A picture worth thousand words! The downfall of world merchandise trade during the crisis. Good news is that it is again picking up after hitting near-rock-bottom. Source: WTO
Thursday, July 29, 2010
Thursday, July 22, 2010
Abdon, Felipe and Kumar have used Hidalgo et al. (2007) and Hausmann et al. (2007)’s concept of product space to come up with an “Index of Opportunities” (full paper here), which captures the potential for further upgrading production, economic growth, and development. It is based on a country’s accumulated capabilities (human and physical capital, legal system, institutions, etc.) to undergo structural transformation.
The idea is that “in the long run, a country's income is determined by the variety and sophistication of the products it makes and exports, and by the accumulation of new capabilities.” Hidalgo and Hausmann have shown that structural transformation occurs when countries grow sustainable by continually upgrading production structure, i.e. redeploying existing production structure to produce (upgraded) new products. It is related to “nearby goods”, “proximity”, and “open forests” concepts used in product space analysis. It is also used to see if coordination failures are binding constraints to growth while doing growth diagnostics of an economy. (An interesting idea that I have used to do growth diagnostics of the Nepalese economy).
Anyway, back to the new Index of Opportunities. It includes:
- Exports sophistication (EXPY--a weighted average of the income level of the products exported, where the latter is calculated as a weighted average of the GDP per capita of the countries that export a given product)
- Sophistication of the core commodities (machinery, chemicals and metals)
- Overall diversification (the number of products in which the country has acquired revealed comparative advantage)
- Diversification of core products (the number of core products in which the country has acquired revealed comparative advantage)
- Share of complex capabilities (the ratio of the number of core commodities with revealed comparative advantage to the total number of commodities with revealed comparative advantage)
- Standardness/uniqueness of the export basket (how many countries export the same product; this measure of uniqueness of the export basket has been called “standardness”)
- Open forest (measure of the potential for further structural change. This variable provides a measure of the (expected) value of the goods that a country could potentially export, i.e., the products that it currently does not export with revealed comparative advantage)
“We estimate cross-country regressions of each of the seven indicators on the level of GDP per capita. Each indicator has two components that enter the construction of the Index. One is the actual value of the indicator, which captures the actual capabilities. The other one is the residual from the regression of the indicator on GDP per capita. This shows whether a country is a positive or a negative outlier given its income per capita. The residual obtained in each case is considered a “reward” or a “penalty”, respectively. A lower value of standardness is considered better. In this case, therefore, a negative residual corresponds to a reward and a positive residual to a penalty. We use highly disaggregated trade data covering 779 products for the years 2001-2007.
We rescale all seven indicators and the residuals such that they lie between 0 (minimum value) and 1 (maximum value). With all the seven indicators (and their residuals) scaled to lie between 0 and 1, and an increasing value corresponding to an improvement, we averaged the fourteen components to obtain the Index of Opportunities.”
The result shows that China has the highest score, followed by India, Poland,Thailand, and Mexico. Nepal stands at number 33 with an index of 0.4729.
The authors use the index to predict average annual economic growth rate between 2010-2030. For instance, the average annual growth rate of Nepal between 1990-2007 was 4.33 percent. Based on the index, growth projection, average annual growth rate, for Nepal, between 2010-2030 is 5.49 to 6.61 percent. For the same timeframe, China’s is 10.34 and 4.15 to 5.12 percent and India’s is 6.47 and 5.78 to 7.07 percent. Their result is pretty close to the one done by Uri Dadush and Benn Stancil (2010) from Carnegie Endowment.
The conclusion is that countries (such as China, India, Poland, Thailand, Mexico, and Brazil) that have diversified and increased the level of sophistication of their export baskets have accumulated a significant number of capabilities, allowing them to perform well in the long run. For countries that have not done so yet, they will have hard time having structural transformation. The authors vouch for “soft” industrial policies advocated by Harrison and Rodriguez Clare (2010). [Soft industrial policies promote collaboration among government, industry, and cluster-level private organizations with an aim to directly increase productivity. It basically seeks to directly address coordination failures that keep productivity low in existing or promising sectors rather than engage in direct interventions that might distort prices. This is like facilitating the process that already looks promising but is not realizing its full potential, rather than instituting one all anew whose success is unclear.]
I am not sure how much impact this index will have but it does not add much new information than EXPY and PRODY analysis developed by Hausmann et al.. It just reaffirms the results that are already there (it reaffirmed the conclusion of the product space analysis and the projections done by Dadush and Stancil). Nevertheless, a series of interesting papers and one more index to look at export-led structural transformation. Also, read the papers I have linked to. The whole concept is amazing!
