Performing (economic) miracles

The metaphor ‘economic miracles’ as applied to the few once-poor countries that have achieved a trajectory of catch-up growth is revealing: these growth dynamics are spectacular, but happen very rarely. In their terrific new book, Beating the Odds: Jump-Starting Developing Countries, Justin Yifu Lin and Célestin Monga give the best overview account I’ve read of how countries might begin to achieve the lift-off from poverty trajectory, and an outline of how in practical terms governments might go about it. And although directed at poor countries, their analysis is more general.

The book points out that mainstream thinking is both impractical and factually wrong. Impractical because, given the emphasis on institutions now, the advice is often: “Be more like Denmark.” Sure, that would be marvellous. Incorrect, because the examples we have of countries reaching escape velocity for the most part did not have the fine, transparent and effective institutions or high-quality infrastructure now usually recommended as preconditions.

One of the platitudes they attack is that corruption or at least bad governance is the main barrier holding back poor countries. Rich countries have corruption scandals too, they point out. Are these less severe than in poor countries? They ask whether the role of money in US elections or corporate lobbying in the west is really ‘less corrupt’. Is the expected 20% tip everywhere in the US different from the expectation in say India that one will make payments to all kinds of people – in both cases, people not earning very much can’t afford not to expect the tip.

So if not western-style institutions or education or infrastructure, what does lead to growth? The book answers: “Sustained growth takes place because of continuous technological upgrading, institutional innovation and structural change.” At the heart of the process is an evolving set of factor endowments. Poor countries must start from the reality of labour intensive resources, and must focus on using what they have; it’s all about (latent) comparative advantage. The factor endowments will change over time, and hence the need for changing institutions and adopting additional technologies. All countries are different: there is no standard, abstract model. High-profile failed ‘big push’ efforts typically ignored the reality of factor endowments – this includes examples such as Zaire’s (DRC) attempt to start up an auto industry in the 1970s, or Indonesia’s bid to enter the shipbuilding market, when neither had the capital or the skills to produce these goods, nor high enough incomes for a domestic market to grow.  Successful ‘miracles’ start with what they have, continuously diversify, and identify and encourage agglomeration economies.

The authors are firm advocates of strategic industrial policies, in the sense of continual upgrading of hard and soft (legal, financial, educational) infrastructures to suit the changing needs of the private sector, the goods and services it produces and the markets it serves. “Clearly, individual firms cannot internalise all these changes cost effectively, and spontaneous co-ordination among firms to meet these new challenges is often impossible. … For this reason, it falls to the government either to introduce such changes or to co-ordinate them proactively. This essential piece of the growth and development puzzle has been missing in the standard model and the traditional development policy framework.” The government also needs to provide information (about say technologies, management techniques and markets) and provide initial human capital (training): “The social value to the economy as a whole of the first movers’ investments is usually much larger than their value to specific firms.” Finally, governments may need to attract FDI or incubate new activities, “to overcome deficits in social capital and other intangible constraints.”

These roles for active government policy are surely valid – and as much for the UK as for a low income economy. The authors are deeply sceptical about the value of (much) foreign aid and especially the multiple conditionalities attached.

In short, “Modern economic growth is a process of continuous structural changes in industry and technology and in political and socioeconomic institutions.” This is as true now as it has been everywhere since the late 18th century. As the book points out, this is not a radical new idea – it quotes Simon Kuznets saying so in 1966, and indeed economists from Marx and Schumpeter to Robert Solow and Joseph Stiglitz have made essentially the same point. Somehow, though, by the time the official aid organisations get involved, the policy advice has been bowdlerised into a standard set of impossible conditions, not recognising how counter-productive these can be in a second-best world.

Elsewhere, the authors have developed a more practical toolkit (the GIFF, growth identification and facilitation framework) for governments to identify their economies’ specific endowments and niches. The downside of recognising the importance of context is that one cannot sum up an economic development programme in ten universal bullet points. In general terms, the book supports export zones and infrastructure investment, and mitigating rent-seeking through exposure to the sunlight of foreign competition as well as political leadership.

