Stumbling and Mumbling

The Bottom Billion: a review

Why are poor countries poor and what can be done about it? One of the many delights of Paul Collier's The Bottom Billion is that he brings a marvellously high ratio of evidence to prejudice to these questions.
He describes superbly how the poorest countries are stuck in four poverty traps:
The conflict trap. Poverty raises the risk of civil war, which in turn destroys the economy.
The natural resources trap. Resources - oil, diamonds - crowd out other economic activity.
Being landlocked with bad neighbours.
Bad government.
His solutions for these traps don't toe any party line. For one thing, he says, "we cannot rescue them. The societies of the bottom billion can only be rescued from within."
He doubts that globalization and free trade can help much. It allows a brain drain and capital flight out of these countries, and they need protection from cheap Asian exports.
But he's also sceptical of unconditional aid; it's so politicized as to be dysfunctional, he says - though he also rejects the glib view that aid just ends up in Swiss bank accounts.
So, what are his answers? He has some ideas for reforming aid and trade policy - read them yourself. For me, though, some of his big, interesting, proposals are for governments to sign up to charters for democracy, budget transparency and investment.
I had thought these were just wishy-washy. But Collier points out that eastern European governments in the 1990s improved their governance and economic performance by committing to meet the standards necessary for joining the EU. He gives some evidence - necessarily incomplete - that similar commitment devices might help the poorest countries, partly by giving potential investors and aid donors greater security.
Another proposal is more controversial - the use of western military intervention to prevent civil wars.
I found this the weakest part of the book. A big claim requires big evidence, but Collier doesn't provide enough. Granted, there's one data point - Sierra Leone - which shows how cheap western military intervention can succeed. But Collier fails to show how this can be a model for elsewhere. Under what conditions can intervention work? What can western forces do to build safer societies and so avoid having to occupy countries for years?
A further issue I have is that the book is largely a description of his own research, with little review of the field of development economics: Easterly and Sachs warrant just one paragraph. This can lend the book a Freakonomics-type tone; readers who were irritated by that might be similarly irked by Collier.
However, these are quibbles. By economists' standards, Collier writes beautifully, with a mordant wit, which might be a necessary sanity-preserving device for anyone studying African economies.
Everyone with an interest in the poorest of the world should read this book. And if you don't have an interest in the poor, why the hell don't you?

Who's leaving?

The BBC reports that record numbers are leaving the UK. This conjures up pictures of fat tax-dodging racists like my dad fleeing to the Costa del Crime.
But this is only part of the story. Almost half those who left (table 2 of this pdf) were  not British citizens - a 28% rise on last year.
This highlights an overlooked point. Many immigrants are footloose - they can and do easily leave. I suspect more will do so if or when labour market conditions deteriorate; in 1992-93, when unemployment was high, there was net migration out of the UK. It's not as if people come here for the weather, is it?
This is one reason why I don't regard high immigration as a problem.
Even if you  think it is, though, today's figures raise another point - that most gross population growth comes from births rather than migration (734,000 vs 559,000).
So, if you're worried about the UK becoming a crowded island, shouldn't you want restrictions on indigenous births as well as on migration?

A race to the bottom?

Anyone who thinks that companies invest overseas mainly to take advantage of low wages should look at today's figures (pdf) on UK overseas direct investment.
They show that the vast majority of UK FDI  flows to high wage countries. Last year, UK firms invested £46bn overseas. £38.6bn of this went to OECD member states, who are mostly developed economies.
If you exclude South Africa, where the commodities boom has boosted FDI, UK firms invested just £1.1bn in Africa. They invested three times as much in France.
There's a message here for both anti-globalizers and free marketeers. The figures tell anti-globalizers that globalization isn't a race to the bottom as firms seek out the cheapest labour. But they also tell free marketeers that capital flows alone won't much help poor countries grow.
So why do firms invest so much in developed economies?
It's not because profits are higher. Quite the opposite. Last year, UK firms earned a return of 22% on their FDI in non-OECD countries, compared to just 10% on investments in OECD nations. Only some  of this difference is due to high profits  in oil and commodity production.
One reason why they like developed economies is that firms prefer to buy existing firms than grow them from scratch. Another reason, I suspect, is that property rights are more secure in developed economies. Just ask Shell.

Why is protectionism popular?

