New Economist: More on the 'resource curse': "

Can economies escape the resource curse? This was the subject of a recent post, which attracted quite a few commments. Now another paper has tackled the issue. Rick van der Ploeg, professor of economics at the European University Institute, explores the issue in a new CEPR discussion paper Challenges and Opportunities for Resource Rich Economies (alternative PDF version available here).

The political economy of resource rich countries is surveyed. The empirical evidence suggests that countries with a large share of primary exports in GNP have bad growth records and high inequality, especially if the quality of institutions and the rule of law are bad. The economic argument that a resource bonanza induces appreciation of the real exchange rate and a decline of non-resource export sectors may have some relevance. More important, a resource boom reinforces rent grabbing, especially if institutions are bad, and keeps in place bad policies.

Optimal resource management may make use of the Hotelling rule and the Hartwick rule. However, a recent World Bank study suggests that resource rich economies squander their natural resource wealth and more often have negative genuine saving rates. Still, countries such as Botswana, Canada, Australia and Norway suggest it is possible to escape the resource curse. Some practical suggestions for a better management of natural resources are offered.

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Growing Income Inequality and the Education Gap

Edward Lazear and Katherine Baicker of the President's Council of Economic Advisers say the growing disparity in wage income between skilled and unskilled labor is not the result of globalization, immigration, or administration policy. The reason for growing income inequality, they say, is increasing returns to education for skilled labor, and this is an opportunity not a problem. "Having an economy that places a greater value on skills and education is a good thing."

They promote a solution to the problem of growing income inequality that attempts to take advantage of this opportunity by reducing the education and skill gap. Three particular steps are recommended as solutions, the No Child Left Behind education reform, the American Competitiveness Initiative, and more importantly they say as responsibility is shifted away from government, is the hope that families will do a better job to "provide the environment and encouragement that is so helpful in producing an educated population":

America at Work, by Edward P. Lazear And Katherine Baicker, Commentary, Wall Street Journal: There is no question that the U.S. is experiencing strong economic gains... The economy created about two million jobs last year, and Friday's jobs report for April showed that we are on track to add more than two million new jobs this year.

This job growth is undeniable, but some ... claim that the benefits of this economic boom are being enjoyed only by the relatively well-off, and that we have left the rest of our workforce behind. Is this true? Over the last 25 years, the wages of the skilled have continued to grow faster than the wages of the less skilled. For example, the wages of the college-educated have grown by 22% since 1980, while the wages of high-school drop-outs has fallen by 3%.

This does not mean, however, that the rich are benefiting at the expense of the poor. Instead, it means that the return to investing in education and training continues to grow. ... Having an economy that places a greater value on skills and education is a good thing. Our economy can grow more quickly when the returns to investment are high, and human capital investment is the most important form of investment.

This presents us with opportunities and challenges. We have the opportunity to increase our standard of living as our workers reap the benefits of the skills that they have acquired. We face the challenge of ensuring that all Americans have access to the education and training that the modern economy values so highly.

The data show that it is this greater return to investing in education that is driving the long-run widening of the income distribution. The cause is not increases in immigration or international trade, as some have alleged. First, wages for less-skilled workers have not declined with growing trade, even in sectors of the economy with the greatest import competition. Second, some of the groups that have experienced the highest wage growth have also seen increased immigration swelling their ranks. Silicon Valley is full of highly paid immigrants and native-born Americans ... earning very high salaries in the high-tech sectors ... Third, those who have examined the data systematically find that trade and immigration can account for at most a small proportion of the increased wage spread that has occurred over the past 25 years.

To make sure that the gains from technology are enjoyed by all, we must be vigilant in providing training and educational opportunity for all. Programs such as the No Child Left Behind ... and American Competitiveness Initiative are vital steps in that direction. Perhaps even more important are steps that families can take to provide the environment and encouragement that is so helpful in producing an educated population. The president's tax cuts have made the tax code more progressive, which also narrows the difference in take-home earnings.

Through education, hard work and entrepreneurship, there is great opportunity for Americans to improve their economic circumstances over their lifetimes. ... Those who invest in education increase dramatically the likelihood that they will enjoy these improvements in their standard of living. ...

Given the importance being given to education in explaining wage disparity, I would like to see a higher level of commitment from the administration to improving education at all levels than has been exhibited to date.

With regard to the claim that taxes are more progressive, see this recent report from the Center for Budget and Policy Priorities for a counterargument:

Recent Tax And Income Trends Among High-Income Taxpayers: Administration officials have consistently sought to portray the distribution of benefits from the 2001 and 2003 tax cuts as balanced or even progressive. Recently, for example, the Treasury Department released a ... fact sheet... The fact sheet makes two main points: that “the individual income tax is highly progressive ... higher income taxpayers pay most of the individual income tax...,” and that the burden these taxpayers bear has increased as a result of the tax cuts enacted under the Bush Administration.[1] These Administration claims are designed to counter arguments that the tax cuts enacted since 2001 are tilted to those at the top of the income scale. The claims, however, are misleading...

Update: Brad DeLong comments on the progressivity claim and on Greg Mankiw's response to the editorial in "Cue the Noisemakers."

Update: I should have linked this commentary by Paul Krugman on whether the returns to education explain the growing income gap, "Graduates and Oligarchs." Quoting, "But Mr. Bernanke did stumble at one point. Responding to a question ... about income inequality, he declared that "the most important factor" in rising inequality "is the rising skill premium, the increased return to education.""

Economist's View: The Increasing Risk of Poverty:

"This is another reason why many people report dissatisfaction with the current economic situation even though the numbers indicate a strong economy. It surprised me to learn that one third of the population in their 40's spent at least a year below the poverty line in the 1990s:

America's 'Near Poor' Are Increasingly at Economic Risk, Experts Say, by Erik Eckholm, NY Times: ...Americans on the lower rungs of the economic ladder have always been exposed to sudden ruin. But in recent years, with the soaring costs of housing and medical care and a decline in low-end wages and benefits, tens of millions are living on even shakier ground than before, according to studies of what some scholars call the 'near poor.'

'There's strong evidence that over the past five years, record numbers of lower-income Americans find themselves in a more precarious economic position than at any time in recent memory,' said Mark R. Rank, a sociologist at Washington University in St. Louis...

In a rare study of vulnerability to poverty, Mr. Rank and his colleagues found that the risk of a plummet of at least a year below the official poverty line rose sharply in the 1990's, compared with the two previous decades. By all signs, he said, such insecurity has continued to worsen.

For all age groups except those 70 and older, the odds of a temporary spell of poverty doubled in the 1990's... For example, during the 1980's, around 13 percent of Americans in their 40's spent at least one year below the poverty line; in the 1990's, 36 percent of people in their 40's did, according to the analysis.

Comparable figures for this decade will not be available for several years, but other indicators — a climbing poverty rate and rising levels of family debt — suggest a deepening insecurity, poverty experts and economists say.

More people work in jobs without health coverage, including tempor"

Economist's View: Galbraith and the Galbraithians...

Richard Parker, John Kenneth Galbraith's biographer, says the media has not adequately described his views. He says he was not a liberal, a Keynesian, or an advocate for big government. But he was an advocate for his own beliefs whether or not they agreed with the party line:

Galbraith's oversized shadow, by Richard Parker, Commentary, LA Times: 'As this is written, American liberals have made scarcely a new proposal for reform in 20 years. It is not evident that they have had any important new ideas…. Rather, they have had a file. Little is ever added. Platform making consists, in effect, in emptying out the drawers."

Can you guess the author of these words? Rush Limbaugh? Tom DeLay? Newt Gingrich? George Will? ... The author is John Kenneth Galbraith. "The state is the kind of organization which, though it does large things badly, does small things badly too." Galbraith again. "Free trade is preferable to the alternative." Again.

When Galbraith died ..., it was front-page news worldwide ... The flood of obituaries and remembrances got the facts mostly right, but few came close to portraying well the man I knew. I'm his biographer, and I found myself wincing all too often when he was too-neatly described as "a liberal," "a Keynesian" or "an advocate for 'big government.' " A man, in short, of a time gone by.

Galbraith wasn't, in fact, any of those things — not, at least, in the way those words are used today. On the contrary, he'd carried on as many arguments in his time with liberals, Keynesians and big-government proponents as he had with their opponents.

He was — for all his elegant wit and stylish friends — a farm boy first. ... Independence of mind and spirit was what he admired foremost. Unlike many liberals, he never viewed markets as an evil meant to be broken by government — but as the opportunity for invention, creativity and the fulfillment of essential human needs. Moreover, ... he actually admired big corporations for their ability to do things small firms found harder: basic research, economies of scale, innovation. Indeed, ... he admired fellow Scot Adam Smith as much as he did John Maynard Keynes — admiring them so much that he spent much of his life trying to rescue them from acolytes who'd misunderstood their genius.

