Author Archives: jdingel

Can the WTO "transform nations"?

Former GATT DG Peter Sutherland says that the WTO has transformative powers:

The power of the WTO to aid national transformation is easily forgotten. All too often, many developing countries measure their success in the WTO’s Doha Round of trade negotiations by the extent to which they avoid obligations to open up their economies. And in polite conversations in Geneva, the potential of WTO disciplines to encourage radical market, institutional, and regulatory reform is a politically incorrect topic. It is the countries that have joined the WTO over the past decade that have drawn the most benefit from global trade rules. Older members, which did not need to negotiate their entry, have probably gained the least.

The WTO has changed the world in the past decade by welcoming China. And if it has changed national fortunes, in Cambodia and Saudi Arabia, for example, it is thanks to its accession procedures. Compared with the terms of bilateral free-trade areas, the terms of WTO membership amount to a revolution. The process is now lengthier than ever. China applied to the WTO’s predecessor (the General Agreement on Tariffs and Trade, or GATT) in 1986 and joined the WTO in 2001, Cambodia applied in 1994 and joined in 2003, and Saudi Arabia joined in 2005 after 12 years of preparation and negotiation.

Why do governments put themselves through such trials to enter what was once tagged a rich man’s club? The answer might simply be to get rich. This is trite, and it cannot explain the efforts by China or Saudi Arabia, where the opportunities for getting rich have long existed. In fact, a better explanation is that at a certain point political leaders understand that fundamental change is necessary, or unavoidable, and that it cannot be achieved without support from the outside. They need a catalyst; the WTO provides it. Change often means confronting vested interests, reducing the role of the state, reforming institutions, and taking on corruption. Change also means shaking up the private sector by encouraging competition, setting entrepreneurs free from government controls, and ensuring efficient and affordable services. In an era of broadening and deepening globalization, small or struggling economies thrive only in an environment that generates opportunity and supports entrepreneurship. Much of what the WTO does is, in fact, about helping achieve good or better governance.

Nowhere is the WTO’s power to transform nations more evident than in its accession process.

Against financial globalization

Dani Rodrik and Arvind Subramanian want to stem financial globalization:

If the risk-taking behaviour of financial intermediaries cannot be regulated perfectly, we need to find ways of reducing the volume of transactions. Otherwise we commit the same fallacy as gun control opponents who argue that “guns do not kill people, people do”. As we are unable to regulate fully the behaviour of gun owners, we have no choice but to restrict the circulation of guns more directly.

What this means is that financial capital should be flowing across borders in smaller quantities, so that finance is “primarily national”, as John Maynard Keynes advised. If downhill and uphill flows are both problematic, capital flows should be more level.

But how is such a levelling-off of flows to be achieved? In the current context, the source of liquidity is large current account surpluses in the oil-exporting countries and east Asia, especially China. Reducing these should be a high policy priority for the international community. Two concrete actions – one for each source of liquidity – suggest themselves.

First, some variant of petrol tax in the main oil-importing countries (including the US, China and India) is essential to cut demand and reduce oil prices and hence the current account surpluses of oil exporters. That such measures should be taken for environmental reasons or that they would reduce the size of sovereign wealth funds only adds to their attractiveness. Second, some appreciation of east Asian currencies is necessary to reduce their surpluses. Even though undervaluation is a potent instrument for promoting growth in low-income countries in general, at this juncture self-interest on both sides calls for an orderly unwinding of current account imbalances…

Financial globalisation has not generated increased investment or higher growth in emerging markets. Countries that have grown most rapidly have been those that rely least on capital inflows. Nor has financial globalisation led to better smoothing of consumption or reduced volatility. If you want to make an evidence-based case for financial globalisation today, you are forced to resort to indirect and speculative arguments.

It is time for a new model of financial globalisation, one that recognises that more is not necessarily better. As long as the world economy remains politically divided among different sovereign and regulatory authorities, global finance is condemned to suffer deformations far worse than those of domestic finance. Depending on context, the appropriate role of policy will be as often to stem the tide of capital flows as to encourage them. Policymakers who view their challenges exclusively from the latter perspective will get it badly wrong.

Mark Thoma has Frederic Mishkin’s contrary view.

Addendum: See the discussion at Martin Wolf’s forum. William Easterly says “To say that there are crises because of international capital flows is not very meaningful; it is like saying there are recessions because of GDP.” Emmanuel argues that “the genie of freer capital flows escaped from the bottle after the collapse of the Bretton Woods system and cannot be put back.”

Economists are tired of trade bashing

Here comes the (academic) backlash! Lawrence MacDonald tires of the pandering in Ohio:

It was perhaps inevitable but it is nonetheless disappointing to see the Democratic candidates for president engaged in such energetic trade bashing… Of course the stakes are high in Ohio and Texas (and even in Rhode Island and Vermont, which also vote on March 4). But it is precisely when the stakes are high that we would hope that candidates for president show their mettle. Obama in particular tells voters he prefers truth-telling – pointing out to Detroit automakers the dire need for higher auto-fuel economy standards, for instance. It’s too bad that he and Senator Clinton aren’t giving us similarly plain talk on the challenges of globalization, and what should and shouldn’t be done about it. In recent years global trade has helped to lift 100 million Chinese from poverty—the greatest reduction in poverty in the history of the world—and through cheap imports helped to hold down inflation, too. Would America be better-off if this had not happened?

