November 26, 2003

Economic Growth Lunch: December 3, 2003

Trade and Growth

Can we believe the large effects of trade on economic growth found by Sachs-Warner (1995), Frankel-Romer (1999), Dollar (1992), Edwards (1992), and others--those that say that a one percentage point increase in import and export shares is associated with a two percentage point increase in real GDP?

Readings:

  • Jeffrey Sachs and Andrew Warner (1995), "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity 1995:1, pp. 1-118.
  • Jeffrey Frankel and David Romer (1999), "Does Trade Cause Growth?" American Economic Review 89:3 (June), pp. 379-399.
  • David Dollar (1992), "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-85," Economic Development and Cultural Change, pp. 523-544.
  • Sebastian Edwards (1992), "Trade Orientation, Distortions, and Growth in Developing Countries," Journal of Development Economics 39:1 (July), pp. 31-57.
  • Dani Rodrik (1999), "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence" (Cambridge: NBER Working Paper 7081, April).
  • Paul Krugman (1995), "Dutch Tulips and Emerging Markets," Foreign Affairs 74:4 (July/August), pp. 28-44.

From Krugman (1995):

...Mexico's crisis is neither a temporary setback nor a purely Mexican affair. Something like that crisis was an accident waiting to happen because the stunning initial success of the Washington consensus was based not on solid achievements, but on excessively optimistic expectations. The point is not that the policy recommendations that [John] Williamson outlined are wrong, but that their efficacy--their ability to turn Argentina into Taiwan overnight--was greatly oversold. Indeed, the five-year reign of the Washington consensus may usefully be thought of as a sort of speculative bubble--one that involved not only the usual economic process by which excessive market optimism can be a temporarily self-fulfilling prophecy, but a more subtle political process through which the common beliefs of policymakers and investors proved mutually reinforcing. Unfortunately, any such self-reinforcing process must eventually be faced with a reality check, and if the reality is not as good as the myth, the bubble bursts. For all its special features, the Mexican crisis marks the beginning of the deflation of the Washington consensus....

The logic that says that tariffs and import quotas almost always reduce real income is deep and has survived a century and a half of often vitriolic criticism nearly intact. And experience teaches that governments that imagine or pretend that their interventionist strategies are a sophisticated improvement on free trade nearly always turn out, on closer examination, to be engaged in largely irrational policies--or worse, in policies that are rational only in the sense that they benefit key interest groups at the expense of everyone else.

Yet there is a dirty little secret in international trade analysis. The measurable costs of protectionist policies--the reductions in real income that can be attributed to tariffs and import quotas--are not all that large. The costs of protection, according to the textbook models, come from the misallocation of resources: protectionist economies deploy their capital and labor in industries in which they are relatively inefficient, instead of concentrating on those industries in which they are relatively efficient, exporting those products in exchange for the rest. These costs are very real, but when you try to add them up, they are usually smaller than the rhetoric of free trade would suggest. For example, most estimates of the cost of protection in the United States put it well under one percent of GDP. Even that cost is largely due to the United States's preference for policies, like its sugar import quota, that generate high profits for those foreign suppliers granted access to the U.S. market. Highly protected economies, like most developing countries before the rise of the Washington consensus, suffer more. Still, conventional estimates of the costs of protection have rarely exceeded five percent of GDP. That is, the standard estimates suggest that a highly protectionist developing country, by moving to completely free trade, would get a one-time economic boost equal to the growth China achieves every five or six months.

For concreteness, let's consider an emerging market economy with outrageous--extraordinary--trade barriers. Trade barriers that effectively double the cost of obtaining imports. And let's assume that under free-trade conditions, the share of imports in GDP would be 8%. But that with the 100%-equivalent tariff of its existing trade barriers, the share of imports in GDP is only 4%. What, in this situation, would be the effect on the economy of a shift to complete free trade?

The first and most obvious effect is the Harberger triangle lost due to protection: opportunities for beneficial exchange--trading exports we don't value much for imports we do--are lost, and the magnitude of the loss shows up as a triangle on the supply-and-demand for imports and exports diagram.

Moving to free trade allows the economy to purchase an additional 4% of GDP's worth of imports--and under partial equilibrium assumptions, the average user surplus of these imports is half its export cost. 4% x 1/2 = 2%: the shift to free trade raises the value of real domestic purchases by 2%. Suppose this shift to free trade takes place over a decade. Then it corresponds to an increase of 0.2% in the economic growth rate over that decade. Suppose this shift to free trade takes place over two decades. Then it corresponds to an increase of 0.1% in the economic growth rate over those two decades. This shift if very worth doing. But it does not have a decisive--it only has a barely noticeable--effect on the overall path of economic growth.

It was back-of-the-envelope calculations like this that led Paul Krugman, early in the 1990s, to argue that neoliberals were grossly overselling their medicine on the international marketplace.

