The Evolution of Agricultural Trade Flows

Earlier research showed that during the 1980s and 1990s most of the global agricultural trade expansion took place among the industrial countries and among countries within trade blocs. These were also periods of declining agricultural prices. These prices increased during the 2000s, there were continuous trade reforms, and many developing countries started to support their agricultural sectors. This paper analyzes trade flows during the past two decades, and tries to measure whether all these developments have changed the trade balances and the share of different groups within the global trade flows. In addition, it looks at the trade balances on food to see the impact of these changes on net food importing countries. In conclusion, unlike the case with manufacturing, developing countries have not been able to increase their export shares in agriculture as significantly. They have maintained their trade shares by primarily expanding exports to other developing countries.

A link to the full paper by Ataman Aksoy and Francis Ng here. The conclusion is not surprising!

No more isolated, finally!

Caption: Locals of Martadi in Bardiya welcome a tractor that reached the district headquarters for the first time on Wednesday. With the road network touching Martadi, all district headquarters in the far-western region of Nepal now have road connectivity. (Source: Republica, June 10, 2010)

It is never too late. Now, five (or four) districts headquarters are left to be connected by roads. After connecting district headquarters, the next public investment should be in expansion of roads within districts so that villages are connected each other. One of the few sectors where donor’s money is making some headway in Nepal!

Clustering in market-institution-deficient markets

Rural nonfarm development plays a key role in generating employment in many developing countries. Clustering is an important form of industrial organization in the rural nonfarm sector. Based on a primary survey of both urban and rural handloom weaver clusters in Ethiopia, one of the country’s most important rural nonfarm sectors, this paper examines the mechanism and performance of clustering. That cluster-based handloom production survives even in remote rural areas illustrates its vitality in restricted environments. In the absence of financial institutions, clustered producers set up interconnected trade credit linkages to ease working capital constraints. Moreover, geographical clustering enables entrepreneurs with limited capital to enter the business through shared workspaces and fine division of labor. Despite the viability of the clustering model of production operating in harsh environments, an improvement in infrastructure can further enhance firm performance in a cluster. Our survey indicates that producers in electrified towns work longer hours than those in towns without electricity. In addition, the rental cost of shared lit workspaces is minimal, attracting more poor entrepreneurs to participate in handloom production than would otherwise be possible.

This one comes from a case study of handloom weavers in Ethiopia. Pretty interesting how people find alternatives way to transact and interact in no-so-perfect markets. An external policy and investment shock such as infrastructure construction improves productivity. More here.

What is disastrous in the short run: Inflation or Deflation?

The consensus among economists is that deflation is disastrous in the short-run but the fear of inflation is legitimate in the long run. We need more (prudent) Keynesian dosage in the economy!

The rough consensus was that in the near term, as Western economies struggle to recover, the bigger worry there is deflation. But as the time horizon lengthened, more experts cited inflation, because it seems the most plausible exit strategy for governments trying to deal with crushing debts.

Using monetary policy to generate the growth necessary to push inflation much above 2% would be difficult, since short-term interest rates are already below 1%. Fiscal policy is turning contractionary as America’s stimulus expires and much of Europe implements austerity measures.

Monetarists downplay the output gap and focus instead on the vast amount of money that has been created as central banks buy bonds or extend loans to banks. They worry that this money, which today is largely being hoarded by the financial industry, will eventually be loaned out into the real economy, prompting prices to rise. Yet this concern is probably overblown.

After all, central banks can still raise interest rates, no matter how big the monetary base is, and they also have ways of withdrawing the exceptional liquidity measures put in place during the crisis. The European Central Bank successfully “sterilised” its recent purchase of government bonds by enticing banks to deposit an offsetting amount of money with the central bank. The Federal Reserve will start testing a similar system on June 14th.

Even if inflation could be created, would it reduce the real government debt, the presumed purpose of such a policy? Not easily. First, for most countries the greatest long-term fiscal threat comes from unfunded retiree benefits, which by their nature are indexed to inflation. Second, the maturity profile of most countries’ marketable government debt is relatively short: over half of America’s and more than 40% of that of Germany, France and Italy matures within three years. Britain, at 20%, is the exception. This means that unless investors are repeatedly surprised, inflation will lead to higher nominal interest rates as debt is refinanced, and in turn to an unchanged real debt. If governments set out to create inflation, investors are likely to notice and react.

The latest crisis has demonstrated that price stability is no guarantee of financial and economic stability—indeed, a narrow obsession with prices may have led central bankers to neglect asset bubbles and the condition of the banks. Yet in practice price stability has not been dislodged from the centre of central banks’ attention.

RTAs are a blessing

Freund and Ornelas argue (full paper here) that regional trade agreements (RTAs) are more of a blessing than a burden. This runs counter to Jagdish Bhagwati’s argument that RTAs undermine free trade. They find that trade creation tends to be the norm in RTAs, which counts to nearly 300 now, and trade diversion an exception; and when trade diversion is observed, its magnitude is relatively small.

It means that there is more trade creation than trade diversion with RTAs.Why so? They argue that it is because governments choose partners well considering factors such as proximity, similarity in GDP and its composition, and difference in factor endowments. Moreover, RTA partners not only lower tariffs on trade between/among them but also lower tariffs on  imports from countries outside the bloc. In fact, RTAs go beyond the mandate of trade liberalization among the partners.

The RTA creates “leakage” in the trade-policy redistributive channel. External protection also becomes more costly, because of the costly trade diversion that accompanies the RTA. As a result, external tariffs tend to fall after the formation of an RTA, both because the economic marginal cost of external protection rises and because the political-economy marginal gain from external protection falls.

[…] The increasing wave of regionalism has been largely beneficial to the world trading system. Most empirical analyses indicate that trade creation, not trade diversion, is the norm, both because governments choose well when forming RTAs and because they adjust other trade policies to moderate the distortions from discrimination.

Here is a list of RTAs so far. More on RTAs here.

From Governance to Growth

This note introduces an evolutionary approach to economic and governance reform. It lays out two especially prevalent trajectories that differ starkly from one another in how they prioritize and sequence economic growth, state building, and the development of civil society and political institutions. The first trajectory focuses initially on investments in state capacity. The second initially prioritizes smaller, more catalytic entry points and addresses specific capacity and institutional constraints as and when they become binding. Over the longer term, both trajectories endogenously generate incentives to strengthen institutions that underpin economic competition and political accountability. But over the short to medium term, the strengths of one trajectory are mirrored as the weakness of the other. For many low-income countries, the combination of rapid growth plus a seeming excess of either order or chaos may thus be in the (medium-term) nature of things, rather than an aberration that requires fixing. 

See more on Brian Levy's Development trajectories: An evolutionary approach to integrating governance and growth

Irrational faith on rational models

Watch this video (Mind Over Money) from PBS.

It is good to be reminded again and again the faults of rational models, its relation to the financial crisis, the warnings, the dismissal (from neoclassicals) and the way back to Keynesian ideas.