On export - led growth and the risks of large trade surpluses

Today in class we discussed whether a trade surplus is 'good' and the discussion drifted into the idea of export - led growth that many sucessful developing countries have followed during the past few decades.

"For five decades, developing countries that managed to develop competitive export industries have been rewarded with astonishing growth rates: Taiwan and South Korea in the 1960’s, Southeast Asian countries like Malaysia, Thailand, and Singapore in the 1970’s, China in the 1980’s, and eventually India in the 1990’s."

The above quote is from an article by Dani Rodrik titled "Is Export Led Growth Passé?".

"Nevertheless, developing countries have been falling over each other to establish export zones and subsidize assembly operations of multinational enterprises. The lesson is clear: export-led growth is the way to go.

But for how long? While reading the economic tea leaves is always risky, there are signs that we are at the cusp of a transition to a new regime in which the rules of the game will not be nearly as accommodating for export-led strategies."

The question is why? Rodrik goes on to explain:

"The most immediate threat is the slowdown in the advanced economies. Europe and the United States are both entering recession, and fears are mounting that the financial meltdown accompanying the sub-prime mortgage debacle has not worked itself out. All this is happening at a time when inflationary pressures hamper the usual monetary and fiscal remedies. The European Central Bank, tightly focused on price stability, has been raising interest rates, and the US Federal Reserve may soon follow suit. So the advanced economies will suffer for a while, with obvious implications for the demand for exports from emerging markets."

So, a slow down in the US and Europe implies a decrease in the import absorbing ability of these countries and thus slower export growth for the developing nations group. In addition,

"On top of this is the almost certain unwinding of global current-account imbalances. Emerging markets and developing countries ran a surplus of $631 billion in 2007, split roughly equally between Asian countries and the oil-exporting states. This amounts to 4.2% of their collective GDP. The US alone ran a current-account deficit of $739 billion (5.3% of its GDP). Neither the economics nor the politics of this pattern of current-account balances is sustainable, especially in a recessionary environment.

The politics is clear to see. Nothing works as potently to inflame protectionist sentiment as large trade deficits. According to a December 2007 NBC/Wall Street Journal poll, almost 60% of Americans think globalization is bad because it has subjected US firms and workers to unfair competition.

If globalization has acquired a lousy reputation in the US, the external deficit deserves much of the blame. US trade policy has been remarkably resistant to protectionist pressure in recent years. But, regardless of who wins America’s presidency, the world should expect closer scrutiny of imports from China and other low-cost countries as well as of outsourcing of services to places like India."

Notice the sentences in italics. This is exactly what we said in class this morning.

All IB economics students (higher and standard level) should read the whole article carefully and it can be found here.

Dani Rodrik's homepage at Harvard is here. Click on the Commentary link on the left hand side of the page to read interesting and (to some extent) accessible stuff for our IB course.

The new job market

Well, this is an upper for all of you budding MBA's! (courtesy of my friend George M.)




Or, maybe this:
"So long, suckers. Millionaire hedge fund boss thanks 'idiot' traders and retires at 37" (courtesy, once again, of my dearest Elly Vintiadis)

It's the end of the world as we know it...!

Well, this is a great REM song I first heard driving out of my driveway back in 1988 while listening to 104.1, WBCN, the rock of Boston. I thought of the song after reading this Nouriel Roubini article.

The delusion that economic contraction in the US and other advanced economies would be short and shallow – a V-shaped six-month recession – has been replaced by certainty that this will be a long and protracted U-shaped recession, possibly lasting at least two years in the US and close to two years in most of the rest of the world. And, given the rising risk of a global systemic financial meltdown, the prospect of a decade-long L-shaped recession – like the one experienced by Japan after the collapse of its real estate and equity bubble – cannot be ruled out.

Indeed, the growing disconnect between increasingly aggressive policy actions and strains in the financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of $30 billion in March, the rally in equity, money, and credit markets lasted eight weeks. When the US Treasury announced a bailout of mortgage giants Fannie Mae and Freddie Mac in July, the rally lasted just four weeks. When the $200 billion rescue of these firms was undertaken and their $6 trillion in liabilities taken over by the US government, the rally lasted one day.

