Dani Rodrik's weblog

The power of advertising?

Warning: this is a self-indulging post. (I can already hear the retort: "you mean all your others weren't...?")

Princeton University Press ran a small ad for my book last Sunday in the New York Times book review. I was curious if it would have any effect on sales, so I ran a little experiment.  I checked the book's sales ranking in amazon.com at periodic intervals starting on Saturday afternoon. I also took down the corresponding information from three amazon sites abroad: amazon.co.uk, amazon.de, and amazon.fr.  The idea was that an ad in the NYT book review should not affect sales in Britain, Germany, or France, as the NYT (especially its Sunday supplements) is not easily available in those markets.  The comparison also allows me to control for day-of-week effects: "serious" books may experience higher sales during weekdays than on the weekend.  In other words, the research design was a simple diff-in-diff.

Here is where things stood, as of this morning:

(Note a couple of things about the chart: I use the log scale for the vertical axis, and a higher number means poorer sales.)

So what did I learn (except for the generally abysmal ranking of the book: the average rank over all four markets is around 20,000 among all English-language books...)? 

First, I was surprised that there was not a more perceptible impact on U.S. sales.  The sales rank at amazon.com dropped from around 15,000 on Sunday midday to around 7,000 this morning. I suppose I exaggerated how many people read the NYT.  (Harvey Mansfield once defined a liberal as someone who wouldn't have anything to do if the NYT did not come out on Sundays.  I guess there are fewer liberals than I thought.) Now, as it turns out, amazon.com ran out of the book midway during the experiment. Can I comfort myself (and my publisher) by thinking that this had something to do with the result? 

Second, I was puzzled by the unexplained and very steep rise of the book in the German site.  On amazon.de the book went from a sales rank of around 27,000 on Saturday evening to a rank below 1,000 this morning.  I have no idea what may have caused this.  I doubt it was the ad in the book review.  So I am clueless.

Third, why is the sales rank in France so stable compared to the three other countries?  What makes the French so consistent in their purchases of English-language books over time?

Bottom line: I was expecting to get some easy results, instead I ended up with lots of questions.    

The "free trade reduces prices" fallacy, yet again

This time the culprit is Tyler Cowen. In his column for the New York Times today, Cowen argues that freer trade in food commodities such as rice would boost global supplies and help reduce prices.  He is probably right about the first, but not about the second. The effect of freer trade on domestic food prices depends on whether a country is a food importer or exporter.  Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers.  Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality. 

Trade works by relieving the relative scarcity of goods.  The key here is the term "relative."  Food importing countries are food scarce countries, and as they open up to trade, the relative price of food falls.  But if you are Thailand or Argentina, where other goods are scarce relative to food, freer trade means higher relative prices of food, not lower.  And all the induced efficiency benefits and short- vs. long-run effects that Cowen talks about have no bearing on this conclusion: in the end some countries have to be net importers, and others net exporters.

New thinking on growth and development policy

That is the title of an executive program I teach in, along with colleagues Ricardo Hausmann, Abhijit Banerjee, Esther Duflo, Sendhil Mullainathan, Rohini Pande, Lant Pritchett, and Chuck Sabel.  It is also the reason that it has been a slow week blogging-wise for me (in case you have been wondering): I have spent much of the week in a classroom.  Attendees are mostly economists from the World Bank, but also include a few professionals from other multilateral institutions and development agencies (ADB, IDB, MCC, and DFID). 

We cover a whole set of topics ranging from growth and growth diagnostics to health, education and credit markets.  The unifying theme for the whole program, in the words of one of the participants, is to "forget the Washington Consensus, and to learn to look for contextualized solutions using diagnostic tools and evaluation techniques."  We try to illustrate the value of such an approach in different circumstances: when doing growth diagnostics for South Africa, for example, or solving the health crisis in Rajasthan. (The latter discussion is introduced by a fascinating video produced by Abhijit and his team.)   

This is the third year of the program, and I find the participants much more willing to buy into this approach than in earlier years.  Either we are selling it a lot better, or times have indeed changed. 

But there is a residual sense of discomfort rooted in the feeling that these new ideas leave their practitioners rudderless--without enough things "we know" to hold on to.  The tendency is to want to turn the new diagnostic approaches into recipes of their own--or at least into a check list that can be applied rather mechanically.  That of course would defeat the whole point of the exercise.  What we need is not more rules of thumb.  What we need is the judicious use of economic theory, in combination with evidence, to identify and remove bottlenecks  That this is hard is obvious, yet should be no objection.     

