Author Archives: jdingel

Credit crisis as case for Doha liberalization?

Richard Baldwin says that the financial crisis will make the gap between bound and applied rates pretty important:

National politicians, who have not had the wisdom to constrain themselves in the WTO, will find it almost irresistible to attempt to shift demand to local producers by raising tariffs on final goods.

On the bright side, this destructive protectionism will highlight the value of the tariff bindings that developing nations are offering in the Doha Round negotiations. So far, industrialised country exporters have turned their noses up at the tariff bindings offered by developing countries in the negotiation since they often don’t lower the actual tariff rates.

In financial terms, tariff bindings are options. The value of options rise with volatility—a fact that will become abundantly clear as recession spreads around the globe via trade accounts.

World leaders should seize the moment and “buy” these options now by finishing the Doha Round negotiations. This would send a great positive signal that they are aware that coordinated action is needed on the current account as well as the capital account.

Should, but won’t.

Again, I have seen far more warnings against protectionist reactions to the credit crisis than I have seen calls for such measures. Is all this preemption necessary?

Rising trade costs despite falling oil prices

Oil has fallen to close to $60 per barrel, but Marc Levinson, author of The Box, says that transportation costs are likely to slow globalization. He cites:

  • Ports unable to handle the next generation of massive container ships
  • Intranational ground transportation systems, notably highways and rail, that are increasingly congested
  • “The cost of international trade has been kept artificially low because shippers do not pay for the environmental harm they inflict. Regulators are finally catching up.”

But how should we interpret Levinson’s concluding paragraph, where he writes that “in retrospect, globalization will likely appear not as an inexorable trend but as a temporary stage in economic development” while also conceding that “slower, costlier, and less certain transportation will not put an end to the growth of international trade”?

Clinton vs Collier on the food crisis

While Bill Clinton recently criticized US buy-American food assistance programs and ethanol subsidies, he also promoted food autarky:

Clinton criticized decades of policymaking by the World Bank, the International Monetary Fund and others, encouraged by the U.S., that pressured Africans in particular into dropping government subsidies for fertilizer, improved seed and other farm inputs as a requirement to get aid. Africa’s food self-sufficiency declined and food imports rose…

“Food is not a commodity like others,” Clinton said. “We should go back to a policy of maximum food self-sufficiency. It is crazy for us to think we can develop countries around the world without increasing their ability to feed themselves.”

Paul Collier in Foreign Affairs:

Politicians and policymakers do, in fact, have it in their power to bring food prices down. But so far, their responses have been less than encouraging: beggar-thy-neighbor restrictions, pressure for yet larger farm subsidies, and a retreat into romanticism…

The real challenge is not the technical difficulty of returning the world to cheap food but the political difficulty of confronting the lobbying interests and illusions on which current policies rest. Feeding the world will involve three politically challenging steps. First, contrary to the romantics, the world needs more commercial agriculture, not less. The Brazilian model of high-productivity large farms could readily be extended to areas where land is underused. Second, and again contrary to the romantics, the world needs more science: the European ban and the consequential African ban on genetically modified (GM) crops are slowing the pace of agricultural productivity growth in the face of accelerating growth in demand. Ending such restrictions could be part of a deal, a mutual de-escalation of folly, that would achieve the third step: in return for Europe’s lifting its self-damaging ban on GM products, the United States should lift its self-damaging subsidies supporting domestic biofuel…

Typically, in trying to find a solution to a problem, people look to its causes — or, yet more fatuously, to its “root” cause. But there need be no logical connection between the cause of a problem and appropriate or even just feasible solutions to it. Such is the case with the food crisis. The root cause of high food prices is the spectacular economic growth of Asia. Asia accounts for half the world’s population, and because its people are still poor, they devote much of their budgets to food. As Asian incomes rise, the world demand for food increases… There is nothing to be done about the root cause of the crisis — the increasing demand for food. The solution must come from dramatically increasing world food supply.

Collier’s essay provides many arguments for greater global integration and commercialization of agriculture. Where’s the evidence favoring food autarky as a means of increasing supply?

Global cities

I am happy to report that I live in the world’s most globalized city, according to Foreign Policy. Why did they create a “global cities index“?

National governments may shape the broad outlines of globalization, but where does it really play out? Where are globalization’s successes and failures most acute? Where else but the places where most of humanity now chooses to live and work—cities. The world’s biggest, most interconnected cities help set global agendas, weather transnational dangers, and serve as the hubs of global integration. They are the engines of growth for their countries and the gateways to the resources of their regions. In many ways, the story of globalization is the story of urbanization.

I should note that I may have lost out by leaving the UK, home of the world’s best global cultural experience.

HT: Sabrina

A survey of organizations and trade

Added to my “to read” list: “Organizations and Trade” (pdf) by Pol Antrás and Esteban Rossi-Hansberg.

We survey an emerging literature at the intersection of organizational economics and international trade. We argue that a proper modelling of the organizational aspects of production provides valuable insights on the aggregate workings of the world economy. In reviewing the literature, we describe certain predictions of standard models that are affected or even overturned when organizational decisions are brought into the analysis. We also suggest potentially fruitful areas for future research.

