Category Archives: Political Transitions

Summary of the 6th InsTED Workshop at the University of Nottingham

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We would like to thank The School of Economics, University of Nottingham, for hosting and sponsoring the 6th InsTED Workshop.  We would also like to thank the Nottingham School of Economics for incorporating The World Economy Lecture into the InsTED Workshop, and Wiley for sponsoring this.  The workshop took place from September 20th-22nd, 2019.  Special thanks go to Roberto Bonfatti, Giovanni Facchini, and Alejandro Riaño as joint chairs of the local organizing committee, and Hilary Hughes for taking care of the local organizational details.

The program comprised of 24 papers ranging over four broad topics at the intersection of institutions, trade and economic development.  The first was factor allocation, productivity, and economic development, focusing on how income shocks are transmitted through distortions in the economy, and how the distortions might be removed to promote development.  The second topic examined trade policies, externalities, and agreements, by developing frameworks that go beyond the conventional two-good or partial equilibrium structures, and introducing the possibility that trade agreements may actually generate negative externalities rather than just removing them.  The third concerned international trade and economic development, again focusing on distortions but this time through trade policies and also labor market institutions such as minimum wages.  The fourth was on political institutions and economic development, focusing on different aspects of the role of democracy on capital formation and growth.

There now follows a summary of all the papers presented at the workshop, organized under the four topic headings above.  A bibliography, together with links to papers where available, is provided at the end.  Please note that for brevity the summary mentions presenters’ names but not those of their co-authors.  This information is contained in the bibliography.

Factor Allocation, Productivity, and Economic Development

An influential view in economics holds that the efficient allocation of resources to production is central to the process of increasing productivity and hence economic development.  Following this view, the market-and-institutions approach aims to set institutions and government policies so that development emerges spontaneously through the efforts of individuals.

Income Shocks, Distortions and Development

The first keynote address by Robin Burgess considered the “stubborn poverty” problem: the issue that even as countries build momentum behind growth and development, many people are left behind in poverty.  The purpose of the paper he presented was to understand why some people stay poor even as growth and development take off, with the ultimate objective of designing policies to facilitate the movement of the poorest out of poverty as part of the process of economic development.  Many government policies already exist for this purpose that make available credit, training, and grants to promote entrepreneurship.  In motivating his talk, Burgess argued that we need to understand why people stay poor even when such policies are available in order to evaluate the extent to which policy programs to mitigate poverty can be effective.

In essence, the paper tests between two views of why people stay poor.  According to the first view, there is equal access to opportunity, but people have different innate mental and physical traits that ultimately determine their standard of living.  According to this view, peoples’ allocation of their talents to the production process is efficient, and the only way to lift them out of poverty is through social protection programs facilitated through the development process.  A crucial implication of the fact that the talents of the poor are already efficiently allocated is that making more assets available to them will not help lift them out of poverty in the long run.  According to the second view, it is not variation in peoples’ talents that determines their standards of living but variation in their access to economic opportunities.  The talents of those who lack access to opportunities are consequently misallocated.  A crucial implication of this second view that contrasts with the first is that a capital transfer will help to facilitate the efficient allocation of the talents of the poor, thus helping to lift them out of poverty, and facilitating development in the process.

The test is implemented using a randomized controlled trial that implements a positive shock to capital over 23,000 households across the wealth distribution in Bangladesh over seven years.  Of these, 4,000 households were randomly allocated an endowment of one year’s worth of personal consumption expenditures.  The allocation was the same across households, but households started with different asset baselines due to pre-existing variation.  The surprising result of the study is that households whose asset base is pushed over a threshold are then able to accumulate capital for themselves, while those below the threshold are not.  This suggests the existence of a poverty threshold or ‘trap’, whereby only transfers large enough to push beneficiaries over the threshold will reduce poverty in the long run.  The implications are profound and far-reaching.  Previous tests may have falsely attributed support to the first view of why people stay poor by failing to make transfers that were sufficiently large to push people over the threshold.  And policies and institutional changes to facilitate the availability of credit, say, must make capital available to the poor on a sufficiently large scale to push them past the poverty threshold if they are to move into the range where they can allocate their talents efficiently.

