Dani Rodrik's weblog

Does the food price crisis enhance the case for self-sufficiency?

The rise in food prices and the costs it generates have been aggravated, some say, by policies of import liberalization and subsidy removal which the World Bank and economists advocated around the developing world in the 1980s and later.  If developing country policies supporting food crops had not been dismantled, this argument goes, poor people in these countries would not have been left in the throes of volatile world market forces and they would not have suffered as much recently.

A Bloomberg news story cites the plight of Honduran farmer Fidencio Alvarez:

Honduran farmers like Alvarez can't compete in a global marketplace where the costs of fuel and fertilizer soared and rice prices doubled in the past year. The former breadbasket of Central America now imports 83 percent of the rice it consumes -- a dependency triggered almost two decades ago when it adopted free-market policies pushed by the World Bank and other lenders.

The country was $3.6 billion in debt in 1990. In return for loans from the World Bank, Honduras became one of dozens of developing nations that abandoned policies designed to protect farmers and citizens from volatile food prices.

...

Rice farmers in Honduras were protected by the highest import tariffs in Central America when former president Rafael Callejas took office in 1990 with the economy stalled. The trade barriers that helped the country meet more than 90 percent of domestic demand were dismantled under an agreement for a World Bank loan in September that year, allowing cheaper imports to flood the market.

The requirements for the loan included eliminating import restrictions and surcharges and reorganizing the agricultural finance system, according to Eurodad, a network of 54 European non-governmental organizations that was granted access to the World Bank's loan database to monitor loan conditions.

Prices paid to farmers fell by 13 percent in 1991 and 30 percent more in 1992, according to the Food and Agriculture Organization in Rome.

In August 1993, the World Bank advised Honduras to adopt a second round of economic changes as part of another loan, according to Eurodad. Those conditions included eliminating all price controls and cutting tariffs further.

``Remaining trade and price controls should be eliminated,'' bank officials said in a 1994 internal report. ``The program of privatization of state silos should be completed; and the use of a grain reserve for price stabilization should not be reinstated.''

The report's author, Daniel Cotlear, now a World Bank economist for Latin American and the Caribbean, declined to comment for this story.

The bank pushed the policies because food prices fell in real terms for at least two decades, and few economists expected that to change, said Mark Cackler, manager of its Agriculture and Rural Development Department. Free trade and open markets remain the best path to competitiveness, he said.

I must say that I do not quite understand the argument of those who criticize the earlier liberalization. It seems to me odd to fault the World Bank for advice some 15 years ago to eliminate import protection--so that domestic prices could come down at the time--while at the same time complaining about high prices now, even with the benefit of hindsight.  If developing countries had all kept their import protection, the global supply of food would have been lower today, not higher. (That is because import protection would have led global production to be reallocated from efficient exporters to inefficient importers.) If you are for self-sufficiency, you must be willing to live with high prices.    

Unless that is you believe in a combination of dynamic learning effects with externalities, in which case temporarily high prices may be worth it because they result in low prices eventually. But it would be hard to make this case for food crops.

So the answer to the question in the title seems to me to be "no".

In defense of Larry Summers

My good friends Devesh Kapur and Arvind Subramanian (along with Pratap Mehta) have written a piece in the FT which takes Larry Summers to task for having expressed views on reforming globalization with which I am broadly in agreement.  They write:

The liberal economic order of the last several decades was premised on two assumptions. First, that the proliferation of prosperity across countries was a good thing. Second, there would be winners and losers but, on balance, a majority of people in both developing and developed countries would benefit. Mr Summers now appears to be questioning both assumptions. He has not stated outright that the proliferation of prosperity is undesirable but his ­columns do suggest that globalisation creates competition for America.

I think there was a third element in the liberal economic order of the postwar period, which is the essence of its success.  And that is the idea that international economic arrangements would leave enough room for nation states and governments to strike their own particular domestic economic and social bargains.  This is the compromise of "embedded liberalism," as my colleague John Ruggie has called it.  This compromise lay at the root of the phenomenal success of the Bretton Woods regime, and its piecemeal abandonment is the chief cause of the troubles of globalization today.  I see Summers' argument as a recognition of this fact.   

In effect Kapur et al. have fewer problems with the message than with its bearer:

The problem Mr Summers identifies, the hyper-mobility of capital, was an outcome that he and the US actively promoted. Attracting foreign capital was one of the raisons d’être of the Washington Consensus-based reforms. Developing countries were forced to change their intellectual property laws. At the US Treasury, Mr Summers was a leading proponent of capital account liberalisation by developing countries. Having swallowed those bitter pills of intellectual property protection and capital mobility as a necessary price for a better future, developing countries are now told that those medicines cause problems that need more – in this case protectionist – medication.

