Author Archives: jdingel

African Growth Prospects

Johnson, Ostry & Subramanian – “The Prospects for Sustained Growth in Africa: Benchmarking the Constraints” – NBER & IMF working paper, March 2007

I saw Simon Johnson present an early version of this paper — it’s very interesting.

IMF blurb:

Africa is experiencing its strongest growth in years. But for those who view Africa’s prospects through the perspective of the “deep” determinants of development—geography, institutions, and history—the outlook still seems somewhat bleak. The paper tries to assess Africa’s prospects by comparing Africa today with countries that were similarly weak in the past—in terms of their institutional development—and yet managed to escape from poverty.

The authors say the data suggest that these deep indicators, especially for a group of “promising” countries, are not much worse in Africa today than they were in much of East Asia in the early 1960s or in Vietnam and China around 1980. There are inherited institutional weaknesses in Africa—and internal conflict and social fragmentation remain concerns—but the East Asian experience demonstrates that some institutional weaknesses can be fixed. So the good news for countries seeking to escape their current poverty trap is that breaking away from their institutional legacy is possible because it has been done by others.

Creating a stronger and more dynamic manufacturing export sector is likely to be one of the keys to sustaining growth. To achieve this, though, reducing direct regulatory costs for exporters and avoiding real exchange rate overvaluation will be essential. And on these scores, the authors see risks going forward that were less of an issue for the East Asian escapees: commodity-based growth and sizable aid inflows that partly underpin the positive prognosis for Africa may impede institutional development and make it harder to avoid real exchange rate overvaluation. Sub-Saharan Africa’s escape from poverty, although certainly possible, may be more challenging than it was for East Asia.

An argument against TPA

Thomas Palley argues that we ought to let TPA lapse:

Over the last two decades the power of corporations has increased dramatically while that of labor has fallen. That power shift is reflected in the increased numbers of Washington K Street lobbyists working on behalf of corporations, which has increased corporate influence over policy and legislation. TPA plays into and amplifies this power shift.

Trade deals are negotiated by the office of the US Trade Representative (USTR), and then sent to Congress for approval. This negotiating process is stacked in favor of business…

Bad agreements pass because the political costs of voting them down on account of specific problems are perceived as too high. Moreover, TPA provides individual congressmen with political cover, enabling them to retain favor with corporate sponsors without having to explain to constituents their lack of action.

Palley’s analysis of the political economy of TPA for PTAs is compelling, though I’m confident that we disagree about which elements of PTAs have been undesirable. See Bernard Gordon on the Christmas tree effect for more thoughts on the Congressional role in PTA formulation.

Coping with offshoring

FT:

A contentious €500m ($672m) European Union “shock ab­sorber” fund to help workers who lose their jobs to global competition has received just two requests for aid since its launch, raising questions about the extent of “de­localisation” of European jobs.

The low level of take-up from the fund, created at the end of last year, has prompted claims from liberals in the European Commission that the threat from the offshoring of jobs to Asia and elsewhere has been exaggerated…

“In a way we have exposed that by creating the globalisation fund,” said one. “It wasn’t set up in a way that would make it difficult to get the money.”

Full story.

Immigration, Interpersonal Utility Comparisons, and Weighted Utilitarianism

Suppose we transfer one person from Mexico to United States (illegally or otherwise). As a result his wages increase compared to what he was making in Mexico. Let us also suppose that as a result of this transfer the wages of some unskilled worker in US fall. Furthermore we will ignore the aggregate gains from immigration that occur and which all economists, including Borjas admit exist. We do this to make our job harder, not easier.

How much do you have to weight the native’s welfare relative to that of the Mexican immigrant in order to oppose moving this migrant into US?

YouNotSneaky assumes that utility is a CES function of the wage and goes from there. It’s an interesting back of the envelope calculation. His result: “Clearly one doesn’t need to be a rootless cosmopolitan to reject these kinds of weights. One only need not be a jerk.”

After checking out YouNotSneaky’s calculations, head over to Marginal Revolution to check out the hostile exchanges in the comments section.

Bhagwati on the labor standards compromise

Jagdish Bhagwati:

Bipartisanship is no guarantor of virtue. The proponents of the compromise also make a serious mistake when they assume that domestic consensus on trade policy is a sufficient condition for further trade liberalisation. Trade needs at least two parties. Unless your trading partners agree with what you propose, your own consensus is well nigh useless. The problem is that, except for bilateral agreements with small countries (or groups of countries, such as Central America) with little political power or with over­riding security interests, the developing-country trading partners of the US are generally opposed to the inclusion of labour (and other non-trade-related) requirements in trade treaties, agreements and institutions…

[T]he pursuit of labour standards in the American political landscape today reflects not altruism and empathy, but fear and self-interest. The Democrats who swept into Congress on anti-trade platforms typically fought their campaigns by arguing that competition with countries with lower standards was harmful to the working and middle classes in the US…

Was this compromise necessary for the renewal of the president’s fast-track trade authority? I doubt it. Think hard: if fast-track were not renewed by Congress, the US would find it impossible to pursue even bilateral agreements, not just the multilateral Doha round. But every other nation would be free to pursue these bilateral deals. So, the US would be increasingly handicapped in world trade. But if the administration stood firm, rejecting the compromise over labour standards, it is surely possible that a few responsible Democrats could be found who would vote for new fast-track authority, purely in America’s interest. Surely, it is not beyond the capacity of Mr Paulson to play this card with success?

