be subject to random shocks, whereas the other is not. I find that, in such a scenario, free trade is not welfare maximizing if the risk-preference of consumers and producers differ, and if a greater degree of specialization on the production of the net-exported good increases the exposition of the economy towards risk. In this case, I demonstrate that it can be welfare improving to introduce a tariff on the net-imported good. This will result in a production structure that is more diversified than under free trade. Thus, if globalization has a volatility increasing effect on an economy, it should restrict the degree of integration. In the second chapter, ''Migration Experience, Aspirations and the Brain Drain'', I investigate a different form of globalization: international migration. It has already been shown in the migration literature, that the skill level in low-wage countries does not necessarily decrease as a result of emigration. While these countries experience indeed an outflow of skilled labor, as a result of a significant international wage gap, the possibility to emigrate and to earn higher wages will increase the incentives for the entire population to invest in education. In this paper, I show that in addition to this incentive effect, emigration also creates an inter-generational spillover effect. In the empirical part of the chapter, I use panel data from an Indonesian household survey to show that emigration changes the goals that individuals want to attain. This ''aspirations effect'' reinforces the positive incentive effect of emigration. I proceed by using this stylized fact to create an inter-generational model of occupational choice and emigration. Using comparative statics I show that the optimal emigration rate, which maximizes the steady state level of skilled workers in the economy, is increasing in the magnitude of this aspirations effect. Furthermore, I also find that, at current migration rates, skilled emigration is likely to be beneficial for more countries than previously assumed. Thus globalization, in the form of migration, can have a positive influence on poor countries, even if this implies that they will lose some of their workforce. As a consequence, these countries should not choose autarky, but the right amount of integration.