Technological innovations that foster trade integration, especially in shipping technology, create positive income shocks that may reduce conflict, in turn promoting economic growth and development.  The paper presented by Reshad Ahsan tests the first part of this proposition against an impressive 250 year sweep of data spanning 1640-1896.  The paper tests the idea that the decline in intra-European conflict from the late Middle Ages to World War One can be explained partly by the increase in Atlantic trade.  It finds that if any two European countries jointly increase their trade integration with the New World by one standard deviation, then the probability that they will be at war with each other decreases by 12.33 percentage points; an economically significant reduction from a baseline probability of war of 14.3 percent.  The endogeneity of New World integration is addressed using exogenous, weather-based shocks to trade between Europe and the New World.

Climate change represents another kind of shock that, through yield volatility, is having a negative effect on the incomes of poorly insured farmers in developing countries. João Paulo Pessoa presented a paper that examined two different channels through which yield volatility can have an effect on the incomes of poor farmers in India.  The paper develops a general equilibrium framework with portfolio choice to allow farmers to respond to a decline in yields by substituting towards other crops.  The model also captures risk aversion among farmers.  So it can explain how farmers may not substitute away from crops whose average yields decline because they fear greater yield volatility from the crops that they might otherwise have substituted towards.  The model can also capture declines in welfare from the direct effect of increases in the volatility of crop yields.  Despite allowing for these subtleties, they find that the most important negative welfare effects of climate change on poor Indian farmers come through sharp falls in mean crop yields through temperature rises.

Conflict, Misallocation, and Development Failure

If positive income shocks can facilitate development then negative income shocks can certainly precipitate development failure through the onset of intranational conflict and ultimately civil war.  The paper presented by Beatriz Manotas-Hidalgo re-examined the extent to which income shocks cause conflict across Africa, by studying how different types of commodity price shock induced by weather shocks affect the possibility not just of armed conflict but of ‘civilian conflict’ such as riots as well.  Her results confirmed the view that when a society is more ethnically fractionalized, a negative income shock increases the probability of conflict.  But surprisingly, she also showed that while positive agricultural and mineral price shocks increase the probability of civilian conflict, they decrease the probability of armed conflict.  This heterogeneity emphasizes the importance of moving beyond a simple ‘opportunity cost of conflict’ view in seeking to understand how conflict arises.

Hâle Utar presented a paper examining the effects of violence on allocation by focusing on the Mexican drug war.  The drug war brought about a surge in violence as a result of which the homicide rate tripled from 800 to 2400 between 2000 and 2010.  Utar assumes that drug-related violence disrupts the ability of productive factors to allocate to the production process, allowing her to use the homicide rate as an instrument for violence that causes negative income shocks through allocation failure.  Her results show that doubling the homicide rate brings about a 4 percent reduction in plant-level employment, a 6 percent reduction in output, a 2 percent increase in the price level and a 4 percent reduction in productivity.  These magnitudes are significant enough to bring about plant closures and cause long-term damage to the Mexican economy.

Infrastructure, Uncertainty, and Economic Development

It is tempting to think that improvements in infrastructure should always help with the process of economic development by facilitating the efficient allocation of resources across a national economy.  But Niclas Moneke showed that was not the case for Ethiopia when the provision of infrastructure was in the form of a road network that led to the entry of foreign firms that were more productive than domestic ones.  Offsetting this effect, however, was the introduction of an electricity network that allowed domestic manufacturing firms to adopt modern technology, thereby enabling them to adopt modern technology and increase productivity.

