Are Sweatshops good for women in Bangladesh?

And interesting new NBER working paper from Rachel Heath and A. Mushfiq Mobarak (disclaimer: I haven’t had time to fully read it yet):

NBER Working Paper No. 20383

We study the effects of explosive growth in the Bangladeshi ready-made garments industry on the lives on Bangladeshi women. We compare the marriage, childbearing, school enrollment and employment decisions of women who gain greater access to garment sector jobs to women living further away from factories, to years before the factories arrive close to some villages, and to the marriage and enrollment decisions of their male siblings. Girls exposed to the garment sector delay marriage and childbirth. This stems from (a) young girls becoming more likely to be enrolled in school after garment jobs (which reward literacy and numeracy) arrive, and (b) older girls becoming more likely to be employed outside the home in garment-proximate villages. The demand for education generated through manufacturing growth appears to have a much larger effect on female educational attainment compared to a large-scale government conditional cash transfer program to encourage female schooling.

 

This looks like more evidence (if any more was needed) that anti-globalisation arguments against trade are wrong. IT’s also evidence from an interesting direction: gender equality.

Remember though, this isn’t evidence to suggest that sweatshops themselves are good. If you make this argument, you’re falling into the fallacy of one choice and just two options: either trade and sweatshops or no sweatshops and rural poverty. There is a third way: trade plus ongoing campaigning to improve conditions in garment factories, using the levers we have as consumers, though aid, and maybe (maybe, maybe) through trade agreements. While also trying raise human capital through every means possible to ultimately give women in developing countries as many options as those in our countries have. That’s the right way to think about this, I think.

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Does Fair Trade Work

An interesting looking new NBER working paper from Raluca E. Dragusanu, Daniele Giovannucci, Nathan Nunn reviewing the economics of fair trade.

From page 11:

In side-by-side comparisons, Fair Trade certified producers do receive higher prices, follow specified work standards, and use environmentally-friendly methods. We review this evidence, but also explore the more difficult questions of interpretation. Are the changes that are correlated with Fair Trade production also caused by certification or is some other factor like the entrepreneurial capacity of the producer affecting both outcomes? What factors make producers more likely to join Fair Trade? What may happen to the advantages of receiving a higher price from being a Fair Trade producer as more producers seek to join? After taking these factors into account, the balance of the evidence does suggest that Fair Trade works—but the evidence is admittedly both mixed and incomplete.

The Trans Pacific Partnership

I’ve blogged my objection to it before. Currently it is receiving some very good discussion from economists and political scientists:

1. Focusing on the economic impacts of tariffs Paul Krugman says it does not matter much for good or bad.

2. Dean Baker and Henry Farrell make offer the right response: the issue really isn’t tariffs but rather rules about intellectual property and the like.

3. And a couple of very interesting looking posts on the Monkey Cage.

As I said in my original post, my problem with free trade is the same as my problem with Abominable Snowmen: they don’t exist. Trade is never free — it is always enabled and bound by rules. And its outcomes depend on the nature of the rules. Whether the TPP is a good thing or not depends very much on the rules it contains. And the trouble, the fundamental problem with it, is that we — citizens of the democracies negotiating it, aren’t being told what rules are being negotiated into the document. Meanwhile lobbyists from various vested interests are actively trying to get rules shaped to serve their needs. Hence the problem

 

 

The trouble with free trade…

My reasons for opposing free trade are surprisingly similar to my reasons for opposing Abominable Snowmen. I oppose both, because neither exist. There is no such thing as free trade. The term is a marketing gimmick used to make a certain approach to trade sound appealing — free as in ‘born free’, as in ‘free at last’. In reality trade takes place everywhere on Earth bound by rules and regulations. (Consumer protection rules, labour laws, rules to prevent monopoly price gouging, rules to prevent theft…) Without these rules, exchange of all but the most primitive sort would be impossible.

Saying this isn’t the same as saying trade is bad (it’s not; it’s essential) or that globalisation is bad. But the rules that govern trade matter. They shape the outcomes we see from trade and exchange. And when the rules governing trade are inequitable there are usually welfare consequences. Indeed part of the reason New Zealand is a relatively well developed country is that we have rules that enable trade in a manner that is usually fairly fair. Rules developed and debated in the open and amongst a power structure of somewhat balanced countervailing forces, amongst the governing framework of democracy.

In the case of international trade things aren’t so simple. There is far greater potential for power imbalances, which reduces the odds of good rules. There is also often far too little transparency to international trade agreement negotiations. Yet transparency is crucial. Not only to let us know if the rules being negotiated are good ones but also because there are always be winners and losers from trade agreements, and if we are to have any idea of who these will be, we need to know what’s in the agreements in question.