The outlook for free trade is bleak. Why? Why is protectionism so popular even though economists know it's a bad idea? Here are some possibilities:
1. The gains from free trade are dispersed - lower prices  for everyone. But the costs are concentrated - (temporary) job loss for a few. As Larry Summers says, if you've lost your job, lower prices are little solace. And the few losers get more publicity, and make more noise, than the  many winners.
2. Even the gains from free trade are not obvious. How many people, on buying a £10 pair of jeans, give thanks to free trade that they don't have to shell out £20 more, as they did a few years ago? Similarly, the tariffs we must pay on Chinese shoes are a hidden tax, one that doesn't appear on the price label.
3. People lose their minds when they think about national economies. It's obvious that, as individuals, we get rich by specializing in the trade we are least bad at, and buying stuff from others. When I go to work, I'm exporting. When I go to Tescos, I'm importing. No-one thinks of it this way, though.
4. People associate free trade and globalization with rising inequality, because both have occurred together in the UK and US. But correlation is not causality. Free trade has helped many of the poor - think how cheap it is to clothe a family thanks to imports from China. And rising inequality probably has more to do with technical change, managerialism and rent-seeking than with globalization.
5. Free-traders can be cavalier about the fact that some people lose. They think it sufficient to point out that trade is a potential Pareto improvement, without asking: can the gains be spread more widely?
My question is: what can economists do to combat  these sources of support for protectionism?
part of the answer is better propaganda - like this and this - to make the case for comparative advantage.
But shouldn't we also think of better ways than tariffs and quotas of helping losers, through better insurance and redistribution mechanisms?

Imperialism still matters

The legacy of imperialism is still with us, according to this paper (pdf) by Ewout Frankema.
He shows that income inequality today is highly correlated with the inequality of land distribution immediately after independence. Where colonialists left inequality, inequality still prevails; west Africa, oddly, is an exception to this trend.
Thic corroborates the message of this paper (pdf) which shows that inequality is remarkably stable over long periods within countries.
Worst still, the inequality left by imperialists was not economically necessary. Frankema estimates that there's no link between colonial land inequality and the crops a country is best at producing.
Instead, he shows, land inequality was greater where the colonists were European - and especially Iberian. And, surprisingly, land inequality was positively correlated with the spread of Caltholicism, even controlling for Iberian colonists.
So, colonial land inequality - and today's income inequality - seems to be the result of cultural, rather than technical economic factors.
But why should we care about inequality?
Simple. Inequality can be bad for economic development. See this (pdf), this and this.

Afghanistan's opium output: what problem?

The great and good are worried by a big rise in Afghanistan's opium production. But is this really a bad thing? Three things suggest not:
1. Afghanistan clearly has a comparative advantage in the production of opium; given its meagre land, labour and capital endowments, it can do little else. Opium production is, then, it's best hope of developing the economy.
2. At the margin, if young men can earn a decent living producing opium, they might be less likely to join the Taleban.
3. A flood of cheap heroin into western markets should reduce its price, and so cut crime as addicts need to commit fewer robberies to get their fix.
On the other hand, there are reasons to worry.
1. This might be a rare example of immiserizing growth (pdf). If Afghanistan increases the supply of opium enough, its price might collapse so much as to leave the economy worse off. (This and point 3 above are two sides of the same coin.)
2. Opium production can increase corruption - as government officials demand bribes to ignore it - and corruption depresses economic growth. This is not, however, a problem confined to opium. It's part ot the general natural resource curse; look how (say) Nigeria's oil resources have led to immiserizing corruption.
3. Opium production might be a way of funding the Taleban, rather than a way of reducing the supply of workers to it.
On balance, then, it's far from clear whether we should welcome Afghanistan's increased opium output. It's an issue requiring analysis, not a kneejerk "yuk" response.

Lebanon and collective action

It looks as if the United Nations is struggling to raise the 15,000 peace-keeping troops it wants in the Lebanon.
This is what economic theory would predict - it's the problem of collective action, most famously analyzed by the late Mancur Olson in this classic book.
The problem's simple. Peace in the Lebanon is a public good - it benefits (almost) all countries, but especially Lebanese and Israelis. However, the cost of policing the peace - the risk of having one's soldiers killed - falls upon individual countries.
Each individual country, therefore, has little incentive to commit troops. It prefers to free-ride upon others efforts. And if it does send troops, it wants to keep them out of harm's way.  The upshot is that UN peace-keeping forces are often weak or worse.
Equally, every government has an incentive to grandstand about the middle-east crisis, as big speeches about global affairs make politicians look like statesmen. So we get noble words but not hard actions.  Chirac is behaving exactly as Olson, and economic logic, would predict.
What's the solution? Partly, it's already in place. Countries have an incentive to offer troops if they can expect overseas aid as a result. It's no accident that Bangladesh and Nepal have been quick to pitch in; they're hoping for a quid pro quo*.
But there's another answer. It's suggested by a classic problem of collective action - the tragedy of the commons, described in Garrett Hardin's controversial essay.
Here, it's in the collective interest to conserve common land. But as no individual owns the land, no individual has an incentive to conserve it. So the land gets over-grazed and ruined.
The solution here is to turn the land over to private ownership, say by selling it to the highest bidder, who then rents it out.
This raises a possibility that should trouble liberals. Could it be that old-style colonialism contained more economic logic than multilateralism does?
There's a good reason why I don't like to think about international affairs.
* There's another issue here.In narrow (autistic) economic terms, it makes sense to use troops from low-wage countries. This is because the economic cost of a dead Bangladeshi - foregone wages - is less than the cost of a dead Frenchman. The moral accounting, of course, is rather different.