Moneke was able to obtain remarkably detailed individual-level occupational choice data for Ethiopia in three waves spanning 1999 to 2016.  To address endogeneity concerns over the location of the electricity network, he exploited plausibly exogenous variation in a location’s electrification status relative to newly opened hydropower dams.  To address endogeneity concerns over the location of the road network, he constructed a least-cost network arising from an implementation of Kruskal’s and Boruvka’s minimum-spanning tree algorithms to solve for a single, purely distance-driven road network that connects all district capitals with at least one road.  From this approach, he was able to present causal evidence that improved transport infrastructure causes decreases in manufacturing employment. But he also showed that this adverse effect of improved market access on manufacturing is reversed via improved productivity with additional access to electricity.

Trade Policies, Externalities, and Agreements

It is now broadly accepted amongst economists that international trade policies can create negative externalities, in which case a key purpose of a trade agreement is to find a way to neutralize those externalities while liberalizing trade in the process.  These insights have been established within the context of classic two-good or partial equilibrium models, wherein trade is assumed to be balanced.

New Trade Policy Models that Go Beyond the Classic Two-Good or Partial Equilibrium Structures

The second keynote address by Giovanni Maggi considered the widespread controversy surrounding so-called ‘deep trade agreements’ such as the Transatlantic Trade and Investment Partnership and the Comprehensive Economic and Trade Agreement.  (Note that the two keynote addresses were sequenced to suit the schedules of our speakers.)  Maggi explained that, according to the dominant paradigm in the economics of trade agreements, unilateral trade policy creates a terms-of-trade externality, and the purpose of a trade agreement is to internalize this externality, thus raising world welfare.  Despite opposition from some quarters, this view underpins the broad sense that ‘shallow trade agreements’ concerning tariffs have broadly been beneficial to the countries that have signed them over the post-World War II period.  However, recently there has been far more controversy around the deep agreements that also impose restrictions on so-called behind-the-border measures such as regulations covering the environment, investment, and labor standards.  Maggi highlighted that this controversy centers on the fact that lobbying by firms appears to be generating externalities of its own through these agreements, rather than agreements neutralizing pre-existing externalities.

Maggi presented a model in which either shallow or deep agreements are possible.  There is a continuum of small countries, which isolates the role of lobbying by ruling out terms-of-trade manipulation by individual countries.  There is also a large number of goods, and each country can produce multiple goods, each from a specific factor with which it is endowed.  Crucially, production and export subsidies are not allowed in his framework, which creates a role for lobbying.  As a baseline, he first considered a model with no domestic distortions.  The outcome in this set-up is a shallow trade agreement involving tariffs only, that increases welfare by pitting exporter interests against import-competing interests. In the non-cooperative outcome, only import-competing interests are represented and this undermines efficiency.  In a shallow agreement, exporter interests are also represented, being pitted against import-competing interests, giving rise to countervailing lobbying.  In effect, in an agreement governments collude to achieve a more efficient distribution that accommodates the interests of exporters, which improves national and global welfare.

His talk then moved on to consider deep agreements and the circumstances under which they may actually undermine welfare.  He did this by first introducing local consumption externalities to the framework, such as local pollution generated by cars.  This provides a rationale for domestic policy intervention and thus creates a role for deep agreements.  In non-cooperative equilibrium, consumption taxes are set at their efficient Pigouvian levels, so anything that causes a change from these levels is bad for welfare.  The cooperative equilibrium of an agreement reduces efficiency since governments collude to favor producers at the expense of consumers.  Second, he replaced the consumption externalities with production externalities, such as local pollution generated by firms.  In this case, the trade agreement pits domestic producers against foreign producers since they have opposing interests regarding domestic taxes.  Assuming that the power of producers is reasonably symmetric, and agreement restores the countervailing feature of lobbying, this time across interest groups in different countries, an agreement can increase welfare.  As Maggi acknowledged, this framework ‘stacks the deck’ against finding positive welfare effects of trade negotiations by ruling out market power and cross-border externalities.  Towards the end of his talk, he introduced terms-of-trade effects and showed that a deep trade agreement will only reduce global welfare if the aggregate political power of producers is sufficiently large to negate the benefit from the agreement of neutralizing the terms-of-trade externalities.

