Dani Rodrik's weblog

What gives trade a bad name

... are statements like this from U.S. trade representative Susan Schwab:

“America’s economic future depends heavily on more free trade agreements like the one we are signing today with Korea,” Ms. Schwab said at a signing ceremony in Washington.

Does anyone really believe this?

Does Europe owe its institutional development to Ottoman Turkey?

Every Turkish schoolboy grows up learning about the multitudes of contributions Turkey has made to Western civilization. My favorite one, not in the textbooks strangely enough, is the croissant. The story goes that the croissant was first concocted by Viennese pastry chefs in celebration of the collapse of the Viennese siege by the Ottomans in 1683, with the crescent on the Ottoman flags serving as the inspiration for the design. Well maybe it is just a legend, but it sounds too good to reject outright ...

Here is a paper, by Murat Iyigun, with a much more important claim, namely that Europe owes its religious tolerance and ultimately the development of its secular institutions to the Ottomans. According to Iyigun, it is thanks to the military threat posed by the Ottomans that the Protestant Reform movement and its offshoots were able to grow and mature without getting crushed by the Catholic establishment. While arguments of this sort have been around, Iyigun is able to document a strong negative correlation between the incidence of Ottoman military campaigns in Europe and the occurrence of religious conflict within Europe.  In Iyigun's words:

Utilizing a comprehensive data set on violent conflicts for a two-century interval between 1451 and 1650, I demonstrate that Ottoman military engagements in continental Europe lowered the number and extent of violent conflicts among and within the European states themselves. The Ottoman-threat-cum-European-cohabitation effects were long lasting and quantitatively very significant: in the 200-year span between 1451 and 1650, when there were roughly 1.5 new conflicts initiated among the Europeans per annum and about 5.1 conflicts per year in total (including those that had begun at earlier dates), Ottoman military expeditions in Europe lowered the number of newly initiated conflicts between the Europeans by about 35 percent, while it dampened longer-running confrontations on the order of about 20 percent. The intensity of military engagements between the Protestant Reformers and the Counter-Reformation
forces (such as the Schmalkaldic Wars, 1546-47, the Thirty-Years War, 1618-48, and the French Wars of Religion, 1562-98) did depend negatively and statistically significantly on Ottomans’ military activities in Europe too: during the interval of time between the birth of Protestantism in 1517 and the end of the Thirty-Years War in mid-17th century, Ottomans’ military expeditions in continental Europe depressed the number of a Protestant and Catholic violent engagement by about 25 to 40 percent.

...

These findings indicate that the European periphery influenced its economic and institutional history in a novel and hitherto neglected fashion.

Between this and the croissant, you would think the EU would be a bit more hospitable to Turkey's membership aspirations. 

Paul Collier, Niall Ferguson, and Africa

Paul Collier's new book on Africa is reviewed highly favorably here by the prolific Harvard historian Niall Ferguson. Ferguson compares the work to recent books by Jeff Sachs and Bill Easterly, and judges it to be more successful than both. Collier is less saintly than Sachs but not as cynical as Easterly, and has real solutions on offer according to Ferguson.

The most controversial of those solutions is the call for Western intervention to prevent civil wars and maintain order in failing states. Here is Ferguson:

Reflecting on the tendency of postconflict countries to lapse back into civil war, he [Collier] argues trenchantly for occasional foreign interventions in failed states. What postconflict countries need, he says, is 10 years of peace enforced by an external military force. If that means infringing national sovereignty, so be it. 

At a time when the idea of humanitarian intervention is selling at a considerable discount, this is a vital insight. (One recent finding by Collier and his associates, not reproduced here, is that until recently, former French colonies in Africa were less likely than other comparably poor countries to experience civil war. That was because the French effectively gave informal security guarantees to postindependence governments.) Collier concedes that his argument is bound to elicit accusations of neocolonialism from the usual suspects (not least Mugabe). Yet the case he makes for more rather than less intervention in chronically misgoverned poor countries is a powerful one. It is easy to forget, amid the ruins of Operation Iraqi Freedom, that effective intervention ended Sierra Leone’s civil war, while nonintervention condemned Rwanda to genocide.

Ferguson himself has long been a proponent of benign imperialism, so it is not difficult to see why he likes this particular prescription. But it is hard not to keep in mind "the ruins of Operation Iraqi Freedom" when thinking about the efficacy and desirability of this option.

Nuggets from the Pew survey

The new Pew survey of global attitudes is full of interesting findings. Here is one that I think might be surprising. Respondents thought that the influence of China on their country is more positive than that of the United States in virtually all countries surveyed (South Africa and Mexico being the only exceptions). 

 

And note what has happened to opinions about the EU in Turkey:

which is not unrelated to the cartoon here.

Clive Crook's very astute observation

Reflecting on suggestions by Slaughter and Scheve and others that globalization's losers should be compensated by increasing the progressivity of the tax system and other reforms, Clive Crook lays bare a logical inconsistency in many arguments of this kind:

The connection between globalisation and middle-class stress is by now a commonplace. Mr Scheve and Mr Slaughter have taken it one step further by designing a policy that links them explicitly. Their approach seems sensible enough, until you think about it. Globalisation is not an end in itself. If it is failing to raise living standards for the great mass of the public, as the authors suppose, why rescue it in the first place? If you were running for office, you might wonder, why not promise more redistribution, if that is good for most Americans, together with less globalisation, if that is also good for most Americans? Many in Congress have exactly this combination in mind.

