Rodrik on South Africa

Dani Rodrik says that outward-orientation would improve South Africa’s growth:

South Africa has undergone a remarkable transformation since its democratic transition in 1994, but economic growth and employment generation have been disappointing. Most worryingly, unemployment is currently among the highest in the world. While the proximate cause of high unemployment is that prevailing wages levels are too high, the deeper cause lies elsewhere, and is intimately connected to the inability of the South African to generate much growth momentum in the past decade. High unemployment and low growth are both ultimately the result of the shrinkage of the non-mineral tradable sector since the early 1990s. The weakness in particular of export-oriented manufacturing has deprived South Africa from growth opportunities as well as from job creation at the relatively low end of the skill distribution. Econometric analysis identifies the decline in the relative profitability of manufacturing in the 1990s as the most important contributor to the lack of vitality in that sector.

The policy prescription is a bit fuzzy, however:

Prices, costs, and productivity are the main drivers of manufacturing production and employment. Therefore putting manufacturing on a permanently steeper trajectory will necessitate working on these same levers. In particular, it will require reversing the decline in relative profitability which the econometrics tells us has been the primary culprit for the sector’s misfortunes.

PDF here.

Paulson’s China liason departs

MSNBC:

Hank Paulson this week suffered his first setback as US Treasury secretary after it emerged that the person he handpicked to run his new strategic economic dialogue with China would be quitting after less than a month in the job.

Deborah Lehr, a former White House official and trade negotiator who was Mr Paulson’s China adviser when he was chairman of Goldman Sachs, is returning to New York to spend more time with her family.

Her decision to step down – less than three weeks after she was appointed special envoy to the strategic economic dialogue and accompanied Mr Paulson to meetings with China’s president and prime minister – astonished China watchers in Washington.

Financial globalization is incomplete

Some stylized facts about financial globalization from Federal Reserve Governor Frederic S. Mishkin:

Although economic globalization has come a long way, in one particular dimension–finance–it is very far from complete. As documented in the superb book by Maurice Obstfeld and Alan Taylor, Global Capital Markets, financial globalization has made its greatest strides in rich countries. Gross international capital flows, which have risen enormously in recent years, move primarily among rich countries. The exchange of assets in these flows is undertaken to a large extent to enable individuals and businesses to diversify their portfolios, putting some of their eggs in the baskets of other rich countries. International capital is generally not flowing to poor countries and is thus not enhancing their development…

As Nobel laureate Robert Lucas has pointed out, this feature of international capital flows is a paradox: Why doesn’t capital flow from rich to poor countries? We know that labor is cheap in poor countries, and so we might think that capital would be especially productive there. Just think of how hugely profitable a factory might be in a country where wages are one-tenth of those in the United States. Capital should, therefore, have extremely high returns in such countries, and we should expect massive flows of capital from rich countries (where the returns on capital should be relatively low) to poor countries (where they should be far higher). In fact, there has been a big increase in the amount of capital moving to emerging-market economies in recent years, but capital primarily still flows from one rich country to another, where the returns on capital are similar.

Thus, financial globalization is far from complete, and that fact raises a set of questions. Should financial systems in developing countries become more integrated with the rest of the world? If so, what should be done to accomplish that integration?

Pan-Africa FTA

Andrew Mitchell, Shadow Secretary of State for International Development, will be speaking at Cato on October 20th:

Africa is one of the most protectionist regions in the world. Most imports, including life-saving drugs and medical equipment, continue to be subjected to high tariff and nontariff barriers. Moreover, African countries impose some of their highest tariffs on goods from other African countries. African trade liberalization could increase intra-African trade by 54 percent. It is hypocritical for African leaders to call for greater access to global markets while rejecting trade openness at home. Andrew Mitchell will explain why African governments should support a Pan-African Free Trade Agreement if they are truly serious about the benefits of trade liberalization.

If African governments were serious about the benefits, they probably wouldn’t confine themselves to a continental agreement. Why are advocates of liberalization investing energy in this idea?

[Does that 54% increase in intra-African trade represent trade diversion or trade creation? No idea, as the context of the calculation is unclear in the policy brief by Marian Tupy, and he obtained the figure through personal communication with a World Bank author.]

Stiglitz asks, EU answers, and what the heck is a BTA?

Joe Stiglitz has suggested imposing countervailing duties on the “hidden subsidies” provided to US firms by America’s non-participation in the Kyoto Protocol. The EU wants to do something like that:

Commission advisors are considering slapping a tax on imported goods from countries which do not impose a CO2 cap on their industry, according to a draft paper seen by European Voice (5-11 October). The paper will be presented to a top group of industrialists, member-state and civil- society experts who help the Commission shape policies in the field of environment and energy – the high-level group on competitiveness, energy and the environment. The idea, known in academic circles as a “border tax adjustment”, is understood to have emerged from expert discussions on long-term energy scenarios at a September meeting of the competitiveness sub-group.

Note that the Commission didn’t take Kyoto as the climate change gold-standard and decided to suggest slapping tariffs on imports from any country without CO2 caps. This means the EU can target nations that have weaker obligations under Kyoto:

Cembureau President Paul Vanfrachem welcomes the idea, saying that the tax would help offset the competitive disadvantage that the ETS forces on the European cement industry. “What we are seeing today is [cement] imports increasing a lot, especially imports from China where there is no carbon constraint,” says Vanfrachem.

Dan Drezner predicted China-bashing to be a likely outcome of declaring war on “hidden subsidies.”

Now, what the heck is a “border tax adjustment” and how does it differ from Stiglitz’s countervailing duty?