There are, it seems, three ways to resolve this problem:

  1. The Gordon Tullock move: assert that the social losses are much greater than the Harberger triangle. Assert that vastly greater amounts and resources are dissipated over the struggle over who is going to get the right to import.
  2. The Cumby-DeLong move: assert that the share of produced means of production in the production function is very large, and that a relatively small efficiency gain will, when fed to a growth model with a large share of produced means of production, generate a large boost to economic growth.
  3. The missing link move: assert that domestic technological and organizational progress is closely and tightly tied to the volume of trade, considered as a proxy for social and technical contact and for the extent to which the government takes down the umbrella protecting inefficient national champions from the rains of competition.

Or you can assert that the empirical findings of tight links are due to economists trying to hard, and unconsciously torturing ambiguous data until they confess.

Which--if any--of these ways is correct? Ah. That is the problem, isn't it?

Posted by DeLong at November 26, 2003 12:00 PM | TrackBack

Comments

I think the question can benefit from a bit of rephrasing.

The fundamental limit on economic activity is how much choice you've already got access to -- someone with an ax, a shovel, some means of starting a fire, and the unpeopled expanse of a hypothetical North America to exploit is probably dead before they can get enough economic activity going to support them, since they have a very small number of very tighly constrained choices. (step one - do not freeze or starve...)

Free trade is useful in as much as it expands the amount and kind of choice available; either things get cheaper, freeing up resources, or things which weren't available before become available, or new markets open which increases revenue, all of which allow people trying to create new kinds of choice marginally better odds. (The more solutions from other people you can use, the better off you are, and the more of them that are ambiently available, the more surrendipity can happen to create new choice.)

I'd argue that at present there isn't very much differentiation in the kinds of choice available across the developed and developing worlds; the differentiator is pretty strictly price. When that's true, the benefits from free trade are going to be pretty marginal, because it imposes social costs in return for narrow marginal improvements on any scale anyone actually sees -- pervasive small indirect benefit versus the risk of immediate personal catastrophe.

If there was a source of new kinds of choice -- better organizational methods, a different scientific tradition, a different technological history -- free trade would be expected to show much larger consequences (as was indeed the historical case.)

What we've got, though, is an attempt to obtain marginal efficiencies through a construction of free trade heavily tied to an insistence on a particular set of organizational forms. Those forms are about at the limit of their ability to provide new kinds of choice. (As evidenced by the pursuit of marginal efficiencies and use of coercive means to get market lock in.)

So I'm going to argue that the biggest single constraint on economic progress isn't the presence or absence of free trade, but having hit the limits of the kinds of choice the existing kinds of organization can provide. There are lots of other kinds of organization (and Open Source is demonstrating a very small number of them), but they haven't got much chance of getting started in the presence of the intollerance of competition to or for the traditional forms.

A market for organizational forms is not what we've got, but I'd argue it would do a better job of increasing access to choice under present circumstances than any amount of free trade would.

Posted by: Graydon on November 26, 2003 12:51 PM

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Benefits of trade for a country has to depend on how much captial is already in that country.

Take a country with little capital (human, industrial, infrastructure...). Small scale investments doesn't pay off as everything has to be done from scratch. Hence trade has to mean take capital away from the country (e.g. slaves, oils). Imports has then to be whatever is needed to fuel this capital relocation (guns and luxuries to project and symbolize power).

Take a country with a capital depth on the same scale as its int'l environment. Investments do pay off as some basic structure is already available at no or little cost, and we are closer to neoclassical assumptions of no benefits of scale. Hence this is a well studied case, were trade does good.

Take the Swedish copper, which once (couple of hundred years ago) dominated the world market. Instead of seeing import revenues fuelling eternal civil wars, we had a lot of (pre-) industrial spin-off, which are today national symbols. (rest products from ore enrichment was processed into paints which still color our cottages, cattle driven to the mines for making ropes [to drain the shafts] also formed a food-industry which still produces its now classical products etc.) To my knowledge, there are not these kind of spin-offs from today's oil fields in the 3rd world. But our then int'l trading partners were not capital deep enough to sustain a high productivity manufacturing of weapons like grenade-launchers and automatic rifles, nor were they able to deliver paint and food at competitive prices including transport.

Posted by: Mats on November 26, 2003 12:55 PM

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Paul Krugman

Posted by: Gnao on November 26, 2003 01:01 PM

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Graydon may be on to something. I wonder how much gains or losses might have a lot to do with the size of an economy. Think of the US, for instance, which is big AND diversified--if we had to make do with autarky it wouldn't be pleasant (no coffee!) but it wouldn't be fatal either. There's already a lot of internal trade that goes on, so the choices available do not expand very much through trade--do I use a Mr. Coffee or a sleek new German espresso maker (cue the 'Sprockets' theme song)?

