Nothing New on Trade

On the one hand, that title is a good thing. Many expected a global economic downturn to lead to trade wars. Many others expected asymmetric shocks to the global economy, in which exporting countries were perceived to be poaching jobs from importing countries, to have the same effect. But I recently finished Paul Blustein's excellent account of the Doha decade Misadventures of the Most-Favored Nations and a big theme is the battle of interests between the developed North -- especially the US and EU -- and the rest -- especially India, Japan, Brazil, and China. The book's narrative ended a few years ago, but little has changed:

India is unlikely to yield to a fresh effort by the developed countries to push for greater concessions by the larger emerging economies to salvage the World Trade Organisation's Doha Round of global trade talks. ...

With the US leading the chorus to demand further concessions from countries like India, China and Brazil, which will have to eliminate tariffs on some products for the round to progress, the talks have been stalled.

We haven't blogged a lot about trade here lately, but that's mainly because not a whole lot has gone on. The international trading system appears to be locked into the status quo for the time being. Interests are still far apart, and the gains from further coordination are not especially high. So the Doha agenda remains stalled.

FOTD

China is building its first aircraft carrier. As Yglesias says:

News that China may be in the midst of building its first aircraft carrier is a reminder both of China’s rising geopolitical clout and also the reminder that they remain quite a bit behind us.

"Quite a bit" is an understatement, of course.

Yglesias also points to this very good article by Rob Farley on why a U.S.-Japan-India coalition to balance against China may not be a good thing, even if its inevitable. It's gated for non-subscribers, but those with institutional IDs (i.e. students) should be able to get access.

The Ignored Financial Crisis

It's in microfinance, in India:

The situation on the ground seems to have remained largely unchanged since we covered the story here: collections in Andhra Pradesh are still on hold, the MFIs remain on the defensive (it seems that SKS's "voluntary" interest rate cap approach is now being more widely adopted), and the scope and nature of regulation in the Indian market remains vague. This is so far an Indian story (though there are also unrelated worries in Bangladesh) but it raises a lot of questions about what we can or should expect from microfinance and what the right way to regulate what is now a pretty big market, with a whole lot of poor borrowers, is.

India's financial regulations had been praised during the subprime crisis (e.g. here, from 2008). Maybe their risk exposures were just different.

A bunch of prominent development economists co-wrote an op-ed in The Indian Express. They conclude:

When it works well, microfinance can be a win-win situation, as the poor can borrow money at rates that may look high, but are much lower than those offered by moneylenders; and banks can make a sustainable business in lending to the poor. All this rests as much on a social contract as on a legal contract. MFIs need to be more diligent in their lending and screen borrowers better — if too many borrowers can’t repay their loans, the social obligation will start to fall apart.

But politicians also need to be wary — in taking aim at the occasional overstep, they may find themselves inadvertently destroying the whole business, at great cost both to the poor, and the financial institutions that have stepped in to work with them. If we are not careful we may end up in the pre-microfinance world. That would be a great disservice to the poor, and their hope of climbing out of poverty.

Obama, India and the UN Security Council

It was 7am this morning and I still hadn't been able to fall asleep. I turned on the tv and flipped through the cable news channels to see if anything could put me to sleep and stumbled upon Morning Joe who had Council on Foreign Relations President Richard Haas on talking about US foreign policy, international trade and foreign presidential trips. Decent discussion of past foreign trips, some talk on Afghanistan and a debate (not very spirited) on what would change now that the Republicans had taken over the HoR. Haas left and I thought to myself, "perfect, they'll bring on some 'strategists' that will start spewing some totally wrong 'analysis' that'll put me right to sleep in no time."

But the foreign policy morning theme continued. It turned out that President Obama was before the Lok Sabha, the Indian lower house of parliament and was going to give a speech around 7:15am. (So that's why Haas was on and they weren't talking about American politics. Damn! There goes my hope for cable news putting me to sleep.) The President's speech was rolling along like any other US presidential speech to the parliament of a strategic ally: lots and lots of butt-kissing, nice words regarding current and future strategic partnership between the oldest and largest democracies, praise for India's ability to raise so many out of poverty and of Indian business and technological advancement.

But then, out of absolutely nowhere it seemed like, President Obama announced that the United States endorsed a permanent seat for India on the United Nations Security Council. I almost fell off the couch. Not because I don't like the idea. In fact, I think it's a great idea and something that is long overdue (along with permanent seats for Germany, Mexico, Brazil, and South Africa) for a variety of reasons. But for an American president to endorse the expansion of the Security Council and to give a permanent seat to a rising power was unprecedented. But it also makes a heck of a whole lot of sense (nice carrot for future US-Indian cooperation, increases legitimacy of the Security Council by including rising powers and expanding voting members, etc.)