Wednesday, July 21, 2010
When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden [in the United States] rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war. It was the war that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war.
Those economists, like New York Times columnist Paul Krugman, who liken confidence to an imaginary “fairy” have failed to learn from decades of economic research on expectations. They also seem not to have noticed that the big academic winners of this crisis have been the proponents of behavioural finance, in which the ups and downs of human psychology are the key.
The evidence is very clear from surveys on both sides of the Atlantic. People are nervous of world war-sized deficits when there isn’t a war to justify them. According to a recent poll published in the FT, 45 per cent of Americans “think it likely that their government will be unable to meet its financial commitments within 10 years”. Surveys of business and consumer confidence paint a similar picture of mounting anxiety.
The remedy for such fears must be the kind of policy regime-change Prof Sargent identified 30 years ago, and which the Thatcher and Reagan governments successfully implemented. Then, as today, the choice was not between stimulus and austerity. It was between policies that boost private-sector confidence and those that kill it.
Here we have the crux: Greece, Ireland, Spain, Portugal and Italy need to be austere. But Germany, Britain, America and Japan do not. With their debts valued by the market at heights I had never thought to see in my lifetime, the best thing they can do to relieve the global depression is to engage in co-ordinated global expansion. Expansionary fiscal, monetary and banking policy, are all called for on a titanic scale. But, the members of the pain caucus say, how will we know when we have reached the limits of expansion? How will we know when we need to stop because the next hundred billion tranche of debt will permanently and irreversibly crack market confidence in dollar or sterling or Deutschmark or yen assets? Will this shrink rather than increase the supply of high-quality financial assets the world market today so wants, and send us spiralling down? Economists had asserted before 1829 that what we call “depressions” were impossible because excess supply of one commodity could be matched by excess demand for another: that if there were unemployed cobblers then there were desperate consumers looking for more seamstresses, and thus that the economy’s problems were never of a shortage of demand but of structural adjustment. But once Mill had pointed out that these economists had forgotten about the financial sector, the way forward was clear – if you could cure the excess demand in the financial sector. Monetarist dogma says the key excess demand in that sector is always for money – and so you can always cure depression by bringing the money supply up. The doctrine of the British economist Sir John Hicks says the key financial excess demand is for bonds, and you can cure the depression by either getting the government to borrow and spend or by raising business confidence so the private sector issues more bonds.
Followers of the US economist Hyman Minsky say the monetarists and the Hicksians (usually called Keynesians, much to the distress of many who actually knew Keynes) are sometimes right but definitely wrong when the chips are as down as they are now. Then the key financial excess demand is for high-quality assets: safe financial places in which you can park your wealth and still be confident it will be there when you return. After a panic, Minsky argued, boosting the money stock would fail.Cash is a high-quality asset, true, but even big proportional boosts to the economy’s cash supply are small potatoes in the total stock of assets and would not do much to satisfy the key financial excess demand. Trying to boost investment would not work either, for there was no excess demand for the risky claims to future wealth that are private bonds. The right cure, his followers argued, was the government as “lender of last resort”: increase the supply of safe assets that the private sector can hold by every means possible: printing cash, creating reserve deposits, printing up high-quality government bonds and then swapping them out into the private market in return for risky assets.
We don’t need one of expansionary monetary and fiscal and banking policy, we need all of them – until further government action begins to crack the status of the US Treasury bond as a safe asset, and further government bond issues reduce the supply of safe high-quality assets in the world economy. Has that day come? No. The US dollar is the world’s reserve currency, the US Treasury bond is the world’s reserve asset. The US has exorbitant privileges that give it freedom of action that others such as Argentina and Greece do not have. Will that day come soon? Probably not.
But trust me, we will know when the time comes to stop expansion. Financial markets will tell us. And not by whispering in a still, small voice.
Could we please have some acknowledgement of the fact that the reason the debt-to-GDP ratio did not rise across the 1930s was because GDP rose, not because debt didn't rise? Debt more than doubled from $22.5 billion to $49.0 billion between June 30, 1933 and June 30, 1941. But nominal GDP rose from $56 billion in 1933 to $127 billion in 1941.
And could we please have some acknowledgement that our 9.4% of GDP deficit in fiscal 2010 pales in comparison to the 30.8% of GDP deficit of 1943, or the 23.3% and 22.0% deficits of 1944 and 1945?