BTW, the guy is more often right than wrong! (check this from another IB econ blog as well as this on Roubini and his home page here)

Here is the video of the song and here are the lyrics:

OPEC: between a rock and a hard place

An interesting article on the current OPEC situation. It seems that members are between a rock and a hard place lately. The price of oil, as you probably are aware, is falling and this spells big problems for countries that rely on oil revenues for much of their growth. Check out the following from the article of today's Herald Tribune:

As the global economy continues to weaken, the Organization of the Petroleum Exporting Countries faces its toughest test in years. The problem for the oil exporters, who meet for an emergency session in Vienna on Friday, is to find a way to stop the price drop at a time when oil consumption is falling markedly in industrialized countries. Even the Chinese economy, long the biggest engine of growth for oil demand, seems to be cooling.

History suggests that OPEC will face a tough time propping up prices as oil consumption slows and the world teeters on the edge of a global recession, analysts said. Some experts warn that if the cartel took too much oil off the market, it could push prices up so much as to worsen the global economic crisis.

"OPEC's problem is they don't know how much demand is falling," said Jan Stuart, an energy economist at UBS. "So the risk they run is either they don't do enough, or they do too much. That's a tough choice."

And here, you find the classic problem facing cartel members:

The cartel, which controls 40 percent of the world's oil exports, has found it difficult in the past to get all its members to abide by production cuts. When prices fall, producers have an incentive to increase their output to maximize revenue, not stick with OPEC quotas.

Read the article here to find out more about the problems facing members and non-members as well as the possiblity of a commodity agreement (an export cartel a la OPEC) for natural gas producers!

Another must for all year 1 IB Economics students! Enjoy.

Well, what do you know!

"During a recession, laxatives go up, because people are under tremendous stress, and holding themselves back," said Shapiro, now chief executive of SAGE, a Chicago-based consulting firm. "During a boom, deodorant sales go up, because people are out dancing around. When people have less money, they buy more of the things that have less water in them, things that are not so perishable. Instead of lettuce and steak and fruit, it's rice and beans and grain and pasta. Except this time the price of pasta's so high that it's beans and rice."

A recent Nielsen report listed tobacco, carbonated drinks and eggs as especially vulnerable to recession, and candy, beer and pasta sauce as recession-proof. On Thursday, Hershey's announced third-quarter sales and income higher than last year's. ("We offer a tremendous variety of affordable indulgences, and people love chocolate, even in hard times." said Kirk Saville, a company spokesman.)

And here is another reason why an increase in GDP does not imply greater happiness!

A downturn, then, could result in benefits unmeasured by the market. "If people eat out less, the GDP goes down," Conley said, "but nothing in the GDP captures what you gain if you cook and eat in a leisurely way with your kids."

The full article can be found here.

A very interesting article on budget deficits

This article is from today's issue of the International Herald Tribune. I think it is a must read for any serious student if IB Higher Level Economics (but also for the interested Standard Level student who wants to go beyong textbooks).

Reading this article carefully may provide the IB Econ student with ideas on how to evaluate theory or a statement. There may be arguments against large budget deficits and expansionary fiscal policy but the seriousness of these arguments must be weighed against the specific circumstances.

The article can be found here.

Chinese economy growth rate slows

Globalization has ensured that the crisis that started in the US subprime market was not contained in the US but has spread all over. China announced the 3rd quarter growth which was once again lower than the previous one:

China's economic growth rate has fallen for the third quarter in succession, amid fears that the economy could be heading for a severe downturn.

The National Bureau of Statistics said the economy had grown at a rate of 9% in the three months to September.

...(This) marked a significant fall from the 10.4% growth of the first half of 2008, and the 12.2% growth seen in the first three quarters of 2007.