This still isn’t an argument against international trade (it’s generally a very good thing). Rather it is an argument for transparent trade negotiations. Something we currently lack when it comes to the Trans Pacific Partnership trade agreement. And if you would like to know which aspects of your life your government is currently signing away as it negotiates this agreement, or if you just want other people to know to facilitate analysis and debate, the It’s Not Right petition is for you. You can sign it to call on the New Zealand government to make the text of the Trans Pacific Partnership available for public scrutiny. Signing takes all of two minutes, which is a very small price to pay to promote democratic deliberation.

The Evidence is in: Fair Trade Doesn’t Work!

As best I can tell, most people’s position on fair trade stems not from evidence but rather from their priors. The radical left dislikes fair trade because it involves – gasp – markets and (even worse) shopping. Meanwhile free-marketeers dislike it because it distorts markets and (even worse) involves compassion. And, to be fair, Guardian hugging, tree reading liberals like myself are probably positively disposed to it because we wanna split the difference and can sleep easier at night when reassured that it is possible to actually harness markets to generate more humane ends.

None of which has anything to do with evidence.

However, on the evidence front, via Paul Clist, via Lee Crawfurd, we find James Choi citing Bruce Wydick:

Fair-trade coffee isn’t a scam, but it is hard to find a development program that has attracted so much attention while having so little real impact. The most recent rigorous academic study, carried out by a group of researchers at the University of California, finds zero average impact on coffee grower incomes over 13 years of participation in a fair-trade coffee network. Low impact is due to a flawed program design: growers must pay for FLO (Fair-trade Labeling Organization) certification and bear the costs of compliance with fair-trade standards. When coffee prices exceed the $1.41 threshold (as they do today, with prices at around $2.50), all growers essentially receive the same market price. It is when coffee prices fall below this minimum price that the real benefits of the program kick in. But in these same years of low coffee prices, coffee growers flock to fair-trade certification, lowering the fraction of the fair-trade crop that can be marketed at the higher fair-trade price, thus neutralizing the benefits of the program.

What is more, fair-trade programs continue to encourage the cultivation of more coffee; the best thing for coffee growers around the world would be if everyone grew less.
–Bruce Wydick, Christianity Today, on the case for free-trade coffee

So, there we go, evidence has resolved the debate. And I can finally go back to drinking crappy instant, right.

Not so fast.

Because, as is often the case in the complicated world of development there’s a little more to the evidence than first meets the eye.

Here’s Reuben and Fort from ‘The Impact of Fair Trade Certification for Coffee Farmers in Peru’, which can be found in a recent issue of World Development (ungated link here), who do some nice propensity score matching to determine the impact of Fair Trade on producers. From the conclusion:

For both groups of (organic and conventional) farmers our results did not show significant effect of FT involvement in terms of higher household income. Net income of conventional FT farmers is partly affected by increased costs of hired labor and reduced revenues derived from other cropping activities and off-farm work. In line with results obtained by Valkila (2009), yield levels of organic FT farmers are slightly higher than their counterparts but no significant difference could be found, whereas a negative and significant yield difference was observed for FT conventional coffee farmers. The lack of a real price difference between FT and nonFT producers in both groups seems to be the main limitation for obtaining higher net benefits. The rather limited market for FT sales in the region and the high local coffee prices largely explain this fact. Consequently, FT prices are increasingly considered as a regional floor price offered by local traders to all coffee farmers and thus nonFT farmers reap similar benefits as part of an externality effect.

Even though, there are some significant difference in household expenditures patterns for FT producers that generally present higher levels of animal stocks, better access to credit and increments in the value of their agricultural assets during last years. In terms of general wellbeing, farmers in older FT cooperatives appear to be better-off than the ones in cooperatives with recent FT involvement. Additionally, FT farmers also invest more in house improvements and land-attached infrastructure than their nonFT counterparts. The improvements made in (organic) coffee production reveal another effect of FT in terms of providing more stable income to farmers that enables a gradually shift towards more specialized (organic) farming. 13

These findings largely corroborate FT effects registered in some earlier studies that report fairly modest direct income effects and highly uneven effects on parameters of health, education and migration (Arnould et al., 2009; Mendez et al., 2010; Barham et al., 2011). Similarly, major FT effects are registered in aspects of credit use and internal capitalization. In line with Arnould et al. (2009) we find that FT implications are strongly related to the length of cooperative participation. Since our study captures full household income, we could also register substitution effects in terms of land use and labor, resulting in a stronger FT coffee specialization and a decline in off-farm employment. This is the likely result of the behavioral change in risk attitudes that may be considered as the most important benefit from FT. It also indicated that FT plays a major role in the transition towards more entrepreneurial coffee production practices and attitudes.

The lack of many expected effects from FT can at least partially be attributed to the deficient distribution and use of the FT premium as perceived by the farmers. The fact that only a quarter of the total number of interviewed FT producers perceives any tangible benefits from the premium is a clear indication. Moreover, premium investments in social and collective infrastructure benefit FT and nonFT farmers alike. In addition, regional markets for coffee and labor are both influenced by the transition towards (organic) coffee production, occasioning generally higher output and input prices.