Niall Ferguson should not do this. The Financial Times should not enable Niall Ferguson to do this.
If you were ignorant of basic facts about the Depression — or if you didn’t know that movements in a ratio can reflect changes in the denominator as well as the numerator — you might think that it’s possible to summarize fiscal policy by looking at the federal debt-GDP ratio, which looks like this from 1929-41:Clearly, then, Herbert Hoover was a wild deficit spender, while FDR was much more cautious. Right?OK, we know that’s wrong. Here’s what nominal debt, the numerator in the debt ratio, looks like:So Hoover ran up very little debt — only about 6 percent of 1929 GDP. FDR, on the other hand, ran up a lot of debt, about 47 percent of 1933 GDP. But Hoover presided over a shrinking, deflationary economy, while FDR presided over a rapidly growing (from a low base) economy with rising prices.
Sunday, July 18, 2010
The UNDP and OPHI have come up with a new measure of poverty— Multidimensional Poverty Index (MPI) — that will be used (rather update) the existing Human Poverty Index (HPI) calculated annually by the UNDP in its flagship report HDRs. Here is the full paper and methodology used in calculating MPI.
Case of Nepal: The percentage of people who are MPI poor (headcount) is 84.7 percent. The average intensity of MPI (average number of depravations each household faces) is 54 percent.
Saturday, July 17, 2010
He argues that living standard of the poorest has to be improved in order to check population growth. The population of the world is projected to reach 9 billion over the next 50 years.
Thursday, July 15, 2010
In his rejoinder to Sachs, William Easterly (seemingly fully in agreement with Bruce Caldwell’s oft-repeated claim that Hayek’s thesis has no bearing on contemporary policy debates over the welfare state per se) suggests that Hayek’s thesis was intended to only have applicability to a system of wholesale state planning.4 In reply, Sachs rightly pointed to Hayek’s 1976 utterance that he deemed The Road to Serfdom to have much applicability to command planning and the redistributive Nordic-style welfare state alike.
Sachs notes that Hayek suggested “that high taxation would be a ‘road to serfdom,’ a threat to freedom itself” (Sachs 2006, 42). Similarly, Sachs maintains that “Hayek was wrong. In strong and vibrant democracies, a generous social welfare state is not a road to serfdom” (ibid.; emphasis added).
Unsurprisingly, Sachs’s reading of Hayek attracted much online commentary. For example, one leading authority on Hayek’s work insisted that Sachs had seriously misread “Hayek’s Road to Serfdom thesis” (Boettke 2006).
Our aim here, however, is not to evaluate whether Sachs and Easterly are correct per se in their claims and counterclaims about the growth performance (whether sterling or otherwise) of the Nordic social democracies. Instead, we argue that Sachs’s “welfare state” reading of Hayek’s thesis is accurate. Indeed, the Sachs-Easterly exchange is merely the latest spark on this particular issue to rise from the rather heated intellectual fire that Hayek’s book immediately lit upon its initial appearance in 1944 (see, e.g., Hansen  1947). Moreover, there is much clear evidence that Hayek himself had always intended his argument to apply with equal stringency against command planning and the welfare state alike (see, e.g., Hayek 1948,  1994, 1960, and  1994). Indeed, as we shall show, Hayek—during the 1940s and after—frequently argued that the logic supposedly set into play by any policy of persisting with the mixed economy, Keynesian demand management policy, and welfare state practices would lead to full-blown central planning. Importantly, Hayek frequently claimed that the “middle of the road” policies—pretty much the welfare state and demand management (Toye 2004)—adopted by the 1945–51 Labour Government in
aptly illustrated the veracity of his thesis in The Road to Serfdom." Britain
The hodgepodge of ill-assembled and often inconsistent ideals which under the name of the Welfare State has largely replaced socialism as the goal of the reformers needs very careful sorting out of its results are not to be very similar to those of full-fledged socialism. This is not to say that some of its aims are not both practicable and laudable. But there are many ways in which we can work toward the same goal, and in the present state of opinion there is some danger that our impatience for quick results may lead us to choose instruments which, though perhaps more efficient for achieving the particular ends, are not compatible with the preservation of a free society. The increasing tendency to rely on administrative coercion and discrimination where a modification of the general rules of law might, perhaps more slowly, achieve the same object, and to resort to direct state controls or to the creation of monopolistic institutions where judicious use of financial inducements might evoke spontaneous efforts, is still a powerful legacy of the socialist period which is likely to influence policy for a long time to come.