The most appealing and likely plan for UN Security Council reform would expand the council to 24 members, increasing the number of permanent members from 5 to 10 and the number of rotating, non-permanent members from 10 to 14. Some proposals call for the new permanent members to also have veto power while others give them only permanent status and reserve veto power for the original five permanent members. The trickiness in the Obama endorsement this morning was that he said "permanent" member which opens the door to including India and placating its demand for a seat in the forum but not watering down US (and other current permanent member) power by adding more states with veto power. The key is in the veto power and not necessarily in increasing the amount of seats or including new permanent members.

Developing (this is going to take a long time to happen) in a very interesting way...

Should the U.S. Pursue Closer Ties with India?

Matthew Continetti asks a good question:

Why do Americans spend so much time analyzing China's growth, but not India's? Yes, the growth of Chinese economic and military power since Deng Xiaoping proclaimed "to get rich is glorious" has been nothing short of extraordinary. But India has also embraced markets over the years, and the results have been equally amazing. We tend to think of India in terms of its relations with Pakistan and Afghanistan, and in terms of its cultural power, rather than in terms of the economic and geopolitical benefits of a prosperous South Asian democracy. But that should end. We have a lot to gain by befriending India, and a whole lot to lose.

The Bush administration made it a point to solidify ties with this formerly nonaligned country. It seems like the Obama administration shares the same goal, but unfortunately also sees India as a lower priority than Afghanistan, Iran, reset with Russia, and "strategic reassurance" with China. Of course, an India closely aligned with the United States could help with some of these strategic dilemmas, and hedge against other threats. Why can't Obama spend less time assuaging America's competitors, and more time supporting her friends? A good place to start would be an Indian-American free trade agreement. It's one European idea Obama ought to emulate.

I think he's completely right about this. Christopher Hitchens has also argued this point vehemently a number of times. India is a largely-secular, largely-democratic, largely-open country in South Asia of rising economic and security importance. It would be disastrous if the U.S. were to waste the chance to become strong allies with India.

Still, there are are two reasons why the U.S. hasn't spent as much time on India as it has with China, and both have to do with time constraints. First is the U.S. relationship with Pakistan, whom the U.S. continues to view as a short-term ally of necessity in the fight for Afghanistan. Publicly cozying up to India could jeopardize what little cooperation we've gotten from Islamabad, and would make an already-difficult task much harder. I wouldn't leave the point there, tho. The U.S. has an opportunity to leverage its potential relationship with India to pressure Pakistan to do much more than it has done, and it should consider doing so. If Pakistan doesn't play ball, then the U.S. can turn to India or threaten to, further isolating Pakistan from the rest of Asia. And if the AfPak effort fails, cooperation between Pakistan and the U.S. will likely dry up anyway. In the short run, then, treading water with India makes sense.

Second is the related fact that India isn't going anywhere. Opportunities for building rapport with India will continue to be available over the next decade and beyond. India already has fairly close ties with Europe, and won't turn against the West to join with China, say. The U.S. has some time to try to deal with more pressing short run concerns before turning to a longer-term relationship with India. I'm not sure that the Obama administration is thinking at that level of abstraction, but I do think it's true.

Despite that, a good governor can juggle more than one ball at a time, and Obama should be doing more to strengthen ties with New Delhi. There is no reason why security initiatives with Pakistan should preclude economic ties with India, for example. And the U.S. should not allow itself to be blackmailed by Pakistan in any way, shape, or form. So I do think it's time for a closer relationship with India.

Mental Health Break

I'm not exactly sure what this is, but it appears to be some sort of border closing ceremony along the India/Pakistan line. The dry, sparse narration makes me think of nature shows, and the pomp and show makes me think of the Bird of Paradise mating dances from Planet Earth. Plus Silly Walks, of course. The cheering crowds indicate that this is a sport of some kind, but I can't tell who's winning. The handshake at the end is a nice gesture. Good sportsmanship, I guess. Could you imagine this happening along the U.S./Mexico border?




(ht: @ebertchicago)

Zero-Value Bribes (Or, The New Testament in India)

Is this a market in everything?