But think of a small specialized country like Nicaragua (coffee) or a Gulf state (oil)--that has awful productivity in other sectors and thus very little internal trade. Here, comparative advantage helps otherwise useless products (for Nicaragua and Dubai) buy nice things like food.

Brad: Can you please give a quick mathematical rundown of how (2) would work and how one might go about measuring that? Thanks. I need something to think about while enjoying the warm weekend on my bike down here in San Diego.

Posted by: Chris on November 26, 2003 02:12 PM

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The other cost that has to be taken into account with opening up to free trade is the transistion and transaction costs (henceforth t+t costs) of reallocating labout and capital.

Lets take 2 examples from Australia. The first one is the Victorian sugar-beet industry, which was destroyed by the trade in cheap Queensland sugar upon Federation in 1901. Although the transition destroyed the fortune of the Sugar Beet Kings, it was pretty cheap and easy to stop growing sugar beet, and start growing, say, potatos in those fields.

The second one is the rationalisation of the car industry following the ramp-down of car tariffs in the 1980s. Now, in this case, higher transition costs were expected and planned for and paid for by the federal government (the "Button Car Plan"), as Australia went from 7 vehicle manufacturers down to three.

If we take Mr De Long's example of a highly protected nation newly exposed to Free Trade which sees it's import substiutution industry shrink from 8% to 4%, and we assume that this gains a 5% real GDP increase, if transistion and transaction costs are 25%, then the costs of reallocting that 4% of GDP equals a full 20% of the total gains from trade.

Of course, if the 'winners' from free trade are, say, an agricultural hinterland, and the 'losers' are the industrial areas around the periphery of major cities, then the t+t costs may be higher as workers need to relocate as well as reskill, and investement needs to be made in transport etc links to enable the new 'winner' areas to exploit their potential gains.

Finally, you need a pretty sophisticated and honest political system to succedd in this, otherwise you get political trouble as the 'winners' keep all the gains, and the 'losers' see nothing from free trade but lost jobs and opportunities they cant access (cf the rise of Hansonist right-wing populism following the end of explicit labour market adjustment programs under the Howard government in the 1990s).

Ian Whitchurch

Posted by: Ian Whitchurch on November 26, 2003 02:46 PM

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Graydon, pardon me, seems to be missing that the number of problems is finite, since we all share similar failings.
Ergo, any new "solution" (technological/supply chain/tax incentive) is putting someone out of business.
I'd argue the total number of "solvable problems" is increasing, but not nearly at the rate of "solutions."
HDTV takes away from TV. They are distinct, competitive, and for precisely the same service (carrying the channel to you!).

Did that make sense? Should I have posted it?

Posted by: Josh Narins on November 26, 2003 02:47 PM

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What is the cost of a tariff on an import that has no (or little) domestic substitute, and yet is a strong production or consumption complement to the rest of production factors or consumption basket items?

Example: what would be the cost of making AIDS drugs unavaible to Africa? How many utils does a dead man produce?

Of course, marginal changes in consumption / production possibilities generate only marginal changes in welfare, at least statically.

When I think of historical examples of closed-economies that have tried to industrialized, I am driven to think the dynamic costs of trade protection run much higher than this kind of back of the envelope calculation would lead us to believe. And are there any example of successful industrial development by a closed economy?

I guess open trade comes with a social mindset: openness is good for us. But it may come less from trade per se than from forced exposure to new ideas (of all kinds - organizational, political, economic, scientific and technical etc.) stemming from trade. Until someone convinces me that countries can stay open to foreign ideas without opening their trade, I shall remain strongly committed to defending free trade.

The case of Mexico leads me to a different conclusion: free short-term capital movements in foreign currency are not good for you. And the original sin is there to stay until these countries strenghen and open their financial system. Especially in countries where revolutions and political intimidation are still thought of as acceptable by too many...

The one thing I do aggree with is that economists have, quite stupidely I believe, endorsed the belief that economic electro-shock therapy is always the best. Whereas in the real world, it does seem that there are sequences to be followed and that good institutions don't come to life over-night. How surprising!

Happy thanksgiving. My gratefulness today will go the the great minds who have supported free trade ;-)

Posted by: Jean-Philippe Stijns on November 26, 2003 02:52 PM

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P.S. Perhaps what the Mexican case teaches me beyond anything else is that soft pegs invite speculation and that currency crises are often very costful. Could have Mexico have attracted capital inflows in Pesos without some sort of peg? Dunno, but maybe the resulting, presumably lower, inflows would have been better suited than the large inflows that it saw, only to be followed by large outflows. And since I am not convinced NAFTA is an optimal currency area, I hardly see why Mexico would want to peg in the first place. A truly independent central bank would seem to me to be a cheaper way to achieve price stability... And as long as a country's government is not willing to give its central bank true independence, well, there is probably no hope for any kind of viable peg anyway...