As a percentage of GDP, gross investment is expected to increase to 38.2 percent as compared to 31.9 percent in the last fiscal year. Meanwhile, gross national savings is expected to decline to 9.4 percent from 9.7 percent of GDP in the same timeframe. The gap between gross domestic savings and gross investment, as a percentage of GDP, is expected to be negative 28.8 percent. It is widening by about six percentage points from last year’s figure. This essentially means that we are consuming more and have little money to fund projects and trigger capital accumulation.
The net export of goods and services is estimated to expand by almost 10 percentage points to a negative 28.4 percent of GDP. Exports are estimated to decrease to 9.2 percent of GDP from 12.4 percent last year. Meanwhile, imports are estimated to increase to 38.1 percent of GDP from 34.6 percent last year. Hence, trade deficit is expected to widen by 41 percent. The growth of remittances income is expected to slow down to 7 percent from 47 percent last fiscal year. The contribution of remittances to GDP is expected to stand at 19 percent, compared to 21.2 percent last fiscal year. This is leading to current account deficit of Rs 27.60 billion, which is an estimated negative 2.3 percent of GDP. Note that the current account balance was Rs 41.44 billion surplus last year. Overall, the Balance of Payments (BoP) deficit is projected to be Rs 19.57 billion.
Wednesday, July 14, 2010
. Most smart people, including academics, don't like to admit when they don't understand something that they read. This provides an opening for those who purposefully write obscurant or jargon-filled papers. If you're befuddled after reading the paper abstract, don't bother with the paper -- a poorly-worded abstract is the first sign of bad writing. And bad academic writing is commonly linked to bad analytic reasoning.
Google Scholar and check out the citation count. The more a paper is cited, the greater its weight among those in the know. Now, this doesn't always hold -- sometimes a paper is cited along the lines of, "My findings clearly demonstrate that Drezner's (2007) argument was, like, horses**t." Still, for papers that are more than a few years old, the citaion hit count is a useful metric.. If you're trying to determine the relative importance of a paper, enter it into
. Nothing Megan McArdle wrote is incorrect. That said, peer review does provide some useful functions, so the reader doesn't have to. If nothing else, it's a useful signal that the author thought it could pass muster with critical colleagues. Now, there are times when a researcher will bypass peer review to get something published sooner. That said, in international relations, scholars who publish in non-refereed journals usually have a version of the paper intended for peer review.
It's a causally complex world out there. Any researcher who doesn't test an argument against viable alternatives isn't really interested in whether he's right or not -- he just wants to back up his gut instincts. A "strawman" is when an author takes the most extreme caricature of the opposing argument as the viable alternative. If the rival arguments sound absurd when you read about them in the paper, it's probably because the author has no interest in presenting the sane version of them. Which means you can ignore the paper.
click here for one example). If you can reason out different policy conclusions from the theory and data, then don't take the author's conclusions at face value. To use some jargon, sometimes a paper's positivist conclusions are sound, even if the normative conclusions derived from the positive ones are a bit wobbly.Sometimes a paper can rest on solid theory and evidence, but then jump to policy conclusions that seem a bit of a stretch (
Conduct this exercise when you're done reading a research paper -- can you picture the findings that would force the author to say, "you know what, I can't explain this away -- it turns out my hypothesis was wrong"? If you can't picture that, then you can discard what you're reading a a piece of agitprop rather than a piece of research.
Trust is a public good that permeates all scholarship and reportage. Peer reviewers assume that the author is not making up the data or plagiarizing someone else's idea. We assume this because if we didn't, peer review would be virtually impossible. Every once in a while, an unethical author or a reporter will exploit that trust and publish something that's a load of crap. The good news on this front is that the people who do can't stop themselves from doing it on a regular basis, and eventually they make a mistake. So the previous rules of thumb don't always work. The publishing system imperfect -- but "imperfect" does not mean the same thing as "fatally flawed."
"Unlike economists and politicians, markets have no ideology. As long as they make money they do not care if they have to eat their words. They simply want whatever “works”—whatever will produce a stable, healthy economic environment conducive to debt repayment. When circumstances become dire enough, they will even condone debt restructuring—if the alternative is chaos and the prospect of a greater loss.
This opens up some room for governments to maneuver. It permits self-confident political leaders to take charge of their own future. It allows them tothe narrative that underpins market confidence, rather than play catch-up.
But to make good use of this maneuvering room, policymakers need to articulate a coherent, consistent, and credible account of what they are doing, based on both good economics and good politics. They have to say: “we are doing this not because the markets demand it, but because it is good for us and here is why.”