Industrial policy has risen up the policy agenda in many countries recently.  The paper presented by Ahmad Lashkaripour develops a model that makes it possible to consider optimal trade and industrial policy simultaneously in a general equilibrium setting, while the prior literature on industrial policy tends to focus focuses only on a partial equilibrium setting.  Lashkaripour’s model has multiple industries featuring increasing returns to scale, and two types of policy instrument: industry-level export and import taxes, referred to as instruments of trade policy; industry-level production and consumption taxes, referred to as instruments of domestic policy.

The first setting that Lashkaripour explored was one of restricted entry, whereby the number of firms in a given industry is given.  Only the home government is allowed to set policy while the rest of the world remains passive.  In this case, import taxes are shown to be redundant: optimal export taxes are regulated by the industry-level trade elasticity and equal to the optimal mark-up of a multi-product monopolist.  Meanwhile,  optimal production taxes are corrective Pigouvian subsidies that eliminate firm-level mark-up heterogeneity in the local economy.  Surprisingly, when domestic policies are available, optimal trade taxes are identical to those in a competitive model; they do not target the profit-shifting margin.  The next setting was one of free entry.  Here, taxes are able to induce firm delocation across international borders and industries.  As a result, import taxes are no longer redundant and optimal production taxes no longer serve only a basic Pigouvian function.  Instead, the optimal policy reflects the fact that each instrument plays a distinctive role in improving the terms of trade.  An interesting question that can be addressed within this framework is how the unilaterally optimal policy compares to an optimal cooperative policy that eliminates inefficiencies at the global level.  Lashkaripour used his framework to argue that if industry-level trade elasticities are sufficiently large, while scale elasticities exhibit sufficient heterogeneity across industries, then the gains from the cooperative optimal policy will dominate those of the unilateral optimal policy.  This provides conditions under which a country will find it worthwhile to join a deep trade agreement that restricts the use of both types of policy.

Mostafa Beshkar took the discussion of trade agreements in a different direction by relaxing the standard assumption that trade is balanced.  Relaxing this assumption necessitates modelling intertemporal dynamics because allowing for trade imbalances implies exchanging consumption today for consumption in the future.  The framework that Beshkar develops to incorporate these features makes it possible to ask how governments should conduct their trade policy under trade imbalances.  The biggest issue for trade policy raised by the possibility of trade imbalances is the fact that governments can substitute capital controls for trade policy.  Consequently, following the negotiation of a trade agreement, there may be scope for governments to use capital controls to manipulate the terms of trade, thus potentially undermining the trade agreement.  The model that Beshkar presented provides a framework to think through this type of issue.

The framework that Beshkar develops combines two models from the prior literature, one capturing optimal trade policy and the other capturing optimal capital controls to provide a new model that features both types of policy.  This framework can be used to address such issues as the cyclicality of trade policy over time, the interdependence of trade policy and capital controls, and the potential effects of trade imbalances on trade policy.  The framework features a two-country Ricardian model with time-varying labor productivity.  The variation in productivity over time creates a role for international borrowing and lending.  The fact that productivity varies over time creates a role for two instruments to be used simultaneously.  In the absence of capital controls, both import and export taxes are necessary to implement optimal policy: one to manipulate the international terms of trade and the other to manipulate the intertemporal terms of trade.  This contrasts markedly with the static two-good model in which one of these trade taxes would be redundant.  The paper goes on to show that if the use of trade taxes is constrained by an international trade agreement then the government could use capital controls to restore a fraction of its constrained policy space.

While not modelling trade policy directly, the paper presented by Lena Sheveleva provides a new ‘minimal model’ of multi-product firms that can be used to test the implications of trade liberalization on productivity improvements as high productivity firms displace those with low productivity.    In the model, any differences between large and small scope exporters that emerge in the model are due to aggregation across different numbers of products. The proposed model makes it possible to test whether differences between large and small scope exporters are greater than would be expected to arise if firms were just a collection of otherwise unrelated products driven by random variety shocks.  She uses her framework to test whether tougher competition does, in fact, drive multi-product firms to concentrate their sales in the top ranked products even if their scope does not change.  The results she presented showed that once the level concentration implied by randomness is controlled for, the effect of market size on concentration becomes more pronounced both in terms of magnitude and statistical significance, suggesting that reallocation of resources across products in response to trade liberalization shocks may play an even more significant role than previously thought.