Whereas household-level welfare effects still appear to be limited, FT played an important role in the processes of recovery of the agrarian cooperatives and for the improvement of coffee production. FT farmers proved to be substantially more inclined to make in-depth investments, renting additional land and improving organic fertilizer use. In this respect, FT paved the way for quality upgrading of coffee production. Given the current proliferation of coffee standards and the increasing importance of premium segments, it is likely that FT producers in Junin province become attractive counterparts for delivering coffee under private labels. This is in fact already happening with the oldest FT cooperative La Florida that made the step towards multi-certification and started to deliver also under the Utz-Certified and Starbucks labels. Since sales to FT outlets remain constrained, FT paved the way for acceding more rewarding outlets served by private labels (see Ruben & Zuniga, 2011 for a similar case of competing labels in Northern Nicaragua).

Maybe subsequent studies will debunk this one, but for now I get to keep my priors. Fair trade: not a panacea, not perfect, but on average, in some ways at least, it almost certainly helps.

[Update: link fixed – thanks Simon]

Fair Trade and Unfair Critique

I could almost agree with this anti-fair trade whinge on the Guardian. I certainly think stronger unions in some third world countries would be a good idea. Yet two aspects of the article bug me.

First, the overarching intellectual framework which seems to be something along the lines of: fair trade can’t solve everything; therefore fair trade is no good. This is an obvious logical fallacy. Not to mention a tired tool of argument that some on the left never seem to tire of using. It’s true that fairtrade isn’t a panacea. But the history of the last century suggests that the search for grand social cure alls is a fool’s errand. What’s more – effecting structural change in other countries is often very hard to do. Which means we may be waiting a long time for the rise of unions. Which means that if fair trade helps in a small way in the meantime, why not do it? It’s better than no help at all.

Second parts of the article are at odds with other parts. Specifically:

By doing that it throws responsibility for making sure farmers and workers are fairly paid back on to consumers – who may or may not be able to afford to take their morals shopping, especially in a recession – rather than on the big businesses, the international traders, the manufacturers and the retailers that make substantial profits out of the goods they sell.

Fair trade alone cannot address the core problem of excessively concentrated markets in which a handful of overpowerful transnational corporations dictate terms of trade and suck profits up into their own coffers.

If the problem is corporate capture of the supply chain leading to low wages then surely fair trade importers, by avoiding leeching corporate monopsony, ought to be able to pay workers higher wages at no cost to the consumer.

Or, if fair trade really necessitates higher costs to the consumers, then this can’t be because corporate middlemen are currently taking a huge bite out of the commodity train. Unless the fair trade organisations are doing the same too. Which they aren’t.

If corporate trade practices are the issue for the types of products that fair trade services then the costs of fair trade won’t be born by consumers. And if consumers have to bear the costs then the issue can’t be the corporate supply chain. Just can’t.

That our author can’t see this makes me suspect her mind was never open to fair trade in the first place. To many markets, not enough structure, or something.

I’m interested in left wing alternatives to the world we live in. But I don’t think their pursuit should blind us to smaller but more probable wins.

Corporate Evil

In comments to my last post J. writes:

Corporations and the larger, increasingly global corporate state is evil. Full stop.

I’ve always been uncomfortable applying the word evil to very broad categories, such as ‘corporations’. But his comment reminded me of one other important point about global businesses and global trade: the issue is not purely economic, political economy is deeply important too.

There are no such things as free markets or free trade. Markets and trade always occur embedded in institutions – laws and norms that form the rules of the game. And these rules can make things considerably better or worse for workers above and beyond the pure economics of what is occurring. If you get good, fair rules workers will typically benefit most from trade. The trouble is that in countries such as China the rules aren’t good or fair. What’s more, the fact that they’re not good or fair reflects in part the impact of lobbying from business groups. Here’s Johann Hari writing in 2007.

Last year, the Chinese dictatorship announced a new draft of labour laws designed finally to allow Chinese workers like her – too late – some basic rights.

The new law would permit people like Lan and Meiren to join trade unions. It would give them the right to a written contract. It would give them the right to a severance payment. It would give them the right to change jobs freely. Where previously China’s labour rules were diffuse, dispersed and barely enforced, now they would be drawn together and backed with big fines.

The dissident-killing Chinese Communist Party didn’t propose this change out of a sudden flush of benevolence. They did it because the Chinese people have in increasing numbers been refusing to be tethered serfs for the benefit of Western corporations. Last year, there were 300,000 illegal industrial actions in China, a huge spate of “factory kidnappings” of managers, and more than 85,000 protests.

The Chinese people were showing they did not want to leap from a Maoist gulag to a market-fundamentalists’ sweatshop. They demanded a sensible compromise: strong trade and markets to generate wealth, matched by strong trade unions to stop markets devouring them. They want an end to grinding poverty, but one that doesn’t kill them as they get there.

