PSD Blog - The World Bank Group

The theory of industrial policy meets reality

The idea of industrial policy has been seeing a bit of a resurgence since the financial crisis. It's good to be reminded of the reality of what these policies end up looking like in practice. It seems that Ethiopia's private sector coffee exporters are not too sympathetic to the idea. (H/t African Agriculture)  

Does GATS require network neutrality?

A new paper argues that permanent blocks by WTO members on internet services like search engines, photo sharing, etc. run afoul of the General Agreement on Trade in Services. The International Economic Law and Policy blog has the details.

Easterly discovers the power law of international trade

Not too long ago, Bill Easterly and Justin Lin squared off at an event at the World Bank over the wisdom of industrial policy in developing countries. While I am sympathetic to Bill's position, judging by the mood of the crowd in the room, I would have to call the debate a tie.

Bill has returned for round two with a new working paper that formalizes some of the arguments he made during that debate. In the Power of Exports, the New York University Professor (and now avid and entertaining Twitterer) points out that tiny Fiji dominates the market for exports to the U.S. in the category of "Women's, girl's suits, of cotton, not knit." More generally, the market for exports tends to be dominated in each country by a few big hits (and what's more, to a particular importing country), whether women's cotton suits or "ceramic bathroom kitchen sanitary items not porcelain." Mathematically, this is described by a power law, where the likelihood of observing a particular value decreases exponentially with the size of that value.

Mongolia needs a Hong Kong (China)

David’s post on Mongolian Cashmere highlights the difficulty Mongolia has had in branding its top quality cashmere. It reminds me of a recent study by Feenstra, Hanson and Lin (2004) on the value of information and other intermediary services in international trade. The study shows that during the 1990s, about 53% of Chinese exports to the rest of the world were re-exported through Hong Kong (China). Re-exporting means that the goods did not receive “substantial transformation” en-route, but did benefit from sorting, packaging, or the application of service activities such as marketing or transport.

Is protectionism on the rise?

The World Trade Organization (WTO) released its flagship Annual Report (2009) on the 22nd of July. Each year, the annual report focuses on a topic of special interest to the global trading community. It didn’t require much guessing to figure out that this year’s report would have something to do with the ongoing financial crisis and its impact on trade. But precisely which aspect of the financial crisis is most important for trade policy today?

The WTO has identified increased protectionism as the biggest danger. In a nutshell, under recessionary pressures, a country is tempted to erect higher trade barriers to shift demand from foreign-made to home-made goods, thereby stimulating its own economy. The problem here is that when all countries resort to protectionism, global welfare is lower (gains from trade are lost) and the recessionary pressures intensify.

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.