WTO Institutional Design

How should the rules of the World Trade Organization (WTO), and its predecessor the General Agreement on Tariffs and Trade (GATT), be designed to maximize the efficiency of outcomes for members, especially in the face of trade shocks that could lead to disputes?  David DeRemer’s paper follows the literature in asking when governments will choose remedies for violation of a trade agreement to ensure compliance with the rules, and when they will choose remedies that allow a breach of the rules but ensure that appropriate compensation is provided to those adversely affected.  The law and economics literature has argued that the former approach defines a ‘property rule’ while the latter defines a ‘liability rule’.  For concreteness, DeRemer couched his discussion in terms of the noteworthy evolution of the majority of non-tariff measures (NTM) from a system of liability rules under the GATT to property rules under the WTO, while actionable subsidies and non-violation complaints have remained as liability rules.

DeRemer’s model features two governments negotiating over several NTMs simultaneously, where each measure operates in a separate market that does not affect the others.  There is a non-cooperative optimal policy that maximizes its government’s payoff function, and a cooperative policy that maximizes the sum of both governments’ payoff functions.  The optimal policies depend linearly on unverifiable shocks to home and foreign preferences.  The paper focuses on the range of the parameter space where there is a conflict of interest between governments over NTMs.  If the difference in the payoffs between cooperative and non-cooperative policies is small, the policy is called a ‘low conflict policy’, and if large it is called a ‘high conflict policy’.  The analysis then focuses on whether the governments should choose a property rule or a liability rule to remedy a violation of an agreement over a particular type of NTM.  Achieving compliance is more difficult on actionable subsidies and non-violations because they are ‘high conflict policies’, and so a larger number of disputes is expected.  Therefore, DeRemer’s framework suggests these policies will be subject to liability rules to minimize the damage done by disputes, explaining what we see in practice.  As for the progression from liability rules in the GATT to property rules in the WTO, the framework suggests this results from increases in gains from coordination over time, relative to the expected costs of disputes, and such coordination gains have indeed occurred due to falling trade costs.

Adam Jakubik considered how WTO rules and flexibilities create a predictable trading environment.  His paper argues that WTO commitments create a predictable trading environment by shaping members’ trade policy responses to import shocks, incentivizing a move away from unilateral tariff increases towards contingent protection, and anti-dumping in particular.  His econometric implementation uses a recently available database of bound tariffs that accounts for countries’ implementation periods and changes of tariff-rate commitments over time, rather than just time-invariant final bindings hitherto used in the empirical literature.  The results he presented showed that as import shocks become larger, countries increase tariffs within the tariff binding, or use contingent measures depending on the level of tariff water. An important implication of their analysis is that the WTO Agreement reduces trade policy uncertainty, not just by setting a maximum allowed tariff, but also by reducing the probability of using tariff water to retaliate.  This is accomplished by providing other flexibilities that are designed to be more predictable, such as tariff bindings that must be removed within a set period of time.

Along similar lines, Michele Imbruno examined how Chinese tariff bindings adopted as part of its entry to the WTO affected Chinese firm-level imports.  The results he presented suggest that a decline in trade policy uncertainty allows Chinese firms to access a greater variety of imported foreign goods, because the payoffs to entering the foreign market are more certain.  The newly available imported goods are also associated with higher quality.  At the same time, tariff bindings prompt more Chinese producers and trade intermediaries to start importing for the first time, thus allowing a greater number of firms and consumers to enjoy potential gains from imports.

International Trade and Economic Development

In classical economics, the removal of distortions created by trade policy represents one of the most significant ways to promote efficient resource allocation and hence economic development.  Recent advances in techniques to causally identify the effects of exogenous trade liberalization shocks, together with the greater availability of data, has made it possible to test for the logic of classical economics in the data.

