Aid & Growth

Dani Rodrik says that the Rajan & Subramanian paper (pdf) on the impact of foreign aid (now forthcoming in the REStat) is “most comprehensive analysis to date of the cross-national evidence on the effect of aid and growth.” The verdict? There is little evidence that aid significantly impacts growth.

Did the US exceed its ag subsidy cap?

The WTO’s DSM is going to heat up a bit:

Brazil lodged its broadest attack against U.S. farm spending with a complaint at the World Trade Organization that may signal the start of a raft of litigation as hopes for an international accord dissolve…

The U.S. stayed below the $19.1 billion a year spending ceiling until 2001. Since then, the U.S. hasn’t provided spending figures to the WTO, Brazil says.

“Available public information indicates that the domestic support that the U.S. provided exceeded its commitment levels,” Brazil’s WTO ambassador, Clodoaldo Hugueney, wrote to his U.S. counterpart, Peter Allgeier.

I’ve seen scholarly work on this subject indicating that US payments have been below the allowed cap, so I do not know if Brazil has a strong case here.

Update: AP reports that the “United States spent only $11 billion on trade-distorting subsidies last year.”

Progress at the IMF?

An editorial (in French) from Wal Fadjri, a Senegalese newspaper, calling for rejection of the EU’s nominee for IMF managing director, Dominique Strauss-Kahn:

As a matter of principle, Africa should challenge the gentleman’s agreement between the U.S. and Europe, whereby the head of the IMF is a European and the head of the World Bank an American. This longstanding divvying-up of these positions-which is no longer justified-is outdated and should simply be abolished. The IMF is not France’s monopoly, even if it has managed it for 32 of its 52 years, and the IMF’s antidemocratic, despotic, medieval, and feudal constitution needs to be amended.

And the IMF is hit with English-language criticism by AEI’s Desmond Lachman:

The need for a serious external evaluation of the IMF and the World Bank would appear all the more pressing now at a time that both of these institutions need to restore their tattered credibility. The IMF is yet to shake off its many missteps during the Asian and Latin American currency crises some ten years ago, while the World Bank is presently reeling from its two years of mismanagement under Paul Wolfowitz’s leadership. And the continued practice of dividing the leadership of the World Bank and the IMF between the Americans and the Europeans has hardly done anything to restore the legitimacy of those institutions, especially among the Asian emerging market economies, whose weight continues to increase in the global economy.

How timely it would be to have an external evaluation of these institutions now on the eve of new management taking charge, when serious questions should be asked as to the correct long-term course that these institutions should be charting.

CGD’s Dennis de Tray is pleasantly surprised to see some progress:

Last Friday the IMF board announced that it would accept nominations… a first and essential step in opening up the process of selecting the IMF leader…

The announcement is a welcome if slightly amazing turn of events. I’ve worked at both the IMF and the World Bank, and came away from my Fund experience thinking this was an institution with an almost pathological aversion to change…

Does this announcement guarantee that the best man or woman will get the job? No, but it is a critical signal that at least some of the world’s leading nations understand that business as usual in the governance of the world’s premier international organizations is just not on.

Strauss-Kahn is still expected to win the post.

Motivations for development

Paul Collier argues against the emotional approach to development taken by some activists and NGOs:

To date policy towards the bottom billion has been driven predominantly by guilt: America’s guilt about slavery, Europe’s guilt about colonialism. Unfortunately, guilt is an appallingly bad basis for action. It leads into the headless heart: the belief that we should ‘atone’ by charity. But its worst effects are within the bottom billion: these small societies lack the intellectual scale to free themselves from our mental models…

Guilt has seldom been an effective driver of change: in the rich countries we are likely to get far more impetus from the tried and tested psychology of enlightened self-interest. A world in which the bottom billion continue to diverge from the rest of mankind bequeaths to our children a legacy of insecurity for which their pampered lives will make them ill-prepared.

Jumping straight to the finish line

I’m merely a student, while Grant Aldonas was US undersecretary of commerce for international trade from 2001-05, but he’s crazy if he thinks this is the way to jump-start Doha:

The answer lies in creating a new structure for the Doha development agenda that would yield real gains in trade, offer real help to the least developed countries and provide a significant incentive for further liberalisation. Towards that end, I would suggest… a “plurilateral” agreement among all WTO members willing to move directly to free trade on a global basis. To participate, members would have to eliminate all barriers to trade in goods and services, including agriculture, and immediately decouple all agricultural subsidies from production. What this would do is create a free trade core within the WTO, provide significant trade benefits to its participants that would ease approval of the overall accord back home and provide a significant incentive for non-participating WTO members to join as soon as they were ready to accept these obligations.

No way.

The other prongs of his plan are also desirable but far from likely to happen. For example, you won’t see a deal to harmonize the various preference schemes for LDCs, because those programs are as much about politics as development.

The other half of the cotton equation

Cotton subsidization is one of the West’s most egregious protectionist offenses, but John Baffes of the World Bank provides some important contextualization:

Cotton subsidies have received considerable attention during the past four years… four cotton-producing countries in West and Central Africa—Benin, Burkina Faso, Mali, and Chad—have requested that the Doha round of negotiations on trade liberalization contain financial compensation for WCA countries for as long as those Western subsidies remain in place. Brazil also brought a case to the World Trade Organization…

Western cotton subsidies should be abolished, but not much attention has been paid to another, perhaps more important, issue. Many African cotton-producing countries, especially in WCA, must reform their cotton sector…

[E]ven if cotton prices increase either as a result of elimination of subsidies or as a result of market forces, it will do no good to poor producers if such an increase is absorbed by bankrupt parastatals, debt-ridden cooperatives, or corrupt public officials unwilling to engage in serious reform efforts… the positive impact of the end of cotton subsidies on the welfare of West African cotton farmers will be limited unless it is accompanied by domestic reforms that should include privatization of the state-owned cotton companies and liberalization of the cotton trade.

