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Rodrik: almost there, but not quite

August 17, 2014

Somehow this Project Syndicate piece from Dani Rodrik really irritated me. I think it’s because he’s half right  — he’s one of the few contemporary neoclassical development economists who I think bark up the right tree — but also scarily misleading.

Rodrik’s main point is that disagreement among economists is healthy; that it’s harmful for economists to coalesce around a narrow model of the economy. Rodrik rightly criticises the apparently near-unanimous agreement in a 2009 survey among ‘top’ economists (whoever decides who they are) on at least five policies: trade, rent controls, exchange rates, outsourcing and fiscal policy.

Rodrik says that trade policy shouldn’t always involve lower tariffs and an absence of quotas because some models have shown that in a situation of increasing returns to scale or externalities trade restrictions can raise welfare. There’s a huge neoclassical literature in this area, including famous papers by James Brander and by Paul Krugman, who won the Nobel prize for his work broadly on this stuff. Political economists like Ha-Joon Chang convincingly argue the case for infant-industry protection.

Rent controls, Rodrik says, are similarly debatable in the case of imperfect competition (which is always the case, in my view).

Exchange rate policy is also open to discussion and should differ according to circumstances. “[T]he proposition that floating exchange rates are an effective system relies on assumptions about the workings of the monetary and financial system that have proved problematic”.

No single model works anywhere. One size doesn’t fit all, which Rodrik has argued before and which I argue in my book.

So far, so good.

But when Rodrik describes economics as a “discipline [which] comprises a diverse collection of models, and that matching reality to model is an imperfect science with a lot of room for error” I think he goes badly wrong. Modelling, especially of the mathematical sort, isn’t always the route to the truth.

Loads of well-known economists (and some lesser names) have unearthed important concepts without models and have explicitly said that models shouldn’t be the only method going. Adam Smith, for example, wrote about the division of labour after physically observing the operation of the pin factory in Pathhead. He didn’t build a model. The whole Scottish tradition of political economy grew out of a combination of empirical observation and reasoning, combining the universal and the particular.

None of Keynes, Ricardo or Marx were ‘modellers’ as such, and Keynes famously rubbished Tinbergen’s attempt to apply econometrics to his theory. One of my favourite development economists, Albert Hirchsman, preferred to observe and draw conclusions rather than go to poor countries armed with a model. Michal Kalecki was similarly suspicious of generalisations. Chang doesn’t model but he’s really useful.

It’s certainly been my own experience that very few policy prescriptions or models are universally applicable in developing countries. People don’t all behave the same way; they tend to be influenced by different things (even that touchstone of all safety-conscious economists, ‘incentives’, means varying things in various places); and institutions and values vary. Modelling, with its inevitable reductionism and falsity of assumption simply isn’t the best way to understand other economies. This is one of the themes of a great book, Postmodernism, Economics and Knowledge, by Cullenberg, Amariglio and Ruccio.

So economics isn’t a discipline characterised by models. Even if most mainstream economists now perform modelling, the existence of a few non-modellers or economists who don’t fetishise the model proves Rodrik wrong.

It’s therefore despairingly narrow to imply that disagreement between advocates of various types of model is enough. Proper disagreement needs to take place on a much wider plane — and it has done so in the past, between competing schools of thought: Austrian, Marxist, Post-Keynesian, neoclassical, green, whatever. Real dialectic is necessary for genuinely new thinking.

I’ve always been dubious about the stale joke about the ambivalent economist which Rodrik prods into life like a seaside donkey halfway through his piece. President Eisenhower is supposed to have wished for a one-handed economist because they kept saying “on the one hand, on the other”. The joke’s not that funny, and in my experience mainstream economists tend to be rather unanimous in their worldview and policy prescriptions. If only they’d been a bit more two-handed in the run-up to the 2007/8 crisis.

[Update: here's a slightly fresher quip from @elianalorch: Have you heard the joke about the economist? ...Well, if it was funny, you would've heard it already.]

