June 05, 2003

Gains From International Trade and Investment

An Irish-Arizonian-Australian cross-disciplinary alliance of Kieran Healy and John Quiggin is thinking about Pierre-Olivier Gourinchas and Olivier Jeanne's brand-new "The Elusive Benefits of International Financial Integration"--the conclusion of which is that in standard neoclassical models freeing up capital flows across nations has the capability to boost economic welfare by an amount on the order of magnitude of one percent:


John Quiggin: (Small) gains from trade: (Small) gains from trade: Kieran Healy links to a paper by Pierre-Olivier Gourinchas and the missing-from-the-web Olivier Jeanne in which a calibrated growth accounting model is used to show that the gains from unrestricted capital mobility are likely to be of the order of 1 per cent of GDP. Gains from risk sharing aren't mentioned but other papers are cited to say that these are of a similar magnitude.

Those who listen to the general pronouncements of economists might be surprised by the modest size of the estimated gains. But for those who have looked at similar exercises in the past there is no surprise here. One of the better-kept secrets of economics is the fact that most studies suggest that the replacement of a typical high-tariff regime (say Australia's in the 1960s) will yield long run benefits of about 3 per cent of GDP.

Those who raise questions about this point are likely to be brushed off with a reference to supposed dynamic gains, not captured in this 'static' analysis. This brings us to an even better-kept thesis. These 'dynamic gains' have aboutas much basis in neoclassical economic theory as the Tooth Fairy.

To complicate matters a bit further, there is a theoretically respectable category of dynamic gains, arising from the removal of distortions in intertemporal resource allocation, but these are even more modest than the static gains...


I have at least three somewhat conflicting reactions:

  1. Well, yes, of course. This is simply Harberger's Law. In almost all neoclassical economies, any one thing that goes wrong with the market system (and a shut-off of international investment is a thing going wrong) will have effects on the economy as a whole that are not overwhelmingly large in proportion to the entire enchilada. Resources used for international capital flows have alternative uses if international capital flows are shut off: if international capital flows are, say, three percent of total product, it would be really surprising if the best alternative use of those resources wasted as much as a third of their value.
  2. 1.24 percent of current consumption is nothing to be sneezed at. In the context of the Australian economy today... Gourinchas and Jeanne's numbers say that (at a five percent per year safe real interest rate, and with a three percent per year economic growth rate) the value of international capital mobility to the Australian economy is on the order of a one-time present of some 400 billion $A. This number is "small" relative to the size of our economies, but only because our economies are so large.
  3. It's time to add the tooth fairy into neoclassical economics. The most powerful real-world arguments against international capital mobility have no place inside the neoclassical economic model:
    • International capital markets are subject to extraordinary and irrational waves of enthusiasm and depression. A wave of depression coupled with weaknesses in financial regulation can produce mass bankruptcies and trigger a Great Depression.
    • International capital markets allow governments following unsustainable policies to sustain them a little longer. They thus allow a government to postpone a crisis that will kick it out of office for a year or two at the cost of imposing a huge burden on the society five or ten years down the road.
    Similarly, the most powerful real-world arguments for international capital mobility have no place inside the neoclassical economic model:
    • The overwhelmingly important piece of the action in international development is technology transfer. We don't know how technology transfer happens, but maximizing contact--economic, cultural, and social contact--across the enormous income and productivity gaps of our world may trigger the process. International capital flows are an important form of such contact.
    • Blockages to international capital flows create enormous domestic rents. These rents are a powerful incentive of and source for corruption. To the extent that a major part of the action in any successful economy is a government that works--as opposed to one whose functionaries spend most of their time figuring out who they can extort bribes from--imposing substantial blockages to international capital flows is a very dangerous road to walk down.
    • There is a constant tradeoff between market failure and government failure. Even the best intentioned of governments is not a perfect organization, and can make big mistakes that may not be immediately apparent to voters or the media. Capital mobility--and the exchange rate swings that come with it--can serve as an early warning system, a notice that at least the investors in New York, London, and Frankfurt whose job it is to try to pierce the veils of time and ignorance and forecast the future are worried.

