May 15, 2008
English cloth and Portuguese wine
Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole... It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England...If Portugal had no commercial connexion with other countries, instead of employing a great part of her capital and industry in the production of wines, with which she purchases for her own use the cloth and hardware of other countries, she would be obliged to devote a part of that capital to the manufacture of those commodities, which she would thus obtain probably inferior in quality as well as quantity.
The quantity of wine which she shall give in exchange for the cloth of England, is not determined by the respective quantities of labour devoted to the production of each, as it would be, if both commodities were manufactured in England, or both in Portugal.
England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth.
Prior to the late 1600s, the British drank plenty of wine, mostly French, a little Spanish, but virtually nothing from Portugal. The wars of 1689-1713 gave the Portuguese allies the opportunity of ten lifetimes. Beginning in 1703 a treaty was signed granting Portugal access to British markets for their wines—generally of a much lower quality than those of France, and often needing to be fortified with brandy or spirits in order to keep from going bad. The Methuen Treaty (as it was known) promised that Portuguese tariffs would always be at least a third lower than those of other nations, most especially France.Of course, most of the Portuguese wine trade was dominated by British ships, merchants, and even vintners working in Iberia. The end of hostilities between Britain and France was seen as a grave threat to all these British interests, and vigorous lobbying by brewers, distillers, and the Anglo-Portuguese merchants stopped attempts to return to the period of open trade with the French.
Trade theorists have learned their lesson: use Greek letters rather than real world examples!
Hat tip: EconTalk.
Posted by Dingel at 09:01 PM | Comments (1) | TrackBack
April 23, 2008
Albouy vs AJR bleg
David Albouy recently posted a new (Feb '08) version of his critique of Acemoglu, Johnson, and Robinson's 2001 AER paper that used European settler mortality rates as an instrument for modern institutional quality.
I haven't had time to read through the back-and-forth exchanges to form my own judgment. Has any third party summarised the dispute and commented? Albouy is revising and resubmitting at AER, so at least some of his claims must be plausible, huh?
Posted by Dingel at 10:45 AM | Comments (0)
April 10, 2008
Two cents on Stiglitz
Emmanuel has spotted a howler in Joe Stiglitz's 2006 book, Making Globalization Work:
Anderson and Cavanagh of the Institute of Policy Studies famously noted in 2000 that of the world's 100 largest economic entities, 51 are now corporations and 49 are countries. Stiglitz recycles this idea in ch. 7 of his book on multinational corporations...Before you do, I feel obligated as an educator to tell you that this argument comparing national output with corporate revenues is technically incorrect and fallacious. It is irksome that Stiglitz did not consult two books on globalization that came out earlier in 2004 that pointed out the flaws in this countries-companies comparison...
As I have previously discussed, the anti-globalization crowd often pumps up factual errors to taboid-ish proportions to make their points. If they are to be taken seriously, then they should start to make sensible arguments instead of bloopers and practical jokes like this one. It is unfortunate that those who should know better sometimes buy into this balderdash.
I would attribute it as an oversight if one of my undergraduate students made this sort of error, but it should absolutely not pass muster with a Nobel laureate in economics.
This one has indeed been around a while. In fact, I recall debunking it myself using the very same sources in 2004!
While we're reading Stiglitz, let's return to his first popular book on the topic, Globalization and Its Discontents (see my review from a few years ago). On pages 73-74, Stiglitz writes:
Behind the free market ideology there is a model, often attributed to Adam Smith, which argues that market forces – the profit motive – drive the economy to efficient outcomes as if by an invisible hand. One of the great achievements of modern economics is to show the sense in which, all the conditions under which, Smith’s conclusion is correct. It turns out that these conditions are highly restrictive...The Washington Consensus policies, however, were based on a simplistic model of the market economy, the competitive equilibrium model, in which Adam Smith’s invisible hand works, and works perfectly. Because in this model there is no need for government – that is, free, unfettered, ‘liberal’ markets work perfectly – the Washington Consensus policies are sometimes referred to as ‘neo-liberal,’ based on ‘market fundamentalism,’ a resuscitation of the laissez-faire policies that were popular in some circles in the 19th century...
The theory says that an efficient market economy requires that all of the assumptions be satisfied.
As Alex Tabarrok reminded Dani Rodrik a while back, those conditions are sufficient but not necessary!
Hat tip to my friend Sabrina (who may or may not endorse my analysis) for the second Stiglitz story.
Posted by Dingel at 04:23 PM | Comments (0)
March 31, 2008
Income Per Natural
As usual, excellent and exciting work from Michael Clemens and Lant Pritchett:
Income Per Natural: Measuring Development as if People Mattered More Than PlacesIt is easy to learn the average income of a resident of El Salvador or Albania. But there is no systematic source of information on the average income of a Salvadoran or Albanian. In this new working paper, research fellow Michael Clemens and non-resident fellow Lant Pritchett create a new statistic: income per natural -- the mean annual income of persons born in a given country, regardless of where that person now resides. If income per capita has any interpretation as a welfare measure, exclusive focus on the nationally resident population can lead to substantial errors of the income of the natural population for countries where emigration is an important path to greater welfare. The estimates differ substantially from traditional measures of GDP or GNI per resident, and not just for a handful of tiny countries. Almost 43 million people live in a group of countries whose income per natural collectively is 50 percent higher than GDP per resident. For 1.1 billion people the difference exceeds 10 percent. The authors also show that poverty estimates are different for national residents and naturals; for example, 26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States. These estimates are simply descriptive statistics and do not depend on any assumptions about how much of observed income differences across naturals is selection and how much is a pure location effect. Our conservative, if rough, estimate is that three quarters of this difference represents the effect of international migration on income per natural.