It’s forthcoming in the first edition of the Annual Review of Economics.

Economics, not polemics

Avinash Dixit states the bloody obvious:

In the last 10 years, Krugman has achieved fame in a much larger arena with his columns in the New York Times. These offer strong views on economics and politics, and they have been harshly critical of the Bush administration on most issues. It is no wonder that they attract adulation from readers who share his views on these matters and hatred from the other side. The former delight in his Nobel Prize, and the latter are shocked and dismayed by it, but both these reactions are mistaken. The prize has nothing to do with the Op Ed columns and would have come to Krugman just the same if he had never written a single one of them. The prize celebrates his achievements in science, not in the policy arena.

Except it’s not so bloody obvious, it seems: “You don’t get the Nobel Prize in Economics for writing newspaper columns (as I’ve been trying to explain to my mother the last couple of days).”

Krugman, international trade, and facts

If I took the time to rebut every stupid comment that has been uttered in response to Krugman’s Nobel win, I’d have to quit my job, drop out of grad school, and stop blogging on any other topic. But here’s one I refuse to let pass:

Paul Krugman wrote some interesting essays in international economics theory (he is not noted for using facts), but began to put politics above economics ever since the 1992 presidential campaign –as shown in my 1994 review of his book, Peddling Prosperity.

That’s Cato’s Alan Reynolds.

While Krugman is an economist theorist, not an empiricist, how could one neglect Pop Internationalism, a collection of essays that use a small dollop of facts and basic arithmetic to rebut trade nonsense?

Bonus: A favorable review of the book from Cato’s Bill Nisakanen.

More Krugman

Two good stories on Krugman — one from yesterday and one from 1991.

The Chronicle of Higher Education has a nice article featuring commentary from Don Davis that exemplifies how most trade economists feel about the award:

That political chatter has some of Mr. Krugman’s colleagues worried that the value of his technical work in economics will be obscured.

“This news should surprise no one,” said Donald R. Davis, a professor of economics and international affairs at Columbia University, in an interview on Monday. “People have known for decades that Krugman might well receive the prize. I think there’s really a sense of delight within the profession today.”…

“It’s not that people were entirely unaware that increasing returns to scale could be a cause of trade,” Mr. Davis said. “But Krugman really provided such an elegant model that was able to encapsulate this idea. You could almost say that in the early work on increasing returns, we were working with hieroglyphs. They could communicate information, but they were very inelegant to work with. Krugman gave us an alphabet that you could then use to create great works of literature. Thousands upon thousands of papers have been written based on these models.”

A Critic of the Left and Right

An oft-noted irony of Mr. Krugman’s career is that even though he has emerged as a scourge of the Bush administration, his early popular writing on economics was largely devoted to criticizing his fellow liberals. In books such as Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations (W.W. Norton, 1994), Mr. Krugman railed against what he described as sloppy protectionist thinking on the left. (In a widely debated 1996 essay in The American Prospect, the left-liberal economist Robert Kuttner wrote, “The career of Paul Krugman epitomizes, if in extreme form, how the conventions of the economics profession work to block a resurgence of liberal activism.”)

But Mr. Davis said that Mr. Krugman’s outlook had not fundamentally changed. “He’s been very consistent throughout his career,” he said. “He says that markets have a role but that markets aren’t perfect. And when markets fail, government has a role. I think he’s been trying to head off mistaken ideas from both directions.”

The other piece of note is Avinash Dixit’s praise for Krugman upon his winning the J.B. Clark Medal. The full profile is worth reading, but here is a great description of Krugman’s style:

Here is Paul’s typical modus operandi. He spots an important economic issue coming down the pike months or years before anyone else. Then he constructs a little model of it, which offers some new and unexpected insight. Soon the issue reaches general attention, and Krugman’s model is waiting for other economists to catch up. Their reaction is generally a mixture of admiration and irritation. The model is wonderfully clear and simple. But it leaves out so much, and relies on so many special assumptions including specific functional forms, that they don’t think it could possibly do justice to the complexity of the issue. Armies of well-trained economists go to work on it, and extend and generalize it to the point where it would get some respect from rigorous theorists. In this process they do contribute some new ideas and find some new results. But, as a rule, they find something else. Krugman’s special structure was so well chosen that most of its essential insights survive all the extension and generalization. His special assumptions go to the heart of the problem, like a narrow and sharp stiletto. By contrast the followers’ work often resembles thoracic surgery, involving much clumsy breaking of ribs; sometimes it proves to be no more than an autopsy of the issue…

Our expectations about the US economy and the US government’s future economic policies may have been diminished as a result of our observation of recent economic performance and policies. But our expectations about Paul Krugman’s future economic research and writing have been greatly raised by our observation of his record so far. I am sure the Clark Medal is but one milestone of many to come in his career.

Krugman is notoriously parsimonious. Here’s an example from The Spatial Economy: