Category Archive for: International Trade [Return to Main]

Saturday, November 18, 2006

NBER Reporter: Firms in International Trade

What are the characteristics of firms involved in international trade? Are these firms more productive? Do they pay higher wages? What are the effects of trade liberalization on employment, labor skill levels, and survival?

Firms in International Trade, by Andrew B. Bernard, NBER Reporter, Fall 2006: For most of its lengthy history the field of international trade largely ignored the role of the firm... Traditional trade theory explained the flow of goods between countries in terms of comparative advantage... Even the research focusing on differentiated varieties and increasing returns to scale that followed Helpman and Krugman continued to retain the characterization of the representative firm.¹ However, the assumption of a representative firm, while greatly enhancing the tractability of general equilibrium analysis, is emphatically rejected in the data. My research ... has been an attempt to ... understand the decisions of heterogeneous firms in shaping international trade and their effects on productivity growth and welfare.

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Is the "Capitalist Domino" About to Fall?

Robert Reich says the U.S. should normalize trade relations with Vietnam. I agree:

The New Domino Theory, by Robert B. Reich, American Prospect: President Bush arrives in Hanoi today for discussions about regional economic issues. He would do well to discuss frankly America’s fears about the "dominoes" of Asian capitalism.

You may remember the old domino theory of Asian communism. Four decades ago, American policy makers clung to the idea that the big domino of Soviet Communism had toppled China, and the domino of Chinese communism had then toppled North Vietnam. Unless the United States propped up South Vietnam, it was assumed, all of Indo-China would become communist.

Tens of thousands of Americans died in that war before America got out and let the dominoes fall where they may. But then a strange thing happened. Soviet Communism disappeared. China became the fastest-growing big capitalist nation in the world. And Vietnam became one of the hottest markets in Southeast Asia.

The real domino turned out not to be communism, but capitalism.

Yet the capitalist domino seems almost as threatening to America today as the communist one was forty years ago. This week, Republican leaders in the House called off a vote on a measure that would have given Vietnam permanent normal trade relations with the United States. They didn’t think they could get the votes needed to pass it.

Talk about shooting ourselves in the feet. Early next year, as part of its entry into the World Trade Organization, Vietnam will reduce tariffs on foreign goods and open its telecom and financial services sectors to foreign investment. But as things now stand, America won’t benefit from these measures because Congress won’t normalize trade relations with Vietnam.

Why not?

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Wednesday, November 15, 2006

Exchange Rate Models "Not as Bad as You Think"

Charles Engel says there has been progress on exchange rate models since Meese and Rogoff's famous finding that the models are no better than a random walk at predicting the out-of-sample evolution of exchange rates:

Exchange-Rate Models, by Charles Engel, NBER Reporter, Fall 2006: Recent research that my co-authors and I have undertaken, as well as related research by other NBER researchers, suggests that theoretical models of foreign exchange rates are "not as bad as you think." ...

Should Exchange Rate Models Out-predict the Random Walk Model? For many years, the standard criterion for judging exchange rate models has been, do they beat the random-walk model for forecasting changes in exchange rates? This criterion was popularized by the seminal work of Meese and Rogoff.[1] They found that the empirical exchange rate models of the 1970s that seemed to fit very well in-sample tended to have a very poor out-of-sample fit. ...[S]ubsequent work has evaluated exchange rate models by the criterion of whether they produce forecasts with a lower mean-squared error than the simple random walk forecast of no change. Mark's (1995) paper was important in reviving interest in empirical exchange rate models.[2] He found that the models were helpful in predicting exchange rates at long horizons. Subsequent work has cast doubt on whether exchange rates can be forecast at long horizons, so there is a weak consensus that the models are not very helpful in forecasting...

West and I question the standard criterion for judging exchange rate models.[3]

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Tuesday, November 14, 2006

Yesterday's Lou Dobbs

Guess where Perot "giant hypocrite sound" Systems is setting up operations?:

Company Ross Perot Built Is Now Hiring, in Mexico, by Elisabeth Malkin, NY Times: Remember Ross Perot’s “giant sucking sound”? The Texas billionaire and onetime presidential candidate railed against the North American Free Trade Agreement in the early 1990s, arguing that it would create a “giant sucking sound” of good American jobs pulled to low-wage Mexico.

But things change. Last week, Mr. Perot’s Texas company announced that it was hiring — in Mexico. The Perot Systems Corporation, which manages information technology for companies, is setting up a technology center in Guadalajara where it expects to employ 270 engineers by the middle of next year. ...

Perot Systems, based in Plano, Tex., had sales of $2 billion last year and employs 20,000 people in more than 20 countries, 6,000 of them in India alone. ...

Back in 1992 and 1993, Mr. Perot’s anti-Nafta harangues made him highly unpopular in Mexico... But a dozen years into Nafta, Mexicans are willing to let bygones be bygones. And so, it seems, is Mr. Perot...

Wednesday, November 08, 2006

Populism vs. Nationalism

I think this is a useful distinction:

A poll victory for economic nationalism, by Jacob Weisberg, Commentary, Financial Times: The bums, or at least many of them, have been thrown out. So the political conversation turns to the question of what the Democrats will do now... While it may be too soon to answer that question, we have seen enough to be alarmed about one tendency in particular: economic nationalism...

Most of those who reclaimed Republican seats campaigned against free trade, globalisation and any sort of moderate immigration policy. That these Democrats won makes it likely that others will take up their reactionary call...

There is an important distinction to be made between economic populism and economic nationalism. Many of Tuesday’s Democratic victors stressed familiar populist themes: corporate misbehaviour and tough times faced by working people. ... Raising the minimum wage (which Republicans foolishly failed to do before the election) is a classic populist position. Opposing Bush tax cuts for the wealthy is another. But in places where Democrats made their most impressive inroads ..., one heard a distinctly different message of economic nationalism. Nationalism begins from the same premise that working people are not doing so well. But instead of blaming the rich at home, it focuses its energy on the poor abroad. The leading economic nationalist today is probably Lou Dobbs, who natters on against free trade, outsourcing, globalisation and immigration...

The most prominent nationalist candidate this year was Sherrod Brown, who unseated incumbent Senator Mike DeWine in Ohio, a state that has lost 200,000 manufacturing jobs since George W. Bush became president. Mr Brown is the author of a book called Myths of Free Trade: Why American Trade Policy Has Failed. Here is a snippet from one of his television advertisements: “Sherrod Brown stood up to the president of his own party to protect American jobs, fighting against the Mexico and China trade deals that sent countless jobs oversees.” For some reason, economic nationalists never seem to complain about job-killing Dutch or Irish competition. The targets of their anger are consistently China and Mexico, with occasional whacks at Dubai, Oman, Peru and Vietnam.

One heard similar themes in the other pivotal Senate races. ... A much harder-edged nationalism defined many of the critical House races, where Democrats called for a moratorium on trade agreements, for cancelling existing ones, or, in some cases, for slapping protective trade tariffs on China. These candidates also lumped illegal immigrants together with terrorists and demanded a fence along the Mexican border. In Pennsylvania, Democratic challengers defeated Republican incumbents by accusing them of destroying good jobs by voting for the Central American Free Trade Agreement and being soft on illegal immigration. “Fair trade” candidates also won back formerly Republican seats in Ohio, Indiana, Iowa, North Carolina and Wisconsin.

Economic nationalism is not unique to Democrats – nor is it a new theme for them. The protectionist wing of the party first emerged in the 1980s when America’s manufacturing decline was linked to imports. ... But during his 1992 campaign, ... Mr Clinton espoused a free-trade position and embraced globalisation through his presidency. This set the direction for his party despite significant resistance in Congress. Mr Clinton’s argument was always that government should address the negative consequences of open trade through worker retraining programmes and by ensuring benefits not tied to employers, like healthcare and portable pensions. But the human capital part of Mr Clinton’s globalisation agenda never went anywhere, which partially explains the current backlash. ...

It would be going too far to say that the 2006 election ushers in a new protectionist consensus. But free trade has definitely left the building.

The populist, economic nationalists versus the populist, economic globalists.

I think Democrats should leave the globalist-nationalist debate aside and focus on areas of agreement first - implementing smart populist policies - because once that's done, the nationalist arguments will be less compelling and hopefully will then fall by the wayside. Here's a similar view:

Thus, ... the best road forward [is] to (a) make the Democratic coalition politically dominant through aggressive populism, and then (b) to argue for pragmatic reality-based technocratic rather than idealistic fantasy-based ideological policies within the Democratic coalition.

Tuesday, November 07, 2006

The New Globalization

I'm not sure this says as much new about globalization as the author claims, e.g. the Blinder work he refers to is discussed in "Offshoring: The Next Industrial Revolution?," but it's worth repeating in any case:

The new globalisation, by Anthony Giddens, Guardian: Globalisation is in the news again, following Gordon Brown's call yesterday to "rout the anti-globalisation forces of protectionism". ... Since ... globalisation has been debated so intensively and so continuously ... it is tempting to think that nothing original can any longer be said about it. But such a thought would be wrong. Anyone interested in how globalisation is changing our lives, and our economies, would do well to ponder the recent writing of a group of eminent economists at Princeton University. They are Professor Gene Grossman, Alan Blinder and their colleagues, together with a British author working in Geneva, Richard Baldwin, who has commented usefully on their work.

They have produced what they call a "new paradigm" of globalisation... One can see globalisation as involving several distinct phases of the disentangling of previous integrated economic activities. Starting in the late 19th century, sharp reductions in transportation costs meant that many goods no longer had to be made close to the place of their consumption. Since about the 1970s, because of a further leap in the ease of communication and transportation, stages in the actual manufacturing process can be separated from one-another and carried out at a distance. Transnational firms have developed a global division of labour...

But now a further phase of is occurring, Grossman et al say, coming from new processes of electronic offshoring, which are affecting services rather than manufacture. So far so conventional, because we are all aware of the growth of call centres in India... However, the authors say, electronic outsourcing is likely to go far deeper than call centres. Any service job can be outsourced that displays four characteristics - if it involves the heavy use of IT; its output is IT transmittable; it comprises tasks that can be codified; and if it needs little or no face-to-face interaction. Blinder believes that somewhere between 30 and 40 million service jobs in the US will be open to offshoring in the future. Since all manufacturing jobs can be offshored too, this would lead to a total of between 42 and 52 million. He doesn't mean that all those jobs will be offshored. However, the workers in those jobs will be exposed to competition from people overseas who will do the same jobs, to the same standards, for much lower wages.

Electronic offshoring is the basis of the new paradigm of globalisation. ... In the next phase of globalisation, global competition is occurring at the level of the individual job, or type of job, rather than at industry or trade level. The same type of job, in other words, can be outsourced across firms and industries of widely different types. It will hence be less useful in the future to see the winners and losers from globalisation in terms of the sector to which they belong or even their skill group. ... The winners and losers will be much more difficult to predict. ...[It] is [not] necessarily the case that the winners will be the highly educated or highly skilled, since the consequences will depend upon the actual task they are carrying out, not the overall competitiveness of the firm or industry in which they work - or their level of education.

The wages of many jobs are set by the fact that ... they are not affected by international competition. A cab-driver in London earns a lot more than a cab-driver in Manila not because he or she does a better job, but because ... cab-driving is non-tradeable. It will remain so, unless someone discovers a way of driving taxis remotely. The same does not apply at all for a host of workers in offices, hospitals or banks who previously believed they were safe from direct competition from workers overseas. ...

Take as an example the work of surgeons. More and more operations almost certainly will be carried out at a distance,... It may be possible for the surgeon to carry out many more operations in the working day than when he or she was confined to a single hospital. Should this happen, the best surgeons will be in much greater demand than the poorer ones, who will find their income dropping and perhaps their livelihood disappearing altogether. Globalisation will be helping one highly qualified worker, but harming the prospects of the other - even though they are both in a sector where overall Western countries have a competitive edge.

Offshoring so far has only affected a small proportion of jobs in the advanced economies, so all this is at a relatively speculative stage. But there are some clear policy implications. Wherever possible, skills training should not be too specialised. What will matter most will be flexibility and adaptability, both at the level of the firm and the overall workforce. It will probably not be the unskilled and semi-skilled who will have to make most adjustments, as has been true in the recent past. ... We need to revise our ideas on these issues, starting now. Mr Brown is right to argue against protectionism, but if we don't get our thinking right the trend might accelerate rather than diminish.

Monday, November 06, 2006

Worker Security, Social Insurance, and Protectionism

More on the decline in worker security:

US faces globalisation without safety net, by Alan Beattie, Commentary, Financial Times: If Americans are feeling ever more insecure about inequality, jobs and globalisation, they are not alone. The concerns of the “anxious middle” income earners are echoed across the Atlantic. But ... Americans have tended to display a much greater tolerance for the type of economic dislocation that can accompany globalisation...

Statistically, the European Union and the US show the same level of enthusiasm for foreign trade and globalisation. Trade also accounts for a similar percentage of both economies. But Europeans demand a larger social safety net ... to shield them from the vagaries of competition, judging by studies of trade, taxes and welfare payments. ...

Meanwhile, differences in inequality between the US and Europe owe as much or more to redistribution as to unequal wages. ...[W]hile wage disparities are similar, in the US government cash benefits reduce the proportion of households in poverty by less than one-quarter, while elsewhere in the OECD welfare systems reduce that proportion by more than half. Among rich countries, the US is thus left with the largest proportion of households living in poverty.

European workers are also much more cushioned if they become unemployed. ... On top of this the European workforce receives a higher “social wage” – public education, healthcare and housing provided free or heavily subsidised by the state – whether employed or not. ...

Who's responsible for the decline in worker security in Europe and the U.S.? According to this, you are:

Consumers Are Killing the Welfare State, by Gabor Steingart, Spiegel: Consumers just want a good deal -- they don't care where a product has been made or whether there is any social safety net in that country. ... We ... expect legally mandated vacations, protection from being fired and sick days. If everything goes wrong in life, we fall back on welfare...

And therein lies the rub: With its surcharges to fund the social safety net, ...[this] significantly increases the labor costs of each employee... [O]ne of the primary reasons for price differences between new and old members of the world labor market is the welfare state. ...

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Tuesday, October 31, 2006

Can "State-Business-Union Collaboration" Save the Middle Class?

In one of the comments in Martin Wolf's forum about Larry Summers commentary on the difficulties globalization is causing for the middle class worldwide, Robert Wade writes:

Robert Wade: Larry Summers says: "The economic logic of free, globalised, technologically sophisticated capitalism may well be to shift more wealth to the very richest and some of the very poorest in the world, while squeezing people in the middle." A new study by Peter Edward presents confirming evidence (... 2006, 'Examining Inequality: Who Really Benefits from Global Growth?', World Development...). Of the increase in world consumption between 1993 and 2001 between 50 and 60 per cent accrued to those in the top 10 per cent of world PPP income in 1993, of whom four-fifths lived in the (old) OECD and most of the rest in Latin America. ...

Most of the rest of the increase accrued to the burgeoning middle class of China. Hardly any accrued to those living on less than $1-a-day, though 'hardly any' in percentage terms may have been sufficient to push enough people up ...[so] that the number under $1-a-day fell while the number between $1 and 2-a-day rose.

So when Larry talks of the "global middle class" being squeezed he is talking about the vast majority of the world's population, and the even bigger majority of the world outside the OECD and China. This should qualify any easy assertion that "globalization works"...

Larry also says: "[W]ithout its [the global middle class'] support it is very doubtful that the existing global economic order can be maintained." ... Elites are likely to sponsor measures that lower inequality only when their legitimacy is seriously threatened. We see fluctuations in after-tax inequality over time in response to the degree of threat to the capitalist order or to the survival of particular states... But despite the ... constancy (not fall) of world income inequality (the fast rise of China and India notwithstanding), inequality has hardly [been] an issue [in] global or even national policy discussion. ...

Finally, Larry says that 'the combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion' in Asia, especially in China. The problem here is that low wage labour is available all over the place, not just in Asia, and diffusable technology is, from the supply side, diffusable all over the place. Asian economies have certainly benefitted from being able to access global product and financial markets... But they have adopted policy regimes that depart in major ways from the principles that Larry keenly promoted from the US Treasury, whose spirit is caught in his remark in this column, 'protectionism [note the 'ism', as though it is a creed, like communism] is counterproductive'.

The governments of the successful economies (think Japan, Taiwan, South Korea, Singapore for starters) have in practice adopted a variety of policy instruments to accelerate the national integration of the economy, as a complement to Larry's central interest in 'international integration'. In the first three, these policy instruments included managed trade regimes with substantial amounts of protection ... in line with a larger development strategy. Larry refers to 'middle-income countries without natural resources struggl[ing] to define an area of comparative advantage'. I suggest that the struggle to define and exploit areas of comparative advantage in the context of increasing competition in world markets may ... involve a more pro-active directional thrust from the state (the direction established through state-business-union collaboration) than Larry would be happy to endorse. ...

I don't think state-business-union collaboration is the answer to this problem. Do you? Martin Wolf also comments on the article.