Now economists'--at least, neoclassical economists'--standard methodology is to start from a well-functioning neoclassical market economy, impose one distortion or blockage at a time, and estimate its consequences. This methodology is not very helpful as far as this issue is concerned (which doesn't mean that I don't think that Gourinchas and Jeanne are doing bad work: they are doing excellent work, we at Berkeley have just hired Gourinchas--it's just that economics is sufficiently underdeveloped that much of what is excellent work within economics is of little more use for the real world outside economics than a medieval alchemist's work on isolating elements of the Philosopher's Stone is of use to a modern chemist). Any assessment of the value of international capital mobility must juggle six different balls in the air at once: six important deviations from the neoclassical framework: irrational noise traders in financial markets, severe moral hazard weaknesses in banking and other parts of the financial system, excessively short planning horizons on the part of governments, the sociology and economics of technology spillovers and technology transfer, the sociological dynamics of retail corruption and wholesale interest-group politics, the importance of well-functioning market-regulating institutions, and our (currently missing) framework for analyzing government failure (the public-choice parodies of such a framework do not yet count). Oops. That's seven different balls in the air.

We economists don't have the tools or the smarts to juggle more than one or maybe two such balls in the air at any one time. As a result, our analyses of international capital mobility are much more like "Gee, I kept one ball in the air, and I think this one was the biggest ball" than like the Flying Karamazov Brothers juggling routines that they need to be. Gourinchas and Jeanne (2003) is a very nice one-ball analysis.

I come down on the pro-mobility side on five days of the week (the other two I wake up in a cold sweat), but that is primarily because of my judgment that late-nineteenth century large-scale international capital mobility was profoundly helpful in spite of all its drawbacks, and I cannot see a difference between then and now that would lead to a different conclusion. That's only one ball (albeit the biggest one).

Posted by DeLong at June 5, 2003 07:09 AM | TrackBack

Comments

Wonderful discussion!
Thinking....

Posted by: anne on June 5, 2003 09:45 AM

Interesting post (as so often). I have a question about one phrase.

"Now economists'--at least, neoclassical economists'--standard methodology is to start from a well-functioning neoclassical market economy, impose one distortion or blockage at a time, and estimate its consequences."

I've always wondered about this. In physics, this is basically perturbation theory. You start with a simple and solvable model, and then add on the difficult bits in an approximate way. It's fine as long as the real world is fairly close to the original simple and solvable model -- that is, as long as you don't go out of the radius of convergence of the perturbation series.

But of course some things are not perturbations.

You can get a realistic theory of gases by starting with the ideal gas law and adding intermolecular interactions as a perturbation, but you can't get a theory of liquids that way. Likewise, you cannot get a theory of superconductivity from a free-electron model of metals.

So my question is, do (neo-classical) economists have an idea when their neo-classical + perturbation model works, or is this asserted, as a matter of prejudice or "common sense"? How do they know they are not, as Stiglitz contends about the role of information, leaving Hamlet out of the play?

Posted by: Tom Slee on June 5, 2003 09:57 AM

I'm not so sure about the gains mentioned ....

1. This is an advantage of international capital flows, but not necessarily of *liberalised* international capital flows. I don't see this as an argument against, say, a Korean or Chinese development model, or as an argument for privatising the local sewage system.

2. One only has to look at Russia or Argentina to see that there can be fairly substantial rents created by too-rapid liberalisation.

3. It has to be said, the investors in NY, Frankfurt and London have a pretty terrible record on this score.

The general theme here is that the advantages of capital mobility /per se/ shouldn't be characterised as advantages of a single, particular and rather extreme model of capital mobility. The sequencing literature is relevant here, and it strikes me that there is a sensible middle ground.

Posted by: dsquared on June 5, 2003 10:10 AM

http://www.nytimes.com/2003/06/04/international/africa/04LETT.html

NAIVASHA, Kenya In the past 20 years, the lake shores have exchanged any lingering memories of the past for a booming industry in the cultivation and sale of out-of-season vegetables like snow peas and trimmed beans, and cut flowers like roses and carnations virtually all of them exported to distant markets in Europe. Paradoxically, the huge expansion of fancy food for export has come in a land that, because of sporadic drought and not-so-sporadic economic mismanagement, cannot grow enough of its own staple, corn.

As the flower and vegetable farms have expanded, lining enormous tracts of land with plastic greenhouses and dense, neat rows of crops, the population living within three miles of the lake shore has quintupled from 50,000 to 250,000. Most of the newcomers are women who have been drawn by cash wages from traditional agriculture in villages elsewhere....