But they bumped into a huge obstacle. Groups representing Western corporations with factories in China sent armies of lobbyists to Beijing to cajole and threaten the dictatorship into abandoning these new workers’ protections.

The American Chamber of Commerce – representing Microsoft, Nike, Ford, Dell and others – listed 42 pages of objections. The laws were “unaffordable” and “dangerous”, they declared. The European Chamber of Commerce backed them up.

Like I said, I have some trouble with the word ‘evil’, but lobbying China to be more repressive? That’s evil if ever I saw it.

 

 

iPods don’t exploit people, people do…

Update: Read this first. It turns out that Mike Daisey was making stuff up.

Chris Blattman finds himself on the horns of a familiar dilemma:

Mike Daisey was a self-described “worshipper in the cult of Mac.” Then he saw some photos from a new iPhone, taken by workers at the factory where it was made. Mike wondered: Who makes all my crap? He traveled to China to find out.

That is the tagline from this week’s This American Life, freely available as an mp3 this week. Often funny but also often horrifying: Child workers, terrible workplace injuries, and police state tactics. They have released reports on the Apple subcontractor from October 2010, May 2011, and September 2011.

I am of two minds. If even a tenth of the abuses are systematically true, then even the most ardent capitalist among you should be incensed.

On the other hand, I am in the midst of a randomized control trial of factory labor in Ethiopia. One reason is because I believe–and the early results suggest–that the improvements in poverty and work conditions and risk and well-being are huge. Huge huge.

When this choice is presented as a simple binary it is a very unappealing one. Buy iPods and support a system that is exploitative and abusive. Don’t buy iPods and leave people condemned to rural poverty. It’s an agonising choice. For what it’s worth I think the least worst option here is to buy the iPod. But the least worst option in this binary is not the same as the actual best available option in reality. There is a third way. It’s simple.

Continued global trade but with workers’ rights. Workers in factories in China and Ethopia would still receive low wages but they probably wouldn’t be quite as low as is currently the case, and their working conditions definitely wouldn’t be so bad.

And how could this happen? In a world of developing countries that were democratic and well governed, it would be easy: trades unions to offset the bargaining advantage of bosses; and the progressive implementation of some workplace safety laws brought about via the democratic process.

Trouble is, neither China and Ethiopia are democratic or well governed (although I guess the situation is slightly better in Ethiopia???).

Then what? This is where I think there is a very real role for consumer activism in developed countries. As much as possible, avoid products produced in situations where workers’ rights are violated. As much as possible, buy fair trade products. Write to companies to let them know that you’re doing this and why you’re doing this. Don’t tell them “don’t make stuff in China?”; tell them “make stuff in China but protect your workers?” Share this information. Fund entities devoted to obtaining this information.

This is an imperfect, partial solution. But it’s better than either of the horns of the dilemma presented above.

—

As a footnote. The other potential improvement here is to write labour standards into trade agreements (and actually follow up on this). Most economists hate this (“oh noes don’t limit teh free trade!”). Me I’m kind of in favour: I think in theory it would work. Although in practice, in the messy world of enforcement, political economy, unequal power, and trade agreement negotiations, it may well not.

Is Fair Trade Really Such a Good Idea?

Still recycling old posts while in the field. This one from here, written in 2006.

In a column written for the Times of London in 2004 English blogger Oliver Kamm had this to say about fair trade:

OXFAM, we learnt last week, is going to back a chain of “fair trade” coffee bars. Meanwhile Gap clothing company has disclosed that many of the factories that it uses in developing countries do not comply with minimum labour standards. For those consumers whose prime concern is Third World development, the proper course is clear: buy clothes at Gap and avoid Oxfam’s coffee.

The rationale of Oxfam’s venture is to lessen the hardship that coffee growers have suffered since coffee prices slumped in 1997. The organisation claims: “Coffee growers will win three times . . . They’ll be selling their coffee at a fair trade price; they’ll share directly in the profits and will also showcase their coffee to the UK.”

Unfortunately the sharp decline in world coffee prices is not only cyclical. Over the past decade, exchange-rate movements and new technology have made the Brazilian coffee industry more productive, while Vietnam has used its low wage costs to become a large and efficient producer. Low coffee prices are not the result of market failure, but a sign that there are too many producers.

Of course laissez-faire is no reputable response to the farmers’ hardship. Oxfam is right that there is an obligation to assist poor coffee farmers. But its Scargillite remedy of subsidising enterprises that can never be profitable will prevent the development of new businesses which could be. A better scheme is to support farmers’ efforts to diversify production.

Now, prescience, is unfortunately not one of Mr Kamm’s strong points. He supported the invasion of Iraq writing, on the day of Saddam Hussein’s capture, that:

American and British forces liberated Iraq with a scrupulous concern to avoid civilian casualties; our respect for due process and our commitment to the rule of law extend even to apprehending alive a man who deserves as no one else to burn in hell.

Yes, well, quite. I guess.