But they also worry that Summers has opened the door to protectionism, whereas the remedies to the ills of U.S. workers, they say, are to be found mostly at home (through better social programs and progressive taxation). 

I don't know.  Yes, we need better social programs. But we also need better international rules.  I think it does the cause no good to throw the "protectionist" label around whenever someone expresses doubts about the current rules. For my part, I celebrate the defection of Larry Summers from the camp of globalization's cheerleaders.     

What you say and where you sit

German president Horst Köhler has some strong words about international financial markets:

Global financial markets have become “a monster” that “must be put back in its place”, the German president has said, comparing bankers with alchemists who were responsible for “massive destruction of assets”.

In some of the toughest comments by a leading European politician since the start of the subprime crisis , Horst Köhler – a former head of the International Monetary Fund – called for tougher regulations and the reconstruction of a “continental European banking culture”.

Mr Köhler singled out excessive executive pay, the focus of much public resentment against top managers, as a factor in the subprime crisis and accused bankers of acting irresponsibly.

“The complexity of financial products and the possibility to carry out huge leveraged trades with little [of their] own capital have allowed the monster to grow…also responsible [is] the grotesquely high compensation of individual finance managers.”

International financial markets are a monster that must be put back in its place? Bankers as alchemists? Tougher regulations on finance?

Now he tells us... I don't recall anything of the kind when he was running the IMF, do you?

There are better ideas than Doha

by Kevin P. Gallagher[1], guest blogger

Negotiators continue to work desperately to achieve a breakthrough in the World Trade Organization’s Doha Round. Their goal is to get an agreement by the end of 2008. Developing countries should pull the plug on this moribund round until rich countries can agree to a new framework that lives up to Doha’s promise to be a “development round” that favors poorer countries.

As rich country leaders try to rally negotiators for yet another “make-or-break” deadline in what has become the most imminent agreement in history, developing country negotiators should remember why the proposals on the table deserve to be sent back to the drawing board. According to the World Bank and other institutions, the current deal would bring welfare gains to developing nations of just $16 billion or 0.2% of GDP (less than a penny per day per person in 2015), reduce poverty by just 2.5 million people (less than 1%), bring tariff losses of at least $63 billion, worsen developing countries’ terms of trade, and curtail the policy space necessary for developing countries to deploy effective development policies.

The poverty of the current negotiations suggests that it is the moment to take a “time-out” from trade negotiations. During the respite, developed countries should demonstrate their commitment to making the world trading system more fit for development. The following are five steps toward that end.

1. Implement prior WTO rulings – The United States and Europe should agree to honor WTO rulings that have found their subsidies for cotton and sugar to be in violation of existing trade rules under the prior agreement. This would give a tangible boost to farmers in West Africa and Latin America and send a strong signal to developing countries that developed nations are willing to honor the rules of the WTO.

2. Address commodities issues – Rich countries should take seriously the proposal by many African nations to tame global businesses that demand unfair prices for resources used in farm production and reap billions in profits on the sale of final products. African nations have made numerous proposals during the round to this end, specifically to make room for international supply management schemes to raise prices and to curb the oligopolistic behavior of large foreign commodity firms. If the Doha Round is to foster development, such proposals should be at the center of the discussion.

3. Recognize commitment to Special and Differentiated Treatment – Negotiators should recognize the Doha principle of “special and differentiated treatment” for poorer nations. Developed nations should roll back patent laws that impede poorer nations from manufacturing cheaper generic drugs. They should also allow poorer countries to exempt staples of their local economies such as corn, rice, and wheat from deregulation, as part of Doha’s stated commitment to protect “Special Products” important for rural development, food security, and rural livelihoods.

4. Make up tariff losses and adjustment costs – International institutions such as the International Monetary Fund (IMF) and World Bank should step in and help developing nations cover the costs of adjustment such as tariff losses and job retraining until the proper policies can be established. The IMF’s Trade Integration Mechanism is already in place for such purposes, but it leaves little room for incorporating costs of adjustment and the Fund is often criticized for tying further reforms to adjustment policies.

5. Moratorium on North-South regional and bilateral trade agreements – These deals exploit the asymmetric nature of bargaining power between developed and developing nations, divert trade away from nations with true comparative advantage, and curtail the ability of developing countries to deploy effective policies for development.

