FT: “Call centre workers are becoming as cheap to hire in the US as they are in India, according to the head of the country’s largest business process outsourcing company.”
[HT: Tepper]
Archive for the ‘Development’ Category
Wage convergence
Wednesday, August 18th, 2010Did AGOA work? Identification and export incentives
Sunday, August 15th, 2010The former USTR-Africa who designed the African Growth and Opportunity Act (AGOA) preferential trade scheme declares it a “phenomenal success“:
Rosa Whitaker: I think it’s been a phenomenal success. Has it been a panacea for everything in Africa? No, it wasn’t designed to do that. But if you look at the return on the investment, it’s been amazing. It costs the American taxpayer very little – about $2 million a year. In under a decade, exports from AGOA-eligible countries grew over 300% from $21.5 billion in 2000 to $86.1 billion in 2008…
AGOA helped develop an automobile industry in South Africa. In 2000, that industry was exporting about $148 million; it has increased to $1.9 billion in 2008. Car parts exported to the U.S. had an 18-25% tariff. When those tariffs came off for Africa, the assembly part of that manufacturing process moved to South Africa. There are plenty of other examples. Lesotho was exporting $139 million in apparel in 2000; now it’s over $340 million: a 143% increase. Kenya’s cut flower industry expanded from $34 million in 2001 and to exports over $240 million now. Swaziland was exporting $85,000 in jams and jellies in 2000; today it’s $1.6 million. For a small country like Swaziland, that’s important. Then you have Tanzanian coffee and other products. I could go on and on.
Policymakers frequently evaluate programs using this approach — they compare circumstances before and after legislation passed and judge the program based on the difference in outcomes over time. But of course, correlations aren’t very informative about causal relationships.
Economists are interested in the counterfactual — what impact did the program make relative to what would have happened without the program? The most obvious problem with a before-and-after comparison is that steady growth creates improvements over time, regardless of policy changes. For example, Singapore’s Business Times touted that US-Singapore trade had grown nearly 20% since the US-Singapore preferential trade agreement took effect, but US-Malaysia trade grew the very same amount during that period without any US-Malaysia PTA.
Similarly, telling us that African export volumes grew from 2000 to 2008 isn’t very informative, because we naturally expect exports to grow over time as economies grow. (If one wants to suggest that AGOA encouraged greater African openness, the appropriate measure would be the exports-to-GDP ratio.) Identifying the causal impact of AGOA requires a method that distinguishes the increase in exports due to the trade preferences from the counterfactual scenario. (A 300% increase in exports is big, so I’m not suggesting that AGOA necessarily had zero impact. The question is: what share of the increase was due to AGOA?)
In such circumstances, economists often turn to an identification strategy known as “differences in differences“. This involves comparing differences across countries in their differences across time. For example, only some African nations are AGOA-eligible. If African economies receiving preferential tariff treatment from the United States experienced export volume growth that was faster than export volume growth in ineligible economies, we might think that this suggests that AGOA spurred greater exports. However, such a comparison doesn’t constitute valid causal inference in the case of AGOA, because AGOA eligibility was determined according to governance and policy criteria that likely make a difference in economic and export growth. Countries with characteristics making them AGOA-eligible may grow faster than their neighbors due to those characteristics, even without any preferential market access.
Paul Collier and Tony Venables tackled this by taking what is akin to a differences-in-differences-in-differences approach: they looked at the value of a country’s apparel exports to the US relative to its apparel exports to the EU (World Economy, 2007). The thrust of their story is captured by their Figure 1:
Collier & Venables (2007) Figure 1.