Galbraith had few illusions about government. Appointed by President Franklin D. Roosevelt at the tender age of 32 as the nation's World War II "price czar," he'd seen close up not only the baleful influence of special interests — their lobbyists and legislators ever ready to do their bidding — but the frequently chaotic and venally incompetent mismanagement that defines bureaucracies in times of greatest challenge.

At war's end, as director of the U.S. Strategic Bombing Survey, he moreover got to see at close range not only the false claims made for military power (strategic bombing, it turned out, hadn't crippled German war production) but the gathering strength of what President Eisenhower would later call the military-industrial complex, and its ambitions in and for the postwar U.S. ...

Power was the subject that fascinated him, and it was the underlying topic of everything he wrote ... He argued with mainstream Keynesians for years — not only with the academics because he thought their preoccupations with abstraction and mathematics crippled their ability to see the world as it is, but with Keynesian policymakers as well, for their arrogant confidence that government could, with the right models and computers, easily deliver a world of permanent full-employment output. The world was too complex, the need constantly to adapt to changing circumstance too great ...to imagine anything so blackboard perfect.

Galbraith was never afraid of using power, either as an insider or outsider. When advisors ... tried to persuade the president to go to war in Southeast Asia, Galbraith as early as the summer of 1961 virtually alone began warning Kennedy of the folly of this "foreign misadventure." ...

When, in early 1965, ... after months of private arguments with President Lyndon B. Johnson over expansion of the war but long before most of the country agreed — he declared his departure memorably. His letter to LBJ, outlining a strategy for withdrawal, began..: "Mr. President, despite much official crap to the contrary, we are going to lose in Vietnam." ...

President Clinton admired Galbraith enough that shortly before he left office, he wrote with the idea that the two of them would write a book on the future of American government. Galbraith weighed the idea for a while but finally declined. He liked Clinton, he said, but Clinton hadn't learned a basic truth about politics. "As I told Harry Truman," Galbraith said, "what this country doesn't need is two Republican parties. One is more than enough."

Economist's View: Sachs: Lessons from the North on Economic Security and Economic Performance

effrey Sachs refutes the claim that economic security must be traded for economic performance by looking at countries that have successfully combined economic security with high economic performance in this Project Syndicate commentary. He also looks at some of the factors such as the use of relatively non-distorting value added taxes combined with redistributive policies that he argues have allowed this to occur:

Lessons From the North, by Jeffrey D. Sachs, Project Syndicate: Fewer debates over economics would be needed if the world spent more time examining what actually works and what does not. Almost everywhere, debate has raged about how to combine market forces and social security. The left calls for an expansion of social protection; the right says that doing so would undermine economic growth and widen fiscal deficits.

But the debate can be moved forward by examining the successful economies of Denmark, Finland, Iceland, the Netherlands, Norway, and Sweden. While no regional experience is directly transferable, the Nordic countries have successfully combined social welfare with high income levels, solid economic growth, and macroeconomic stability. They have also achieved high standards of governance.

To be sure, there are also differences among the Nordic states... Nevertheless, whereas the taxes at the national level in the United States are equal to around 20% of GNP, in the Nordic countries the ratio is more than 30%. High taxation supports comprehensive national health care, education, pensions, and other social services, resulting in low levels of poverty and a relatively narrow income gap between the richest and poorest households. ...

American conservatives argue that a large public sector is subject to inefficiency and mismanagement, corruption, and bureaucratic abuse, while the taxation needed to support it blunts economic efficiency. But each of these propositions is refuted by the Nordic experience.

Consider the claims of inefficiency and waste. As a result of government-funded national health insurance, the Nordic countries have a higher life expectancy and a lower infant mortality rate than the US ... where the government does not guarantee national health insurance and millions of families are too poor to pay for it on their own. Ironically, the ... US system is so inefficient that Americans pay a larger share of GNP for health (14%) than do the Nordic countries (11%), but get less. ...

Nor has high taxation in the Nordic countries impeded economic performance. Rather than relying mainly on income taxation, as in the US, the Nordic countries rely on value-added taxation, which provides a relatively high amount of revenue with relatively low rates of evasion and few distortions to the economy.

The Nordic experience also belies conservatives’ claim that a large social welfare state weakens incentives to work and save. National saving in the Nordic countries averages more than 20% of national income, compared to around 10% in the US.

Moreover, economic growth in the Nordic countries has been similar to that in the US in recent years. Income levels are higher on average in the US, but mainly because the Nordic countries work fewer hours per week. In any case, all of the Nordic countries have very high incomes, and Norway’s per capita income actually exceeds the US.

Several factors appear to explain the Nordic countries’ economic success. Taxation is broad-based and relatively non-distorting, while open international trade, market forces, and private ownership of industry are relied on to maintain incentives. The Nordic countries are not “socialist” economies, based on state ownership and planning, but “social welfare” economies, based on private ownership and markets, with public provision of social protection. Importantly, they invest heavily in higher education and in science and technology, so they remain at the cutting edge of high-technology industries.

Half a century ago, the free-market economist Friedrich von Hayek argued that a large public sector would threaten democracy itself, putting European countries on a “road to serfdom.” Yet the Nordic states have thrived, not suffered, from a large social welfare state, with much less public-sector corruption and far higher levels of voter participation than in the US. ...

But how replicable are the Nordic successes? These countries have small populations, easy access to international trade, natural resources, and peaceful neighbors. Most notably, they are ethnically homogeneous, so that social divisions are more amenable to compromise. However, this means that the challenge of maintaining a strong social welfare state in ethnically and racially diverse societies such as the US is not economic, but one of promoting respect and inclusiveness.

European income inequality

by Jerome a Paris
Thu May 4th, 2006 at 09:20:31 AM EDT

More pretty graphs, courtesy of Eurostat (pdf):

These represent the top decile, the bottom decile and the median for industrial and services incomes (so NOT overall incomes) by regions (above) and by countries (below).

The most interesting thing I see is that bottom deciles are remarkably similar across Europe and regions, except for the new members, which are still behind), and the difference in median levels comes from the presence of higher-paid layers in the richest regions, reflecting, presumably, their specialisation in higher value added jobs (like finance and the like).

Poor Britons healthier than rich Americans

by Jerome a Paris
Thu May 4th, 2006 at 07:15:34 AM EDT

Some good news to contrast with Agnes a Paris's relative pessimism on the NHS:

Study Shows Americans Sicker Than English

White, middle-aged Americans — even those who are rich — are far less healthy than their peers in England, according to stunning new research that erases misconceptions and has experts scratching their heads.

Americans had higher rates of diabetes, heart disease, strokes, lung disease and cancer — findings that held true no matter what income or education level.

Those dismal results are despite the fact that U.S. health care spending is double what England spends on each of its citizens.

The upper crust in both countries was healthier than middle-class and low-income people in the same country. But richer Americans' health status resembled the health of the low-income English.

Is there a clash of civilizations? By Robert Kagan and Amartya Sen

From: Robert Kagan
To: Amartya Sen
Subject: Why Is There So Little Evidence To Contradict the "Clash" Theory?
Wednesday, May 3, 2006, at 6:48 AM ET

Dear Dr. Sen,

Let me begin our little correspondence by congratulating you on your wonderful book. It is (with apologies for the following string of back-cover-blurblike phrases) elegantly written, powerful, convincing, humane, and necessary. No doubt our hosts at Slate will be unhappy to hear this, but I agree with you about almost everything. I agree entirely when you insist that to interpret the present era as a "clash of civilizations" is both mistaken and dangerous and that it is important to view people not by a single identity—as Muslim, "Western," or Asian—but as a bundle of identities. Your keenest insight may be that we need to avoid falling into precisely the trap that Osama Bin Laden has deliberately laid for us: to divide the world into Muslim and non-Muslim. Above all, I share your conviction that liberal democracy is not a cultural phenomenon but a basic human aspiration. I may perhaps go even further than you in arguing that liberal democracy—which does not separate peoples by cultures but unites them in common devotion to the principle of equal rights—is the only durable answer to the present crisis...

Economist's View: Paul Krugman: Our Sick Society

Paul Krugman stays with the topic of his last column, our health care system. In this column, he wonders why being American appears to be bad for your health:

Our Sick Society, by Paul Krugman, Commentary, NY Times: Is being an American bad for your health? That's the apparent implication of a study just published in The Journal of the American Medical Association.

It's not news that something is very wrong with the state of America's health. ... But it isn't clear exactly what causes this stunningly poor performance. How much of America's poor health is the result of our failure, unique among wealthy nations, to guarantee health insurance to all? How much is the result of racial and class divisions? How much is the result of other aspects of the American way of life?

The new study ... doesn't resolve all of these questions. Yet it offers strong evidence that there's something about American society that makes us sicker than we should be.

