Does globalization reduce inflation? No, says Lawrence Ball.

Marcus Noland says industrial policy is failing Japan (pdf):

Japan faces significant challenges in encouraging innovation and entrepreneurship. Attempts to formally model past industrial policy interventions uniformly uncover little, if any, positive impact on productivity, growth, or welfare. The evidence indicates that most resource flows went to large, politically influential “backward” sectors, suggesting that political economy considerations may be central to the apparent ineffectiveness of Japanese industrial policy.

Rather than traditional industrial or science and technology policy, financial and labor market reforms appear more promising. As a group, Japan’s industrial firms are competitive relative to their foreign counterparts. Japan falls behind in the heavily regulated service sector. The problems are due less to a lack of industrial policy than to an excess of regulation. Japan may have more to gain through restructuring the lagging service sector than by expending resources in pursuit of marginal gains in the industrial sector.

Emmanuel tracks the continued obsession with competitiveness. Previous coverage here and here.

Q: What do you win if you achieve the “Robert Mugabe level of economic incompetence“?

A: Leadership of the UN Commission on Sustainable Development.

Wow.

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.

LA Times:

World Bank President Paul D. Wolfowitz violated his contract, broke the bank’s code of conduct and trampled on numerous staff rules in arranging a promotion and a series of raises for his companion, a bank employee, according to a scathing report by an internal committee investigating the controversy.

Citing “the damage done to the reputation of the World Bank Group and to that of the president,” the seven-member committee recommended that the institution’s board “consider whether Mr. Wolfowitz will be able to provide the leadership needed to ensure that the bank continues to operate to the fullest extent possible” in its mission to fight world poverty.

The report, delivered to the board and released Monday evening, also skewered Wolfowitz for “questionable judgment and a preoccupation with self-interest over institutional best interest.”

37 country directors ask the Bank to resolve the issue quickly.

WaPo:

The Bush administration and Democratic leaders have struck a compromise that would insert stricter labor rules into future trade treaties, potentially lending fresh momentum to the global effort to promote free trade… Under the plan, the trade deals signed with Peru, Panama and Colombia would have to be renegotiated with their governments before they can be revised and submitted to Congress for a vote, raising the possibility they could be killed by opposition in those countries.

I read the story as saying that this compromise is a deal to pass already completed trade agreements — it “does not apply to the president’s quest for an extension of his so-called fast-track authority.” But the lead paragraph implies that it has implications for Doha. The confusion ought to clear up when the compromise is actually announced.

UPDATE: Plenty of newspapers carried the story this morning. See Bloomberg and NYT.

Fredrik Erixon asks: “Some sources says labour and environmental standards should be invoked in trade deals, but does that only apply to future negotiations or also to already finished agreements that awaits Congress approval? Furthermore, some media sources mentions Doha in their reports, but does this deal contain a new TPA for the round as well?”

The deal isn’t concrete yet (Bloomberg: “It seems some of the details are still getting ironed out.”), but it’s certain that the current agreement only applies to Peru and Panama. Colombia and South Korea are being discussed. No TPA.

The deal may serve as a template for future discussions of trade, but it has no legal bearing on them. As far as I can tell, the newspaper accounts mention Doha because USTR Susan Schwab is saying that the deal will help her at the WTO negotiations, but I see little basis for that claim.

The World Bank President blog has been brought back to life to track Paul Wolfowitz’s troubles.

Reasons to be optimistic about the political economy of trade:

Wall Street. Wal-Mart and Wall Street. Those are the diffuse, weak, politically inept actors benefiting from current trade arrangements. We’d better be very careful to be sure someone stands up for them. Don’t forget the little guy.

Paul Collier, with whom I enjoyed lunch on Friday, has a new book out titled The Bottom Billion. He says that the great Sachs vs. Easterly clash has overinflated the importance of foreign aid in the discussion of how to improve the lives of the billion people living in countries that, without massive changes, will not eliminate poverty through growth in the next few decades.

Drawing upon the US experience in helping rebuild Europe after World War II, Collier identifies four relevant mechanisms: (1) foreign assistance, (2) trade, (3) security guarantees, and (4) governance. His policy suggestions are original, interesting, and likely to spur debate. He recommends trade preferences for Africa (pdf) to give them an advantage against Asian developing countries benefiting from agglomeration effects. Perhaps most provocatively, Collier suggests that the West offer external security guarantees to some troubled states — he’d prefer that you think of the British in Sierra Leone rather than the United States in Iraq.

Check out this short article (pdf) for an introduction to the book’s ideas.