Their storyline needs to convince their electorates as well as the markets. If they succeed, they can pursue their own priorities and maintain market confidence at the same time."
Tuesday, July 13, 2010
"A wide gulf, therefore, is set between the ideas of lenders and the ideas of borrowers for the purpose of genuine investment; with the result that the savings of the lenders are being used up in financing business losses and distress borrowers, instead of financing new capital work.
At this moment the slump is probably a little overdone for psychological reasons. A modest upward reaction, therefore, may be due at any time. But there cannot be a real recovery, in my judgment, until the ideas of lenders and the ideas of productive borrowers are brought together again; partly by lenders becoming ready to lend on easier terms and over a wider geographical field, partly by borrowers recovering their good spirits and so becoming readier to borrow. If the diagnosis is right, the slump may pass over into a depression, which might last for years."
Monday, July 12, 2010
In most sub-Saharan countries the demand by commercial banks for bonds does not readily respond to changes in the interest rate. One reason is that there is little competitiveness in domestic bond markets and another is that the bonds of African governments have extremely low credit ratings from Standard and Poor’s or Moody’s—if they are rated at all.
The main impact of the central bank’s raising of the bond interest rate will be to induce commercial banks to replace loans to the private sector with government bonds because the relative return from the former has fallen. This is a perverse result because when bonds increase the assets of commercial banks, they should expand their creation of credit. But because of the high yields received by banks on government securities, it is profitable for them to hold excess reserves instead of lending.
This process is fundamentally different from the so-called ‘crowding out’ of private investment, about which the IMF repeatedly warns national policymakers. But the ultimate effect is the same. ‘Crowding out’ allegedly occurs when government borrowing to cover public expenditures competes with private borrowing. The dynamic that we are describing is different because the increase in the central bank rate does not originate from a need to cover public expenditure, but from the false expectation that the higher rate would appreciate the exchange rate and reduce inflationary pressure.
Sunday, July 11, 2010
Along with some ´incurable chronic syndromes´ like yawning growth gap, stagnant manufacturing and agriculture sectors, dwindling exports, sustained high inflation and rising recurrent expenditures, the impoverished economy has lately been exposed to a set of new and unexpected challenges coming mainly from the financial sector.
The stomach-churning mismatch between the inflow and outflow of foreign currency reflected in terms of deficit in the Balance of Payments (BOP) fuelled mainly by a breathtaking rise in trade deficit, slowing remittance growth and shortage of liquidity in the banking system was the distressful financial problem that hit the country this year.
However, worries created by the alarming deficit in BOP towered above all else, as it has shaken the economy to its very foundations.
The country experienced a stunning squeeze in foreign currency reserves, which is crucial for settling international payment obligations like repaying loans and financing imports, among other things. As a result, import capacity declined to 6.6 months from almost 10 months recorded at the beginning of the fiscal year.
Though the BOP deficit is shrinking slowly to come down to Rs 17 billion, it can anytime reemerge to spark a financial crisis, as the government has not taken concrete steps toward correcting a widening trade deficit.
According to latest central bank data, the trade deficit recorded till mid-May surpassed total remittances that the country received during the period. Even more, the mismatch between imports and exports is so big that Nepal´s total export finances only 16 percent of imports.
It is a fact that the country has limited options for dealing with the problems. After the collapse of Nepal´s traditional export pillars, woolen carpets and readymade apparel, it has neither competitive exportable products nor a convincing plan to develop such products in the medium term.
The alarming disparity between bloated consumption that is fueling imports on one hand and squeezing exports on the other is the root cause of present economic problems, says Keshab Acharya, chief economic advisor at the Ministry of Finance.
Since boosting exports is not possible in the near future, curbing consumption by means of both tariffs and non-tariff measures is the most suitable treatment for the problem, he added.
Similarly, Nepal´s financial sector, one of the few sectors that had enjoyed virtually uninterrupted expansion during the last decade, faced another problem of liquidity shortage. Though the problem was detected around September, it quickly escalated into something chronic by February, pushing the inter-banking lending rate to a record 13 percent.
The liquidity shortage, which has now eased to some extent, has already resulted in a rise in both lending and deposit interest rates. It is good that the deposit rate has increased, providing some relief to depositors who have been reeling under negative interest rates for years.
However, rapid rise in lending rates has raised concern as such a rise can discourage investors. Many of them are unable to withstand the heat of a five percentage point increment in lending rates within less than a year.
