August 21, 2003

In Memory of Rudi Dorbusch

The late Rudi Dornbusch was supposed to give the AEA's Richard T. Ely lecture last winter. Stanley Fischer gave it instead. Here the Economist summarizes on the main message that Stan had to convey:

Economist.com | Economics focus:

Begin with the top chart. Each point represents a country. The vertical axis shows average annual growth of income per head between 1980 and 2000; the horizontal axis shows the level of income per head in 1980. Note in passing that the countries of sub-Saharan Africa are distinguished from the others: they are clustered in the lower left-hand corner of the diagram, representing both very low incomes and very slow growth.

In the last 20 years of the 20th century, globalisation, however you measure it, was advancing rapidly. Globalisation, according to its advocates, helps poor countries to catch up. So what one would wish this chart to show is a marked downward-sloping pattern of points: saying, in effect, the poorer any given country, the faster its growth. The chart shows no such pattern. In fact, a line of best fit through the scatter of points (as shown) slopes slightly upwards, implying that, on average, the rich are getting richer faster than the poor are getting richer.

In the bottom chart, the axes and the countries plotted are the same as before, but the points are now drawn as circles whose areas are proportional to the population of the countries concerned. Whereas the first chart gave a sense of how the poorest countries in the world are doing in relation to the richest, the second chart shows how the people living in the poorest countries are doing in relation to the people living in the richest. Switching the focus to people transforms one's impression of the figures, for now one sees a strongly downward-sloping pattern. The poor, on average, are catching up. And the main reason is that two of the poorest countries in the world--China and India--have both (a) enormous populations and (b) rapid growth in incomes per head in the years in question.

Encouraging as that may be, an anti-globalist would draw attention to the very large number of people (as well as countries) who suffered not merely from slow growth but from negative growth--falling incomes per head--in the 1980s and 1990s. This is true, but is it just a coincidence that India and China, both of them rapid globalisers, did so well, whereas the countries of sub-Saharan Africa (in particular) combined severely limited economic integration with dismal economic performance? Bearing this in mind, the more closely one looks at the charts, the stronger the case for globalisation seems. The real question--at least so far as reducing global poverty is concerned--is not whether globalisation is a good thing, but why some countries (and in Africa's case an entire region) find it so difficult to participate. The answers, as Mr Fischer relates, are complicated. Rich- and poor-country governments alike are partly to blame.

America and the European Union both maintain trade restrictions that hurt the developing countries. They have been promising reform for years, but the world is still waiting. Mr Fischer calls for "significant increases" in aid, though he acknowledges that aid will need to be more selective if its patchy record of success to date is ever going to be improved.

But governments of the poorest countries themselves bear much of the responsibility. Many of the world's highest trade barriers are those imposed by poor-country governments on trade with other poor countries--to say nothing of the failure to provide security or stability, or of the enormous sums (including money received as aid) squandered on vanity public projects or luxuries for the ruling circles and their chums. For countries with governments like this, globalisation is always going to be difficult to achieve. Nonetheless, it cannot hurt to understand that the problem is not too much globalisation, but too little. If you ever need reminding of this, look at Mr Fischer's charts.

*"Globalisation and Its Challenges";. By Stanley Fischer. AEA Papers and Proceedings. American Economic Review, volume 93, number 2, May 2003.

Posted by DeLong at August 21, 2003 09:37 AM | TrackBack

Comments

"Globalisation, according to its advocates, helps poor countries to catch up. So what one would wish this chart to show is a marked downward-sloping pattern of points: saying, in effect, the poorer any given country, the faster its growth."

Really? I would have thought the standard would be "the more 'globalized' the economy, the faster the growth." The problem isn't that people are poorer than other people, it's that people are poor. If all we want is for the developing world to 'catch up', we should just have everyone in North America and Europe take a few decades off work. That should be an easy sell.

Posted by: Andrew Northrup on August 21, 2003 10:07 AM

How does political instability and war factor into the equation? India has had some minor internal conflict and conflict with Pakistan while China has had minor conflict with Tibet. Other than that, these countries have enjoyed peace and certainly nothing like the social upheaval in Africa. There were 11 major armed conflicts in Africa in 1998, the world's worst conflict zone.