When it comes to coffee, almost immediately after Kamm declared that the decline in coffee prices was more than just cyclical, coffee prices began to rise again.
(more here)

Kamm’s predictive powers then can fairly safely be discounted. But what about his more substantive point about the futility of subsidising enterprises and the impact this on people’s incentives to diversify.

Kamm’s argument, in a nutshell, is that: by paying small farmers a premium, Oxfam is reducing their incentives to diversify into areas where they can someday earn enough to move out of poverty.

So does he have a point? Is Oxfam essentially barking up the wrong Coffee-tree, so to speak?

The short answer is no. Kamm is mistaken. His reified world of markets and incentives just doesn’t map to the reality of the small coffee growers that he claims to be concerned about.

This excellent paper by Oxford academic Alex Nicholls provides an in-depth discussion goes into more detail about why simple incentive based explanations such as Kamm’s don’t map to real world development economics.

The most important point is simply that lack of incentives isn’t the real reason why small coffee farmers aren’t diversifying. It’s lack of options and capabilities. For a start, absence of education means that farmers may well be unaware of alternatives available to them. And lack of training means that alternative employment options may be thin on the ground too. By funding schools, fair trade products help overcome this. On top of this, many farmers may not have the capital to switch crops or change careers. The small premium paid to farmers by fair trade organisations can help with this too. Fair trade coffee can also provide money for investment in infrastructure (infrastructure investment has been a significant contributing factor to the success of Brazilian agriculture). And, as the upturn in coffee prices has shown, coffee itself may not be the development dead end that Kamm predicts. Coffee production is certainly not the magic elixir of wealth, but – when topped up with a fair trade premium – it can ease the poverty burden and, through funding education and infrastructure, and by providing capital, what it can do is give farmers an important first step onto the ladder.

It’s very hard to see why mister Kamm opposes this.

Postscript: Earlier this year I was fortunate to attend an informal panel discussion at which the producer of a movie on fair trade spoke, along with the proprietor of a fair trade coffee company and a staff member from trade aid. One thing that came out of this was that, fair trade, like all development solutions is still a fraught process. It’s not a panacea and there are lots of potential problems ranging from large companies co-opting the label to tradeoffs when it comes to eliminating the middlemen from the export/import process.

Trade Deal Arm Twisting…

I’ve defended AusAID quite a bit lately, but in response the latest bad press all I can say is why? What are the NZ and Australian foreign ministries (and aid agencies) so caught up in pressing trade deals on the Pacific.

As I wrote in my recent DevPolicy blog post, the Development benefits of these agreements is almost certainly trivial (if not actually negative in some small way). So why?

Capital Controls (tweet tweet)

Consider this a Luddite’s version of a retweet: a must read in the Guardian, Kevin Gallagher on capital controls and trade agreements.

All the Views Fit to Print

More Aidwatch watching. Sorry…

Poor old Bill. Such is the life of a sceptic. While Jeffrey Sachs gets actual print column inches he’s reduced to the online edition.

Although having read his column, I’m inclined to think the FT may have been doing its print subscribers a favour.

I mean, the guy’s academic papers are great, and he clearly knows and cares a lot about development, but his polemics are excruciating. The FT missive being a case in point.

The problems:

1. He writes:  “Of the eight goals, only the eighth faintly recognises private investment, through its call for a “non-discriminatory trading system”. Which, although you’d never learn this from Easterly’s column, is because the first seven goals are not about means at all. They are measures of ends. And for what it’s worth teh aid (boo! hiss!) gets the exact same weighting as trade under goal 8 (have a look yourself).

2. He writes: “But current experience and history both speak loudly that the only real engine of growth out of poverty is private business, and there is no evidence that aid fuels such growth.” Except that there is evidence that aid leads to higher rates of economic growth. For example, here and here). It is true that the methodological issues associated with aid growth regressions mean that such evidence isn’t particularly reliable. But it’s evidence nonetheless. And the fact that we have difficulties finding more evidence may be as much a result of the difficulties inherent in cross country growth regressions, as a product of the limitations of aid. Complicated – yes. Uncertain – yes. But definitely not the same as “no evidence”.

3. Throughout the column he implies that almost all the campaigning effort associated with the MDGs has been about aid while there’s been near silence on trade. Once again, this just isn’t true. I mean have a read of Sachs’ book the End of Poverty. Trade is most definitely mentioned. Or have a look at the campaign platforms of MakePovertyHistory (NZ, UK) or the One Campaign. People campaign on trade. They really do.

4. And if you’re going to be pedantic about it, the econometric evidence that reducing remaining trade barriers would lead to sustained increased economic growth (different from static benefits) is, to be generous, about as strong as the evidence for an aid-> growth relationship.

Easterly laments the fact that aid sceptics get so little press. This is a dubious claim but let’s grant it for now. If it’s really so hard for Bill to make his voice heard, why, when he finally gets the chance, does he waste it with platitudes and erroneous claims? Why? I really have no idea.