Sunday, October 29, 2006

Summers: The Global Middle Cries Out for Reassurance

Because of the problems globalization and technological change have created for middle class workers, Larry Summers believes that the advancement of global integration will depend upon "what can be done for the great global middle" through policies enacted by the "best parts of the progressive tradition." He has in mind progressives who "do not oppose the market system," instead "they improve on the outcomes it naturally produces":

The global middle cries out for reassurance, by Larry Summers, Commentary, Financial Times (free): ...Neither the after-effects of September 11 2001 nor a tripling in oil prices has prevented the world’s economy from growing faster in the past five years than in any five-year period in recorded economic history. Given this recent performance and the ... optimistic outlook, one might have expected this to be a moment of particularly great enthusiasm for the market system and for global integration.

Yet in many corners of the globe there is growing disillusionment. From the failure to complete the Doha trade round to pervasive Wal-Mart-bashing, from massive renationalisation in Russia to the success of populists in Latin America and eastern Europe, we see a [growing] degree of anxiety about the market system...

Why is there such disillusionment? Some anti-globalisation sentiment can be seen as ... arising from the Bush administration’s foreign policy misadventures. But there is a much more troubling source: the growing recognition that the vast global middle is not sharing the benefits... – and that its share of the pie may even be shrinking.

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Friday, October 27, 2006

"Twin Deficits, Twenty Years Later"

A new paper from the New York Fed looks at the twin deficits debate. Here's the introduction explaining the debate, part of the conclusion, and a link to the paper:

Twin Deficits, Twenty Years Later, by Leonardo Bartolini and Amartya Lahiri, Current Issues in Economics and Finance, October 2006  Volume 12, Number 7: In recent years, the twin-deficit hypothesis—the argument that fiscal deficits fuel current account deficits—has returned to the forefront of the policy debate. The argument first emerged in the 1980s, when a significant deterioration in the U.S. current account balance accompanied a sharp rise in the federal budget deficit. Now, with the U.S. current account and fiscal balances plunging by 3 and 4 percent of GDP, respectively, from 2001 to 2005, the view that the two deficits might be closely linked has attracted new interest. Changes in U.S. fiscal policy have also been viewed as playing a key role in widening the nation’s current account deficit since the turn of the millennium and thus in determining whether global current accounts will be rebalanced over the next decade.

According to the twin-deficit hypothesis, when a government increases its fiscal deficit—for instance, by cutting taxes—domestic residents use some of the income windfall to boost consumption, causing total national (private and public) saving to decline. The decline in saving requires the country either to borrow from abroad or reduce its foreign lending, unless domestic investment decreases enough to offset the saving shortfall. Thus, a wider fiscal deficit typically should be accompanied by a wider current account deficit.

Casual observation suggests that the twin-deficit hypothesis accurately captures the U.S. experience in the 1980s and the first years of the new century. However, the hypothesis does not explain the U.S. record of the late 1990s, when a substantial current account deficit coexisted with a federal budget surplus. Nor does it accord with Japan’s experience during the 1990s, or the experience of many other countries undergoing sharp swings in fiscal policy over the past two decades. Many empirical studies have also failed to find a strong relationship between fiscal and current account deficits, perhaps because they have used data on a very limited number of countries or have focused on periods that were too short to yield reliable evidence in a variety of environments and over time.

This edition of Current Issues contributes to the debate on the twin-deficit hypothesis by analyzing the link between fiscal and current account deficits across a larger sample of countries and over a longer period than examined in earlier studies. Reviewing the international record over the past thirty years, we revisit both key components of the twin-deficit hypothesis: the relationship between fiscal policy and private saving, and the response of current account balances to fiscal policy changes. Our findings confirm the broad wisdom that private saving indeed tends to decline when fiscal policy loosens. However, this response may have weakened over time. Saving now tends to fall by about 35 cents in response to each extra dollar of fiscal deficit, down from the decline of 40 to 50 cents that researchers have reported for earlier periods. In addition, much of the decrease in national saving is matched by a drop in the current account, whose deficit rises by 30 cents for each extra dollar of fiscal deficit.

These results offer some support for the twin-deficit view. They suggest, however, that the effects of fiscal policy on saving and the current account balance are too weak for deficit reductions in the United States to play a central role in correcting the nation’s current account imbalance with the rest of the world.


Conclusion ...Our estimates suggest that even if the federal fiscal deficit—currently about 2 percent of GDP—were fully erased, the nation’s current account deficit would improve by only a fraction of its current 7 percent of GDP. For example, if the U.S. current account continues to respond to fiscal changes as it has, on average, in our sample of OECD countries—by 30 cents on the dollar—a full elimination of the federal fiscal deficit would improve the U.S. current account by only 0.6 percent of GDP, or less than one-tenth of its current level. While these calculations are based on historical correlations that could break down if circumstances change in unexpected ways, they are nonetheless suggestive of the likely magnitude of the effects at work.

Friday, October 13, 2006

Mishkin: Globalization: A Force for Good?

The newest Fed Governor, Frederic Mishkin, gives his first speech. The topic, the globalization of financial markets, has been covered here recently in an commentary by Mishkin from the Financial Times, and an interview from Crooked Timber about his book on the same topic. Here's one small section of the speech:

Globalization: A Force for Good?, by Frederic S. Mishkin, Board of Governors: ...Can more globalization--in particular, financial globalization--be a force for good?

The globalization of trade and information over the past half century has lifted vast numbers of the world's people out of extreme poverty. Despite the doom and gloom that you often hear, world economic growth since the Second World War has been at the highest pace ever recorded. What we are seeing in countries that are export oriented, and thus able to take advantage of the present age of globalization, is a reduction in poverty and a convergence of income per capita toward industrial-country levels. In India and China, for example, globalization in recent years has lifted the incomes of more than 1 billion people above the levels of extreme poverty. ...

The benefits of globalization of trade in goods and services are not controversial among economists. Polls of economists indicate that one of few things on which they agree is that the globalization of international trade, in which markets are opened to flows of foreign goods and services, is desirable. But financial globalization, the opening up to flows of foreign capital, is highly controversial, even among economists...

For example, in his best-selling book Globalization and its Discontents, Nobel laureate Joseph Stiglitz is very critical of globalization because he sees the opening up of financial markets in emerging-market economies to foreign capital as leading to economic collapse. Even Jagdish Bhagwati, one of the leading economists defending globalization of trade (after all, his book is titled In Defense of Globalization), is highly skeptical of financial globalization, stating that "the claims of enormous benefits from free capital mobility are not persuasive." George Soros, the prominent financier, opens his book On Globalization with a chapter entitled "The Deficiencies of Global Capitalism."

One reason for the controversy is that opening up the financial system to foreign capital flows has led to some disastrous financial crises causing great pain, suffering, and even violence. These crises can arise when bad policies encourage excessive risk taking by financial institutions, policies that rich elites in the developing countries often advance for their own profit. There are those (including Stiglitz and Bhagwati) who put the primary blame for the failures of financial globalization in emerging-market economies on outsiders, specifically on the International Monetary Fund, or what they refer to as the Wall Street-Treasury complex. The evidence has brought me to the conclusion that institutions like the IMF or the U.S. Treasury are not primarily to blame, although neither are they blameless--public and private financial institutions active in the international capital markets have often aided and abetted poorly designed financial globalization, although that was not their intention. ...

We have seen that the repression of the financial system is a great obstacle to economic growth and the reduction of poverty in poorer countries. Yet, if financial development offers such tremendous benefits, why doesn't every country jump on the path to growth and prosperity by imitating the institutions of the advanced economies? Part of the answer is that good institutions need to be home-grown; institutional frameworks that have been developed in the rich countries frequently do not translate well to poorer countries. This is a lesson that many in the advanced economies of the world have yet to learn. The development of good institutions in the advanced countries took hundreds of years; as they grew, they adapted to local conditions. Poor countries must develop their own institutions, and the citizens of these nations must feel they have ownership of the institutions or the institutions will be ineffective and short lived. ...

I will conclude by saying that those who oppose any and all globalization have it completely backward: Protectionism, not globalization, is the enemy. It is true that, by itself, globalization in both finance and trade is not enough to ensure economic development and that economies must position themselves to handle foreign capital flows. But as I said, to be against globalization as such is most assuredly to be against poor people, and this is presumably not the position antiglobalizers want to take. Developing countries cannot get rich unless they globalize in both trade and finance. Making financial flows truly worldwide and creating robust, efficient financial markets in developing countries is not optional: It needs to be the focus of the next great globalization. In sum, I want to challenge those who oppose globalization to rethink their objections. As Kofi Annan, the Secretary General of the United Nations, has put it, "The main losers in today's very unequal world are not those who are too much exposed to globalization. They are those who have been left out." Rather than opposing or limiting globalization, we in the rich countries and those in the developing countries must, as a moral imperative, work together to make globalization work for the general good of people all over the world.

Tuesday, October 10, 2006

Banning Child Labor in India

The problem of poverty induced child labor in India:

India's latest move to stop child labor, by Anuj Chopra, Christian Science Monitor: On a rainy night, ... Raju is busy at work. This timid 10-year-old works 12-hour days serving customers and scrubbing mountains of utensils... After a full day, he often pockets less than a dollar. If there's food left over, he gets a meal. If not, he goes home on an empty stomach.

Concerned about the future of children like Raju, India Tuesday begins implementing a country-wide ban on children below 14 working as domestic help or in the hospitality sector. And punishment for those who choose to defy it is stringent: imprisonment for up to two years and a fine as high as $430.

Children in India are already banned from working in factories, mines, and other perilous jobs. India's Child Labor Act, first passed in 1986, will now carry two more in a list of 57 professions deemed "hazardous" for children.

Child rights activists in India say it's an important step in the battle to stop child labor. But some worry that the government is still not doing enough to provide alternative options for families that depend on income from their children. And many are skeptical about how effective enforcement of the ban will be.

"It is important to remember that the problem won't disappear by just introducing a ban," says Shireen Miller, head of policy at the India branch of the US-based Save the Children organization. "Legislation is a start," she says pointing out that previous legislation hasn't been stringently enforced.

"Now there's a clear signal that [no one] can get away with employing and exploiting children as workers," says Shantha Sinha, an anti-child labor activist who in 2003 won the prestigious Ramon Magsaysay Award. Ms. Sinha recalls how all 34 cases of domestic child labor that she took up last year ... couldn't stand up in court. All of the accused wriggled out of blame, she says, as employing children as domestic help wasn't then prohibited by law. She hopes this ban will reverse such tendencies.

India has the largest number of child laborers on the planet. ... According to the New Delhi-based, National Sample Survey Organisation, nearly 16.4 million Indian children aged 5-14 years are engaged in economic activities and domestic or non-remunerative work. The World Bank puts that figure at 44 million. ...

Ingrid Srinath, the CEO of Child Rights and You (CRY), a New Delhi based NGO, calls the ban notification "insular" and is skeptical that it will do much good in its current form. The ban, he says, does little to address the reasons that compel children to work: backbreaking poverty, family debts, marginalization, and migration of their parents.

A recent study conducted by the International Labour Organization found that "children's work was considered essential to maintaining the economic level of households, either in the form of work for wages, of help in household enterprises, or of household chores in order to free adult household members for economic activity elsewhere."

Raju's father, a daily wage laborer, frets that the ban will only exacerbate his family's financial woes. "At least now, he doesn't steal. He earns his meals with dignity," he says. "If the ban is enforced, he might be forced to beg for alms, or the family might go hungry."

India's Ministry of Labor and Employment hasn't yet spelled out any coherent rehabilitation and education plan for children who they lose their jobs. The Ministry assures that a blueprint to ensure self-sufficiency for the kids will emerge soon.

Activists also say that the ban won't work unless mindsets change. Children are widely employed in the homes of India's affluent and middle classes.

Raju's employer, a coarse, burly man who calls himself Pappu, employs two other kids, 12 and 14. Pappu intends to retain his young employees despite the ban. And if cops pester him, he unabashedly says, he'll do what many Indians often do to give the law a slip - offer a bribe.

He says he doesn't see anything wrong in employing the children. "I give the best I can offer," he says. "I do take care of them. I give them food. The kids won't survive if they don't work."

This notion of benevolence often masks the exploitation and the long-term harm for children, says Ms. Sinha. "Just because children are given food or money doesn't mean that they're benefiting," she says. "They're cheap and work long hours without any question. That's exploitation. The ban now gives weight when we say: 'That's wrong!' "

I believe that, to the extent that there has been a reduction in child labor, international trade has helped to force the changes that brought it about. Of course we shouldn't overlook child labor for the economic benefits it might bring us. But if improvement is fueled by the demand for change as a condition of trade, then closing the doors to trade is not the solution. As much as we'd like to say "stop this before we trade at all," the reality is that economic conditions don't allow the change, at least not easily, and trade coupled with the insistence on steady improvement is a means to overcome this constraint.

Monday, October 09, 2006

Mishkin: Promoting the Next Great Globalization

Our newest Federal Reserve System governor, Frederic Mishkin, on how globalization of the financial system can help to lift poor countries out of poverty. This was written just before his appointment to the Fed:

Promoting the next great globalisation, by Frederic Mishkin, Commentary, Financial times: While much of the talk about globalisation is of either the “for” or “against” variety, this is a false choice. The real question is whether political and business leaders will take the world in the prosperous direction of the next great globalisation, that of the financial systems of emerging market countries, or the perilous path of the next great reversal, a retreat from free flows of goods, services and capital across borders.

The globalisation of trade and information in the past half century has lifted vast numbers of people out of extreme poverty. World economic growth since 1960 has been the highest ever. There has been a convergence of income per capita and a reduction of poverty in countries that have taken advantage of globalisation by becoming export-oriented. In India and China, globalisation has led more than 1bn people out of extreme poverty.

Countries that have not been able to take advantage of globalisation, such as most of sub-Saharan Africa, have not only seen their position relative to globalisers fall, but have experienced absolute drops in per capita income...

Globalisation is not inevitable, nor does it march immutably forward. What we are experiencing is actually the second great globalisation of trade and capital flows in modern times. The first began in 1870 and ended with the start of the first world war in 1914. The war disrupted capital flows and international trade between nations. The world economy never fully recovered from this Great Reversal and the 1930s saw a global depression, the rise of fascism and the start of the second world war.

Could there be another Great Reversal in which globalisation retreats and the world suffers political, social and economic upheaval and destruction? The answer is yes. In recent years there have been notable electoral successes of anti-globalist politicians in developing countries.

What can be done to help poorer countries reach the next stage of economic development so they can eventually get rich? The development of an efficient financial system will enable emerging market economies to allocate capital to its most productive uses. Institutions need to be created that promote strong property rights and a well-functioning legal system. Institutional reform must be put at the top of the agenda in developing countries. This can be difficult because ... rich elites and special interests have much to lose from anything that encourages an efficient financial system and promotes competition.

The solution is to increase demand within developing countries for more robust financial activity. Financial globalisation helps create these incentives because when domestic companies in developing countries can borrow from abroad or from foreign financial interests, domestic financial firms start to lose business. They will need to find new customers to whom they can profitably lend. ... These firms will need to push for institutional reforms... They will be more likely to encourage legal reforms to protect property rights.

Rich countries can help encourage this institutional development by providing the right incentives. As William Easterly has pointed out in his book, The Elusive Quest for Growth, aid has generally not worked well in promoting development because it has not provided the right incentives for governments to act in their citizens’ interest.

What promotes development is encouraging poorer countries to pursue an external orientation and develop a successful export sector. This not only forces the economy to become more efficient, but creates a demand to improve institutions. In addition to offering technical assistance and greater incentives for institutional development, advanced countries can also help to alleviate poverty by opening up their markets to exports from poorer countries. Those who lose their jobs in advanced countries from this opening of markets deserve our sympathy and our support to find new jobs, but displaced workers can be assisted in other ways than trade restrictions.

Free trade, fuelled by effective financial support, raises productivity in developing and advanced countries alike. “Trade not aid” will help make globalisation work to the benefit of poorer countries. Financial reform in developing nations is the first step in promoting this happier state of affairs.

Thursday, October 05, 2006

Fraternal Twin Deficits

Menzie Chinn on the relationship between the current account and budget deficits:

Twin deficits redux, by Menzie Chinn:

On the current account deficit, "We have met the enemy, and he is us".

[T]he issue of global imbalances ... is never far away from policy-makers minds. Of course, there are two major camps in the debate. First, there is the Bernanke "global saving glut" view, and the closely related but intellectually distinct "Bretton Woods Revived" force. The U.S. current account deficit, according to adherents of this view is made abroad, or at least made anywhere but in America. Second, there is the "Twin Deficits View". This perspective has taken a lot of lumps in recent years, partly because the current account deficit kept on rising even as the budget balance moved toward surplus over the latter part of the 1990's. Of course, since budget surplus was achieved in 2000, the Administration's policies have re-established the positive correlation between budget deficits and current account deficits by driving both to new nominal heights (and percent of GDP records, for the current account).

But what of the 1990's experience? Doesn't the divergent trends in the two deficits necessarily invalidate the twin deficits hypothesis? Certainly, this talking point has been taken as a way to absolve fiscal policy of any responsibility in the current account imbalance. Well, my response to this bivariate view of the world is that questions like this led man to create "multiple regression analysis". Taking this perspective, Hiro Ito and I have updated the results [PDF] discussed in this post.