What should the World Bank know and think about governance?

You can read the four short essays on this question produced by Daron Acemoglu, Frank Fukuyama, Doug North, and myself here.  There is much convergence of views in these essays, but also some disagreements. Daron and I disagree in particular on two issues: whether industrial policy makes sense or not (me: yes, Daron: no) and whether institutional reform should adopt a best-practice approach or not (me: no, Daron: yes).  I take Doug North's views on the latter question to be much closer to mine than to Daron's--or at least they appeared to be so in the discussion following the presentations. 

A truly development-friendly trade round?

The crisis spawned by the global run-up in food prices provides an opportunity for a trade round that will actually accomplish some true poverty reduction, according to Nancy Birdsall and Arvind Subramanian of the Center for Global Development.

The contours of trade policies friendly to a New Deal on hunger are clear. Industrial countries should eliminate any practices that reduce global food supply, including all forms of subsidies to biofuels that compete with food production. Developing country food producers should eschew export restrictions. And importing countries can also contribute. To reassure developing country exporters about future access should prices become volatile or even decline, they could agree now to lock in their recent liberalization -- a plus for all agricultural exporters.

We also propose that in a New Deal on Hunger, major developing country producers set aside for now their reasonable objections to traditional rich country agricultural protection -- the bone of contention in the Doha trade round -- at least in the case of food staples (if not cotton and cocoa). Rich countries would ideally reduce this protection on their own (as their taxpayers might well like in the case of domestic production subsidies). But for a hunger deal now their long-perverse agricultural protection is not a central issue -- and leaving it aside has the political virtue of greasing the wheels of a global deal on hunger.

Finally, to address the concerns of the poorest food-importing countries that have been worst hit by food shortages requires immediate action. In addition to traditional emergency food aid, all food exporting countries -- the U.S., Brazil and other big beneficiaries of the current price hikes -- could commit a small proportion of their exports as food aid (or provide the cash equivalent), with this proportion increasing in line with any increase in world prices.

Since unilateral trade policies in this area have clear negative externalities--export taxes in food exporting countries and import liberalization in food-importing countries both raise world food prices--the case for some kind of international coordination is indeed quite strong.

But the most mischievous part of the Birdsall-Subramanian proposal is that they want Bob Zoellick to head the effort. 

... Mr. Zoellick is ideally suited to the task. He should secure agreement that trade and development ministers will meet within a month to agree on the trade principles of a new hunger deal, aiming for a full-fledged agreement before the end of the year. Indeed his leadership on this issue, especially in eliminating U.S. protection of corn-based ethanol, would complete his transition from representing U.S. trade interests to the development needs of the world's poor.

A test case indeed.

Adam Smith, the finance skeptic

Was Adam Smith a finance skeptic?  The following passage from the Wealth of Nations, written in connection with a banking collapse in Scotland, suggests so:

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.

(From Book 2, Chapter 2, paragraph 94.)  Thanks to Frank Levy for the pointer. 

And while I am at it, you do need to read Frank Levy's piece on inequality and institutions. His take makes a lot more sense to me than this. 

UPDATE: To clarify, the reason I am puzzled by Mankiw's piece in the NYT last Sunday is that the explanation he proffers for growing inequality--which he attributes to work by Goldin and Katz--cannot explain the striking increase at the very top of the income distribution, which Mankiw himself uses to motivate his column. Look at the updated Piketty-Saez figures: 

As this makes clear, the most striking change since the 1980s is the increase in the share of the top 1%.  The share of the rest of the top decile has not increased all that much. It's hard to see how lagging education can explain this, since the top 1% presumably hardly differs from the next 9% in terms of educational attainment.    

Guns, drugs, and financial innovation

Is there any difference between these, asks my latest column for Project Syndicate. All three provide private benefits (sometimes), but can cause havoc for the rest of us. Why do we approach regulation in each area so differently? (And how does Mark Thoma beat me to it every time, even when it is my own piece?)

Meanwhile, Carmen Reinhart and Ken Rogoff's new paper (summary here) makes the obvious but important point that financial globalization and financial crises are related. In their words, "Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically." Here is the picture that is words a thousand words.