The authors of the study compared the prevalence of such diseases as diabetes and hypertension in Americans 55 to 64 years old with ... a comparable group in England. Comparing us with the English isn't a choice designed to highlight American problems: Britain spends only about 40 percent as much per person on health care..., ... Moreover, England isn't noted either for healthy eating or for a healthy lifestyle.

Nonetheless, the study concludes that "Americans are much sicker than the English."... What's ... striking is that being American seems to damage your health regardless of your race and social class. That's not to say that class is irrelevant. ... In fact, there's a strong correlation within each country between wealth and health. But Americans are so much sicker that the richest third of Americans is in worse health than the poorest third of the English.

So what's going on? Lack of health insurance is surely a factor in the poor health ...[and] everyone in England receives health care from the government. But almost all upper-income Americans have insurance.

What about bad habits...? The ... statistical analysis suggests that bad habits are only a fraction of the story. In the end, the study's authors seem baffled by the poor health of even relatively well-off Americans. But let me suggest a couple of possible explanations.

One is that having health insurance doesn't ensure good health care. For example, a ... report on diabetes pointed out that insurance companies are generally unwilling to pay for care that might head off the disease... It's possible that Britain's National Health Service, in spite of its limited budget, actually provides better all-around medical care ... because it takes a broader, longer-term view than private insurance companies.

The other possibility is that Americans work too hard and experience too much stress. Full-time American workers work ... about 46 weeks per year; full-time British, French and German workers work only 41 weeks a year. I've pointed out in the past that our workaholic economy is actually more destructive of the "family values" ... than the European economies in which regulations and union power have led to shorter working hours.

Maybe overwork, together with the stress of living in an economy with a minimal social safety net, damages our health as well as our families. These are just suggestions. What we know for sure is that although the American way of life may be, as Ari Fleischer famously proclaimed back in 2001, "a blessed one," there's something about that way of life that is seriously bad for our health.

Freakonomics Blog » The best economics humor ever

Almost all economics PhD students hate being PhD students. They get demoralized and abused constantly. The one day a year that they rise up in triumph is the “skit party.” Almost all the programs have skit parties where the students make fun of the faculty.

This video (from the Columbia skit party as far as I can tell) is the funniest thing I have ever seen produced by economists. The person singing in the video is pretending to be Glenn Hubbard who was one of the leading candidates to be the Chair of the Federal Reserve, but the job was instead given to Ben Bernanke.

Russian firms blur line - Europe - International Herald Tribune

Here in the Caucasus, above Sochi, an elite ski resort is rising beside the Layura River. The resort, a multimillion-dollar project with a hotel and conference center, cottages, six lifts and miles of trails, is a centerpiece of Sochi's improbable bid for the Winter Olympic Games of 2014.

Even more improbable is the project's developer: Russia's state gas monopoly, Gazprom.

Gazprom is a vast and powerful energy giant, a company now worth more than $240 billion, having gained $10 billion in value in one week in April alone. It is the fifth-largest corporation in the world, having in the past year leaped past Wal-Mart, Toyota and Citigroup. Its executives vow to make it the biggest...

Creative Construction: "The stereotype is that American students aren't very well-trained technically and thus do poorly when tested in areas such as math and science, but their intuitive skills are fairly well developed. Foreign students are just the opposite according to this view, excellent technically, but less able to express the intuitive reasoning behind the mathematics or the science and less able to use intuitive skills to combine ideas creatively. The difference is generally attributed to a difference in emphasis in education with foreign students far more devoted to rote learning than their American counterparts. While this gives Americans a disadvantage in engineering, computer programming, and so on, they are much more likely to come up with innovative new ideas. Or so the story goes. Is this is really true? India and China believe it and are wondering how to change their educational systems to encourage more creativity:

Worried About India's and China's Booms? So Are They, by Thomas L. Friedman, Commentary, NY Times: The more I ... travel, the more I find that the most heated debates in many countries are around education. ... every country thinks it's behind. ... America agonizes that its ... public schools badly need improvement in math and science. I was just in Mumbai attending the annual meeting of India's high-tech association, ... where many speakers worried aloud that Indian education wasn't nurturing enough "innovators."

Both India and China, which have mastered rote learning and have everyone else terrified about their growing armies of engineers, are wondering if too much math and science — unleavened by art, literature, music and humanities — aren't making Indira and Zhou dull kids and not good innovators. Very few global products have been spawned by India or China.

"We have ... everyone going into engineering and M.B.A.'s," said Jerry Rao, chief executive of ... one of the top Indian outsourcing companies. "If we don't have enough people with the humanities, we will lose the [next generation of] V. S. Naipauls and Amartya Sens," he added, referring to the Indian author and the Indian economist, both Nobel laureates. ...

Innovation is often a synthesis of art and science, and the best innovators often combine the two. The Apple co-founder Steve Jobs ... recalled how he dropped out of college but stuck around campus and took a calligraphy course, where he learned about the artistry of great typography. "None of this had even a hope of any practical application in my life," he recalled. "But 10 years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography." ...

Capital will now flow faster than ever to tap the most productive talent wherever it is located ... Hence the concern I found in India that it must move quickly from business process outsourcing ... into knowledge process outsourcing ... coming up with more original designs and products.

"We need to encourage more incubation of ideas ... to make innovation a national initiative," said Azim Premji, the chairman of ... one of India's premier technology companies. "Are we as Indians creative? Going by our rich cultural heritage, we have no doubt some of the greatest art and literature. We need to bring the same spirit into our economic and business arena."

But to make that leap, Indian entrepreneurs say, will require a big change in the rigid, never-challenge-the-teacher Indian education system. "If we do not allow our students to ask why, but just keep on telling them how, then we are only going to get the transactional type of outsourcing..." said Nirmala Sankaran C.E.O. of ... an Indian-based education company. "We have a creative problem in this country."...

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Amartya Sen: Democracy Isn't 'Western': "Amartya Sen, a Nobel laureate in economics discusses the deception of using cultural differences between countries as an explanation of economic and political differences, in particular as an explanation for the emergence of democracy in some countries, but not in others:



Democracy Isn't 'Western', by Amartya Sem, Commentary, WSJ: 'The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings.' Culture too, like our stars, is often blamed for our failures. Attempts to build a better world capsize, it is alleged, in the high sea of cultural resistance. The determinism of culture is increasingly used in contemporary global discussions to generate pessimism about the feasibility of a democratic state, or of a flourishing economy, or of a tolerant society, wherever these conditions do not already obtain.

Indeed, cultural stereotyping can have great effectiveness in fixing our way of thinking. When there is an accidental correlation between cultural prejudice and social observation (no matter how casual), a theory is born, and it may refuse to die even after the chance correlation has vanished without trace. For example, labored jokes against the Irish, which have had such currency in England, had the superficial appearance of fitting well with the depressing predicament of the Irish economy when it was doing quite badly. But when the Irish economy started growing astonishingly rapidly, for many years faster than any other European economy, the cultural stereotyping and its allegedly profound economic and social relevance were not junked as sheer rubbish. Theories have lives of their own, quite defiantly of the phenomenal world that can be actually observed.

Many have observed that in the '60s South Korea and Ghana had similar income per head, whereas within 30 years the former grew to be 15 times richer than the latter. This comparative history is immensely important to study and causally analyze, but the temptation to put much of the blame on Ghanaian or African culture (as is done by as astute an observer as Samuel Huntington) calls for some resistance. Mr. Huntington closes his contrast with a spectacular formula: "South Koreans valued thrift, investment, hard work, education, organization and discipline. Ghanaians had different values. In short, cultures count." Ghanaians, and perhaps many other Africans, seem doomed to stagnate, according to this analysis.

In fact, that cultural story is extremely deceptive. There were many important differences, other than any differences in cultural predispositions, between Ghana and Korea in the 1960s. First, the class structures in the two countries were quite different, with a very much bigger -- and proactive -- role of business classes in Korea. Second, the politics were very different, too, with the government in South Korea eager to play a prime-moving role in initiating societal reform and economic development in a way that was not true in Ghana. Third, the close relationship between the Korean economy and Japan, on the one hand, and the U.S., on the other, made a big difference, at least in the early stages of Korean economic expansion.

Fourth -- and perhaps most important -- by the 1960s South Korea had acquired a much higher literacy rate and a much more expanded school system than Ghana had. Korean massive progress in school education had been largely brought about in the post-World War II period, mainly through resolute public policy, and it could not be seen just as a reflection of cultural difference. This is not to suggest that cultural factors are irrelevant to the process of development, but they do not work in isolation from social, political and economic influences. Nor are they immutable.

