Openess to trade = High standard of living
It's not rocket science, and sometimes it's worth remembering that it's as simple as that.
No. The issue is not straightforward, get used to it. You were right, it's not rocket science - it's more complicated than that
So what's the interested observer to think? On the one hand there's me saying that trade theory is really quite simple - "openness to trade = higher growth" and then there's Jim making all sorts of theoretical caveats to justify why it is, in fact, quite complicated. Problem is he's not providing any evidence, so why believe an "expert" attempt to convince you that you must trust their expertise, instead of little old me, telling you that your intution and casual empiricism is correct?
Empirics
My original assertion is, I think, undeniable. It's certainly impossible to contradict unless evidence is shown. Whilst we wait for Jim to provide examples of countries that are part of the global economy yet poor, or countries that are autarkic but rich, here's Gwartney et al*, keeping things simple:
The $24,744 GDP per person of the 12 most open economies is almost eight times the comparable figure for the 12 least open economis. The per capita GDP of the 12 most open economies grew at an annual rate of 2.7% during 1980-1999, compared to 0.4% a year for the 12 least open economies. All 12 of the open economies had positive growth rates and all but one grew at an annual rate of 1.4& or more. In contrast, six of the least open economies experienced reduction in per capita GDP and only four of the twelve achieved a growth rate in excess of 1%.
Openness continued to exert apostive and statistically significant impact on both growth and income even after the effects of cross-country differences in the variability of the inflation rate and quality of the legal system were taken into account.
But as i've said before, I don't think it's even necessary to get bogged down in the American Economic Review: such debates end up arguing about statistical significance and measurement technique and miss the big picture. What countries are open to trade? Hong Kong, Singapore, Belgium, Germany, UK, Netherlands, Luxemburg, Switzerland, USA, Malaysia, Sweden, Ireland. And which are least open? Myanmar, Bangladesh, Burundi, Iran, Sierra Leone, Syria, Algeria, Madagascar, Tanzania, Argentina, Brazil, India. (And let's make a nnote that India growth rate from 1980-1999 was 3.7%, as effective average tariff rate fell from 31% to 22% in that period - it's opened itself to trade and is growing richer.)
A subjectivist way to assess which of these countries are most favourable to live in would be to look at migration patterns. Is Jim really going to claim that the first list of countries don't have higher living standards than the second list??
The bottom line? openness to trade = higher living standards
Theory
It's funny (if somewhat) tragic when an economist justifies their intervention on the grounds that they have a faulty model. Surely the interested observer should say "get a new model!" rather than hand over a blank cheaque. Jim pointed out quite rightly that people are heterogeneous and the world is dynamic. That's why i'm an Austrian economist, and theorise on the tenets of subjectivism, uncertainty, and time. And to quote a lecture i'm giving this afternoon on information, this neatly encapsulates the difference between new Keynesianism and the Austrians:
Whilst Akerlof and Stiglitz say that competition is bad away from ideal conditions, Hayek and Kirzner say its at its best away from ideal conditions – the bigger the inefficiency the bigger the profit opportunity
I realise this point probably deserves elaboration, but for now let me leave it at this: Jim, I know the flaws in the neoclassical model. The difference is that I also know Public Choice theory and basic logic of choice. Therefore what you see as an inefficient problem, I see as an inefficent opportunity.
* Gwartney, Stroup, Sobel & Stroup (2003) Microeconomics: Public and Private Choice discuss evidence from Gwartney, Lawson & Skipton, "Trade Openness, Income Levels, and Economic Growth" in Economic Freedom of the World 2001 (Fraser Institute); Frankel & Romer (1999) "Does Trade Cause Groeth?" American Economic Review; Sachs and Warner (1995) "Economic Reform and the Process of Global Integration" Brookings Papers on Economic Activity
"and then there's Jim making all sorts of theoretical caveats to justify why it is, in fact, quite complicated. Problem is he's not providing any evidence, so why believe an "expert" attempt to convince you that you must trust their expertise, instead of little old me, telling you that your intution and casual empiricism is correct?"