Trade Distortions and Economic Development

The paper presented by Beyza Ural Marchand looked at the effect of exogenous trade liberalization in Vietnam on intergenerational mobility.  The United States (US)-Vietnam Bilateral Trade Agreement, signed in December 2001, led to an immediate drop in US tariffs against Vietnamese exports of 21 percentage points. The logic underpinning the paper is that while trade liberalization can improve economic efficiency as workers relocate to the expanding export sector, if low intergenerational mobility reflects rigidities in the labor market and workers cannot move, trade liberalization may end up causing an unexpected increase in inequality.  It is, of course, possible that international trade worsens intergenerational mobility by lowering the returns to skills and thus the incentive to invest in education.

The results Marchand presented showed that the reduction in US tariffs applied to Vietnamese exports actually increased intergenerational skill mobility. Interestingly, this effect is visible only for individuals employed in the manufacturing industry and not agriculture and mining. This is consistent with the observation that most of the export expansion was in manufacturing.  In order to further investigate the effect of trade liberalization on human capital investment, she differentiated between the individuals who are the oldest son within households and individuals who have birth order of two or larger. Controlling for education, location, and other labor market characteristics, one should not observe different effects if resources are allocated efficiently within households. The results Marchand presented show that the effect of the export shock on intergenerational mobility is in fact limited to firstborn sons.

Facundo Albornoz’s paper considered a shock going in the opposite direction.  In mid-1997, the US suspended preferential tariff rates on over 100 different imports from Argentina, granted under the generalized system of preferences (GSP) program, affecting over a third of Argentinian exports to the US.  Particularly because this represented retaliation arising from a separate dispute over the protection of intellectual property rights, the tariff increases can plausibly be taken as exogenous.  Comparing the reactions of the firms affected by the suspension with the behavior of firms whose products were unaffected by tariff changes, Albornoz showed that the tariff increase induced some firms to stop exporting to the US market altogether.  Surprisingly, for those firms that continued to export, there was no significant reduction in the volume of their exports because those firms were able to rebalance towards exporting goods that were not affected by the suspension.  So more resilient exporters are able to partially circumvent the tariff increases through a (potentially inefficient) shift of resources across products.  Even more surprising was the finding that essentially all the results obtained for the US market carry through to third markets, where there was no policy change regarding imports from Argentina.

A complementary perspective was provided by Florian Unger in the paper he presented.  He considered the effect of corporate tax reforms on the exports of multi-product firms.  For the Organization of Economic Cooperation and Development (OECD) countries, the average statutory corporate tax rate has fallen from 39.9% in 1990 to 27.5% in 2014.  In contrast to the previous paper, these tax reforms tended to affect all exports of a particular firm equally.  The theoretical model introduces tax policy to multi-product firms.  The model shows that the reduction of the corporate tax rate in a particular destination leads to more intense competition in that location as exporters reduce product scope in that destination, focusing on their better performing products.  The paper tests the predictions of the model using data from the World Bank Exporter Dynamics Database combined with information on corporate tax rates over the period 2005-2012.  The resulting dataset covers firm dynamics in 70 origin countries in all their export destinations, and corporate tax reforms in 49 destination countries.  The results that Unger presented show strong support for our theoretical predictions that a reduction in the destination tax rate reduces the number of exported products, while increasing the exit of exporters to that country.  Moreover, using detailed information on firm export sales by product and destination, he was able to show that a lower corporate tax rate in the destination country increases the within-firm skewness of export sales to that destination, which reinforces the theoretical mechanism.