Posted by: anne on June 5, 2003 10:25 AM

Note to the economics 'community':

1.

AGAIN fellas, money does not--repeat: NOT--"make the world go 'round". INERTIA "makes the world go 'round." Get over it.


2.

AGAIN fellas, PEOPLE--that is, communities, nations, societies, CULTURES are the "CARTS" ECONOMIES are the "HORSES".

(That's right: that makes you guys "just" a bunch of "cowboys" or perhaps, "veternarians" MAYBE, someday (unless one of you happens to get yourself installed as "maximum leader" in some godforsaken place or other--THAT would make you a "breeder" ;-)

3.A. (For Brad)

That small fraction of the REAL world that we humnan beings can actually SEE is "IN TECHNICOLOR", Bubba. Get over your infantile "need" for a simplistic "black and white", "two sided" "model" and/or "game". In short, GROW UP already.

We adults are "playing" over here:

"We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America..."
http://www.house.gov/Constitution/Constitution.html

We've been here for OVER two friggin' centuries. And we're playing a MUCH more interesting AND (potentially) rewarding "game" now:

"...My aim is to start a dialogue about the core problem of capitalism. The symptoms range from bloated CEO pay, sweatshops, and speculative excess to stagnant wages, corporate welfare, and environmental indifference.

All spring from a single source: the mandate to maximize returns to shareholders. In major public corporations -- where there is little reason to so favor shareholders -- this mandate amounts to property bias, which is akin to racial or gender bias.

It arises from the unconscious belief that property owners, or wealth holders, matter more than others. The system upholding this belief I call economic aristocracy.

Civilization has crossed a great divide in history, from monarchy to democracy. But we have democratized only government, not economics. Property bias keeps our corporate worldview rooted in the predemocratic age. To change this, we begin by seeing it.

I am a small business owner myself, like my father and grandfather before me. I cofounded the publication Business Ethics in 1987, in the belief that individual companies, becoming socially responsible, would transform capitalism. I no longer believe this.

I have watched as ethics, employee ownership, family-friendly policies, and other progressive notions have put down only shallow roots -- to be torn out and discarded when they conflict with the mandate to maximize returns to shareholders.

It is this mandate we must challenge, for lasting change is not possible until we do. The work of the progressive business community must go deeper. Although we've learned much and achieved much, it's been mostly at the margins. We must act more boldly, challenging the conceptual design of the system, which is structured to uphold shareholder primacy..."--Marjorie Kelly
http://www.divinerightofcapital.com/


It's a TRULY great "game" called "Life on Earth" Bubba. At the moment, we're engaged in the business of TRYING to keep our "carts" between the ditches, Bubba. We could use your help.

Oh. And Brad, ONE of the secrets of the game (being LITERALLY "older than the hills") is really no "secret" at all.

It's called "BALANCE", baby. But don't take MY word for it:

"...Throughout America's adventure in free government, such basic purposes have been to keep the peace; to foster progress in human achievement, and to enhance liberty, dignity and integrity among peoples and among nations.

To strive for less would be unworthy of a free and religious people.

Any failure traceable to arrogance or our lack of comprehension or readiness to sacrifice would inflict upon us a grievous hurt, both at home and abroad...

...Crises there will continue to be. In meeting them, whether foreign or domestic, great or small, there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties. A huge increase in the newer elements of our defenses; development of unrealistic programs to cure every ill in agriculture; a dramatic expansion in basic and applied research these and many other possibilities, each possibly promising in itself, may be suggested as the only way to the road we wish to travel.

But each proposal must be weighed in light of a broader consideration; the need to maintain balance in and among national programs balance between the private and the public economy, balance between the cost and hoped for advantages balance between the clearly necessary and the comfortably desirable; balance between our essential requirements as a nation and the duties imposed by the nation upon the individual; balance between the actions of the moment and the national welfare of the future. Good judgment seeks balance and progress; lack of it eventually finds imbalance and frustration..."--Dwight Eisenhower
http://mcadams.posc.mu.edu/ike.htm

Posted by: Mike on June 5, 2003 11:03 AM

Mike, you running for some office or something?