Specifically, we have "rigorously interrogated" the data... We find the following (for the industrial countries, as defined by the IMF), over the 1975-2004 period:

  • The pooled OLS estimate of the response of the current account balance to the budget balance, using 5-year-averaged data and time fixed effects, is 0.15 to 0.16. This means a one percentage point (ppt) change in the budget balance to GDP ratio induces a 0.l5 to 0.15 ppt improvement in the current account to GDP ratio (statistically significantly different from zero, using robust standard errors, and the 10% marginal significance level). ...
  • The two stage least squares estimate (i.e., accounting for endogeneity) of the response is 0.325, statistically significantly different from zero at the 10% level.
  • The estimate using Hodrick-Prescott (HP) trends (to identify the medium term values) is 0.095, statistically significantly different from zero at the 10% level.
  • The OLS estimate using HP trend data and fixed effects is 0.485, statistically significantly different from zero at the 10% level. This result means that a 1 ppt. increase in the budget balance to GDP ratio purged of business cycle frequency effects induces an approximately 0.5 ppt. improvement in the the current account balance purged of business cycle frequency movements, after conditioning for country specific effects.
  • In general, the point estimates range from a minimum of 0.095 (HP trends and OLS) to a maximum of 0.485 (HP trends, fixed effects), with a median of the estimates reported in the paper of 0.325.

In other words, in an exhaustive study that has addressed issues of specification (pooled OLS versus fixed effects), extraction of medium term variation (five year averages versus Hodrick-Prescott filtering), endogeneity (OLS versus 2SLS), the importance of institutions (w/ and w/o institutional variables), we find that fiscal policy has important economic and statistically significant effects on the current account imbalance. (By the way, as pointed out by Calculated Risk in this post, don't hold your breath for actual progress on the "on-budget" budget deficit).

This shouldn't deny the fact that international factors may have an impact on our current account imbalance. But those who hold blameless U.S. fiscal policy should reconsider the empirical evidence.

Wednesday, October 04, 2006

China’s Huge Corporate Savings

Martin Wolf identifies the source of China's high savings rate - "huge corporate savings" - and he explains how both saving and the current account surplus can be reduced through government action:

Beijing should dip into China’s corporate bank, by Martin Wolf, Commentary, Financial Times: China represents something new in the history of the modern world: a developing country that has a vast global impact. This is why Hank Paulson, the US treasury secretary, has ... call[ed] for it to be a “responsible stakeholder”. But China will behave as the US wants only if it perceives that this is in its own interests. ...

At present, the most vexed issue between the two countries is the payments “imbalances”. Many in the US complain that China is manipulating its currency, to preserve excessive competitiveness. Certainly, China has a large current account surplus... No other country has as big a surplus.

The starting point then must be whether it makes sense for a poor country to export so much capital. The answer, I would argue, is “no”. But we must then also ask why China is running such large surpluses. ... Contrary to the conventional wisdom, the frugality of Chinese households is not the chief explanation for China’s surplus savings ..., the principal explanation is China’s huge corporate savings.

Between 2000 and 2005, ... some 70 per cent of the increase in gross savings was generated by the rising profitability of the corporate sector... Certainly, Chinese household savings are high by international standards ... an impressive 32 per cent of household disposable income in 2004. Nevertheless, household savings generate only a third of China’s overall savings. The undistributed profits of corporations are far more important. ...

Now consider the big question: does it make sense for China to save so much or, for that matter, to invest so much? After all, consumption – public and private – is no more than half of GDP, while private consumption is only 40 per cent of GDP. The answer, I suggest, is “no”. China can probably grow as fast with lower investment. It certainly does not need to accumulate more foreign assets. Higher consumption today would surely be desirable, particularly if it were consumption by – or on behalf of – the hundreds of millions of rural poor.

Moreover, as the World Bank has argued, the government has a simple way of achieving this outcome. It can ask the companies it notionally owns to pay dividends instead of keeping all the profits for themselves. Suppose it took 5 per cent of GDP from these companies in this way and spent this money on valuable social programmes: public health, for example. Other things being equal, the gross savings rate and current account surplus would fall. The welfare of the Chinese today would rise...

Now consider, instead, what might happen if gross investment were reduced, as those fearful of overheating and excessive investment suggest, but without cutting savings. Then the current account surplus would explode upwards. This would be globally disruptive and would bring no obvious benefit to China itself.

I would argue that the government needs not a policy to cut investment, but one to cut savings. Moreover, it can easily achieve this aim, because it is itself directly or indirectly responsible for the bulk of these savings. Above all, such a change is in the interest of the Chinese people. All the government needs do is exercise its rights of ownership. This, not a change in exchange-rate policy, is the most important step towards external adjustment...

Tuesday, October 03, 2006

Fixing Global Imbalances

In this post from yesterday, Joseph Stiglitz explains how to solve global warming using WTO trade sanctions. Today he explains how to fix domestic and global imbalances without incurring a recession. He also recommends overhauling the global reserve system to cure the underlying structural problems that allow these imbalances to occur:

How to Fix the Global Economy, by Joseph Stiglitz, Commentary, Ny Times: The International Monetary Fund meeting in Singapore last month came at a time of increasing worry about the sustainability of global financial imbalances: For how long can the global economy endure America’s enormous trade deficits — the United States borrows close to $3 billion a day — or China’s growing trade surplus of almost $500 million a day?

These imbalances simply can’t go on forever. The good news is that there is a growing consensus to this effect. The bad news is that no country believes its policies are to blame. The United States points its finger at China’s undervalued currency, while the rest of the world singles out the huge American fiscal and trade deficits. ...

Treating the symptoms could actually make matters worse, at least in the short run. Take, for instance, the question of China’s undervalued exchange rate... Even if China strengthened its yuan relative to the dollar and eliminated its $114 billion a year trade surplus with the United States, and even if that immediately translated into a reduction in the American multilateral trade deficit, the United States would still be borrowing more than $2 billion a day: an improvement, but hardly a solution.

Of course, it is even more likely that there would be no significant change in America’s multilateral trade deficit at all. The United States would simply buy fewer textiles from China and more from Bangladesh, Cambodia and other developing countries.

Meanwhile, because a stronger yuan would make imported American food cheaper in China, the poorest Chinese — the farmers — would see their incomes fall... China might choose to counter the depressing effect of America’s huge agricultural subsidies by diverting money badly needed for industrial development into subsidies for its farmers. China’s growth might accordingly be slowed...

Nothing significant can be done about these global imbalances unless the United States attacks its own problems. No one seriously proposes that businesses save money instead of investing in expanding production simply to correct the problem of the trade deficit; and while there may be sermons aplenty about why Americans should save more — certainly more than the negative amount households saved last year — no one in either political party has devised a fail-proof way of ensuring that they do so. The Bush tax cuts didn’t do it. Expanded incentives for saving didn’t do it.

Indeed, most calculations show that these actually reduce national savings, since the cost to the government in lost revenue is greater than the increased household savings. The common wisdom is that there is but one alternative: reducing the government’s deficit.

Imagine that the Bush administration suddenly got religion (at least, the religion of fiscal responsibility) and cut expenditures. Assume that raising taxes is unlikely for an administration that has been arguing for further tax cuts. The expenditure cuts by themselves would lead to a weakening of the American and global economy. The Federal Reserve might try to offset this by lowering interest rates, and this might protect the American economy — by encouraging debt-ridden American households to try to take even more money out of their home-equity loans to pay for spending. But that would make America’s future even more precarious.

There is one way out of this seeming impasse: expenditure cuts combined with an increase in taxes on upper-income Americans and a reduction in taxes on lower-income Americans. The expenditure cuts would, of course, by themselves reduce spending, but because poor individuals consume a larger fraction of their income than the rich, the “switch” in taxes would, by itself, increase spending. If appropriately designed, such a combination could simultaneously sustain the American economy and reduce the deficit. ...

Underlying the current imbalances are fundamental structural problems with the global reserve system. John Maynard Keynes called attention to these problems three-quarters of a century ago. His ideas on how to reform the global monetary system, including creating a new reserve system based on a new international currency, can, with a little work, be adapted to today’s economy. Until we attack the structural problems, the world is likely to continue to be plagued by imbalances that threaten the financial stability and economic well-being of us all.

Tax policy won't be used to redistribute money from the rich to the poor anytime soon, even as part of an expenditure reduction package. It also appears it would take very large income transfers to offset government spending reductions since the impact of any dollar that is transferred is only the difference in the marginal propensities to consume. As for the connection between the budget and trade deficits which is assumed but not explained, see Menzie Chinn who estimates that a 10% reduction in the budget deficit would reduce the current account deficit by 4%.

Monday, October 02, 2006

Can WTO Trade Sanctions Save the Planet?

Felix Salmon wonders if Joseph Stiglitz is on to something:

Kyoto intransigence as illegal subsidy, by Felix Salmon, Economonitor: The CGD's Lawrence MacDonald reports on one of Joe Stiglitz's bright ideas:

U.S. trade partners [should] ask the WTO for authority to impose countervailing duties on exports of U.S. steel and other energy-intensive products that benefit unfairly from Washington’s refusal to join the Kyoto Protocol limiting carbon and other greenhouse gasses.

The logic is kinda fabulous:

There is a precedent for such duties, Stiglitz said, because Washington previously obtained a World Trade Organization ruling in support of a U.S. ban on the import of shrimp caught in Thailand using nets that killed endangered species of turtles. "I asked one of the (WTO) appellate judges (involved in the decision) whether he understood what the implications were for global warming, because clearly if you can impose a trade sanction to save a turtle, you can impose a trade sanction to save the planet," Stiglitz told a standing-room only audience. “And the judge said, yes… we were aware of where this was going.”

MacDonald says this is Stiglitz's "most interesting and important" idea – could it really happen?

Lawrence MacDonald has the answer. Referring to Stiglitz' book, he says:

The book contains a detailed explanation of the proposal--and an interesting discussion of the response his idea has received so far from senior officials:

I have discussed this idea with senior officials in many of the advanced industrial countries that are committed to doing something about global warming. And while, almost to a person, they agree with the analysis, almost to a person they also show a certain timidity: the proposal is viewed by some as the equivalent, in the trade arena, of declaring nuclear war. It is not. It would, of course, have large effects on the United States, but global warming will have even larger effects on the entire globe. It is just asking each country to pay for the full social costs of its production activities. Following standard practice, the pressure of trade sanctions could gradually be increased; and almost surely, as America recognizes the consequences, its policies would be altered--as they have been in other instances where the United States has been found in violation of WTO rules.

Until there is a change in leadership in the U.S., little will change.

Sunday, October 01, 2006

Free-Trade is Good

As a follow-up to this post noting some of the problems with the North American Free Trade Agreement (NAFTA) for Mexico, here's an argument strongly supporting free-trade agreements with Bolivia, Colombia, Ecuador, and Peru:

Don't Let the Andes Trade Pact Expire, by Sergio Muñoz, Comentary, LA Times: Salgado Chambi is a 30-year-old single mother who lives with her young children, Carlos and Ana, in a barrio in El Alto, Bolivia's third-largest city. She is one of tens of thousands of Bolivian artisans who owe their livelihoods to the Andean Trade Promotion and Drug Eradication Act, which the U.S. Congress first passed in 1991. The law allows about 5,600 Bolivian products — among them cut flowers, native fruits and vegetables, jewelry and traditional Indian clothing — to be sold duty-free in the United States.

Salgado, who learned the art of weaving from her Aymara Indian mother and grandmother, specializes in making alpaca coats, sweaters, bags and caps. Her clothing used to sell for less than $20 apiece in the local El Alto market. When the Andean trade law kicked in, ... and after a local bank loaned her $10,000 to buy the necessary equipment, she hired three women as weavers. Business has been good, and she now employs 15 women. She gets $50 for every clothing item sold in the U.S. for $90.

But the trade program that has created an economic miracle in El Alto — 80,000 new jobs and roughy $250 million in annual income from sales in the U.S. — may lapse in December.

The original goal of the Andean trade act was to combat drug production and traffic in Bolivia, Colombia, Ecuador and Peru by helping those countries create legitimate jobs, and it has largely worked. In 2001, Congress approved a five-year extension of the program, assuming that by 2006, all four countries would have negotiated free-trade agreements with the United States.

None have, although Peru and Colombia have signed deals that await congressional approval. Ecuador and the U.S. stopped talking free trade a few months ago. And Bolivia is not even on the table. ... Bolivian President Evo Morales' decision to nationalize the country's natural gas resources has only made things worse for Bolivia in the U.S. Congress...

For Bolivia, the expiring trade act is crucial to its economic vitality. ... Even Rep. Charles B. Rangel (D-N.Y.), whose free-trade voting record is mixed at best, has introduced a bill that would extend the trade provisions for Bolivia by two more years. But Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, opposes any extension because of Morales' move toward nationalization, even though no U.S. companies would be affected.

To end Salgado's and other Bolivian artisans' competitive advantage in the U.S. marketplace would be shortsighted and counterproductive, and it would border on the petty. For Latin Americans, it would be hard to understand why the world's richest country turned its back on the second-poorest in the hemisphere by ending a trade program that benefits about 40% of El Alto's largely impoverished population and amounts to 65% of Bolivia's trade with us.

Washington has a broad interest in promoting democracy in the Andean region, where Venezuelan President Hugo Chavez is using his country's vast oil wealth to spread his "Bolivarian Revolution." With indigenous movements in Ecuador and Bolivia gaining strength, fighting in Colombia continuing and dissatisfaction with the market economy festering in Peru, it would be foolish for Washington to give Chavez more ammunition by denying poor Bolivian Indians access to the U.S. market. Extending the trade program not only would help solve Bolivia's enormous problems but would serve to restore regional trust in the U.S. commitment to democracy.

Saturday, September 30, 2006

The Neo-Liberal Road to NAFTA

Brad DeLong reconsiders the neo-liberal foundations of his support for the North American Free Trade Agreement:

Neo-liberalism has a patchy Mexican record, by J. Bradford DeLong, Project Syndicate: Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success. The key argument in favor of NAFTA had been that it was the most promising road the US could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop.

Since NAFTA, Mexican real GDP has grown at 3.6 percent per year, and exports have boomed, going from 10 percent of GDP in 1990 and 17 percent of GDP in 1999 to 28 percent of GDP today. Next year, Mexico's real exports will be five times what they were in 1990.

It is here -- in the rapid development of export industries and the dramatic rise in export volumes -- that NAFTA made the difference. ... Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.

Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity. Likewise, greater efficiency should have been reinforced by a boom in capital formation...

The key word here is "should." ...[T]he 3.6 percent rate of growth of GDP, coupled with a 2.5 percent per year rate of population and increase, means that Mexicans' mean income is barely 15 percent above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened. Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago (indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico).

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade.

We see great strengths in the Mexican economy -- a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next 12 years.

To be sure, economic deficiencies still abound in Mexico. According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy. But these deficiencies should not be enough to neutralize Mexico's powerful geographic advantages and the potent benefits of neo-liberal policies, should they?

Apparently they are. The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.

We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime and official corruption. We thus implicitly suggest that Mexicans would be far worse off today without NAFTA and its effects weighing in on the positive side of the scale.

That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico's slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.

Friday, September 29, 2006

The Myth of the Coming Labor Shortage

Richard Freeman says not to expect the future labor shortages that many are forecasting:

Is A Great Labor Shortage Coming? Replacement Demand in the Global Economy, by Richard B. Freeman, NBER WP 12541, Sept 2006:

The sky is falling down, the sky is falling down ...
I must go and tell the king ...
A great labor shortage is coming.

In the early 2000s, the business press and media began reporting that the US labor market was on the verge of a major transformation. The retirement of baby boomers and slow projected growth of the labor force were going to create a great labor shortage. Policy-makers should forget about the sluggish real wage growth of the past three decades, the deterioration in pensions and employer provided health care, the “jobless” recovery from the 2001 recession, and fears of job loss from off shoring or low wage imports and focus on helping business find workers in the coming shortage. ...

In this paper, I assess the shortage claims and the labor supply and demand projections on which they are based. I conclude that there is no more reason to believe that the US faces a great future labor shortage than that Chicken Little got it right about the sky falling down. The retirement of baby boomers and slow growth of the US work force, on which the shortage claims are based, will most likely have modest and hard to detect impacts on the job market. I argue that increased supplies of skilled labor in low wage countries will impact US workers more than slower increases in domestic labor supply.


If the analysis of this paper is correct and the economic sky will not fall down in the face of a slower growth in the US work force, why have so many persons concerned with the well being of the US economy warning about the great coming labor shortage?

I suspect that ... fears of a coming shortage fit with the concerns of various groups. Future shortage or not, business will benefit from policies that increase labor supply to drive down labor costs. Advocates of education and training see the shortage analysis as a way to gain national support for increased spending on training that will benefit workers. Politicians can use the shortage analysis to avoid dealing with policies like minimum wages, mandated health care spending, labor law reform, or enforcement of labor laws, and the like, by endorsing “win-win” education and training policies while sidestepping the fact that someone must pay for these investments. ...

I [also] believe the [reason] shortage analysis appeals to some is that it offers a more optimistic framework for analyzing the economic future than the view that the biggest problem facing US workers is competition from low wage labor overseas is. If the doubling of the global work force has weakened the position of workers in the US, the country has to deal with issues regarding the rules of the global economy, ways to increase savings and the supply of capital, ways to retain good jobs and sectors and to distribute the gains from globalization to labor as well as capital while deterring protectionism.