African apparel exports to the US increased dramatically faster than such exports to the EU in the early 2000s (even though the EU’s Everything But Arms initiative, which is similar to AGOA, launched in 2001). Collier and Venables also present econometric results in which AGOA apparel eligibility is associated with significantly greater relative exports to the US. A glance at the data on South African automobile exports also suggests that Rosa Whitaker’s story is meaningful in comparative terms: auto exports to the US jumped while exports to the UK and Germany fell slightly.
| Period | Trade Flow | Reporter | Partner | Code | Trade Value | |
| 2000 | Export | South Africa | Germany | 87 |
$538,728,295
|
1
|
| 2000 | Export | South Africa | USA | 87 |
$190,767,522
|
1
|
| 2000 | Export | South Africa | United Kingdom | 87 |
$158,073,103
|
1
|
| 2008 | Export | South Africa | USA | 87 |
$1,867,615,402
|
1
|
| 2008 | Export | South Africa | Germany | 87 |
$485,841,841
|
1
|
| 2008 | Export | South Africa | United Kingdom | 87 |
$139,980,048
|
1
|
Yet such evidence need not imply that AGOA caused a significant increase in exports by eligible countries. The AGOA trade preferences raised both the incentive to export and the relative incentive to export to the US. It is possible that AGOA-eligible countries would have experienced significant export increases even in the absence of the preferential program and the tariff advantages of AGOA only induced them to direct their sales to the US instead of the EU. Such a claim is compatible with the two pieces of evidence discussed thus far: (1) African exports to the US increased significantly after AGOA came into force and (2) AGOA-eligible economies export more to the US relative to the EU.
Collier and Venables (2007) and Frazer and Van Biesebroeck (2007) address such concerns to some degree. For example, the latter show that:
The impact of AGOA on E.U. imports is in column (6). The effects for most product categories are not significantly different from zero. Perhaps surprisingly, where the effect is significant, it is positive. For example, E.U. imports of GSP-Manufactured products, are found to increase by 4%. A potential explanation (among many) could involve spillover effects from the increased U.S. imports.
Note that though this evidence makes the alternative story about export diversion suggested in my previous paragraph rather unlikely, it cannot completely rule it out (perhaps the relative magnitudes aligned so that the size of the total export increase offset the change in relative shares, leaving exports to the EU constant). This demonstrates one of the difficulties of doing causal inference in a non-experimental setting. We have highly suggestive evidence, but, with enough effort, one can conceive of an alternative explanation.
So was AGOA a success? Probably. Economists have both theoretical reasons to expect it would improve African exports and empirical evidence that suggests that it did. Policymakers and other commentators would be more persuasive if they cited comparisons (in the spirit of Figure 1 from Collier and Venables) rather than just presenting the time series of US imports from Africa – say something like “AGOA-eligible countries’ exports to the US grew 300% in the last eight years, substantially more than their exports to Europe”. Better (if imperfect) efforts at identifying the counterfactual distinguish the studies analyzing AGOA from meaningless statistics cited in support of other trade policies.
[I've tried to informally convey some ideas about empirical identification issues in the context of AGOA. For a proper introduction to the topic, start with a paper or book that mentions the Rubin causal model, such as Angrist and Pischke's Mostly Harmless Econometrics or Imbens and Wooldridge (JEL, 2009).]
What’s the growth cost of developed countries’ tariffs?
Friday, August 13th, 2010Oddly, I didn’t come across this paper until just now:
John Romalis, “Market Access, Openness, and Growth”, NBER Working Paper 13048, 2007 (ungated version):
This paper identifies a causal effect of openness to international trade on growth. It does so by using tariff barriers of the United States as instruments for the openness of developing countries. Trade liberalization by a large trading partner causes an expansion in the trade of other countries. Trade expansion induced by greater market access appears to cause a quantitatively large acceleration in the growth rates of developing countries. Eliminating existing developed world tariffs would increase developing country trade to GDP ratios by one third and growth rates by 0.6 to 1.6 percent per annum.