The bottom line: migration is one of the most important sources of poverty reduction for a large portion of the developing world. If economic development is defined as rising human well being, then a residence-neutral measure of well-being emphasizes that crossing international borders is not an alternative to economic development, it is economic development.
Hat tip to Wilkinson.
Posted by Dingel at 12:28 AM | Comments (0)
February 14, 2008
Growth accelerations and replicating research
It would be interesting to see Dani Rodrik respond to this article (pdf) by Richard Jong-a-Pin and Jakob de Haan in the latest issue of Econ Journal Watch:
Economists treat replication the way teenagers treat chastity—as an ideal to be professed but not to be practiced (Hamermesh 2007, 1).HPR's [Hausmann, Pritchett, and Rodrik's] finding that a political regime change increases the probability of an economic growth acceleration is wrong and the result of a data error. When we correct for this error and stick to the definition of political regime change as a three-unit change in Polity, we find that regime changes do not affect the probability that a growth acceleration occurs. We also find some evidence that economic liberalization increases the probability of a growth acceleration (sustained or otherwise)...
The work represented here was submitted, of course, to the Journal of Economic Growth, although in that version of the paper we had not yet pinpointed the data-description error in the Polity IV manual. The paper was rejected on the basis of the argument that our note is a “welcome correction, however, of limited significance for the main contribution of the original paper.” However, in their abstract, HPR state that one of their main conclusions is that “Political regime changes are statistically significant predictors of growth accelerations.”
Jakob de Haan blogs about the experience:
As our paper was a comment on a previously published paper in the Journal of Economic Growth, it is unlikely to be accepted by another journal. However, a relatively new electronic journal called Econ Journal Watch, recognizes the importance of replication in economics. The editor of that journal, Dan Klein, was therefore happy to publish our paper. It will be published in the first issue of 2008. Of course, HPR get the opportunity to reply to our critique.Even though I am very happy with this new outlet, I feel that editors of all scientific journals should pay much more attention to replication. A starting point is that authors of published empirical research should commit to make their data available to anyone interested. Unfortunately, even this is not common practice.
Admittedly, the primary achievement of the Growth Accelerations paper was to change how we think about identifying economic growth in a relevant manner. I certainly didn't recall the regime change finding when I thought of the article. Nonetheless, a data coding error seems like a substantive correction, and I haven't seen any reply from Hausmann, Pritchett or Rodrik.
I should also note that the Hamermesh paper is interesting in itself.
Posted by Dingel at 02:54 PM | Comments (0)
Rodrik on growth accounting
What use is sources-of-growth accounting?
Aside from all kind of measurement problems, these accounting exercises say nothing about causality, and so are very hard to interpret. Say you found it's 50% efficiency and 50% factor endowments. What conclusion do you draw from it? You could imagine a story where the underlying cause of growth is factor accumulation, with technological upgrading or enhanced allocative efficiency as the by-product. Or you could imagine a story whereby technological change is the driver behind increased accumulation. Both are compatible with the result from accounting decomposition. Indeed, I have yet to see a sources-of-growth decomposition which answers a useful and relevant economic or policy question...So here is a contest for economist (or wannabe economist) readers of this blog: can you come up with an interesting question to which a sources-of-growth decomposition is the answer?
Posted by Dingel at 11:14 AM | Comments (0)
January 16, 2008
Facts matter: On PPP GDP estimates
The recent revisions of PPP GDP estimates have been widely discussed, which puzzles Daniel Altman:
[P]urchasing power figures are not, by themselves, a good measure of a country’s economic importance in the world. They are only an interesting abstract notion. So, when the World Bank said that China’s purchasing power was smaller than it had previously thought, the announcement didn’t change anyone’s lives, nor did it affect the timeline for China becoming the world’s dominant economy. Just ask the people in French’s article; they were poor before, and they’re still poor now.
Now, I rarely dabble in epistemology, but I think that people care about what they believe. Though poor people exist even if you forget to count them, people care when we find out that millions more persons are in poverty than previously estimated. Some lives ought to be affected by these estimates, because when the facts change, some people change their actions. One has to be strangely captivated by the thing-in-itself to believe that it's no big deal whether we accurately perceive it or not.