[Update: More evidence for point 3 – Chris Blattman stumbles across Bono arguing Africa needs trade more than aid. Yes, Bono. Myopically aid focused advocates do. not. exist.]

Sweatshops and the fallacy of one choice and just two options

Well, Bill and Laura may be in abeyance, but the fun and games are continuing over at Aid Watch. Today taking the form of a guest post by Benjamin Powell making the case for sweatshops.

His argument will is a familiar one: poor jobs at poor wages are better than no jobs at all.

Which is correct as far as it goes, but it’s also a perfect illustration of what I’ve (rather inelegantly) decided to call the ‘fallacy of one choice and just two options’. It’s a popular right wing debating technique: either you’re with us or you’re with the enemy; if you’re in favour of protecting the environment then you’re also in favour of ransacking the economy; if you don’t support bombing the s##t out of the Middle East then you’re opposed to fighting terrorism; and if you’re opposed to sweatshops then obviously you’re in favour of protectionism and joblessness for people currently employed in them.

The thing is, in every one of these instances, there’s more than two choices: I am against you and your enemies; I’m in favour of protecting the environment by re-gearing the economy; I think terrorism is better fought through police work, and a political settlement over Israel/Palestine, combined maybe with targeted intervention.

And in the case of sweatshops: I want the workers to stay employed. But I also want their jobs and conditions to improve. Call it the third way, if you will.

Which means supporting initiatives to strengthen workers’ political rights in developing countries, and, particularly when this isn’t possible, sending a signals through the market via purchasing decisions (like buying fair trade), and maybe, just maybe, using trade rules, although only if this isn’t going to have major unintended consequences.

Sweatshops or unemployment – two lousy options. But the thing is, they’re not the only ones. And development, if it means anything, surely means trying to improve the options people have.

Friday Links! Somewhere Between Hair-shirted and Harebrained

Ah yes, the future, I’d been trying not to think about that. Matt Ridley has though, and he likes what he sees: free markets, free people and the triumph of  reason. Rather! Mark Boyle, on the other hand is, to put it mildly, somewhat less sanguine about progress and technology. In order to save our planet and ourselves he’d have us return to a neo-primitive past. Me? In my optimistic moments at least, I’d like to think they’re both wrong and that there’s some hope for the future somewhere between the harebrained and the hair-shirted, which is probably why I really enjoyed this review in OpenDemocracy of Ridley and Boyle’s recent books.

Sticking to the future for the time being, also worth a read is Charles Kenny’s critique of the New Malthusians at Foreign Policy.

Meanwhile, an interesting article at VoxEu points to the fact (I think?) that much (but not all) of the recent improvements in life expectancy in developing countries have come from reduced infant mortality.

Did someone say economics? As you’ll know this blog has a policy of not discussing economics without at least one mention of industrial policy. Here we go: a great debate at the Economist between Rodrik and Lerner on IP.

Speaking of economic debates, how ’bout that fiscal stimulus aye? Barry Eichengreen has an interesting column at Project Syndicate.

While, in a feisty thread at Aidwatch, Michael Clemens offers a nice defence of quantitative research:

Numbers are one of many ways to organize information. While they can in some cases have the drawback of oversimplifying complex phenomena, they have the large advantage of creating transparency in how hypotheses are formulated and tested (provided one takes the time to study quantitative methods), and thus contribute to the falsifiability of claims.

And, closing out the economics section of this post, are people happier when insulated from market mechanisms? Some evidence.

Back in the qualitative world: a death in the Middle East. Not just any death though; one that makes the media; one that re-makes it; one that is made by it…Interesting analysis by David Kenner, Adam Shatz and Glen Greenwald.

Finally, having offered a qualified defense of AusAID in the face of a not particularly high quality media storm, it’s worth noting these two articles, both good and both pretty damming. The Crikey article is part of a series, with the rest of the series available to subscribers to that news-site.

[Update: just stumbled across a really good read – Michael Clemens on the Congo at 50.]

Link Friday

Starting with industrial policy…

At VoxEU Ann Harrison and Andres Rodriguez-Clare make the case for “soft industrial policy”…

…whose goal is to develop a process whereby government, industry, and cluster-level private organisations can collaborate on interventions that can directly increase productivity. The idea is to shift the attention from interventions that distort prices to interventions that deal directly with the coordination problems that keep productivity low in existing or raising sectors. Thus, instead of tariffs, export subsidies, and tax breaks for foreign corporations, we think of programmes and grants to help particular clusters by increasing the supply of skilled workers, encouraging technology adoption, and improving regulation and infrastructure. While “hard” industrial policy is easier to implement than “soft” industrial policy measures, tariffs and subsidies become entrenched and are more easily subject to manipulation by interest groups.