Posted by: Jean-Philippe Stijns on November 26, 2003 03:11 PM

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Jean-Philippe: the US developed very well behind trade barriers for most of the late 19th and early 20th century.

(Caution: if any would-be protectionist is tempted to say "aha!", he should first read Irwin, "Interpreting the Tariff-Growth Correlation in the Late Nineteenth Century")

Posted by: Kimon on November 26, 2003 03:50 PM

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Josh -

The number of problems is finite, but it might be Vast, too.

And trade is not a zero sum game; we're typing on computers, not huddled in huts made from half-cured hide, despite bronze smiths putting flint knappers out of business.

The human trick, the thing we're specialized for as a species, is to gang up on problems. We're really good at complex co-operation and most of this capability is built into our social institutions, rather than individual humans.

So a market -- and trade -- is not an end in itself, not really; it's there as a means of facilitating ganging up on problems. The more kinds of problem a social system can handle, the more choice people have -- why, yes, you can live there, we know how to drill wells and build all-weather roads... sorts of things.

The cost of handling problems gets into 'the number of problems that can be handled at any given time', and that defines the general access to choice -- you can live there because many jobs pay well enough to afford the place, even though the wells and the roads run the price up a bit, versus 'you have to be rich to live there'.

So the question about free trade is really 'is this actually increasing the ability of this society to handle problems, either in type or number?'

That's a very hard question to answer, but I think that's a better question to try to answer than in terms of what it does to GDP or monetary value of exports, since those don't directly correlate with the ability of the society to create and distribute access to choice for its members.

Posted by: Graydon on November 26, 2003 05:41 PM

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It seems to me that those that are all for free trade and dismiss the often painful adjustments that it requires are in occupations that are unlikely to be affected by such adjustments or are quietly confident that they could adjust to the loss of their job.

Labour is not a perfectly flexible and adjustable resource. People cannot move cities at the drop of a hat, and retaining and reskilling takes time and cannot always be replied on to generate a job.

Imagine for a moment that a movement occurred in which economists were outsourced to a country where the standard of living was cheaper, and therefore using high speed data links, the functions of economists were quite able to be carried out without requiring them to be locally available.

This is entirely possible, people are pretty much the same level of intellgence all over the world, and therefore local economists don't have many advantages over those overseas.

Now imagine that you have been laid off and that your occupation has effectively been demolished, you now have to find the resources to retrain and reskill, and you are now competing in whatever area that you choose to retain and reskill with much younger people. for example, you may decide to become a school teacher, but you are competing with people much younger than yourself and they may well hold an advantage over you in the eyes of potential employers.

Being able to purchase widgits for cheaper is not going to benefit you specifically, as you may well find yourself without the means to purchase widgits at all!

There is always a human cost to removing trade barriers, and all too often that cost is ignored with hand waving that the total economy improves. Yes it may well do so, but the benefits are reaped by those able to either stay in jobs that are unaffected, those nimble enough to be able to take advantage of the new opportunities or those able to acquire unfair advantages in the new economy.

The cost of removing trade barriers, is that some part of the populace may well never get an equivalent job ever again. This can take a generation of so to smooth out, as their children move into the new jobs that may or may not be created.

Wal Mart is able to source goods cheaply and hold down costs, does this provide a benefit to those working in the retail industry or not? Are these people able to move into other occupations, and if not why not?

If other countries produce foodstuffs more cheaply than US farmers, would it be a sensible thing to eradicate farming as an industry in the USA (apart from small niche activities) and rely entirely on external supply?

Posted by: Alex Heatley on November 26, 2003 06:21 PM

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Did not Krugman also discuss the models when subsidizing nascent industries brings the country an advantage in the long run? So if free trade assumes no subsidies the gain is sometimes negative? Actually, I always thought this logic also applied to any industries in non-decreasing-returns phase.

Posted by: Leopold on November 26, 2003 07:08 PM

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Did not Krugman also discuss the models when subsidizing nascent industries brings the country an advantage in the long run? So if free trade assumes no subsidies the gain is sometimes negative? Actually, I always thought this logic also applied to any industries in non-decreasing-returns phase.

Posted by: Leopold on November 26, 2003 07:13 PM

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Good Lord! A thread that actually discusses the possibility that we may not know with absolute certitude whether free trade is a net good! A thread where pros and cons are discussed rationally and in a moderate tone of voice!

Surely I am dreaming; after digesting the turkey and pumpkin pie, it will be vanished like a sweet mirage.

