Author Archives: jdingel

The IMF and WB in Africa

Ha-Joon Chang has a new book promoting protectionism, titled Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. In an article in this month’s issue of Prospect magazine (hat tip to Pablo), he writes:

As for Africa, its per capita income grew relatively slowly even in the 1960s and the 1970s (1-2 per cent a year). But since the 1980s, the region has seen a fall in living standards. There are, of course, many reasons for this failure, but it is nonetheless a damning indictment of the neoliberal orthodoxy, because most of the African economies have been practically run by the IMF and the World Bank over the past quarter of a century.

While I agree that the IMF and the World Bank haven’t done a great job, I think it’s wrong to portray them as the caretakers of Africa and the institutions responsible for its disappointing growth rates. They’ve never had that much power, and I’ve never seen another academic suggest it. Research on African economic performance has focused on institutions and geography. As Paul Collier summarizes (pdf):

Africa’s growth failure has attracted competing explanations. During the 1980s the World Bank diagnosed the problem as inappropriate economic policies, Berg (1981) offering the
first clear statement of this position. Bates (1981) was the first to explain these dysfunctional policy choices in terms of the interests of powerful groups, notably the taxation of export agriculture. During the 1990s the limited response to reform induced a broader search for explanations (Collier and Gunning, 1999, 1999a). Recently three further explanations have gained currency: institutions (Acemoglu et al., 2001), leadership (Jones and Olken, 2005), and geography (Sachs, 2003).

Is there any academic research that concurs with Chang in blaming the IMF and World Bank for Africa’s disappointing growth?

Political economy of trade policy: Irrational voters & protection for sale

The thesis of Bryan Caplan’s The Myth of the Rational Voter, in the briefest terms and paraphrasing Mencken, is that the common people know what they want, and democracy gives it to them good and hard. As Caplan explains it, in the realm of trade policy, steel tariffs are imposed not because clever lobbyists fight to reap concentrated benefits at the (dispersed) expense of the general public, but because average people (and the median voter) like steel tariffs. That’s why the president holds a press conference to announce new protectionism, rather than quietly erecting barriers that favor special interests.

Caplan’s story is very different from the most popular political economy model of trade policy — Grossman & Helpman’s “Protection for Sale.” That model abstracts from much of the political process and applies contract theory (see “Protection for Sale Made Easy“). In short, the lobbies present the government with contribution schedules that induce the government to do what the lobbies want the government to do. The government’s objective function is some linear combination of social welfare and political contributions. The result of lobbying is that governments care too much about producer profits and thus impose tariffs. The model’s predictions are borne out empirically to some degree. Moreover, investigations also find a positive correlation between the size of contributions and tariff levels.

So which story better explains reality? Do lobbies or public opinion trigger protectionism? Are there data that would allow us to distinguish between the two hypotheses, given that they both predict protection?

A synthesis of the two would be Jagdish Bhagwati’s distinction between downstream directly unproductive profit-seeking (DUP) activities – rent-seeking taking place in response to an existing distortion, such as lobbying for a quota allocation – and upstream DUP activities that aim to create distortions. The broad contours of trade policy – a country’s aggregate openness – may be determined by public opinion or the median voter, while the specific manifestations of protection are sufficiently insulated from public perception that they are largely determined by an inside-the-Beltway lobbying process.

Empirically testing this suggested synthesis would be difficult, however. If firms lobby rationally and know that they are constrained by public opinion, then we should expect them to largely engage downstream DUP activities, foregoing upstream DUP activities rendered impotent by the democratic process. But classifying real-world lobbying activities as upstream or downstream may be impossible, making the test hopeless.

Other suggestions for tackling this topic?

Compensating globalization’s losers, redux

Echoing Julian Sanchez’s argument against compensating globalization’s losers, Alex Tabarrok writes:

Imagine that transportation costs fall so that Joe buys his shoes from China. Why do lower transportation costs impose an obligation on Joe to compensate Mary, a U.S. shoe maker? If transportation costs rise (say because the price of oil increases) does Mary have an obligation to compensate Joe?…

Of course, I understand that we might have to compensate the losers from globalization because without compensation they won’t allow us to trade… It might be expedient… but is this justice?

Compensating globalization's losers, redux

Echoing Julian Sanchez’s argument against compensating globalization’s losers, Alex Tabarrok writes:

Imagine that transportation costs fall so that Joe buys his shoes from China. Why do lower transportation costs impose an obligation on Joe to compensate Mary, a U.S. shoe maker? If transportation costs rise (say because the price of oil increases) does Mary have an obligation to compensate Joe?…

Of course, I understand that we might have to compensate the losers from globalization because without compensation they won’t allow us to trade… It might be expedient… but is this justice?

Compensating globalization's losers, redux

Echoing Julian Sanchez’s argument against compensating globalization’s losers, Alex Tabarrok writes:

Imagine that transportation costs fall so that Joe buys his shoes from China. Why do lower transportation costs impose an obligation on Joe to compensate Mary, a U.S. shoe maker? If transportation costs rise (say because the price of oil increases) does Mary have an obligation to compensate Joe?…

Of course, I understand that we might have to compensate the losers from globalization because without compensation they won’t allow us to trade… It might be expedient… but is this justice?

Rato done

Unexpected: “Rodrigo Rato stunned colleagues on Thursday with the surprise announcement that he is stepping down early as managing director of the International Monetary Fund.”