In Doha last month, CommGAP learned about the work of 5th Pillar, which has a unique initiative to mobilize citizens to fight corruption. In India, petty corruption is pervasive – people often face situations where they are asked to pay bribes for public services that should be provided free. 5th Pillar distributes zero rupee notes in the hopes that ordinary Indians can use these notes as a means to protest demands for bribes by public officials. I recently spoke with Vijay Anand, 5th Pillar’s president, to learn more about this fascinating initiative.

According to Anand, the idea was first conceived by an Indian physics professor at the University of Maryland, who, in his travels around India, realized how widespread bribery was and wanted to do something about it. He came up with the idea of printing zero-denomination notes and handing them out to officials whenever he was asked for kickbacks as a way to show his resistance. Anand took this idea further: to print them en masse, widely publicize them, and give them out to the Indian people. He thought these notes would be a way to get people to show their disapproval of public service delivery dependent on bribes. The notes did just that. The first batch of 25,000 notes were met with such demand that 5th Pillar has ended up distributing one million zero-rupee notes to date since it began this initiative. Along the way, the organization has collected many stories from people using them to successfully resist engaging in bribery.

One such story was our earlier case about the old lady and her troubles with the Revenue Department official over a land title. Fed up with requests for bribes and equipped with a zero rupee note, the old lady handed the note to the official. He was stunned. Remarkably, the official stood up from his seat, offered her a chair, offered her tea and gave her the title she had been seeking for the last year and a half to obtain without success. Had the zero rupee note reached the old lady sooner, her granddaughter could have started college on schedule and avoided the consequence of delaying her education for two years. In another experience, a corrupt official in a district in Tamil Nadu was so frightened on seeing the zero rupee note that he returned all the bribe money he had collected for establishing a new electricity connection back to the no longer compliant citizen.

This is yet another piece of evidence in favor of the argument that in order to succeed markets (and governments) must be embedded in a set of social institutions, many informal, that reinforce norms of reciprocity, fairness, and accountability. Without those ideals firmly in place, society can fail to progress, or break down rather rapidly. Deidre McCloskey calls them the "Bourgeois Virtues", although these examples from India would perhaps point to a more universalist explanation.

Of course this is not a new story.

ht: DavosBoy.

Q. What Gets Poorer the More It Gets Richer?

A. India.

A good lesson for social scientists: know what the measures you are using are actually measuring.

To make a long story short, the World Bank decided to boot richer India out of the group of poorest countries used to determine the poverty line, which made the poverty line higher, which made Indian (and global) poverty higher – all because India was richer. This misguided revision of the poverty line, which accounted for virtually all of the upward revision, was not clear to virtually anyone until this new paper by Deaton. ...

Then there is the “index number problem,” which only is of great fascination to 2 people, but unfortunately can change the ratio of US/Tajikstan incomes by a factor of 10. The trouble is that rich people and poor people consume very different things. For example, poor people may consume a lot of something that is cheap in the poor country, which is not consumed much and is expensive in the rich country. Similarly, rich people consume a lot of something else that is cheap in the rich country and expensive in the poor country. If you use rich country prices, you exaggerate poor people’s consumption basket value (they are given a lot of credit for consuming a lot of something very expensive, but it isn’t that expensive in the poor country and if it were, they would consume a lot less of it). Conversely, if you use poor country prices, you exaggerate rich people’s consumption basket value. There are possible intermediate solutions but no complete solutions to this intractable problem.

I don't like PPP measures for this reason: I don't think they are always measuring what they claim to measure. Which is not to say that non-PPP-adjusted measures don't have their own problems; they do. But I think that traditional GDP measures (say) lend themselves to more straightforward cross-national comparisons. Even if they aren't exactly comparing apples to apples, at least they're not comparing apples to aardvarks.

Stimulus Spending in Comparative Perspective

The NY Times ran a series of articles on how stimulus funds have been spent in the U.S., E.U., India, and China. Let's have a look:

In the U.S., for all the talk of "rebuilding America's infrastructure" the need to fund "shovel-ready projects" has meant that stimulus funds have gone to some dubious projects, like a sports complex at a community complex in suburban Chicago. Actual new spending on infrastructure has been slow. And if the point was increase employment, it hasn't done that very well either: more money should have gone to state and local governments, and expanded education and job re-training. It's not that stimulus has done no good; it's just that the government hasn't gotten much short-term bang for its buck, nor has it led to long-term reform or structural improvement.