One could wonder how could a 9% growth rate be an issue! Well, it sure can. Dani Rodrik wrote this two weeks ago:

When other countries experiences financial crises, they lose a few percentage points of GDP and they get it over with. A lot more is at stake in China. China's precarious social balance and political stability hinge on continued high growth. Derail that growth engine, and you could have some really scary consequences that will affect 1.3 billion people and their neighbors.

What are the indicators that point to the slowdown and what are the Chinese authorities doing?

Correspondents say indicators from steel prices to housing sales suggest a severe economic slowdown could be in prospect.

Chinese factories are reporting that export orders are down sharply. Last week, the government said that half the country's toymakers had gone out of business.

Mr Li said the government had initiated timely measures to deal with the economic slowdown and cushion the impact from the global credit crisis, including falling exports and a restricted credit supply.

These included changing its focus from preventing the overheating of the economy and preventing structural inflation to the "preserving growth" and "controlling" inflation, he added.

Officials said over the weekend that the government was preparing to announce tax cuts and increased infrastructure investment. Curbs on the housing market in certain areas may also be relaxed. The People's Bank of China has cut interest rates twice and reduced banks' required reserves since mid-September. A third interest rate cut is expected later this year.

Read the BBC article about the new growth data here and read Rodrik's 'The other shoe drops' post here.

Paul Krugman rules!

I'm very happy!

This year's winner of the Nobel prize in Economics is Princeton economist and NYT columnist Paul Krugman.

Unfortunately guys, I never did bet and I thus didn't win any money, but I was right in predicting that he would win the Nobel prize this year! Check out my October 7 post 'This one is for you, Alex'!

Quoting from the New York Times article announcing the prize:

The prize committee lauded Mr. Krugman for “having shown the effects of economies of scale on trade patterns and on the location of economic activity.” Mr. Krugman is probably more widely known as a perpetual thorn in George Bush’s side from his perch as an Op-Ed page columnist for nearly a decade. His columns have won him both strong supporters and ardent critics. The Nobel, however, was awarded for academic — and less political — research that he conducted primarily before he began regularly writing for The Times.

He has developed models that explain observed patterns of trade between countries, as well as what goods are produced where and why. Traditional trade theory assumes that countries are different and will exchange only the different kinds of goods that they are comparatively better at producing; this model, however, was not reflected in flow of goods and services Mr. Krugman saw in the world around him. He set out to explain why worldwide trade was dominated by a few countries that were similar to each other, and why a country might import the same kinds of goods that it exported.

In his model, companies get more efficient at producing their goods as they sell more. Consumers like variety, so they pick and choose goods from among these producers in different countries. He developed this work further to explain what effect transport costs, which obstruct trade, should have on migration patterns. He helped explain under what conditions trade would lead to concentration or decentralization of populations.

Mr. Krugman’s models have been praised for their simplicity and practicality — features economists are often criticized for ignoring.

“Krugman’s trade models became the standard in the economics profession both because they fit the world a bit better and because they were masterpieces of mathematical modeling,” said Edward L. Glaeser, a professor at Harvard University who also studies economic geography. “His models’ combination of realism, elegance and tractability meant that they could provide the underpinnings for thousands of subsequent papers on trade, economic growth, political economy and especially economic geography.”

Mr. Krugman has been writing his Op-Ed page columns for The Times since 1999. In recent years, in his column and a related blog on nytimes.com, he has frequently and unrelentingly criticized Bush administration policies.

It's great that right now we are discussing trade theory in class. I hope that at least my ambitious group will take some time to check out a few things on the net about his ideas and contributions to orthodox economic theory. Even if you just bookmark the stuff for later!

I feel now even better adopting these past few years his introductory textbook for my IB economics classes!

Here is the Unofficial Paul Krugman site. Here you can find summaries of his NYT articles. And this is on his latest book "The Conscience of a Liberal".

Trading blocks, again

This week we are finally discussing trading blocks, so do read the material I had posted a month ago on this blog. You can go directly to the post in question by clicking here.

Bhagwati's evaluation of regional deals rules: "...termites in the trading system"! Don't forget to include that in a relevant question!