Posted by: Charles on November 26, 2003 10:34 PM

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It is not really a matter of trade or no trade: this would really be just an invitation to straw man arguments. The argument is over the terms and conditions of trade. In the previous thread on this topic I advanced a crude argument to suggest that trade clearly benefits advanced industrial economies and probably to a greater degree than it does underdeveloped economies. In the former case, it is a matter of increased international trade increasing the economic risk and instability in the lives of a large segment of the working population with an increased pace of sectoral realignments and of an increase in income inequality. In this case, public social supports and after-market income redistributions can allieviate the pains of trade while realizing its gains, at once distrubuting its benefits more widely in the economy and rendering it more politically palatable. Is it any wonder that European countries that are much more exposed to trade than the U.S.A. prefer a higher degree of social democratic type welfare provision?

In the case of underdeveloped or putatively developing economies the case seems less clear cut. In the prior thread, a case was made for export-led growth by citing the examples of Taiwan and South Korea. The response was that their robust development was accompanied by high tariffs, import substitutions and strategic industrial policy guided by the government- (land reform, as well, although this was not mentioned.) It seems to me that the weakness of neo-classical claims for free trade lies in their general hostility toward government and their tendency to exalt private market exchanges as the sole source of growth, as with IMF type demands for the privatization of public services. It seems to me that the development of internal markets, a sufficient degree of differentiation and interconnectivity in the domestic economy, would be as much a desiderata of economic development as the pursuit of gains from international trade and the import of foreign capital goods, that comparative advantage changes dynamically with time such that being locked-in at a low level of the value added chain is not a particularly great advantage, and that government provision of infrastructure and other public goods as well as minimal survival guarantees, such as, e.g., water security, amounts to a necessary loss-leader for development, (though without an adequate private base for tax revenues these would not be possible). At any rate, a one-size-fits-all prescription, based on a scientific understanding of the universal "laws" of the market seems less germane here, than a casuistical application of particular models to cases. As to the three proffered alternative explanations: 1) the Tullock move seems to me the least likely, as in cases where there are import/export monopolies there are also probably authoritarian regimes and overt competition, using "social resources"- (and why is it only here that the role of "social resources" is acknowledged?)-, is unlikely to be permitted, though one may otherwise complain of both the economic and political costs of dictatorship. 2)The DeLong move: I assume that "produced means of production" means capital goods and in underdeveloped economies these are precisely scarce and do not play a large role in the available production possibilites, at least initially. The development of an increasing degree of capital intensity in production is synonymous with industrial development but this is counterbalanced by the need for sufficient incomes to provide both adequate demand and required savings. At any rate, capital goods alone, regardless of the context of their functionning, do not guarantee enhanced economic growth. 3)The "missing link" move: it should be emphasized that production technologies form interconnected, complementary complexes; the enhancement of one component without uptake from the others will not generate increased overall productivity but rather a production bottleneck. This is what one often sees in images of formerly "Third World" nations: donkey carts beside Mercedes trucks, airplanes beside canoes, oil refineries with people from shanty towns selling gas in gallon cans by the road. As for business organization, multinational corporations are vastly more sophisticated than indigenous business organizations, which have no chance of competing, and often organize their inputs without regard to the local economy. The result is a two-tiered economy in which never the twain shall meet.

Posted by: john c. halasz on November 27, 2003 01:38 AM

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International trade is one of those things like moving the peasants into the cities: it brings things into the numbering system.

When the sweet little girls of Java or Ipanema start putting it out on credit cards, there is a sudden leap in GDP -- and incidentally an exception to the economists' Law that services are refractive to increases in productivity.

Posted by: David Lloyd-Jones on November 27, 2003 06:01 AM

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Excellent discussion!

I'm going to side with those who talk about the dynamic effects of trade. I also suspect that the dynamic gains from trade (and thus from lowering barriers) far outweigh the static effects that the back-of-the-envelope calculations estimated. The exposure to new ideas (organizational, scientific, political, etc.) that J-P Stijns talks about seems central to this. But let me put a slightly different spin on the same story.

International trade analytically looks exactly the same as technological progress. And many people believe that tech. progress fundamentally has dynamic benefits beyond any one-time efficiency gain. I'm not sure we really know how, to be honest. How does a new type of coffee maker (to continue a leitmotif here), a better way to produce washing machines, or a better piece of tax accounting software create dynamic gains beyond their initial benefit? I don't know -- it's a bit of a mystery, I think. Nevertheless, most people agree that they do have dynamic benefits. And trade -- which is just another form of efficiency-enhancing technological progress -- does the same thing.

The adjustment costs to trade that some of the comments mention are real, may be large at times, and certainly need to be taken into account... but then so do the dynamic -- and largely unmeasurable -- gains from trade. The question is how do we do that?

Because those dynamic gains from trade are so hard to measure explicitly, that's exactly why the trade and growth literature is so important -- trade and growth studies effectively estimate the effects of those dynamic gains from trade that we can't measure directly. And the evidence seems to suggest that those mysterious, unmeasurable dynamic gains are large.