An easy example of why this matters is that some people use the number of people exiting poverty during the last 25 years as a measurement of globalisation's success. For example, see Surjit Bhalla's Imagine There's No Country: Poverty Inequality and Growth in the Era of Globalization
Arvind Subramanian has a very insightful post on why the facts matter (over at Rodrik's blog):
The reductions in GDP per capita imply a large increase in measured poverty, especially in China and India. Is this a problem? Yes, the new numbers are going to be awkward for the Bank because China and India cannot suddenly have hundreds of millions more poor people because new data have been produced. We are not quite in a Heisenberg quantum world where measurement affects underlying realities.But the problem is less big than it appears. First, it should be emphasised that the new revisions change poverty rates according to the international one-dollar-a-day standard. But most researchers and policy-makers place far more faith in nationally determined poverty benchmarks and estimates. India’s poverty rate will always be determined by the NSS surveys (fraught and contentious though even they are) not by international measurements.
The international standard was created to facilitate cross-country comparisons. But it was always recognised that setting this standard was hazardous because of the difficulties in comparing poverty across borders and time. The new revisions have merely served to expose these difficulties, and it is going to be very interesting to see how the Bank extricates itself out of this problem...
The new data suggest that renminbi undervaluation is about 16%, which is not only substantially lower than most analysts’ estimates (of about 30-40 per cent) but also implausibly lower than the estimates for other countries, including India’s (undervaluation of about 26 per cent)...
The broader policy question that India and the world community should be asking is why nearly 15 years had to elapse before GDP data were updated. Had the Bank devoted more time, effort, and financial resources to doing more such exercises in the past, there would be fewer surprises today...
[A] large share of the Bank’s resources — substantially larger than currently foreseen — should be channelled to activities that produce global public goods. A great example of such goods is knowledge produced by the Bank, including the knowledge embodied in the new GDP data generated by the Bank’s statisticians...
We should therefore raise a toast to these humble folk, the bean counters, who beaver away at such unsexy but invaluable tasks. But as we do so, we should not shy away from asking this question: can the loanwallahs at the World Bank (and elsewhere) make comparable claims of adding value to the world.
Posted by Dingel at 03:13 AM | Comments (0)
December 20, 2007
Today I enjoyed 4.6 utils and made 6.3 units of human progress
I will not hold my breath waiting for the EU, OECD, UNDP, and WB to develop a standard measure of progress in human societies.
Posted by Dingel at 02:54 AM | Comments (0)
December 16, 2007
Sachs-Warner?!
Why are people still using the Sachs-Warner index in empirical work? It's a dummy variable, and it's not driven by the tariff and NTB components. Surely by now someone must have built and made readily available a cross-country data set that better describes trade policy. And if not, that's a project worth pursuing, right?
Posted by Dingel at 11:50 AM | Comments (2)
August 16, 2007
Border effects & prices
Yuriy Gorodnichenko and Linda Tesar (2006), "Border Effect or Country Effect?":
This paper reexamines the evidence on the border effect, the finding that the border drives a wedge between domestic and foreign prices. We argue that if there is cross-country heterogeneity in the distribution of within-country price differentials, there is no clear benchmark from which to gauge the effect of a border. In the absence of a structural model it is impossible to separate the “border” effect from the effect of trading with a country with a different distribution of prices. We show that the border effect identified by Engel and Rogers (1996) is entirely driven by the difference in the distribution of prices within the US and Canada.
Via DeLong.
Posted by Dingel at 10:08 PM | Comments (0)
July 19, 2007
Estimating trade restrictiveness
Haiu Looi Kee, Alessandro Nicita & Marcelo Olarreaga describe their efforts to translate theory into practice in measuring the restrictiveness of trade policy. Their VoxEU article is full of interesting details.
[HT: Muse]
Posted by Dingel at 07:45 AM | Comments (0)
June 24, 2007
Real income vs real GDP
"It's just as important to give US consumers access to cheap foreign goods as it is to make real GDP bigger." -- Robert Hall
Posted by Dingel at 04:27 PM | Comments (0)
June 16, 2007
BEA answers Business Week
The Bureau of Economic Analysis has responded to the Business Week piece criticizing its measurement of productivity gains in the face of outsourcing. I'm not familiar enough with the data and measurement issues to hold an opinion on this topic.
Posted by Dingel at 11:34 AM | Comments (0)
April 10, 2007
Measuring the significance of an FTA partner
Daniel Altman uses a misleading metric to describe the US-Korea trade deal, and I've seen this fallacy deployed by a number of others discussing FTAs:
Why is it so important? South Korea ranks just behind the European Union, United States, Japan, China and Hong Kong as an exporter. It shipped $284 billion worth of merchandise in 2005, the last year for which the WTO offers global statistics. That amount, which was three times India's exports, was also equivalent to the total merchandise shipped by the world's bottom 118 economies, ranked by the same metric.All but 30 of those economies are also members of the WTO. So signing a free trade agreement with South Korea could be as economically important as signing agreements with 88 of the group's 150 members. Given the intense and growing trade relationship between the United States and South Korea, it could be even more important.
Trade agreements are supposed to spur new trade, not entitle partners to claiming the existing volume of trade. (Though the latter might be a rough description of trade diversion.) If the US-Korea FTA doesn't create any new trade, then it doesn't matter at all that South Korea is already a massive exporter. Present performance is not a measure of potential gains.
Posted by Dingel at 08:55 AM | Comments (0)
April 02, 2007
Where are Commerce's Chinese subsidy calculations?
