Not a big deal: the WTO Doha round failed again

Newspaper editorials are abuzz with anger and frustration against India and China for creating a gridlock, again, in the WTO talks, leading to collapse of the protracted Doha "development" round of trade talks. High on the agenda were the US and the EU farm subsidies and demand posed by the US to developing countries to open up their manufacturing/industrial sector for trade. It is understandable that the US wants the manufacturing to be as free as possible despite its intransigence attitude in reducing farm subsidies --note that the US automakers and manufacturing firms have been struggling to stay put in the market chiefly due to stiff competition from low priced and better fuel economy vehicles from Japan and South Korea. They could not compete in home, so now they want to compete in places where the economy cannot afford to invest in manufacturing plants now. Its like grabbing before anyone grabs it or develops a potential to grab it!

India raised last minute alarm by insisting on inclusion of a provision for it (and the G33) to raise tariff in sectors very vulnerable to international price fluctuation.  Though the new condition was hugely unpopular among the West's negotiators, Indian chief negotiator and commerce minister, Kamal Nath, was also in a dilemma: domestic politics and international trade. He chose the first (remember, the Indians are going to polls in couple of months). He is being cheered in India now! The US, India, and China failed to agree a compromise on a proposal called the Special Safeguard Mechanism (SSMs), which was designed to protect farmers in the developing world against temporary surges in cut-price imports of cotton and rice...Kamal Nath claims that he had the backing of 100 developing countries. He was concerned about the livelihood of poor and subsistence farmers in India, where 70% of the population still depend on agriculture for living, rather than the inflated gains from trade and manufacturing sector deals.

Kamal Nath argues:

It is unfortunate in a development round, this is the last mile we couldn’t run because of an issue of livelihood security.

The Washington Post bemoans and argues that it will make the developing countries more poorer (what a ridiculous argument???) :

...China's role in the demise of the Doha Round is particularly dismaying, considering China has reaped huge benefits from global trade in the seven years since it joined the organization -- with strong U.S. support. Chinese exports have quadrupled from $300 billion in 2002 to $1.2 trillion in 2007, thanks in large part to free access to the U.S. market. U.S. supporters of Chinese inclusion in the WTO argued that drawing China into a system of multilateral give-and-take would mute its nationalistic tendencies. Evidently, the Chinese see the matter differently. They, and the world, will be poorer because of it.

Similar, but a milder, tone from the NYT:

...A breakdown would certainly be harmful. And the world’s poorest countries would lose the most.

...If the world’s richest nations give in to the temptations of protectionism, the world’s poorest countries will suffer the most. But no one, including the rich nations, will escape the damage to the global economy

Did the collapse of this trade talks mean that we lost a whole lot in terms of tariff and welfare gain? Well, not really. The tariff loss would amount somewhere between $50 billion to $100 billion-- that is equal to or double the amount of foreign aid given to developing countries in a year. It is a very tiny fraction of world GDP (around 0.1%). Worse, the benefits of trade would have gone mainly to the West- not to the poor farmers in developing countries. Ironically, the Doha round is also termed as "development round" in the belief that a success in trade talks would help the poorest people the most. Also, the poor countries already have special access to the markets of the rich world, meaning that a general cut in tariff across the globe would either not affect them or they would lose (the latter one having higher probability of occurrence!)

Here is Rodrik's advice to not cry loud for Doha:

Actually, not much. There was not a whole lot at stake to begin with for poor nations as a whole. (Cotton is a somewhat big deal for West Africa, but pretty much everything else is a mixed bag.) And if the taxpayers and consumers of the U.S. and EU want to reap the considerable benefits of reducing farm supports, they can surely do that on their own without having to be bribed by increased market access abroad.  So don't listen to trade officials and editorialists who will bemoan the huge downside risks.

The Economist says the collapse was expected (and it really was):

The failure of the Geneva talks will not send that into reverse. But with the world economy slowing, it is singularly ill-timed nonetheless. The best that can be said for the collapse of negotiations is that, after all the difficulties and acrimony that have plagued the Doha round for much of its seven-year life, few outside Geneva (and perhaps not many on the lake’s shore) expected a deal. But bad news, even when it is entirely predictable, is bad news all the same.