I just don’t think that economists try to “match reality to model”. They rigidly stick to an approach which says that modelling is the only way to discover things about economies. Many economists fight to prove their model correct even in the face of contrary evidence. Look at the so-called ‘debate’ between freshwater and saltwater economists in the United States. I can think of a few pubs in Edinburgh where that sort of bust-up would be sniggered at as a lovers’ tiff.

To describe mainstream economics as an “imperfect science with a lot of room for error” suggests that we’re almost on the right track but we need to tweak things. How can economics be almost correct when most of its prominent practitioners so patently failed to predict the crisis and when the discipline remains so far from useful in many important situations, such as in the developing — ie. majority — world?

I think the Rodrik piece is so irksome because he’s the upstart, the leftfield critic wheeled out to satisfy the doubters. In reality his view is quite conventional and serves to delude the non-specialist that the discipline is vigorously searching for answers. I don’t want to criticise Rodrik too much because he sounds like a good bloke, but something’s wrong when the damaging claims of an ersatz radical are broadcast to such a wide audience.

Boosting the domestic economy is the key to raising Papua New Guinea growth

August 13, 2014

The creation of the PNG LNG project highlights the next major challenge facing Papua New Guinea: how to grow the non-mining sectors. Economist Dan Gay says growing domestic demand, the internet and service industries can help overcome inherent problems.

Whatever the Pacific’s been doing until now, it hasn’t been working.

Overall economic growth in the region has been lacklustre and trade growth disappointing.

World Bank data shows that in 1980, just after most countries became independent, merchandise trade in Pacific Island small states was 88.8% of GDP.

Twenty-two years later, in 2012, it had actually fallen to 76.5%. In the rest of the world, it rose from 35.2% to 50% of GDP over the same period.

Main challenges

Some of the main challenges are transport costs, including shipping both internationally and domestically, as well as energy, finance, infrastructure and costs resulting from a lack of domestic competition.

Low formal employment is a challenge, as are the tyranny of distance, a lack of economies of scale, geographic fragmentation and isolation.

Policymakers had imagined that trade agreements would somehow automatically solve all the Pacific’s trade problems.

Currently Pacific exports comprise about the same proportion of GDP as in 1989, roughly the start of the liberalisation period, manifested in the signing of trade agreements.

Clearly trade agreements haven’t much boosted either trade or exports.

To boost productive capacity you need an activist government (and donor community) capable of stimulating capital accumulation, technological progress and structural change through policy. This is what happened in almost all other successful developing economies, with and South Korea and Japan being the prime examples.

The Pacific is borrowing an inappropriate trade model from elsewhere, and needs to use a much more development-focused model, which is tailored to its own ends.

Boosting production

I don’t think there’s much scope for intra-regional goods trade. The Pacific island countries aren’t going to sell much fish or coconuts to each other.

To boost productive capacity you need an activist government (and donor community) capable of stimulating capital accumulation, technological progress and structural change through policy.

This is what happened in almost all other successful developing economies, with and South Korea and Japan being the prime examples.

They were able to export their way to success partly because they built such a big domestic engine, not just via the increasing penetration of international markets. The issue of boosting domestic demand has been neglected in the Pacific, with too much faith placed in demand from overseas.

In my view, the Internet represents a huge and until now under-exploited opportunity for services trade in the region. It doesn’t matter where you are in the world. It addresses many the problems of the islands, like distance, smallness and fragmentation.

Service industries

The one bright spot for trade in the Pacific is in services.

Principally this means tourism but other areas are emerging too, like the export of labour.

My calculations, using World Bank data, show that average trade in services from the Pacific island states has risen from 39.2% of GDP in 2005 to 50.0% in 2012.

Business process outsourcing and call centres, even things like engineering, education and architectural services can all be potentially traded online.

The Melanesian Spearhead Group trade in services agreement is an example. There is provision for nurses and others to bypass the normal immigration and work permit rules.

In my view, the Internet represents a huge and until now under-exploited opportunity for services trade in the region. It doesn’t matter where you are in the world. It addresses many the problems of the islands, like distance, smallness and fragmentation.

And certain countries in the region have good education and skills, the kind of things that could be sold online.