Dan Drezner is sympathetic to the imposition of countervailing duties on Chinese coated paper exports, since "this policy shift seems to make sense within the context of what those duties are supposed to accomplish." He links to a NY Times piece describing the Department of Commerce's previous position on non-market economies: "[I]t is impossible to determine what a subsidy is in a state-controlled economy... Today, that reasoning is regarded as out-of-date as China has moved from a faltering economy two decades ago to an export superpower."
Is there good reason to believe that the calculation of the countervailing duties has become feasible? The GAO backgrounder I quoted suggested that Commerce's calculations might rely upon third-country data. The department's press release (pdf) and fact sheet (pdf) say nothing about how they determined the subsidization rates. (If you know where to find that information, please let me know.)
The specific allegations I've seen in the press are low-interest loans, tax breaks, and other subsidies. Given the structure of China's financial system, I doubt those were easily identified. That means I'm unable to refute Zhou Shijian, a former trade negotiator for China, who says "the U.S. Department of Commerce hasn't produced substantive evidence."
Below the fold, I've reproduced a few paragraphs from two segments of the USITC's December determination on coated sheet paper from China, Indonesia, and Korea. (I don't recommend reading the full 198 pages (pdf).) The first portion is the ruling on the volume of imports. The second is the chairman's dissent. I think the dissenting opinion, which focuses more greatly on product differentiation, is the preferable interpretation, but the more intriguing aspect is the degree to which the determination depends on the interpretation of a single data point.
The determination:
Section 771(7)(C)(i) of the Act provides that the “Commission shall consider whether the volume of imports of the merchandise, or any increase in that volume, either in absolute terms or relative to production or consumption in the United States, is significant.”The absolute volume of cumulated subject imports rose throughout the POI. The largest single-year increase was between 2003 and 2004, when the volume of subject imports rose from *** short tons to *** short tons. Volume rose again to *** tons in 2005. In interim 2006, the volume of cumulated subject imports reached *** short tons, which was higher than the volume in either interim or full-year 2005.
During the POI, cumulated subject imports also rose relative to production and consumption in the United States. Subject imports’ share of U.S. apparent consumption rose from *** percent in 2003 to *** percent in 2005, and was *** percent in interim 2006, compared with *** percent in interim 2005. During the 2003-2005 period, subject imports’ gain in market share came largely at the expense of non-subject imports, the market share of which declined from *** percent in 2003 to *** percent in 2005.117 In interim 2006, however, subject imports’ continued gain in market share was directly at the expense of the domestic industry, the market share of which was *** percent in interim 2006 compared with *** percent in interim 2005, while non-subject imports’ market share declined only slightly. In addition, the ratio of subject imports to domestic CFSP production rose over the POI.
For the foregoing reasons, we find, for purposes of the preliminary phase of these investigations, that the volume of subject imports is significant, both in absolute terms and relative to consumption and production in the United States.
The dissent:
In relative terms, however, the increases in the volume of subject imports were more modest. In 2003, subject imports accounted for *** percent of apparent U.S. consumption. In 2005, subject imports accounted for *** percent of apparent U.S. consumption, an increase of less than *** percentage points. Furthermore, that modest increase came at the expense of other imports. Nonsubject imports accounted for *** percent of apparent U.S. consumption in 2005, down from *** percent in 2003. The market share of the domestic like product was, in 2005, essentially unchanged from 2003, *** percent to *** percent. In interim 2006, subject imports were *** percent, up from *** percent in interim 2005. But shipments of the domestic product in interim 2006 still accounted for *** percent of the market, while nonsubject imports accounted for *** percent.The volume data alone present a mixed picture, with absolute increases but rather modest shifts in market share. In addition, the record indicates a notable attenuation of competition between subject imports and the domestic like product. As noted, web rolls account for a significant majority of apparent U.S. consumption. Similarly, domestic production is heavily concentrated on the web roll sector. Subject imports, however, are heavily concentrated in sheets and, to a lesser extent, sheeter rolls. Of the nearly *** short tons of subject CFSP imported between 2003 and 2005, less than *** short tons were web rolls. The record does not provide an indication why web rolls did not account for a more significant share of subject imports, as web rolls are produced in each of the subject countries. Respondents claim that shipping difficulties make web rolls an unprofitable and difficult item to ship, but the record indicates that respondents did ship modest volumes of sheeter rolls, which suggests that the shipping of rolls can be done profitably. Whatever the reason, subject imports were essentially absent from the product segment that accounts for approximately 70 percent of apparent U.S. consumption, and this absence was consistent over the POI.
Web rolls are designed for use in rotary web presses and are intended for high-volume printing through high-speed presses at high temperatures. Sheet CFSP, on the other hand, is intended to be used in sheet-fed presses, for shorter runs, with higher-grade finishes. The record provides no indication that these products are interchangeable in the market.
Thus, the record indicates that subject imports increased modestly relative to overall apparent domestic consumption. The market share of subject imports increased between 2003 and 2005, but that increase came at the expense of nonsubject imports rather than the domestic industry, and only in interim 2006 did the market share of the domestic industry decline modestly. The record indicates that subject imports were absent from a significant segment of the domestic market. For these reasons, I find that the volume of subject imports is not significant.