ADDENDUM: I was just reading again the Economist leader "A second-best choice" and I noticed the comments from readers. They are interesting as they express the dissatisfaction that exists with the WTO process and its bias in favor of developed nations. Quoting bits from a couple of comments:

The WTO trade deal, from a developing countries point of view, is highly flawed as it lets the developed world exploit its competitive advantages (e.g., banking, services, etc) while not allowing the developed world to exploit its - cheap farming.

or,

Is US justified in imposing tariffs to protect 1% of GDP while other countries are asked to open up their market to be plundered? Beats me !

Check them out - you will get a flavor of why the Doha Round has to this point failed.

By Elly, for Ellie and all: Barry Schwartz: less choice is better

"....the secret to happiness is: low expectations..."

Elly Vintiadis brought this TED talk to my attention. This is Barry Swchartz, professor of Social Theory and Social Action at Swarthmore College. This semester he is teaching Psychology, Economic Rationality, and Decision Making and a seminar in Thinking, Judgment, and Decision Making.

Not only is he a most engaging speaker but what he says makes a lot of sense (keep in mind, he is focusing on western industrial societies). And, it is closely related to our field, Economics.

‘The absence of some metaphorical fishbowl
is a recipe for misery and possibly, disaster.’

On the role of fiscal policy

This is the link to the Robert Reich article I mentioned in class. Let me bring to your attention a couple of points:

Finally, not all deficits are equal. As every family knows, going into debt in order to send a child to college is fundamentally different from going into debt to take an ocean cruise. Deficits that finance investments in the nation’s future are not the same as deficits that maintain the current standard of living.

We had mentioned something along these lines when trying to evaluate the 'crowding out' argument.

Also:

The top 1 percent now takes home about 20 percent of total national income. As recently as 1980, it took home 8 percent. Although the economy has grown considerably since 1980, the middle class’s share has shrunk. That’s a problem not just because it strikes so many as being unfair, but also because it’s starting to limit the capacity of most Americans to buy the goods and services we produce without going deep into debt. The last time the top 1 percent took home 20 percent of national income, not incidentally, was 1928.

That's another potential problem with rising inequality in the distribution of income.

Enjoy the article here.

Trade related data response questions

We will be discussing in the next couple of days question 2 from HL P3 of May 2008 "The softwood timber dispute" as well as question 4 from HL P3 May 2007 "USA and Australia enter trade agreement". I am mostly interested in how we handle question (d) in each. It's going to be fun. Be prepared.

Interesting wording...!

This quote reminds me of our description of the 'pro-market' supply-side policies, but the wording sounds better! It is from the Yahoo! News article 'McCain, Obama clash over economic crisis'

He (Obama) contended that Bush, McCain and others had favored deregulation of the financial industry, predicting that it would "let markets run wild and prosperity would rain down on all of us."

What are the questions

What are the quesions? (I just remembered Joan Robinson's book!)

Well, these are questions that three top notch economists (two of them Nobel prizes) would ask in the presidential debate.

Sometimes, the questions are worth more than the answers. Read them (and think about them) here.

ADDENDUM:
I think that the best of these questions (for our purposes) is Scholes' question #1:
Discuss the tradeoffs for our economy, if any, between growth (so-called trickle down) and redistribution (so-called sprinkle around) policies

Then, Scholes #3, Stiglitz #1 and Stiglitz #2. What do you thnk? Imagine the Scholes #1 as a long essay (Paper 1) for IB Higher Level Economics in the May 2009 exam! With slightly different wording, believe me, it's game!

ADDENDUM #2:
Isn't the expression 'sprinkle around policies' great?

This one is for you, Alex!