The temptation of founding economic pessimism on cultural resistance is matched by the evident enchantment, even more common today, of basing political pessimism, particularly about democracy, on alleged cultural impossibilities. While it is easy enough to understand the widespread -- and increasing -- doubts about armed intervention allegedly aimed at jump-starting democracy in Iraq through largely foreign and military planning, it would be quite a leap from there to become skeptical of the general possibility of the emergence of democracy in any country that is currently nondemocratic. It is worth remembering that democracy has developed well enough in many countries in Asia, Africa and Latin America, and in the case of some, such as South Africa, even foreign assistance to local democratic movements (for example through economic boycott) has positively helped.

When it is asked whether Western countries can "impose" democracy on the non-Western world, even the language reflects a confusion centering on the idea of "imposition," since it implies a proprietary belief that democracy "belongs" to the West, taking it to be a quintessentially "Western" idea which has originated and flourished exclusively in the West. This is a thoroughly misleading way of understanding the history and the contemporary prospects of democracy.

Democracy, to use the old Millian phrase, is "government by discussion," and voting is only one part of a broader picture (an understanding that has, alas, received little recognition in post-intervention Iraq in the attempt to get straight to polling without the development of broad public reasoning and an independent civil society). There can be no doubt at all that the modern concepts of democracy and of public reasoning have been very deeply influenced by European and American analyses and experiences over the last few centuries (including the contributions of such theorists of democracy as Marquis de Condorcet, Jefferson, Madison and Tocqueville). But to extrapolate backward from these comparatively recent experiences to construct a quintessential and long-run dichotomy between the West and non-West would be deeply misleading. There is a long history of public reasoning across the world, and while it has gone through ups and downs everywhere, the sharp priority of liberal tolerance that has emerged in the West over the past three centuries reflects how social evolution can strengthen and consolidate one tendency to the exclusion -- or near exclusion -- of other tendencies.

The belief in the allegedly "Western" nature of democracy is often linked to the early practice of voting and elections in Greece, especially in Athens. Democracy involves more than balloting, but even in the history of voting there would be a classificatory arbitrariness in defining civilizations in largely racial terms. In this way of looking at civilizational categories, no great difficulty is seen in considering the descendants of, say, Goths and Visigoths as proper inheritors of the Greek tradition ("they are all Europeans," we are told). But there is reluctance in taking note of the Greek intellectual links with other civilizations to the east or south of Greece, despite the greater interest that the Greeks themselves showed in talking to Iranians, or Indians, or Egyptians (rather than in chatting up the Ostrogoths).

Since traditions of public reasoning can be found in nearly all countries, modern democracy can build on the dialogic part of the common human inheritance. In his autobiography, Nelson Mandela describes how influenced he was, as a boy, by seeing the democratic nature of the proceedings of the meetings that were held in his home town: "Everyone who wanted to speak did so. It was democracy in its purest form. There may have been a hierarchy of importance among the speakers, but everyone was heard, chief and subject, warrior and medicine man, shopkeeper and farmer, landowner and laborer." Mr. Mandela could combine his modern ideas about democracy with emphasizing the supportive part of the native tradition, in a way that Gandhi had done in India, and that is the way cultures adapt and develop to respond to modernity. Mr. Mandela's quest for democracy and freedom did not emerge from any Western "imposition."

Similarly, the history of Muslims includes a variety of traditions, not all of which are just religious or "Islamic" in any obvious sense. The work of Arab and Iranian mathematicians, from the eighth century onward reflects a largely nonreligious tradition. Depending on politics, which varied between one Muslim ruler and another, there is also quite a history of tolerance and of public discussion, on which the pursuit of a modern democracy can draw. For example, the emperor Saladin, who fought valiantly for Islam in the Crusades in the 12th century, could offer, without any contradiction, an honored place in his Egyptian royal court to Maimonides, as that distinguished Jewish philosopher fled an intolerant Europe. When, at the turn of the 16th century, the heretic Giordano Bruno was burned at the stake in Campo dei Fiori in Rome, the Great Mughal emperor Akbar (who was born a Muslim and died a Muslim) had just finished, in Agra, his large project of legally codifying minority rights, including religious freedom for all, along with championing regular discussions between followers of Islam, Hinduism, Jainism, Judaism, Zoroastrianism and other beliefs (including atheism).

Cultural dynamics does not have to build something from absolutely nothing, nor need the future be rigidly tied to majoritarian beliefs today or the power of the contemporary orthodoxy. To see Iranian dissidents who want a fully democratic Iran not as Iranian advocates but as "ambassadors of Western values" would be to add insult to injury, aside from neglecting parts of Iranian history (including the practice of democracy in Susa or Shushan in southwest Iran 2,000 years ago). The diversity of the human past and the freedoms of the contemporary world give us much more choice than cultural determinists acknowledge. This is particularly important to emphasize since the illusion of cultural destiny can extract a heavy price in the continued impoverishment of human lives and liberties.

"

Amartya Sen: Democracy Isn't 'Western': "Amartya Sen, a Nobel laureate in economics discusses the deception of using cultural differences between countries as an explanation of economic and political differences, in particular as an explanation for the emergence of democracy in some countries, but not in others:



Democracy Isn't 'Western', by Amartya Sem, Commentary, WSJ: 'The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings.' Culture too, like our stars, is often blamed for our failures. Attempts to build a better world capsize, it is alleged, in the high sea of cultural resistance. The determinism of culture is increasingly used in contemporary global discussions to generate pessimism about the feasibility of a democratic state, or of a flourishing economy, or of a tolerant society, wherever these conditions do not already obtain.



ndeed, cultural stereotyping can have great effectiveness in fixing our way of thinking. When there is an accidental correlation between cultural prejudice and social observation (no matter how casual), a theory is born, and it may refuse to die even after the chance correlation has vanished without trace. For example, labored jokes against the Irish, which have had such currency in England, had the superficial appearance of fitting well with the depressing predicament of the Irish economy when it was doing quite badly. But when the Irish economy started growing astonishingly rapidly, for many years faster than any other European economy, the cultural stereotyping and its allegedly profound economic and social relevance were not junked as sheer rubbish. Theories have lives of their own, quite defiantly of the phenomenal world that can be actually observed.

Many have observed that in the '60s South Korea and Ghana had similar income per head, whereas within 30 years the former grew to be 15 times richer than the latter. This comparative history is immensely important to study and causally analyze, but the temptation to put much of the blame on Ghanaian or African culture (as is done by as astute an observer as Samuel Huntington) calls for some resistance. Mr. Huntington closes his contrast with a spectacular formula: "South Koreans valued thrift, investment, hard work, education, organization and discipline. Ghanaians had different values. In short, cultures count." Ghanaians, and perhaps many other Africans, seem doomed to stagnate, according to this analysis.

In fact, that cultural story is extremely deceptive. There were many important differences, other than any differences in cultural predispositions, between Ghana and Korea in the 1960s. First, the class structures in the two countries were quite different, with a very much bigger -- and proactive -- role of business classes in Korea. Second, the politics were very different, too, with the government in South Korea eager to play a prime-moving role in initiating societal reform and economic development in a way that was not true in Ghana. Third, the close relationship between the Korean economy and Japan, on the one hand, and the U.S., on the other, made a big difference, at least in the early stages of Korean economic expansion.

Fourth -- and perhaps most important -- by the 1960s South Korea had acquired a much higher literacy rate and a much more expanded school system than Ghana had. Korean massive progress in school education had been largely brought about in the post-World War II period, mainly through resolute public policy, and it could not be seen just as a reflection of cultural difference. This is not to suggest that cultural factors are irrelevant to the process of development, but they do not work in isolation from social, political and economic influences. Nor are they immutable.

The temptation of founding economic pessimism on cultural resistance is matched by the evident enchantment, even more common today, of basing political pessimism, particularly about democracy, on alleged cultural impossibilities. While it is easy enough to understand the widespread -- and increasing -- doubts about armed intervention allegedly aimed at jump-starting democracy in Iraq through largely foreign and military planning, it would be quite a leap from there to become skeptical of the general possibility of the emergence of democracy in any country that is currently nondemocratic. It is worth remembering that democracy has developed well enough in many countries in Asia, Africa and Latin America, and in the case of some, such as South Africa, even foreign assistance to local democratic movements (for example through economic boycott) has positively helped.

When it is asked whether Western countries can "impose" democracy on the non-Western world, even the language reflects a confusion centering on the idea of "imposition," since it implies a proprietary belief that democracy "belongs" to the West, taking it to be a quintessentially "Western" idea which has originated and flourished exclusively in the West. This is a thoroughly misleading way of understanding the history and the contemporary prospects of democracy.