Brief definition: “Rebate of indirect taxes (taxes on other than direct income, such as a sales tax or VAT) on exported goods and levying of them on imported goods. May distort trade when tax rates differ or when adjustment does not match the tax paid.”

If you think “border tax adjustment” sounds ugly, you could use “tax adjustments applied to goods entering into international trade” as suggested by a GATT working party in 1970.

Here’s some more info (pdf; hat tip to Jonathan Alder):

Under the “destination system” of border tax adjustments (BTAs), traded goods are subject to the taxes of the importing (“destination”) country and exempted from the taxes of the exporting (“origin”) country. For instance, gasoline trucked from Toronto to Buffalo is exempted from
paying gasoline tax in Canada and subject to gasoline tax in New York, at the combined New York/federal tax rate. BTAs are a necessary part of a tax on national or in-state consumption, and are a nearly universal feature of sales, excise, value added and other taxes. Because BTAs are required for consistent treatment of a consumption tax base they are regarded as a normal part of the tax and not as a form of local favoritism…

BTAs should be distinguished from tariffs and other forms of industry protection. Energy-intensive manufacturers (e.g. basic chemicals, aluminum) already undertake large investments in developing countries that sometimes displace American production and jobs. Various factors make such investments attractive including lower resource costs and the prospect of winning large new markets. A BTA ensures that job displacement is not accelerated by the FCCC, but does not favor domestic over foreign production or otherwise alter underlying market conditions. Aluminum or ethylene production that already would have been shifted overseas, for example, will still be shifted. But it won’t be shifted because of climate protection policies.

Relevant literature on BTAs to counter non-participation in emissions permit trading schemes:

* Javier de Cendra “Can Emissions Trading Schemes be Coupled with Border Tax Adjustments? An Analysis vis-à-vis WTO Law” 2006
* R. Ismer & K. Neuhoff “Border Tax Adjustments: A feasible way to address nonparticipation in Emission Trading” 2004
* Philippe Quirion & Damien Demailly “Leakage from climate policies and border tax adjustment: lessons from a geographic model of the cement industry” 2006

Having learned what a BTA is about fifteen minutes ago, I have no opinion on this topic and will leave the punditry to others.

The G-20

Ever been unsure about the identity of the G-20 when someone mentioned it while discussing the international economy? That’s no surprise. As Alan Wood notes, there are two.

The group that involves countries making up 85% of global GDP: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea,Turkey, the United Kingdom and the United States of America. Plus the EU.

The group that negotiates on agriculture at the WTO: Argentina, Bolivia, Brazil, Chile, China, Cuba, Egypt, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines, South Africa, Tanzania, Thailand, Uruguay, Venezuela, Zimbabwe.

7 countries are members of both G-20s. One G-20 has 19 member countries (plus the rotating EU presidency). The other has 21 member nations.

The rich G-20 was institutionalized in 1999, while the agricultural G-20 only came into being in 2003. The rich G-20 was created as an extension of the G-7 after informal meetings of the G-22 and G-30.

It’s simple, see?

WTO rules on GMOs

Can the WTO rule on biotechnology issues like genetically modified foods without experiencing “mission creep” and becoming a judge of scientific debates? Ross Korves, who says that three decisions released at the end of last month “are critical for the WTO in establishing a rules-based system for handling trade disputes on biotech crops,” suggests that the WTO pulled it off:

The WTO panel made clear in its ruling that it was not the panel’s task to determine whether biotech crops are generally safe or if they were “like” their conventional counterparts. They also did not consider whether the EU’s product-by-product procedures for considering the safety of biotech crops were appropriate or judge the conclusions reached by various EU scientific committees as part of the approval process. The panel did seek advice from six scientific experts who submitted hundreds of pages of materials and spent two days with the panel and representatives of the two sides.

The WTO is not a standards setting body for biotech crops or any other products. That is left to groups like Codex. It also does not try to second guess the fine points of science and risk assessment. It focuses on how member countries follow the rules as set out in WTO agreements.

As trade talks increasingly concern non-tariff barriers, it’s important that the WTO be able to address their abuse without becoming a global regulatory agency. Korves’ article suggests that it is successfully doing so.

Development Tidbits

AdamSmithee points to two recent papers that question measures of corruption derived from opinion surveys:

Two recent papers suggest that the noise-to-signal ratio in indicators built on perceptions of corruption is likely to be extremely high.  Ben Olken uses physical and financial audits to measure levels of corruption across villages in an Indonesian road project and then compares this measure to the levels of corruption perceived by villagers… [T]heir answers were far more strongly correlated with factors such as the level of ethnic diversity in the village than with actual levels of corruption.

Using a pretty nifty instrumental variable, James Feyrer & Bruce Sacerdote argue that colonialism improved the performance of island economies:

We have argued for an “islands as experiments” approach where random variation in the colonial experiences of islands can be used to think about the long run effects of colonial history on economic performance. The most interesting fact in our sample is a robust positive relationship between the years of European colonialism and current levels of income. While some of this relationship could be driven by smart selection of islands by
colonizers, we suspect that part of the relationship is causal. When we instrument for colonization and settlement using wind patterns, we obtain coefficients on years of colonization that are identical to our OLS results.

While the basic results suggest that longer European colonial exposure is good for the modern inhabitants of the islands in our sample, there are a few interesting caveats that we can introduce. First, there is a discernable pecking order amongst the colonizers. Years under US and Dutch colonial rule are significantly better than years under the
Spanish and Portuguese.

Second, later years of colonialism are associated with a much larger increase in modern GDP than years before 1700.