The book ends with The Conference of the Birds: thousands of birds embark on a long and perilous journey but only 30 make it the whole way. When they reach their destination, they find the mythical king they were looking for is a reflection of themselves. Achieving successful development cannot start with a list of mythical missing ingredients as preconditions. Development economists and donors have been wrong to insist on an ideal model, Lin and Monga argue – and they are no keener on the latest development economics fashion for experiments and RCTs, as these ask micro questions and get micro answers; they cannot address the need for structural transformation. The bottom line is pragmatism, and the willingness to embark on the long and perilous journey, like the brave handful of birds in the 12th century Persian story.

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Gloom and doom

There was a letter in the Financial Times this week that caught my mood on the day. It cited an excellent book, Joseph Tainter’s The Collapse of Complex Societies, summarizing its argument about populist situations like this: “This was characterised by dislike of the elites and their institutions and indifference to the fate of society if it came under attack (as with the Roman empire). Another feature was the inability of national treasuries to fund essential infrastructural maintenance and improvement or to raise significant additional revenue without taxing the less well off more heavily or reducing their benefits such as subsidised food.” The letter was of course drawing parallels with Trumpism and Brexitism.

Tainter’s book often comes to mind – as in this 2014 post, The Unsustainable is Never Sustained. To the extent we have any agency, the choice is about how things turn out to be not sustained. I do find myself tending to gloom these days. Every time I peep from behind the sofa at the news, there is fresh horror, like Trump’s gangsterism against the Morning Joe journalists this week, or the thousands of people rescued from the Med (and who knows how many not rescued).

The FT letter emphasizes the economic strains that lead to collapse. Jared Diamond’s work Guns, Germs and Steel, and especially Collapse emphasize environmental pressures. Check, we have that too. Charts of polar ice melt are even scarier than the news bulletins.

To cap it all, I read Cixin Liu’s excellent SF novel The Three Body Problem this week. The collapse of civilisation is only a matter of time…..

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Humanising economists

Cents and Sensibility: What Economics Can Learn From The Humanities, by Gary Saul Morson and Morton Schapiro, made me groan slightly, inwardly, when it arrived at Enlightenment Towers. Did I really want to read another book criticising economics, having just tackled two other recent arrivals in the econ-bashing genre?

In fact, it’s rather a nice argument for economists paying more attention to stories. It also softened me up by starting out by pointing out, quite rightly, that the humanities (‘dehumanities’, the book calls them) have to a large extent brought their decline on themselves by devaluing the idea of great literature, teaching bowdlerised politics and sociology, and generally disappearing down the rabbit hole of critical studies.

Broadly, I agree wholeheartedly with the view that economics, narrowly understood as modelling and empirics, needs to be supplemented by careful attention to history, ideas and culture. This matters because important variables are unquantifiable; because people do not only take decisions on ‘economic’ grounds; and because causes simply can never be identified by looking at macro data, which need narrative to make sense of the numbers. It also matters in a meta way. As this book argues, empathy is vital so researchers understand that some people think differently from them and are not bad or stupid for doing so: “The narrower the set of values entertained and entertainable by our major educational institutions, the less empathetic they become to the population at large, and the more they wind up turning themselves into trainng grounds for one social gruop to maintain its pre-eminence.” A vital message for the academy in our times.

The bulk of the book is devoted to examples of economists who fail to understand the importance of stories and humanity (eg Gary Becker) and those who completely get it (eg Joel Mokyr). I would challenge some of the details or interpretations. For instance, the authors criticise the use of ‘QALYs’ (quality adjusted life years) to evaluate the selection of patients for costly treatments by the UK’s NHS, seemingly imagining that hospitals look at individual patients and take account of their earning potential before deciding to treat them or not. This is an absurd projection of the practices and mores of the US health market on the UK’s non-market system. Still, elsewhere the book makes the very good point that cost benefit analysis is widely tainted by the use of market values only to evaluate benefits – the example is spending to eliminate the parasitic disease of river blindness in sub-Saharan Africa, prevalent in poor areas where people do not earn much – meaning the value of the project hard to demonstrate to donors.

The moral of the book, for economists, is read more history, or novels even. For researchers in the humanities – well, maybe that’s their next book, but the advice probably isn’t to become more like economists.

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Is it really curtains for globalisation?

Finbarr Livesey’s From Global to Local: The Making of Things and the End of Globalisation is a terrific read, although I’m not completely persuaded by the argument that the transformation of production by global supply chains will be reversed. In fact, the book gives a nuanced and highly informative account of why firms manufacture what they do where they do – making, too, the entirely valid point that the political context is highly uncertain and we could be seeing not only a retreat from hyper-globalisation but a full-blown canter toward nationalism and protectionism. The world has seen such unwindings before.