Trade-induced learning
Tuesday, July 27th, 2010The review of trade-induced learning on pages F324 to F332 of this new article by Ronald Mendoza seems like a pretty good introduction to the topic. He covers the empirical literature on firm-level productivity (selection vs learning by exporting), the roles of quality and variety in importing and exporting, the importance of export destinations’ characteristics, and the product space. As with any survey, you’ll have to turn to the underlying papers to get into the methodological issues and strategies.
[HT: Jim]
Where are labor-intensive manufactures headed next?
Saturday, July 17th, 2010NYT: “Bangladesh, With Low Pay, Moves In on China”
[Hat tip to Alan Beattie]
Today at Vox
Thursday, March 25th, 2010There are two columns on important, big-picture topics at VoxEU today.
Martin Ravallion: The World Bank’s estimate of China’s real GDP per capita was revised down by 40% in 2005. This column explains how price surveys led to dramatically different estimates once they considered the effect of economic growth. It argues that while large revisions were needed, they could have been avoided with better economic models to measure PPPs.
Yiping Huang: Should the US follow Paul Krugman’s advice and use protectionist policies against China’s exports to encourage a revaluation of its currency? This column argues against this idea. Far from saving jobs, a revaluation of the Chinese currency might even cut global economic growth by 1.5%.
What will we learn from Millennium Villages?
Thursday, March 18th, 2010Michael Clemens on the Millennium Villages Project:
The only independent evaluation of the MVs is currently planned to proceed in three waves: baseline, year 3, and year 5 of the project. That is, the evaluation has no publicly-stated plan to proceed long past the end of the five-year intervention in each village, before deciding whether or not it would be right to vastly scale up the intervention all across Africa. A recent research paper starkly showed how inadequate such a stance can be.
That paper, by Shaohua Chen, Ren Mu, and Martin Ravallion, is a lesson in humility (ungated version here, published here). It studies the Southwest Project in China, a village-level development package intervention executed in 1,800 rural villages in the late 1990s. Like the Millennium Village intervention it targeted the poorest villages, lasted about five years, and cost hundreds of thousands of dollars per village. It sought to permanently reverse the fortunes of those villages with a broad-based package including roads, piped water, power lines, upgrading schools and clinics, training of teachers and health-care workers, microcredit, and initiatives for raising crop yields, animal husbandry, and horticulture.
Right before the end of the Southwest Project intervention, five years after it started, the project seemed to indeed be reversing the fortunes of the treated villages. Income in those villages grew by 20% more during the project than in similar villages in the same area that had not received the intervention, and savings grew by 100% more.
Then the intervention ended and—fast forward five years—all those effects on income and savings disappeared. Ten years after the five-year project began, average income and savings in the villages that got that massive package of interventions were indistinguishable from income and savings in villages that did not.
Notably, incomes in both the treated and untreated Chinese villages in the Southwest Project area increased greatly during the span of the project (1995-2000) and for years thereafter. The reason this happened is because the Chinese economy was being transformed during this period, not because of massive village-level package development interventions.
The point here is not that the Southwest Project was the same as the MVP; it wasn’t. The point is that short-term evaluation is plainly inadequate. It is obvious that the MVP is going to have short-term impacts. The size of the intervention is the same order of magnitude as the size of the entire economy of each village; that is, the MV intervention is roughly 100% of local income per capita (see the bottom of this post for this calculation). Indeed, it would be astonishing to not see short-term effects with an intervention that gargantuan. The three-year evaluation results that the MVP plans to release this year simply won’t tell us much.
The only interesting evaluation question is in the long term, for three reasons: 1) because unlike short-term impacts the answer is not obvious, 2) because long-term change is the stated goal of the MVP, and 3) because other village-level package interventions have shown that short-term effects and long-term effects can be completely different from one another.
Ravallion on Pinkovskiy and Sala-i-Martin
Monday, March 8th, 2010Martin Ravallion is open to the idea that African poverty has been improving to the last 15 years, but he is cautious regarding the quality of our data and methods:
Maxim Pinkovskiy and Xavier Sala-i-Martin (PSiM herafter) have confidently claimed that “The conventional wisdom that Africa is not reducing poverty is wrong” and that “African poverty is falling and is falling rapidly.” This sounds like good news. But is it right?