Kash

Posted by: Kash on November 27, 2003 08:29 AM

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I'm with J-P and Kash. I have to think the biggest gains are the dynamic and competitive ones. Compare American products and American manufacturing techniques before Japanese and German manufacturers entered the market to what they eventually became. The improvement is startling. You could not make a Pinto today and get away with it, but Ford sold a million of them in the 1970s.

John's point about trade not being a panacea for developing countries also seems right. What's tricky about this is that there are no examples of successful development in which countries did not compete on the world market. As Paul Krugman once put it, "Every successful example of economic development this past century--every case of a poor nation that worked its way up to a more or less decent, or at least dramatically better, standard of living--has taken place via globalization; that is, by producing for the world market rather than trying for self-sufficiency." But at the same time, there are any number of countries that have tried to produce for the world market that have not made the leap. Having an outward orientation may be a necessary but not sufficient condition. (It's probably not quite right to call the East Asian policies "import substitution," in the sense that that most of the subsidized industries were not producing primarily for the domestic market at all, but were intended from the beginning to produce for the world market.)

Of course, this is also complicated by the fact that almost all of our examples of successful 20th-century development come from Asia.

Posted by: James Surowiecki on November 27, 2003 10:07 AM

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Trade contains many complex elements. Exports actually conjure Externalty Costs to Consumers, as Exports reduce domestic supplies; this inciting a increase in Price, to buy limited supply or capitalize excessive supply. This Externalty Cost is not computed in most analysis of Trade, but it is very real and present.

Imports compete with domestic supply, and thereby constrict domestic production; this producing excessive Capital Costs, loss of Labor Wages, and inferior Growth rates due to less Profits and Wages.

Trade, after all this is said, must be considered essential and benefical; especially in Resource aquisiton. The above elements do impact, though; generating a examination of Trade in terms of volume, as Trade moves from a Plus to a Negative.

I have conducted some rudimentary evaluations, and believe no more than 3.7% of GDP could be effected by Trade. For this analysis, I have used some observations of the German economy during the two World Wars, minus the munitions industries.

I believe Trade must be considered in terms of a Bell curve, whose apogee should therefore be 3.7% of GDP. The baseline should be the level of Imports. The left half of the Bell curve reflects benefical trade, while the right half of the Bell curve reflects externalty costs of Trade. This is considered the normal split with Imports equaling Exports. Export surplus shifts the benefit line to the Right, while Export deficits shift the benefit line to the Left.

The Above seems like an appropriate means to evaluate Trade benefit or loss.
lgl

Posted by: Lawrance George Lux on November 27, 2003 10:08 AM

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Trade contains many complex elements. Exports actually conjure Externalty Costs to Consumers, as Exports reduce domestic supplies; this inciting a increase in Price, to buy limited supply or capitalize excessive supply. This Externalty Cost is not computed in most analysis of Trade, but it is very real and present.

Imports compete with domestic supply, and thereby constrict domestic production; this producing excessive Capital Costs, loss of Labor Wages, and inferior Growth rates due to less Profits and Wages.

Trade, after all this is said, must be considered essential and benefical; especially in Resource aquisiton. The above elements do impact, though; generating a examination of Trade in terms of volume, as Trade moves from a Plus to a Negative.

I have conducted some rudimentary evaluations, and believe no more than 3.7% of GDP could be effected by Trade. For this analysis, I have used some observations of the German economy during the two World Wars, minus the munitions industries.

I believe Trade must be considered in terms of a Bell curve, whose apogee should therefore be 3.7% of GDP. The baseline should be the level of Imports. The left half of the Bell curve reflects benefical trade, while the right half of the Bell curve reflects externalty costs of Trade. This is considered the normal split with Imports equaling Exports. Export surplus shifts the benefit line to the Right, while Export deficits shift the benefit line to the Left.

The Above seems like an appropriate means to evaluate Trade benefit or loss.
lgl

Posted by: Lawrance George Lux on November 27, 2003 10:10 AM

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I'm with J-P and Kash. I have to think the biggest gains are the dynamic and competitive ones. Compare American products and American manufacturing techniques before Japanese and German manufacturers entered the market to what they eventually became. The improvement is startling. You could not make a Pinto today and get away with it, but Ford sold a million of them in the 1970s.

John's point about trade not being a panacea for developing countries also seems right. What's tricky about this is that there are no examples of successful development in which countries did not compete on the world market. As Paul Krugman once put it, "Every successful example of economic development this past century--every case of a poor nation that worked its way up to a more or less decent, or at least dramatically better, standard of living--has taken place via globalization; that is, by producing for the world market rather than trying for self-sufficiency." But at the same time, there are any number of countries that have tried to produce for the world market that have not made the leap. Having an outward orientation may be a necessary but not sufficient condition. (It's probably not quite right to call the East Asian policies "import substitution," in the sense that that most of the subsidized industries were not producing primarily for the domestic market at all, but were intended from the beginning to produce for the world market.)