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[1] Kevin P. Gallagher is a professor of international relations at Boston University and research associate at the Global Development and Environment Institute (GDAE), Tufts University. This guest blog is drawn from a new policy brief by Gallagher and Timothy A. Wise, also from GDAE. For a link to the brief (and citations to all studies mentioned here) see: http://www.ase.tufts.edu/gdae/Pubs/rp/RISPolicyBrief36DohaMay08.pdf

Italian doldrums

I am off to Milan this afternoon, first to talk to students at Bocconi university, and then to take part at a panel in a public conference on Governing Globalization. So I have been reading about recent economic performance in the EU, especially within the Eurozone, which will complete its first decade at the end of this year. 

To me the EU is the most impressive achievement of international economic statecraft in the second half of the 20th century.  But clearly not everything is hunky-dory, and Italy's performance of late has been particularly disappointing.  I found the chart below, from one Bruegel's publications, particularly striking: 

The chart reveals an important reason behind Italy's poor performance: a large real exchange rate appreciation. Compare this for example to Germany, where significant real depreciation (an increase in external competitiveness) has stimulated export growth and has been an important driver of recent growth.

What is surprising about this of course is that it wasn't supposed to be this way. These countries are all in the Eurozone, and they share a common currency. Nonetheless, inflation patterns have diverged. If the Eurozone was a country rather than a loose grouping of countries, workers would be migrating en masse from Italy to Germany. It's not clear that there are similar equilibrating mechanisms within the Eurozone.

(What about Ireland in the picture above, some of you may ask. Ireland has experienced both an appreciation and an export boom.  Well, that is what is called an "equilibrium real appreciation": the real exchange rate movement is the result of export performance, not the other way around.)

More on the Nordic model

The Center for European Studies at Harvard is hosting a conference on "The Nordic Model: Solutions for Continental Europe’s Problems?" today and tomorrow.  Here is the program and the papers. 

Growth Diagnostics for South Africa

The South African National Treasury has just put on its web site all the papers that were completed during a two-year project that I was involved in (along with a long list of other economists and social scientists).  The papers run the whole gamut from straightforward research exercises to detailed policy recommendations.  If you want a summary of the main results and recommendations, read this piece by Ricardo Hausmann.

In the press statement accompanying the release of these papers, the Treasury notes:

The research papers do not necessarily reflect government’s views, nor has government adopted or rejected any of the recommendations made by the Panel. Government also notes that there is no universal recipe or set of policies for a successful growth strategy. Whilst government has been debating, and will continue to debate the issues raised in the research, the process of responding to the papers and recommendations will benefit from a broader public debate. At their last meeting with members of Cabinet on 19 July 2007, the President requested that the papers should be made public to encourage a broader debate on shared growth. It is with this objective in mind that the papers are now being released for further dissemination by the public in general and the economic community in particular.

To facilitate the broader debate, Government is planning a major workshop on the report, between the international panel, government officials, local academics and economists, policy researchers and various stakeholders. This workshop is planned for 17 or 18 June 2008 (subject to confirmation). It is hoped that this workshop will also encourage local economists and academics to prepare response papers in order to stimulate the broader public debate. In this respect, economic departments at SA universities and research institutions will be encouraged to convene workshops later in the year on various aspects raised in the research papers, where such local papers can be presented.

This effort to distill the outsiders' views through the experience and knowledge of locals is extremely important and it is exactly what should happen whenever a government asks foreigners for advice.  I am happy that the South Africans are following this approach. 

Of course, I will be also very happy if they ultimately find our recommendations of some use! 

The $64 million question, now on video

Here is the video of a talk I gave last month at the annual meeting of the Turkish-American Scientists and Scholars Association (TASSA).  The title of my talk: Why Do Some Countries Remain Poor While Others Grow Rich?  The answer: I wish I knew.

Rob "Indiana" Jensen

Through Chris Blattman I learn that Freakonomics has anointed my former colleague Rob Jensen the Indiana Jones of economics.  Rob has a really funny account of his adventures--together with co-author Nolan Miller--in the search for that elusive treasure, the Giffen Good:

About five years ago, I was using a large, publicly available data set of Chinese households to explore the link between income and health. My colleague Nolan Miller walked into my office, saw what I was doing and asked, half as a joke, if I’d looked for a Giffen good.

I looked at my data, and sure enough, there it was. Higher rice prices in southern provinces of China were associated with higher rice consumption. The same held in northern provinces with wheat (things like noodles). We giggled like idiots, and quickly wrote up the results in a short paper.

But then the ground began to rumble as a giant boulder rolled towards us: The Identification Problem.

Which then led Rob and Nolan to carry out a field experiment in China--one of the best of its kind in my view in that it uses theory explicitly to guide the experiment.  Read the rest of Rob's account for the full story.  Read also Chris Blattman's account of his adventures with Rob.

