PSD Blog - The World Bank Group

And they say imports are a bad thing?

According to the mercantilist view which for long shaped trade policies, imports were considered to be a bad thing while exports, a good thing. The reason for this thinking was that imports depleted a country’s gold reserves (foreign exchange reserves) or its national wealth making the country poorer and weaker. On the other hand, exports had the opposite effect.

With the establishment of GATT/WTO, the “imports are bad” hypothesis got a new rationale - lowering import barriers worsened a country’s terms of trade (ratio of export prices to import prices) lowering the country’s national welfare. Hence, allowing more imports was considered a “concession” by the importing country that had to be compensated for through greater access to its partners’ markets. This “reciprocity” in trade concessions was the founding principle of GATT.

Sins of trade protectionism

A new collection of articles from Brookings provides policymakers some advice heading into the G20 summit on April 2. One of the articles - Tame Protectionism and Revitalize Trade - urges the G20 leaders to avoid making high-minded but empty commitments to free trade and instead take a defensive posture. Author Paul Blustein argues in particular that leaders need to avoid subsidizing industries that aren't systematically important. Or as he perhaps more colorfully puts it:

...the G-20 needs to...draw a distinction between “mortal” and “venial” sin—promising never to commit the former, while treating the latter as forgivable. To qualify for venial sin treatment, subsidies should meet a series of tests. The two most important are that 1) the industry being subsidized is systemically critical to the national economy, and 2) the subsidy being provided is clearly temporary, and will be withdrawn by a specified time period (say, two years).

Debating sweatshops

Nicholas Kristof, a columnist for the New York Times, recently wrote an article in support of sweatshops, citing what he sees as the relevant counterfactual:

...the vast garbage dump here in Phnom Penh. This is a Dante-like vision of hell. It’s a mountain of festering refuse, a half-hour hike across, emitting clouds of smoke from subterranean fires. The miasma of toxic stink leaves you gasping, breezes batter you with filth, and even the rats look forlorn. Then the smoke parts and you come across a child ambling barefoot, searching for old plastic cups that recyclers will buy for five cents a pound. Many families actually live in shacks on this smoking garbage...

Talk to these families in the dump, and a job in a sweatshop is a cherished dream, an escalator out of poverty, the kind of gauzy if probably unrealistic ambition that parents everywhere often have for their children.

Kristof goes on to argue that we should be skeptical of labor standards in international trade agreements, as these can serve indirectly as barriers to trade, thus reducing demand for the products from factories in the developing world. But is he setting up a false choice between scavenging and sweatshops and between free trade and labor standards?

China, meet World of Warcraft

The Financial Times today reports that China does U-turn on online money-making. Making 'real' money by trading virtual currencies earned from online gaming was banned two years ago, but it looks like the Chinese government has changed its mind. China will now collect a 20 percent tax on income earned from online gaming.

As I point out in a post on The end of Doha and the World of Warcraft, gold farming and trading in virtual currencies is "largely under the radar of the World Trade Organization and, to some extent, government tax collectors." The FT cites an online contributor with a slightly more poetic take on the issue: "If they successfully implement this tax, I will jump over Mount Everest."

Trading without Doha

Still upset about the failure of the latest round of Doha talks? Don't worry - there are still many ways to improve the outlook for international trade. You can take Simeon Djankov's advice over on the Doing Business blog and reduce the delays related to trade. Or, according to a new World Bank working paper, you could make trade more transparent. In Governance, Corruption, and Trade in the Asia Pacific Region, authors Kazutomo Abe and John S. Wilson estimate huge gains for trade and GDP due to reforms that improve transparency:

[T]he reforming economies in APEC stand to benefit significantly in regard to GDP and welfare gains with the type of reform we examine here. In particular, Vietnam could expect an increase in real GDP by more than 30 percent in Case 1. Russia, Philippines and Thailand’s GDP and welfare would rise substantially, as well. The benefits to Malaysia and China would be almost one year’s growth. The estimated global benefits here with transparency reform, US$406 billion in Case 1 and US$290 billion in Case 2 in the 2006 prices are larger than those reported in previous work on trade facilitation.