That the coming labor shortage is more myth than reality does not invalidate some of the policies that shortage analysts endorse to help the economy progress. More and better schooling and job training and greater provision of occupational information may be critical to the nation’s preserving comparative advantage in high tech sectors under the global competition vision of the future. There is arguably greater need for those policies if global competition places downward pressure on US workers than if a domestic labor shortage puts them in the catbird seat in the economy and places business under pressure to recruit more workers.

Finally, if my analysis is wrong and the US develops a great labor shortage in the future, I do not see how the country can go wrong allowing market forces to raise the price of labor. There is nothing in economics that predicts “slower growth in the standard of living, change in the balance of payments, inequality, persistent structural unemployment,” or any other economic disasters from the normal functioning of competitive markets in the face of a shift in the supply-demand balance. If there is going to be a great labor shortage that raises wages and benefits for American workers, maybe we ought to cheer the workings of the Invisible Hand rather than seeing this as a disaster that policy should seek to avoid.

The last paragraph is worth emphasizing. David Wessel of the WSJ and Andrew Samwick have a previous discussion of these results.

Thursday, September 28, 2006

The Poverty of Anti-Trade Sentiments

"This is a sweatshop?" asks Bloomberg's Andy Mukherjee as he examines how trade affects poverty in developing nations:

Apple IPod Lifts Generation of China's Workers, by Andy Mukherjee, Bloomberg: Is America's gadget fixation lifting Asians out of poverty or pushing them deeper into it? That has been a question ever since press reports suggested that Apple Computer Inc.'s iPod music players are being assembled in sweatshop conditions in China.

Workers were being forced to toil for as little as $50 a month under Dickensian conditions, one commentator said. Poor Asians, mostly women, were caught in this vicious cycle because Americans are addicted to gizmos, another rued.

Amid the hysteria, Apple began its own audit of the factory... The findings, unveiled last month, are interesting. Air-conditioned hostels, Apple's auditors discovered, are available to workers free of charge; the dorms have TV rooms, free laundry, snooker tables and public telephones; the campus comes with soccer fields, a swimming pool, supermarkets, Internet cafes, banks, 13 restaurants and a hospital.

There's no child labor; no one is paid less than the locally mandated minimum wage; male and female employees are housed in separate dormitories; safety isn't a concern. Everyone has medical coverage.

The biggest complaint of workers: a lack of overtime opportunities during non-peak periods. This is a sweatshop? The assembly-line jobs in export industries may seem dreary, exacting and unrewarding to an analyst in Europe or the U.S., but they are far better than what's available in the domestic sectors of a developing Asian economy. ...

The interdependence of the Asian producer and the American consumer is a mutually beneficial one in a world where labor can't move freely to close the wage arbitrage. Making electronic goods for the U.S. ... has proven to be the shortest route to riches in Asia in the past 50 years. ...

None of this is to contend that Hon Hai workers in Shenzhen are living in a capitalist utopia. Work weeks are often longer than the stipulated 60 hours.

Accommodation is of considerably poorer quality for those workers who are forced to live outside the campus. After Apple published its audit report, Hon Hai said it would hire more workers and build more dormitories. Hon Hai and Apple would surely keep their promises. The Taiwanese company has a market value of $31 billion, almost half that of Apple. That's a lot of corporate reputation at stake.

The biggest winners will be the Chinese workers and their families. Millions of Asians have fed the American craving for consumer goods and crawled out of poverty within one generation, as the Hon Hai workers in China surely will.

Wednesday, September 27, 2006

Worker's Cooperatives

Andrew Leonard at Salon notes the demise of Burley bikes:

Cheap labor vs. a worker's cooperative, by Andrew Leonard: Eleven years ago, ... I bought myself a mountain bike and a Burley Trailer to tow my 1-year-old daughter around Berkeley, Calif. The Burley wasn't cheap, but its striking blue and yellow colors were, and still are, a familiar sight around the Bay Area. And it's held up well -- my ex-wife still uses it to transport groceries and other vital necessities around town.

I did not know until today, however, that for 25 years Burley had been a worker-owned cooperative in Eugene, Ore. I say, "had been," because I also learned today, via a link from Treehugger, that in June, after three years of mounting losses, Burley converted itself to a private corporation. Then, on Sept. 11, a local businessman bought the company. Already, some 40 employees have been laid off and more will probably follow.

It's easy, especially living in Berkeley, where memories of the infighting and squabbling that doomed the legendary Berkeley Co-op 20 years ago still linger, to hear the words "failed worker-owned coop" and start pointing fingers at some inherent flaw in collective management. New owner Michael Coughlin alluded to exactly that, in the most mild of ways, when he told the Eugene Register-Guard that "I think it is a great business. I just think that they really had troubles adapting to competitive issues and keeping their product costs under control. I think managing a business in a very competitive arena is not well suited for a cooperative structure."

What exactly would that competitive arena be?

Continue reading "Worker's Cooperatives" »

Monday, September 25, 2006

"Ricardo's Difficult Idea"

The usefulness of mathematical modeling, a subject brought up by Krugman in this commentary, seems to have struck a bit of a chord. So let me follow up with one or two more commentaries from Krugman on this topic. Let's start with this defense of both economic models and Ricardo's theory of comparative advantage (this is fairly long -- Section 4, "The Two Cultures," deals directly with mathematical modeling):

Ricardo's Difficult Idea, by Paul Krugman: The title of this paper is a play on that of an admirable recent book by the philosopher Daniel Dennett, Darwin's Dangerous Idea: Evolution and the Meanings of Life (1995). Dennett's book is an examination of the reasons why so many intellectuals remain hostile to the idea of evolution through natural selection -- an idea that seems simple and compelling to those who understand it, but about which intelligent people somehow manage to get confused time and time again.

The idea of comparative advantage -- with its implication that trade between two nations normally raises the real incomes of both -- is, like evolution via natural selection, a concept that seems simple and compelling to those who understand it. Yet anyone who becomes involved in discussions of international trade beyond the narrow circle of academic economists quickly realizes that it must be, in some sense, a very difficult concept indeed. I am not talking here about the problem of communicating the case for free trade to crudely anti-intellectual opponents, people who simply dislike the idea of ideas. The persistence of that sort of opposition, like the persistence of creationism, is a different sort of question, and requires a different sort of discussion. What I am concerned with here are the views of intellectuals, people who do value ideas, but somehow find this particular idea impossible to grasp.

My objective in this essay is to try to explain why intellectuals who are interested in economic issues so consistently balk at the concept of comparative advantage. Why do journalists who have a reputation as deep thinkers about world affairs begin squirming in their seats if you try to explain how trade can lead to mutually beneficial specialization? Why is it virtually impossible to get a discussion of comparative advantage, not only onto newspaper op-ed pages, but even into magazines that cheerfully publish long discussions of the work of Jacques Derrida? Why do policy wonks who will happily watch hundreds of hours of talking heads droning on about the global economy refuse to sit still for the ten minutes or so it takes to explain Ricardo?

In this essay, I will try to offer answers to these questions. The first thing I need to do is to make clear how few people really do understand Ricardo's difficult idea -- since the response of many intellectuals, challenged on this point, is to insist that of course they understand the concept, but they regard it as oversimplified or invalid in the modern world. Once this point has been established, I will try to defend the following hypothesis:

Continue reading ""Ricardo's Difficult Idea"" »

Protectionist Threats

The protectionist threats are getting louder. Unless China changes its practices immediately, Senators Schumer and Graham are calling for a vote on their bill to impose a temporary tariff of 27.5% on all imports:

Play by the Rules, by Charles E. Schumer and Lindsey O Graham, Commentary, WSJ: If there's one issue on which we all should agree, it is that increasing global trade is good for American workers and businesses. No serious economist believes that we would be better off if we closed our borders. But for trade to be good for our people, every major economic power needs to abide by the rules of free trade.

One of the fundamental tenets of free trade is that currencies should float -- or at the very least, move along with market forces. The reason for this is that a free-floating currency allows large trade imbalances to self-correct... Unfortunately, the Chinese government intervenes in the market to keep its currency, the yuan, artificially low, which allows China to artificially inflate its exports and reduce its imports. Their continued manipulation is a form of protectionism, and it throws the whole global trading system out of balance...

China bends or breaks the rules far too often. Years of currency manipulation, intellectual property theft, and barriers to entry have cost American jobs and contributed heavily to our trade deficit with China... China's actions ... make it harder for Americans to support free trade...

Three years ago, we grew frustrated with the pace of China's reforms, and we introduced a bill that would impose a temporary tariff of 27.5% on all Chinese imports unless China agreed to play by the rules. Our bill was carefully crafted to not impose tariffs immediately, giving the parties time to negotiate an alternative. In addition, the president would retain the right to delay the tariff for up to two years. Neither of us wants the tariff to become law; our goal all along has been to send a shot across China's bow and prod them to play fair...

Senior administration officials concede that our bill has helped strengthen their hand in negotiations. So we have succeeded in getting China's attention. In fact, we believe the only reason there has been any progress on this issue at all is because of the existence of our bill...

In April 2005, we finally brought our bill to the Senate floor. The Chinese responded that July by allowing the yuan to appreciate by 2.1%, and promising to allow market forces to play a greater role in determining its value. Since the small revaluation, however, the currency has appreciated very little in 14 months... So the rhetoric out of China is not being matched by real results.

We have agreed four times since last April to delay taking a final vote on our bill. Before the most recent delay, in March of this year, we traveled to China to meet with several of its top government officials... We returned from our trip with the strong impression that China would move more quickly in the ensuing months. However, ... there was no real movement.

We appreciate that China's banking system is not yet ready for a fully floating currency, but we also agree with most mainstream trade economists that gradual currency appreciation is possible without disrupting their "harmonious society." We have been patient and reasonable, but the time for patience has run out. The workers and manufacturers in our states rightfully demand a level playing field...

Unfortunately, the Chinese appear to be content with the status quo... They have no reason to change unless we send a very strong message that the status quo is not acceptable.

We look forward to meeting with Treasury Secretary Hank Paulson, who just recently returned from China. We hope he brings back good news. If not, the clock will have run out and it will be time for an up-or-down vote. With Congress's recess imminent, we know our bill will not become law, but it will be our last opportunity before a new Congress convenes to send such a message. We believe more strongly than ever that pressuring the Chinese to allow their currency to float is in the economic interests of both nations.

My guess is that China will say the right things, then do what it was going to do anyway. Hopefully, whatever happens, protectionism can be avoided -- that's a downward spiral for all. But if the yuan is devalued revalued significantly, a previous post (slightly edited) summarizes what might happen. We shouldn't expect any miracles in the short-run:

1. Consumers are worse off due to the rise in the price of consumer goods. If revaluation is bilateral and production moves from China to other countries, this effect may not be as large in the long-run. If the dollar devalues against other currencies generally, the effect on prices paid by U.S. consumers will be larger.
2. Borrowers (households, business, and government) are worse off due to rising interest rates which increases the cost of loans and the cost of financing government debt. Part of this is a transfer from borrower to lender, but there is a net drain as well due to debt held by foreigners.
3. U.S. manufacturers are better off, but this requires the dollar to devalue against other currencies generally, not just against a particular currency such as the yuan.
4. If U.S. manufacturers do better, then employment will increase as well making labor better off, but this takes time to occur.
5. If employment and manufacturing do increase, there are transitional costs to consider. Rising interest rates will cause less activity in sectors such as housing and more activity in other sectors such as (hopefully) computer chips. Thus, during the transition unemployment could increase. Nevertheless, to the extent that such domestic and international rebalancing is healthy for the economy in the long-run, there is a long-run benefit that more than offsets the short-run cost.

Update: I didn't cover this aspect, but Greg Mankiw and KNZN (the latter more completely) evaluate the statement "One of the fundamental tenets of free trade is that currencies should float."

Update: William Polley has the latest, "But it does keep their name in the papers...":

Senators Schumer and Graham may be standing down... for now...

Friday, September 22, 2006

Oil Prices and the U.S. Trade Deficit

This Economic Letter from the San Francisco Fed looks at the relationship between oil prices and the trade deficit:

Oil Prices and the U.S. Trade Deficit, by Michele Cavallo, Economic Letter, FRBSF: With the price of oil ... having nearly quadrupled over the last four years, it is little surprise that U.S. import prices have soared. One concern about these higher import prices relates to their implications for the U.S. trade balance... This Economic Letter explores the relation between the surge in oil prices and the trade deficit...

Continue reading "Oil Prices and the U.S. Trade Deficit" »

Wednesday, September 20, 2006

Cheap Shoes

The Wal-Mart, globalization, and sweatshop labor questions about the benefits of trade summarized in a tennis shoe:

Sneakers for Social Justice?, by Dave Zirin, The Nation: Stephon Marbury, the wildly talented and widely criticized point guard for the New York Knicks, usually carries a Q rating commensurate with Kim Jong Il. Making max dollars and being the face of the NBA's most dysfunctional franchise will do that. But Marbury has been drawing high-profile praise in recent days for promoting a new basketball sneaker described as "revolutionary."

What's "revolutionary" about the new Starbury One--a reference to Marbury's on-court moniker--is that ... Starbury Ones are listed at $14.98.That's $14.98. Not $149.80. As William Rhoden recently wrote in the New York Times, "This is an industry in which star athletes encourage children to buy shoes for anywhere from $75 to $200."

The shoe is not cardboard and canvas but serious and solid enough that Marbury has pledged to wear them in games this season. He says his motivation was rooted in discussions he had with Knicks GM Isaiah Thomas about the civil rights movement and Marbury's eventual legacy. ... In tune with the idea of a sneaker for social justice, Marbury's website urges visitors to "join the movement," and the chic insignia, familiar to those with a fascination for Che Guevara, is a stylized red star. Marbury isn't all talk. He has a history of putting his money where his heart is. He pledged about $500,000 last year to help victims of Hurricane Katrina...

The Starbury One sneaker is ... flying out of the stores as quickly as they are being made. As Howard Schacter from Steve and Barry's told me, "The vision we shared with Stephon was to eliminate the incredible pressure kids and parents feel to pay top dollar for the latest and coolest sneakers and clothes. What we're saying is, You can pay a lot less for these things.... it simply doesn't cost that much to make high-quality sneakers and clothes."

But the Starbury One--because of both its price and the fact that it is being marketed as footwear for social justice--has also invited scrutiny. The athletic shoe industry is notorious for some of the most appalling of sweatshop conditions. Are the Starbury Ones, made in China, produced in such a manner?

Schacter says no. ... " our history and culture is a deep commitment to legal compliance and ethical business practices. This commitment is a fundamental part of the philosophy upon which we were founded."

Schacter says that costs are kept low because their business model "eliminates the middleman" by producing their own product and selling them in Steve and Barry's stores. They also rely on word-of-mouth instead of national advertising campaigns.

But some leading antisweatshop activists doubt this claim... Jim Keady is ... co-director of the antisweatshop organization Educating for Justice. He ... said... "...I would bet my professional reputation that these shoes are produced in sweatshop conditions. That said, Asbury Park has a poverty rate of 30 percent. I see kids buying sneakers I know they can't afford, so it is a good thing an affordable sneaker is available." ...

I was unable to reach Marbury for this piece, but it's difficult to imagine him being unsympathetic to the plight of workers overseas. He has spoken out about selling sodas on the beaches of Coney Island as a young boy, trudging on the sand and trying to scrape a dollar or two from the tourists visiting the famed amusement park. ...

As Jim Keady said, "The real slam-dunk would be if Stephon Marbury came forward and said, 'Not only do I want poor kids to be able to afford my sneakers. I want their moms and dads to have good-paying factory jobs-- in Coney Island, Bed-Stuy or Asbury Park for that matter. Imagine that: a sneaker made for the players in Brooklyn by the people in Brooklyn, he said. "Would they be able to sell them for $14.98? Maybe not, but that would be a tremendous model that other athletes and other entrepreneurs could follow."

Tuesday, September 19, 2006

Avoiding Protectionism

The Economist is running a series this week on what the emergence of China, India and other developing countries means for developed countries. This article in the series examines the problems arising from globalization, the potential causes of those problems, and how to avoid a resurgence of protectionism in response:

More pain than gain, The Economist: Rich countries have democratic governments, so continued support for globalisation will depend on how prosperous the average worker feels. Yet workers' share of the cake in rich countries is now the smallest it has been for at least three decades (see chart 5). In many countries average real wages are flat or even falling.


Meanwhile, capitalists have rarely had it so good. In America, Japan and the euro area, profits as a share of GDP are at or near all-time highs (see chart 6). ...

[T]he redistribution of income from labour to capital can be largely explained by the entry of China, India and other emerging economies into world markets. Globalisation has lifted profits relative to wages in several ways. First, offshoring to low-wage countries has reduced firms' costs. Second, employers' ability to shift production, whether or not they take advantage of it, has curbed the bargaining power of workers in rich countries. ... And third, increased immigration has depressed wages in sectors such as catering, farming and construction. ...

Most of the fears about emerging economies focus on jobs being lost to low-cost foreign competitors. But the real threat is to wages, not jobs. ... So long as labour markets are flexible, job losses in manufacturing should eventually be offset by new jobs elsewhere. But trade with emerging economies can have a big impact on both average and relative wages. ...