Posted by: Chuck Nolan on June 5, 2003 12:06 PM

Given this very fair discussion of the state of economic modeling, and the uncertainty that it suggests--"I come down on the pro-mobility side on five days of the week (the other two I wake up in a cold sweat)" does not imply great certainty in your position--how can you be so dismissive of the anti-mobility arguments elsewhere in this blog?

These are complicated issues, with definite tradeoffs (you don't even mention the distributional implications of capital mobility, which are probably substantial). Some people read the potential costs and benefits of mobility and trade liberalization a bit differently than you, concluding that the negatives outweigh the positives. But you've taken a consistently vituperative tone toward anti-free-trade arguments on this blog. So do other free-traders, in a manner that IMHO makes rational discussion of the tradeoffs quite difficult. Is that justified by your intuitive, unsupported-by-strong-evidence judgment that the pros outweigh the cons?

Posted by: Jesse on June 5, 2003 12:13 PM

By the time I finished my BA at Berkeley in econ (1978), I was firmly convinced that you had at least seven balls in the air, but econometrics wasn't going to be able to keep up. It was fun, but not reality. Gave up, went to law school, and have spent the last twenty years doing international tax work on financial transactions. Add some additional balls in the air, Brad, for competing government policies, social engineering, corporate greed, anti-corporate greed legislation, xenophobic legislation and ....I could go on for days. Reality is much more quantum than Newtonian.

Posted by: wol on June 5, 2003 12:19 PM

Chuck:

You got anything interesting to say?

Posted by: Mike on June 5, 2003 12:37 PM

Two big subjects here-free trade of money and free trade of products.

Maybe the problem is trying to go always from theory to reality and apply to everything, rather than looking at each transaction on a case by case basis. I realize that that may be impractical for everything, but saying "free trade all good" or "free trade all bad" just gets everybody's blood pressure up for no good reason.

For example a free trade issue recently in MN the slapping on of tariffs on hard durum wheat, presumably to punish Canada for position on Iraq? No good reason. Companies in US prefer the Canadian wheat for making superior pasta. Both sides benefit.

But forcing other countries to buy our ag products? Which are produced because of subsidies and not because anyone wants them? Stupid, and makes us lose face to the world as a country that doesn't make/produce high quality stuff.

As far as the money movement goes, the way I understand it the US has attracted a lot of the money from overseas because of instability in other countries. That will probably change very soon, as other countries realize that US is losing its purchasing power and its standard of living is decreasing. We haven't really used the money to invest in anything, just to finance more consumption, and once other countries realize that, maybe they will prefer to keep their money at home. But as a signal I can see the reason to at least give people the option of having alternate countries to put their money.

As far as free trade goes- I think that free trade of humans between countries will lead to faster development than the free trade model of cheap manufactured goods. Free trade of humans either with work visas or with immigration means that American currency goes straight from US to families in the other country, and when the regular methods of transfer are ineffective, immigrants in US seem to develop their own more efficient methods, such as what the Somalis in Minnesota do. Free trade in cheap manufactured goods between 1st and 3rd world, leads to, well, conditions about as good as in the early 20th century in this country, and if there is a repressive government it could literally go on forever with no improvement.

I know there is a lot of animosity nowdays because of the work permits to people from India, but maybe we should be pressuring India to offer exchange work visas for our workers, especially if they are single and would like a change for a year or two. After all, maybe it wouldn't hurt for them to have an opportunity to see what lifestyle their India counterpart has.

Posted by: northernLights on June 5, 2003 01:05 PM

Is point 3b right? I'm not sure which "unsustainable policies" you refer to, but I thought that liberalized capital flow was one of the main reasons for the end of Keynesian-style high state expendatures + deficits + currency inflation.

Posted by: msw on June 5, 2003 02:13 PM

"how can you be so dismissive of the anti-mobility arguments elsewhere in this blog"

Simple - a bad argument is a bad argument, even if you happen to agree with its conclusion on other grounds.

Brad, I think another disquisition on economists' methodology is called for. Maybe take Tom Slee's post above as a starting point - its a very good short critique of comparative statics.

Posted by: derrida derider on June 5, 2003 05:01 PM

"how can you be so dismissive of the anti-mobility arguments elsewhere in this blog"

Simple - a bad argument is a bad argument, even if you happen to agree with its conclusion on other grounds.

