Links of Interest (12/15/2009)

Remembering Paul Samuelson

Paul Krugman reflects back on the life and career of the incomparable economist-- Paul Samuelson

Read Samuelson’s work, and what you get is the sense of a man who, rather than sitting down to write Very Serious Papers, was having fun with ideas. Sometimes the playfulness boiled over into inspired silliness. Look at footnote #9 in his overlapping-generations paper, where he writes: “Surely, no sentence beginning with the word ‘surely’ can validly contain a question mark at its end? However, one paradox is enough for one article …” It seems clear to me that Samuelson’s playfulness liberated his imagination, and fueled his creativity.

And yet Samuelson was at the same time always grounded in reality. No ivory-tower academic, he remained deeply interested in events and policy, played the markets, and never let his theories override his sense of the way things actually were.

Chris Blattman fleshes out his thoughts on aid and growth (exactly what I think is problem with the way economists look at the relationship between aid and growth. Building a coherent short-run and long-run model to show that aid can aid growth in the long-run is possible through this logic; I am eagerly waiting for Owen’s paper. His earlier blog post on the issue here)

So if aid has been good at saving lives now, but not (in the short term) at spurring industry, then we shouldn’t be surprised that we don’t see take-offs. Rather, in most countries aid might actually lower the short term, measured number.

But by almost any measure, though, aid would still be a huge success. Maybe the “failure of aid” is really a failure to industrialize, disguised.

IR theories behind Obama’s Nobel speech (well, its an art how to fit the views with the models)

Interpreting the Maoist’s vocabulary right (hypocrites, distorting, populist, self-interested and self-fulfilling!)

Nepal’s future in regional integration (Nepal gains more from regional integration with India and China. I had written a very similar piece on the same issues two weeks ago.)

Can data tell the determinants of economic growth?

Foreign banks allowed to enter Nepalese banking industry (initial capital requirement of US$ 30 million plus US$ 5 million for each branch)

The Doha Round is not breathing but is still alive

Determinants of growth

This paper revisits the cross-country growth empirics debate using a novel Limited Information Bayesian Model Averaging framework to address model uncertainty in the context of a dynamic growth model in panel data with endogenous regressors. Our empirical findings suggest that once model uncertainty is accounted for there is strong evidence that initial income, investment, life expectancy, and population growth are robustly correlated with economic growth. We also find evidence that debt, openness, and inflation are robust growth determinants. Overall, the set of our robust growth determinants differs from those identified by other studies that incorporate model uncertainty, but ignore dynamics and/or endogeneity. This underscores the importance of accounting for model uncertainty and endogeneity in the investigation of growth determinants.

More here

R.I.P. Paul Samuelson

Paul Samuelson (1915-2009) requires no introduction among people studying economics. He will be sorely missed!

Extracts from an obituary published in the NYT below:

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His textbook taught college students how to think about economics. His technical work — especially his discipline-shattering Ph.D. thesis, immodestly titled “The Foundations of Economic Analysis” — taught professional economists how to ply their trade. Between the two books, Mr. Samuelson redefined modern economics.

The textbook introduced generations of students to the revolutionary ideas of John Maynard Keynes, the British economist who in the 1930s developed the theory that modern market economies could become trapped in depression and would then need a strong push from government spending or tax cuts, in addition to lenient monetary policy, to restore them. No student would ever again rest comfortably with the 19th-century nostrum that private markets would cure unemployment without need of government intervention.

That lesson was reinforced in 2008, when the international economy slipped into the steepest downturn since the Great Depression, when Keynesian economics was born. When the Depression began, governments stood pat or made matters worse by trying to balance fiscal budgets and erecting trade barriers. But 80 years later, having absorbed the Keynesian preaching of Mr. Samuelson and his followers, most industrialized countries took corrective action, raising government spending, cutting taxes, keeping exports and imports flowing and driving short-term interest rates to near zero.

Remarkably versatile, Mr. Samuelson reshaped academic thinking about nearly every economic subject, from what Marx could have meant by a labor theory of value to whether stock prices fluctuate randomly. Mathematics had already been employed by social scientists, but Mr. Samuelson brought the discipline into the mainstream of economic thinking, showing how to derive strong theoretical predictions from simple mathematical assumptions.

Early in his career, Mr. Samuelson developed the rudimentary mathematics of business cycles with a model, called the multiplier-accelerator, that captured the inherent tendency of market economies to fluctuate. The model showed how markets magnify the impact of outside shocks and turn, say, an initial one-dollar increase in foreign investment into a several-dollar increase in total domestic income, to be followed by a decline.

In a famous theorem, known as Stolper-Samuelson, he and a co-author showed that competition from imports of clothes and similar goods from underdeveloped countries, where producers rely on unskilled workers, could drive down the wages of low-paid workers in industrialized countries.

Mr. Samuelson also formulated a theory of public goods — that is, goods that can be provided effectively only through collective, or government, action.