The record in the E.U. is even more spotty. The Stability and Growth Pact prevents local governments from engaging in much fiscal stimulus directly, and the broader E.U. has done very little. Some think that the E.U.'s "automatic stabilizers" are sufficient, while others are not interested in using E.U. funds to prop up individual countries (e.g. Spain). Additionally, many member states had high debts before the crisis, which has limited their abilities to fight it. In short, the crisis has shown -- once again -- that E.U. member states do have to sacrifice some sovereignty to join the union. But this may not be a terrible thing: Ireland's recent passing of the Lisbon Treaty shows that many in Europe have confidence in the union than has not been shaken by the crisis.

India responded to the crisis with aid for rural workers and tax cuts, but they may have overshot: growth is back to 6%/year, but inflation is now a worry. And the rapid response by the government was somewhat unfocused, leaving many questioning why more money wasn't spent on improving India's infrastructure and expanding opportunities for the poor. The recent decline in the dollar has also adversely affected exporters.

China's response to the crisis was swift and large: huge fiscal stimulus, a loosening of monetary policy, and injections of liquidity into the banking system. A good bit of the stimulus is going to infrastructure projects, but China had so many "shovel-ready" projects in the pipeline that some wondered whether this stimulus spending represented new spending or just planned expenditures under a new name. But China has not used the crisis to build up domestic institutions (like a social safety net and access to credit for private small businesses) that would increase domestic consumption and begin reversing the global imbalances that contributed to the crisis in the first place. Perhaps that transition is too much to ask of a short-term stimulus package, but they could have started programs to that end.

In short, a mixed record. And despite all the talk of reform, very few concrete actions have been taken to address the major issues in global or domestic economies. I suppose those will have to wait for the next crisis.

Amartya Sen on India

An interview with Sen on the state of India, that starts with this:

There are many argumentative Indians, but very few who can hold your attention in quite the way Amartya Sen can—if you catch him at his expansive best. He dazzles you by moving fluidly between welfare economics and history, philosophy and international politics, the laws of Manu and Article 377, the pronouncements of Gautama Buddha and the policies of Manmohan Singh

It's nice to see Sen interviewed by an Indian magazine rather than the Western press. How else would we get things like this:

How peculiar it is that someone as non-violent as Gandhiji, who was very inspired by the Gita, was on the side of Krishna, who is making Arjuna fight a war and kill people, when Arjuna is saying maybe I shouldn’t kill!

And here is Sen on the record of India since independence:

But given the adversities we have had—a very poor country, largely illiterate, border wars with China and Pakistan, with Pakistan going its peculiarly difficult way, the relationship problems that we have had with the United States and the global powers—have we done as well as expected? Yes. Except in one big respect, namely that I had expected that non-dramatic deprivations would receive more attention than they ended up getting. Famines did go away with democracy, as I had expected, but I thought other things like gender inequality and the huge undernourishment of children would get more attention, but they did not get enough. That’s the disappointment.

The U.S. Plays Chicken with the BRICs

A few days ago, Dr. Oatley wrote about the attempt by the U.S. House of Representatives to cap greenhouse emissions and coerce other countries into doing the same:

This time it is the Waxman-Markey cap and trade legislation. The intent of the legislation--reduce greenhouse gases--addresses concerns of the Democrats' median voter, who cares deeply about climate change. Producers, however, are concerned that the higher energy costs generated by cap and trade will disadvantage them relative to Chinese firms who are not facing higher energy costs because China does not regulate greenhouse gases. The solution, added late to the legislation, is to impose tariffs on goods from countries that do not regulate GHG (i.e., China). Nobody really wants to impose tariffs, but the hope is that the threat of tariffs will be sufficient to induce China to agree to international regulations on CO2 emissions.

This realist view is often borne out in the politics of international regulations. But in this case it is difficult to see whether the U.S. has the muscle to coerce China (and others) into adopting the U.S.-preferred strategy. Krugman loves it, but the push-back from China and India has already begun:

The Chinese government also said it believed the carbon tax proposal violated the principle set out in the Kyoto protocol that developed and developing countries should respond to climate change together but with different responsibilities. “[It] severely harms developing countries’ interests,” Mr Yao said.

The WTO report, which gave a cautious nod to carbon tariffs, was prepared by the organisation’s secretariat, which can advise and facilitate discussion among the WTO’s members but does not set the rules itself. If a government such as China’s challenged such taxes, the case would be decided by the WTO’s dispute settlement system – panels of independent trade experts and lawyers.