Brad, I think another disquisition on economists' methodology is called for. Maybe take Tom Slee's post above as a starting point - its a very good short critique of comparative statics.

Posted by: derrida derider on June 5, 2003 05:02 PM

"Simple - a bad argument is a bad argument, even if you happen to agree with its conclusion on other grounds."

But too often, trade skeptics are dismissed out of hand without even the barest reference to the arguments being made. The tone often resembles that used against Holocaust deniers, as if it is simply impossible that a reasonable person could be skeptical that freer trade is a net plus. [I haven't bothered to dig up an example out of the archives. However, if someone doubts this claim I'd be happy to.] I've never understood how such dismissiveness could be justified.

northern lights: Yes, trade and capital mobility are in principle different things. In practice, the policies in question almost always involve both, so the distinction isn't all that important. In any case, your point that trade restrictions should be looked at on a case-by-case basis is more or less what I have in mind; many economist's dismissiveness toward the trade skeptic's position doesn't allow this.

Posted by: Jesse on June 5, 2003 05:23 PM

"1.24 percent of current consumption is nothing to be sneezed at. In the context of the Australian economy today..."

Yes, it IS "to be sneezed at". The catch is like a sailing ship pointing too far into the wind and not ending up upwind because it's slipping too far in another respect. That percentage is small enough to be outweighed by similarly small cumulative problems of revenue streams being acquired by outside interests - particularly on the back of somebody else's reserve currency. Australian ownership of Australian resources is being sold at a greater rate than that - so, while there are indeed net gains, more than 100% of that small percentage gain is going outside Australia. Which means Australia is losing as a result.

The actual change in ownership seems to be that countries exporting to the USA are accepting dollars and immediately passing the buck to Australia through their own savings rates. It's the middlemen who are acquiring the resources while the USA is merely getting current consumption from exporting inflation, not acquiring a revenue stream from an asset base.

Similar things apply to the people in Kenya Anne was writing about, that are being pulled towards the new cash crops (and most of all to those pulled but not finding a place yet). They aren't getting any net gains as yet, because those are distributed between outside interests and local entrepreneurs (and may not even be a net gain for Kenya in aggregate).

Posted by: P.M.Lawrence on June 5, 2003 05:26 PM

1.

I'm just going to "post" in CAPITALS. And short "declarative" sentences with QUOTES around some "words". Deal with it. Baby.

2.

The world is COMPLICATED. You can't "model" it. You can't even understand it. Stop TRYING. Baby.

3.

This section is reserved for a bunch of quotes. I'm short of time so I won't bother "linking" or quoting "directly", I'll let you do that yourselves. Baby/ies.

4.

Taking DD's point -- er, that's Derrida, not Daniel -- somewhat seriously, I wonder if, short of being able to get Brad and Daniel and John Q. into a room for a weekend and let them come out with a discussion paper at the end, would it be feasible to have an interactive discussion area in someone's blog where a few of them just go at this for a while, taking it in turns to write and respond? I'm thinking of what happens on Slate, where they publish "dialogues" between a couplke of chosen correspondents on various issues. I'd like to see what an extended dialogue between Delong, Davies and Quiggin would result in.

Baby.

Posted by: Michael Harris on June 5, 2003 05:37 PM

>>I'd like to see what an extended dialogue between Delong, Davies and Quiggin would result in.


It would result in Davies being seriously found out, early. One thing I don't stress enough, because it reduces my aura of invincibility, is that Brad and John Quiggin are at a massively higher level than I am on these things; I'd consider myself to be a decent blue belt but no better. The weblog format massively favours well-educated bluffers, particularly those who live in different time zones from their discusants and thus have time to look things up.

Posted by: dsquared on June 5, 2003 11:26 PM

>>I'd like to see what an extended dialogue between Delong, Davies and Quiggin would result in.


It would result in Davies being seriously found out, early. One thing I don't stress enough, because it reduces my aura of invincibility, is that Brad and John Quiggin are at a massively higher level than I am on these things; I'd consider myself to be a decent blue belt but no better. The weblog format massively favours well-educated bluffers, particularly those who live in different time zones from their discusants and thus have time to look things up.

Posted by: dsquared on June 5, 2003 11:32 PM

Well, I wouldn't suggest doing it in "real-time". The Slate dialogues are by correspondence. And you could just be the guy Asking The Awkward Questions. Leave the Difficult Answers to the sensei. ;-)

Ahem. Excuse me.