Democracy, to use the old Millian phrase, is "government by discussion," and voting is only one part of a broader picture (an understanding that has, alas, received little recognition in post-intervention Iraq in the attempt to get straight to polling without the development of broad public reasoning and an independent civil society). There can be no doubt at all that the modern concepts of democracy and of public reasoning have been very deeply influenced by European and American analyses and experiences over the last few centuries (including the contributions of such theorists of democracy as Marquis de Condorcet, Jefferson, Madison and Tocqueville). But to extrapolate backward from these comparatively recent experiences to construct a quintessential and long-run dichotomy between the West and non-West would be deeply misleading. There is a long history of public reasoning across the world, and while it has gone through ups and downs everywhere, the sharp priority of liberal tolerance that has emerged in the West over the past three centuries reflects how social evolution can strengthen and consolidate one tendency to the exclusion -- or near exclusion -- of other tendencies.

The belief in the allegedly "Western" nature of democracy is often linked to the early practice of voting and elections in Greece, especially in Athens. Democracy involves more than balloting, but even in the history of voting there would be a classificatory arbitrariness in defining civilizations in largely racial terms. In this way of looking at civilizational categories, no great difficulty is seen in considering the descendants of, say, Goths and Visigoths as proper inheritors of the Greek tradition ("they are all Europeans," we are told). But there is reluctance in taking note of the Greek intellectual links with other civilizations to the east or south of Greece, despite the greater interest that the Greeks themselves showed in talking to Iranians, or Indians, or Egyptians (rather than in chatting up the Ostrogoths).

Since traditions of public reasoning can be found in nearly all countries, modern democracy can build on the dialogic part of the common human inheritance. In his autobiography, Nelson Mandela describes how influenced he was, as a boy, by seeing the democratic nature of the proceedings of the meetings that were held in his home town: "Everyone who wanted to speak did so. It was democracy in its purest form. There may have been a hierarchy of importance among the speakers, but everyone was heard, chief and subject, warrior and medicine man, shopkeeper and farmer, landowner and laborer." Mr. Mandela could combine his modern ideas about democracy with emphasizing the supportive part of the native tradition, in a way that Gandhi had done in India, and that is the way cultures adapt and develop to respond to modernity. Mr. Mandela's quest for democracy and freedom did not emerge from any Western "imposition."

Similarly, the history of Muslims includes a variety of traditions, not all of which are just religious or "Islamic" in any obvious sense. The work of Arab and Iranian mathematicians, from the eighth century onward reflects a largely nonreligious tradition. Depending on politics, which varied between one Muslim ruler and another, there is also quite a history of tolerance and of public discussion, on which the pursuit of a modern democracy can draw. For example, the emperor Saladin, who fought valiantly for Islam in the Crusades in the 12th century, could offer, without any contradiction, an honored place in his Egyptian royal court to Maimonides, as that distinguished Jewish philosopher fled an intolerant Europe. When, at the turn of the 16th century, the heretic Giordano Bruno was burned at the stake in Campo dei Fiori in Rome, the Great Mughal emperor Akbar (who was born a Muslim and died a Muslim) had just finished, in Agra, his large project of legally codifying minority rights, including religious freedom for all, along with championing regular discussions between followers of Islam, Hinduism, Jainism, Judaism, Zoroastrianism and other beliefs (including atheism).

Cultural dynamics does not have to build something from absolutely nothing, nor need the future be rigidly tied to majoritarian beliefs today or the power of the contemporary orthodoxy. To see Iranian dissidents who want a fully democratic Iran not as Iranian advocates but as "ambassadors of Western values" would be to add insult to injury, aside from neglecting parts of Iranian history (including the practice of democracy in Susa or Shushan in southwest Iran 2,000 years ago). The diversity of the human past and the freedoms of the contemporary world give us much more choice than cultural determinists acknowledge. This is particularly important to emphasize since the illusion of cultural destiny can extract a heavy price in the continued impoverishment of human lives and liberties. "

Transportation Costs and Globalization: "Changes in transportation technology have reduced transportation costs substantially helping to fuel the globalization process. Since digital technology is also a means of reducing transportation costs - email is cheaper and faster than air mail - globalization has been facilitated by the ability to move goods and services across borders at a reduced cost. Virginia Postrel discusses the sharp decline in international shipping costs in her last Economic Scene for the New York Times:



The Container That Changed the World By Virginia Postrel, Economic Scene, NY Times: The political showdown over a Dubai company's plan to operate terminals at six American ports briefly focused public attention on one of the most significant, yet least noticed, economic developments of the last few decades: the transformation of international shipping. Just as the computer revolutionized the flow of information, the shipping container revolutionized the flow of goods. ... By sharply cutting costs and enhancing reliability, container-based shipping enormously increased the volume of international trade and made complex supply chains possible.

'Low transport costs help make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics and American colorants, and ship them off to eager girls all over the world,' writ"

The Foreign Direct Investment Behavior of Multinational Corporations: "A colleague, Bruce Blonigen, writing in the NBER Reporter on the determinants of foreign direct investment by multinational corporations:



Foreign Direct Investment Behavior of Multinational Corporations, by Bruce A. Blonigen, NBER Reporter: There is increasing recognition that understanding the forces of economic globalization requires looking first at foreign direct investment (FDI) by multinational corporations (MNCs): that is, when a firm based in one country locates or acquires production facilities in other countries. While real world GDP grew at a 2.5 percent annual rate and real world exports grew by 5.6 percent annually from 1986 through 1999, United Nations data show that real world FDI inflows grew by 17.7 percent over this same period! Additionally, MNCs mediate most world trade flows. For example, Bernard, Jensen, and Schott find that 90 percent of U.S. exports and imports flow through a U.S. MNC, with roughly 50 percent of U.S. trade flows occurring between affiliates of the same MNC, or what is termed intra-firm trade (1)

Despite the obvious importance of FDI and MNCs in the world economy, research on the factors that determine FDI patterns and the impact of MNCs on parent and host countries is in its early stages. The most important general questions are: what factors determine where FDI occurs, and what impacts do those MNC operations have on the parent and host economies? As I discuss in a recent survey of the empirical literature addressing the first question -- the determinants of FDI decisions -- the answers are not straightforward.⁽²⁾ In particular, the literature has shown that we cannot simply conclude that factors such as exchange rates or tax policies have an unambiguous general impact on FDI patterns. Instead, meaningful insights come from developing hypotheses about, say, when a factor should matter for FDI, or even just a particular form of FDI, and then finding creative ways to test these hypotheses in the data.

Exchange Rates and FDI

One good example of this is the effect of exchange rate movements on FDI. For years, the conventional theory was to compare FDI to bonds, for which exchange rate movements do not affect the investment decision. A depreciation of the currency in the host country reduces the amount of foreign currency needed to purchase the asset, but it also reduces the nominal return one receives in the foreign currency. Thus, the rate of return for the foreign investor does not change. Empirical studies of FDI seemed to confirm this, often finding insignificant effects of exchange rates. In contradiction to this, the popular press often points to host-country exchange rate depreciations as a contributing factor to inward foreign investment booms, and worries about the selling of key national technological assets.

I find a resolution to this puzzle by considering FDI that involves firm-specific assets (such as patents or managerial skills) - the type of assets previous literature established as crucial to formation of MNCs and FDI.⁽³⁾ Such assets are typically intangible and easily transferred across a firm's operations. Thus, the purchase prices of such assets through FDI are in the host-country's currency, but returns can be generated anywhere the firm operates and are not necessarily tied to the home country's currency. This means that host-country currency depreciations theoretically can lead to increased acquisition of FDI, particularly of firms that have firm-specific assets. This hypothesis is strongly confirmed for a panel of acquisitions of U.S. firms by Japanese and German firms and provides evidence for the notion in the popular press that currency depreciations ease foreign firms' purchases of U.S. host-country technological assets.

Taxes and FDI

Another factor that the literature finds does not affect FDI in a straightforward manner is tax policy. MNCs are potentially subject to taxation in both the host and parent country. However, most parent countries have policies to reduce or eliminate double taxation of their MNCs. James R. Hines, Jr. and co-authors have shown that the way in which parent countries reduce double taxation on their MNCs (for example, allowing credits or deductions) can have quite different implications for FDI activity.⁽⁴⁾

Many countries also have negotiated bilateral investment treaties (BITs) to mutually reduce withholding taxes on MNCs based in the other country. The Organisation for Economic Co-operation and Development (OECD) has been a big advocate of BITs as a way to enhance FDI across member countries. Others contend that BITs are mainly intended to share tax information across countries in order to deter tax evasion and to reduce administrative costs and, thus, should have little, or even negative, effects on FDI flows.⁽⁵⁾ Ron B. Davies and I examine whether the empirical evidence suggests that such treaties increase FDI flows across nations, as the OECD and many economists presume.⁽⁶⁾ In separate studies, we examine the evidence for the U.S. and for OECD BITs, respectively, in panel data that span a variety of bilateral country pairs over time. Across these various samples and numerous specifications, we find little evidence that these BITs increase FDI activity, a surprising result in light of OECD promotion of these treaties.