Some trade lawyers point out that past WTO decisions have permitted governments to restrict trade in order to protect natural resources. But others say the case law is patchy, and it is hard to prove that such measures are being applied in a fair and consistent manner – a necessary condition for meeting WTO rules.

And the Indians have quite a point:

With 1.1bn people – roughly a sixth of the world’s population – India has one of the lowest per capita emission levels, with 1.2 tonnes per head, about 4.6 per cent of total global emissions. “India has not polluted – we are bearing the brunt of global climate change caused by the developed countries and we are being asked to curb emissions,” he said. “I find this ludicrous.”

However, India’s carbon emissions are expected to rise sharply in the future, especially as the country tries to meet its power deficit through the rapid development of generating capacity. India uses about 450m tonnes of highly-polluting coal for power generation each year, a figure that Mr Ramesh said would rise to about 1bn tonnes in less than a decade.

“There is no running away from our karma – without coal, we have no economic future,” he said.

That last sentence is the crux: India and China will not yield because they cannot. They can credibly commit to hurt U.S. consumers and producers in retaliation (in this case, retaliation could be as simple as accepting reduced economic gains from trade; of course, they could also slap retaliatory tariffs or simply stop buying U.S. bonds). So the question is whether the U.S. thinks that the environmental gains from carbon tariffs will out-weigh the economic costs of a trade war during a nasty recession. More specifically, does the president and the 60th most-progressive senator think so? So far, Obama has indicated that he is not interested in playing chicken with the Chinese.

From my seat (nowhere near the table), it appears that the provision will be stripped from the Senate version of the bill, and/or the bill will not pass. The costs to American consumers of challenging China and India (and Canada) have already become too great. That could change if the U.S., E.U., Japan, and others make a concerted stand against the BRICs, but that would allow the BRICs to accuse the rich world of preventing the development of some of the world's poorest people in order to fulfill their pet preferences. And they would be right.

Addendum: China may have actually started the trade war over a month ago.

The Politics of Insourcing

A new proposal for stimulus, relayed by Friedman:

Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.

“All you need to do is grant visas to two million Indians, Chinese and Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper. “We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate — no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”

From Alex Tabarrok, who adds:

Note that the multiplier on the "buy a house, get a visa" strategy would be much larger than any possible domestic multiplier since the money would come from outside the economy (and efficiency would improve as well.)

I think there would be considerable support among economists that immigration (buy a house, get a visa), a payroll tax cut and maintaining state and local funding would be reasonably good policies in this recession (albeit not necessarily sufficient) yet these policies seem to be the ones that the political system rejects out of hand. (See also Matt Yglesias here and here). Now, I can understand rejecting these policies as compared to doing nothing, ala a precautionary principle, but why these policies are rejected compared to taking a trillion dollar gamble is puzzling even to someone like myself schooled in public choice.

I recently praised public choice economists (relative to other macroeconomists), but if Tabarrok is really representative then I might have to take it back. Later in the same op-ed, Friedman writes "the U.S. Senate unfortunately voted on Feb. 6 to restrict banks and other financial institutions that receive taxpayer bailout money from hiring high-skilled immigrants on temporary work permits known as H-1B visas." Even worse, that sentence was quoted on Tabarrok's own blog yesterday. He seems surprised that we aren't encouraging immigration, but why should he be? The stimulus is being framed as an employment bill, and that employment is intended for Americans. No Congressperson wants to go back to their district and explain why they are giving 2 million jobs to Chinese and Indian immigrants while domestic unemployment is spiking.

Nevermind that those jobs (likely) wouldn't be going to Americans, or that those jobs would beget other jobs which would: that level of nuance isn't currently possible in the larger American political discussion. The median voter would respond to a bill that expands immigration like they always do: mumbling "Dey took our jerbs!" and voting the offending representative out of office. Ross Perot got 19% of the vote in 1992 almost entirely because of "Dey took our jerbs!" rhetoric. The biggest domestic policy battle of President Bush's second term was over what to do with immigrants already in the country. It is pretty much inconceivable that the Democratic Congress, after winning a large majority by campaigning on a vaguely-protectionist "support Main Street" platform, would make one of their first acts the passage of a bill allowing millions of immigrants to enter the country. Especially Chinese and Indian immigrants, since those two countries have been the target of many recent "Dey took our jerbs!" attacks.

And no, it doesn't matter that they'd buy our houses.

The fact that it may be a good idea is mostly academic. Given the political situation we're in, it would probably make more sense to push for a lowering of the payroll tax and expansion of payouts to state and local governments.