Sub-Saharan Africa has experienced devatating social upheaval and unstable governments, proxy wars, AIDS, Civil Wars, etc. The list of countries with civil wars would include Sudan ( 2 million dead) Rwanda (1 million), Angola (half million dead), Ethiopia/Eritrea (10,000+), Sierra Leone, Liberia, Ethiopia/Eritrea, Congo-Brazzaville, Democratic Republic of Congo, Somalia, etc. etc. Much of it is fueled by small arms trade, weak governments, tribal conflicts and outright criminal behavior. Many of these countries are still trapped in the remnants of the cold war proxy wars. Economic development is difficult when for example Shell Oil once hired Cuban soldiers to guard oil production facilities against US backed guerillas in Angola.

Posted by: bakho on August 21, 2003 10:08 AM

http://www.nytimes.com/2003/08/17/international/asia/17INDI.html?ex=1062135917&ei=1&en=89be7bf3d1044677

Professor Teaches Change in His Indian Village
By AMY WALDMAN

MIRDHA, India Along fields so green they seemed to vibrate with color, Jagadish Shukla walked toward his childhood home.

There, a room specially built for his visits waited, as did a generator rented so fans could cool him in the Indian heat his family's modest effort to provide the comforts of his Bethesda, Md., home in this rural village.

Professor Shukla, 59, has lived for 32 years in the United States and is now its citizen. He is a professor at George Mason University in Fairfax, Va., and a climatologist who directs the Center for Ocean-Land-Atmosphere Studies in Calverton, Md.

But he has never relinquished his past or forgotten his home. Every year since leaving India, he has returned to this village of 1,500 people, where he grew up and where his family still lives.

Like many "nonresident Indians," or "N.R.I.'s," he has used his relative wealth earned in America to pay for the education of his siblings' children here, their marriages, their home improvements, their mother's funeral and, in lean times, their food "95 percent" of the family's needs, said his older brother, Mahendra Pratap Shukla....

Posted by: anne on August 21, 2003 10:22 AM

"America and the European Union both maintain trade restrictions that hurt the developing countries."

This is a significant under-statement. China and India, as Brazil and South Africa, have been powerful enough in bargaining to largely limit trade restrictions against them. Other African states than South Africa, however, have been grossly hurt by trade restrictions.

Posted by: anne on August 21, 2003 10:33 AM

Interesting comments, and Ruby's graphs - very nice ones. Seems to me - in a very modelized way -that there are two opposite forces here. One that stems from scale-benefits and tend to move capital (in a broad sense)to where there is already plenty of it (super-linear returns). Another, opposite, that makes non-tangible capital cheaply available to all (productivity catch-up).

The first would dominate in sub-saharan Africa, the latter in China and India.

Posted by: Mats on August 21, 2003 11:35 AM

I tend to hold with H. DeSoto that institutional issues separate, say, Africa from the rest of the world on development. Capital investment occurs when the investors have an expectation of security in their investments. This requires stability and honest governments. Honesty because it requires the implicit or explicit promise by government not to nationalize or unnecessarily block profitability to be credible - call this property rights. Stability because the investor has to be confident that the current government will continue to honor the pledge and that any successor do the same. Africa has been a war zone with both governments and rebels looting all they see. Thus, no capital, and no growth. (This analysis applies to both home-grown and outside investment.)

China and India have been reasonably stable recently, which has allowed the "catch-up" effect Brad mentions to dominate. China, despite its "communist" label, isn't. It is authoritarian, but it is in most ways more capitalist today than most of the third world outside South America. If all of the world had stable, democratic, and rights-respecting governments, those graphs would be much more consistently downward sloping.

Posted by: rvman on August 21, 2003 11:49 AM

By the way, is the blue circle with the least Y value Afghanistan?

Posted by: bakho on August 21, 2003 12:03 PM

Please please. There are 48 countries in sub-Saharan Africa, and they have had 48 distinct histories. Nigeria is not South Africa is not Botswana is not Malawi is not Uganda is not Kenya is not Angola is not Niger. South Africa is comparable to Brazil in development.

Posted by: anne on August 21, 2003 12:03 PM

Interesting graph. Where now do prominent Latin American countries fit in, and the other, smaller 'Asian Tigers'. These countries would seem to have had reasonable political stability, but are they growing fast enough to stay on top of the curve?

Posted by: non economist on August 21, 2003 12:20 PM

Prof. DeLong couldn't be more right that what the world needs is more globalization rather than less. What is ironic is that the leftists who claim to have the interests of the poor at heart are ardent promoters of US protectionism. Mr. Kucinich goes as far as to say that if he is elected president he will "abolish NAFTA and the WTO". How a president could "abolish" a treaty and an international organization he doesn't say.