Sterling - in the euro bloc?

Is sterling already part of the euro zone? I ask because two measures suggest it is. First the annualized volatility of the £-€ rate in the last 52 weeks has been very low. Second, the correlation between the £-$ rate and €-$ rate has been high. Our chart shows that both are close to levels not seen since sterling was in the ERM.
This suggests the market regards sterling not so much as an independent currency, but as a part of the euro bloc.
This in turn means one of the arguments for staying out of the euro - that it's useful to have an independent currency to insulate ourselves from country-specific economic shocks - is losing its force; the FX market does not anticipate such shocks.
Other arguments for staying out are also weakening. The strong recovery in the euro zone suggests we might not be shackling ourselves to a declining economy. And with euro zone interest rates rising, entry to the euro would not necessarily lead to an inflationary boom as UK rates fell to European levels.
Logically, therefore, the case for us joining the euro is stronger now than it was a few years ago.
Which raises the question. Why are we not hearing the case being made with more force than a few years ago?
It couldn't be that the argument for entry was never really based upon economics, could it?

(Why) does free trade favour the rich?

"Free trade always favours the most powerful and advanced economies" claims Martin Jacques.
This is gibber, and not just - as Tim points out - because it favours consumers over producers.
Think back to the basic principles of free trade - the Heckscher-Ohlin model.
Imagine two countries - a big powerful one and a small one - and two goods: CDs and bananas. The big country imports bananas and exports CDs.
Now imagine that the big country grows, so output of CDs and demand for bananas both grow. What happens?
Simple - the prices of CDs must fall, to induce the small country to buy more of them. And prices of bananas rises, as the small country cannot increase production of them sufficiently to meet demand.
So, the powerful country sees its terms of trade worsen. In extremis, they may do so sufficiently to offset the welfare benefits of higher output; this is immiserizing growth.
Basic textbook reasoning, then, says free trade doesn't always favour powerful countries. Exactly the opposite.
So, how can Martin be right? There are at least a couple of possibilities:
The dull one is that trade isn't free. Maybe he means that "unfree trade always favours the most powerful economies." But this is intellectually trivial.
The more interesting one is that advanced economies don't specialize as much as the H-O model predicts. Indeed, it's poorer countries that are typically dependent upon a handful of industries.
This gives advanced economies two advantages. It means they are less vulnerable to shifts in demand in the international economy. And it means they are less likely to suffer a worsening terms of trade as they grow, because their exports of any particular good are a small fraction of world trade. Immiserizing growth, insofar as it happens at all, is more of a problem for poorer countries.
The interesting questions are: how serious is this second problem? What (if anything) should be done about it? Why would tariff barriers for developing economies be a better solution than (say) income transfers from the west?
I labour this point because Martin is making a common error among the psuedo-left. His legitimate hostility to Bush's support for big business is spilling over into a hostility to free trade.
But remember - big business and free trade are two very different things.

Globalization and poverty

There's a new paper from the NBER which should improve the quality of debate about globalization and poverty. Some highlights:

Impediments to exports from developing countries exacerbate poverty in those countries. Developing countries need access to developed country markets. The evidence shows a clear link between export activity and poverty reduction...

Simple interpretations of general equilibrium trade models such as the Hecksher-Ohlin framework are likely to be incorrect.

There are losers among the poor from trade reform. Poor workers in import-competing sectors - who cannot relocate possibly due to the existence of inflexible labour laws - are likely to be hurt by globalization.

Globalization has been accompanied by increasing inequality within developing countries. One implication is that rising inequality induced by globalization offsets some of the poverty reduction achieved via trade-induced growth.

Relying on trade or foreign investment alone is not enough...The poor need better education, access to infrastructure, access to credit for investing in technology improvements, and the ability to relocate out of contracting sectors.

Here's an earlier version (pdf) of the paper. It's the introduction to a forthcoming book, draft chapters of which are here. And here are more papers by the author Ann Harrison.