Bilateral and multilateral trade deals will be popular now (the Doha round is not dead yet...and it should not be!) because countries would be willing to go for free trade in a regional block where they face similar overhead costs and structural problems. For instance, India is really pushing forward for a free trade agreement in the SAARC region (known as SAFTA) and have already been allowing duty free entry of numerous goods into its market.

Here is an assessment from a recent study (The Promise and Perils of Agricultural Trade Liberalization: Lessons from Latin America) by the the Global Development and Environment Institute (GDAE) at Tufts University. It accentuates the need for SSMs:

The government’s responsibility is to provide the tools necessary to enable small farmers to take advantage of high global food prices to enter this virtuous cycle of development.  Governments should retain the ability to use tariffs to protect small holder agriculture when global prices fall; focus poverty alleviation programs on rural areas; accumulate food stocks to cushion citizens from price fluctuations; and act as a guaranteed buyer to small farms in acquiring these stocks.  Developing countries must navigate multilateral and bilateral trade negotiations in a way that allows them to retain the use of tariffs and safeguard measures.

Here is a nice summary of why the the talks stumbled.

The upside of rising global food prices-- Is there any?

An interesting debate is going on about the impact of food prices in positive direction-- actually trying to find out "an upside for humanity in the rise of food prices".

Here is the proposition posed by The Economist :

"There is an upside for humanity in the rise of food prices."

Here is an excerpt from an email I got from Lauryn Nicasio on behalf of the ongoing debate:

Although we can never overlook the grave situation posed by rising food prices, we hope to dissect the issue and view it from fresh perspectives to see if it can have a positive impact. For example, do rising food prices benefit farmers? Can they lead to development of safe, genetically modified foods which in turn can help developing nations with marginal farmlands become self-sustainable? And are the shorter-term pains of creating biofuels worth the longer-term gains of reduced transportation costs? 

Here is the debate hall

Here is Joachim von Braun (I agree with him!)

Here is Homi Kharas

Here is Papa Abdoulaye Seck

I think the answer is "it depends"...some farmers can gain from it but in the long run many more will suffer...we have to look at the net effect, especially from the perspective of farmers in the developing countries. Some initial thoughts:

