Author Archives: jdingel

The free trade panacea

Reason‘s Ron Bailey reports:

Trade is THE solution to poverty. Throw in international labor mobility, and we’re well on the way to remedying any of the problems that money can fix—like controlling infectious diseases, providing electricity, clean water and sanitation, feeding people, educating women, and so forth. Or at least that’s what Kym Anderson, an economics professor at the University of Adelaide in Australia more or less asserted in his presentation on trade and migration on the third day of the Copenhagen Consensus 2008 Conference.

Anderson looked at a number of econometric modeling scenarios and calculated the cost and benefits that would obtain from full trade liberalization under realistic assumptions derived from the current World Trade Organization’s Doha Development Agenda negotiations. Anderson estimated that liberalization of global merchandise trade would mean an annual increase of $287 billion per year in global GDP, of which $86 billion would go to developing countries.

No.

Assume there are one billion poor people in developing countries. If all of the estimated benefits of liberalisation for developing countries accrue to them, their average gain is less than 30 cents per day. Unless almost all of the world’s poor are sitting right below the dollar per day poverty line, this won’t eliminate poverty. Moreover, Anderson and Alan Winters estimate that $70b of that $86b gain goes to middle-income countries like Brazil and Mexico, leaving only $16b for low-income contries, including India, which has a couple poor people (page 60 of their paper).

Anderson and Winters never say “THE solution to poverty” in their report. They use phrases like “contribute to reducing poverty” and “helpful in the fight against poverty.” I doubt that Kym Anderson was so careless as to say that the Doha round is “THE solution,” in which case Ron Bailey’s summary of what the economist “more or less asserted” is pretty inapt.

There’s a dangerous tendency amongst libertarians to believe that free trade is a cure-all. Not only does it never do harm, but it can fix any problem! Some seem to think that a bit more trade openness on the part of the United States and Europe would solve African development and make failed states rich. This is nonsense. But unless Kym Anderson horribly misrepresented his own research, Ron Bailey either believes nonsense or didn’t listen very carefully.

[Previous installments of bad Reason reporting on trade liberalisation available here.]

Banerjee: Against macroeconomics

Abhijit Banerjee isn’t too keen on macroeconomics and the emphasis on growth as a means to alleviate poverty:

The problem with this comes down to basic economics: The one thing that everyone learns in their first economics class is that it all comes down to where your marginal product is highest. Even if growth were the best way to reduce poverty, we economists might want to focus on poverty reduction through other means if we think that is where we have the highest marginal product…

[T]he illusion of commensurability: Big questions must have big answers. Growth is surely the biggest question that we economists tackle. Hence the evidence that can inform growth policy must be evidence about big things…

There are at least two senses in which this is misleading: First suppose the conclusion from the macro evidence is that reducing corruption is vital for promoting growth. But reducing corruption how? And what form of corruption are the most worth fighting?…

In the end, details matter too much for it to be possible to do effective growth policy without experimental/quasi-experimental data…

It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control. Maybe all that happens is that something goes right for once (privatized agriculture raises incomes in rural China) and then that sparks growth somewhere else in economy, and so on. Perhaps, we will never learn where it will start or what will make it continue. The best we can do in that world is to hold the fort till that initial spark arrives: make sure that there is not too much human misery, maintain the social equilibrium, try to make sure that there is enough human capital around to take advantage of the spark when it arrives. Social policy may be the best thing that we can do for growth to happen and micro-evidence on how to do it well, may turn out to be the key to growth success.

Easterly on the Growth Commission

If you’re overconfident about development, Bill Easterly pokes holes in your arguments. And if you’re modest, he makes fun of you.

The report of the World Bank Growth Commission, led by Nobel laureate Michael Spence, was published last week. After two years of work by the commission of 21 world leaders and experts, an 11- member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.

This conclusion is fleshed out with statements such as: “It is hard to know how the economy will respond to a policy, and the right answer in the present moment may not apply in the future.” Growth should be directed by markets, except when it should be directed by governments.

My students at New York University would have been happy to supply statements like these to the World Bank for a lot less than $4m.

Of course, Easterly also has a serious point to make:

What to do in a world of such unpredictability? There are some general principles and they do not require experts. Another Nobel laureate gave the crucial insight a long time ago – the answer is freedom for multitudinous individuals to figure out their own answers. Friedrich Hayek said: “Liberty is essential to leave room for the unforeseeable and unpredictable; we want it because we have learned to expect from it the opportunity of realising many of our aims. It is because every individual knows so little and … because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.”

The evidence for this vision is not found in those baffling fluctuations of growth rates, it is in the levels of development attained in the long run. Confirming Hayek, systems that give more liberty to individuals – featuring both more economic and political freedoms – are associated with much less poverty. The evidence for this comes from both history (for example old, despotic, poor Europe compared with modern, free, rich Europe) and cross-country comparisons (for example South Korea compared with North Korea, former West Germany compared with East, New Zealand compared with Zimbabwe). This alternative paradigm has a much smaller role for experts, because experts cannot direct or impose freedom from the top down (or else it would not be freedom).

The end of the “development expert” paradigm does not mean the end of hope for development. Development is al ready gradually ending poverty (global poverty rates have fallen by more than half in the past three decades) – not because of development experts such as those who wrote the World Bank Growth Commission report – but thanks to more freedom for more of the 6.7bn individual development experts alive today.

Against biofuels

C. Ford Runge and Benjamin Senauer attack ethanol in FA:

Although controversy remains over how much of the food price increase since 2006 can be attributed to biofuels, their effects cannot be overlooked. In 2008, 30 percent of the U.S. corn crop will be used for ethanol. Although economic growth in developing countries (especially India and China) and poor crop conditions in certain parts of the food-exporting world (such as Australia) are part of the explanation for rising commodity prices worldwide, neither offers constructive opportunities for policy redirection. By contrast, the panoply of subsidies, tariffs and mandates protecting the biofuels sector, especially in the United States and the European Union, is ripe for reform…

The policy response to these pressures, in both rich and poor countries, has not been encouraging. Rather than reducing the mandates, subsidies, and tariffs that buttress the ethanol industry, the U.S. government has larded new agricultural legislation in Congress with further subsidies and shifted blame to other countries (or to economists). The one token reduction came in the recent farm bill, which trimmed the ethanol subsidy from 51 to 45 cents per gallon–hardly a significant change…

Biofuels… [threaten] both food security and the natural environment. It is now time for governments to respond, not with more trade distortions and subsidies, but by ending the failed policies that have created an artificial industry that is emptying the stomachs and purses of the world’s poor.

Preference utilisation by EU trading partners

There’s a gap between trade preferences on paper and in practice. The preference margins have to be large enough that enteprises bother to use them. Remember Jagdish Bhagwati’s quip that Europe’s trading partners now enjoy least favored nation status?

In consequence, the EU’s MFN tariffs now apply only to five countries, with all others enjoying politically driven lower-tariff access under different terms to the EU under multiple PTAs, differentiated GSP (Generalized Scheme of Preferences), EBA (Everything but Arms) and other schemes. Evidently, MFN in the EU has now become LFN — the least favored nation tariff.

But practice differs:

Even so, in spite of the European Union’s expanding patchwork quilt of preferential arrangements, 74 percent of its trade remains on an MFN basis, according to the European Commission’s own estimates.