Now what is important about this conclusion is that it runs counter to a growing piece of conventional wisdom in the academic literature, namely that there is no relationship between propensity to financial crisis and openness to foreign capital flows.  Rogoff himself (with co-authors) wrote in an earlier survey: "In sum, there is little formal empirical evidence to support the oft-cited claims that financial globalization in and of itself is responsible for the spate of financial crises that the world has seen over the last three decades." 

I think the difference may be between cross-sectional and historical evidence: the latter shows a close correlation, but this does not mean (perhaps) that the countries that experience the most crises during periods of high capital mobility are necessarily those that are financially the most open.  In any case, I find this a case of reason restored. 

(While I am on the subject, check out also the Fondad blog maintained by Jan Joost Teunissen which has an interesting discussion going on the current financial crisis.)

UPDATE: Carmen Reinhart writes to clarify her views:

In 1999, Graciela [Kaminsky] and I wrote in our twin crisis paper:

"Our results also yield an insight as to the links of crises with financial liberalization (Table 3). In 18 of the 26 banking crises studied here, the financial sector had been liberalized during the preceding five years, usually less. Only in a few cases in our sample countries, such as the early liberalization efforts of Brazil in 1975 and Mexico in 1974, was the liberalization not followed by financial sector stress. In the 1980s and 1990s most liberalization episodes have been associated with financial crises of varying severity. Only in a handful of countries (for instance, Canada which is not in the sample) did financial sector liberalization proceed smoothly. Indeed, the probability of a banking crisis (beginning) conditional on financial liberalization having taken place is higher than the unconditional probability of a banking crisis."

And to be clear, Rogoff's co-authors in the survey piece I referred to were Ayhan Kose, Eswar Prasad, and Shang-Jin Wei.

Will Argentina waste a historic opportunity?

Rarely do you see a country where the mood among business people tells such a different story than the statistics.  Now, in Argentina there are statistics are then there are damn lies--inflation figures are made up--but the broad contours of the economic performance of the last few years are not in dispute.  Argentina has been growing at Asian rates, its investment rate has risen to levels not seen in decades, national saving is at record levels, and TFP growth has been stellar.  By their own admission, Argentine businessmen are making more money now than they ever have in recent memory.

Yet business people are somber, bitter, and angry at the government. The general sense, even among those that supported Nestor Kirchner's policies, is that the government is frittering away a golden opportunity.  Worse, the government has authoritarian--some would say thuggish--tendencies that portend ill for the future of Argentina's democracy.

What is going on?

First, the good news.  Recent economic growth, unlike that of the 1990s, is of the good kind and it not just the result of high commodity prices.  The investment boom of the last few years is supported by high saving, not by external borrowing as in the 1990s:

The difference is that recent growth has been fueled by a competitive currency, which increased the relative profitability and output of a wide range of tradables: agro-industries, manufacturing, and a wide range of services (from tourism to call centers). Unemployment and poverty rates have come down. Manufacturing employment has been growing after a long period of decline.  The weak currency has stimulated the right kind of structural change--from lower productivity activities to higher-productivity tradables--which is the source of the economy-wide increases in TFP we have seen. This is a textbook illustration of the magic of sustained currency undervaluation.

To get a sense of the magnitude of Argentina's accomplishment, compare its recent record to that of Brazil, a distinctly worse performer:

So next time someone says Brazil is the tortoise that will eventually overtake the Argentinean hare, ask how this will be possible with saving and investment rates that are well below 20% and a productivity growth rate that is decidedly lower.  (All data here come from the Economist Intelligence Unit, but I have cross-checked them against other sources where possible.) 

Now the bad news.  In a growing economy, the tendency for the real exchange rate is to appreciate--unless the economy can generate growing surpluses of saving over investment (as in China until recently).  The result can be seen in Argentina's prices. While the peso is stable against the dollar in nominal terms, the overheated economy has generated inflationary pressures (over 20% annually at present) which are being grossly mismanaged.  The answer to high inflation is a big fiscal surplus--much larger than what the government is managing at the present despite the huge windfall in commodity prices. Instead, the government has been resorting to ad hoc and temporary measures: price controls, export taxes, and intervention in currency markets.  It has no coherent plan to deal with inflation and no strategy for sustaining competitiveness in the face of the real appreciation that will take place even in the best of circumstances.      