China is not the only one courting Africa

Turkey is making big strides in building relations with Africa. The Jamestown Foundation reports that:

Turkish interest in Africa is underwritten by soaring bilateral trade: while Turkey's trade volume with the entire African continent was $5 billion in 2003, Gul noted that with government encouragement, Turkish-African trade had been increasing annually by double digit figures since 2004 and exceeded $12 billion last year, a figure that his government hoped to increase to $30 billion by 2010.

The article also reports that Turkey brings a lot of agricultural expertise to bear. Perhaps this kind of partnership will bring more development benefits than the results reported by UNCTAD in Economic Development in Africa: 2008.

A new export niche for Jamaica?

Much of the lament following the latest failed talks of the Doha Round centered on liberalization of trade in agriculture. The hope, at least in part, was that a reduction in subsidies in the developed world could provide a stimulus to farmers in the developing world (never mind that the global rise in food prices would have been exacerbated in the short run by a reduction in subsidies). Coupled with the failed talks is a slowdown in the OECD economies, reducing overall demand for exports from the developing world. What's a developing country to do?

Creative destruction on Wall Street

Get ready to hear it ad nauseum: creative destruction! If you're an ardent supporter of the free market, there is little else to fall back on in the face of today's events on Wall Street. In fact, one might even be pleased about the turn of events, given that financial authorities allowed Lehman Brothers to fail. Avinash Persaud sums up this perspective in an op-ed today in the Financial Times:

[T]here is the subject of moral hazard. While central banks have been offering liquidity on generous terms and stopping institutions from going bankrupt, some banks were not engaged in hard restructuring but gaming the system. They were busy hoarding liquidity and pushing risky instruments into the hands of the authorities... the game is not about luring sovereign wealth funds to invest before markets recover but about how to restructure for a brave new world in which the financial sector is smaller.

According to this reading, it's good that Lehman fell - an inefficient firm has been destroyed, and capital will be freed to migrate to new, better managed institutions. But while all of this may be true, the next few weeks and months will certainly not be pretty for the U.S. economy. I noticed one thing missing from most of today's coverage in the press and (surprisingly) in the blogoshere: What will the effect be on developing economies? 

Fighting climate change through trade liberalization

The Institute of Public Affairs, a free market-oriented think tank in Australia, has issued a mini-manifesto on combating climate change. In Undermining Mitigation Technology, Tim Wilson puts forth two arguments about how best to develop and spread new technologies to combat climate change. His big argument is that patent rights ought not to be violated. I think that part of the argument will prove contentious.

More interesting to me is Wilson's argument that trade barriers present a significant obstacle to the diffusion of mitigation technology. This one looks like a no-brainer. In his own words:

The global market for environmental goods and services is worth between USD$550 billion and USD$613 billion per annum. Of this figure, 35 per cent is in goods and 65per cent in services. Yet some countries impose tariffs of up to 70 per cent on these technologies. In Asia and Latin America the average tariff on environmentally sensitive technologies is between 15 and 20 per cent. If the governments of developing countries want to promote the transfer of CO2 mitigation technologies, they can do something immediately—remove their tariff barriers.

Resurrecting the Washington Consensus

A new paper available from the National Bureau of Economic Research called Is The Washington Consensus Dead? attempts to resurrect the Washington Consenus, or at least the bit of it that argued for trade liberalization. Authors Antoni Estevadeordal and Alan Taylor let it be known that this was no easy task: "[W]e painstakingly collect new and more detailed tariff data on consumption, capital, and intermediate goods from primary sources, using easy digital sources for recent years, but with recourse to some extremely cumbersome and hitherto unused archival sources for the 1980s." In other words, econometrics is not for the faint of heart. Here is what their hard work has led them to conclude:

We think these results show that there is quite strong support for the trade policy prescriptions of the 1990s Washington Consensus. The WC claimed that lowering tariffs would promote growth in the developing world. Theory suggests a mechanism: lower tariffs will lead to cheaper capital and intermediate goods imports.