Economic Freedom of the World 2006

Though I was surprised to learn that William Easterly participated in the latest edition of the Economic Freedom of the World report, his chapter contains few surprises. In brief, he writes:

– Jeff Sachs and the poverty trap argument are a trip back to the 1950s and 60s.
– The Millennium Development Goals involve a lot of central planning.
– Poor countries have grown faster than rich ones.
– Economic freedom, GDP per capita, and manufacturing exports are all positively correlated. We can instrument for economic freedom to address reverse causality concerns.
– Foreign aid doesn’t boost growth. (Citation of Rajan & Subramanian)
– Meaningful accountability promotes success.

The report and the full dataset are available online. (Unfortunately, the data are only available at five year intervals prior to 2000, so you can’t go very far back if assembling annual panel data.)

Better Off Stateless?

“Better Off Stateless: Somalia Before and After Government Collapse” by Peter Leeson strikes me as a fun paper because its claims ought to spur some controversy and debate. The abstract:

Could anarchy be good for Somalia’s development? If state predation goes unchecked government may not only fail to add to social welfare, but can actually reduce welfare below its level under statelessness. Such was the case with Somalia’s government, which did more harm to its citizens than good. The government’s collapse and subsequent emergence of statelessness opened the opportunity for Somali progress. This paper uses an “event study” to investigate the impact of anarchy on Somali development. The data suggest that while the state of this development remains low, on nearly all of 18 key indicators that allow pre- and post-stateless welfare comparisons, Somalis are better off under anarchy than they were under government. Renewed vibrancy in critical sectors of Somalia’s economy and public goods in the absence of a predatory state are responsible for this improvement.

In the short term, no government at all may be superior to some forms of government. In the long term, would it be more difficult to transition from predatory state to sucessfully developing country or from anarchy to successful development? Which country would you bet on: Somalia or Zimbabwe?

(This paper by Tatiana Nenova and Tim Harford suggests that some Somali success depends upon the presence of governmental institutions in other countries, such as the Saudi banking network.)

Cleaning Up the Kichen Sink

I haven’t finished reading “Cleaning Up the Kitchen Sink” (pdf) by Francisco Rodriguez, but the first nine pages are compelling enough for me to pass it along anyway.

Rodriguez goes into the archives to revisit Mankiw-Romer-Weil and the models from which linear regression specifications are derived in growth theory. When authors toss in a vector of variables of interest in addition to the standard measures of initial GDP, human capital, etc, they almost always assume that the variables of interest (malaria, institutions, etc) are linearly related to growth. Of course, that doesn’t jive very well with good economic theory (for example, binding constrants and the theory of the second best). Rodriguez argues that the ad hoc introduction of quadratic terms and interaction variables is not a sufficient remedy.

What if the non-linearity is more complex than what can be captured by a set of simple quadratic and linear interaction terms? As I discuss below, if this is the case then most of the regressions currently estimated suffer from misspecification bias, making the type of inferences commonly drawn from their estimation invalid. Furthermore, the data requirements of estimating truly non-linear functions can be quite demanding and far outstrip the availability of data in currently existing data sets.

This problem is more than a theoretical curiosum. A systematic exploration of the theoretical foundations of the linear growth specification reveals that the set of assumptions necessary to justify fitting a linear function to the data is so restrictive as to practically make the linear specification the true theoretical curiosum. I suggest that the starting framework for an exploration of the growth evidence should be a specification that allows for a general set of interactions between the set of potential production function shifters.

[Hat tip: AdamSmithee]

Stiglitz v. Bhagwati

Dr. Joseph Stiglitz’s new book, Making Globalization Work, seems likely to trigger another round with Jagdish Bhagwati:

Attacking the idea of free-for-all markets in a superfluous debate with conservative purists only overshadows Dr. Stiglitz’s practical suggestions, like adding labor and environmental ministers to trade negotiations. [NYT]

The book is shipping now, so it seems that I will have to grab a copy soon.

Zedillo bashes PTAs

Ernesto Zedillo: “Every additional PTA will become one more obstacle to the universal and non-discriminatory trade liberalization that the world needs. PTAs have been more easily hijacked by special interests groups and are not resulting in really good instruments… [T]he present deals are little monsters that will be much regretted in the future.”

Sugar Protectionism

Since this post is the first google result for sugar protectionism, I’ll post a collection of better resources:

Mark Groombridge, “America’s Bittersweet Sugar Policy,” December 2001, PDF
Kim Elliott, “Big Sugar and the Political Economy of US Agricultural Policy,” April 2005, PDF
Jose Alvarez and Leo C. Polopolus, “The History of U.S. Sugar Protection,” June 2002, HTML
Omer Gokcekus, Justin Knowles and Edward Tower, “Sweetening the Pot: How American Sugar Buys Protection,” 2003, PDF

Please submit more links in the comments.

Regionalism vs Multilateralism: Empirical Research

One of the most interesting parts of Richard Baldwin’s most recent paper (pdf) is his historical narrative arguing that, contrary to some critics’ notion that PTAs exploded onto the international trade scene in the 1990s, “multilateral and regional liberalisation proceeded in tandem since 1947.”