"In interim 2006, however, subject imports’ continued gain in market share was directly at the expense of the domestic industry" versus "only in interim 2006 did the market share of the domestic industry decline modestly"! And this debate is about an undisputed fact - the market share of imports. Imagine making determinations about estimates of subsidization via low-interest loans!
Posted by Dingel at 09:33 PM | Comments (3)
March 17, 2007
Bhalla: Raise the Poverty Line
Surjit Bhalla, known for arguing that there are far fewer poor people than conventionally estimated
Asian and world poverty has declined significantly, and the concept of absolute poverty has receded. Today, absolute poverty in most parts of the developing world is relative; hence the need for a new, and higher, poverty line.
Before arriving at that conclusion, Bhalla challenges numerous other conventional wisdoms. He says that the World Bank overestimates poverty, that world poverty today really means African poverty, and that foreign aid is already adequate in the Jeff Sachs sense -- transferred resources are at least equal to the minimum required to eliminate poverty.
I've only read the introduction, but I know that this contrarian work is interesting enough to pass it along before having completed it. Bhalla's paper is "Raising the Standard: The War on Global Poverty" (pdf), part of Joe Stiglitz's Initiative for Policy Dialogue.
Posted by Dingel at 07:08 PM | Comments (0)
Measuring Inequality
Emmanuel, relying on the work of Branko Milanovic, provides a nice primer on measures of global inequality.
Posted by Dingel at 09:17 AM | Comments (0)
January 05, 2007
How big is China's trade surplus?
Michael Spence has a Nobel prize in economics, a series of very prestigious academic appointments, friends on the Harvard faculty and access to the opinion page of the Wall Street Journal.I, obviously, don’t have comparable qualifications -- or comparable access to the Wall Street Journal's oped page.
But I do try to follow the data coming out of China closely. I probably shouldn't say this, but it sure seemed to me that Dr. Spence got a few key facts wrong in his Wall Street Journal oped...
If you just look at China's trade surplus (BoP basis), it works out to around 5.5% in 2005 and probably 6.5-7% of China's GDP in 2006 -- numbers comparable to the US trade deficit. Spence’s graph shows China’s trade surplus through 2004. That seems a bit misleading to me: China’s trade surplus ballooned in 2005 and 2006, just when the graph ends. Spence's argument worked through 2004. It no longer does.
Spence's side of the debate is behind the WSJ's firewall.
Posted by Dingel at 03:16 PM | Comments (0)
November 11, 2006
Network Topology of International Trade
"The Architecture of Globalization: A Network Approach to International Economic Integration" by Javier Reyes and Raja Kali:
We combine data on international trade linkages with network methods to examine the global trading system as an interdependent complex network. We map the topology of the international trade network and suggest new network based measures of international economic integration, at both a global system-wide level and a local country-level. We develop network based measures that incorporate not only the volume of trade but also the influence that a country has on the international trading system. These measures incorporate the structure and function of the network and may provide a more meaningful approach to globalization than current measures based on trade volumes. We find that in terms of participation and influence in the network, global trade is hierarchical with a core-periphery structure at meaningful levels of trade, though integration of smaller countries into the network increased considerably over the 1990's. The network is strongly “balkanized” according to geography of trading partners but not as strongly by income or legal origin. Using these new measures we find that a country's position in the network has substantial implications for economic growth and that network position is a substitute for physical capital but a complement to human capital. We therefore suggest that a network approach to international economic integration has potential for useful applications in international business, finance and development.
Last week, I saw Dr. Kali present an application of their measures: "Financial Contagion on the International Trade Network"
The data are from the Feenstra et al. NBER set of bilateral trade data by commodity for 1962-2000, which sounds powerful based on Kali's description.
Posted by Dingel at 04:24 PM | Comments (0)
September 20, 2006
1.96 is the magic number
Deirdre McCloskey has long emphasized the warping effects of the "statistical significance" hurdle to publication in economics. Alan Gerber and Neil Malhotra survey the top two journals in political science to produce this finding:
There are plenty of publications with findings that are barely statistically significant and a noticeable absence of papers that fall just short of the goalline. Figure 2a is more damning.
What's the implication? Andrew Gelman thinks it shows why hypothesis testing is problematic. Kevin Drum says it demonstrates massaging of data. The authors say:
The goal of this paper is to raise awareness of publication bias in political science. We have found that many more results are published just over the p=.05 threshold than below it, implying a certain amount of bias in parameter estimates. Our results suggest that as reviewers, editors, and researchers, political scientists appear to be far too conscious of the .05 significance level, and that this might cause important distortions in how knowledge advances in political science.
Full paper here.
Posted by Dingel at 12:46 PM | Comments (3)
September 12, 2006
Indian peak tariff rates
T.N. Srinivasan & Suresh D. Tendulkar, Reintegrating India with the World Economy, 2003, p.39:
By the way, the term "peak tariff rate" as used in Indian official documents is peculiar because the same documents often cite individual tariffs that exceed the peak!
Posted by Dingel at 08:01 PM | Comments (0)
September 09, 2006
1:3:2 World
In making his standard argument against "free trade fundamentalism" Robert Wade presents a novel analytic suggestion:
In thinking about these issues, we should also give up talk of "the developing world" in contrast to "the developed world," and talk instead of a "1:3:2 world" (one billion people live in the rich countries, three billion live in countries where growth rates are faster than those of the rich countries, and two billion live in countries where they are substantially slower).