The authors answer that globalisation is a good thing overall, and quote the standard estimates of large whole-economy gains. But then they seem to accept that stagnant incomes for all but the very rich are a natural consequence of liberal trade. They talk of downward pressure on wages from the integration of China and India, from the outsourcing of services and so forth. “Given the lack of recent real income growth for most Americans, newfound scepticism about globalisation is not without cause,” they concede.

If globalisation is benefiting only a sliver of the richest people and impoverishing the rest of us, I say get those tariffs up, put those outsourcing chief executives in jail and make Lou Dobbs US trade representative. Later, we can talk about tax reform.

Clive Crook is pointing to the illogic of accepting on the one hand that globalization is a raw deal for the middle class, and arguing on the other that trade policies should not be part of the arsenal of tools with which you deal with the consequences. Clive Crook doesn't mention him by name, but one has to assume that one of his targets is his fellow FT-commentator Larry Summers, who has made middle-class malaise a big theme of his recent writings while also arguing that any restriction on increases in international trade would be very dangerous.   

Of course Clive Crook believes globalization has been beneficial to the middle class (and that all the worrying about how to make the middle class feel better is besides the point). He points to a paper by my colleague and friend Robert Lawrence, discussed here previously,which argues that there isn't a tight connection between wage trends in the U.S. and the ebb and flow of globalization. 

As much as I like Lawrence's paper though, I do not think it makes the strong case Crook would like to see made. It doesn't argue that globalization has made the middle class better off, and its analysis of globalization's impact is limited to one particular mechanism (the Heckscher-Ohlin channel on relative wages). My guess is that Robert Lawrence would say the jury is still out on the question. In fact, just after I wrote the previous sentence, I read the following in a piece he recently co-authored:

Today many American workers feel anxious—about change, and about weak or nonexistent income growth. These concerns are real, widespread, and legitimate. What role the forces of global engagement have played in this recent poor labor-market performance of most Americans remains an open question.

Interestingly, Lawrence's co-author on this piece is the very same Matt Slaughter (along with Grant Aldonas). The piece reprises the Scheve-Slaughter recommendations on the tax system along with others on adjustment assistance. I wonder what Clive Crook would make of that...

An MPAID blog from Liberia

A summer internship is a required part of the MPAID curriculum. One of our students, Molly Kinder, is doing her internship at the finance ministry in Liberia, and has started a fascinating blog from Liberia. Check it out for a great mix of pictures, anecdotes, and development economics.

The inescapable trilemma of the world economy

Sometimes simple and bold ideas help us see more clearly a complex reality that requires nuanced approaches.  I have an "impossibility theorem" for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.

Here is what the theorem looks like in a picture:

To see why this makes sense, note that deep economic integration requires that we eliminate all transaction costs traders and financiers face in their cross-border dealings. Nation-states are a fundamental source of such transaction costs. They generate sovereign risk, create regulatory discontinuities at the border, prevent global regulation and supervision of financial intermediaries, and render a global lender of last resort a hopeless dream. The malfunctioning of the global financial system is intimately linked with these specific transaction costs.

So what do we do?

One option is to go for global federalism, where we align the scope of (democratic) politics with the scope of global markets. Realistically, though, this is something that cannot be done at a global scale. It is pretty difficult to achieve even among a relatively like-minded and similar countries, as the experience of the EU demonstrates.

Another option is maintain the nation state, but to make it responsive only to the needs of the international economy. This would be a state that would pursue global economic integration at the expense of other domestic objectives. The nineteenth century gold standard provides a historical example of this kind of a state. The collapse of the Argentine convertibility experiment of the 1990s provides a contemporary illustration of its inherent incompatibility with democracy.

Finally, we can downgrade our ambitions with respect to how much international economic integration we can (or should) achieve. So we go for a limited version of globalization, which is what the post-war Bretton Woods regime was about (with its capital controls and limited trade liberalization). It has unfortunately become a victim of its own success. We have forgotten the compromise embedded in that system, and which was the source of its success.

So I maintain that any reform of the international economic system must face up to this trilemma. If we want more globalization, we must either give up some democracy or some national sovereignty. Pretending that we can have all three simultaneously leaves us in an unstable no-man's land.   

More wisdom from Martin Wolf

Martin Wolf outlines his proposals for the international financial system, as promised:

Is it possible to take advantage of the financial brain’s abilities, while limiting its capacity for irresponsible, short-sighted and destructive behaviour? What are the policy issues that we would be examining if we wanted to do so.

First, for essentially political reasons, we must re-examine the taxation of income and wealth.

Second, we should recognise that emerging and small economies have to manage their involvement with the global financial system cautiously.

Third, we must also realise that the mixture of floating exchange rates with a number of important pegged rates is creating huge distortions.