Of course, this is also complicated by the fact that almost all of our examples of successful 20th-century development come from Asia.

Posted by: James Surowiecki on November 27, 2003 10:12 AM

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Trade contains many complex elements. Exports actually conjure Externalty Costs to Consumers, as Exports reduce domestic supplies; this inciting a increase in Price, to buy limited supply or capitalize excessive supply. This Externalty Cost is not computed in most analysis of Trade, but it is very real and present.

Imports compete with domestic supply, and thereby constrict domestic production; this producing excessive Capital Costs, loss of Labor Wages, and inferior Growth rates due to less Profits and Wages.

Trade, after all this is said, must be considered essential and benefical; especially in Resource aquisiton. The above elements do impact, though; generating a examination of Trade in terms of volume, as Trade moves from a Plus to a Negative.

I have conducted some rudimentary evaluations, and believe no more than 3.7% of GDP could be effected by Trade. For this analysis, I have used some observations of the German economy during the two World Wars, minus the munitions industries.

I believe Trade must be considered in terms of a Bell curve, whose apogee should therefore be 3.7% of GDP. The baseline should be the level of Imports. The left half of the Bell curve reflects benefical trade, while the right half of the Bell curve reflects externalty costs of Trade. This is considered the normal split with Imports equaling Exports. Export surplus shifts the benefit line to the Right, while Export deficits shift the benefit line to the Left.

The Above seems like an appropriate means to evaluate Trade benefit or loss.
lgl

Posted by: Lawrance George Lux on November 27, 2003 10:12 AM

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Trade contains many complex elements. Exports actually conjure Externalty Costs to Consumers, as Exports reduce domestic supplies; this inciting a increase in Price, to buy limited supply or capitalize excessive supply. This Externalty Cost is not computed in most analysis of Trade, but it is very real and present.

Imports compete with domestic supply, and thereby constrict domestic production; this producing excessive Capital Costs, loss of Labor Wages, and inferior Growth rates due to less Profits and Wages.

Trade, after all this is said, must be considered essential and benefical; especially in Resource aquisiton. The above elements do impact, though; generating a examination of Trade in terms of volume, as Trade moves from a Plus to a Negative.

I have conducted some rudimentary evaluations, and believe no more than 3.7% of GDP could be effected by Trade. For this analysis, I have used some observations of the German economy during the two World Wars, minus the munitions industries.

I believe Trade must be considered in terms of a Bell curve, whose apogee should therefore be 3.7% of GDP. The baseline should be the level of Imports. The left half of the Bell curve reflects benefical trade, while the right half of the Bell curve reflects externalty costs of Trade. This is considered the normal split with Imports equaling Exports. Export surplus shifts the benefit line to the Right, while Export deficits shift the benefit line to the Left.

The Above seems like an appropriate means to evaluate Trade benefit or loss.
lgl

Posted by: Lawrance George Lux on November 27, 2003 10:14 AM

____

Trade contains many complex elements. Exports actually conjure Externalty Costs to Consumers, as Exports reduce domestic supplies; this inciting a increase in Price, to buy limited supply or capitalize excessive supply. This Externalty Cost is not computed in most analysis of Trade, but it is very real and present.

Imports compete with domestic supply, and thereby constrict domestic production; this producing excessive Capital Costs, loss of Labor Wages, and inferior Growth rates due to less Profits and Wages.

Trade, after all this is said, must be considered essential and benefical; especially in Resource aquisiton. The above elements do impact, though; generating a examination of Trade in terms of volume, as Trade moves from a Plus to a Negative.

I have conducted some rudimentary evaluations, and believe no more than 3.7% of GDP could be effected by Trade. For this analysis, I have used some observations of the German economy during the two World Wars, minus the munitions industries.

I believe Trade must be considered in terms of a Bell curve, whose apogee should therefore be 3.7% of GDP. The baseline should be the level of Imports. The left half of the Bell curve reflects benefical trade, while the right half of the Bell curve reflects externalty costs of Trade. This is considered the normal split with Imports equaling Exports. Export surplus shifts the benefit line to the Right, while Export deficits shift the benefit line to the Left.

The Above seems like an appropriate means to evaluate Trade benefit or loss.
lgl

Posted by: Lawrance George Lux on November 27, 2003 10:17 AM

____

Y'know, the problem with the ideology of comparative advantage is that it's obviously true on logical grounds - but on empirical grounds it doesn't generally seem to work. I can't think of any state larger than a city-state (other than Britain) which didn't come to economic prosperity through a policy of protecting its' industries.

And that's because another part of the problem is the rule of diminishing returns - where it runs into not only the rule of economies of scale - but the power of scale.

Economics is wonderful, but perhaps a little more empirical research into how countries ACTUALLY (rather than theoretically) made themselves prosperous is required.