[Hat tip: Pienso]
Posted by Dingel at 11:21 AM | Comments (0)
August 15, 2006
FTAs' predicted gains: promises and practice
Bryan Mercurio is miffed that governments promise big benefits from FTAs and then fail to actually do the liberalization predicted to produce those gains (e.g. Japan & agriculture, Korea & agriculture, etc). I thought that that was basically standard practice.
Posted by Dingel at 05:43 PM | Comments (0)
August 04, 2006
The trade balance, the current account balance, and other definitions
I saw Don Boudreaux speak about statistics yesterday. He used the trade deficit as an example of a frequently misunderstood statistic. Unfortunately, I feel his discussion may have done more to muddle the issue than clarify it. Correctly understanding the details of the trade deficit should be of interest to both those who did and did not attend the particular lecture in question.
Boudreaux made three statements that I felt were either incorrect or incomplete:
1. The trade balance measures the value of merchandise goods exported minus the value of merchandise goods imported. The current account balance includes net exports of services.
2. The inclusion of services meaningfully alters the size of the trade deficit. [Update: I was likely mistaken in interpreting this as an implication of Prof. Boudreaux's remarks. See his comment below.]
3. Media sources frequently report the trade balance without properly recognizing its components and relative significance.
My thoughts on each of these claims follow. Please email me (link on right sidebar) if I have made an error.
What is the trade balance?
The trade balance is the difference between exports and imports. It may measure visible (merchandise) trade only, or trade in both goods and services. Invisibles are difficult to measure, so the balance of trade in goods and services is less reliable and more likely to be revised than the visible balance.
So Boudreaux could be right that only the merchandise trade balance is reported. However, I don't think that is US practice:
The U.S. Bureau of Economic Analysis collects and compiles U.S. services import and export statistics. The U.S. Census Bureau and the U.S. Bureau of Economic Analysis combined goods and services into one report and began publishing a joint monthly press release, titled U.S. International Trade In Goods and Services report (FT900), in January 1994.
The BEA's International Economic Accounts page lists data on the balance of payments, trade in goods and services, international services, international investment position, and direct investment. I am unable to find a "trade balance" statistic that excludes services.
The US Census Bureau's Foreign Trade Statistics page currently has the headline: "Trade Deficit Increases in May 2006. The Nation’s international deficit in goods and services increased to $63.8 billion in May from $63.3 billion (revised) in April, as imports increased more than exports. (12 July 2006)"
Similarly, here is John Makin's testimony given at the Trade Deficit Review Commission:
Let me offer some basic definitions. The trade balance, as usually measured for the United States, is the difference between the dollar value of goods and services sold abroad and the dollar value of goods and services purchased abroad. The major categories of the trade balance are the balance on merchandise trade (or net goods sales to foreigners) and services trade (or net services sales to foreigners). The other major category of U.S. external accounts is net income on foreign investments which, when added to the trade balance, gives the more comprehensive current account balance.
Perhaps there are some analysts who mistakenly label the net exports of merchandise goods the "US trade balance." I have been unable to find a data source that makes that mistake.
What is the current account balance?
Not to be confused with the trade balance, the current account balance is "the balance of trade in goods and services plus net rents, interest, profits and dividends and current transfer payments." That is more than merely goods plus services. The distinction is important, too. Recall the Lazear-Mankiw-DeLong discussion earlier this summer.
Does the inclusion of services meaningfully alter the size of the trade deficit?
Census & BEA release for May 2006:
In May, the goods deficit increased $0.5 billion from April to $70.1 billion, and the services surplus was virtually unchanged at $6.2 billion. Exports of goods increased $2.4 billion to $84.2 billion, and imports of goods increased $2.9 billion to $154.3 billion. Exports of services increased $0.4 billion to $34.4 billion, and imports of services increased $0.3 billion to $28.2 billion.
Professor Boudreaux noted that the service sector comprises 80% of US GDP, but goods still dominate our export profile by about 2 to 1. Moreover, the services surplus of $6.2b is fairly small compared to the goods deficit of about $70b. The distinction between the merchandise trade balance and the trade balance does not significantly alter the picture: the US is running a deficit around 6% of GDP.
Does the media understand these facts?
Probably not. Paul Krugman may be careful about his statistics and know that the trade deficit includes both goods and services when opining on the subject, but most newspaper employees haven't won the J.B. Clark Medal. I wouldn't be suprised if the popular press frequently misreports the merchandise trade balance as the trade balance. Successful media outlets employ people like Lou Dobbs, who writes:
The president's fast-track authority is set to expire next year, more than 30 years after its passage. It is no coincidence that the United States has now posted a trade deficit for 30 consecutive years.
You mean the fast track authority that Clinton didn't have and Bush had to fight for in 2002? Good grief. Whether Dobbs is including services in that calculation is the least of our worries...
Posted by Dingel at 12:05 PM | Comments (3)
July 17, 2006
Political Discourse
From now on, please refer to the Doha round as "this trade thingy."