Business process outsourcing and call centres, even things like engineering, education and architectural services can all be potentially traded online.

The Pacific needs to develop a trade and economic development model that suits its own circumstances.

Thimbles, buckets and taps

July 25, 2014

I’ve been wittering on delivering cogent analysis lately about the importance of productive capacity in the Pacific islands.  Productive capacity is defined by some economists as the  resources, entrepreneurial capabilities and production linkages which together determine the ability of a country to produce goods and services and enable it to grow and develop.

In other quarters, in contrast, it’s generally imagined that trade agreements will somehow automatically solve all the Pacific’s trade problems; that somehow, given unlimited access to overseas markets, the Pacific island economies will independently generate the corresponding supply. That’s unlikely.

To boost productive capacity countries need an activist government (and maybe even donor community) capable of stimulating capital accumulation, technological progress and structural change through policy. These things won’t happen by themselves. Some of the now-uncool economists like Hirschman and Kalecki said these things long ago.

As I said in this p5730685856_770d88226d_q (1)ost, putting all your faith in market access is a bit like filling a bathtub with a thimble. Better  to use a bucket instead, or even turn on the taps — ie. put at least some effort into also developing the  domestic economic engine so that there’s enough to export.

This isn’t true only of the Pacific. My trade diagnostic work in other least developed countries has led me to  the conclusion that in most small, peripheral developing countries much more needs to be done to  develop productive capacity. Few least-developed economies have the economic flexibility or adaptability  to be able to generate much new supply in response to enhanced market access.

Whatever’s been going on until now hasn’t been working. As this World Bank blog points out:

The world’s 45 Least Developed Countries that are not oil producers (non-oil LDCs) are exporting less and less in the global market place. Between 1985 and 2012, the world market share of non-oil LDCs’ exports of goods and services fell from 1.2 percent to 0.8 percent—all while their share in world population rose from 7.5 percent to 9.9 percent.

LDC share of exports

 

These 45 countries — around a quarter of the world’s total, containing one in ten people — have been increasingly marginalised despite their products facing no quotas or taxes in any major market: Australia, New Zealand, China, the US or Europe.

In my view the LDCs are borrowing an inappropriate trade model from elsewhere and need a much more development-focused strategy tailored to their own ends. Good intentions exist in that direction, but with little impact so far. It’s no good imagining that the LDCs can emulate the rich economies and concentrate solely on opening markets (in any case there’s not much more to open) because they haven’t got much to sell in those markets.

European, Chinese and US firms are logically concerned with breaking down overseas trade barriers (although even for them the gains are looking more and more slim). LDC economies are incalculably less complex or sophisticated than these bigger economies and just can’t supply the diversity of goods and services. They face a completely a different scenario.

It’s useful that the LDCs have such huge potential market access, and building domestic capacity doesn’t exclude the possibility of maintaining good access to overseas markets. Nor does it necessarily mean protection (which is another story and which might not be possible anyway). Trade liberalisation also helps countries import more cheaply, which can contribute to economic growth and maybe exports. The point is that to export more, you need to be able to produce more.

Sustainable Development Goals Haiku winner and runners-up announced!

July 22, 2014

Dan:

My deeply non-poetic SDG Haikus were:

LDCs need more
Productive capacity,
Not market access.

and…

Don’t forget about
Building strong economies.
Poverty matters.

Originally posted on Post2015.org - what comes after the MDGs?:

Last week marked another milestone in the long and winding process to define a new global development agenda.  Governments concluded a year’s work in an ‘open working group’, to propose a set of new Sustainable Development Goals (or SDGs).

To celebrate the group’s final meeting, @clairemelamed and @PJLaddpost2015 initiated a twitter Haiku competition.  We could claim that it was a serious effort to explore the various topics in the agenda through the medium of poetry.  Actually, it was the work of about 10 seconds in the coffee break at a MY World planning meeting.  But anyway. The simple rule: a Haiku is a three line poem, with 5,7 and 5 syllables on each respectively.