His “correspondence principle” showed that information about the stability or instability of a theoretical economic system — whether, after a disruption, the economy returns to fixed levels of prices and output or, instead, flies out of control — could be used to predict the aggregate outcome of decisions taken by consumers and business firms. He showed, for example, that only a stable economic system would undergo ordinary business cycles like those captured by Mr. Samuelson’s multiplier-accelerator model.

He also helped develop linear programming, a mathematical tool used by corporations and central planners to calculate how to produce pre-set levels of various goods and services at the least cost.

Mr. Samuelson wedded Keynesian thought to conventional economics. He developed what he called the Neoclassical Synthesis. The neoclassical economists in the late 19th century showed how forces of supply and demand generate equilibrium in the market for apples, shoes and all other consumer goods and services. The standard analysis had held that market economies, left to their own devices, gravitated naturally toward full employment.

Mr. Samuelson’s resulting “synthesis” amounted to the notion that economists could use the neoclassical apparatus to analyze economies operating near full employment, but switch over to Keynesian analysis when the economy turned sour.

But Mr. Samuelson regarded the teaching at Chicago as “schizophrenic.” This was at the height of the Depression, and courses about the business cycle naturally talked about unemployment, he said. But in economic-theory classes, joblessness was not mentioned.

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Here is the last paper Samuelson wrote about Hayek and the epic, unsettling battle of ideas in economics.

Here is Krugman on Samuelson:

It’s hard to convey the full extent of Samuelson’s greatness. Most economists would love to have written even one seminal paper — a paper that fundamentally changes the way people think about some issue. Samuelson wrote dozens: from international trade to finance to growth theory to speculation to well, just about everything, underlying much of what we know is a key Samuelson paper that set the agenda for generations of scholars.

Export promotion works!

The number of national export promotion agencies has tripled over the past two decades. Although more countries made them part of their export strategy, studies criticized their efficacy in developing countries. The agencies were retooled, partly in response to these critiques. This paper studies the impact of today's export promotion agencies and their strategies, based on new survey data covering 103 developing and developed countries. The results suggest that on average they have a statistically significant effect on exports. The identification strategies highlight the importance of EPA services for overcoming foreign trade barriers and solving asymmetric information problems associated with exports of heterogeneous goods. There are also strong diminishing returns, suggesting that as far as export promotion agencies are concerned, small is beautiful.

More from the paper "Export promotion agencies revisited"

More on trade policy and climate change, economic crisis, and Doha Round here

Gains from regional integration in South Asia

Regional cooperation can be the key instrument to promote increased market integration in South Asia through greater flow of goods, services, capital, and ideas. This is appropriate for a region which is the least integrated region in the world, although many countries share analogous cultures and histories, as well as a passion for cricket and curry.

It is also very timely given the global downturn and the slowdown in global trade. Increased regional trade could more than compensate for the potential loss in global trade. It is estimated that increased intra-regional trade could add two percentage points to South Asia's GDP growth. This could raise South Asia's real GDP growth from 6 % to 8 % in 2010. Unlike fiscal stimulus, increased market integration and regional trade could add to GDP growth, without increasing public debt. It is the most efficient and cost effective instrument for South Asia to cope with the global downturn.

It is lagging regions and the small, land locked countries, like Afghanistan, Bhutan, and Nepal, which will benefit most from improved access to the markets of others.

More by Ejaz Ghani here. My take on the gains from regional integration for Nepal here.

Labor dispute chases away FDI from Nepal!

Exactly the kind of thing the Nepalese economy does not want right now:

Amid worsening business conditions created mainly by Maoist-affiliated workers, Varun Beverage Nepal Ltd -- the bottler of Pepsi in Nepal, has decided to halt its production and also announced that it will not make further investments any other sector in the country including, expansion of Pepsi.

The workers have been agitating since Friday demanding the removal of the newly-appointed shift engineer Shivaraj Bhandari by the management. " The workers started showing their inhumane and illogical behavior just because the management didn´t pay Rs 3,000 in advance payment to one of the workers who in fact had taken the advance amount earlier," added Jaipuriya.

Jaipuriya had earlier announced investing Rs 1 billion in various sectors including Pepsi, housing sector and the newly opened KFC and Pizza Hut outlets. With this ongoing disturbance Jaipuriya has decided to drop the decision. The company was preparing to expand Pepsi plant in the Tarai as well.

Varun Beverages has recruited more than 350 individuals as permanent employees and they draw a minimum of Rs 10,000 as basic salaries.

More here

Regional integration in South Asia and export-led growth in Nepal

In my latest op-ed I look at if regional integration in SAARC (and BIMSTEC) would be better for Nepal or from the whole WTO bloc. Given the lack of benefits so far from the world trading bloc and minute expected benefits from the Doha Round, the gains from more regional integration looks higher and promising.