Enough of the populist grandstanding, you're not on Fox News you know. Also, isn't presuming to know what your readers' 'intuition' would be a little ... conceited? Your 'intuitive' understanding may not be shared by many others, and indeed your apparent belief that the entire field of 'economic theory' says just one very simplistic thing about trade and development, is rather worrying for a professional in the subject. Unlike you, I'm a layman, yet I still seem to have delved more into the evidence than you have.
And before I get onto that, it's interesting that someone who has previously seemed so uninterested in the empirics ignores perfectly reasonable theoretical arguments when I present them and instead demands evidence. Well, I'll give you evidence, but I'm tired of making all the effort in this exchange and after this comment I'm not going to waste any more time arguing with someone who doesn't appear to be open-minded enough to listen.
"Whilst we wait for Jim to provide examples of countries that are part of the global economy yet poor, or countries that are autarkic but rich"
That's easy. Most Sub-Saharan African countries are 'part of the global economy' in terms of their own trade policy, but still poor. Many if not most of them have significantly lower tariffs than, for example, East Asian countries like South Korea, Vietnam and China did while growing very fast for many years. The same goes for many Latin American countries, to a lesser extent because they're not quite as poor. Bolivia, for example, has low tariffs and low overall trade restrictiveness, yet is extremely poor. I'm surprised you don't know any of this. As for autarky, I've never suggested that countries should try it, so I'll mark that off as a rather feeble straw-man attack.
"What countries are open to trade? ... And which are least open? Is Jim really going to claim that the first list of countries don't have higher living standards than the second list??"
Are you really going to tell me that this might not also be the result of rich countries liberalising rather than poor countries that liberalise becoming rich? Again, although you seem reluctant to actually say it out straight, I'm assuming you think liberalisation caused enrichment. But it is well known that it was the other way around for today's rich countries, which almost all had high tariffs in the early decades of the 20th century and were all wealthy by the standards of today's poor countries by the time the (not exactly instantaneous) liberalisation under GATT began. So: association does not prove causation, and indeed we know that for many countries the direction of causation was the opposite to what you seem to think it is. Indeed, Dani Rodrik says that the *only* systematic relationship that emerges from the data on trade policy and growth is that "countries dismantle trade restrictions as they get richer" [1].
You mention as your own supporting evidence three individual studies. I'll take Gwartney et al first. They construct a "Trade Openness Index" which consists of "four general components: (a) tariff rates, (b) the blackmarket exchange rate premium, (c) restrictions on capital movements, and (d) the actual size of the trade sector compared to the expected size". But only one of these (the first) is actually a measure of trade *policy*. The others are at best partially related to trade policy but are clearly influenced by many other factors such as macroeconomic policy and geography. It's no surprise that each of them is independently associated with low incomes, because that creates the foundation for Gwartney et al's desired conclusion - that restrictive trade *policy* causes low growth. This is exactly the same trick as the Fraser Institute pulls with its wider 'Economic Freedom Index' - lump lots of *indicators of poverty* into a big pot and stir till you've got an alleged 'indicator of policy', which you then claim has a causative impact on poverty. So it's nothing but high-class bullshit.
Next is Frankel and Romer, which is also seriously flawed, but at least in a different fashion. Wait, did you notice that the first line of their abstract [2] is "Examining the correlation between trade and income cannot identify the direction of causation between the two". Sound familiar? It's also interesting that their paper is concerned with the relationship between incomes and the *volume* of trade, rather than trade policy. But the problem with the paper, as Rodriguez and Rodrik [3] say, is that their geographically-constructed trade share is flawed because "geography is likely to be a determinant of income through a multitude of channels, of which trade is (possibly) only one". When R&R introduce other geography variables into the regression equation, trade becomes insignificant, "consistent with the hypothesis that non-trade effects of geography are the main driving force behind the findings of Frankel and Romer." So Frankel and Romer tell us nothing of use either.
Finally there's Sachs and Warner. I'm not going to spend much time on this one because it is already so deeply discredited, as anyone familiar with the trade and development literature knows. Here's Rodriguez and Rodrik again:
"We find that the Sachs-Warner dummy’s strength derives mainly from the combination of the black market premium and the state monopoly of exports variables. Very little of the dummy's statistical power would be lost if it were constructed using only these two indicators. In particular, there is little action in the two variables that are the most direct measures of trade policy: tariff and non-tariff barriers ...