We must first be clear about what we mean when we say “poverty is falling”. What many people mean is falling numbers of poor. However, PSiM refer solely to the poverty rate—the percentage of people who are poor. (There is no mention of this important distinction in their paper.)…
Here we agree: aggregate poverty rates have fallen in Sub-Saharan Africa (SSA) since the mid-1990s. Shahoua Chen and I came to exactly the same conclusion in our research, for the World Bank’s global poverty monitoring effort, although our methods differ considerably and (no surprise) I prefer our methods.
However, Chen and I also point out that the decline in the aggregate poverty rate has not been sufficient to reduce the number of poor, given population growth…
Two points to note here: (i) Chen and I show that the poverty decline in SSA tends to be larger for lower poverty lines (in the region $1-$2.50 a day) and (ii) PSiM’s method attributes the entire difference between GDP and household consumption to the current consumption of households, and they assume that its distribution is the same as in the surveys. These assumptions are very unlikely to hold, and they give an overly optimistic picture.
In effect, PSiM are using a lower poverty line than us…
PSiM do not tell readers just how few survey data points they have actually used after 1995. Indeed, readers of their paper may be surprised to hear that there is any uncertainty about the trend decline since the mid-1990s; their main graph has 30 annual data points since 1995. But these are not real data points in any obvious sense; rather they are synthetic (model-based) extrapolations based on national accounts and growth forecasts.
We have national household surveys for all but 10 of the 48 countries in SSA since 1995. However, for only 18 countries do we have more than one survey since 1995; for 30 countries, there are is at most one survey since 1995.
As we warn explicitly in our paper, this is not yet sufficient survey data to be confident about the (promising) downward trend for Africa’s aggregate poverty rate that PSiM have announced with such confidence.
Hopefully we will see a confirmation of the emerging downward trend for Africa in the years ahead, as more (genuine) data emerge.
HT: Larry W-S.
Addendum: Blattman beat me to it and has more thoughts.
Export-led Growth 2.0
Wednesday, March 3rd, 2010Otaviano Canuto, Mona Haddad, and Gordon Hanson in the World Bank’s Economic Premise write:
How dependent are developing countries’ exports on de- mand in developed countries? This note shows that much of the recent growth in developing countries’ exports was driven by demand in other developing countries. This means that developing countries may continue to rely on South- South trade to recover from the crisis. In fact, countries like China are leading the recovery through strong import demand. Over the medium term, the development of an “export-led growth v2.0,” in which South-South trade plays a more important role, will be essential. Policy makers can support this process by continuing to liberalize South-South trade, focusing in particular on nontariff measures.
Exporting raises productivity in sub-Saharan African manufacturing firms
Wednesday, January 20th, 2010Now here’s something you don’t see every day – evidence that exporting raises firm-level productivity. The conventional evidence says that exporters are more productive because of selection effects rather than learning-by-exporting (Clerides, Lach, and Tybout, QJE, 1998). But things may be different in Africa:
Proponents of trade liberalization argue that exporting helps firms to achieve higher productivity levels. This hypothesis is examined for a panel of manufacturing firms in nine African countries. The results indicate that exporters in these countries are more productive and, more importantly, exporters increase their productivity advantage after entry into the export market. While the first finding can be explained by selection–only the most productive firms engage in exporting–the latter cannot. The results are robust when unobserved productivity differences and self-selection into the export market are controlled for using different econometric methods. Scale economies are shown to be an important channel for the productivity advance. Credit constraints and contract enforcement problems prevent firms that only produce for the domestic market from fully exploiting scale economies.
Johannes Van Biesebroeck (2005), “Exporting raises productivity in sub-Saharan African manufacturing firms,” Journal of International Economics, 62(2): 373-391.