Thus the usual argument in favour of globalisation—that it will make most workers better off, with only a few low-skilled ones losing out—has not so far been borne out by the facts. Most workers are being squeezed.

If GDP per person is growing fairly briskly, why are most workers missing out on real pay rises? Partly because a bigger share is going to profits, and partly because high earners have pocketed a huge slice of the gains in income, causing inequality to widen. ...

It's all comparative

Traditional trade theory, based on the ideas of David Ricardo, ... argues that economies gain from trade by specialising in products where they have a comparative advantage. Developed economies have lots of skilled workers, whereas emerging economies have lots of low-skilled ones, so according to the theory advanced countries will specialise in capital-intensive products requiring skilled labour and emerging economies in low-tech products. Competition from cheaper imports will reduce the wages of unskilled workers in developed economies, but workers as a whole will be better off.

Yet, ... the average worker does not seem to be enjoying his fair share of the fruits of economic prosperity. Richard Freeman, an economist at Harvard University, points to several reasons why the traditional theory may need modifying.

Continue reading "Avoiding Protectionism" »

Sunday, September 17, 2006

Jagdish Bhagwati on Globalization

Jagdish Bhagwati answers questions on globalization:

Q & A with Jagdish Bhagwati, by Daniel Altman, IHT Managing Globalization blog: Today we’re very pleased to present ... an expert on globalization from Columbia University... Jagdish Bhagwati, who has advised the World Trade Organization and the United Nations on aspects of international economics...

Bob Kirenga Uganda: We in the developing world (especially sub-Saharan Africa), considered as the poorest of the poor, do not understand this concept of globalization. Do you have a universally accepted definition of that term, and how do you operationalize it in the so-called “global village,” which is still a mystery to some of us?

A. Globalization may be cultural in origin, arising from watching foreign films and sending students abroad, for instance. But much of the debate today is about economic globalization and its economic and social consequences. ... For clarity, we need to remember that economic globalization ... has at least five distinct aspects: trade, direct foreign investment (... sometimes simply called “multinationals”), short-term capital flows (which were at the heart of the Asian financial crisis in the 1990’s), international flows of humanity, and technology transfer (which includes the problem of patents and generics which has central importance for the poor countries). So, when you see polls that say a majority of our respondents think globalization is good or bad, just dismiss the results ... as nonsense: you have no idea which of these components of globalization the respondents have in mind.

For the poor countries, including yours, the major problem generally speaking has not been that globalization ... has been bad for you. It is rather that globalization has passed you by as far as DFI is concerned and ... has been constrained by domestic factors that include governance difficulties. Now that Africa is getting its political act together, ... I am confident that Africa will join the rest of us (I am from India) in being able to use globalization as part of a reform agenda that would advance prosperity, increase skill formation and be a force in reducing poverty and distress among the poor. ...

Jeong Yeon Ryu Republic of Korea: Do you think the World Trade Organization has finally hit the bottom in the process of liberalization, and that instead, countries will turn to a growing trend of contracting aggressive free trade areas? What are the actual effects of these free trade areas in relation to the Doha round?

A. The architects of GATT, looking at the degeneration of the world trading system in the 1930’s into protectionism and discriminatory trade in the form of bilateral preferences, had vowed: Never again. They had made non-discrimination, and its embodiment in the Most Favored Nation clause (which guarantees to every member the lowest tariff by any member), the central principle of GATT. But they had allowed for an exception in the case of free trade areas (FTAs) and customs unions in Article 24. I am sure they thought this Article would be used rarely. But today, there are over 300 such FTAs formed or announced, and they are multiplying by the week... [T]he whole world has practically collapsed into bilateralism...

These Preferential Trade Agreements (PTAs), among other problems, have created a chaotic system of preferences. ... This is bad in itself. But it also has led to the diversion of scarce administrative and negotiating talent from Doha to the bilaterals...

Continue reading "Jagdish Bhagwati on Globalization" »

Saturday, September 16, 2006

The Exchange Rate-Consumer Price Puzzle

Diego Valderrama, an Economist at the San Francisco Fed, discusses a puzzle. Why are consumer prices so unresponsive to exchange rate movements? Is it transportation costs, non-traded goods, or market power?:

The Exchange Rate-Consumer Price Puzzle, by Diego Valderrama, Economic Letter, San Francisco Fed: Since February of 2002, the dollar has lost 27% of its value relative to other major currencies. Over the same period, consumer prices (excluding food and energy goods) have increased by a much smaller amount—8.9%. To economists, and particularly to central bankers and others who think about forecasting inflation, this relative insensitivity of consumer prices to exchange rates is a puzzle; indeed, it is one that has a long history and that is a characteristic not only of the U.S. but of other countries as well.

Why is it a puzzle? Because international trade theory argues that, if all goods and services were traded at a negligible cost and if their prices reflected only their production costs, then retail prices should be very responsive to exchange rate changes.

Of course, one might expect that the solution to the puzzle is in part related to the distances and costs involved in shipping goods, as that would clearly imply that trading costs are not negligible. But recent research suggests that other factors are better at explaining not only why consumer prices are relatively insensitive to exchange rate movements but also why they are even less sensitive than import prices. One explanation rests on the inclusion of non-traded good and service costs as part of the consumer price index (CPI). While import prices may respond to exchange rate changes, consumer prices, which include many non-traded cost components, may not. A second explanation arises from the profit margins that foreign exporters and local distributors have as a result of imperfect competition. Exporters and distributors may choose to adjust their profit margins rather than change price levels in response to exchange rate changes, for example, to maintain market share.

This Economic Letter first reviews the empirical evidence on exchange rates, import prices, and consumer prices. It then discusses recent studies that evaluate alternative theories to explain the puzzle.

Continue reading "The Exchange Rate-Consumer Price Puzzle" »

Thursday, September 14, 2006

An Insider's View of the Bretton Woods Negotiations

Sadly, a colleague who was believed to be the last surviving U.S. economist involved in the Bretton-Woods negotiations, Ray Mikesell, has died of natural causes at age 93:

UO professor, Bretton Woods economist, dies at age 93, by Rebecca Nolan, The Register-Guard: A University of Oregon professor, believed to be the last surviving economist from the 1944 Bretton Woods conference that led to the creation of the World Bank and the International Monetary Fund, died Tuesday at his home in Eugene. Raymond Mikesell died of age-related causes. He was 93. ...

Toward the end of World War II, he became an adviser to Assistant Treasury Secretary Harry Dexter White, who led U.S. efforts to shape the world's economy after the war. Mikesell was present at the Bretton Woods conference, where White and the British economist John Maynard Keynes negotiated the design of the World Bank, the IMF and the General Agreement on Tariffs and Trade. The institutions funded the European recovery and laid the foundation for the postwar economic expansion.

Mikesell provided data for White to use against Keynes' attempts to preserve British interests. ...

After the war, Mikesell worked as ... as an adviser to the State Department on currency reform in Saudi Arabia and as economic adviser to the Joint British-American Cabinet Committee on Palestine. In the 1950s, he served as a senior economist at the Council of Economic Advisors and then on the Paley Commission, designing policies that encouraged worldwide development and trade in natural resources. He served as a consultant to the United Nations, the World Bank, the Organization of American States and to Oregon Sen. Wayne Morse and the Committee on Foreign Relations. ...

Mikesell was a firm believer in free markets and economic development, causing him to resign from the Sierra Club over the group's opposition to the North American Free Trade Agreement... [Update: NY Times story]

Among all countries involved in the Bretton Woods negotiations the last surviving economist is, as far as I'm aware, Dr. Jacques J. Polak who was a member of the Netherlands delegation. He is 92, lives in Washington, D.C., and maintains an office at the IMF where he continues to write.

I should also note that Ray gave the Department a million dollars to fund our endowed Chair in Environmental and Resource Economics now held by Trudy Cameron. How did he get a million dollars to spare?:

In 1998, Professor Mikesell endowed a chair in environmental and resource economics at the University of Oregon. At the graduation day speech announcing his gift, Ray walked slowly to the podium, then stopped and looked up at the students and their parents. “Some of you might be wondering how a professor got to be so well off that he could afford give this much money away.” he said. “You do it like this. Save 5% from every paycheck and invest it, even if it’s only at 3%. Eventually, you’ll have a million dollars too.” He looked up again, and then with perfect timing added “Of course, it helps if you live as long as I have.” The crowd broke into laughter, then applause. Ray smiled, and walked off the stage.

One of Ray's many books, Foreign Adventures of an Economist written in 2000, gives details of his experiences in all sorts of negotiations and advisory capacities.  One part of the book details his experiences at Bretton Woods and it's a history worth preserving. Ray's main lasting contribution at the conference was to determine the IMF and World Bank formula used to set quotas:

This exercise required many calculations with a 1940s-style calculator, using a number of variables and weights for each country. If I had had access to a modern computer, I could probably have come up with a better formula. ... My formula was ... used as a basis for determining the IMF and World Bank quotas at Bretton Woods for most member countries represented at the conference. Thereafter, it was used in a somewhat revised form for new members joining the Fund. In fact, the formula is still used, but with special adjustments for individual countries. I take no pride in having authored the formula and sometimes apologize for it as my claim to infamy! It has continued to be used in large part because the Fund wanted to apply the same conditions in determining quotas for new members as were applied to the original members.

The book has a lot of interesting detail and insider information on the negotiations, and I've included the pdf's for the chapters on Bretton-Woods below for anyone who is interested. Here's one small section:

A Note on Personalities
John Maynard Keynes

As a young academic who had studied and taught both The Treatise on Money and The General Theory I was awed by Keynes and grateful that I could sit in meetings with him. Although he fought hard for positions he regarded as important for Britain's welfare, his economic arguments were academic and dispassionate. Keynes could accept philosophically the economic advantages of multilateral trade while continuing to defend a discriminatory sterling area in terms of Britain's national interest.

There was a sharp contrast between the literary quality of Keynes's ICU proposal and the legalistic formulation of the July 1943 version of the White plan. Keynes displayed arrogance in the elegant language of an educated British lord. He disliked the style and format of the Fund's Articles of Agreement. He said they were written in Cherokee, and he blamed the language on the Treasury Department's lawyers. Keynes frequently complained that Americans were too dependent on attorneys, and once suggested that "when the Mayflower sailed from Plymouth, it must have been entirely filled with lawyers."

Keynes was capable of displaying temper and once threw one of White's drafts to the floor, but he usually expressed his anger through sarcasm. He always had an air of dignity and did not join the revelry at the Bretton Woods nightclub. I never saw him in sport clothes. Nevertheless, he was approachable. Junior members, such as myself, were able to talk privately with him, and I always found him willing to answer my questions. If we took too much time, however, Lady Keynes would tiptoe over to protect him from becoming too tired. Those of us who were privileged to shake his limp hand on the train from Savannah to Washington following a light heart attack were left with the memory of saying farewell to a truly noble man.

Harry White

Personalities played an important role in the Bretton Woods debates and in the final outcome. I saw White in numerous meetings and on dozens of other occasions when we talked alone in his Treasury Department office. His Monetary Research staff was largely composed of former academicians, and many of us returned to universities after the war. The staff was intensely loyal to White, and he respected us as scholars and strongly supported us even when he thought we had made mistakes. I do not recall White's embarrassing any staff member by dressing him down, but he showed another side when he was involved in negotiations outside the Treasury Department. He was often brusque, even crude, in his meetings with Keynes and the British delegation.

When annoyed, he sometimes cynically addressed Keynes as "Your Royal Highness" or "Your Lordship." Lord Robbins, who participated in many of the pre-Bretton Woods meetings but was not close to White, described White well in his book Autobiography of an Economist:

It is true that White was not a very beautiful character. He was brash, truculent, and, I suspect, somewhat unscrupulous where his own interests were concerned. In his younger days he had been the victim of academic unemployment, possibly due to the discreditable anti-Semitism which at that time tended to affect the policies of the great university with which he had been associated; and I am fairly clear that he was determined that henceforth Harry White should not be worsted in the struggle for survival-- or eminence. But that he was in any way associated with the groups in the United States who actively wished harm or wished to exploit our [Britain's] position of weakness will not stand up to examination for a moment. (Robbins, 1971).

White often expressed to his staff his hostility toward the State Department, with which he frequently struggled for power within the U.S. government. Like Morgenthau, he wanted the Treasury Department to be the center of postwar economic policy and planning. This helps to explain the comprehensive nature of the original White plan. International financial institutions were not a high priority in the State Department; without White's zeal, there probably would not have been a Fund or a Bank. The Bretton Woods institutions might not have come into being if they had not been well advanced before the end of the war, since by then there was a plethora of immediate economic problems that these institutions were not equipped to handle.

White sought to conduct his own foreign policy independently of the State Department. He dealt directly with foreign officials in Washington, and members of the Monetary Research staff in American embassies in Allied countries, including myself, secretly reported directly to White without going through their embassies. White sometimes used the press to promote his policies that were in opposition to those of the State Department. On one occasion, while I was alone with him in his office, he dictated over the phone a long, top-secret State Department statement to a reporter. I do not know the reasons for White's antipathy toward the State Department, but it was not directed at individuals since he had close relations with some of them. I believe it was a reaction to the State Department's traditional insistence that it have commanding responsibility over foreign policy.

White believed that the U.S. government should have sought closer cooperation with the Russians. Through certain members of his staff, he provided information to and discussed policy with Soviet embassy officials. These relations were later discovered by the FBI and led to White's dismissal from the government, but they were not known to most of us in Monetary Research.

Many people have asked me if White was a Communist. I am convinced that he was not. White believed in free markets and capitalism and devoted his energies to planning for a postwar world with free and nondiscriminatory trade and payments. He was, however, quite willing to deal with Communist officials to achieve his objectives. The Soviet Union shared his political objectives regarding postwar Germany, and he believed that Soviet officials would support the Fund and the Bank proposals. He did not share the pervasive fear that the Communist ideology would spread to the rest of the world, or that the Soviet Union might dominate the world by military conquest. He believed that a Communist state could operate under a system of nondiscriminatory trade rules, abiding by the trade and exchange obligations of his plan.

White's associates who were later accused of being spies for the Soviet Union -- Sol Adler, Frank Coe, and Harold Glasser -- never indicated to me that they were not completely loyal to the United States or that they did not believe in a democratic capitalist society. I knew them so well personally that it is difficult for me to believe they could have concealed communist ideology from me. Although they may have had some association with the American Communist movement in their youth, as did many of my college acquaintances in the 1930s, I believe that the accusations directed against them arose from White's propensity to carry on direct relations with the Soviet government outside regular diplomatic channels. If these same activities had been carried on with the British or Canadians, they would have been acceptable. White and his closest associates simply ran their own foreign ministry.

A few weeks before White's death, he and I were speakers at a conference of the American Academy of Political and Social Science in Philadelphia. After the evening meeting on April 19, 1947, I spent a couple of hours with him in the lobby of the Benjamin Franklin Hotel. He was in a reflective mood, and we reminisced about the events leading to the creation of the Bretton Woods institutions. White had already been compelled to give up his position as the U.S. executive director of the Fund. He had been working as a consultant to the Chilean government and had recently returned from Santiago. He was scheduled to testify before the House Committee on Un-American Activities, but he spoke very confidently of being able to disprove the charges against him and appeared to look forward to the opportunity. White was charged with providing confidential information to the Soviet Union, but I have never believed he gave any information that was harmful to U.S. national interests. White did speak of his heart condition and, when we parted, he apologized for taking the elevator rather than walking the two flights to where both of our rooms were located. Some say he committed suicide to avoid testifying before the House committee. I do not believe it.

More from the book which may not be as well known as it should be (I may excerpt more of the book later as there are quite a few interesting, informative, and entertaining episodes):

Cover and Table of Contents
Chapter 2: Bretton Woods: Preconference Negotiations
Chapter 3: Bretton Woods
Chapter 4: Ratifying the Bretton Woods Agreements

One last note those who knew him will appreciate. This was Ray:

He loved mountains, the Pacific Northwest, hiking, and skiing. His PhD students – and there were many – each has a story about how Ray would take them hiking, wear them out on the trail, and then sit around the campfire while they recovered, smoking cigars and telling them what they needed to do for their dissertation.

Ray traveled everywhere from Antarctica to Nepal. It seemed like he knew every mountain, trail, and stream in the southern Cascades, and his favorite camping spot was Linton Meadows. Ray was still skiing downhill at Willamette Pass in his nineties – and said it was a lot easier with a new heart valve. He was also an avid tennis player, and played his last doubles match a year before his death.

Ray will be missed.

Tuesday, September 12, 2006

The Trade Deficit Increases

Brad Setser on today's record trade deficit data:

Not quite so bright after all … (The July trade data), by Brad Setser: The trade deficit (ex-oil) was thought to be on a downward trajectory. But after today’s data, that argument may need to be reconsidered.

I have been a bit more cautious than most in predicting the “turn” in the trade deficit. That was for two reasons.

First, I wasn’t sure that non-oil goods imports would stay flat at around $127-128b for the entire year. This month’s data suggests that the economy hasn’t slowed enough to end all import growth. Non-oil goods imports rose to $130b. Barring the recession Nouriel is now forecasting, I would expect non-oil imports to continue to trend up over the course of the year.