1. I think the moderator is asking a wrong/misplaced question, because the impact of global rise in food prices cannot be answered in plain black and white; the options cannot be either 0 or 1.
2. Switching production from low price food products to high price food products will not be as easy as has been assumed. Especially in the developing countries, farmers are too poor to buy new seeds, local development banks are reluctant to offer a reasonable line of credit for such activities because of moral hazard problems. Development aid for agriculture has fallen from a high of 17% of total aid to just 3% today, with some international donors demanding that fertilizer subsidies be eliminated, making it even more difficult for cash-strapped farmers to compete. Paul Collier puts it in this way: "Unfortunately, peasant farming is generally not well-suited to innovation and investment: the result has been that African agriculture has fallen further and further behind the advancing productivity frontier of the globalized commercial model. Indeed, during the present phase of high prices the FAO is worried that African peasants are likely to reduce their production because they cannot finance the increased cost of fertilizer inputs. While there are partial solutions to this problem through subsidies and credit schemes, large scale commercial agriculture simply does not face this problem: if output prices rise by more than input prices, production will be expanded because credit lines are well-established."
3. The big producers from the West would definitely benefit as they shift production to high priced corps, which earns them higher marginal revenue. These farmers can offer the technology needed for large scale production.
4. Obviously, #2>#3 in terms of population...hence, the farmers in the developing countries will lose...(But if #2 is not a problem, then there might be upsides benefiting most of the people-- as of now a highly unlikely case...keep reading for some reasons!)
5. About technology transfer: Even if higher food prices would trigger development of new technology and innovation in the West, the new technology might not transfer to developing countries as easily as we have been thinking. Have we seen a sea change in technology in the oil sector, even though prices skyrocketed during the 80s? Also, did the oil price rise change consumption patter? (Also, was there a change in consumption pattern after high global food prices during the 80s?)
6. Moreover, transfer, adoption, and right use of new technology depends on institutional constraints, governance, culture, education, transportation, and communication, among others. How would my parents-- who entirely depend on agriculture for livelihood and live in an area where there is just one single lane, unpaved road--constructed in 2006/07, thanks to donors!--be able to use, in our small farm, a new technology made in the West? Also, would my parents be able to afford it? (Ans: No!)...Moreover, would the new innovation in the West, where farming is done in a large scale, be suitable for farmers in the developing world who hold small, fragmented land? Obviously, the transfer of technology would be too slow, if any. We have not seen high mobility of technology, one of the foundations of successful economies, from the West to Africa in the past couple of decades. Technology transfer argument is easier said than done!
7. People argue that markets clear itself and we will have an equilibrium price soon? Well, this argument is based on the assumption that there already is a free market in this sector-- which is not true! For instance, the subsidies given by the West and also by the developing countries like India and China to its farmers have been creating a situation where price stabilization towards an equilibrium is just not possible. There will be high degree of volatility and fluctuation, depending on many environmental variables. It should be noted that the subsidies in the US and EU alone in crops used for producing biofuels is driving 60% of the rise in food prices. Will this stop? As of now, it won't-- the protracted WTO talks collapsed just because of some of these thorny issues. See here how Japan alone can distort price of rice in the global market.
8. Along the veins of the preceding argument, free market-- interpreted in conventional terms-- is not possible in this sector. No country would be willing to put its population under threat of a certain product and shift production pattern. For instance, India, where 70% of the population prefer rice and chapati (made from wheat) two times a day for meal, would not be willing to shift production from rice and wheat to say soybean, just because its price is rising in the international market. The very survival of millions of farmers and households depend on the agriculture sector (rural households spend more than 70% of their household budget on food). This sector is too vulnerable to let it freely flow along with the free market principles. We have already seen how deep we ran in troubled waters (in fact, the depth is still not reached) after the housing market and banking sector was let free flow according to the principles of free market. There is already a backlash-- more regulatory power given to the Fed and government administrations. As one of my Romanian friend used to say, "Free market cannot sustain in very vulnerable sectors because it is not a matter of losing an asset if anything goes wrong--it is a matter of life and death." Free market in sectors where survival is not in line-- like auto industry, airline sector, etc-- is good but not in sectors which have a direct bearing on the survival of poor people...(that said, I do believe in the power of market if things are as they should be!). Governments do not want to let their population fall prey to increased volatility and uncertainty in global food market, which is beset with demand and supply shock--there seems to be no end to it! Collier argues, "The sharp increase in the world price of staple foods is an inconvenience for consumers in the rich world, but for consumers in the poorest countries, especially in Africa, it is a catastrophe."
9. The final effect would depend on whether households are net buyer or seller (or in a country level, whether countries are net importer or exporter). As of now, poor households are net buyers, which means that higher prices not only put too much strain in their household budget, any upside benefit would only go to the farmers in the West who can invest large sum of money. Also, poor households in the developing countries do not enjoy economies of scale as they own small pieces of land. Unlike them, the farmers in the West own large farmlands, enabling them to reap economies of scale--thus, making sure that their over the long run price of their product is always lower than the price of similar product produced by the poor country farmers.
10. Any change in consumption and production patterns has to be global to ensure that upsides are fair to all. As Joe Stiglitz argues, Only new patterns of consumption and production – a new economic model – can address that most fundamental resource problem." Note that, we need a completely new economic model. The present model will not solve the problem.
11. Well, follow The Economist's Debate Hall, which will feature expert views...I will spill some more thoughts in the coming days, especially on the incentive factor... I will also discuss why production in Lanao del Sur, which is one of the most fertile regions for rice production in the Philippines, is not done in the way it should have been to reduce pressure of rice demand in the Filipino economy, one of the most high rice consuming nations...incentives do come in play here???...that discussion is for later date...

Here is a good summary of the implications of rising global food prices. A more extended discussion from a variety of sources on this issues here. Also see this.

Links of Interest

Africa: Soon to be the next China?