Posted by: Ian Welsh on November 27, 2003 10:55 AM

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My take on that is to notice that people do what they percieve to be in their best interests, and that recognizing indirect benefits is harder than recognizing direct detriments or direct benefits. (From which stem protectionism and all the various flavours of fraud and near-fraud which plague market systems.)

Successful globalization, successful industrialization, comes with an ideology about why this change is worth the effort.

Posted by: Graydon on November 27, 2003 11:05 AM

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Graydon,

You cant eat ideology.

Unless you are prepared to wear political - or other - revolt by the losers, the winners have to subsidise the transition.

Ian Whitchurch

Posted by: Ian Whitchurch on November 27, 2003 03:20 PM

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Graydon,

You cant eat ideology.

Unless you are prepared to wear political - or other - revolt by the losers, the winners have to subsidise the transition.

Ian Whitchurch

Posted by: Ian Whitchurch on November 27, 2003 03:23 PM

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Ian Welsh: there is a lot of litterature about empirical growth studies.
See for starters:
Barro, "Economic Growth in a Cross Section of Countries", QJE 106:2
Barro, "Determinants of Economic Growth", NBER W5698
Mankiw-Romer-Weil, "A Contribution to the Empirics of Economic Growth", NBER W3541 ("This paper takes Robert Solow seriously")

Empirical studies show that long-term growth comes from good infrastructures, the rule of law, and abundant human capital.

Trade policy by itself is a minor factor. However, "good" trade policy is correlated with "good" policy in general, so outward-oriented countries did much better than inward-oriented countries in the long run.

--Kimon

Posted by: Kimon on November 27, 2003 05:00 PM

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A good post, followed by a good discussion. But going back to the original post, aren't putative explanations (1) and (3) - the Tullock explanation of the cost of rent seeking behaviour and the correlation of trade openness with more competitive structures - basically the same thing?

AS for torturing the data, I reckon the confessions are too consistent from too many datasets for them to be false ones. And much of the torture has been relatively gentle (Gitmo rather than Saddamite techniques).

Posted by: derrida derider on November 27, 2003 05:23 PM

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Along with free-trade, currency devaluation was often a proviso of a structural adjustment program for developing countries (the extent to which it was carried out is another matter). Do these models consider a shift in the real exchage rate? If not, I wonder what effect, if any, that would have.

Posted by: Stephen on November 28, 2003 02:14 AM

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Along with free-trade, currency devaluation was often a proviso of a structural adjustment program for developing countries (the extent to which it was carried out is another matter). Do these models consider a shift in the real exchage rate? If not, I wonder what effect, if any, that would have.

Posted by: Stephen on November 28, 2003 02:20 AM

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"Which--if any--of these ways is correct? Ah. That is the problem, isn't it?"

No, it isnīt. That question is an overgeneralization. Some important empirical examples just donīt fit your preselected set of answers and/or satisfy the conditions for being grouped into various of the categories you propose.

"even a small efficiency gain will, when fed to a growth model with a large share of produced means of production"
How about feeding a database of case studies to a growth model that actually accommodates important differences in the values of variables - such as a relatively large or relatively small share of produced means of production?

The whole mess starts with the term "free trade" - which describes conditions of trade that do not even apply to exchanges between the most industrialized nations. Trade among states is selectively restricted trade. This is very much an analog problem, not one of placing your finger on the freedom switch.
It is, of course, quite obvious that the offsets involved in trade are not usually identical to what public discussion makes them out to be. It would, however, be useful to try and do an analysis informed by "public choice"-theory why this is so. Merely registering that there is lobbyism isnīt satisfactory. When, why and how was/is lobbyism successful? Are there any intertemporal, multi-country studies on this question? (Unfortunately I am not a Ph.D.-candidate...)
I do tend to think that the worst restrictions on trade are efforts at forcing it - like export subsidies on agricultural products. Theory predicts that they should be of no consequence, but I know examples from Africa where food imports displaced subsistence farming - in the sense that the African peasantsī enforced switch to producing crops for the world market actually lowered their income and the degree of "food security" they enjoyed (compared to their previous status as subsistence farmers). The inadequacy here would seem to be the reversal of causality, which is made to run from the monetary to the real economy - instead of the other way around.
If theory and experience donīt match, then youīve got to throw away the theory. In Dani Rodrikīs words: Neoliberal economics is to neoclassical economics what astrology is to astronomy.

Posted by: Joerg Wenck on November 28, 2003 03:56 AM

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Ian -

No, I can't eat ideology.

There isn't any compelling necessity for the winners to subsidize the losers, though, if the losers are losing badly enough; it's certainly not a general consequence of the current round of globalization. It's even possible for an ideology to be created which has most of the losers convinced that their sacrifice was worth it, for the greater good or prestige or some other thing like that.

Posted by: Graydon on November 28, 2003 04:21 AM

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