The competition unleashed an incredible number of so far hidden poetic souls among the wonks and diplomats of sustainable development. The entries numbered in the hundreds …..

Below we list ten(-ish) of our favourites, but with…

View original 470 more words

Pacific islands: Market access alone won’t boost trade

July 17, 2014

A blog I wrote for the Lowy Institute for International Policy:

Solomon Islands last week became the first country to receive approval to export timber to Australia under new guidelines on the legality of logging products. The move secures the $4 million market in sawn timber exports to Australia, an industry which employs at least a thousand workers.

It’s good news, but the move shouldn’t be read as a boost to Solomon Islands’s flagging trade balance, still less a prop to its shaky economy. Logging in the Solomons is in terminal decline and timber sales to Australia remain less than 1% of total exports. Forestry fueled the economy since independence in 1978. So many logs have been felled that there are few viable areas of natural forest left to exploit. Plantations remain a small part of production.

Like many Pacific island countries Solomon Islands has spent decades liberalising its own economy and securing overseas market access for products like timber.

The country is a member of the World Trade Organisation, party to three regional trade agreements and has duty-free and quota-free entry to China, Europe and the US. Australia and New Zealand, the region’s biggest trading partners, also grant tariff and quota-free access. Efforts are underway to reduce quarantine barriers. Under PACER Plus, the trade agreement currently under discussion between Australia and the Pacific Island Forum countries, little remains left to liberalise.

All this emphasis on market access (both inward and outward) hasn’t benefited trade as much as it was supposed to.

Over the past 30 years Pacific island merchandise trade has fallen as a proportion of economic output, according to World Bank data. During the same period exports of goods and services from the Pacific islands rose more slowly than the world average. In some of the most enthusiastic regional liberalisers, like Solomon Islands, exports of goods and services even formed a progressively shrinking share of economic output.

It may seem like a no-brainer, but much of the reason for this underperformance is that Pacific island countries simply can’t produce enough. However much other countries want Pacific island goods, the Pacific just can’t make things for those markets in adequate quantity, consistency or quality.

When I worked in the Vanuatu Department of Trade, a colleague came back from a trade fair in Japan saying that a potential buyer loved Tanna Coffee and wanted 20 containers per month. Great, my friend replied, but 20 containers was total national production in a good year.

That story is typical: across the region, formal work forces are too small, countries too distant and fragmented, and production until now too volatile to fulfil the demand that exists for Pacific products. It’s a bit like trying to fill a bathtub with a thimble.

But this doesn’t mean the islands should give up on trade. Instead of concentrating relentlessly on opening up to foreign markets, much more should be done to boost domestic productive capacity. Use a bucket, not a thimble.

Economists define productive capacity as the resources, entrepreneurial capabilities and production linkages which together determine the ability of a country to produce goods and services and enable it to grow and develop. Productive capacity deals more with the national economy than with foreign markets, although the two are linked.*

The productive engine develops via capital accumulation, technological progress and structural change. Clearly these processes have been weak in most of the Pacific island countries.

Rates of capital accumulation are very low, partly due to the small size of the formal economy in many countries but also as a result of low savings rates and the underdevelopment of financial services, which mean that savings are not converted into investment. Technological progress has been limited or non-existent. Structural change (the rate at which agricultural productivity has risen and manufacturing and services have supplanted agriculture) is similarly slow. Melanesia’s economies in particular remain dominated by large subsistence sectors.

Roads, ports, bridges and wharves in many parts of the Pacific are among the poorest in the world, and this in countries which depend critically on transport. Tertiary, vocational and higher education need to improve if the region is to produce higher value-added goods and services. Low levels of labour productivity and widespread underemployment are among the key causes both of the weakness of productive capacity, and, more importantly, of persistent poverty.

It’s about time the Pacific island countries and development partners stopped putting all their faith in market access and started attending to the more complex task of developing and diversifying the domestic economic engine. Trade can boost development, but only if the islands have enough to sell.

 

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Photo by Flickr user Tony Morris.

