Dani Rodrik's weblog

Sensible words from Paul Krugman

Paul Krugman tries to locate a sensible middle ground between anti-globalists and knee-jerk free traders:

Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.

Well said!

UPDATE: Greg Mankiw appears to be saying, in response, that "those who are worried about trade" do not deserve respect, because they ARE protectionists. Hmmm. Perhaps we can make more progress here if we stopped using blanket terms to characterize where people stand, and used real words to describe what their views are.

Rodrick is back

and talking about institutions and development (yet again) here.

Deconstructed by the media

I gave a talk yesterday in Istanbul at the Economic Research Forum of Koc University (sponsored jointly by TUSIAD, the premier business association in Turkey). The talk was on industrial policy, and the presentation can be found here for those of you who can read Turkish.

Knowing it was a sensitive subject and not wanting to detract attention from the topic at hand, I said nothing about the exchange rate. But one of the questions at the end directly asked me what I thought about the role of currency policy in Turkey. So I formulated what I thought was a moderate and diplomatic answer. "A more competitive currency would make an important contribution to industrial policies in Turkey," I said. "But," I added, "in view of Turkey's recent macroeconomic history, manipulating the value of the currency is a very risky strategy at the moment."

I was surprised to see this morning that the newspapers, without exception, had found the comment about the exchange rate the most newsworthy part of my presentation. The headlines were all about my comments about the currency. (Well almost all. The only remaining left-wing newspaper in the country used as its headline my negative comments on neo-liberal policies.)

Second surprise: Half the newspapers reported only the first part of my comments, while the other half reported only the second part. So if you were to read one newspaper, you would learn that I argued for a more competitive currency and that I had send a "thinly veiled message" to that effect to the monetary authorities. If you bought another newspaper instead, you would read that I had argued against any changes in the current exchange-rate policy and against "currency manipulation." If you read both, you would justifiably conclude that I was just downright confused...

The NYT doesn't get it on trade

The New York Times bemoans the lack of support that the existing trade regime gets from the field of Democratic presidential candidates:

Many Americans are experiencing economic anxiety. Wages for most workers are going nowhere. It is a sad fact that despite enormous gains in productivity over the past few decades, the wages of typical workers are only marginally higher than they were a quarter of a century ago. But throttling trade — say, by reconsidering existing agreements — would hurt a lot more people than it helped. There is scant evidence that trade has played a big role in holding down typical workers’ wages. There is abundant evidence that it has contributed substantially to America’s overall economic growth. It offers American producers access to foreign markets. It multiplies choices for producers and consumers. Foreign competition spurs productivity growth at home.

Trade, like technological change, can produce wrenching dislocations that hurt some workers. But trade barriers are not the proper tool to deal with these changes. What is needed is a bold strategy to rebuild a functioning safety net, deploying some of the vast wealth this nation has gained through globalization to assist those hurt by the forces of economic change. This will allow Americans to embrace globalization, rather than fear it.

Here's what's wrong with this argument:

1. It automatically equates any desire to reconsider trade agreements and take a breather on new agreements as "protectionist."

2. It fails to recognize the ways in which technology and globalization interact to contribute to unequalizing trends in incomes, taking refuge in the defensive statement that "There is scant evidence that trade has played a big role in holding down typical workers’ wages."

3. It follows up this statement with "There is abundant evidence that it has contributed substantially to America’s overall economic growth," ignoring what every student of trade learns, which is that large gains from trade are possible only of there are also large amounts of income redistribution.

4. In portraying the conflict as purely one over incomes, it overlooks what is the greatest strain in the present regime of globalization--namely, the incompatibility between the scope of markets (straining to become global) and the scope of regulatory institutions (still national).

5. And as a consequence, rather than accept the need to rethink the existing rules of the game, the editorial takes refuge in the same stale recommendations that every trade liberalizer has been offering for the last quarter century at least--more safety nets, better training, and more progressive income taxation.