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Regional Integration & Growth

Nepal is one of the most open economies in South Asia. It is also the poorest economy in the region. Achieving high growth driven by exports has been one of the major objectives for at least two decades now. The period between 1990 and 1996 saw one of the most astounding increases in exports and an impressive economic growth rate (7.9 percent in 1994). With high hopes of stimulating exports and growth, Nepal joined the WTO on April 23, 2004, becoming the first LDC to join the trading bloc through full working party negotiation process.

With this came the end of MFA in 2005, leading to a collapse of Nepali garment and textile industry, once the main driver of export-led growth. The gains from trade liberalization (economic growth and development goals) under the WTO have been pretty dismal. Exports, as a percentage of GDP, have declined to 15 percent. Meanwhile, imports, as a percentage of GDP, are ever rising, reaching 37 percent in 2008. The manufacturing sector is going downhill, registering a negative growth rate. Annual economic growth rate has stagnated below 5 percent.

Given the clear lack of benefits from the WTO regime, is there still room for export-led growth in Nepal? The answer is yes, provided that we focus on full integration into the regional markets and in signing FTAs with countries that possess potential markets for Nepali exporters. This also includes instituting right measures on trade facilitation and specialization on products that are relevant and within purchasing power of customers in targeted markets.

Even the Doha Round, for whose completion negotiations have been going on since 2001, is not favorable to Nepal. A World Bank study showed that total gains from the Doha Round would be as low as $96 billion and only $16 billion would go to developing countries. Worse, half of all the benefits that would go to the developing countries would go to eight countries (Argentina, Brazil, China, India, Mexico, Thailand, Turkey and Vietnam). For South Asia, real income gains would be about US$2.5 billion. India alone is expected to gain US$1.7 billion. There is very little, if any, at store for Nepal from the Doha Round. Worse, terms of trade, the relative prices of a country’s export to import, is expected to be negative, putting further strain on exports.

The gains from further integration into the regional markets could be more fruitful than the gains from further liberalization under the Doha Round. The booming Indian economy, with which our market is the most integrated among all the other markets, provides a huge potential for Nepali exporters. Already 62 percent of total trade takes place with India. More than 70 percent of exports go to India and over 60 percent of imports come from India. There are more than 300 million potential customers in the bordering states that Nepali exporters could cater to, provided that they produce goods based on taste, preferences and purchasing power of the customers. Furthermore, Nepal could piggyback on the success of over $15 billion software service exports industry in India, if it could work on enhancing human capital and incubating business units based on the needs of the software industry. The two economies are expected to integrate and trade even more after the recently signed trade treaty.

Charting out strategies to fully integrate with other SAARC nations would also help to stimulate investment and exports. Nepal exports more to SAARC members than it does to other nations. Nepal’s export to SAARC, as a share of its total exports, increased from 53.9 percent in FY 2003/04 to 72.5 percent in FY2007/08. Meanwhile, imports, as a share of total imports, from SAARC increased from 53.9 percent in FY 2003/04 to 67 percent in FY 2007/08. In this regard, expediting integration under SAFTA (and BIMSTEC) would produce more gains than from any other trading blocs. These two blocs (plus China) could be the most important markets for Nepali exports in the coming days. The future of export-led growth would depend on how much Nepal can capitalize from integrating with these markets with huge potential.

Note that among South Asian nations, Nepal has the highest volume of trade flows and trade intensity, the ratio of Nepal’s exports to a destination (SAARC) to its exports to the world. In 2006, it was 42.4. Nepal also has high trade complementarity, the degree to which export pattern of Nepal matches with imports pattern of other SAARC nations. For South Asia as an export destination, Nepal’s trade complementarity was 55.2 in 2006, which means that there are more favorable prospects for a successful regional trade arrangement. Focusing more on regional integration is also important to increase investment. FDI from SAARC has increased from US$3 million in FY 1998/99 to US$30 million in FY 2007/08. From other regions, excluding SAARC, FDI decreased from US$29 million in FY 1998/99 to US$ 18 million in FY 2007/08.

It should be noted that just joining regional trading blocs would not be an elixir to all the problems ailing the Nepali exports sector. One of the main reasons why the export-led growth strategy failed was because of Nepal’s lack of competitiveness in the international market. This was caused primarily due to internal labor disputes and lack of trade facilitation. Internal trade disputes in firms led to a disruption in production, a halt in manufacturing activities, an increase in labor costs, and a severe dispute over wage and permanent employment status regardless of labor competence and productivity. This was compounded by regular strikes along the main highway and energy shortage, leading to production and supply bottlenecks, and an increase in transportation costs. Add to this 50 percent higher logistics costs than average for transporting goods from Kathmandu to Kolkata port, there is a huge cost disadvantage.

If these issues are properly sorted out in time, then growth could be spurred by exports to regional markets. Nepal should focus on production of goods and services that have market potential in the regional markets, that could be exported with comparative advantage, and that are consistent with preferences and purchasing power of targeted customers.

(Published in Republica. December 2, 2009)