Dani Rodrik's weblog

Be a man and take it on the chin

... is Ricardo Hausmann's advice to monetary and fiscal authorities in the U.S.

I like especially the opening sentence:

The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis.

I wonder who Ricardo has in mind by the "same voices." Well, I don't actually. It's pretty clear...

Teaching blues

I just looked at my teaching evaluations for my international trade course this Fall, and it was a bit like taking a cold shower.  Frankly, I was expecting a big improvement from previous years, after the work I had put into redesigning it. But it wasn't to be.

Looking at the detailed comments, I find that most students were quite pleased with the course and the lectures. But there was an undercurrent of dissatisfaction relating to a number of issues.  I was generally judged to be inaccessible outside the classroom (probably fairly so).  The course needs more policy applications, said some.  And we need more assignments along the way to make sure we are learning the material, said many. (I am not kidding... This is a bunch of MPAID students after all.) Most significantly, it appears, many students found me somewhat intolerant of diverse views and disrespectful. We are afraid to ask "dumb" questions, wrote one person.

Now that last charge comes as a surprise. I am the "many recipes" guy after all. But there must be something to it, as it is the second time I get this kind of complaint--and these students are not a bunch of complainers.

It is clear that I need an attitude adjustment. There will be a new me on display here.

How not to make friends

What is the chance that I responded positively to this?

Epiphanies of the weekend

Having spent the weekend at an event organized by a major bank for its hyper-wealthy clients--don't get the wrong idea, I was just part of the entertainment--I came away with much greater awareness of two important dividing lines in the world economy today.

The first is between the entrepreneur and the financier. The super-rich get that way by one of two routes. They either inherit their wealth from their parents, or they build a business from scratch and then sell it off to a larger entity. In either case, the financiers play an important supporting role: they help maintain and grow the wealth generated by the family business and they arrange the deals that allow the multi-billion dollar takeovers.  But it was evident at the meeting that they get no respect from the entrepreneurs. Entrepreneurs view financiers as people with no understanding of business, who are as likely to ruin them as help them grow. We generate the jobs, the wealth, and take all the risk, they say. If we fail, no-one bails us out. Financiers, on the other hand...

The second dividing line today is between the pessimism that pervades the U.S. and Europe and the pervasive optimism of entrepreneurs from emerging (emerged?) nations.  The financial crisis that is still growing has left business people from the advanced nations in a very dark mood. Whether a recession is around the corner, or has already arrived, no-one in the first world thinks 2008 is going to be a good year. It is all shades of pessimism.

But if you talk to businessmen (alas they were all men) from India, Russia, China, Turkey or the Gulf States, you would hardly know that we have just experienced a credit market freeze-out in the West. They are all ho-hum about it. Yeah, we could shave a point or two off our growth estimates, they say, if the U.S. goes into a deep recession, but it's no big deal--and can you pass the wine please. Indians are saying we don't rely that much on exports anyhow; the Chinese are relying on their growing middle class; and others have their own stories.

Is this the famous "decoupling" at work? Will this be the beginning of a new era of the world economy, with several key developing countries, the BRICs and the N-11 (using the faddish terms that attach to them), gaining real ascendancy over their Western counterparts?

Probably not. But something interesting is going on.  

Capital flows analogy of the day

How do you deal with capital flows when they are so prone to boom-and-bust cycles and generate (roughly once a decade) financial crashes with painful economic consequences?  The mainstream answer is that you do not regulate capital flows directly--through capital controls such as financial transactions taxes or deposit requirements--but you rely instead on prudential regulation of financial intermediaries. The best way to avoid crashes, this argument goes, is not to "throw sand in the wheels of international finance" (as Tobin famously put it), but to make sure that intermediaries do not take excessive risks.

This argument is just about as convincing as the one gun control opponents use when they say "guns do not kill people, people kill people." What we are supposed to conclude from this is that the appropriate way to deal with guns is to regulate the behavior of people who own them--and not to control the circulation of guns directly. But any sane person understands that because we cannot observe and control behavior perfectly, a sensible regulatory framework must use both margins simultaneously.

And it is the same with capital flows.  We bemoan the shortcomings of prudential regulation after each financial crash. That should teach us that policy needs to extend beyond prudential regulation to a wider set of instruments.           

Trade and the great divergence

Opening up to international trade raises the return to skills in advanced economies and reduces it in the less advanced ones, according to the standard factor-endowments story. If human capital accumulation in turn depends on these returns to skills, trade should enhance human capital accumulation in the rich countries, but slow it down in poor economies.  In other words, trade could serve to accentuate over time an initial divergence in income levels. As a result of trade, already rich countries should end up growing faster, while poor countries remain poor.

Just a theoretical possibility?  In an interesting paper, Oded Galor and Andrew Mountford argue that it is a lot more than that.  This story may help account for the "Great Divergence" in economic history--i.e., why Britain took off while India, say, failed to industrialize (yes, yes, I know there are other reasons too...). It may also shed light on the failure of poor countries to converge to the living standards of the rich in the current era of globalization.

It's not that there are no gains from trade for both sides.  But rich countries take the gains in the form of larger income per capita, while the poor take it in the form of larger population (higher fertility).

Aside from an interesting historical discussion, Galor and Mountford provide some striking evidence on the contemporary relationship between trade, on the one hand, and fertility and education, on the other.  Controlling for endogeneity and other possible problems, they show that larger trade shares are associated with lower fertility and greater investment in education in the OECD economies, but with higher fertility and lower education in developing economies.

 

I am more convinced by the historical discussion than by the contemporary evidence (for one thing, the skill premium has generally risen--not fallen--in most developing economies opening up to trade in recent decades). But I do find these scatter plots intriguing. 