Second, I wasn’t convinced that the very strong growth in US exports that propelled monthly goods exports from $75b a month last summer to around $85b a month now (and pushed goods and services exports up from $106b a month to $120b a month) could continue for ever. It now seems that the pace of export growth has slowed somewhat. Exports have been stuck at around $120b for the past three months, bouncing up in June and back down in July.

In some sense, conditions were perfect – or almost perfect – for US exports over the past 12 months. Demand for civil aircraft outside the US was very robust (and demand for aircraft in the US was very low, freeing up all of Boeing’s production for export). Global growth was very strong. And in one key part of the world – Europe – that growth was driven by domestic demand. The lagged impact of the dollar’s 2004 fall was helping US firms gain market share -- particularly in product areas where US production competes with European production. And even with something of a rebound in 2005, the dollar was clearly much weaker than it had been in 2001-02.

In sum, conditions were perfect for a surge in US exports. And that was what happened. My concern all along has been that things were more likely to get worse than better. Plus, Boeing’s export capacity looked pretty maxed out – at least until 787s start rolling off a new production line.

Calculated Risk has more.

Saturday, September 09, 2006

Educated People Favor Globalization

According to this, generally, the more education a person has, the more favorable they are towards further globalization. Lower educated groups are much more fearful of displacement from the global reorganization of production. This comment from Martin Wolf's Forum discusses the political economy of international trade:

C. Fred Bergsten: Martin Wolf’s analysis of today applies forcefully to the United States. An Institute for International Economics team led by Gary Hufbauer recently quantified the impact of trade globalization on the United States. Using four different methodologies, it concluded that the US economy is about $1 trillion per year richer as a result of its integration with the global trading system over the past 60 years. This equates to about 10% of GDP or $10,000 per household.

At the same time, annual adjustment costs are estimated at $50 billion. About 200,000 workers are dislocated by trade flows each year and experience lifetime earnings losses that can range as high as 30-40%. The benefit:cost ratio for the country as a whole is a lopsided 20:1 but the costs are heavily concentrated and many more workers than are actually affected fear that "there but for the grace of God go I".

Another set of Institute studies has thus found that public attitudes toward further globalization are almost evenly split between favorable and unfavorable views. There was a single decisive variable: the level of education of the respondent. College graduates, and even those with only partial college training, welcome the opportunities afforded by globalization. But those with a high school education or less, which still account for almost half the US labor force, resist it due to their fears of being unable to compete. Hence there is at present a very unstable domestic political foundation for further globalization of the US economy despite its huge aggregate benefits (which we found could add $500 billion of further annual income benefits if the world could move to totally free trade).

Friday, September 08, 2006

Explaining the Gains from Globalization

This is from a guest post at NDN. I expect a few of you will disagree that "There are good answers to all of these questions":

Explaining the Gains from Globalization, by Mark Thoma, Guest Contributor, NDN: Recently, the topic of how to share the gains from globalization in order to prevent a protectionist backlash has been widely discussed. For example, the in the last few days the Financial Times has two articles on this issue, Share gains with globalisation’s losers by Martin Wolf and Global stability rests on sharing the gains by Jan Kregel and William Milberg, the New York Times has had many articles about this such as Real Wages Fail to Match a Rise in Productivity by Steven Greenhouse and David Leonhardt, and this topic has been discussed in many other forums as well including this year's Federal Reserve Symposium at Jackson Hole, Wyoming.

A common theme in these articles is that a key to political success and to staving off protectionist responses to problems perceived to be caused by globalization and technological change is to find a way to share the gains more equally without sacrificing the political support of the winners. However, Berkeley economist Brad DeLong, writing about the Martin Wolf Financial Times article, says simply redistributing the gains may not be enough:

Continue reading "Explaining the Gains from Globalization" »

Thursday, September 07, 2006

The Economics and Politics of Growing Income Inequality

[This is the first two posts in a series of guest posts for NDN]

The Economics and Politics of Growing Income Inequality, by Mark Thoma, NDN Guest Blogger on the Bush Economy: In the 1990s the Clinton administration, with the enthusiastic support of economists, strongly supported free trade and globalization initiatives. In this vision of the world, globalization would produce large gains and lift the fortunes of all involved. For those left behind or displaced by globalization, education and retraining would be used to bring these workers into the global workforce so that they too could benefit from global trade. For instance, here is Bill Clinton in support of NAFTA in 1993:

In a few moments, I will sign three agreements that will ... create a North American Free Trade Agreement. In the coming months, I will submit this pact to Congress for approval. It will be a hard fight... And though the fight will be difficult, I deeply believe we will win ... because NAFTA means jobs American jobs, and good-paying American jobs. ...

The only way we can recover the fortunes of the middle class in this country so that people who work harder and smarter can ... is to adapt to the changes which are occurring. ... [We] cannot resist the winds of change that economics and technology and information flow have imposed... Our only realistic option is to embrace these changes and create the jobs of tomorrow.

I believe that NAFTA will create 200,000 American jobs in the first 2 years of its effect. ... I believe that NAFTA will create 1 million jobs in the first 5 years of its impact. And I believe that that is many more jobs than will be lost--as, inevitably, some will be, as always happens when you open up the mix to a new range of competition. ...

But the promises made about globalization have not been realized by all, and a growing sense of economic insecurity has been the result. As as I looked through this report from the NDN on Bush's economic record, Section 2 caught my attention because it reflects the disappointment many people feel over the unrealized promises made by Democrats about the benefits of globalization. The growing inequality in income illustrated in Section 2 of the report is emerging as a political issue and many people I talk to blame globalization (and often immigration too) for stagnating worker income and the growing income gap. 

Other problems, such as the decline health care coverage and growing workplace insecurity, are also attributed to globalization. In order to compete in the global marketplace, the argument goes, firms are forced to shed benefit programs for their workers and to hold wages down. But is globalization really to blame for all these problems?

Continue reading "The Economics and Politics of Growing Income Inequality" »

Wednesday, September 06, 2006

Sharing the Gains from Globalization

Martin Wolf's column this week is about how to share the benefits of globalization:

Share gains with globalisation’s losers, by Martin Wolf , Commentary, Financial Times: Globalisation remains the great economic story of our era. It is also the great political story. The big question remains how likely is a reversal of our era’s move towards a more integrated global economy. History suggests, alas, that the onward march towards integration is not inevitable: economics may propose, but politics dispose.

This was the issue raised by Ben Bernanke ... in his address to this year’s ... symposium ... at Jackson Hole, Wyoming. ...Mr Bernanke argued that “the social and political opposition to openness can be strong. Although this opposition has many sources... much of it arises because changes in the patterns of production are likely to threaten the livelihoods of some workers and the profits of some firms, even when these changes lead to greater productivity and output overall”. The need, he suggests, is to ensure that the benefits of integration are sufficiently widely shared. ...

The need is to find a way of ensuring a broad sharing of the gains. This can be done by subsidising retraining, subsidising the wages of the unskilled or subsidising goods and services that are particularly important for the futures of the unskilled (health and education services being obvious examples).

The political challenge is to secure consent to changes that should benefit almost everyone in the long run. The answers will be different in different countries. But answers must be found. Globalisation offers big potential benefits. Policy must ensure that this potential is realised. July’s failure of the Doha trade negotiations suggests that policymakers still fail to recognise its urgency.

This is an entry in Martin Wolf's Forum. Brad DeLong comments:

Brad DeLong: Ben Bernanke said that the world will move forward with globalization only if policy makers "ensure that the benefits of integration are sufficiently widely shared." He is wrong: just making the benefits of integration widely shared isn't enough. After all, the benefits of globalization and increased economic integration are widely shared today--and yet forward progress on further globalization still hangs in the balance for politico-economic and politico-security reasons.

In the United States, at least, the problem is that most beneficiaries from globalization don't really know that they are beneficiaries, or how much they benefit. Feckless congressmen and congresswomen don't understand that the American economy is cushioned from their fiscal policy stupidities by the ability of the U.S. government to sell bonds internationally on a jaw-droppingly unbelievable scale. Home sellers in California don't realize that they got such a good price because of financing from across the Pacific. Walmart shoppers see the "made in China" stickers, but don't understand what a good deal they are getting because the rulers of the PRC are desperate to sell the products that their workers make at always low prices in order to stay as close as possible to full employment.

The task is primarily one of making perceptions agree with reality, and only secondarily one of changing reality.

Martin Wolf responds:

Martin Wolf: Brad is right, of course. The question is how to do this. There are four points here. First, as Mancur Olson would have said, ignorance is rational for the individual voter. Putting in the effort required to understand how trade and capital flows work is hard. Second, as Olson would also have said, there are concentrated interests against globalisation, while the interests in favour of it are generally more diffuse. Third, the adverse effects of job losses are visible, while the benefits of greater trade are not. Finally, patriotism is the last refuge of the scoundrel and the first refuge of the protectionist.

So perceptions do matter. They are also difficult to shift. But if the government were seen to be concerned about the fate of apparent losers from this process, globalisation might also be politically more palatable. This, too, is a matter of perceptions.

I agree with Brad that the benefits are diverse and could be better understood. But I also agree with Martin. I think a big part of the problem is that the government seems unconcerned with the fortunes of workers affected by globalization. True or not, workers perceive policy as siding with business interests over their own. That's something that can be changed. And I would hope that the government does more than just try to "seen to be concerned about the fate of apparent losers" and actually does something to help.

Update: One more comment from the Forum:

O von Rein: Basically, globalisation increases returns on capital (in the developed countries) and gains are thus channeled towards shareholders. This readily ties back into recent studies showing the growing wedge in income growth between top earners and the average population in the US. If we then feel the need to "share the gains with globalisation’s losers", I wonder what remedy follows? Here your commentary falls silent. Was that because you dare not mention the 'T' word? Progressive taxation almost imposes itself. Somewhat counter to the policies implemented by the present US administration.

Tuesday, September 05, 2006

The End of the Rainbow

Brad Delong sees a promising future before us:

The pot of gold could soon be accessible to all, by J. Bradford DeLong, Project-Syndicate: For quite a while now -- certainly since the terrorist attacks on the US on Sept. 11, 2001, and before as we watched the slaughter in Kosovo, Sarajevo, Srebrenica, Rwanda and Congo on our televisions -- the news has been dominated by war and rumors of war, by violent death and threats of violent death. Everyone, everywhere is keenly aware of the power of our weapons. ... [W]e have used our technology to greatly amplify the dark parts of our nature as a violent -- and not even a properly predatory -- species.

I certainly do not want to downplay or dismiss this side of humanity's history and our current events. ... But that is not the whole story. Indeed, the human abattoirs of the 20th century -- and even the slaughterhouses that various humans are preparing now -- may not appear from the perspective of the future to be the most important part of our experience and condition, and of what our descendants will regard as their history.

For them, the most important features of what our experience may instead be very different. The experiences could include what UN demographers foresee as the end of the population explosion: the halting of the growth of the human population at 10 billion or so around the middle of this century.

They could include the coming of a truly humane world as the numbers of those engaged in subsistence agriculture -- or those whose wages are kept at subsistence levels by labor market pressure from those who have migrated from the countryside into teeming cities -- fall to a small fraction of the human population.

For most of the 20th century, large chunks of the world remained desperately poor for one or more of four related reasons: one, criminal misgovernment; two, lack of the machines to do anything useful and productive in the world economy besides subsistence agriculture and unskilled service work; three, lack of the public education system needed to give people the literacy and the skills to operate machines; and four, barriers (legal and physical) that kept people where demand was low from selling the products of their work where demand was high.

But over the course of the late 20th century, these four causes of desperate poverty have largely fallen away. Governments as bad as Kim Jong-il's in North Korea are now extremely rare. Nearly all countries in the world are at most one generation away from near-universal literacy. The fast pace of technological progress has created a cornucopia of invention and innovation that is open to every place that can send someone away to get a master's degree in engineering.

Most important, the barriers to making goods and services in Mauritius, Mozambique, or Mauritania and selling them in New York or Berlin, Santiago or Tokyo are dropping swiftly. ... The use of information technology to manage transportation and distribution channels is likely to have a similarly profound effect. Moreover, the advent of the Internet and the fiber-optic cable will do as much to make service-sector work internationally tradable as the coming of the iron-hulled steamship a century and a half ago did to make bulk agricultural products and manufactures internationally tradable.

It will take at least a generation for these changes to make themselves felt in most corners of the world. But inside the industrial core of the world's rich countries there is already concern about these looming revolutions ... as citizens in rich countries fear that as the remaining barriers to international trade fall, industrial-core income distributions, social orders, and politics will be shaken to their foundations.

For the world as a whole, however, the next two generations are ones that will bring an extraordinary opportunity for economic growth and world prosperity. Perhaps at the end of history there is a pot of gold, after all.

If population does converge to a steady state of around 10 billion by the middle of the century, something unimaginable to me just a few decades ago and something I still have doubts about, then there is certainly room to be optimistic that technology and world economic growth can bring more prosperous conditions to the vast majority of people.

Sunday, September 03, 2006

“Making Globalization Work”

A review of Joseph Stiglitz new book:

Aiming to Level a Global Playing Field, by Stephen Kotkin, NY Times: ...Dr. Stiglitz’s new book, “Making Globalization Work”, is billed as a sequel to his “Globalization and Its Discontents” (2002). It reads like an unacknowledged reply to a searing review in The Economist of that previous best seller. Gone is the innuendo about colleagues in Washington doing the dirty work of Wall Street in their capacity as public servants... New are The Economist’s requested chapters on trade and growth, market forces and the environment, the multinational monopoly — in short, on globalization, the advertised subject.

Two notions still animate the author.

Continue reading "“Making Globalization Work”" »

Saturday, September 02, 2006

Globalization, Productivity, and Wages

In response to a question about globalization's role in breaking the link between productivity and wages arising from his latest column, Paul Krugman says:

Surprise! The Rich Get Richer and . . ., Paul Krugman's Money Talks: ...There's a dispute about how much of a role international trade has played in the disconnect between productivity and wages; standard economic models say that trade has played some role, but not the dominant one. It's worth pointing out that Wal-Mart — to pick a non-random example — while it sells a lot of imports, must use U.S. workers to operate its stores, so it really isn't in a position to outsource. Nonetheless, it pays low wages and offers minimal benefits. That's not a conclusive proof that trade isn't the villain, but it's a reminder that stories about manufacturing don't easily generalize to the economy. (And imagine how different things would be if service workers were members of strong unions, received universal health care, etc.)...

Tuesday, August 29, 2006

"Historical Aspects of U.S. Trade Policy"

What happens when the U.S. closes its doors to trade? Does protectionism help infant industries? Does protectionism impact economic growth? Douglas Irwin looks to the past to answer these and other questions about international trade:

Historical Aspects of U.S. Trade Policy, by Douglas A. Irwin, NBER Reporter: While international trade and trade policy continue to be as controversial as ever, the United States has been committed for more than half a century to maintaining an open market. It was not always that way. For most of U.S. history, the United States imposed fairly substantial barriers to imports in an effort to protect domestic producers from foreign competition.

For the past several years, I have been investigating the historical aspects of U.S. trade policy as part of the NBER's research on international trade and the development of the American economy. The purpose of this research has been to study the economic effects of past trade policies on the U.S. economy and understand the political and economic forces that have shaped those policies.

Early American Trade Policy ...[H]istorical data ... from early government documents ... reveal that tariffs started out at relatively low levels, about 15 percent in the 1790s, but rose thereafter to generate additional revenue and help finance the War of 1812. ...

One of the classic, early statements on U.S. trade policy is Alexander Hamilton's Report on Manufactures in 1791. This report called for government support of manufacturing through subsidies and import tariffs... Although Hamilton's proposals for bounties (subsidies) failed to receive support, ... Congress adopted virtually every tariff recommendation put forward in the report by early 1792. These tariffs were not highly protectionist duties, because Hamilton feared discouraging imports, the critical tax base on which he planned to fund the public debt. Indeed, because his policy toward manufacturing was one of limited encouragement and not protection, Hamilton was not as much of a protectionist as he is often made out to be. Hamilton's moderate tariff policies found support among merchants and traders, the backbone of the Federalist Party. But disappointed domestic manufacturers shifted their political allegiance to the Republican Party, led by Thomas Jefferson and James Madison, both of whom were willing to consider much more draconian trade policies aimed at Britain.

Indeed, as president, Jefferson was responsible for one of the most unusual policy experiments in the history of U.S. trade policy. At his request, Congress imposed a nearly complete embargo on international commerce from December 1807 to March 1809. The Jeffersonian trade embargo provides a rare opportunity (or natural experiment) to observe the effects of a nearly complete (albeit short-lived) elimination of international trade. Economists usually describe the gains from international trade by comparing welfare at a free-trade equilibrium with welfare at an autarky equilibrium. In practice, such a comparison is almost never feasible because the autarky equilibrium is almost never observed, except in unique cases such as this one. By mid-1808, the United States was about as close to being fully shut off from international commerce as it has ever been during peacetime.

Monthly price data allow us to observe the dramatic impact of the embargo: the export-weighted average of the prices of raw cotton, flour, tobacco, and rice, which accounted for about two-thirds of U.S. exports in the United States, fell by one third within a month or two of the embargo. The price of imported commodities rose by about a third as the number of ships entering U.S. ports fell to a trickle and imports became increasingly scarce. According to my calculations, the static welfare cost of the embargo was about 5 percent of GDP. Thus, the embargo inflicted substantial costs on the economy during the short period that it was in effect.