You could "just" be the GUY asking the "awkward" QUESTIONS. Baby.

That's better.

Posted by: Michael Harris on June 5, 2003 11:42 PM

On a technical note, Brad's capitalisation of the 1.24% of GDP to get to a big number for the present value, is something that bugs me a great deal, because it's effectively adding up the consumption of different generations. While I have no problem with the general concept of net present value representing intertemporal preferences of an individual, I think that there are very serious problems indeed with *intergenerational* present value calculations. Succeeding generations are not the same as infinitely-lived individuals, and the implicit monotone decreasing rate of time-preference is unreasonable (in other words, *we* might view consumption 100 years away as not being worth all that much today, but the people alive in 2103 will put a higher value on it). Since there isn't and couldn't be an intergenerational capital market allowing us to trade with future generations, I tend toward Derek Parfit's view that the appropriate long term risk free social discount rate is zero, unless you want to justify a positive discount rate on redistributive grounds (future generations will most likely be richer than us, so they should pay more of the costs). Don't know what the practical effect of this is on the calculation, but think that it's meaningless.

Posted by: dsquared on June 6, 2003 05:07 AM

Surely the point is that free capital mobility is a goal of much development interventions and comes at some considerable risk. The small size of the reward should be reflected in its relative prioritisation in world bank IMF or other interventions and in the risk reward calculations of anyone thinking of allowing it.

As for the capitalisation, decisions about this kind of thing are unlikely to be permanent and so the appropriate capitalisation need only be modest.

My interpretation is that standard models do present advantages but that they are modest. Much of the debate about issues like this is good/bad rather than reflecting its importance. The size is also significant in that it could easily accrue to an elite minority for example without benefitting the population as a whole with ensuing policy issues which might well have outweigh the advantages of economic growth earned through that mechanism.

In contrast I think the general assumption has been that the value of the growth promotion has been overwhelming. This research might suggest that it may not be.

Posted by: Jack on June 6, 2003 06:39 AM

Tom, I don't believe Economics is any different than Physics or any other field in using "permutations" to advance a theory. My impression is that new models tend to be developed in most fields when permutations on existing theories are clearly not giving answers consistent with available data.

wol, we don't necessarily have to balance all of the balls. A useful model need not be perfectly reflective. Indeed, economics has some fairly predictive models based on only a few relevent inputs. Basic human greed (aka: wants) has provided a strong predictive basis for modeling economic exchange.

Brad, I assume the basic problem for international financial flows is balancing the conflicting positions of national governments and international investors. The need of national governments to protect themselves from the negative self-fulfilling prophesy aspects of international currency runs has the moral hazard of these governments unduly taxing their international investors. I keep thinking that forward contract purchases could be used as a way of allowing markets to manage this conflict.

Mr. Lawrence, should the U.S. be concerned since the Dutch own so much of our productive means? Isn't the purchase of foreign productive means the only way a country like Japan can provide a consistent standard of living for its aging population? Doesn't their aging impact their future buying and selling of foreign assets?

Posted by: Stan on June 6, 2003 09:37 AM

Stan, perturbation is not permutation in mathematical modelling. A new model is done most of the time by adding a new term, factor, whatever, to what was already there. Permutation is simply the exchange of position in the evaluation of a given set of data.

DSW

Posted by: Antoni Jaume on June 6, 2003 01:41 PM

Good stuff! :-)

Dr. DeLong writes, "I come down on the pro-mobility side on five days of the week (the other two I wake up in a cold sweat), but that is primarily because of my judgment that late-nineteenth century large-scale international capital mobility was profoundly helpful in spite of all its drawbacks, and I cannot see a difference between then and now that would lead to a different conclusion."

I'd like to see the actual numbers for your judgement about the "late nineteenth century international capital mobility was profoundly helpful"...e.g. a plot or table of international capital mobility for late nineteenth century and world GDP growth rate in the late nineteenth century. Then values for the same parameters for some time period when capital mobility was slow (but the Depression period would be somewhat of a self-fulfilling dataset, it seems to me). Then maybe values for the same parameters from, say, the 1980s to the present, when I assume capital mobility has speeded up.

Dr. Delong continues, "That's only one ball (albeit the biggest one)."