The article is an excellent overview of the industrial policy debate, and their suggestion certainly has appeal. As always though, I’m still not confident that what they’re arguing for could really work in the institutional environment of developing countries, or that it would be any less subject to manipulation by interest groups than traditional industrial policy. Still, well worth a read.

Meanwhile, industrial policy is now on the menu at the World Bank, courtesy of their interesting new chief economist Justin Lin. And at Poverty to Power Duncan Green reviews some of Lin’s suggestions for industrial policy, offering similar concerns about feasibility in less than optimal institutional environments. To which Lin offers a thoughtful response.

Sticking with Oxfam, Oxfam New Zealand, spurred by last year’s Ministerially mandated change of focus to New Zealand’s aid programme (the core focus now being on economic development), have produced a really interesting piece of research [pdf] on what might work in terms of aid for economic development in the Pacific.

Also on the subject of aid, Owen makes an uncharacteristic error in attributing an incorrect figure to William Easterly. And yet the underlying point of his post is correct and bares repeating. The West really, really hasn’t given that much aid to developing countries:

The G-20 countries have, over the whole history of aid, given less aid to sub-Saharan Africa than they spent on fiscal stimulus in the single year of 2009.

Keeping the segues flowing, William Easterly is at least 50 percent correct in his most recent post at AidWatch:

Here’s why direct solutions to problems cannot foster development. Each direct solution depends on lots of other complementary factors, so the solutions can seldom be generalized across different settings; Solutions must fit each local context. Solutions that generate the highest payoff in each setting should be a higher priority than the lowest payoff solutions. Since there is little or no feedback on how well each solution is working in each local situation, there is little possibility for any such adjustments.

Hear, hear.

Where his post falls apart is in it’s extolling of markets and democracy as the best possible means of finding solutions to the complexities of context. The invisible hand is a miraculous allocational tool, and functioning markets have a critical role to play in enhancing human welfare. But markets are embedded in institutions and when institutions are poor markets are often absent or have perverse outcomes. And in most developing countries institutions are poor. Similarly, democracy is an incredibly good thing. And it’s certainly the least worst means of governance that humans have developed. But in countries where the nation state sits awkwardly against identity and informal institutions, democracy struggles. It’s not a panacea.

Which isn’t to say that economic markets or democratic polities are bad things, even in the most troubled developing countries, but rather that they aren’t the sole answer to the curly problems of aid and development. They’re only part of the answer: compliments to good aid and hard work in determining what works in governance; not alternatives.

Finally (and by now I’m all out of segues) Johann Hari attributes the commodity price crisis, not to rising demand in China, not to supply shocks, not even to ethanol, but rather to investment banks working the futures market. Is he correct? I don’t know. If he is, he’s certainly right about one thing: morally, if not legally, that’s an incredible crime.

Import Substitution vs the Washington Consensus

…and required Monday reading

Dani Rodrik examines some evidence on the ‘Latin American Question’: Import Substitution vs the Washington Consensus

For all its faults, IS [Import Substitution] promoted rapid structural change.  Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones.  So much for the inherent inefficiency of IS policies!

Under WC [Washington Consensus], firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor.  The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services.  In other words, the WC ended up promoting the wrong kind of structural change.

[Update: William Easterly uses football to argue that Rodrik is seeing patterns when, in reality, randomness prevails. I’m not convinced: distinct trends in 15 year continent wide averages being based too shorter time frame? Please. That’s like saying the Great Depression was nothing more than a series of unrelated random downturns in a whole heap of countries, by coincidence at the same time. On the other hand, Ted in comments, offers a more plausible rejoinder to Rodrik: that the Washington Consensus didn’t start at one particular moment and wasn’t one particular thing. Also Bill Easterly’s subsequent comment that import substitution arguably deserves some blame for the debt crisis (i.e. it’s high levels of growth were borrowed not owned) seems plausible to me.]

Hunger thy Neighbour

Walden bellow writes:

The Philippines provides a grim example of how neoliberal economic restructuring transforms a country from a net food exporter to a net food importer. The Philippines is the world’s largest importer of rice.

At a first glance this seems like a meaningless charge to lay at the feet of neo-liberalism. As a country develops, it makes perfect sense that it will start producing less of its own food. Moreover, if rice can be imported cheaper from elsewhere, consumers of rice benefit, and factors of production previously involved in rice growing can reallocate into other enterprises or be compensated. This is hardly the end of the world. England imports most of its food. Is anyone suggesting it should de-industrialise to change this?

On its own a change from being a food exporter to being a food importer is consistent with rising welfare, and orthodox trade theory would suggest it is unproblematic.

However

Imagine for a moment you’re living in a world where demand for food is about to outstrip supply. Where food prices are about to start rising rapidly. A world a bit like this one described by Jeremy Harding in the London Review of Books. A world a bit like our own prior to the Great Recession. What happens in that kind of world? One thing which might happen, if you’re really lucky, is that some bright spark will come up with a new Green Revolution, a way of producing food much more efficiently. If this happens the day of reckoning gets postponed a while.