If you lack FT access, Mark Thoma has a longer excerpt.

Takeoffs

This abstract presents some interesting findings, as well as a few puzzles:

This paper identifies factors associated with takeoff — a sustained period of high growth following a period of stagnation. We examine a panel of 241 “stagnation episodes” from 146 countries, 54 % of these episodes are followed by takeoffs. Countries that experience takeoffs average 2.3% annual growth following their stagnation episodes, while those that do not average 0% growth; 46% of the takeoffs are “sustained,” i.e. lasting 8 years or longer. Using probit estimation, we find that de jure trade openness is positively and significantly associated with takeoffs. A one standard deviation increase in de jure trade openness is associated with a 55% increase in the probability of a takeoff in our default specification. We also find evidence that capital account openness encourages takeoff responses, although this channel is less robust. Measures of de facto trade openness, as well as a variety of other potential conditioning variables, are found to be poor predictors of takeoffs. We also examine the determinants of nations achieving sustained takeoffs. While we fail to find a significant role for openness in determining whether or not takeoffs are sustained, we do find a role for output composition: Takeoffs in countries with more commodity-intensive output bundles are less likely to be sustained, while takeoffs in countries that are more service-intensive are more likely to be sustained. This suggests that adverse terms of trade shocks prevalent among commodity exports may play a role in ending long-term high growth episodes.

Joshua Aizenman & Mark Spiegel – “Takeoffs” – NBER WP 13084. Ungated copy here (pdf).

Venezuelan update

“[President Hugo] Chávez has now reached the Robert Mugabe level of economic incompetence by messing with the farm sector. Let’s hope he does not move past that to the Mao Zedong/Great Leap Forward level of economic mismanagement.” — Dan Drezner

The latest issue of Foreign Policy has a provocative piece by Alvaro Vargas Llosa on the “Latin American Idiots” who love Chávez and President Evo Morales of Bolivia.

Chinese revaluation

I ought to leave the topic to those who follow it more closely, such as Brad Setser, but here’s the Economist on Chinese revaluation:

[M]any mainstream American economists are now calling on China to revalue by 20% or more. Yet the standard arguments for a revaluation are based partly on a series of myths.

The first myth is that there is overwhelming evidence that the yuan is grossly undervalued. China’s large bilateral trade surplus with America proves nothing. It largely reflects Asia’s changing supply chain…

At one extreme is Morris Goldstein, of the Peterson Institute for International Economics, who argues that the yuan is undervalued by 40% or more against the dollar and should immediately be revalued by 10-15%. In the other corner many highly respected economists, including Robert Mundell, an economics Nobel prize-winner, and Ronald McKinnon, of Stanford University, strongly argue against a big appreciation of the yuan…

Myth number two is that the sharp increase in China’s trade surplus is due to an explosion in cheap exports… The entire increase in China’s trade surplus since 2004 has come from trade in heavy industrial materials and equipment. China used to import increasing amounts of steel, aluminium, chemicals and machinery, but import growth collapsed after 2004 when the government started to tighten policy, causing a sharp slowdown in construction, one of the biggest importers of machinery and materials. At the same time China continued to invest heavily in metals and equipment, creating substantial excess capacity, so import growth remained relatively weak last year. Mr Anderson argues that imports should recover as overcapacity is used up.

The third fallacy is that imports from China destroy jobs and harm the American economy… Trade with China may affect the composition of jobs in America, but it has little impact on total employment…

The biggest myth of all is that a revaluation of the yuan would greatly reduce America’s trade deficit. The real cause of the deficit is that Americans spend too much and save too little. This means that the country has to import surplus savings from abroad by running a current-account deficit. If a stronger yuan did not cause Americans to save more, it would do little by itself to reduce the trade deficit.

Another reason why even a big rise in the yuan would do little to reduce America’s deficit is that there is little overlap between American and Chinese production, so American goods cannot replace Chinese imports. Instead, other countries, such as Indonesia and Vietnam, would probably replace the Chinese. Shifting purchases to higher-cost producers amounts to imposing a tax on American consumers, says Stephen Roach, chief economist of Morgan Stanley…

America is right that China needs to revalue, but for the wrong reasons. And arguing that a revaluation helps America’s economy makes it less likely that Beijing will act.