Final Report Summary - GOPG (Globalization, Optimal Policies and Growth) Globalization and technological progress are among the most visible forces shaping today’s world economy. Although these processes open new profitable opportunities, they also pose new policy challenges. The goal of this project is to study some of these challenges. One of the key questions for sustaining growth in a global economy is how to protect the returns from innovation optimally. We find that, when innovation is sequential, optimal policies should strike a balance between protecting innovation rents and permitting a fast diffusion and standardization of new technologies. Moreover, the optimal point in this trade-off depends on the extent of globalization and on the mode of technology transfer across countries. The project also studies how trade liberalization and the accumulation of knowledge increase the importance of competition and of the selection of talent.Another important question concerns the effects of offshoring of production to low-wage countries. By lowering production costs, offshoring is often perceived as an opportunity. Yet, offshoring is also seen as a threat by millions of low-skill workers in advanced countries who fear the migration of their jobs. We argue that to fully understand the effect of offshoring on wages and welfare we also need to consider its impact on the pace and shape of technological progress. By doing so, we find that offshoring of jobs and skill-biased technical change may be two faces of the same coin, but that this may change soon: as offshoring continues, it will eventually redirect innovation in favor of low-skill workers so that its unequalizing effect may ultimately be self-correcting.While these results concern the characterization of optimal policies, globalization also affects their political feasibility. Studying how international trade affects political constraints and the implications for the world political structures are the main aims of the second part of this project.We build our analysis on the observation that globalization is creating a growing mismatch between political and economic borders. This mismatch requires a change in political structure that redistributes power away from centralized jurisdictions or states and towards a new set of overlapping jurisdictions that are both larger and smaller than the existing states. Our theory suggests that globalization provides a simple and yet powerful explanation for the rise of large nation-states followed by the creation of international unions (such as the EU or the WTO) together with a process of political fragmentation within states. Finally, we find that globalization may also explain why countries with very different sizes and policies coexist. Our results suggest that we need to study the process of institutional change that leads societies to organize themselves into different political structures. They also highlight the importance of adapting constitutional arrangements so that they can react optimally to globalization. This is a major challenge faced by modern societies and political institutions which are currently under pressure from above by the expansion of international institutions (such as the EU, the WTO…) and from below by growing requests for decentralization.