Well, you can place your bet on who's going to win this year's Nobel prize in Economics! N. Greg Mankiw made me aware of the odds this year. The favorite is Martin Feldstein (with odds of 8.00). I'd bet for Paul Krugman with odds of 15.00! Here is a quote:

2008 will go down in history for the unprecedented turmoil witnessed in the financial markets of the world's largest economies - the Credit Crunch. Given the world's seemingly relentless economic meltdown, all eyes will be on the Royal Swedish Academy of Sciences, administrators of the world famous Nobel Peace Prize. They will no doubt be deliberating long and hard before announcing, on October 13th, the winner of 2008 Nobel Laureate for conferring the greatest benefit on mankind in the field of Economics.

"A cut in interest rates is all that would be necessary ...": Remember that M05 HP3 question 'd'?

Well, check out this one on the importance of consumer confidence in spending decisions. The article is titled "Full of Doubts, U.S. Shoppers Cut Spending" and is published in today's NYT. The link is here and this is a quote from it:

Cowed by the financial crisis, American consumers are pulling back on their spending, all but guaranteeing that the economic situation will get worse before it gets better.

In response to the falling value of their homes and high gasoline prices, Americans have become more frugal all year. But in recent weeks, as the financial crisis reverberated from Wall Street to Washington, consumers appear to have cut back sharply. Even with the government beginning a giant bailout of the financial system, their confidence may have been too shaken for them to resume their free-spending ways any time soon.

Recent figures from companies, and interviews across the country, show that automobile sales are plummeting, airline traffic is dropping, restaurant chains are struggling to fill tables, customers are sparse in stores.

Beyond the obvious macro viewpoint, try to find the most income elastic goods and services in here and think of the importance of the level of income itself in determining the degree of income elasticity of demand!

Your Internal Assessment and other tales of ordinary madness..

Just a reminder (posted on the net so no one can claim otherwise - this one is for you Mr. 'Sorry for being late, I didn't hear the bell over there...')

I am expecting you to hand in Commentary #2 tomorrow, and we have agreed in class that:

The International Economics related exam will be after the OCT 28 short break (but, I am making NO commitments on the exact date: be prepared)

The big -pre end of semester- review exam (Micro, Macro, Trade & elements from Development) will be after the NOV 17 break (again, no commitments on the exact date: be prepared)

Commentary #3 is due the week before the NOV 17 break and commentary #4 right before Xmas break.

Have fun!

(and speaking of commitments, have you seen the movie?

The American Anti-Intellectual Threat / by Jeff Sachs

A very interesting article (again, not related to IB economics but very much within the IB spirit) worth reading!

Here is a quote:

Humanity’s only hope is that the vicious circle of extremism can be replaced by a shared global understanding of the massive challenges of climate change, food supplies, sustainable energy, water scarcity, and poverty. Global scientific processes like the IPCC are critical, because they offer our best hope of forging a consensus based on the scientific evidence.

Here is the link.

Read also the comment below that an anonymous reader of our blog was kind enough to make.

Letterman & Robin Williams

Not related to IB economics (or, is it?) but really good in my opinion:

Part 1:


Part 2:

What if the whole world could vote

You can 'vote' for McCain or Obama in the "Global Electoral College" that the Economist has set up. The count up to now is even more interesting if one considers who reads the magazine. It came to my attention through the Mankiw blog and I have to admit that at first I had no idea what the title of his post meant...!

For the bright and ambitious

My colleague, John L. Tomkinson, brought to my attention this letter published in today's issue of the International Herald Tribune:

Lost MBAs

The current financial debacle may herald the end of an era epitomized by three letters: MBA. The mad stampede among talented students and young entrepreneurs to earn an MBA from Harvard, Stanford and Wharton, and thereby get on the fast track to a job on Wall Street, has drained the pool of talent for other more essential but less lucrative professions. What a tragic waste when all that accumulated talent, energy and learning only produces a giant, burst bubble in the biggest casino in the world.

Clearly something must be missing in the magic mix that is being imparted on these bright young titans of the universe if they can throw themselves into such a selfish, unproductive world of financial brinkmanship on such a massive scale.

Do ethics or historical and social perspective have any place in their curriculum? We need to ask those charged with teaching our brightest and best whether the values they teach need to be rethought.

Robert Nadler, London

Difficult to disagree, isn't it?