Check out the short article, which is Cato’s latest Economic Development Bulletin (pdf), for discussion of six problems in the cotton sector that reformers need to address.

NBER highlights

Almost two weeks late, here are some NBER abstracts that caught my eye:

The Two Crises of International Economics – In this essay, we argue that key assumptions in international macroeconomic theory, though useful for understanding the economic relationships among developed countries, have been pushed beyond their competence to include relationships between developed economies and emerging markets. The Achilles heel of this extended development model is the assumption that threats to deprive the debtor countries of gains from trade provide incentives for poor countries to repay more than trivial amounts of international debt. Replacing this assumption with the idea that collateral is required to support gross international capital flows suggests that the pattern of current account balances seen in recent years is a sustainable equilibrium.

Zeros, Quality and Space: Trade Theory and Trade Evidence – Product-level data on bilateral U.S. exports exhibit two strong patterns. First, most potential export flows are not present, and the incidence of these “export zeros” is strongly correlated with distance and importing country size. Second, export unit values are positively related to distance. We show that every well-known multi-good general equilibrium trade model is inconsistent with at least some of these facts. We also offer direct statistical evidence of the importance of trade costs in explaining zeros, using the long-term decline in the relative cost of air shipment to identify a difference-in-differences estimator. To match these facts, we propose a new version of the heterogeneous-firms trade model pioneered by Melitz (2003). In our model, high quality firms are the most competitive, with heterogeneous quality increasing with firms’ heterogeneous cost.

Trade Growth under the African Growth and Opportunity Act – This paper explores whether one of the most important U.S. policies towards Africa of the past few decades achieved its desired result. In 2000, the United States dropped trade restrictions on a broad list of products through the African Growth and Opportunity Act (AGOA). Since the Act was applied to both countries and products, we estimate the impact with a triple difference-in-differences estimation, controlling for both country and product-level import surges at the time of onset. This approach allows us to better address the “endogeneity of policy” critique of standard difference-in-differences estimation than if either a country or a product-level analysis was performed separately. Despite the fact that the AGOA product list as chosen to not include “import-sensitive” products, and despite the general challenges of transaction costs in African countries, we find that AGOA has a large and robust impact on apparel imports into the U.S., as well as on the agricultural and manufactured products covered by AGOA. These import responses grew over time and were the largest in product categories where the tariffs removed were large. AGOA did not result in a decrease in exports to Europe in these product categories, suggesting that the U.S.-AGOA imports were not merely diverted from elsewhere. We discuss how the effects vary across countries and the implications of these findings for aggregate export volumes.

Is the US at fault for Doha?

Bhagwati and Panagariya blame America for Doha’s failure, citing its maximalist demands and “almost pathetic” offered concessions. Read the full piece.

In the comments section at VoxEU, Peter Gallagher objects to the authors’ argument that if India is asked to lower its bound rates sufficiently so as to lower its applied rates, then the US ought to do the same. Gallagher notes that the US bound rates on agricultural tariffs are nearly the same as its applied rates, but the relevant US policy instrument is agricultural subsidization – in which case the bound rate vastly exceeds actual payments to farmers. See this short note (pdf) by Kim Elliott for the relevant numbers – at present, the US offer wouldn’t reduce the level of total trade-distorting support.

India, whisky, and barriers to trade

India has announced that it will reduce its 550% tariff on Scottish whisky. The impetus? An Indian tycoon just bought Whyte & Mackay, one of the world’s largest Scotch whisky producers.

Alex Singleton criticizes the soon-to-be-gone tariffs:

Scotch producers are delighted, believing that they could see exports to India increase by a factor of four. Needless to say, this is exactly the opposite of what development campaigners would like to see. After all, whisky is an infant industry for India, and therefore needs “targeted protection”.

Back in the real world, targeted isolationism has had a dismal record over the past fifty years. Such isolationism breeds uncompetitive companies that fail to turn into profitable industries. It is much better for industries to be created that can actually compete in the here and now: they are the ones that really will grow into global players. Whisky is likely to be one such industry for India. Perhaps I haven’t been looking but I haven’t noticed Indian whisky on the supermarket shelves yet. I’m sure we’ll be seeing a lot more of it in the future.

Not so fast. You don’t see Indian whisky in the UK, but the problem isn’t Indian:

The term “western-style spirits” refers to products made in accordance with
internationally accepted industry standards (e.g., EU, WTO etc), which specify raw materials, aging,
level of alcohol by volume (abv), etc. Much of the whisky produced in India, for example, does not
qualify as “whisky” under the EU industry standards. The EU definition specifies that whisky has to
be made from cereals, at least 40% abv and aged for three years or more, whereas Indian whisky is
derived from molasses. [International Center for Alcohol Policies pdf]

I very much doubt that protectionism has hurt the development of the Indian whisky industry, considering the massive domestic market – Indians drink 570 million litres per year, making them by far the largest consumers of whisky.

While the Indian protectionism certainly deserved criticism – poor Kunal Doshi can only afford Scotch when drinking on his parents’ tab – the more relevant question now is whether the EU’s technical barrier to trade is reasonable consumer protection or unjustified nativism.