We then ask to what extent the black-market premium and state monopoly variables are measures of trade policy. We suggest that their significance in explaining growth can be traced to their correlation with other determinants of growth: macroeconomic problems in the case of the black-market premium, and location in Sub-Saharan Africa in the case of the state monopoly variable. We conclude that the Sachs-Warner indicator serves as a proxy for a wide range of policy and institutional differences, and that it yields an upwardly-biased estimate of the effects of trade restrictions proper".
That's a polite way of saying that the Sachs-Warner 'openness' variable tell us *nothing* useful about the actual trade policy of a country.
So, sorry, but all three of the studies you put forward as evidence are seriously flawed. I suggest you try reading these instead:
- DeJong and Ripoll: http://www.pitt.edu/~ripoll/files/rstat-round3.pdf
- Yanikkaya: http://www.cer.ethz.ch/resec/teaching/seminar_aussenwirtschaft_wt_04_05/yanikkaya_JDE.pdf
- Sammen: http://hdr.undp.org/docs/publications/background_papers/2005/HDR2005_Samman_Emma_22.pdf
The first two are particularly interesting because they suggest a contingent relationship - tariffs are if anything positive for poorer countries, as distinct from the rich ones. This is consistent with the theoretical argument involving threshold effects which I put forward in my previous comment, and which you ignored. But don't feel too bad - many economists in rich countries seem oblivious to the possibility that the effect of freer trade might differ for poorer households or poorer countries.
Lastly, I want to say that I'm not the one making a dogmatic argument. I don't deny that liberalising trade can increase living standards. Indeed, as a country becomes more developed it becomes more necessary. I just think it is generally best done gradually, carefully and with due regard to considerations of poverty, revenues and infant industries, and I also recognise that it can have serious negative impacts on some people. This, I think, is slowly becoming the standard view in the World Bank and among serious economists, largely because research that doesn't suffer from the serious flaws of the studies you proposed do not show clear positive impacts of trade liberalisation . To conclude: everyone, but EVERYONE, who studies trade knows that both protection and liberalisation create losers as well as winners. Everyone except you, apparently.
[1] Page 22: http://ksghome.harvard.edu/~drodrik/UNDPtrade.PDF. But I think you should read the whole thing.
[2] http://ideas.repec.org/a/aea/aecrev/v89y1999i3p379-399.html
[3] http://ksghome.harvard.edu/~drodrik/skepti1299.pdf. Again, this is vital reading, probably more so than [1].
Posted by: Jim | July 12, 2006 at 01:04 AM
What i'm going to do is read through the links you've posted, then reignite this debate at a later stage, once i've had time to reflect on your points.
If I may though, I'll try to bring together what's been said (and then respond to a couple of your points).
Empirically I think there's (typically) two ways of looking at this question. The first is the construction of some kind of globalisation index, the second is econometric studies of trade policy on economic growth. Neither of these are my forte - I specialise in qualitative methodology which hasn't generated as much literature for development than more mainstream methods. Interestingly you point out Dani Rodrik's work, and he has actually edited a volume of analytic narratives (which i'm sure you're familiar with) "In Search of Prosperity".
It's on my shelf of books I've been meaning to read, but from the briefest of flicks through when it arrived I recollect that the key findings are that insitutions are all important, and the institutional reform required for growth to occur is fairly simple.
This ties into a previous discussion we had where I stressed the importance of institutions (a href="http://blog.ctrlbreak.co.uk/?p=368">here) as being a foundation and predetermination of private investment. I don't know if you'd agree, but in that case and also in this case I think the point is constitutionalism - trade policy and private investment are both dependent on the rules of the game.
So I think there's some common ground to share - you're using a Rodrik paper to support your view, I'm fairly confident that I can use a Rodrik (edited) book to support my own.
But returning to the empirical evidence that is on show, lets both agree that there's a difference between globalisation indices and econometric studies.