*As well as the 2006 UNCTAD Least Developed Countries report this perspective draws analytically on works including Albert Hirschmann (1958) The Strategy of Economic Development. Yale University Press, New Haven, Conn.; Michal Kalecki (1969) Theory of economic dynamics, New York: Augustus M. Kelley; Nicholas Kaldor (1967) Strategic Factors in Economic Development Cornell University Press, Ithaca, New York; Jose Antonio Ocampo (2005) (ed.) Beyond Reforms: Structural Dynamics and Macroeconomic Vulnerability, Stanford Economics and Finance, Stanford University Press and the World Bank, Washington DC.

From the Millennium Development Goals to the Sustainable Development Goals

June 17, 2014

Here’s a paper I did with Jodie Keane and Yurendra Basnett of the Overseas Development Institute. It uses a series of trade diagnostic studies from the Pacific island countries to argue (amongst other things) the following:

• The Sustainable Development Goals (SDGs) that will be adopted in 2015 need to include a commitment to deliver a new global trade framework for the world’s least developed countries and small-island states, such as the Pacific Island Countries.

• Market access will be meaningless without increasing productive capacity. Focus also needs to also be placed on behind-the-border measures including on rules of origin, supporting adherence to standards, and ensuring that aid for trade is additional and targeted.

• Regional trade agreements are changing the global trade landscape and shaping the future trading opportunities for the Pacific. There is a need to ensure small and economically powerless countries are not adversely affected by such agreements, nor their aspirations to achieve regional integration undermined.

Does narrative matter?

May 29, 2014

Narrative is often forced. Why should writers oblige rushed readers to plough through their concocted stories? The advantage of those pieces of Internet click-bait – 10 reasons why Putin is a paedophile, 164 ships to visit before you die – is that they convey chunks of information in palatable slices. You can skip the things that don’t interest you without losing your place.

Lots of authors might as well just list their unconnected ramblings by number. They’re in a privileged position and excess verbiage is self-indulgence. More often than not our treatises are imagined. I doubt that the Internet is killing the written word. Far from the end of a golden age of literature, we’re all probably now reading more than ever before, just in smaller bits.

On the other hand proper explanation requires joining dots. As Robert Fisk implies here (h/t Aditya Chakrabortty), there’s something worryingly goldfish-like and conservative about a series of unconnected splurges. The modern 24-hour news cycle, for example, makes the world seem like a list of disparate happenings when in fact separate events often amount to a story and it’s important to make connections. Remember the anecdote about the slowly boiling frog? The frog only noticed a rather important cumulative trend when it was too late. Lyotard was wrong: grand narrative hasn’t collapsed; narrative is explanation.

Academic and policy reports are often so deadly boring because their authors don’t tell stories, which need character development, narrative arc, plot and suspense. As Gordon Peake says, “With each draft, and each round of comments, the awkward, the ineffable and the ‘you really couldn’t make it up’  get leavened out.” The unexpected contributes to a sense of the human. Without these age-old storytelling traits, reports are just piles of barren bones featuring endless abstraction. That’s why they don’t get read.

One of the books that first got me interested in economic methodology was Deirdre McCloskey’s The Rhetoric of Economics, which broadly argued that most economic research is in fact rhetoric; not rhetoric in its sometimes dismissive modern usage but in the original Greek sense meaning to convince. Despite economists cloaking themselves in the garb of objectivity, they just use sophisticated methods to prove their cases – and nothing wrong with that. But they’re telling yarns (albeit sometimes useful and fascinating ones), not proving timeless truths. All findings about human society – even dead clever ones, like supply and demand – are provisional generalisations specific to a time or epoch. As I said in this post, they’re still scientific, albeit scientific in a special sense.

Narrative is critical in making sense of the world. I suppose what really irks me about those boring reports is that they’re just so inhuman and pseudo-objective. We’re all just spinning stories and we might as well admit it. But at the same time I think that the Fisks of this world risk looking like fuddy-duddies. There’s a role for rapid-fire information. And those of us who aren’t Ernest Hemingway might sometimes be excused the search for narrative. Unexpected ending (sorry, just trying to avoid hypocrisy).

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