The embargo, along with the dramatic reduction in trade as a result of the War of 1812, is commonly believed to have spurred early U.S. industrialization by promoting the growth of nascent domestic manufacturers.

Continue reading ""Historical Aspects of U.S. Trade Policy"" »

Monday, August 28, 2006

Expensive Wal-Mart Flip-Flops

Sebastian Mallaby wonders why centrist Democrats have shifted their stance on globalization:

Shopping for Support Down the Wrong Aisle, by Sebastian Mallaby, Commentary, Washington Post: Once upon a time, smart Democrats defended globalization, open trade and the companies that thrive within this system. ... Then dot-bombs and Enron punctured corporate America's prestige, and Democrats bolted. Rather than hammer legitimately on real instances of corporate malfeasance -- accounting scandals, out-of-control executive compensation and the like -- Democrats swallowed the whole anti-corporate playbook.

To see the difference between then and now, just look at the Clintons. In the late 1980s and early 1990s, Hillary Clinton sat on Wal-Mart's board; and when Sam Walton died in 1992, Bill Clinton lauded him as "a wonderful family man and one of the greatest citizens in the history of the state of Arkansas.'' Campaigning in the New Hampshire primary that year, Bill Clinton came proudly to the rescue of a local company called American Brush Co. by helping it become a Wal-Mart supplier.

Times change. Last year Hillary Clinton returned a campaign contribution from Wal-Mart... The nation's most successful retailer, which has seized the opportunities created by globalization ... is now seen as too toxic to touch. ... Clinton is not alone... Joe Lieberman, who holds fast to his principles on the Iraq war, recently abandoned his centrist economic credentials by appearing at an anti-Wal-Mart rally. No matter that Lieberman once served as chairman of the business-friendly Democratic Leadership Council. ...

After Lieberman ... stepped down as chairman of the DLC, he was succeeded by Sen. Evan Bayh of Indiana. Well, Bayh recently showed up at an anti-Wal-Mart rally, too, as has Iowa Gov. Tom Vilsack, who is the current DLC chairman. ... Harry Reid, the Democrats' Senate leader, appeared at an anti-Wal-Mart event on Saturday, and Sen. Joe Biden and Gov. Bill Richardson popped up at earlier stops. ...

How can supposedly centrist Democrats defend this betrayal of their principles? Some claim that their beliefs are consistent, but that the company has changed: The Wal-Mart of the early 1990s mainly bought American, whereas today's irresponsible monster buys cheap stuff from China. But this argument merely illustrates how far Democrats have come. Since when did the party's centrists believe that trading with China is evil? It was the Clinton administration that brought China into the World Trade Organization.

Other Democrats reaffirm their centrist credentials while calling upon Wal-Mart to pay workers more. ... But the idea that Wal-Mart pays below-market wages is false. Otherwise nobody would work there. Hillary Clinton and Sen. John Kerry have attacked Wal-Mart for offering health coverage to too few workers. But Kerry's former economic adviser, Jason Furman of New York University, concluded in a paper ... that Wal-Mart's health benefits are about as generous as those of comparable employers. Moreover, Clinton and Kerry know perfectly well that market pressures limit the health coverage that companies can provide. After all, both senators have proposed expansions in government health provision precisely on the premise that the private sector can't pay for all of it.

The truth is that none of these Democrats can resist dumb economic populism. ...[T]he DLC crowd is pandering shamelessly to the left of the party... For a party that needs the votes of Wal-Mart's customers, this is a questionable strategy. But there is more than politics at stake. According to a paper for the National Bureau of Economic Research by Jerry Hausman and Ephraim Leibtag, neither of whom received funding from Wal-Mart, big-box stores led by Wal-Mart reduce families' food bills by one-fourth. Because Wal-Mart's price-cutting also has a big impact on the non-food stuff it peddles, it saves U.S. consumers upward of $200 billion a year, making it a larger booster of family welfare than the federal government's $33 billion food-stamp program.

How can centrist Democrats respond to that? By beating up Wal-Mart and forcing it to focus on public relations rather than opening new stores, Democrats are harming the poor Americans they claim to speak for.

I think the answer to the question of why centrist Democrats have shifted their stance on globalization is straightforward - the gains from globalization have not been shared equally. The claims made in the 1990s about the benefits of globalization have not been realized and it's no longer wise politically to assert that globalization will benefit typical households. With stagnant real wages and other economic problems such as declining health care coverage, Wal-Mart is an obvious and glaring symbol to many of the failed promises of globalization, and lower priced imported goods do not overcome the failed promises the symbol represents.

I continue to support global economic integration, I am not a Wal-Mart basher, and I think the anti Wal-Mart campaign is misplaced (though I do have concerns about the extent to which it exploits its market power in input markets). But I also think it is important for Democrats to acknowledge their role in pushing for globalization in the past, and show they understand that the very unequal benefits that globalization has brought about requires us to rethink how to protect the most vulnerable from its effects.

Flying Globalized Geese and Lumpy Golden Eggs

More from Jackson Hole on attempts to better understand the forces and consequences of globalization:

Policymakers fear ‘lumpy’ growth may not benefit all, by Krishna Guha, Financial Times: ...This year no fewer than 20 central bank governors, ... plus other senior officials ..., made the pilgrimage to the Fed’s annual Jackson Hole gathering. ...[T]he ... group discussed the defining force of our time: globalisation.

Like businesspeople and investors, central bankers are struggling to keep pace with rapid changes in global economic activity. They listened as some of the world’s leading academic economists presented research offering insights into how globalisation works. But even those speaking admitted that the process, its likely outcomes and its demands on policy remain imperfectly understood.

Continue reading "Flying Globalized Geese and Lumpy Golden Eggs" »

Sunday, August 20, 2006

Build It, and They Will Stay Home

So long as the wealth gap between countries persists, there will be a powerful incentive for immigration, legal or not:

Wealth gulfs fuel migration, by Branko Milanovic, Project Syndicate: Is today's globalizing era coming to an end? If so, it may not necessarily end with a repeat of the slaughters of the last century, but with an economic retrenchment that brings economic stagnation and consigns billions of people to grinding poverty.

Various candidates have been proposed for the role of globalization's assassin. But one little noticed, yet likely, aspirant has been sneaking up on the world economy: The growing tendency to limit the free circulation of people, to "fence in" the rich world.

We see the menace of this tendency constantly nowadays, but we perceive it in such a seemingly unthreatening way that we may well become accustomed to it. Globalization means free movement of capital, goods, technology, ideas, and, yes, people. Any globalization that is limited to the first three or four freedoms but omits the last one is partial and not sustainable.

After all, if over-populated countries with high unemployment cannot export people, why not reach for higher tariff barriers to protect the jobs they have? But what of the unemployed who become locked into their societies? The war on terror has shown us the dangers that can arise from the social frustrations that often result.

Nevertheless, the "fencing-in" of the rich world continues apace. The United States plans to construct a veritable "Mexican Wall" to keep poor people from crossing into Texas or California.

Likewise, hundreds, if not thousands, of Africans die every year trying to reach the shores of Fortress Europe. Efforts to restrict people's movement between countries expose the soft underbelly of globalization: The deepening gap between countries' mean incomes.

Rather than poor countries growing faster than the rich ..., mainly the reverse is true. This huge gap spurs migration..., and if moving across a border means that their income can be multiplied several-fold, they will try to do it. This is why today's most contentious borders separate economies where the income gaps between people on the two sides are the greatest.

There are four such global hot spots: The borders between the US and Mexico, Spain and Morocco, Greece (and Italy) and the southern Balkans, and Indonesia and Singapore (or Malaysia).

Income differences were not always so huge. In 1980, average income in the US was a little more than three times that of Mexico, and the difference between Spain and Morocco 3.5 to one. So income gaps between all these contiguous countries have increased significantly during the last quarter-century.

If globalization, which has so enriched the world's wealthiest countries, is to continue, governments must find ways to increase incomes more evenly. Global income redistribution by the rich countries should be viewed as a matter not of charity, but of enlightened self-interest.

To me, in the long-run, the only real solution is to help poorer countries develop economically. I don't hear much objection to free immigration for Canadians and, outside of South Park, I suspect there would be very little. Free trade with Canada also seems mostly acceptable, though there are certainly frictions, e.g. in lumber.

If the wealth gap persists, we won't be able to build fences high enough, moats wide enough, or do anything else to stop people from trying to come here, and from being successful in their attempts. We might reduce the flow, but no more than for, say, illegal drugs. Poverty prevents countries from doing all the things we think of as "fair," better environmental rules (but look back at the choices we made at similar stages of economic development before casting stones), health care, decent wages, etc. The very existence of poverty makes competition with wealthier countries look unfair to those affected by the entry of poor countries into the marketplace.

But how do we solve that? By isolating those countries from the world's wealth through protectionism, immigration restrictions, and other means so that the wealth gap persists while they try to develop on their own? Or are we better off engaging with poor countries economically and doing everything we can to help them develop and overcome the poverty that is holding them back while also helping the poorer residents of developed countries who might be affected by such policies?

People do not want to leave the place they grew up, leave their family and friends, and go illegally to a foreign country with a different language, a place where they are not generally welcome. It takes a powerful economic incentive to induce them to leave. I am not advocating opening our borders to anyone who wants to come here. But doing all we can to encourage investment in poor countries is the best way to solve the wealth gap and associated problems in the long-run, and that may mean accepting US companies outsourcing or moving to poorer countries during the transition period, and allowing more immigrants from those countries to come here and work. But by whatever means, economic development in poorer countries is the key to resolving many of the difficult problems we face and the only way to achieve a lasting solution.

Thursday, August 17, 2006


Another silly photo op for the president. Dan Froomkin says:

Bush made time for a photo op on his way to the Pennsylvania fundraiser. The York Daily Record reports:

At Harley-Davidson's Springettsbury Township plant, George W. Bush may as well have been a rock star. Donning sunglasses similar to the ones worn by U2 front man Bono, President Bush strutted into the motorcycle maker's Softail plant Wednesday afternoon for a two-hour foray.

Wow, what a cool guy. Mid-life crisis Republican bikers for Bush.

I'm glad Bush has all the difficult problems he faces completely figured out so he has time to play around making loud vroom sounds for the cameras. Let's see, work on saving lives from the ravages of war, or put on a costume and make loud noises for the cameras. Hmmm. Let's play dress-up! -- but we need an excuse. How about we say it's to tout the merits of free trade? Yeah, that's the ticket:

Free-Trade Ain't What It Used to Be, by Dean Baker: USA Today had a great story about President Bush's visit to a Harley-Davidson factor in York, Pennsylvania to tout the merits of "free-trade." The reason why the story was so great is that the plant is in fact a testament to the effective use of protectionist policies to sustain a favored industry.

Don't take my word for it, here's the beginning of a 1983 article in the New York Times describing President Reagan's decision to impose tariffs on imported motorcycles:

In an unusually strong protectionist action, President Reagan today ordered a tenfold increase in tariffs for imported heavyweight motorcycles.

The impact of Mr. Reagan's action, which followed the unanimous recommendation of his trade advisers, is effectively limited to Japanese manufacturers, which dominate every sector of the American motorcycle market.
The action was exceptional for protecting a single American company, the Harley-Davidson Motor Company of Milwaukee, the sole surviving American maker of motorcycles ("U.S. Raises Tariff for Motorcycles," 4-2-83:A1).

So now this successful protectionist measure is touted as a testament to the merits of "free-trade." Anyone got any Iraqi WMDs? Thanks to Peter Hart from Fairness and Accuracy in Reporting (FAIR) for the tip.

Protecting Open Markets

This is a defense of China's restrictions on the flow of foreign capital into the real estate market followed by a criticism of recent US restrictions on inbound investment arising from to security concerns:

Nation's opening up is continuing despite rules, by Yi Xianrong, Commentary, China Daily: Recently, this author has been asked frequently by overseas media and businesspeople whether the policy of reform and opening up is being reversed and the country's doors being slammed shut to the rest of the world, now that restrictions are being imposed on speculative overseas capital in the real estate sector...

As a matter of fact, China's reform and opening up are developing in depth, and the country is bound to become more open to the outside world. Now let's have a look at the questions of concern. To begin with, China is not alone in restricting overseas speculative money from entering the domestic land-property market. Many other countries do so, too. ...

Continue reading "Protecting Open Markets" »

Sunday, August 13, 2006

Has Opposition to Outsourcing Subsided?

Daniel Gross wonders why we haven't heard more about outsourcing with the approach of the fall elections. Maybe what we have are "discouraged complainers," i.e. people who are as upset as ever over the job situation, but are tired of not having either party hear their complaints, or, when they do hear, not having much to offer to change the situation other than the usual free trade rhetoric:

Why ‘Outsourcing’ May Lose Its Power as a Scare Word, by Daniel Gross, Economic View, NY Times: In the 2004 political season, offshore outsourcing — the practice of hiring lower-paid service workers in places like India to carry out tasks previously done by higher-paid American workers — became an important issue.

The debate flared after the annual Economic Report of the President was issued in February 2004, just as the Democratic presidential primaries were heating up and payroll job growth was sluggish. Answering reporters’ questions about a section of the report on trade, N. Gregory Mankiw, then the chairman of the White House’s Council of Economic Advisers, made a statement... The crux of it was this: “outsourcing is just a new way of doing international trade.”

The phrase was translated into headlines, as well as politically motivated press releases, that accused Mr. Mankiw, and hence President Bush, of supporting the wholesale export of jobs from Bangor to Bangalore...

Outsourcing has yet to make a significant appearance in this year’s political campaign. The furor surrounding the practice seems to have subsided quickly once the ballots were tallied in November 2004. ... As the number of jobs has risen steadily — albeit not impressively — politicians now seem preoccupied with other issues, like Iraq and energy.

But it’s also possible that, considered in its macroeconomic context, outsourcing just isn’t that big a deal right now. ...

Continue reading "Has Opposition to Outsourcing Subsided?" »

Wednesday, August 09, 2006


Though unintended, Adam Posen has a good follow-up to Samuelson's latest column. First, Samuelson:

Cooling Off About Keeping Up, by Robert Samuelson, RCP/WaPo: ...We are experiencing another competitiveness panic. These occur every 15 or 20 years. There's an outpouring of worried reports and articles. After Sputnik in 1957 -- the first artificial earth satellite -- we were supposedly doomed to be overtaken by the Soviet Union. In the late 1970s and 1980s, it was Germany and then Japan. Lately, China and India have been the threats. ...

One problem with these debates is that competitiveness is a vague term. What does it mean? If it means keeping the lead in every industry where we once led, we're doomed. ... Similarly, if competitiveness requires the United States to maintain its present share of the world economy, we are also probably doomed. ...

One possible "competitiveness'' definition is the ability of countries to stay ahead in developing new industries. Economists once saw land, labor and capital as the basic inputs of any economy. But they've now added "knowledge,'' as David Warsh ... shows in his engaging book "Knowledge and the Wealth of Nations.'' ... By this standard, the United States is still doing well. It's a leader in many industries -- aerospace, computers, biotechnology, investment banking and entertainment. It also leads in research and development. ...

Maybe we ought to settle on this definition: productivity. That's economists' code word for "efficiency.'' ... Higher productivity allows for new products and services, from health care to iPods. Incomes and living standards tend to move in parallel with productivity changes. In the first 25 years after World War II, productivity in the business sector grew about 3 percent a year. ... Since 1995, it's grown at about 3 percent again. If we can sustain that, we'll have an easier time meeting all the future's competing needs. ...

How to do that? Good question. Unfortunately, economists don't understand why productivity has fluctuated so much. ...

While we may not be able to explain the cyclical components of productivity growth, i.e. every bit of variation around the long-run average, we do have some idea of what makes the average increase over time (no, it's not tax cuts), and competition is a big part of the story.

I think Adam Posen would agree that a focus on productivity rather than "competitiveness" is best, and that competition is one of the keys to attaining high productivity growth. Here's his comments on competitiveness and the folly of mercantilist ideas about using competitiveness to maximize exports over imports:

A heavy burden for any economy, by Adam Posen, Commentary, Financial Times: Exports are all the rage this season. Cries for adjustment of global imbalances become disputes over who has to “shoulder the burden” of reducing their current-account surpluses; the collapse of the Doha trade talks makes every World Trade Organisation member acutely aware of barriers to their export success; and the integration of China and India into the global labour force raises “competitiveness” once again to prime status as the policy goal on politicians’ lips.

Yet export competitiveness has little beyond being fashionable to recommend it as an objective for economic policy. Like today’s again trendy platform shoes, pursuit of competitiveness gives one a temporary boost that is un­stable, untenable and, with repeated use, unhealthy. A dozen years ago Paul Krugman, the US economist, famously called competitiveness “a dangerous obsession” among US policymakers. In fact, in every decade, in all advanced economies, a focus on export competitiveness tends to erode living standards and distracts policymakers from a more beneficial emphasis on productivity.