The Republicans in Congress preach free trade, but most of them vote to protect industries that happen to be in their districts. President Bush's failure of leadership on this issue is most unfortunate.

Posted by: Joe Willingham on August 21, 2003 12:38 PM

anne, most sub-Saharan countries all have histories that have left them with little institutional or social capital. They are low on capital, and hence capital leave in form of oil, diamonds, uranium ;) Payments for African oil concessions are non-disclosed, so its probably below market. And I do think they have to pay a premium for their import of weapons and luxuries. Doesn't it look like they deserve a common color (except SA and one other, which?) in the diagram?

bakho, Afghanistan seems bigger and poorer according to
http://www.comstech.org.pk/htm/indp/map1.htm
I don't know, Palestine?

Posted by: Mats on August 21, 2003 12:40 PM

Haiti shrank a lot during the period. Or maybe one of the smaller ex-soviet republics, like Armenia or Belorus? The latter seem more in line with the starting place of 4k per year.

Posted by: rvman on August 21, 2003 12:49 PM

Well, as a non-economist it seems to me that the best description of either graph is "scattered" and that any argument over whether the line is sloping up or down is reaching pretty far. There simply is no line worth speaking about. The correlation is poor, end of story.

To say "the more closely one looks at the charts, the stronger the case for globalisation seems" is as much a stretch as claiming there is a straight line through that cloud of blobs. Ditto, to be fair, to argue "against globalisation" on the basis of these graphs.

Unfortunately, most of the comments above are of the form "if you take X into account then the line would look straighter and would slope up/down" (depending on the poster). Have people actually tried to draw such graphs? Or is this just reading the pattern of tea leaves in the bottom of a cup (which, come to think of it, the second graph looks a bit like).

Posted by: Tom Slee on August 21, 2003 12:53 PM

The poorest countries are caught in series of diabolical vicious circles. A recent study of the World Bank showed an almost linear correlation between poverty and the chance of civil war. The best way to alienate your country from the chances of economic growth is civil war.
In this context "governments of the poorest countries themselves" with the emphasis on "themselves" is so poor an advice on worldwide peace and prosperity...

How right you are Andrew "The problem isn't that people are poorer than other people, it's that people are poor."

Posted by: Frans Groenendijk on August 21, 2003 01:11 PM

Mats

Interesting comments on Africa. I agree. I am thinking about African social capital issues, and will respond.

Anne

Posted by: anne on August 21, 2003 01:38 PM

Just looking at GDP per capita seems a bit misleading. It doesn't deal with income and wealth disparities within a country. Furthermore, while there's certainly no doubt that China and India have seen amazing and sustained growth (again, who did it benefit, who did it leave behind?), and their size makes them two of the most important countries to examine, they are just two countries, and holding them up as proof that "globalizaiton" works is rather glib. Can you lead me to a source that gives a bit more information to back up your argument than these two graphs?

Posted by: David on August 21, 2003 02:18 PM

Just looking at GDP per capita seems a bit misleading. It doesn't deal with income and wealth disparities within a country. Furthermore, while there's certainly no doubt that China and India have seen amazing and sustained growth (again, who did it benefit, who did it leave behind?), and their size makes them two of the most important countries to examine, they are just two countries, and holding them up as proof that "globalizaiton" works is rather glib. Can you lead me to a source that gives a bit more information to back up your argument than these two graphs?

Posted by: David on August 21, 2003 02:19 PM

Globalization of the new technologies and free trade all would be wonderful things in getting per capita income in the poorer nations to rise if we can also assume there will be new investment in these economies so the new machines can embody the new technology. Many poor nations have trouble enough generating the savings from such investment - and now we have a U.S. fiscal policy designed to suck up all global savings for the petty amount of investment the U.S. is doing - completely on borrowed funds. Then again Bush43 is only rehashing a fiscal policy stance that was enacted during the second year of this graph. So the poor in America complain about tax cuts for the rich - but what about the really poor in the rest of the world?

Posted by: Hal McClure on August 21, 2003 02:19 PM

I would chime in with Mr. Slee upon the seemingly weak connection presented, though I do as well have to agree with the generally salient point presented here.

I have to present a disclaimer that I come about this not from a background in theoretical economics, but from my own independent observations and conjectures.

The greater issue at this point is not that globalization is the particular harm, but that this half-and-half mixture of free trade and protectionism is intolerable.

But, in the underlying factors that create the persitance of that issue lies the failure of globalization. It fails in the same fashion that dogmatic approaches to the world continually fail. An entity, and this holds whether we are speaking in terms of the individual human or coalition of nations, acts such to increase its own prosperity.