Hmmmm...this seems like a comparison of apples and oranges. You write of the effects of variations of individual parameters on a MODEL, and then refer to an input/output*** effect for the real world. Hope you're not beginning to confuse your model(s) with the real world. ;-) In my personal experience, this can be a mistake. ;-)

P.S. ***It seems to me a distinct possible problem with correlating capital mobility with world GDP growth is that, how does one know it isn't the slow world GDP growth that caused the low capital mobility, and not vice-versa?

P.P.S. An alternative way of looking at the issue would be to look at individual countries, rather than the whole world. For example, my impression is that India has allowed more and more capital mobility beginning in 1990. If so, has this increased GDP growth rate. The same with China, possibly starting circa 1980. Again, unless one could see some lag between when capital mobility increased, and when GDP growth rate increased, how would one know for certain that the GDP growth rate increase wasn't causing the capital mobility increase?

P.P.P.S. I'm a small way into "Globalization and Its Discontents" (or is it "Malcontents?" ;-)). The initial part of the book seems to offer plausible explanations of why a country allowing increased capital mobility would be bad, in certain situations. But of course, virtually everything is bad "in certain situations."

Posted by: Mark Bahner on June 6, 2003 02:34 PM

"For example, my impression is that India has allowed more and more capital mobility beginning in 1990. If so, has this increased GDP growth rate."

It's always hard to prove causality, but India's GDP growth rate did indeed pick up in the 1990s.

Posted by: Abiola Lapite on June 7, 2003 04:18 AM

This is mainly a reply to Stan.

Consider BdeL''s "my judgment that late-nineteenth century large-scale international capital mobility was profoundly helpful in spite of all its drawbacks, and I cannot see a difference between then and now that would lead to a different conclusion."

It is different. While BdeL's assessment of the late-nineteenth century is correct (and borne out by Keynes' insights at the beginning of "the Economic Consequences of the Peace"), today is not like that. Today's situation is far more like the French revolutionary armies printing occupation money to buy land and acquire and "evacuate" (their term) assets from Northern Italy and the Netherlands (they also did stuff with Church lands). The thing is, the late 19th century situation used hard money and - in the English speaking world - direct investment in undeveloped colonies. Even so, French and Dutch colonies of that era did use funny money/controlled exchange rate tricks, and there was a real benefit to countries that were major silver and gold producers. Even so, they didn't produce so much as to cause inflation but rather got the gains from a much more limited seigneury and the economic rents of the producing areas.

Almost the only place under British control to suffer that way was the Palestinian Mandate, and that was not deliberate British policy so much as the coincidence of post-1918 timing. (That does mean, however, that Zionist claims of making fair purchases of land are inaccurate.)

Anyhow, the problem doesn't come from foreign ownership as such (except where the country is mainly a primary producer, which wouldn't have remained the case if there really had been a real capital inflow - but see Nassau Senior's reasoning about the limited harm from absentee owners in his work on "wages"). It comes from lack of a quid pro quo, and the speed at which ownership does change which prevents any long term adjustment mechanisms from curing the damage - things like local savings rates picking up once it looked like a good idea.

The "something for nothing" aspect comes from the fact that ownership is being transferred for nominal fiat currency as well as some real funds flows the other way. While the discrepancy is small, unfortunately it has a cumulative effect. Governments on both ends are getting benefits from that, in particular the US government which can export inflation. Very few others are getting much good from it. Middlemen are acquiring assets as they pass the bucks they get from the USA for current consumption they give it, but they don't end up ahead of the game as a result. Rather, Australia ends up guaranteeing exports to the USA as well as its own, and even though the USA is also on the wrong end of the same ownership loss mechanism, unlike Australia it has two things it can do: print more reserve currency; and get away with changing the rules (sovereign risk).

Posted by: P.M.Lawrence on June 8, 2003 02:50 AM

Michael Harris:

If you REALLY think you can "handle" the "WHOLE enchilada", baby, spread those sweet lips of yours--widely--and click HERE:

(-:> http://www.j-bradford-delong.net/movable_type/2003_archives/001570.html baby ;!)

(Oh and be sure to let me know if you're STILL hungry afterwards. There's PLENTY more where THAT came from ;!)

Posted by: Mike on June 8, 2003 02:31 PM
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