How to Get the Biggest Bang for 10 Billion Bucks (Bjorn Lomborg argues that the same dollar spent on tackling diseases would generate greater economic payoffs than from investment in tackling transitional terrorism or hunger.)

Transitional terrorism: Stopping one catastrophic terrorist event would save the world at least $1 billion. Under these assumptions, this would mean a return of about $9 on each dollar spent.

Diseases: Each dollar spent on ensuring people are healthier and more productive would generate $20 in benefits.

Hunger:The improved nutrition would lead to higher productivity and fewer health problems. Each extra dollar spent would generate economic benefits worth $16.

Rising Income Inequality: Technology, or Trade and Financial Globalization?:

We examine the relationship between trade and financial globalization and the rise in inequality in most countries in recent decades. We find technological progress as having a greater impact than globalization on inequality. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization-and foreign direct investment in particular-is associated with an increase. A key finding is that both globalization and technological changes increase the returns on human capital, underscoring the importance of education and training in both developed and developing countries in addressing rising inequality.

Where are the jobs that take people out of poverty in Brazil?

11microfinance groups agree to publish rates; Nobel winner says don't profit from poor

 

Martin S. Feldstein: "Father of modern NBER"

David Warsh extols the contribution of Martin S. Feldstein, whom he labels as "father of modern NBER" :

Here’s a challenge for the economics profession: to think up something suitable, an occasion or a prize, to commemorate the contribution of Martin S. Feldstein.

...Whatever challenges these plum jobs might have offered, they probably pale in comparison to the satisfactions of the position that Feldstein devised for himself more than thirty years ago, hashing over the possibilities with friends while watching his daughters skate at the rink next to Belmont High School. Today Feldstein is a grandfather. His economist wife, Kathleen, and their daughters came to the party the NBER threw for him. And like any father, figurative or otherwise, he is not without his flaws.

But his “family” has grown far beyond the thousand or so professors of economics or business who are research associates, bringing to their work together a broad spectrum of policy views...

Government activism in the US

Here is a brief history, from the WSJ, about activism in the US. (Long story short: The more the depth of market failure, the more longer the hands of the state!) Proof: the sweeping powers to the Fed and other new regulatory establishments due to the subprime housing crisis, bank runs, Fannie Mae and Freddie Mac mess, and symptoms of recession, and a general pessimism over the performance of US markets. Were the virtues of free market overblown?

1860s-1900s

The end of the Civil War and the completion of the intercontinental railroad helped spur industrialization. Around the 1980s, great industrialists -- including petroleum magnate John D. Rockefeller Sr., left -- dominated the steel, oil and banking industries. Later, outrage among Progressives over J.P. Morgan's role in bailing out markets in the Panic of 1907 led to the creation of the Federal Reserve to handle monetary issues.

1920s

During the post-World War I boom of the 1920s, fast economic growth was powered by the expansion of automobiles, home electricity, radio and telephone. The U.S. moved to a dominant position in international trade and global business. President Calvin Coolidge took a hands-off approach to markets.

1930s

After the 1929 market meltdown and amid the ensuing Great Depression, President Franklin D. Roosevelt brought the New Deal and tough new regulatory agencies to Washington. Later, Republican President Dwight D. Eisenhower oversaw a further expansion of federal power by funding the interstate highway system.

1960s

Turning power over to technocrats has led to disaster on any number of occasions, including the escalation and loss of the war in Vietnam by the "best and the brightest" of the Kennedy and Johnson administrations. Inflation starts to be a problem.

1970s-1980s

Disgust at bungled government policies and the stagflation of the late 1970s led to the Reagan-era canonization of the free market and a series of anti-inflation and anti-big-government policies, as well as tax cuts

1990s

The government took a backseat to the market's needs and desires during much of the tech-powered expansion of the 1990s -- and in the subsequent stock-market bubble of the late 1990s.

2000s

A new era of government activism started with the terrorist attacks of Sept. 11, 2001, which led to the nationalization of airport workers and the creation of the elephantine Homeland Security A gency. The Enron and WorldCom scandals dealt a heavy blow to the Reagan revolution of deregulation and smaller government, and the Sarbanes-Oxley law in 2002 subsequently increased regulation and oversight of U.S. companies.