In the interest of a nation's own welfare it logically follows that they will attempt to exploit the furthest level of their ability. I realize that it is a basic tenent of globalization theory that this be allowed to occur. However, in this instance, even in the most ideal situation where a nation can be persuaded to drop tariffs and subsidies, how can a less prosperous nation compete? Unless there is a dramatic difference in capacity and costs of production and exportation for a commodity, there is no way that the weaker nation can counter the overwhelming imbalance of technology.

What am I missing in my thinking? Dropping out China and India to think in terms of the difficulties of smaller nations to adapt to globablization (which I realize probably invalidates the data, but nontheless) the line in the second graph would again trend upward.

Posted by: Tripleg on August 21, 2003 02:35 PM

I would chime in with Mr. Slee upon the seemingly weak connection presented, though I do as well have to agree with the generally salient point presented here.

I have to present a disclaimer that I come about this not from a background in theoretical economics, but from my own independent observations and conjectures.

The greater issue at this point is not that globalization is the particular harm, but that this half-and-half mixture of free trade and protectionism is intolerable.

But, in the underlying factors that create the persitance of that issue lies the failure of globalization. It fails in the same fashion that dogmatic approaches to the world continually fail. An entity, and this holds whether we are speaking in terms of the individual human or coalition of nations, acts such to increase its own prosperity.

In the interest of a nation's own welfare it logically follows that they will attempt to exploit the furthest level of their ability. I realize that it is a basic tenent of globalization theory that this be allowed to occur. However, in this instance, even in the most ideal situation where a nation can be persuaded to drop tariffs and subsidies, how can a less prosperous nation compete? Unless there is a dramatic difference in capacity and costs of production and exportation for a commodity, there is no way that the weaker nation can counter the overwhelming imbalance of technology.

What am I missing in my thinking? Dropping out China and India to think in terms of the difficulties of smaller nations to adapt to globablization (which I realize probably invalidates the data, but nontheless) the line in the second graph would again trend upward.

Posted by: Tripleg on August 21, 2003 02:38 PM

There's something missing from all this abstract talk about Africa's growth malaise, and that is a concrete understanding of the fact that most African "countries" are nations in name only. It's a bit much to expect a country's "leadership" to think about the "national good" when the very concept of nationhood is shared by hardly any of the population.

There are hard facts backing up my assertion about Africa's problems. See
http://reti.blogspot.com/2003_08_10_reti_archive.html#106098998024833329
for more on this subject.

What I find ironic about the underplaying of this issue is that I discovered the very paper that confirmed my own prior conclusions on this (i.e. Brad DeLong's) very website.

Posted by: Abiola Lapite on August 21, 2003 02:39 PM

Tremendously sorry for the double post.

My screen did not refresh so I figured that I had a connection error.

Posted by: Tripleg on August 21, 2003 02:44 PM

Tripleg, what you're missing is the
difference between comperative advantage
and absolute advantage. What matters is not
the difference in technology between rich and
poor countries, but the relative difference
in production of different goods between rich and
poor countries.

As far as "is there a line, or isn't there" question; As Brad said, in the first graph the
line is pretty much flat (as Mr. Slee noted,
no correlation). But in the second graph the
bigger countries in terms of population are given
more weight - hence there's a downward sloping line.
If one wants draw the line while "taking X into
account" you do it by running a multivariate
regression. This is sometimes known as
"conditional convergence" - the fact that once
all sorts of things are taken into account -
such as political situation, saving rates,
education, openess (globalization), size of
government - poorer countries grow faster then rich ones.
And yes, the openess variable is positively
related to growth rate (Sachs and Warner) -
which is actually sort of an extra bonus to
globalization. From standard trade theory one
would expect only a static gain from trade (an
increase in the level of income but not in its
growth rate). The fact that it affects growth
rates is probably indicative that a lot of
technology transfer from rich to poor countries
occurs through trade - the tech is embodied
in the goods.

Finally to David. Yeah looking at GDP per capita
says nothing about how income and wealth
distribution change with trade or growth or
both. There's is work on this however.
In general, since poor countries tend to be
labor abundant and capital scarce, trade
essentially allows them to export labor and
import capital. This means that usually the
workers in those countries gain, while capital
owners lose (vice versa in rich countries).
The effect of growth on income distribution -
well, the Kuznets curve probably still says
it all - income inequality increases with
growth at first, and then turns around and
decreases. Holding other variables, such
as tax policy, constant of course. Anyway,
this is a wide subject, and this post is already
too long.