I do think those items in the NYT's policy agenda have an important place on the policy agenda. My earlier book Has Globalization Gone Too  Far?  was largely about the need for a serious social-insurance  complement to the trade agenda. But it is also time to recognize that the WTO rules need to become much more flexible to provide a better balance between international trade and domestic regulatory and other policy priorities--in other words, to assure domestic electorates that their values and preferences are not being sacrificed to the demands of some globalization agenda constructed, in any case, by a narrow elite.

UPDATE: Although much more restrained, Paul Krugman too has worries that his editors may not have gotten things quite right. But his doubts seem to be based on the much greater share of imports coming from developing countries in GDP, compared to a couple of decades ago. I never quite understood why these volume indicators are important in a world where prices and competition get determined at the margin. But I look forward to Paul's new paper and to see where he ends up.

How "The Office" would play at Harvard

Graduate students at Harvard's Department of Government ("Political Science" to the rest of the academic world) have put together a video skit which adapts the British series "The Office." It's called The Department, features many of its leading lights, and is very funny. The subject: a takeover of the Department of Government by the Kennedy School of Government. Among other things, you get to see the high regard in which Harvard's political scientists hold the Kennedy School.
Which, not so incidentally, has just rebranded itself the "Harvard Kennedy School" with the acronym HKS. Goodbye KSG, hello HKS. Like HBS and HLS, see.
But returning to the skit, some doctoral students are obviously way too talented to be doing a Ph.D...
(Thanks to Jeff Frieden for forwarding the video.)

Isn't the WTO just so amazing?

"The US must do more to eliminate billions of dollars in illegal subsidies to its cotton farmers" writes the FT. Who says?  A dispute resolution panel of the World Trade Organization. And guess what: the U.S. may well grumble and choose to appeal, but in the end, it will have to act. Just as it did on earlier occasions, when it had to bring its tax regime and environmental regulations into line with WTO rules following similar procedures.
Whether you like it or not, the WTO is the only international organization in existence that actually makes the U.S. do what it would not otherwise have done on its own. No other organization has such power. I would love it if somebody would come up with a sensible story as to why the U.S. has ceded so much power in trade, while zealously guarding its sovereignty and right to unilateral action in every other domain.

The (mis)use of ICAs

If the term ICA does not mean anything to you, you have not been paying much attention to development policy in recent years. The acronym refers to Investment Climate Assessment, and it has been the latest rage at the World Bank. It is essentially a survey of enterprises that asks a host of detailed questions about both the characteristics of their operation and the main constraints they face. The Bank now has a new Investment Climate Unit that maintains and analyzes these surveys, which have been carried out in more than 30 countries.

In the words of the Bank:

Work to improve the investment climate is recognized as a key pillar of World Bank Group efforts to promote economic growth and poverty alleviation in developing countries. ICAs provide a standardized way of measuring and comparing investment climate conditions in a country; replacing a number of varying and sometimes ad hoc methodologies of the past. They are envisioned by the World Bank Group’s Private Sector Development Strategy as a systematic means to “allow i) better identification of the features of the investment climate that matter most for productivity and hence income growth, especially for poor men and women, ii) tracking of changes in the investment climate within a country, and iii) comparison of countries or Regions within countries.”

As the quote makes clear, these surveys are used increasingly to diagnose the main constraints facing firms and to identify policy reform priorities. If, for example, firms in country A complain most about the cost of finance while in B they complain about a skill shortage, this is taken as an indication country is constrained by poor access to finance while country B is constrained by poor human capital.

Sounds reasonable enough, right? Unfortunately, it’s not so straightforward. Inferences of this kind are quite likely to be wrong, and policy priorities based on what an existing sample of firms reports as major headaches are almost certainly biased.