Davos thoughts

Well it's time for Davos again, and all the talk about it these days (see here and here) makes me think back to my own Davos days.  I did attend a few of these in the past, to perform my role dutifully as house critic, but it's been some years since I last went. (I dropped out at the last minute once, and have not been invited ever since...)

To begin with, the weirdness of the setting.  This little skiing town is hardly where you would expect to find the leading lights of business, politics, arts, and academia.  For one thing, it's damn hard to get to (unless you are arriving on an helicopter). The town of Davos itself does not have enough hotel rooms to accommodate everyone, so unlucky guests have to stay in nearby Klosters and commute to the event by bus.  The conference site itself is small and feels terribly cramped. Lunch and dinner sessions are held in a variety of locations, which you are sure to miss if you rely on the shuttle service (run with Italian rather than Swiss efficiency).  OK, the skiing is better than in Maine, but that's really about it.  The whole thing is a marketing and PR miracle, pulled off by one man.

Next the sessions, which range from the exquisite to the absurd.  I have been in some pretty dreary panels (often as speaker) as well as in sessions which worked really well.  Davos organizers have pioneered new formats: panels where the panelists seat in comfortable sofas pacing the audience, roundtables with electronic voting by the audience, discussion sessions where each table is assigned a specific question and reports back its conclusions.  Sometimes these yield silly results (how many attendees do you think vote against the following proposition: "Peace in the Middle East is possible only if the two sides eschew violence and show tolerance vis-a-vis each other"). But in the hands of experienced moderators the results can be quite revealing.  For example, it was in one of the Davos sessions that it finally dawned on me that Doha was going nowhere fast.  

But what I loved most about being there is the spectacle. Think of hundreds of CEOs and statesmen packed together, all of whom are used to being accompanied by a retinue of assistants and (sometimes) bodyguards. When these personalities walk, ordinary people make way.  Their sense of personal space is not quite the same as yours or mine. Imagine them now in Davos, minus their staff, negotiating a crowded staircase as they try to advance to their next session. Everyone's body language says: get out of my way. But no-one makes room because everybody expects others will yield first.  The traffic is quite a sight.  Luckily, the thoughtful organizers strategically place beautiful young guides throughout to direct the distraught dignitaries. 

And then there are the parties. Emerging market, banks (when they are doing well), and other institutions compete with each other in putting the most luxurious spreads.  The worst of these I attended was one hosted by Yale, where I think there were no more than a dozen people.  The best was a super-event held by the Turkish government with every imaginable kind of food and exquisite entertainment.  You could tell it was the place to be because Tom Friedman was milling around the whole time.  It was the year that Miss Turkey had won the European beauty championship, and the poor thing was made to parade around the guests with a crown atop her head!   

So on the looong way back, you could always comfort yourself with the tales you had accumulated for your grandchildren and the high-end gadgets you were given for free.

Mr. Lin goes to Washington

Justin Lin is apparently poised to become the World Bank's next chief economist, following the departure of Francois Bourguignon. LIn is an inspired choice for a number of reasons. First and foremost, this is the first time that the Bank has appointed an economist from a developing world.  Second, the appointment recognizes the importance of China. Third, Justin is an institution builder. (I was his guest at the China Center for Economic Research and was very impressed with what he has built there.) Fourth, Justin is a risk-taker. (How else can one interpret his defection to mainland China from Taiwan in 1979 by swimming across the strait?)  And Justin is a very good economist on top. All are reasons to be happy about.

Let's see how he will manage the bureaucracy...

How Ireland does it

The Irish economy (the "Celtic tiger") has become the envy of many others ever since it took off in the 1990s. Behind the miracle lies sensible fiscal policies, a wage accord with labor, and--surprise, surprise--a range of industrial policies. The New York Times explains how Enterprise Ireland, a government agency, works. The agency takes equity positions in startup firms, leases space in Midtown Manhattan to provide accommodation for young Irish firms looking to expand in the U.S., helps set up operations in China by hooking up Irish firms with Chinese government officials, and finances R&D.

Colm O’Gorman, who teaches entrepreneurship in master of business administration courses at Dublin City University, said the government agency is at the heart of several trends. Enterprise Ireland “supports research and development at Irish companies and universities,” Professor O’Gorman said, “and it is encouraging more women to become entrepreneurs, as the role of women has changed in Irish life.”

And oh, the corporate tax rate is only 12.5 percent, which must help too.

Trade and compensation

Steven Landsburg has some good points to make about why trade-induced changes in income distribution should not automatically call forth compensation for the losers.  We accept such losses (and offer no compensation) in too many other circumstances--for example, when technological progress leaves some people behind.

But he misses the important point that we do not blithely accept all such situations either. The kind of introspection Landsburg asks us to undertake also suggests that we judge the appropriateness of a change in income distribution by asking whether the mechanism that causes it is consistent with basic moral precepts and prevailing norms.  In other words, we use a procedural fairness test. If we discovered tomorrow that Bill Gates had obtained his billions by lying and cheating the companies he decimated (instead of by ingenuity and hard work), we would think far less--or even less--of Microsoft. 

Similarly, what is at issue in globalization debates is the procedural fairness of some types of outsourcing.  Trade is controversial because it involves exchanges of the type we routinely block at home (e.g., exchanges that involve unfair labor or environmentally harmful practices). This often makes trade look different from other instances of redistribution. I have written about this before.

Another key point not to lose sight of is this.  The question of how we should respond to a trade-induced change in income distribution is not one on which economists can offer any expertise.  This is a question about ethics, values, and norms, none of which is part of an economist's training. Landsburg's take on this is as good as mine--which is as good as that of any person on the street.  But once we accept that trade creates losers, at least we can begin to confront these questions explicitly.