But if it doesn’t happen things get scary. In the Philippines case, initially, if the price of rice rises enough, the country might become a net food exporter again. Farmers will be better off; urban consumers worse. Walden Bello might be happy. However, if prices keep rising, acquiring food becomes a real problem for anyone who is not either wealthy or benefiting from rice exports. Then political economy kicks in. All of a sudden the masses start asking: ‘Why are we exporting rice when people here starve?’; ‘Why should farmers get rich while others suffer?’ These are perfectly reasonable questions. And if prices rise enough, and if enough people are made worse off, governments will likely act. Ideally, by taxing farm profits and redistributing income to those hurting from food prices. But such policies – tax and transfer – don’t always work very well in the shaky institutional environments of developing countries. Instead, what is likely is export controls – preventing or restricting the export of rice. This is pretty much what Argentina did with beef in 2006.

Such policy makes sense for an individual country. Just like raising tariffs did for individual countries in the face of the Great Depression. They make sense for any one individual country acting on its own. But if everyone does it (or at least all the big food exporters do) then everyone becomes worse of. Global trade in food starts to unravel compounding the already existing issues and everyone has less of everything. Call it hunger thy neighbour. Coming to a planet near you*.

*Or, more accurately, maybe coming to a planet near you. But let’s really, really hope it doesn’t.

Trade and Poverty

Ever wondered how much multilateral tariff reduction reduce poverty globally? or whether a simple unilateral reduction in their own tariffs would be beneficial for developing countries?

Anderson, Cockburn and Martin (ACM) have some answers for you at Vox EU*

One day, when I’m not preparing a talk in Tok Pijin for later this afternoon and a seminar for tomorrow I plan to blog more on trade and try to clarify my own thoughts properly, but for now:

• ACM find that multilateral reductions and unilateral reductions would, on average, benefit the poor in the countries modeled. Yet, while the overall benefit is not to be sniffed at (approx 3% global reduction in poverty) and well worth realising, it remains small in comparison to global poverty levels. Trade policy is important but,  despite all the sound and fury expended over it in the 1990s, it doesn’t come anywhere near explaining the totality of global poverty (although see next point).
• As I understand it (without having read the actual paper) the article details static benefits associated with changes in relative prices. Therefore someone like Ha Jun Chang could counter and defend developing country tariffs by claiming that even if there are static benefits for developing countries from lowering their own tariffs, what really matters in the long run is the potential positive benefits of such tariffs on economic growth (the industrial policy argument).
• Note that the impacts of the different tariff cuts ACM model vary quite significantly from country to country (context matters!) and that the impacts will vary within countries too. What might be good for the poor on aggregate will still hurt some who are poor. In response to this ACM call for compensatory policies. Good idea and I agree. Noting though that such policies are much easier to implement in Sweden than Sierra Leone.
• Also note that in the article developing country government revenue losses are modeled as significant. ACM’s solution is Aid for Trade.

* These are modeled answers of course. Usual disclaimer applies.

Industrial Policy

I missed this when it came out, but well worth a read – Dani Rodrik at Project Syndicate on Industrial Policy.

I’m persuaded: good industrial policy aids economic development; it may even be essential (can you name any country which has developed without something resembling IP?*)

As for what ‘good’ means when it comes to industrial policy, Rodrik provides a handy how to:

First, industrial policy is a state of mind rather than a list of specific policies. Its successful practitioners understand that it is more important to create a climate of collaboration between government and the private sector than to provide financial incentives. Through deliberation councils, supplier development forums, investment advisory councils, sectoral round-tables, or private-public venture funds, collaboration aims to elicit information about investment opportunities and bottlenecks. This requires a government that is “embedded” in the private sector, but not in bed with it.

Second, industrial policy needs to rely on both carrots and sticks. Given its risks and the gap between its social and private benefits, innovation requires rents – returns above what competitive markets provide. That is why all countries have a patent system. But open-ended incentives have their own costs: they can raise consumer prices and bottle up resources in unproductive activities. That is why patents expire. The same principle needs to apply to all government efforts to spawn new industries. Government incentives need to be temporary and based on performance.

Third, industrial policy’s practitioners need to bear in mind that it aims to serve society at large, not the bureaucrats who administer it or the businesses that receive the incentives. To guard against abuse and capture, industrial policy needs be carried out in a transparent and accountable manner, and its processes must be open to new entrants as well as incumbents.

Excellent advice. Or, at least, excellent advise for Sweden or any other part of the reasonably well governed world. The trouble is the developing countries of our planet don’t have governments like Sweden – think low capacity bureaucracies, corruption, clientelism, unstable polities. And the real question – the real curly question – is how do you get good industrial policy from a bad government? And, in the absence of this, is bad industrial policy better than nothing?

* Hong Kong maybe. But they hardly count given their circumstances and given their ‘policy’ of permitting flagrant violations of intellectual property rights.