Posted by Dingel at 05:35 PM | Comments (0)
July 14, 2006
CGE
Ben Muse points to an Economist article on the use of computable general equilibrium models in trade liberalization debates. For an application to PTAs, see Panagariya and Duttagupta (pdf).
Posted by Dingel at 07:31 AM | Comments (1)
June 28, 2006
Lazear: Very large trade deficits can be benign
I don't know if Greg Mankiw agrees with Ed Lazear, but this post features the latter saying something interesting about the trade deficit:
I would like to point out the historic record suggests that countries can be in a current-account deficit or a surplus situation for very long periods of time. New Zealand and Australia have had deficits for decades. Australia in particular has been running a current account deficit that has created a level of foreign indebtedness equal to about 72 percent of their GDP, whereas our foreign indebtedness was only about 21 percent of GDP in 2004 (most recent available published data). Yet, the Australian economy has been very strong and growing at robust rates over the past decades. Australia’s real GDP has grown at an average rate of 3.5 percent over the last decade.
Don't put Lazear in the Don Boudreaux camp, however:
There is no clear correlation between a country’s surplus or deficit and economic growth. Given the lack of obvious correlation, should we still be concerned about a large current account deficit? We should still be concerned. We must constantly monitor our international situation for the reason that abrupt changes could create problems for the U.S. economy.
On the other hand...
In particular, a rapid decline in the U.S. current account deficit would correspondingly imply a rapid decline in the U.S. capital account surplus. Were this to happen, there could be significant adverse consequences to the U. S. economy and to the rest of the world. We do not anticipate abrupt changes like this occurring.
UPDATE: Brad DeLong notes the difference between the current account deficit and the trade deficit, and the implications for sustainability. Read his post. I'd feel bad for making that error, but so did Greg Mankiw.
Posted by Dingel at 03:25 PM | Comments (1)
June 21, 2006
The most economically illiterate statement I have heard this year
"Cheap foreign labor is a subsidy." -- Mark Krikorian at a panel on immigration.
Wow.
Posted by Dingel at 11:13 PM | Comments (0)
June 15, 2006
Beware of Chinese FDI Statistics
If you think China receives an amazing amount of foreign direct investment, it's because you've been seeing Chinese statistics. In a pair of posts, Madhukar Shukla points to evidence that China counts capital goods imports as FDI, reports "round-tripping" of money through Hong Kong as foreign investment, and generally doesn't conform to OECD and IMF standards in this regard.
Posted by Dingel at 07:24 PM | Comments (0)
May 10, 2006
WDI 2006 out
Need the latest data for your regressions? World Development Indicators 2006 is available now.
[Hat tip: PGP]
Posted by Dingel at 08:00 PM | Comments (0)
April 05, 2006
Cato PA #557 & Average Tariff Statistics
A note worth passing along: Jim catches an odd statistical choice by Marian Tupy in his latest Policy Analysis, "Trade Liberalization and Poverty Reduction in Sub-Saharan Africa." Check it out.
Using three countries to represent the average tariff of the 48 nations in sub-Saharan Africa is an embarrasingly bad approach, but apparently Tupy also avoided using an earlier base year that offered more data!
Another irony: Figure 7 makes it appear that Sub-Saharan Africa's trade regime was the most liberal in the world in 1983!
Posted by Dingel at 05:18 PM | Comments (0)
March 15, 2006
Question on Djankov, Freund & Pham (2006)
If you're familiar with "Trading on Time," I have a quick question. At the bottom of page eleven, in defining the remoteness variable, the subscript for Distance is lj. I suspect this is just a typo that should have been kj. Is this what others who have read the paper concluded? D is used for both distance and a vector of dummy variables at different points in the paper, so I may just be confused.
Posted by Dingel at 12:00 PM | Comments (1)
February 10, 2006
Why are so many US imports from China?
Dan Drezner points to a NYT article that contains an important point regarding our growing trade deficit with China:
But often these days, "made in China" is mostly made elsewhere — by multinational companies in Japan, South Korea, Taiwan and the United States that are using China as the final assembly station in their vast global production networks.Analysts say this evolving global supply chain, which usually tags goods at their final assembly stop, is increasingly distorting global trade figures and has the effect of turning China into a bigger trade threat than it may actually be. That kind of distortion is likely to appear again on Feb. 10, when the Commerce Department announces the American trade deficit with China. By many estimates, it swelled to a record $200 billion last year. [NYT]
Posted by Dingel at 07:58 AM | Comments (0)
January 11, 2006
Economic Freedom & Bar Graphs
I apologize for nit-picking, but I think advocates of liberalization hurt their cause when they overstate their case. Johan Norberg writes:
I still meet anti-capitalists who claim that liberalisation and market reform destroy economies and increase poverty. Why don´t they take a look at this graph from the new Index of Economic Freedom 2006. Per capita growth in the countries that liberalised the most since 1995 has been almost three times higher than in those where economic freedom declined.
Let's stop pretending that trade liberalization skeptics are ridiculous for not hailing the truth of this and similar bar graphs. Anyone that took AP Statistics in high school can produce a sufficient number of objections to render this evidence inconclusive: correlation isn't causation, the causal relation may be bidirectional or run the other way, lurking variables may be omitted, etc.