If governments want to increase their economies’ share of global production in high-value-added sectors or, better still, create new such products and sectors, then the policy goal should be to increase competitive pressure upon an economy’s own businesses. In spite of the frequently cited examples of export-led growth for some developing countries, there is mounting evidence that the benefits to growth of countries’ engagement in trade are attributable to openness. These include: the direct benefits of importing lower prices and greater variety; the efficiency gains from challenging (rather than protecting) domestic businesses; and policy choices that contribute to a broadly liberal and market-orientated framework across the economy. Exports taken on their own, the usual narrower target of competitiveness policy, are not correlated with average per capita income growth.

A focus on export competitiveness usually leads to actively harmful policies, beyond simply wasted resources and rhetoric. If exports are the public criterion of economic success, policymakers can meet that goal only by self-destructive means: depreciating a country’s currency, thus eroding the purchasing power and the accumulated wealth of citizens; depressing wages in export sectors, either directly or through relative deflation vis-a-vis trading partners, thus cutting real incomes and domestic demand; subsidising or protecting exporting companies, thus distorting investment decisions and locking in old technologies and businesses at the expense of new entrants; or promoting national champions, thus increasing both wasteful public spending and the costs to domestic households and businesses.

The only constructive way to increase exports is for the total value of exports to rise as the side-effect of productivity growth...

Daniel Drezner also comments on Posen's article and the politics of Doha.

Big, Fat American Shoppers

Two different views of the breakdown of the Doha Round. First, Ken Rogoff:

Big, fat American shopper to the rescue, by Kenneth Rogoff, Project-Syndicate: It is appalling that the world has decided to blame the United States for the crushing end to five years of global trade talks last month (the so-called Doha Round). I am the first to admit that the U.S. under President George W. Bush has not covered itself with multilateral glory in recent years. But accuse America of sabotaging the trade talks? Give me a break.

Has anybody noticed that for more than a decade now, U.S. imports have been averaging several hundred billion dollars more than exports? Do people seriously believe that the U.S. has accomplished its majestic trade deficit by shutting its doors to foreign goods? On the contrary, through its low tariffs and general lack of import restrictions, ... Americans buy more foreign-made refrigerators, cars, clothing, computers -- you name it -- than anyone else.

Happily for world exporters, the same binge mentality that makes a whopping two-thirds of Americans either overweight or obese seems to extend to all their purchasing habits. Since the start of this decade, neither recession nor hurricanes nor sky-high oil prices have seemed to dent their appetites.

The simple fact is that even if [the] U.S. ... had refused to make a single "concession," and if Europe, Japan and the big emerging markets had kept their best offers on the table, the U.S. would still remain more open than all but a few small countries.

True, in the endgame of the talks, the U.S. caved in to its wealthy and powerful agribusiness lobby. But that was only after five years of intransigence by Europe's even more powerful farm lobbies. And this is not to mention emerging market politicians' failure to grasp that unilaterally reducing their excessive import restrictions would be a good idea even if rich countries sat on their hands.

What does last month's trade fiasco mean? ... The ... Democratic Party seems poised to take up growing wage inequality as an issue in this year's midterm U.S. congressional elections and in the 2008 presidential election. ...

The last thing that Bush's Republicans want is to appear indifferent to the plight of the middle classes. So, unfortunately, even if Europe came to its senses and emerging markets showed greater enthusiasm for liberal trade, we may not see a big global deal until the next decade.

How bad would that be? After all, many Asian countries have achieved impressive export-led growth under the current system. And bilateral or regional trade deals can chip away at some of the barriers in the current global system. ...

Even if Asia has succeeded by relentlessly exporting manufactured items, today's poorest countries, especially in Africa, can realistically export only agriculture and textiles ... precisely the range of goods that remain most protected under existing agreements. Bilateral deals can help, but they can also lead to higher trade barriers for everyone else. ...

[G]lobal economic growth in the past four years has been the fastest since the early 1970s. Rapidly expanding global trade, combined with an ever-freer and faster exchange of people and ideas, has been a cornerstone of this growth, particularly of the strong productivity gains that underlie it. Absent further trade agreements, there is a big risk that the pace of globalization will slow, with profound consequences for global poverty and welfare.

Outside Africa, the people who will suffer the most are those in countries like Brazil, India, China and Mexico, whose leaders rightly took on rich-country farm subsidies, but wrongly failed to recognize the profound costs of the developing world's own import restrictions.

So for now, the world must hope that Americans continue gorging on foreign imports. Wallis Simpson, the controversial U.S.-born Duchess of Windsor, once famously quipped, "You can never be too rich or too thin."

Fortunately for everyone, America's motto nowadays is "You can never be too rich or too fat." When Americans finally decide to go on an import diet, as they will someday, the world's hypocrisy over the failed global trade talks will become apparent to all.

And here's another view from Joseph Stiglitz:

Western trade barriers are perpetuating poverty, by Joseph Stiglitz, Project Syndicate: Hopes for a development round in world trade - opening up opportunities for developing countries to grow and reduce poverty - now seem dashed. ... The failure hardly comes as a surprise: The United States and the European Union long ago reneged on the promises they made in 2001 at Doha to rectify the imbalances of the last round of trade negotiations - a round so unfair that the world's poorest countries were actually made worse off.

Once again, America's lack of commitment to multilateralism, its obstinacy, and its willingness to put political expediency above principles - and even its own national interests - has triumphed.

With elections looming in November, President George W Bush could not "sacrifice" the 25,000 wealthy cotton farmers or the 10,000 prosperous rice farmers and their campaign contributions. Seldom have so many had to give up so much to protect the interests of so few.

The talks bogged down over agriculture, where subsidies and trade restrictions remain so much higher than in manufacturing. With 70 percent or so of people in developing countries depending on agriculture, they are the losers under the current regime.

In the trade talks, America said that it would cut subsidies only if others reciprocated by opening their markets. But, ... [d]eveloping countries cannot, and should not, open up their markets fully to America's agricultural goods unless US subsidies are fully eliminated.

To compete on a level playing field with developed countries would force developing ones to subsidize their farmers, diverting scarce funds that are needed for education, health, and infrastructure. ...

There remains one further concern: America has rushed to sign a series of bilateral trade agreements that are even more one-sided and unfair to developing countries, which may prompt Europe and others to do likewise.

This divide-and-conquer strategy undermines the multilateral trade system, which is based on the principle of non-discrimination. ... Indeed, the entire world is the loser if the multilateral trade system is weakened.

The rest of the world must not embrace America's unilateral approach: The multilateral trade system is too precious to allow it to be destroyed by a US President who has repeatedly shown his contempt for global democracy and multilateralism.

Sunday, August 06, 2006

What Were Economists Saying About Income Inequality in 1997? An Interview with Arrow and Judd

I drew a blank trying to find something to post or write about today and tonight, slow economics day I guess, so I dug up a couple of old interviews on income inequality and globalization from a 1997 Hoover Digest to see what economists were saying about those issues at that time. The first is an interview with Ken Arrow and Ken Judd on income inequality, and the other (in the post below this one) is an article by Milton and Rose Friedman defending free trade:

Rich Man, Poor Man, Hoover Digest 1997 No. 4, Interview by Peter Robinson: The difference between the income of the rich and poor in the United States is growing--and growing dramatically. In talking recently with Hoover fellow Peter Robinson, two experts, Arrow and Judd, agreed about the reasons but disgreed about whether anything should--or could--be done.

ROBINSON Consider two sets of statistics. In 1968, the average income for the richest one-fifth of American households came to about $74,000, while the average income for the poorest one-fifth came to less than one tenth of that amount, or about $7,000. That's the first set of statistics.

Here's the second. By 1994, the average income for the richest one fifth of American households had grown to $106,000, while the average income for the poorest one-fifth had barely risen at all, remaining at about $7,000.

Ken Arrow, do you accept the implication? That the rich in America are getting richer, while the poor are barely holding their own?


ROBINSON Ken Judd? Do you believe that the rich are pulling away while the poor are just treading water?

JUDD The evidence is pretty clear.

ROBINSON Why is the gap between rich and poor growing so sharply?

ARROW I must confess that it's something economics isn't so good at explaining. But there are several hypotheses that have been advanced. One is foreign trade, the notion that increased imports from low-cost countries--Indonesia, Malaysia, and China--are forcing down wages here in the United States. The problem with this view is that the volume of these imports simply isn't very big. It's less than 3 or 4 percent of national income.

ROBINSON So Ross Perot is overreacting? There's no giant sucking sound as jobs move overseas?

ARROW There is a sucking sound, but it's not giant. Let's call it a little hiss.

ROBINSON Okay, so there's a hiss. That's one factor.

ARROW A second factor is immigration. The notion is that a large proportion of immigrants to the United States are competing for low wage, low-skill jobs, once again driving down wage rates. But, again, this seems to leave the majority of the growing income inequality unaccounted for.

The third factor--the one that many stress--is that the changing technology of American industry is creating a greater demand for highly skilled workers. According to this view, it's less a matter of the poor doing worse and worse than of the rich doing better and better as the economy creates higher and higher rewards for those with extensive amounts of education and technical skills--for the so-called cognitive elite.

ROBINSON Ken Judd, you'd accept this description of the three factors?

JUDD I would, but I'd add one more. There have been important changes in the nature of the family. When we talk about how the typical family of today is doing compared with the typical family of thirty years ago, we're really comparing apples and oranges. The typical family of thirty years ago was pretty close to that old television show Ozzie and Harriett.

ROBINSON A mom and dad with two or three kids.

JUDD Right. And remember that the dad had a job while the mom stayed home to take care of the house and kids. Today you have a lot of families in which both the mom and dad have jobs. That tends to push up the income figures for the wealthier households. On the other end of the spectrum, you have a lot of single moms trying to raise kids by themselves, without any dad in the household at all. And that tends to push down the figures for the lower-income households.

ROBINSON So the figures that show a growing gap between rich and poor aren't merely reflecting changes in the structure of the economy but changes in the structure of society?

ARROW There's no question about it. It used to be that if you looked at the people in the bottom, say, 10 to 20 percent of income, they'd be single males--drifters. Now what you'll find is single heads of households. This has great social consequences. Go back forty or fifty years, and you'll find that the proportion of children being brought up in the poorest one-fifth of households was about 15 percent. Today the figure is 25 percent. In fact, you have more children in this lower group than there are adults.

ROBINSON You're anticipating my next question, which is this. When you look at this pattern of growing income inequality, how do you respond to it? Is it something that concerns you? Or is it morally neutral, of no more importance to the formation of public policy than, say, the distribution of blonds, brunets, and redheads?

Continue reading "What Were Economists Saying About Income Inequality in 1997? An Interview with Arrow and Judd" »

What Were Economists Saying about Globalization in 1997? Milton and Rose Friedman Defend Free Trade

In the second article from the 1997 Hoover Digest, (first), Milton and Rose Friedman defend free trade. I doubt that the passage of time has altered these views:

The Case for Free Trade, by Milton and Rose Friedman, Hoover Digest 1997 No. 4: It is often said that bad economic policy reflects disagreement among the experts; that if all economists gave the same advice, economic policy would be good. Economists often do disagree, but that has not been true with respect to international trade. Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world.

Yet tariffs have been the rule. The only major exceptions are nearly a century of free trade in Great Britain after the repeal of the Corn Laws in 1846, thirty years of free trade in Japan after the Meiji Restoration, and free trade in Hong Kong under British rule. The United States had tariffs throughout the nineteenth century, and they were raised still higher in the twentieth century, especially by the Smoot-Hawley tariff bill of 1930, which some scholars regard as partly responsible for the severity of the subsequent depression. Tariffs have since been reduced by repeated international agreements, but they remain high, probably higher than in the nineteenth century, though the vast changes in the kinds of items entering international trade make a precise comparison impossible.

Today, as always, there is much support for tariffs--euphemistically labeled "protection," a good label for a bad cause. Producers of steel and steelworkers' unions press for restrictions on steel imports from Japan. Producers of TV sets and their workers lobby for "voluntary agreements" to limit imports... Producers of textiles, shoes, cattle, sugar--they and myriad others complain about "unfair" competition from abroad and demand that government do something to "protect" them. Of course, no group makes its claims on the basis of naked self-interest. Every group speaks of the "general interest," of the need to preserve jobs or to promote national security. The need to strengthen the dollar ... has more recently joined the traditional rationalizations for restrictions on imports.

One voice that is hardly ever raised is the consumer's. That voice is drowned out in the cacophony of the "interested sophistry of merchants and manufacturers" and their employees. The result is a serious distortion of the issue. For example, the supporters of tariffs treat it as self evident that the creation of jobs is a desirable end, in and of itself, regardless of what the persons employed do. That is clearly wrong. If all we want are jobs, we can create any number--for example, have people dig holes and then fill them up again or perform other useless tasks. ... Our real objective is not just jobs but productive jobs--jobs that will mean more goods and services to consume.

Another fallacy seldom contradicted is that exports are good, imports bad. The truth is very different. We cannot eat, wear, or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports. As Adam Smith saw so clearly, the citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports or, equivalently, from exporting as little as possible to pay for its imports.

The misleading terminology we use reflects these erroneous ideas. "Protection" really means exploiting the consumer. A "favorable balance of trade" really means exporting more than we import, sending abroad goods of greater total value than the goods we get from abroad. In your private household, you would surely prefer to pay less for more rather than the other way around, yet that would be termed an "unfavorable balance of payments" in foreign trade.

The argument in favor of tariffs that has the greatest emotional appeal to the public at large is the alleged need to protect the high standard of living of American workers from the "unfair" competition of workers in Japan or Korea or Hong Kong who are willing to work for a much lower wage. What is wrong with this argument? Don't we want to protect the high standard of living of our people?

The fallacy in this argument is the loose use of the terms "high" wage and "low" wage. What do high and low wages mean? American workers are paid in dollars; Japanese workers are paid in yen. How do we compare wages in dollars with wages in yen? How many yen equal a dollar? What determines the exchange rate?

Consider an extreme case. Suppose that, to begin with, 360 yen equal a dollar. At this exchange rate, the actual rate of exchange for many years, suppose that the Japanese can produce and sell everything for fewer dollars than we can in the United States--TV sets, automobiles, steel, and even soybeans, wheat, milk, and ice cream. If we had free international trade, we would try to buy all our goods from Japan. This would seem to be the extreme horror story of the kind depicted by the defenders of tariffs--we would be flooded with Japanese goods and could sell them nothing.

Before throwing up your hands in horror, carry the analysis one step further.

Continue reading "What Were Economists Saying about Globalization in 1997? Milton and Rose Friedman Defend Free Trade" »

Saturday, August 05, 2006

Fed Policy and Inflationary Pressures from Import Prices

knzn says Brad DeLong is "is going out on a bit of a limb":

Not the End of the World, by knzn:  Now that we’re going to have a recession, the question arises as to how we are going to get out of it. “With great difficulty,” seems to be the consensus. Getting out of a recession is seldom easy, but I think some commentators have exaggerated the difficulties involved this time around. In particular, Brad DeLong (quoted by Mark Thoma) is pessimistic about the options the US would have available should it fall into a recession (for which he puts the odds at about 30%, although he doesn’t make much of a case for the remaining 70%). The rest of this post reproduces (on mvpy's suggestion) a comment I made on Mark Thoma’s entry above. First, citing Professor DeLong regarding the prospects for a monetary solution:

… sharp reductions in interest rates would lower the value of the dollar and increase inflationary pressures from import prices in a way that the Federal Reserve does not dare allow.

This is a controversial point, and Brad is going out on a bit of a limb here. First of all, many imports are priced in dollars, and many of those that aren’t literally so are effectively priced in dollars because the prices get adjusted according to the prices of dollar-priced competitors. Brad remembers as well as anyone how adamantly foreign producers tried to defend their US market shares during the dollar declines of the late 1980s.

Second, policymakers in foreign countries that depend on US demand or compete heavily with the US aren’t likely to allow dramatic appreciation in their currencies. The Asian countries just won’t let it happen. Europe may let it begin to happen, but when their economies start to decline due to US competition and their inflation rates decline due to a strong Euro, the ECB will ease up and allow the dollar to appreciate again (and, in fact, traders will anticipate this action and forestall a dramatic rise in the Euro to begin with). Moreover, the Fed will anticipate these foreign responses and therefore will not be tremendously concerned with the value of the dollar until they actually see the inflation rate rising because of it (which it may never do, for this and all the other reasons described here).

Third, with the US economy in recession, with the Fed’s inflation-fighting credibility high (as it will be, if the Fed manages to cause a recession), and with an extremely weak US labor market (much weaker, because of the recession, than the already very weak labor market today), there will be dramatic domestic disinflationary pressures to offset any inflationary pressure from imports.

Fourth, in the event of a US recession, those imports (such as oil) that have volatile prices will (along with everything else) experience a drop in demand, which will put downward pressure on prices and tend to offset the effect of the weak dollar.

Finally, to the extent that import prices do rise, and export prices fall in terms of foreign currencies, this will be an excellent stimulus for the US economy. Like any economic stimulus, a weak dollar also tends to be inflationary, but it is not reasonable to assume that its inflationary impact would be out of proportion with its stimulative impact. You wouldn’t say, “Sharp reductions in interest rates would increase demand for building materials and construction workers and thus produce inflationary pressures that the Fed doesn’t dare allow.” During a recession, the Fed does dare allow inflationary pressures, because they are offset by the disinflationary impact of the recession itself.