Thinking harder about globalization

I’ve been thinking recently of how little credibility economists have with working class Americans (or so it seems to me).  In some sense, I’m not surprised.  Economists did a terrible job of predicting the Great Recession and didn’t have much new to offer when it came to fixing the mess.  I could hardly blame anyone for questioning how much faith to put in economic theories.

The Harvard Business Review has a great article this week by Joan Williams called “What So Many People Don’t Get About the U.S. Working Class” and she gives a lot of other reasons that white, middle class voters may distrust economists.  She writes “One key message is that trade deals are far more expensive than we’ve treated them, because sustained job development and training programs need to be counted as part of their costs.” 

I think that she is absolutely correct and that perhaps we have focused too much on the long run benefits of trade (wouldn’t be the first time) to the detriment of the short term costs on American workers.  I had a student once who argued that we should just elect economists as presidents and they can then enact the best policies.  Beside the fact that economists don’t come close to agreeing what the “best policies” are, there is also the issue that we live in a democracy and any policy (good or bad) needs popular support behind it.  I stress all the time to my students that they need to understand the economics and the politics in whatever country they are studying.  It is not enough to just know the economics.  You can recommend awesome, growth-producing policies, but if you can’t convince anyone that you are right, then you have nothing.

Somehow this is harder for me to do when it comes to thinking of US policy.  One of the best, and most honest, exchanges I’ve read about the effect of trade policy on the US middle class came in an interview with Angus Deaton.  The interviewer asks Deaton for his thoughts about globalization and the increasing mortality rate, a provocative finding described in The Atlantic in January 2016:

“Between 1998 and 2013, Case and Deaton argue, white Americans across multiple age groups experienced large spikes in suicide and fatalities related to alcohol and drug abuse—spikes that were so large that, for whites aged 45 to 54, they overwhelmed the dependable modern trend of steadily improving life expectancy. ”  

And this is Deaton’s response to the interviewer:

“But you asked me why this [the mortality rate]—what has this got to do with globalization, and I’m like, you know. And I’ve always taken the position which is—you know, I’ve done a lot of work over the years for the World Bank, and I think this is a pretty accepted, in those organizations, cosmopolitan position—globalization has dragged or pulled or liberated hundreds of millions of people from poverty, in India and China in particular. And those people were really poor to start with. So this is just like an incredibly major achievement in the world.

So when you think the world is going to hell in a handbasket, which it sort of is right now, you have to look back on those amazing achievements. And a lot of those have come from opening up markets, you know, from greater international trade, from all the things we know about. And the sort of cosmopolitan position is, OK, maybe some people in the U.S. and Western Europe were hurt by this process, but you know, they’re really well-off compared with the people in China and India who are being helped. So if you take this sort of positon, that we prefer to help people who are poorer than people who are richer, then this seemed like a pretty good thing.

And so, however, when you see these middle-aged people—and these are the people in the U.S. who are bearing the brunt of this—these are the people who used to have good factor jobs with on-the-job training. These are the people who could build good lives for themselves and for their kids. And all of that has gone away. The factory’s in Cambodia, the factory’s in Vietnam, the factory’s in China, wherever. And, you know, there’s been a lot of dispute between the right and left as to how badly off them are. You know, are the price indices correct, are median wages really falling, and so on. But when you actually see them killing themselves, you know, and the mortality rates are going up, then you think something really, really seriously has gone wrong. One of my colleagues—an anthropologist, Carolyn Rouse—has used the term these people have lost the narrative of their lives.

Now, Pamela asked me the question, you know, why? We don’t know why is the answer. And, of course, everybody has their theory, and that’s where—but, I mean, it’s hard to believe it’s not connected up with those 20 or 30 years of declining economic prospects for people with only a high school education in the United States. And, you know, somehow we’ve got to find a way—I’m not against globalization. I’m certainly not going to go for protectionist solutions or something. But we’ve got to find a way of sharing the benefits with those people, too—and if not with them, at least with their kids.”

Perhaps economists shouldn’t have been so surprised about working class support for Donald Trump.

*Note: The blog title derives from a good quote by Deaton on globalization and its short to medium term effects, saying “We’ve really got to think harder about this than we have.”  

 

 

 

The Kinky Effects of Aid

I came across a new and interesting NBER working paper called “The Effect of Aid on Growth: Evidence from a Quasi-Experiment” by  Sebastian Galiani, Stephen Knack, Ben Zou, and Lixin Colin Xu.

Here’s the abstract:
The literature on aid and growth has not found a convincing instrumental variable to identify the causal effects of aid. This paper exploits an instrumental variable based on the fact that since 1987, eligibility for aid from the International Development Association (IDA) has been based partly on whether or not a country is below a certain threshold of per capita income. The paper finds evidence that other donors tend to reinforce rather than compensate for reductions in IDA aid following threshold crossings. Overall, aid as a share of gross national income (GNI) drops about 59 percent on average after countries cross the threshold. Focusing on the 35 countries that have crossed the income threshold from below between 1987 and 2010, a positive, statistically significant, and economically sizable effect of aid on growth is found. A one percentage point increase in the aid to GNI ratio from the sample mean raises annual real per capita growth in gross domestic product by approximately 0.35 percentage points.