Fourth, we must look more closely at how monetary policy interacts with the financial sector and asset prices.

Fifth, we should also look once again at how well vast rewards are aligned with risk in financial markets.

Finally, we must encourage regulatory and fiscal authorities to achieve higher levels of co-ordination.

We will have to live with today’s financial markets, since policymakers would seek to curtail them only after a disaster. Even their critics should fear such a disaster. The task is, instead, to exploit the many benefits, while managing the risks. This will never be done perfectly. But it can be done at least tolerably well. The alternative is too awful to consider.

These all make a lot of sense. But do they go far enough? Stay tuned.

Sachs has advice for Zoellick

My former MPAID student Varad Pande refers me to a new piece by Jeff Sachs in Fortune.  Here is the gist of it:

[T]he core problem in Africa is not corruption but the lack of basic infrastructure and services. Like all poor regions (and rich nations like the U.S.), Africa has its corruption problems, but they do not explain its distinctively poor economic performance.

The causes are obvious to anyone who has spent a few days in African villages. There are almost no roads, electricity, doctors, nurses, fertilizers, high-yield seeds, and all the other things that constitute the first step out of extreme poverty.

These villages live at subsistence or below, trying to eke out survival on soils depleted of nutrients, with children dying of malaria and mothers and fathers dying of AIDS, and without the most rudimentary help of technology.

When poor American farmers lacked electricity, the U.S. established the Rural Electrification Administration in 1935 to provide low-cost credits to bring electricity to the countryside.

When India needed a Green Revolution in the 1960s, the Rockefeller Foundation brought high-yield seeds, and the U.S. government shipped massive amounts of fertilizer.

When China's countryside needed roads and electricity, the Chinese government, not the private market, did the job, and the World Bank helped with financing.

Yet when it comes to Africa, according to Washington's free-market ideologues, all those wonderful things are supposed to spring up by themselves, with markets coming to the rescue. And when those things don't arrive, since there is no way to pay for them, African governments are blamed for corruption.

As any junior IMF staffer could tell the bank in a heartbeat, the African governments do not have the fiscal means to invest in what's needed, and that would be true even if Mother Teresa were running the local treasury.

New bank chief Zoellick needs to tell his staff that their jobs depend on meeting the goals in Africa. Here are four areas where the bank can have a quick and dramatic success:

• It can help Africa raise food production at least 50 percent by 2010. Malawi introduced a voucher scheme to ensure that every farmer could obtain fertilizer and high-yield seed. This program could be implemented Africa-wide within two years. African governments are ready, and the Gates and Rockefeller foundations will provide valuable support.
• The bank can help Africa defeat malaria. By 2010 every sleeping site in malaria-transmission regions can be protected with a long-lasting bed net, and every village can be protected with first-line medicine. More than one million lives per year can be saved, with massive add-on effects on schooling and harvests.
• It can help Africa achieve electrification by 2015. It is a cruel myth that development without electricity is possible in the 21st century. Rather than helping countries ship their oil abroad and then remain dependent on wood for energy, the bank should be helping Africa develop its hydrocarbons to support regional power grids.
• The bank urgently needs to help Africa finance roads and rail upgrading, starting with a major highway (rather than a two-lane, broken- down road) linking the port of Mombasa in Kenya with Nairobi and Uganda, Rwanda, Burundi, and eastern Congo. A road and rail network would enormously expand trade between Africa and the world.

Seasoned practitioners not held back by ideology and posturing know how rapidly results can be achieved. The philanthropy Millennium Promise, which I helped start, has raised over $100 million in private funds for Millennium Villages. This demonstrates how rural life can be improved dramatically from one season to the next.

Sachs makes it all sound so easy, as if we have all the answers, and all we need is to put the money and the programs in place. I want to believe with all my heart that he is right, and yet most of what I know about development tells me that Sachs is approaching things from the wrong end--dealing with the symptoms of underdevelopment--lack of resources of various kinds--rather than its fundamental undrerlying dynamics.

Sachs does have a version of these dynamics, which is the idea that African nations are unable to grow out of poverty because investments in health, education, infrastructure, and technology are all subject to significant returns to scale at low levels of development. Hence in the absence of a coordinated big push in all these areas, these countries get stuck in a "poverty trap."

The trouble is that the evidence in support of generalized poverty traps is extremely weak. I am inclined to believe that the underlying constraints differ from country to country and therefore require a different sequence of reforms in different settings. In any case, without understanding the true dynamics I am afraid Millennium Villages will remain a success only as long as Sachs and the outside world keep  the spotlight shining on them.

Good news from the World Bank

Bob Zoellick is now officially in charge, and there are indications that he may put the fight against corruption where it belongs: among a long list of  challenges, which vary in how badly they constrain development, rather than at the very top of the list. This is Wolfensohn on Zoellick:

“He [Zoellick] understands that you have to return the bank to its main thrust, which is development on behalf of the poor.

“As one of the elements, you want to combat corruption,” Mr. Wolfensohn added. “But you can’t make the bank into the attorney general of the world.”

Well said, and particularly meaningful as Wolfensohn is the person who brought the fight against corruption to the Bank.