Many industries have lost their financial viability even before coming into operation. Such developments, if allowed to go unchecked for some time, will slow down both investments and consumption and eventually drag down an already sluggish growth.
Sustained high inflation continues to be another challenge. Though it has eased lately, it still hovers at over 10 percent - three percentage points more than target. And the latest fuel price increment is likely to aggravate inflation further.
The glum outlook in the real sector continued this year. Economic growth rate was squeezed to 3.5 percent, lower than last year´s growth, as the economy continued to be the victim of a murky business environment, power shortage and insecurity.
Like in past years, agricultural production that grew by 1.05 percent against an annual population growth of 2.27 percent not only dragged down the overall growth but also increased dependency on imported food grain. A decline of 11 percent in paddy production, the mainstay of Nepal´s agro-production, was the most frustrating development.
Gloomy performance by the agricultural sector that provides a livelihood to two-thirds of the population and commands a one-third contribution to the national economy, means the poverty situation is likely to worsen this year.
However, per capita income recorded an impressive 16.7 percent growth to Rs 41,851--US$ 562 -- thanks to continued healthy growth in incomes from overseas, including workers´ remittances. Similarly, domestic savings as a percentage of GDP declined slightly to 9.36 percent, fueling consumption and widening the savings- investment gap.
With widening mismatch between expenditure and revenue, cracks have appeared in fiscal management, as the budget deficit by the third week of June soared to Rs 15 billion compared to Rs 4.7 billion recorded last year.
The terrific growth in revenue mobilization seen in the first half of the fiscal year has now lost steam and hovers around 24 percent, a growth level almost equal to the rise in total expenditure.
However, an impressive growth of over 35 percent, more than the recurrent expenditure growth rate, in capital expenditure remained one of the few achievements of the year. The total capital expenditure on cash basis has touch Rs 50 billion, which is 71 percent of the revised estimate.
The Ministry of Finance is hoping to hit the revised capital expenditure target of Rs 84.71 billion this year. The increased expenditure capacity at major projects was mainly due to the adoption of a multi-year contract awarding system and electronic bidding procedures.
Low absorption of foreign aid continued to be a major problem, as disparity between the realized and committed amounts of foreign aid continued to widen.
As of the third week of June, the government has mobilized around Rs 27 billion whereas commitment in foreign aid is more than double that. Of the amount, the government received Rs 23 billion as grant against a revised target of Rs 42.7 billion while Rs 4 billion was received as loan, against the target of Rs 15 billion.
Friday, July 9, 2010
He is a little bit more pessimistic than I am.
Well that is a different story; coming back to CA, lack of vision and political will along with weak administrative structure have resulted in poor implementation of all agricultural plans and programs so far, including the ‘20-year Agricultural Perspective Plan’ (APP). Therefore, in all likeliness, NTIS 2010 too will meet the fate of APP as capabilities and intention of politicians and bureaucrats haven’t changed any. Therefore, investing single-mindedly on products that have natural competitiveness and fixed cost advantages and on infrastructure and social sectors like education, health and food security should be our focus as diverting resources (both public and private) elsewhere is simply a misuse of the scarce means.
Wednesday, July 7, 2010
Research generally neglects to identify whether interventions were motivated by industrial policy reasons or rent-seeking considerations. In fact, there is no evidence to suggest that intervention for industrial policy reasons in trade even exists. Instead, existing evidence suggests that protective measures are often motivated by optimal tariff considerations, for revenue generation, or to protect special interests (see Broda et al. 2008, Gawande et al. 2005, Goldberg and Maggi 1999, and Mobarak and Purbasari 2006). Tariff protection is also frequently granted to less successful firms or declining industries that have political power (Beason and Weinstein 1996 and Lee 1996).
If such measures are part of a broader effort to achieve technological upgrading then they may be helpful, whereas if they are implemented in isolation they are likely to fail.
Instead of blanket subsidies for exports and FDI, one can try to attract multinationals to produce key inputs or to bring specific knowledge needed by clusters with the ability to absorb them. As Chandra and Kolavalli (2006) have put it, “without host-country policies to develop local capabilities, MNC-led exports are likely to remain technologically stagnant, leaving developing countries unable to progress beyond the assembly of imported components” (p. 19).
First, soft industrial policy reduces the scope for corruption and rent seeking associated with hard industrial policy such as protection or selective production subsidies. Second, soft industrial policy is much more compatible with the multilateral and bilateral trade and investment agreements that many LDCs have implemented over the last decades.