Over at Vox, Willem Buiter and Anne Sibert dissect Obama’s Patriot Employer Act:

If the Patriot Employer Act proposal is anything to go by, we are in trouble if Obama wins. The legislation would provide a tax credit equal to one percent of taxable income to employers who fulfill the following conditions:

· First, employers must not decrease their ratio of full-time workers in the United States to full-time workers outside the United States and they must maintain corporate headquarters in the United States if the company has ever been headquartered there.

· Second, they must pay a minimum hourly wage sufficient to keep a family of three out of poverty: at least $7.80 per hour.

· Third, they must provide a defined benefit retirement plan or a defined contribution retirement plan that fully matches at least five percent of each worker’s contribution.

· Fourth, they must pay at least sixty percent of each worker’s health care premiums.

· Fifth, they must pay the difference between a worker’s regular salary and military salary and continue the health insurance for all National Guard and Reserve employees who are called for active duty.

· Sixth, they must maintain neutrality in employee organising campaigns.

Only the last of these conditions does not raise serious issues…

Companies ought to decide the location of their headquarters and their domestic and foreign employment levels without being subjected to fiscal incentives. It is also unenforceable. Foreign branches of domestic companies, whose workers count as employees of the parent, would be changed to subsidiaries, whose workers no longer count as employees of the parent. Companies ever headquartered in the United States would be sold to shell companies or shut down and immediately reopened with a different name and legal identity, headquartered abroad. Let Commerce Department lawyers try to use corporate DNA fingerprinting to determine the ancestry of these new corporations! Unfortunately, idiotic legislation that is unenforceable is not harmless – it breeds contempt for laws and institutions…

The Patriot Employer Act seeks to transfer wealth from the truly downtrodden of the world to a limited number of favoured US workers: mainly those in once dominant manufacturing industries that have lost their global competitive edge. It is breathtaking hypocrisy to object to the often appalling conditions of work and employment in developing countries and emerging markets, including sweatshops and child labour, while at the same time trying to prevent the operation of the normal and effective mechanisms for remedying these deplorable circumstances: foreign direct investment, outsourcing, off-shoring and all other manifestations of free trade.

Sen. Barack Obama’s proposal is reactionary, populist, xenophobic and just plain silly. It is time for him to stop pandering and to show the world that hope and reason are not mutually exclusive. Instead of increased protectionism, the United States might increase its competitiveness by sensible investments in infrastructure and education.

Somehow I doubt these objections will alter the candidates’ campaign strategies.

Update: The Economist blog defends Obama: “This bill is much less bad than it could be, primarily because the restrictions it contains are optional… There is a case to be made that Mr Obama is the most economist-friendly candidate out there… This bill is bad, but it’s not dangerous. It’s far less offensive than many of the anti-trade, anti-immigration proposals seen elsewhere in the campaign.”

Flows, not stocks, of poverty

Anirudh Krishna notes that while there is a lot of research characterising the stock of poor people, there isn’t much work on the flows into and out of poverty.

Here’s a table from a recent presentation (pdf) by Professor Krishna.









Escaped povertyBecame poorChange in poverty
Rajasthan11%8%3%
Gujarat9%6%3%
Andhra14%12%2%
West Kenya18%19%-1%
Uganda24%15%9%
Peru17%15%2%
North Carolina23%12%11%

Studies that focus on changes in the level of poverty mask a lot of “steady-state” turnover. Such churning has a lot of implications for human welfare and policy effectiveness:

Because escaping poverty and falling into poverty are caused by different factors, looking only at the figure for net change will not help to develop appropriate policy responses. The net change in poverty over any period of time is obtained by subtracting one causal stream (escape) from another and separate causal stream (descent). It does not as such have an independent causal significance.

Rich country doctors’ stupid moral claims about poor country doctors

Pablo spots stupidity:

Rich countries are poaching so many African health workers that the practice should be viewed as a crime, a team of international disease experts say in the British medical journal The Lancet…“The resulting dilapidation of health infrastructure contributes to a measurable and foreseeable public health crisis,” the article said. “The practice should therefore be viewed as an international crime.”

If anyone contributing to a phenomenon that might impede economic development is a criminal, we’re going to need a few more jails. Michael Clemens has already refuted this brand of moral nonsense:

“Ethical recruitment”, the mis-named practice mentioned in the BBC article of taking steps to block the hiring of African professionals, treats Africa as a homogenous mass because it applies to all countries indiscriminately.

If you think that limiting the movement of Ghanaian doctors is justified by the fact that Ghana doesn’t have enough doctors, ask yourself: Does Ghana have enough entrepreneurs? Does it have enough engineers? Does it have enough wise politicians? The answer is ‘no’ across the board, so the logical conclusion of this sort of thinking is that we will somehow develop Ghana if we stand at the airport and prevent all Ghanaians with any kind of skill from leaving, preventing them from accessing the very high-paying jobs to which most of us living in rich countries have access by birthright alone. That is ethically problematic at a minimum, as well as ineffective — trapping entrepreneurs in Ghana would not produce an efflorescence of investment.

In addition to being ethically questionable, the Lancet’s claim is factually incorrect. Clemens’ post also explains that the international movement of health care professionals is not a binding constraint on improving African health.