Trade Protection and FDI

The notion that trade protection encourages FDI is folk wisdom for economists, so much so that it is rarely examined empirically. But my research into this relationship has also yielded surprises. In a study examining all U.S. antidumping trade protection actions from 1980 through 1995, I find that FDI responses to these trade actions (tariff-jumping FDI) occur only for firms with previous experience as MNCs.⁽⁷⁾ Most firms facing such trade policies (many from developing countries) have no such experience and do not respond with FDI. Instead, these firms must face either significant antidumping duties or go through the costly process of raising U.S. prices and requesting recalculations of the duties.⁽⁸⁾ For domestic firms, whether foreign firms tariff-jump the antidumping duties matters significantly. Work with Tomlin and Wilson finds that domestic firms experience a 3 percent increase in expected discounted profitability from antidumping duties unless the foreign firms subject to the duties decide to tariff-jump, in which case the domestic firms do not experience any increase.⁽⁹⁾,⁽¹⁰⁾

Information and FDI

An almost unexplored issue in the literature has been the role of information on FDI decisions. FDI requires substantial fixed costs of identifying an efficient location, acquiring knowledge of the local regulatory environment, and coordination of suppliers. Thus, access to better information about some host countries may make FDI to that location more likely. Ellis, Fausten, and I find an interesting avenue for investigating this hypothesis using information on Japanese industrial groups called keiretsu.⁽¹¹⁾ Horizontal keiretsu are groups of firms across a wide range of industries, typically centered around a main bank that owns significant shares in these firms. A number of studies have focused on the potentially favorable financing received by keiretsu firms from their main bank as one impetus for greater investment by these firms, including FDI -- but the evidence is mixed on this. However, the major firms in a keiretsu also get together on a regular basis in what are termed Presidential Meetings and presumably share information more than other firms would. My work with Ellis and Fausten examines whether this information affects FDI choices, by estimating how much prior-year FDI by members of a firm's keiretsu in a particular host country increases the likelihood that the firm will also choose that country for its FDI. We find that prior-year investment by a firm in the same keiretsu will raise a firm's probability of locating an investment in that same host country by about 20 percent.

A related paper with Wooster examines whether U.S. firms increase overseas investments when a new CEO who is foreign-born takes over.⁽¹²⁾ Our examination of CEO turnover among Fortune 500 firms in the 1990s does show evidence of significant increases in FDI when a "foreign" CEO takes over. It is difficult to disentangle whether such an effect is attributable to better information of foreign markets by the foreign CEO or to different personal preferences influenced by a less U.S.-centric perspective. Regardless, the results suggest that there are likely other important factors behind FDI patterns than the standard economic ones so often mentioned in the literature.

Estimating Long-Run General-Equilibrium Determinants of FDI

Much of the literature described to this point motivates analysis with partial equilibrium models of individual firm-level FDI decisions. But we also want to have empirical specifications of FDI that are grounded in theory and that do a good job of explaining FDI patterns across the world. Researchers looking at world FDI patterns have generally used variations of a gravity framework to model FDI, specifying parent- and host-country GDPs along with distance as core determinants of FDI. These models seemingly do well to describe FDI patterns statistically, but while Anderson and van Wincoop have solidified an appropriate gravity specification as theoretically valid for trade patterns, it is not clear this is true for FDI patterns.⁽¹³⁾

Of course, deriving a theoretically based empirical specification of FDI is a fairly complicated problem. General equilibrium theoretical models of MNCs and their FDI activities only first began to be developed in the mid-1980s with Markusen's development of a horizontal model of FDI where an MNC replicates its process across multiple countries to avoid trade frictions, and Helpman's vertical MNC model where firms locate their production process abroad to take advantage of lower factor costs.⁽¹⁴⁾ A recent important step by Carr, Markusen, and Maskus (CMM) was estimation of empirical specifications of FDI based on general equilibrium models of MNCs.⁽¹⁵⁾ Their work shows that other factors missing from gravity-based FDI specifications, particularly factor endowment differences, are important for explaining FDI patterns.

In recent work with co-authors I have explored the central question of how well these specifications actually fit the real-world data we observe. The empirical specification estimated by CMM was a starting point in this research, since its inclusion of endowment differences clearly outperforms a standard gravity equation of FDI. In initial work with the model, Davies, Head, and I found that the CMM model had a specification of endowment differences that was not consistent with the theory. Once corrected, the model no longer provides evidence that vertical FDI motivations are very important in overall FDI flows between countries.⁽¹⁶⁾ Work with Davies and Wang shows that specification error goes beyond this with not only the CMM model, but also with the gravity specification.⁽¹⁷⁾ Data on FDI between countries are highly skewed, with very large activity between developed countries and small or even no activity for very small countries. We show that even after logging variables, adding country fixed-effects, and splitting samples into developed countries versus less-developed countries, one is still not guaranteed of having normally distributed error terms. In other words, finding an appropriate specification that effectively models the substantial heterogeneity in FDI activity across countries is still an open issue. Until this is resolved, using these models as control variables in studies of how new factors of interest affect FDI can be misleading.

An additional concern is that MNC models typically use a two-country framework and empirical FDI specifications use bilateral FDI data. This assumes that FDI decisions to different markets are independent. There are a number of reasons to think this may not be true. For example, U.S. firms may prefer to locate FDI in one country and then export to neighboring countries (export-platform FDI). In this case, more FDI in a particular host country would mean less in neighboring ones. Alternatively, U.S. firms may have vertical production relationships between affiliates such that more FDI in a country will naturally be associated with more in neighboring ones because of production externalities. Davies, Naughton, Waddell, and I explore this by explicitly modeling spatial interdependence in empirical estimation of U.S. FDI patterns.⁽¹⁸⁾ We find that spatial interdependence shows up significantly in the data, although the nature of these spatial relationships is strongly affected by the particular geographic features of the sample of countries one chooses to examine. However, our finding that the coefficients on the standard control variables in FDI studies are hardly affected by including these spatial considerations is relatively good news for previous work using these empirical specifications.

Conclusion

The study of FDI and MNCs is both fascinating and important for understanding economic globalization. There has been substantial progress in the literature in the past couple of decades, but it is complicated enough that, in many ways, we are still in the process of uncovering what we don't know. I am excited to work on filling more gaps in our understanding in my future research efforts.

---

1. A.B. Bernard, J.B. Jensen, and P.K. Schott, "Importers, Exporters and Multinationals: A Portrait of the Firms in the U.S. that Trade Goods," NBER Working Paper No. 11404, June 2005.

2. B.A. Blonigen, "A Review of the Empirical Literature on FDI Determinants," NBER Working Paper No. 11299, May 2005, and forthcoming, Atlantic Economic Journal.

3. B.A. Blonigen, "Firm-Specific Assets and the Link Between Exchange Rates and Foreign Direct Investment," American Economic Review, 87(3), June 1997, pp. 447-65.

4. For example, see J.R. Hines, "Altered States: Taxes and the Location of Foreign Direct Investment in America," NBER Working Paper No. 4397, May 1997, and American Economic Review, 86(5), December 1996, pp. 1076-94, and M.A. Desai, C.F. Foley, and J.R. Hines, "Foreign Direct Investment in a World of Multiple Taxes," NBER Working Paper No. 8440, August 2001, and Journal of Public Economics, 88(12), December 2004, pp. 2727-44.

5. For example, see T. Dagan, "The Tax Treaties Myth," New York University Journal of International Law and Politics, Summer 2000, pp.939-96.

6. B.A. Blonigen and R.B. Davies, "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," International Tax and Public Finance, 11(5), September 2004, pp. 601-22, and B.A. Blonigen and R.B. Davies, "Do Bilateral Tax Treaties Promote Foreign Direct Investment?" NBER Working Paper No. 8834, March 2002, and Handbook of International Trade, Volume II: Economic and Legal Analysis of Laws and Institutions, J. Hartigan, ed., Blackwell Publishers, 2005.

7. B.A. Blonigen, "Tariff-jumping Antidumping Duties," NBER Working Paper No. 7776, July 2000, and Journal of International Economics, 57(1), June 2002, pp. 31-50.

8. B.A. Blonigen, "Evolving Discretionary Practices of U.S. Antidumping Activity," NBER Working Paper No. 9625, April 2003, and, forthcoming, Canadian Journal of Economics, documents the rapidly rising trend in U.S. antidumping duties and the sources of this trend. B.A. Blonigen and S.E. Haynes, "Antidumping Investigations and the Pass-Through of Exchange Rates and Antidumping Duties," NBER Working Paper No. 7873, October 1999, and American Economic Review, 92(4), September 2002, pp. 1044-61, and B.A. Blonigen and J.-H. Park, " Dynamic Pricing in the Presence of Antidumping Policy: Theory and Evidence," NBER Working Paper No. 8477, September 2001, and American Economic Review, 94(1), March 2004, pp. 134-54, address the economics of firms' strategic pricing decisions in the face of antidumping duties.