Francois: Don’t revive the patient

I have yet to read someone pleased with the current WTO round being saddled with the title “Doha Development Agenda.” Some, like Joe Stiglitz and Andrew Charlton, argue that the name is misleading because the rich countries are not actually focused on development-friendly liberalization. Others believe that the moniker poisoned the negotiations from the start by giving developing countries reason to believe they might enjoy a “round for free” in which they would not have to liberalize their own trade barriers. In fact, each side is unhappy with the DDA because the other side interprets the phrase differently.

Joseph Francois is a member of the latter camp, but he thinks this clash is getting old:

If you surf the WTO website, Ministerial declarations, NGO news feeds, and the pronouncements of the alphabet soup of developing country blocks – G20, G33, LDCs, SVEs – you get the distinct impression that what matters is OECD concessions. Yet this focus on the OECD is an exercise in misdirection. Preferential access is not the key to trade-based growth… [R]ecent research suggests that preferences do not work as advertised, help parties they are not meant to help, and otherwise represent a triumph of form over substance…

If the OECD would resign from its role as scapegoat (scrapping industrial protection and then walking away), the South could then move past its post-colonial obsession with OECD import protection and finally take steps to place its own collective house in order.

Francois argues that the Doha round’s focus on an intransigent issue – agriculture – is damaging, and that WTO members would be best off declaring the round complete via some watered-down compromise and moving on to address more important issues, such as multilateralizing regionalism and promoting South-South liberalization.

Francois: Don't revive the patient

I have yet to read someone pleased with the current WTO round being saddled with the title “Doha Development Agenda.” Some, like Joe Stiglitz and Andrew Charlton, argue that the name is misleading because the rich countries are not actually focused on development-friendly liberalization. Others believe that the moniker poisoned the negotiations from the start by giving developing countries reason to believe they might enjoy a “round for free” in which they would not have to liberalize their own trade barriers. In fact, each side is unhappy with the DDA because the other side interprets the phrase differently.

Joseph Francois is a member of the latter camp, but he thinks this clash is getting old:

If you surf the WTO website, Ministerial declarations, NGO news feeds, and the pronouncements of the alphabet soup of developing country blocks – G20, G33, LDCs, SVEs – you get the distinct impression that what matters is OECD concessions. Yet this focus on the OECD is an exercise in misdirection. Preferential access is not the key to trade-based growth… [R]ecent research suggests that preferences do not work as advertised, help parties they are not meant to help, and otherwise represent a triumph of form over substance…

If the OECD would resign from its role as scapegoat (scrapping industrial protection and then walking away), the South could then move past its post-colonial obsession with OECD import protection and finally take steps to place its own collective house in order.

Francois argues that the Doha round’s focus on an intransigent issue – agriculture – is damaging, and that WTO members would be best off declaring the round complete via some watered-down compromise and moving on to address more important issues, such as multilateralizing regionalism and promoting South-South liberalization.

Francois: Don't revive the patient

I have yet to read someone pleased with the current WTO round being saddled with the title “Doha Development Agenda.” Some, like Joe Stiglitz and Andrew Charlton, argue that the name is misleading because the rich countries are not actually focused on development-friendly liberalization. Others believe that the moniker poisoned the negotiations from the start by giving developing countries reason to believe they might enjoy a “round for free” in which they would not have to liberalize their own trade barriers. In fact, each side is unhappy with the DDA because the other side interprets the phrase differently.

Joseph Francois is a member of the latter camp, but he thinks this clash is getting old:

If you surf the WTO website, Ministerial declarations, NGO news feeds, and the pronouncements of the alphabet soup of developing country blocks – G20, G33, LDCs, SVEs – you get the distinct impression that what matters is OECD concessions. Yet this focus on the OECD is an exercise in misdirection. Preferential access is not the key to trade-based growth… [R]ecent research suggests that preferences do not work as advertised, help parties they are not meant to help, and otherwise represent a triumph of form over substance…

If the OECD would resign from its role as scapegoat (scrapping industrial protection and then walking away), the South could then move past its post-colonial obsession with OECD import protection and finally take steps to place its own collective house in order.

Francois argues that the Doha round’s focus on an intransigent issue – agriculture – is damaging, and that WTO members would be best off declaring the round complete via some watered-down compromise and moving on to address more important issues, such as multilateralizing regionalism and promoting South-South liberalization.

Whom to trust?

Harold Meyerson on an increasingly important puzzle – international capital flows controlled by governments:

China just bought itself a $3 billion share in Blackstone, the U.S. private equity firm.

To be sure, the Committee on Foreign Investment in the United States has the power to nix such purchases if they compromise national security. But what is the proper response of laissez-faire advocates to this sudden wave of foreign government investment in non-security-related companies? It’s okay if the Chinese government owns a slice of our economy but not okay if our own government does? We trust every other government more than we trust our own?

I posed this question to William Niskanen, chairman of the libertarian Cato Institute and among the most principled ideologues on our political landscape. Foreign government ownership, he argued, shouldn’t pose a problem unless that government obtains a controlling interest. When I then asked whether it would be a problem for the U.S. government to buy into such a company, he answered immediately, “I don’t think I would want to be a shareholder in a company in which the U.S. government owned a good bit of the shares,” and then, pausing, continued, “I haven’t thought about this” — “this” being the distinction between U.S. ownership and, say, Chinese.

Niskanen is hardly alone. None of us have thought sufficiently about how the belief in untrammeled capitalism could lead to foreign governments, whatever their agendas, controlling more and more of the American economy.

Via Thoma.