To see why, you need to think in general-equilibrium terms and understand that the type of firms and operations that exist in an economy already reflects that economy’s constraints. In particular, the more binding the constraint with respect to a certain trait, the less likely it is that firms that depend on that trait will survive and prosper. And those firms that populate the sample will be those that either do not depend on that trait or have found some special way of getting around it. If I have little need for, say, public infrastructure, I am unlikely to report that its sorry state is a big deal for me. After all, if I depended on public infrastructure, I would not have lasted long. And this even if public infrastructure is the true binding constraint for the economy in the sense that a major improvement would unleash significant new entry and investment.

Or think of it this way. Whether the lack of X is a big headache for firms depends both on the severity of the constraint associated with X in general and on the importance of X to existing firms. As the constraint becomes more severe, the first factor becomes more important while the second becomes less. The net effect is ambiguous.

You may think this is all academic hairsplitting, but it’s not. Consider South Africa for example. A lot of people think that one of the most severe constraints that the economy faces is the high cost of labor (in dollar terms). This constraint finds reflection in a very high unemployment level and the weakness of the non-resource based tradables sector. Yet when the World Bank carried out an ICA recently, it found that firms complained mostly about lack of skills and about macroeconomic instability.

I think the explanation is that the structure of South Africa’s private sector already reflects the fact that one does not make money by operating a labor-intensive activity. So instead what you have is a bunch of skill- and capital-intensive enterprises in finance and other service industries, as well as in manufacturing, complaining about what matters not to the economy as a whole but to them specifically.

The bottom line? Surveys can be immensely useful if used intelligently, but identifying binding constraints requires a lot more than just asking firms.

Good economists, bad fact-checking

Thee distinguished authors, Will Baumol, Bob Litan, and Carl Schramm, have a new book called Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity. With such a title, I should have read it a long time ago. Alas I didn't, and therefore missed out on an interesting boo-boo, which John Marangos has brought to my attention.

In a chapter called "What Drives Economic Growth" Baumol, Litan, and Schramm write:

Rodrik, a noted critic of the original Washington Consensus, proposes moving in a very different direction: augmenting Williamson’s initial list with another ten factors that he believes are central to growth. Table 2 lists Rodrik’s ten additional policy prescriptions” (emphasis in the original).

I propose what? The authors leave the reader (here and the ensuing discussion) with the distinct impression that I am a proponent of the Augmented Washington Consensus, just as John Williamson was a proponent of the original Washington Consensus. Not so, of course. Far from endorsing this enlarged agenda, my purpose in drawing it up (as a summary of where I felt policy advice had moved) was to bemoan its lack of realism and relevance the needs of developing societies.

Even more curious still, the authors follow up with criticisms that, ahem, sound quite familiar, to these ears at least: that the Augmented Washington Consensus gives policy makers no sense of priorities, laundry lists are in any case not very useful, and one should avoid the same blueprint for all countries.    

This has left me wondering how Baumol et al. could have ended up writing what they did. Three possibilities: (i) I am very bad at expressing myself; (ii) Baumol et al. have an exquisite and wicked sense of irony; or (iii) a research assistant was given a bit too much freedom and three very busy authors had other things on their mind when they did the final proofreading.

John Williamson has often complained that ideas not in the Washington Consensus--such as capital-account opening--were mistakenly attributed to him. I feel a bit more empathy for him now. 

I will be glued on TV this Sunday

The Premier League is having its tightest race for the top spot in years, and this Sunday the four top teams are matching up in two killer games: Liverpool v. ManUtd and Arsenal v. Chelsea.  I am luckily in Turkey, which means I can watch both games on local TV (free!).

Here is how the BBC presents the recent performance of these teams:

which is proof that even sports journalists now use Excel. 

Devoted readers of this blog know who I am rooting for.

And now on video...

The IMF has put up a video of a presentation of my book and of the discussion that followed. I hate watching myself speak, but I hope not everyone else feels the same way. (Via Marshall Jevons, oddly enough)

Incidentally, the best part of the event, I think, was the question posed by Ted Truman, which had to do with the degree to which my approach differs from an intelligent application of the Washington Consensus. It should be towards the very end, assuming they put up a complete video of the event.