Regarding globalisation indices of course they're imperfect. I just think they're a handy and useful means to approximate a very broad phenomena. I'd welcome competition betwen indices but as things stand The Economics Freedom Index is the best guide we have, and it's such a complex phenomean to reduce onto a table there'll always be ways to find fault with the measurement technique - but lets not miss the big picture.
Regarding econometric studies notice how you've responded in exactly the way i'd feared - on each paper you're arguing about statistical significance. Have you seen the court case between (Lott and Levitt?) An interesting debate on gun control has been reduced to the technicality of how you define "replication". The theory, insights and value is all out the window, it's just two mathematicians arguing about terms. I see that as being typical of the outcome of econometric debates. I think there's vastly high diminishing returns to arguments about econometric evidence.
Finally, to clear up what might be some misunderstandings
Most Sub-Saharan African countries are 'part of the global economy' in terms of their own trade policy, but still poor. Many if not most of them have significantly lower tariffs than, for example, East Asian countries like South Korea, Vietnam and China did while growing very fast for many years
My emphasis. That seems like an important caveat for you to make, and should be more explicit since you're changing the terms of the debate. I'm not claiming that if a poor country abolished all tariffs then it's become rich overnight. I'm making the general point that countries that participate in trade tend to have higher living standards than those that don't. Of course "opennes to trade" is part of a bundle of conditions that constitute globalisation, and although perhaps I should have been clearer, i'm sure you realise that it is this broader phenomena of economic freedom that I think determines a nations prosperity.
"countries dismantle trade restrictions as they get richer"
That statement is correlation not causation as well, surely.
But i'm yet to see an empirical paper address this question of causation satisfactory. Certainly the above statement cannot be used as causation - whether trade restrictions or growth has historically "led" the other is irrelevent.
someone who has previously seemed so uninterested in the empirics ignores perfectly reasonable theoretical arguments
This started with me asking whether Quinn and yourself acknowledged that your argument rests on mercantile reasoning and infant-industries. I didn't feel that you answered that question, so I don't know what your theoretical arguments are. You raise valid points such as threshold effect, path-dependency and fiscal reform but these aren't so much theories as possible events. Whether they're likely to occur (and whether that in turn is a problem )depends on your theoretical frame. I've tred to make it clear what theory i'm using, but unless you do the same we can't have a theoretical argument.
everyone, but EVERYONE, who studies trade knows that both protection and liberalisation create losers as well as winners
Again, it depends on the time scale. If you asked a docker in Liverpool if they'd be willing to take redundency if it meant that his sons would all find it easier to get jobs, I think they'd take it. Protection certianly creates winners (politicians, concentrated interests) and losers (consumers=everyone). As for liberalisation winners are clear (consumers=everyone) and losers are typically short term, and dependent on the flexibility of the labour market and general prosperity of the country.
Just to finish though, notice how you think the optimum liberalisation/growth policy is knowable. I don't think it is, so this whole debate is somewhat misguided. I don't think any individual - professional economist or layman - has sufficient knowledge to *know* the optimum set of policies to create economic growth at minimal cost. I do think correllation is very clear (openness to trade = higher living standards) and that needs to be repeated. But the causation is complicated and therefore our best hopes of stumbling upon the optimal outcome is to allow endogenous solutions to emerge, and facilitate things with very broad, very simple, and very obvious institutional reforms.
I hope that can piece together a few things, and I'll look forward to another joust soon!
populist grandstanding
We're all guilty of that from time to time though aren't we? What's blogging if not "populist grandstanding"?!
Posted by: AJE | July 12, 2006 at 10:16 AM
What i'm going to do is read through the links you've posted, then reignite this debate at a later stage, once i've had time to reflect on your points.
If I may though, I'll try to bring together what's been said (and then respond to a couple of your points).
Empirically I think there's (typically) two ways of looking at this question. The first is the construction of some kind of globalisation index, the second is econometric studies of trade policy on economic growth. Neither of these are my forte - I specialise in qualitative methodology which hasn't generated as much literature for development than more mainstream methods. Interestingly you point out Dani Rodrik's work, and he has actually edited a volume of analytic narratives (which i'm sure you're familiar with) "In Search of Prosperity".
It's on my shelf of books I've been meaning to read, but from the briefest of flicks through when it arrived I recollect that the key findings are that insitutions are all important, and the institutional reform required for growth to occur is fairly simple.