Radek

Posted by: radek on August 21, 2003 05:29 PM

"...is it just a coincidence that India and China, both of them rapid globalisers, did so well, whereas the countries of sub-Saharan Africa (in particular) combined severely limited economic integration with dismal economic performance? Bearing this in mind, the more closely one looks at the charts, the stronger the case for globalisation seems."

No, because it doesn't test for whether any of the gains are at the expense of the latecomers, some sort of spillover or a similar but price-mediated thing. The data so far also fits the hypothesis "globalisation hurts, but unevenly with globalisers taking enough more from non-globalisers that they have a net gain". Are there figures showing whether increases in aggregate globalisation are associated with aggregate improvements? We would need to see those too.

Posted by: P.M.Lawrence on August 21, 2003 05:55 PM

America and the European Union both maintain trade restrictions that hurt the developing countries. They have been promising reform for years, but the world is still waiting. Mr Fischer calls for "significant increases" in aid, though he acknowledges that aid will need to be more selective if its patchy record of success to date is ever going to be improved.

Yeah, and they mantain those restrictions in exactly the areas where the third world has the most significant comparative advantage, and they only wanted globalization if it went hand in hand with free investment such that they could capture some (or most) of the benefits from trade of the third world nation. (After all, it isn't the same for a Malaysian shoe company to export to the U.S., where Malaysia gets the benefits in terms of wages and profits, as for a U.S. company to do it where Malaysia only gets the wages and the profits are captured by first world multinationals.)

Actually, I've yet to see a theory or framework of international trade that takes the distortions of "who benefits" that occur because of free investment and adequately addresses them.

Posted by: Lorenzo on August 22, 2003 06:30 AM

Since when is India a "rapid globalizer"?? The case of India is a great example of how much of this research is quite flawed. Is the tag "globalizer" a relative or an absolute one? Relative to where the country was c1990, yes, India has "globalized". Relative to where Haiti is today, no, India still looks mighty "closed". The small debate over Dollar and Kraay's similar research a few years back should have found more reflection in Fischer's comments.

Posted by: General Glut on August 22, 2003 06:45 AM

Since when is India a "rapid globalizer"?? The case of India is a great example of how much of this research is quite flawed. Is the tag "globalizer" a relative or an absolute one? Relative to where the country was c1990, yes, India has "globalized". Relative to where Haiti is today, no, India still looks mighty "closed". The small debate over Dollar and Kraay's similar research a few years back should have found more reflection in Fischer's comments.

Posted by: General Glut on August 22, 2003 06:50 AM

Since when is India a "rapid globalizer"?? The case of India is a great example of how much of this research is quite flawed. Is the tag "globalizer" a relative or an absolute one? Relative to where the country was c1990, yes, India has "globalized". Relative to where Haiti is today, no, India still looks mighty "closed". The small debate over Dollar and Kraay's similar research a few years back should have found more reflection in Fischer's comments.

Posted by: General Glut on August 22, 2003 06:55 AM

I swear I hit the "post" button only once!

Posted by: General Glut on August 22, 2003 07:01 AM

General Glut, level of globalization is a relative condition. I'll assume you aren't suggesting that Haiti is a great investment opportunity?

How many on this thread arguing against trade have read Brad and Larry Summer's research piece on the relative cost of capital equipment investment?
http://econ161.berkeley.edu/pdf_files/QJE_Equipment.pdf

Posted by: Stan on August 22, 2003 09:29 AM

The key to all these papers is to do exactly what Fischer in fact does, which is to rapidly and early on call China a "rapid globaliser" and hope everyone's forgotten by the time questions come around. If you're making a general "trade is good mkay" presentation, then sure, include China and India. But since what Fischer, the Economist and, distressingly often, Brad, are actually trying to say is "Don't have capital controls and join the WTO", it's actually very poor form to enlist China in this enterprise.

Posted by: dsquared on August 22, 2003 09:43 AM

dsquared, just because a country doesn't fit all of the criteria of a model doesn't mean it isn't closer to it than others. The term "rapid globalizer" is loose but it definately includes more than capital controls.

Chile has capital controls as well and it is much more open to trade than any of its neighbors. China is much more open to trade than it was 20 years ago. It is also more open than many other developing countries.

Perhaps a better point would be that capital controls can be used without negatively impacting growth? Maybe the threat they pose for domestic corruption or abuse of foreign investors can be overcome with better design?

Posted by: Stan on August 22, 2003 11:20 AM
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