I like the approach and have often wondered whether donor country thresholds make a difference. I have to say that I like my title better than theirs though!

Narcotraficantes and economic growth in Mexico

I just came across a new working paper entitled “Crime and growth convergence : evidence from Mexico” by the awesomely named Ted Enamorado and his co-authors Luis Lopez-Calva and Carlos Rodriguez-Castelan.  They study crime in Mexico and test whether different types of crime affect economic growth differently.  Here is what they find:

Scholars have often argued that crime deters growth, but the empirical literature assessing such effect is scarce. By exploiting cross-municipality income and crime data for Mexico — a country that experienced a high increase in crime rates over the past decade — this study circumvents two of the most common problems faced by researchers in this area. These are: (i) the lack of a homogenous, consistently comparable measure of crime and (ii) the small sample problem in the estimation. Combining income data from poverty maps, administrative records on crime and violence, and public expenditures data at the municipal level for Mexico (2005-2010), the analysis finds evidence indicating that drug-related crimes indeed deter growth. It also finds no evidence of a negative effect on growth from crimes unrelated to drug trafficking.

h/t @mclem

Political Business Cycles in Mexico

Kevin and I have long been interested in political business cycles in developing countries.  We have a 2000 JLE piece called Political Cycles in Non-Traditional Settings, Theory and Evidence for Mexico, where we find a significant postelection economic collapse but no preelection boom, and that elections create, rather than resolve, inflation uncertainty.

So it was interesting to see the WSJ yesterday remarking on the same phenomena in Mexico in an article called “Mexico’s Curse of Economic Slowdown.” Anthony Harrup puts Mexico’s weak economic growth in 2013 in political context, noting that the first year of a new presidency often brings with it disappointing economic performances.

He lists GDP growth rates in the first and last years of presidential terms.  Presidents can only serve one term in Mexico so a transition always involves a change of leadership.

1994, last year of Carlos Salinas de Gortari 4.7%
1995, first year of Ernesto Zedillo -5.8%

2000, last year of Ernesto Zedillo 5.3%
2001, first Year of Vicente Fox -0.6%

2006, last year of Vicente Fox 5.0%
2007, first year of Felipe Calderón 3.1%

2012, last year of Felipe Calderón 3.8%
2013, first year of Enrique Peña Nieto 1.2%*

* Private consensus estimate from Bank of Mexico survey
Source: Inegi, Bank of Mexico

I didn’t know there was a term for this phenomena, but apparently the economist Jonathan Heath has named it the “sexenio curse” (presidents serve a 6 year term, or sexenio).  It was curious to find such a pronounced political business cycle in a one-party system, but the Mexican political system was unique in creating the incentives for one.  It’s interesting that the phenomena lives on in a democratic Mexico.  Perhaps we should update our paper and see if this new PBC is statistically significant…

 

 

 

Are Leaders to Blame for Slow Growth?

Andrew Mwenda has another excellent article up on the Independent.  He argues that it isn’t helpful to blame Africa’s economic problems on bad leadership.  It may be true that Africa has had a disproportionate share of bad leaders, but this just begs the question of why bad leaders keep rising to the top.  Here are some of his main points:

1. “Sub-Saharan Africa has had many changes of leaders over the last 50 years – in all over 300 presidents. Basic mathematical probability would tell you that if the personalities of these individual presidents were the main explanation for poor performance, out of these 300 leaders Africa would have had a high chance to produce the hero we have been looking for like a Lee Kuan Yew (Singapore), a Park Chung Hee (South Korea) or a Chiang Kai Shek (Taiwan). Yet even after 14 presidents of Nigeria, 10 of Ghana, eight of Uganda, four of Tanzania and Kenya, five in Zambia etc we have not seen this happen.

2. Our leaders don’t come from Asia or Europe. They are products of our societies. Therefore, even if their venality was the driving force behind our poverty and bad politics, there must be unique fissures within our societies that produce such a disproportionate amount of poor leadership.

3. There was as much corruption, dictatorship and nepotism in Indonesia under Suharto as in Nigeria under its various military rulers. Yet the developmental results of the two countries were different. In South Korea two former military rulers were arrested and tried for corruption in the 1990s – Chang Du Hwan and Tae Won Roh and both admitted to accumulating fortunes worth over US$ 600 million while in office. 

4. This tendency to perpetually condemn our political leaders is actually one way we African elites exonerate ourselves of the blame we must share and allows us to carry a holier-than-thou attitude.”

Mwenda consistently has interesting and thought provoking columns on development and comparisons between Africa and Asia.  I’ve been so impressed that I have incorporated a couple of them into my Ph.D. syllabus on economic development.