Unlike the real Indiana Jones, Rob is extremely good in the class room too.  He regularly embarrassed me and the rest of the MPAID faculty--except for Nolan who does equally well--by pulling the highest teaching evaluations imaginable.

UPDATE:  Nolan tells me that it was the "persistent nagging" of a first-year MPAID student that got him thinking about real examples of Giffen goods in the first place.  Rarely do you see the benefits of our students in such direct ways: from questions in the classroom to a research project that took several years to complete, to a major publication in AER, and to a paper that will be in every introductory economics textbook for decades...

If the Danes can do it, why can't others?

Bob Kuttner spends some time in Denmark and has wise things to say about the welfare state in Denmark and advanced countries in general:

Reading Adam Smith in Copenhagen -- the center of the small, open, and highly successful Danish economy -- is a kind of out-of-body experience. On the one hand, the Danes are passionate free traders. They score well in the ratings constructed by pro-market organizations. The World Economic Forum's Global Competitiveness Index ranks Denmark third, just behind the United States and Switzerland. Denmark's financial markets are clean and transparent, its barriers to imports minimal, its labor markets the most flexible in Europe, its multinational corporations dynamic and largely unmolested by industrial policies, and its unemployment rate of 2.8 percent the second lowest in the OECD (the Organization for Economic Cooperation and Development).

On the other hand, Denmark spends about 50 percent of its GDP on public outlays and has the world's second-highest tax rate, after Sweden; strong trade unions; and one of the world's most equal income distributions. For the half of GDP that they pay in taxes, the Danes get not just universal health insurance but also generous child-care and family-leave arrangements, unemployment compensation that typically covers around 95 percent of lost wages, free higher education, secure pensions in old age, and the world's most creative system of worker retraining.

Does Denmark have some secret formula that combines the best of Adam Smith with the best of the welfare state? Is there something culturally unique about the open-minded Danes? Can a model like the Danish one survive as a social democratic island in a turbulent sea of globalization, where unregulated markets tend to swamp mixed economic systems? What does Denmark have to teach the rest of the industrial world?

These questions brought me to Copenhagen for a series of interviews in 2007 for a book I am writing on globalization and the welfare state. The answers are complex and often counterintuitive. With appropriate caveats, Danish ideas can indeed be instructive for other nations grappling with the enduring dilemma of how to reconcile market dynamism with social and personal security. Yet Denmark's social compact is the result of a century of political conflict and accommodation that produced a consensual style of problem solving that is uniquely Danish. It cannot be understood merely as a technical policy fix to be swallowed whole in a different cultural or political context. Those who would learn from Denmark must first appreciate that social models have to grow in their own political soil.

At the heart of the Danish model, Kuttner says, is the idea known as flexicurity.  What this means, in part, is that in Denmark there are simply no restrictions against laying off workers other than the requirement of advance notice. But: 

What makes the flexicurity model both attractive to workers and dynamic for society are five key features: full employment; strong unions recognized as social partners; fairly equal wages among different sectors, so that a shift from manufacturing to service-sector work does not typically entail a pay cut; a comprehensive income floor; and a set of labor-market programs that spend an astonishing 4.5 percent of Danish GDP on initiatives such as transitional unemployment assistance, wage subsidies, and highly customized retraining.

In the U.S. by contrast, "spending on all forms of government labor-market subsidies -- of which meager and strictly time-limited unemployment compensation makes up the most part -- is about 0.3 percent of GDP."

The focus on economic security also enables a remarkable degree of consensus and enthusiasm on free trade.  Denmark is probably one of the few places in the world where you will find, as Kuttner did, trade unionists arguing that industry should engage in more outsourcing!

If you want to learn from and adopt the Danish model, Kuttner says, you cannot do it on the cheap.  The trade adjustment or wage insurance remedies that are circulated in the U.S. context do not include

the other key elements that make flexicurity both a political and a policy success. Most seek to buffer the dislocations of trade on the cheap. But the Danish model cannot be understood as a strategy merely of "compensating losers" or even of reinforcing political consent for free trade. It is part of a far broader national commitment to maintaining a highly egalitarian society in which there are no bad jobs and to the use of ongoing labor-market subsidies to create a highly skilled and dynamic work force as the essence of global competitiveness. The other northern European nations have their own successful variants of active labor-market policy, but most of the proposals outside Scandinavia that invoke the Danish model would appropriate the flexibility without the security. None is politically serious about the necessary scale of public outlay or social collaboration.

Kuttner's bottom line is that the Danish model is too specific to Denmark to be exported wholesale.  But, as he hastens to add, the ideas in it are simply too good to ignore.