9. B.A. Blonigen, K. Tomlin, and W.W. Wilson, "Tariff-jumping FDI and Domestic Firms' Profits," NBER Working Paper No. 9027, June 2002, and Canadian Journal of Economics, 37(3), August 2004, pp. 656-77.

10. A related issue is how FDI may affect trade protection policies (that is, reverse causality), which I address with co-authors in B.A. Blonigen and R.C. Feenstra, "Protectionist Threats and Foreign Direct Investment," NBER Working Paper No. 5475, March 1996, and in Effects of U.S. Trade Protection and Promotion Policies, R.C. Feenstra, ed.,Chicago: University of ChicagoPress, 1997, pp. 55-80, and B.A. Blonigen and D.N. Figlio, "Voting for Protection: Does Direct Foreign Investment Influence Legislator Behavior?" American Economic Review, 88(4), September 1998, pp. 1002-14.

11. B.A. Blonigen, C.J. Ellis, and D. Fausten, "Industrial Groupings and Foreign Direct Investment," Journal of International Economics, Vol. 65(1), January 2005, pp. 75-91 (An earlier version was circulated as "Industrial Groupings and Strategic FDI: Theory and Evidence" NBER Working Paper No. 8046, December 2000).

12. B.A. Blonigen and R.B. Wooster, "CEO Turnover and Foreign Market Participation," NBER Working Paper No. 9527, March 2003.

13. J.E. Anderson and E. van Wincoop, "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Paper No. 8079, January 2001, and American Economic Review, 93(1), March 2003, pp. 170-92.

14. J.R. Markusen, "Multinationals, Multi-Plant Economies, and the Gains from Trade," Journal of International Economics, 16(3-4): pp. 205-26, and E. Helpman, A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, 92(3), pp. 451-71.

15. D.L. Carr, J.R. Markusen, and K.E. Maskus, "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Paper No. 6773, October 1998, and American Economic Review, 91(3), June 2001, pp. 693-708, and J.R. Markusen, and K.E. Maskus, "Discriminating Among Alternative Theories of the Multinational Enterprise," NBER Working Paper No. 7164, June 1999, and Review of International Economics, 10(4), November 2002, pp. 694-707.

16. B.A. Blonigen, R.B. Davies, and K. Head, "Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment," NBER Working Paper No. 6773, October 1998, and American Economic Review, 93(3), June 2003, pp. 980-94.

17. B.A. Blonigen and R.B. Davies, "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," International Tax and Public Finance, 11(5), September 2004, pp. 601-22, and B.A. Blonigen and M. Wang, "Inappropriate Pooling of Wealthy and Poor Countries in Empirical FDI Studies," NBER Working Paper No. 10378, March 2004, and Does Foreign Direct Investment Promote Development? T.H. Moran, E.M. Graham, and M. Blomstrom, eds., Institute for International Economics, April 2005, pp. 221-44.

18. B.A. Blonigen, R.B. Davies, G.R. Waddell, and H.T. Naughton. "FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment," NBER Working Paper No. 10939, December 2004, and "Spacey Parents: Spatial Autoregressive Patterns in Inbound FDI," NBER Working Paper No. 11466, July 2005.

"

Paul Krugman: Letter to the Secretary: "Paul Krugman sends a Dear John letter:



Letter to the Secretary, Dear John Snow, by Paul Krugman, NY Times: Dear John Snow, secretary of the Treasury:

I'm glad that you've started talking about income inequality, which in recent years has reached levels not seen since before World War II. But if you want to be credible on the subject, you need to make some changes in your approach.

First, you shouldn't claim, as you seemed to ..., that there's anything meaningful about the decline in some measures of inequality between 2000 and 2003. Every economist realizes that ... 'much of the decline in inequality during that period reflected the popping of the stock market bubble,' which led to a large but temporary fall in the incomes of the richest Americans.

We don't have detailed data ... yet, but the available indicators suggest that after 2003, incomes at the top ... came roaring back. ... I find it helpful to illustrate ... with a hypothetical example: say 10 middle-class guys are sitting in a bar. Then the richest guy leaves, and Bill Gates walks in. Because the richest guy in the bar is now much richer than before, the average income in the bar soars. But the income of the nine men who aren't Bill Gates hasn't increased, and no amount of repeating "But average income is up!" will convince them that they're better off.

Now think about what happened in 2004 ... a small fraction of the population got much, much richer. ... In effect, Bill Gates walked into the bar. Average income rose, but only because of rising incomes at the top.

Speaking of executive compensation, Mr. Snow, it hurts your credibility when you say, as you did ..., that soaring pay for top executives reflects their productivity and that we should "trust the marketplace." Executive pay isn't set in the marketplace; it's set by boards ... And executives' pay often bears little relationship to their performance. You yourself ... are often cited as an example. When you were appointed to your present job, ... the performance of the company you had run, CSX, was "middling at best." Nonetheless, you were "by far the highest-paid chief in the industry." ... So my advice on the question of executive pay is: don't go there.

Finally, you should stop denying that the Bush tax cuts favor the wealthy. ... [U]sing the right measure — the effect of the tax cuts on after-tax income — the bias toward the haves and have-mores is unmistakable. ... once the Bush tax cuts are fully phased in, they will raise the after-tax income of middle-income families by 2.3 percent. But they will raise the after-tax income of people ... with incomes of more than $1 million, by 7.3 percent.

And those calculations don't take into account the indirect effects of tax cuts. If the tax cuts are made permanent, they'll eventually have to be offset by large spending cuts. ... that means cuts where the money is: in Social Security and Medicare benefits. Since middle-income Americans will feel the brunt of these cuts, yet received a relatively small tax break, they'll end up worse off. But the wealthy will be left considerably wealthier.

Of course, my suggestions about how to improve your credibility would force you to stop repeating administration talking points. But you're the secretary of the Treasury. Your job is to make economic policy, not to spout propaganda. Oh, wait."

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Social Justice and Global Trade: "Joseph Stiglitz discusses trade liberalization and asks how to reform the global trading system to 'enhance the chances that trade and globalization come closer to living up to their potential for enhancing the welfare of everyone.':



Social Justice and Global Trade, FEER, March 2006, By Joseph Stiglitz: The history of recent trade meetings—from Seattle to Doha to Cancun to Hong Kong—shows that something is wrong with the global trading system. Behind the discontent are some facts and theories.

The facts: Current economic arrangements disadvantage the poor. Tariff levels by the advanced industrial countries against the developing countries are four times higher than against the developed countries. The last round of trade negotiations, the Uruguay Round, actually left the poorest countries worse off. While the developing countries were forced to open up their markets and eliminate subsidies, the advanced developed countries continued to subsidize agriculture and kept trade barriers against those products which are central to the economies of the developing world.

Indeed, the tariff structures are designed to make it more difficult for developing countries to move up the value added chain... As tariffs have come down, America has increasingly resorted to the use of non-tariff barriers as the new forms of protectionism. Trade agreements do not eliminate protectionist sentiments or the willingness of governments to attempt to protect producer and worker interests.

The theories: Trade liberalization leads to economic growth, benefiting all. This is the prevalent mantra. Political leaders champion liberalization. Those who oppose it are cast as behind the times, trying to roll back history. Yet the fact that so many seem to have been hurt so much by globalization seems to belie their claims. ...the details of the trade agreements—make a great deal of difference.

That Mexico has done so poorly under NAFTA has not helped the case for liberalization. If there ever was a free trade agreement that should have promoted growth, that was it, for it opened up for Mexico the largest market of the world. But growth in the decade since has been slower than in the decades before 1980, and the poorest in the country, the corn farmers, have been particularly hurt by subsidized American corn.

The fact of the matter is that the economics of trade liberalization are far more complicated than political leaders have portrayed them. There are some circumstances in which trade liberalization brings enormous benefits—when there are good risk markets, when there is full employment, when an economy is mature. But none of these conditions are satisfied in developing countries. With full employment, a worker who loses his job to new imports quickly finds another; and the movement from low-productivity protected sectors to high-productivity export sectors leads to growth and increased wages. But if there is high unemployment, a worker who loses his job may remain unemployed. A move from a low-productivity, protected sector to the unemployment pool does not increase growth, but it does increase poverty. Liberalization can expose countries to enormous risks...

Perhaps most importantly, successful development means going stagnant traditional sectors with low productivity to more modern sectors with faster increases in productivity. But without protection, developing countries cannot compete in the modern sector. They are condemned to remain in the low growth part of the global economy. South Korea understood this. Thirty-five years ago, those who advocated free trade essentially told South Korea to stick with rice farming. But South Korea knew that even if it were successful in improving productivity in rice farming, it would be a poor country. It had to industrialize.