2007-08

The collapse in the housing market and the battering of financial institutions has required the kind of fast infusion of liquidity that only the Federal Reserve can provide. As a result, expert government technocrats are gaining power across the economy, and the Fed itself has seen the biggest accumulation of power. The depth of the government response will depend on the depth of the crisis.

 

Here is Alan Blinder's view:

"There's a backlash against the laissez-faire, 'isn't-it-wonderful-how-creative-markets-are' viewpoint... Markets are creative, but sometimes the creativity leads to strange and dangerous directions."

The American people tend to agree with this view:

More here.

Economic Growth: Institutions rule but endowments do matter more than expected

What are the reasons for highly rich and poor country clubs? The  reasons  vary based on researchers-- institutions,  geography,   genetically capitalist  and bourgeois virtues (mainly Gregory Clark), and also see Diamond on guns, germs, and steel determining the fate of human societies. However, two school of thoughts have garnered more attention in this debate. One believes in geography/endowments (led by Sachs) and the other in institutions (led by ???...but Rodrik, AJR and AJR are some of the ones I studied).

The debate is never ending. Some also argue that these school of thoughts might be getting different interpretations by running very similar correlations. Dixit seems unsatisfied with econometric evidence so far because the instrumental variables used by the school of thought that emphasizes the role of institutions are either geographic variables themselves or are highly correlated with geography, hence making it difficult to distinguish the partial effect of geography and institutions on income.

Now, a recent study (The Colonial and Geographic Origins of Comparative Development) by Raphael Auer shows how the effects of institutions and geographic endowments on income can be distinguished. He writes:

The key insight is that one can distinguish between the determinants of development by utilising the fact that geographic endowments had a differential effect on institutional development in former colonies and in the rest of the world. For example, in a former colony, high prevalence of malaria has reduced income because of both the direct effect of the disease on income and the indirect effect of the disease on settler mortality and thus colonisation policies. In contrast, in a country that has never been colonised, only the first of these two effects is present.

While the indirect impact of endowments on colonisation policies and thus institutions is present only in former colonies, the direct impact of endowments on income is present in all countries. Therefore, one can identify the relation between income and institutions by utilising the difference in how endowments have shaped institutional development in former colonies and in the rest of the world.

In contrast to the existing literature, this way of identifying the relation between institutions and income does not restrict the direct effect of endowments on income to be absent, thus allowing me to estimate the partial effects of the two channels.

He concludes that though institutions are not the only one, it is the main determinant of development. He underscores that endowments do have a statistically significant and economically relevant impact on income. Easterly and Levine also show that though geography does not affect economic development directly, it definitely affect indirectly through institutions. Similar conclusion was also reached by Rodrik, Subramanian, and Trebbi but they place very little (almost nil) emphasis on the role of geography and endowments. This is where Auer differs from Rodrik et al:

For example, in a typical specification, I find that a one standard-deviation difference in the included measures of geographic endowments is associated with a direct effect on income per capita equivalent to a seven-fold difference in GDP per capita. For a former colony, the same one standard-deviation difference is associated with an effect on colonisation policies, institutional outcomes, and thus income equivalent to an additional 18-fold difference in GDP per capita. Thus, while institutions are substantially more important than endowments, the direct effect of economic endowments can hardly be neglected.Together, both channels can explain around 40% of the variation in international income levels.

What are the policy implications for poverty reduction? Well, Auer argues that the current focus on aid and healthcare intervention would only help solve extreme poverty, not end poverty. Ending poverty requires appropriate institutional reforms that can convert development aid into sustained economic growth. Not a surprising policy prescription (despite quite and interesting study) because we all know these recommendations already! But an interesting study overall.

 

The Last Lecture

First I read it in the WSJ, then in NYT, then in Time, then in Post, and in many blogs...It is about Randy Pausch, a professor at Carnegie Mellon University, who died of cancer recently and his last lecture in life. So what is The Last Lecture about. Well, here it is from YouTube. Simply amazing!

 

Here is more from Time.