Measuring regionalism

Richard Pomfret has a great article in this month’s edition of The World Economy discussing how to think about the prevalence of preferential trade:

The main problem with using counts of RTAs as measures of the increasing importance of regionalism is that, while some agreements are important, many RTAs are inconsequential. Clearly, all notified RTAs should not carry equal weight…

The numbers are inflated because RTAs which cover both trade in goods and trade in services (Australia-Thailand, Japan-Mexico and Panama-El Salvador) require MFN waivers under both GATT and GATS; such double-counting only occurs after 1995 when the GATS came into effect, which biases comparison of the numbers notified before and after the establishment of the WTO…

Counting RTAs is not just a poor measure of the extent of regionalism; it can lead to nonsensical conclusions about trends in the global economy due to the treatment of regional disintegration and integration. The replacement of a regional bloc by a web of bilateral or plurilateral agreements increases the number of RTAs, and by the counting criterion indicates an increase in regionalism. Conversely, the replacement of a network of minor RTAs by a single RTA can be interpreted as a decline in regionalism…

The main reason for the rapid increase in the number of RTAs during the 1990s was the proliferation of bilateral and plurilateral free trade agreements among countries of the former Council for Mutual Economic Assistance and among successor states to Yugoslavia, the USSR and Czechoslovakia… In sum, the increased number of RTAs in the 1990s and early 2000s was largely driven by a decline in regionalism and shift towards multilateralism on the part of two dozen formerly centrally planned economies…

Despite the increased attention being paid to regional arrangements, the hold of multilateralism is stronger than ever as practically all trading nations have now acceded to the WTO, with lower trade barriers and stronger trade dispute settlement procedures than ever before. Perceptions of WTO enfeeblement reflect a tendency of news reporting to highlight conflict rather than accord.

Full article (Blackwell Synergy journal access required).

Japanese industrial policy

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.

Heterogeneous firms, trade liberalization & "good jobs"

Don Davis & James Harrigan provide theoretical grounding for public worries in “Good Jobs, Bad Jobs, and Trade Liberalization”:

Globalization threatens “good jobs at good wages”, according to overwhelming public sentiment. Yet professional discussion often rules out such concerns a priori. We instead offer a framework to interpret and address these concerns. We develop a model in which monopolistically competitive firms pay efficiency wages, and these firms differ in both their technical capability and their monitoring ability. Heterogeneity in the ability of firms to monitor effort leads to different wages for identical workers – good jobs and bad jobs – as well as equilibrium unemployment. Wage heterogeneity combines with differences in technical capability to generate an equilibrium size distribution of firms. As in Melitz (2003), trade liberalization increases aggregate efficiency through a firm selection effect. This efficiency-enhancing selection effect, however, puts pressure on many “good jobs”, in the sense that the high-wage jobs at any level of technical capability are the least likely to survive trade liberalization. In a central case, trade raises the average real wage but leads to a loss of many “good jobs” and to a steady-state increase in unemployment.

NBER working paper.

Heterogeneous firms, trade liberalization & “good jobs”

Don Davis & James Harrigan provide theoretical grounding for public worries in “Good Jobs, Bad Jobs, and Trade Liberalization”:

Globalization threatens “good jobs at good wages”, according to overwhelming public sentiment. Yet professional discussion often rules out such concerns a priori. We instead offer a framework to interpret and address these concerns. We develop a model in which monopolistically competitive firms pay efficiency wages, and these firms differ in both their technical capability and their monitoring ability. Heterogeneity in the ability of firms to monitor effort leads to different wages for identical workers – good jobs and bad jobs – as well as equilibrium unemployment. Wage heterogeneity combines with differences in technical capability to generate an equilibrium size distribution of firms. As in Melitz (2003), trade liberalization increases aggregate efficiency through a firm selection effect. This efficiency-enhancing selection effect, however, puts pressure on many “good jobs”, in the sense that the high-wage jobs at any level of technical capability are the least likely to survive trade liberalization. In a central case, trade raises the average real wage but leads to a loss of many “good jobs” and to a steady-state increase in unemployment.

NBER working paper.

African Growth Prospects

Johnson, Ostry & Subramanian – “The Prospects for Sustained Growth in Africa: Benchmarking the Constraints” – NBER & IMF working paper, March 2007

I saw Simon Johnson present an early version of this paper — it’s very interesting.

IMF blurb:

Africa is experiencing its strongest growth in years. But for those who view Africa’s prospects through the perspective of the “deep” determinants of development—geography, institutions, and history—the outlook still seems somewhat bleak. The paper tries to assess Africa’s prospects by comparing Africa today with countries that were similarly weak in the past—in terms of their institutional development—and yet managed to escape from poverty.

The authors say the data suggest that these deep indicators, especially for a group of “promising” countries, are not much worse in Africa today than they were in much of East Asia in the early 1960s or in Vietnam and China around 1980. There are inherited institutional weaknesses in Africa—and internal conflict and social fragmentation remain concerns—but the East Asian experience demonstrates that some institutional weaknesses can be fixed. So the good news for countries seeking to escape their current poverty trap is that breaking away from their institutional legacy is possible because it has been done by others.

Creating a stronger and more dynamic manufacturing export sector is likely to be one of the keys to sustaining growth. To achieve this, though, reducing direct regulatory costs for exporters and avoiding real exchange rate overvaluation will be essential. And on these scores, the authors see risks going forward that were less of an issue for the East Asian escapees: commodity-based growth and sizable aid inflows that partly underpin the positive prognosis for Africa may impede institutional development and make it harder to avoid real exchange rate overvaluation. Sub-Saharan Africa’s escape from poverty, although certainly possible, may be more challenging than it was for East Asia.

An argument against TPA

Thomas Palley argues that we ought to let TPA lapse:

Over the last two decades the power of corporations has increased dramatically while that of labor has fallen. That power shift is reflected in the increased numbers of Washington K Street lobbyists working on behalf of corporations, which has increased corporate influence over policy and legislation. TPA plays into and amplifies this power shift.

Trade deals are negotiated by the office of the US Trade Representative (USTR), and then sent to Congress for approval. This negotiating process is stacked in favor of business…

Bad agreements pass because the political costs of voting them down on account of specific problems are perceived as too high. Moreover, TPA provides individual congressmen with political cover, enabling them to retain favor with corporate sponsors without having to explain to constituents their lack of action.

Palley’s analysis of the political economy of TPA for PTAs is compelling, though I’m confident that we disagree about which elements of PTAs have been undesirable. See Bernard Gordon on the Christmas tree effect for more thoughts on the Congressional role in PTA formulation.