Infants who export aren’t necessarily growing up

I just discovered another objection to the infant industry argument. In a 2002 paper, Donghyun Park and Jung Hur demonstrate that a protected firm’s ability to export is not necessarily evidence that it is reaping the dynamic gains (economies of scale and learning-by-doing) touted by import substitution proponents.

In this note, we use simple graphical analysis to examine whether exports per se are evidence of the success of an IS trade policy regime. Our analysis indicates that it is possible for an IS industry to export even without the dynamic effects associated with the infant industry argument, according to which a domestic industry protected under IS eventually grows up to become internationally competitive.

In our analysis, the IS monopolist becomes more efficient only in the very limited sense that it moves down a given average cost curve, which remains above the world price everywhere. However, there is no growing up in a more fundamental sense of the infant industry argument – i.e. the IS industry’s price becoming competitive with world price. Indeed, in our analysis, the IS industry faces little incentive to grow up.

Therefore, exports per se do not necessarily tell us about whether IS enabled an industry to achieve significant efficiency gains over time. In fact, we showed that protectionism and economies of scale can combine to render exporting profitable for an IS monopolist that inherently cannot compete in world markets. Our analysis provides some grounds for caution in viewing exports as evidence of successful IS.

APEC contains nouns

Peter Gallagher’s latest post is the third or fourth article that I have read this week to allude to Gareth Evans‘ quip that the Asia Pacific Economic Cooperation is “four adjective in search of a noun.” Regardless of opinions about APEC policies, analysts ought to stop repeating this grammatical error.

Asia is a noun. Cooperation is also a noun. Asia Pacific Economic Cooperation might be a clumsy or meaningless title (perhaps it should have been Asia Pacific Economic Cooperative?), but two of the four words are nouns.

Moreover, APEC hyphenates its name, so it reads “Asia-Pacific Economic Cooperation.” In that case there are three words, and one of them is a noun.

Foreign Investment: Correlation & Causation

I agree with Paul Staines of the Globalization Institute that foreign direct investment generally has positive effects. A good case can be made that foreign investors aid the growth of developing economies by introducing new competition, technologies, business practices, tacit knowledge, etc. However, the data cited by Staines in his latest post are insufficient to draw that conclusion.

The “rough correlation between the preponderance of multinationals operating in a given country and lower poverty indicators” does not imply causation. Lower poverty indicators likely correlate to greater foreign investment because many things that reduce poverty (credible governmental policymaking, an educated and healthy populace, transparent property rights, etc) also increase returns to investments. Does Staines want us to conclude that the United States was poor until a plethora of multinationals invested here?

My affinity to positive conclusions about the desirability of foreign investment in developing countries can’t override my instinct to point out that correlation doesn’t necessarily imply causation.

My Ongoing Hiatus

I apologize for the lack of posts over the last month. Without declaring an official hiatus, I’ve been neglecting the blog in order to focus upon my graduate school applications and some research work. I anticipate that the neglect will continue until Christmas.

If that leaves your appetite for trade and development blogging unsatiated, some of the best posts I’ve read lately have been from Jim at Our Word Is Our Weapon. Check him out.

APEC vs EU

Charles Finny defends APEC from attacks by Eurocrats, arguing that the Asian organization has positively contributed to multilateral liberalization while the EU did little to help.

But the ongoing positive role Apec has played in setting and determining the content of the global policy debate in several important areas is constantly overlooked. The list of contributions is extensive. I want to focus on three areas: non-agricultural market access; environmental goods and services; and fish subsidies. In all three areas, Apec has either delivered meaningful results, or is seen as setting the way for any outcome likely to emerge from the WTO Doha Round. [Bangkok Post]

For an in-depth comparison of the two approaches, check out Europe, East Asia and APEC by Peter Drysdale and David Vines.

Many Russians fear foreign investment

Pollsters say 80% of Russians are against any foreign investment in their country’s military industry, and between 66% and 69% believe foreign capital should be completely barred from the oil, gas, coal, ore and timber industries, other natural resource sectors, and the electricity power industry.

The VTsIOM polling center said one of its polls suggested that 51% of Russia’s population did not want foreign capital going into aircraft manufacturing, 46% into agriculture, and 42% into the food industry.
Some 39% want banks, investment companies, and the communications sector to be out of reach for foreigners.

Between 27% and 33% are opposed to foreign investment in transportation, construction, auto manufacturing, trade, advertising, and marketing. Between 46% and 51% have no objection to foreign investment in those industries but believe it should be subject to quotas.

Very small proportions of Russians are in favor of unlimited foreign investment: 16% are in favor of unlimited for-eign investment in auto manufacturing, 11% and 12% in trade, advertising, marketing, and construction, and a maxi-mum of 9% in other sectors.

VTsIOM said it had questioned 1,600 people in 46 Russian regions. [Interfax, 10.17.2005]

India: “Still can’t get the basics right”

Fortune has an excellent article on the messy state of Indian economic liberalization:

China’s economic miracle was achieved by getting the basics right–building good roads, educating women and young girls, loosening labor restrictions, and opening the economy to competition and foreign trade.

India, by contrast, is the global economy’s idiot savant. It excels at the impossible, turning out hundreds of thou-sands of brilliant engineers a year. Its software houses manage complex data across thousands of miles of undersea cable for the world’s most sophisticated clients. India has world-class business leaders and, unlike China, solvent banks. And yet India flubs the obvious stuff. The national roadway network is a shambles and the power grid even worse. Nearly a third of India’s population–and more than half its women–can’t read or write. India has moved grudgingly to lower tariffs and balked at turning money-losing state-owned enterprises over to the private sector. Red tape and corruption discourage foreign investment, as do restrictions on how firms deploy workers.

This bipolar development model is reflected in the crazy-quilt of wealth and squalor in cities like Mumbai, where billboards touting Mallya’s Kingfisher beer and Standard Chartered Bank’s investment-planning experts tower above sprawling slums, and urchins approach cars at gridlocked intersections hawking copies of Harvard Business Review. In Bangalore, executives visiting the immaculate campuses of software firms like Infosys and Wipro marvel that while their data can travel to the other side of the earth at the speed of thought, they must crawl along in bumper-to-bumper traffic for more than an hour to get back to their hotels.