Even worse is the growing disconnect between the government and the business community.  In its approach to the private sector, the government is developing a reputation for being abusive, threatening, and intimidating.  The Kirchners' strategy seems to be to play to their main political power base while assuming that growth will continue.  But in the current environment it is difficult to imagine that the private sector will continue to invest as strongly as it has.

In the early 1990s, after years of mismanagement and hyperinflation, the binding constraint on Argentinean growth was lack of confidence in macroeconomic policies. The Convertibility Law was an ingenious short-cut for overcoming this constraint.  But as circumstances changed and the binding constraint became lack of competitiveness instead, the Convertibility Law turned into a liability. It allowed no way to respond to the new constraint within the existing rules of the game.  The post-2002 policies were in turn successful because they removed the competitiveness constraint. But the growing gulf between the private and public sectors has put lack of confidence and credibility once again front and center--now as the binding constraint on sustaining Argentina's growth. 

And that is a pity, because there is a lot that is going right with the Argentine economy today. The underlying model is much more sound than anything in memory. There is nothing wrong with it that a larger fiscal surplus and a bit of dialog between the public and private sectors would not cure.

Is "good governance" an end or a means?

And does it matter?  Here are the opening paragraphs of my contribution to a panel discussion on governance tomorrow at the World Bank:

A deep insight that has emerged out of the disappointments of the Washington Consensus is that successful policy reform is at its core governance reform. Reforms in the areas of, say, trade or fiscal policy require much more than just cuts in tariffs and a balancing of the budget. If you want to achieve lasting change and have a real impact on the behavior of those agents that determine the success of reform, you must change the “rules of the game”—the manner in which trade policy is made or fiscal policy is conducted. This insight, assisted and reinforced by the academic literature on institutions and growth, has in turn produced a new development agenda focusing on a broad list of governance reforms. These reforms target a lengthy list of objectives, including reducing corruption, improving the rule of law, increasing the accountability and effectiveness of public institutions, and enhancing access and voice of the citizenry. The agenda is neatly captured and quantified by the Kaufmann-Kraay Governance Indicators data set.

Much of this is for the good. In particular, the tilt towards governance has the virtue that it helps shift the focus of reforms towards objectives that are desirable end-goals in and of themselves. The items on the original Washington Consensus agenda were all of instrumental value at best. Playing around with tariff and tax schedules and with the composition of public expenditure is worthwhile only to the extent that it achieves other objectives we really care about: increased growth, reduced poverty, improved equity. By contrast, it would be hard to take issue with the intrinsic importance of improved governance along its various dimensions: rule of law, transparency, voice, accountability, effective government. We might even say good governance is development itself. Combine it with material well-being, and we attain the Nirvana of advanced societies.

So good governance is both an end and a means. It is a key goal of development, broadly construed, and it is also an instrument for achieving better policymaking and improved economic outcomes. Any sensible discussion of governance must be clear about the distinction. And it must clarify in which of these two senses governance is “the problem” we are trying to fix.

I make the following points below. First, economists have very little useful to contribute to governance-as-an-end. Second, while they have more to say about governance-as-a-means, what they do say is often not what they should say. Where economists can be useful is in designing institutional arrangements for specific policy reforms targeted at relaxing binding growth constraints--what one might call “governance in the small.” This agenda differs quite a bit from the broad governance agenda on which much ink is being spilt. And third, there are sometimes tradeoffs between governance-as-an-end and governance-as-a-means which policymakers and advisors need to be conscious of.

You can read the piece in its entirety here.

Volcker's priors

The Economist features (and only mildly disagrees with) my piece with Arvind Subramanian on financial globalization this week.  Did I mention that I find them quite agreeable these days...

Coincidentally, I made a presentation on the same topic at a breakfast meeting today at the Council on Foreign Relations in New York, organized by my old teacher Peter Kenen.  Paul Volcker was there, and he said he had come to reinforce his priors that all this money sloshing around international capital markets had not done a whole lot of good.  He seemed pretty well satisfied...

On a more dissonant note, I found a surprising amount of hostility to Argentina around the CFR breakfast table. This is after all a country that is growing faster than any decent-sized country in Latin America, and doing so for good Asian reasons (high saving, high investment, competitive currency, external and fiscal surpluses). Oh, of course they still have outstanding debt they are not repaying and they are getting very little FDI.  So they do look like pretty bad business from a Wall Street perspective.

More on Argentina after my trip there next week...