He uses this history to argue that regionalism can be structured to complement multilateralism. In regards to the Uruguay Round, Baldwin writes:

Plainly the 1980s show no sign of unilateralism, regionalism and multilateralism being substitutes. 1986 saw i) the Uruguay Round launched, ii) a major step in European regional integration (the SEA), iii) a major step in North American integration (CUSFTA talks). The juggernaut approach explains this by noting the reshaping of the political economic landscape induced by trade liberalisation in the 1970s would have lower resistance from import-competing firms to MTNs and RTAs while the expansion of export sectors would have raised political support for both. Moreover, European and North American regional integration, the SEA and CUSFTA, would bolster trans-Atlantic discrimination and this heightened the attractiveness of an MTN to both parties.

Some empirical evidence suggests that regionalism and multilateralism are substitutes at the tariff line level, however. In “PTAs as Stumbling Blocking for Multilateral Trade Liberalization: Evidence for the US,” (CEPR) Nuno Limao examines the Uruguay Round of negotiations and finds:

The U.S. multilateral tariff reductions in PTA goods were smaller than those in similar goods not imported from PTA partners. On average an exporter to the U.S. that did not belong to one of its PTAs received about 52% the benefit (in terms of price increases) if it exported any PTA good instead of a similar non-PTA good. This effect is even stronger if the good was exported by all PTAs or was an important export for a PTA partner.

He has another paper with Baybars Karacaovah that finds similar results for the European Union in the last two GATT/WTO rounds.

A story synthesizing these two arguments might suggest that preferential trade has negative impacts upon third parties, which causes them to seek multilateral liberalization. But these MTNs are more successful in liberalizing product lines where trade diversion did not occur. In this story, regionalism does some damage, but it spurs more trade creation than diversion by reenergizing the multilateral talks.

What other available empirical research might flesh out our understanding of the relationship between regionalism and multilateralism?

Obsession with “competitiveness” lives on

Adam Posen’s FT op-ed earlier this month demonstrates the continued relevance of Pop Internationalism, which I recommended in my last post. Posen writes:

A dozen years ago Paul Krugman, the US economist, famously called competitiveness “a dangerous obsession” among US policymakers. In fact, in every decade, in all advanced economies, a focus on export competitiveness tends to erode living standards and distracts policymakers from a more beneficial emphasis on productivity…

A focus on export competitiveness usually leads to actively harmful policies, beyond simply wasted resources and rhetoric. If exports are the public criterion of economic success, policymakers can meet that goal only by self-destructive means: depreciating a country’s currency, thus eroding the purchasing power and the accumulated wealth of citizens; depressing wages in export sectors, either directly or through relative deflation vis-à-vis trading partners, thus cutting real incomes and domestic demand; subsidizing or protecting exporting companies, thus distorting investment decisions and locking in old technologies and businesses at the expense of new entrants; or promoting national champions, thus increasing both wasteful public spending and the costs to domestic households and businesses.

Paul Krugman – Pop Internationalism

I read Paul Krugman’s Pop Internationalism (1996) over the past two days. It’s well-written and a quick read. Krugman savagely demolishes bad arguments made by those that subscribed to “competitiveness” theories, thought that NAFTA would have massive impacts (good or bad) upon the United States, and made other errors. This short tome should be part of any international economics library. My only complaint is that, due to the book being a collection of previously published articles, some messages are repeated too frequently in the course of 220 pages.

Some may find the discussion of NAFTA, international competitiveness, and the Clinton administration quaintly dated. But one of the most important lessons in international economics (which you can learn from following Jagdish Bhagwati or reading Against the Tide) is that errors rear their heads again and again under guises that historically aware economists will recognize as old hat. For example, the competitiveness bug seems to have bitten Malcolm Gladwell.

There’s still much to learn from this classic collection of essays, and it’s under $8 including shipping.

“Unfair Trade” & IP (Old School Edition)

I thought that TRIPS brought intellectual property (arguably a non-trade issue) into the realm of international trade, but it seems that the uneasy marriage has a much older heritage in the United States: Smoot-Hawley, everyone’s favorite tariff legislation.

The ITC was established in 1916 as the U.S. Tariff Commission. Smoot-Hawley gave it the authority to review claims of “unfair trade practices” based on patent infringement. If a company with U.S. operations believes a competitor is importing a product that infringes on its intellectual property, it can bring a Section 337 claim to the ITC. An administrative law judge then hears the case, and he can issue an exclusion order barring imports of the infringing product for the duration of the patent. The order is also subject to the review and approval by the six-member, bipartisan ITC board.

Incredibly, all of this takes place separately from normal judicial proceedings on patent infringement or validity. Most of the cell-phone cases mentioned above are also in court on patent-infringement grounds, but these cases can take years and are subject to lengthy appeals. The ITC tries to discharge Section 337 cases in about a year, and will not wait for the courts. Once the ITC votes on the judge’s order, there is only one avenue of appeal: The President has 60 days to override the ITC’s order. If he doesn’t act, the import ban takes effect… [WSJ]

More at Against Monopoly.