This ties into a previous discussion we had where I stressed the importance of institutions (a href="http://blog.ctrlbreak.co.uk/?p=368">here) as being a foundation and predetermination of private investment. I don't know if you'd agree, but in that case and also in this case I think the point is constitutionalism - trade policy and private investment are both dependent on the rules of the game.
So I think there's some common ground to share - you're using a Rodrik paper to support your view, I'm fairly confident that I can use a Rodrik (edited) book to support my own.
But returning to the empirical evidence that is on show, lets both agree that there's a difference between globalisation indices and econometric studies.
Regarding globalisation indices of course they're imperfect. I just think they're a handy and useful means to approximate a very broad phenomena. I'd welcome competition betwen indices but as things stand The Economics Freedom Index is the best guide we have, and it's such a complex phenomean to reduce onto a table there'll always be ways to find fault with the measurement technique - but lets not miss the big picture.
Regarding econometric studies notice how you've responded in exactly the way i'd feared - on each paper you're arguing about statistical significance. Have you seen the court case between (Lott and Levitt?) An interesting debate on gun control has been reduced to the technicality of how you define "replication". The theory, insights and value is all out the window, it's just two mathematicians arguing about terms. I see that as being typical of the outcome of econometric debates. I think there's vastly high diminishing returns to arguments about econometric evidence.
Finally, to clear up what might be some misunderstandings
Most Sub-Saharan African countries are 'part of the global economy' in terms of their own trade policy, but still poor. Many if not most of them have significantly lower tariffs than, for example, East Asian countries like South Korea, Vietnam and China did while growing very fast for many years
My emphasis. That seems like an important caveat for you to make, and should be more explicit since you're changing the terms of the debate. I'm not claiming that if a poor country abolished all tariffs then it's become rich overnight. I'm making the general point that countries that participate in trade tend to have higher living standards than those that don't. Of course "opennes to trade" is part of a bundle of conditions that constitute globalisation, and although perhaps I should have been clearer, i'm sure you realise that it is this broader phenomena of economic freedom that I think determines a nations prosperity.
"countries dismantle trade restrictions as they get richer"
That statement is correlation not causation as well, surely.
But i'm yet to see an empirical paper address this question of causation satisfactory. Certainly the above statement cannot be used as causation - whether trade restrictions or growth has historically "led" the other is irrelevent.
someone who has previously seemed so uninterested in the empirics ignores perfectly reasonable theoretical arguments
This started with me asking whether Quinn and yourself acknowledged that your argument rests on mercantile reasoning and infant-industries. I didn't feel that you answered that question, so I don't know what your theoretical arguments are. You raise valid points such as threshold effect, path-dependency and fiscal reform but these aren't so much theories as possible events. Whether they're likely to occur (and whether that in turn is a problem )depends on your theoretical frame. I've tred to make it clear what theory i'm using, but unless you do the same we can't have a theoretical argument.
everyone, but EVERYONE, who studies trade knows that both protection and liberalisation create losers as well as winners
Again, it depends on the time scale. If you asked a docker in Liverpool if they'd be willing to take redundency if it meant that his sons would all find it easier to get jobs, I think they'd take it. Protection certianly creates winners (politicians, concentrated interests) and losers (consumers=everyone). As for liberalisation winners are clear (consumers=everyone) and losers are typically short term, and dependent on the flexibility of the labour market and general prosperity of the country.
Just to finish though, notice how you think the optimum liberalisation/growth policy is knowable. I don't think it is, so this whole debate is somewhat misguided. I don't think any individual - professional economist or layman - has sufficient knowledge to *know* the optimum set of policies to create economic growth at minimal cost. I do think correllation is very clear (openness to trade = higher living standards) and that needs to be repeated. But the causation is complicated and therefore our best hopes of stumbling upon the optimal outcome is to allow endogenous solutions to emerge, and facilitate things with very broad, very simple, and very obvious institutional reforms.
I hope that can piece together a few things, and I'll look forward to another joust soon!
populist grandstanding
We're all guilty of that from time to time though aren't we? What's blogging if not "populist grandstanding"?!
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