What are we to make of the oft-quoted studies that show that countries that have liberalized more have grown faster? Put aside the numerous statistical problems that plague almost all such “cross country” studies. Most of the studies that claim that liberalization leads to growth do no such thing. ... Studies that focus directly on liberalization—that is, what happens when countries take away trade barriers—present a less convincing picture that liberalization is good for growth.

But we know which countries around the world have grown the fastest: they are the countries of East Asia, and their growth was based on export-driven trade. They did not pursue policies of unfettered liberalization. Indeed, they actively intervened in markets to encourage exports, and only took away trade barriers as their exports grew...

The point is that no country approaches liberalization as an abstract concept... Every country wants to know: For a country with its unemployment rate, with its characteristics, with its financial markets, will liberalization lead to faster growth?

If the economics are nuanced, the politics are simple. Trade negotiations provide a field day for special interests. ... Exporters want others’ markets opened up; those threatened by competition do not. Trade negotiators pay little attention to principles... They pay attention to campaign contributions and votes.

In the most recent trade talks, for example, enormous attention has been focused on developed countries’ protection of their agricultural sectors—protections that exist because of the power of vested agricultural interests there. Such protectionism has become emblematic of the hypocrisy of the West ... Some 25,000 rich American cotton farmers, reliant on government subsidies for cotton, divide among themselves some $3 billion to $4 billion a year, leading to higher production and lower prices. The damage that these subsidies wreak on some 10 million cotton farmers eking out a subsistence living in sub-Saharan Africa is enormous. Yet the U.S. seems willing to put the interests of 25,000 American cotton farmers above that of the global trading system and the well-being of millions in the developing world. If those in the developing world respond with anger, it is understandable.

The anger is increased by the United States’s almost cynical attitude in “marketing” its offers. For instance, at the Hong Kong meeting, U.S. trade officials reportedly offered to eliminate import restrictions on cotton but refused to do anything about subsidies. The cotton subsidies actually allow the United States to export cotton. When a country can export a particular commodity, it does little good to allow imports of that commodity. The U.S., to great fanfare, has made an offer worth essentially zero to the developing countries and berated them for not taking it up on its “generous” offer. ...

In short, trade liberalization should be “asymmetric”, but it needs to be asymmetric in a precisely opposite way to its present configuration. Today, liberalization discriminates against developing countries. It needs to discriminate in their favor. Europe has shown the way by opening up its economy to the poorest countries of the world in an initiative called Everything But Arms. Partly because of complicated regulations (“rules of origin”), however, the amount of increased trade that this policy has led to has been very disappointing thus far. Because agriculture is still highly subsidized and restricted, some call the policy “Everything But Farms.” There is a need for this initiative to be broadened. ... In fact, the advanced industrial countries as a whole would be better off, and special interests in these countries would suffer.

There is, in fact, a broad agenda of trade liberalization (going well beyond agriculture) that would help the developing countries. But trade is too important to be left to trade ministers. If the global trade regime is to reflect common shared values, then negotiations over the terms of that trade regime cannot be left to ministers who, at least in most countries, are more beholden to corporate and special interests than almost any other ministry. In the last round, trade ministers negotiated over the terms of the intellectual property agreement. This is a subject of enormous concern to almost everyone in today’s society. ... It reflected the interests of U.S. drug and entertainment industries, not the most important producers of knowledge, those in academia. And it certainly did not reflect the interests of users, either in the developed or less-developed countries. But the negotiations were conducted in secret, in Geneva. The U.S. Trade Representative (like most other trade ministers) was not an expert in intellectual property; he received his short course from the drug companies, and he quickly learned how to espouse their views. The agreement reflected this one-sided perspective.

Several reforms in the structure of trade talks are likely to lead to better outcomes. The first is that the basic way in which trade talks are approached should be changed. Now they are commercial negotiations. Each country seeks to get the best deal for its firms. This stands in marked contrast to how legislation in all other arenas of public policy is approached. Typically, we ask what our objectives are, and how we can best achieve them. ... If we began trade talks from this position of debate and inquiry, we could arrive at a picture of what a true development round look like. ...

As more and more countries have demanded a voice in trade negotiations, there is often nostalgia for the old system in which four partners (the U.S., EU, Canada and Japan) could hammer out a deal. There are complaints that the current system with so many members is simply unworkable. We have learned how to deal with this problem in other contexts, however, using the principles of representation. We must form a governing council with representatives of various “groups”—a group of the least developed countries, of the agricultural exporting countries, etc. Each representative makes sure that the concerns of his or her constituency are heard. ...

Finally, trade talks need to have more focus. Broadening the agenda also puts developing countries at a particular disadvantage, because they do not have the resources to engage on a broad front of issues.

The most important changes are, however, not institutional changes, but changes in mindset. There should be an effort on the part of each of the countries to think about what kind of international rules and regulations would contribute to a global trading system that would be fair and efficient, and that would promote development.

Fifteen years ago, there was a great deal of optimism about the benefits which globalization and trade would bring to all countries. It has brought enormous benefits to some countries; but not to all. Some have even been made worse off. Development is hard enough. An unfair trade regime makes it even more difficult. Reforming the WTO would not guarantee that we would get a fair and efficient global trade regime, but it would enhance the chances that trade and globalization come closer to living up to their potential for enhancing the welfare of everyone."

Fair Enough?: "When consumers pay extra for Fair Trade certified goods such as coffee, how much of the money goes to the farmers?:



Fair Prices for Farmers: Simple Idea, Complex Reality, by Jennifer Alsever, NY Times: Tim Terman always looks for the black and white certified Fair Trade logo when he buys bags of coffee ... He pays nearly twice as much — up to $10 a pound — as he would for conventional coffee, hoping the extra dollars go to struggling farmers. That's not always the case. ... Critics say too many fair trade dollars wind up in the pockets of retailers and middlemen, including nonprofit organizations.

But organizations involved in fair trade say the benefits do trickle down. Paul Rice, chief executive of TransFair USA, which controls Fair Trade certification in the United States, said the programs sometimes eliminate as many as five middlemen — a local buyer, miller, exporter, shipper and importer — and instead allow farmers to deal directly with an American wholesaler... 'When they do that, they can make dramatically higher prices, often two to three times higher.' ...

Fair trade programs, which promise a "fair wage" to family farmers, have grown rapidly. Today, 35,000 retailers and restaurants nationwide ... carry products bearing the fair trade label, an increase of 60 percent in three years. Since 1999, more than 100 million pounds of certified Fair Trade coffee, cocoa, tea, rice, sugar, bananas, mangoes, pineapples and grapes have been imported... "There are now 800,000 small-scale farmers benefiting from fair trade," said Rick Peyser, director of social advocacy at Green Mountain Coffee Roasters... Still, it can be difficult for consumers to quantify the benefit they bring to farmers ... Fair Trade labels don't list the amount paid to farmers; that ... requires research...

The coffee farmer who produced the one-pound bag of coffee purchased by Mr. Terman received $1.26, higher than the commodity rate of $1.10. But whether Mr. Terman paid $10 or $6 for that fair trade coffee, the farmer gets the same $1.26. "There is no reason why fair trade should cost astronomically more than traditional products," Nicole Chettero, a spokeswoman for TransFair USA, said. "We truly believe that the market will work itself out... As the demand and volume of Fair Trade certified products increase, retailers will naturally start to drop prices to remain competitive." ...

Each fair trade commodity has its own fair trade price, or the lowest price farmers will receive even if conventional commodity prices fall. That price is meant to allow them to cover their cost of production and improve their lives...

In some cases, the individual farmers may receive less than fair trade rules require because the money goes to cooperatives, which have their own directors who decide how much to pass on to farmers. "We did a breakdown and saw that sometimes, what they're paying farmers is only 70 cents to 80 cents a pound" for coffee instead of the entire fair trade price of $1.26, said Christy Thorns, a buyer at Allegro Coffee... Transfair, she said, doesn't "clearly communicate that to consumers."

Allegro is among a number of coffee and tea companies setting up their own systems to work directly with farmers ... Starbucks, which bought 11.5 million pounds of fair trade coffee last year, has created a buying program called CAFE, for Coffee and Farmer Equity Practices... Starbucks requires suppliers to provide receipts showing how each party in the supply chain was paid, but it has no fixed price for the coffee. Starbucks' Web site tells consumers about the program. ...

Without fair trade, supporters say, some farmers have no access to market information and can often be duped into selling to middlemen at below-market prices or, if prices fall, can be forced to quit farming. Ms. Chettero acknowledges the fair trade system is not perfect but said it is a step toward farmers improving their lives. If not for consumers and the fair trade system, she said, "Who else is going to do it?"

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