In Norberg's defense, in spite of titling his post "freer and richer," he actual formulates a weaker claim -- liberalization does not destroy economies and increase poverty. It appears true that improvements in a country's economic freedom score do not negatively affect growth so much as to overwhelm other engines of growth. But "liberalization isn't harmful" is a far cry from "liberalization is helpful." Moreover, the bar graph describes per capita GDP growth, not poverty reduction. There is plenty of evidence that economic growth reduces poverty, but I think it's a bit sloppy to conflate the two.
Posted by Dingel at 09:48 AM | Comments (0)
November 18, 2005
APEC contains nouns
Peter Gallagher's latest post is the third or fourth article that I have read this week to allude to Gareth Evans' quip that the Asia Pacific Economic Cooperation is "four adjective in search of a noun." Regardless of opinions about APEC policies, analysts ought to stop repeating this grammatical error.
Asia is a noun. Cooperation is also a noun. Asia Pacific Economic Cooperation might be a clumsy or meaningless title (perhaps it should have been Asia Pacific Economic Cooperative?), but two of the four words are nouns.
Moreover, APEC hyphenates its name, so it reads "Asia-Pacific Economic Cooperation." In that case there are three words, and one of them is a noun.
Posted by Dingel at 07:25 AM | Comments (0)
July 21, 2005
Trade Balance vs Trade Volume
In a generally well-written piece criticizing the Bush administration's fondness for bilateral trade agreements, Bruce Bartlett writes:
A 2003 study by the Congressional Budget Office found the economic potential of bilateral agreements very limited. It noted NAFTA, one of the largest such agreements, had virtually no effect on the U.S. trade balance with Mexico even after eight years. However, the study also noted there might be important noneconomic reasons to support free trade agreements. [WaTi]
The balance of trade is not a measure of economic well-being (though it can signal problems in the economy). It's an accounting figure that must balance vis-a-vis the capital account (or in the case of capital immobility, balance to zero itself). A more appropriate measure of the economic potential of bilateral agreements is the trade volume, though it too is not a measure of welfare.
To illustrate via the most extreme example possible, imagine a world of two countries with immobile capital. Under both autarky and free trade, each nation's trade balance would be zero. Clearly there would be welfare differences between these two policy-worlds. Volume, though not a welfare measure, is a more relevant statistic than balance.
Posted by Dingel at 11:42 PM | Comments (0)
June 18, 2004
Countries Still Rule
[This post originally appeared on another blog written by Jonathan Dingel. It has been imported into Trade Diversion. I apologize for the hyperbolic rhetoric of my former years.]
Tyler Cowen at Marginal Revolution recently unknowingly resurrected an old fallacy. He writes that, of the world's one hundred largest economic entities, "[f]ifty-one are corporations, and General Motors comes in at number twenty-three, just ahead of Denmark (the data are from 2000, Wal-Mart should be higher than listed, among other changes)." The caveat Cowen offers ("To be sure, these comparisons are problematic. Yearly sales are not strictly comparable to gross domestic product") is woefully insufficient.
Jagdish Bhagwati tackles this fallacy in his new book, In Defense of Globalization.
This dramatic statistic is misleading, however, as the two sets of data are not comparable... So when we compares sales volumes, which are gross values, with GDP, which is value added, we are comparing oranges with apples. The comparison, while conceptually flawed, also exaggerates the role of corporations because sales figures across the entire economy will add up to numbers that will vastly exceed the GDPs of the countries where these sales occur. [p.166]
This idea of corporations ruling the world was manufactured by left-wing critics of globalization in order to instill fear. Corporations, despite all their incentives to please populaces and customers, are not democratic, so people prefer to see democratic governments remain powerful enough to control corporations when necessary. "Wal-Mart and GM are stronger than most governments!" is a great catch-phrase to scare people undecided about the desirability of globalization.
Martin Wolf took this Institute for Policy Studies "paranoid delusion" to task over two years ago; it's too bad that Professor Cowen blogged without catching this criticism of the data. Here's how Wolf reads the data in his February 6, 2002 Financial Times column:
In fact, only two of the top 50 economies, measured by value added, and 37 of the top 100 were corporations. For the critics, GM is bigger than Denmark and Wal-Mart is bigger than Poland. Properly measured, Denmark's economy is more than three times bigger than GM. Even impoverished Bangladesh has a bigger economy than that of GM.But the flaw in such claims is not just factual but also conceptual, since countries and companies are radically different. A country has coercive control over its people and its territory. Even the weakest state can force millions of people to do things most of them would far rather not do: pay taxes, for example, or do military service. Companies are quite another matter. They are civilian organisations that must win the resources they need in free markets. They rely not on coercion but on competitiveness. [GlobalPolicy.org]
In short, leftists trying to critique corporate power have bastardized the data until it produced an interesting statistic. Hopefully the Marginal Revolution will revise its take on the matter to include a stronger disclaimer than its mere "these comparisons are problematic." Something along the lines of "these comparisons are ridiculous and misleading" would be more appropriate.
Posted by Dingel at 02:08 PM | Comments (0)