The first part of the book describes how the increasing specialisation of manufacturing, enabled by technology and declining transaction costs, led to the development of long cross-border supply chains. It then goes on to roll forward the evolution of both transport/transactions costs and automation, covering issues such as containerisation and shipping costs, the oil price, the move to regional trade deals, and agglomeration economies. These are some of my favourite subjects, and these chapters give a very nice synopsis of the economic issues.

However, one of my queries about the argument arises in the section on agglomeration. The suggestion here is that the economic forces of agglomeration apply to cities in developed economies but perhaps not so much in the emerging markets. “One of the open questions is whether the massive collection of companies making so many things in southern China has become a self-reinforcing cluster, a location with its own internal gravity binding manufacturers to it for a significant time into the future. …. [G]iven the rise of automation and the desire of leading firms to retain design and intellectual property control over their products, some of the clustering forces for places like Guangzhou and Shenzhen may not be as strong as thought at first glance.” My guess – no more than that – is that while automation will lead to some ‘reshoring’, as Livesey suggests, the Chinese manufacturing centres do in fact have some distinctive capabilities: the ability to manufacture to consistent standards on a large scale; unparalleled logistical expertise; and growing R&D/design capabilities in a number of products from clothes design to renewables.

Having said that, the book is very strong in describing the complexity of the production decisions facing manufacturers now, and there is loads of interesting detail. One chapter covers environmental issues, including the now widespread drive to reuse and recycle (IKEA is a nice example here). Another looks at trade policy and politics, and the importance of proximity (hello, Brexiteers!), leading some companies to switch their focus from exporting to markets to owning production assets in those markets: “Government regulations on foreign ownership will become the new trade barrier,” as otherwise companies may not be able to access certain markets at all. There is a chapter about automation and additive manufacturing, and the implications of smaller factories, with lower retooling costs, becoming economically viable. Labour costs will become steadily less decisive as a reason for locating production in an emerging economy (although I think that reason has been over-stated sometimes.)

All in all, Livesey predicts: “[I]t is likely we will see anything from a 20-30% fall in global merchandise trade (services are not affected the same way) over the coming decade.” This is quite a bold prediction, implying a big restructuring of production and diminution in importance of cross-border supply chains, given how much of merchandise trade now consists of components rather than finished products. I’m not sure about this, yet do agree with that the technological, political and economic conditions that shaped the world of global supply chains are changing substantially.

From Global to Local makes a great combination read with Richard Baldwin’s The Great Convergence published earlier this year. They offer two different sets of lenses on the organisation of the world of production. One could add Stephen King’s Grave New World, a pessimistic, big picture perspective on global political economy.

Reflecting on these three recent books, they need to be combined with looking at implications for employment and incomes. As David Autor pointed out in his IFS lecture last week, trade has contributed enormously to the biggest decline in poverty recorded in human history as China has grown – and the loss of jobs, income and status among some (not very numerous) groups of people in the west, a narrow but deep cost of technology & globalisation. We surely need to think much harder about the social and economic welfare implications of current trends, including whose welfare, given how badly prepared economists and politicans were for the implications of past developments. Globalisation and automation started to eat western livelihoods around 1980, and the failure to make sure those who lost out were properly compensated with appropriate policies goes quite a long way to explain today’s politics.

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Some very old truths in economics

I’ve just read through a facsimile edition of William Petty’s Political Arithmetick. Previously I’d dipped into bits and somehow never read through. What’s interesting is how clearly Petty foreshadows some key ideas about economic growth. One is agglomeration economies, which I always assume Marshall was the first to articulate. But no, before 1690 Petty was insisting on the benefits of dense populations, for reasons of economies of scale and specialisation. He writes about the importance of clear title to property, duly enforced by the courts. He is an ardent advocate too for the importance of trade (and hence the need to invest in shipping and naval skills). All this in the context of comparing Britain favourably with France and unfavourably with Holland. Fascinating.

A highlight of my visit to Chetham’s library in Manchester was being able to hold the copy of Political Arithmetick Marx and Engels had read during their period studying there in 1846.

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