Yet another perspective was provided by Alejandro Riaño, with his examination of export subsidies in Nepal.  Nepal is the third poorest country in Asia.  Moreover, its exports are highly concentrated among only five HS6-digit products, with 85% of exports going to only five countries, with 80% of these going to India alone.  In 2012, the Nepalese government introduced the Cash Incentive Scheme for Exports (CISE) in order to try to overcome frictions in exporting and thereby increase export diversification.  Accordingly, CISE is an ad valorem cash subsidy to exports of a select group of products available only for exports sold in countries other than India.  The econometrics are based on customs transaction data for the period 2011-2014 combined with information on subsidy payments to individual firms.  The CISE subsidy is available to 24 industrial and 7 agricultural products such as carpets, pashminas, tea, coffee and spices. These products accounted for 41% of total export value in 2011.  The results that Riaño reported show that, relative to the control group, firms that received the subsidy increase the number of destinations (other than India) they sell to by 10-12% and the number of products included in the CISE scheme they export by 6-7%. And just as the theory in his paper predicts, the subsidy did not affect the intensive margin of targeted product-destinations, i.e. average exports per product, destination and product-destination combinations.  But the results suggest that the scheme may not be economically efficient given its high fiscal cost.

While the removal of distortions to trade promotes efficient resource allocation, one of the main channels for rent-seeking in developing countries is through distortions to trade policy.  The paper presented by Adeel Malik is among the first to provide a systematic empirical assessment of the impact of political connections on protectionism.  Focusing on Egypt, it develops a unique dataset to identify, at the international standard industrial classification (ISIC) 4-digit level, which products were being produced by crony firms that had links to the Mubarak regime.  The paper then argues that the events of  ‘September 11th’ exogenously triggered the European Union (EU) to successfully push for a trade deal with countries in North Africa, resulting in the installation of a large number of NTMs on imports.  The key finding of the paper is that crony firms have a much smoother experience with the implementation of NTMs than firms that are not politically connected.  For example, where NTMs involve inspections, inputs imported by crony firms are ‘waved through’ at the border, while those imported by other firms are subjected to long delays.  Thus, the paper breaks new ground by demonstrating the endogeneity of trade distortions to crony influence.

One of the most controversial arguments in the field of international trade is that protection can actually enhance industrial development by shielding a nascent industry from the intensity of competition with established foreign technologies: the so-called ‘infant industry argument’.  Roberto Bonfatti presented a paper that regarded World War I as creating a natural experiment that cut India off from trade with the UK, asking whether this promoted Indian industrial development as a result.  More specifically, the paper explores whether regions in India that were more exposed to the negative trade shock with the UK had a greater propensity to increase their manufacturing output.  It finds that Indian districts that were exposed to a greater fall in net imports from Britain in 1913-1917 did indeed witness a greater increase in industrial employment as a result.  The effect is statistically and economically significant: in the paper’s baseline results, as one moves from the 10th to 90th percentile in exposure to the shock, the share of industrial employment to total population increases, on average, by an extra 12% of the initial value.

Labor Market Distortions, Trade and Development

There is a growing empirical literature arguing that minimum wages do not have adverse employment consequences, challenging conventional wisdom in economics.  In turn, minimum wages have been on the rise, both in level and the degree to which they are enforced.  The paper presented by Xue Bai argues that findings of apparent positive (or not significantly negative) employment effects from minimum wages may arise from the fact that these studies take a partial-equilibrium approach.  Her paper takes a general-equilibrium approach based on the underlying structure of a Heckscher-Ohlin model.  Moreover, it introduces firms that are heterogeneous in their productivity levels, and focuses on the selection effects of minimum wages across all sectors.  The key feature of her model is that the exit of existing firms increases as a result of an increase in the minimum wage in sectors that have a binding minimum wage.  Based on data for China, the paper shows that, as predicted by the model, a binding minimum wage raises product prices, encourages substitution away from labor, though less so for high-skill-intensive and capital-intensive goods, and creates unemployment. Less obviously, it reduces output and exports, especially of the labour-intensive good, despite the price increases.  Least obvious is the prediction, also borne out in the data, that selection in the labour-intensive sector becomes stricter, while that in the capital intensive sector becomes weaker.

While rigidities in the labor market can create unemployment, the existence of an informal sector that doesn’t have these rigidities can provide a buffer that helps to absorb adverse shocks to the economy.  The paper presented by Gabriel Ulyssea focuses on the informal sector in Brazil where firms do not register with the authorities but do perform legal production, and are therefore invisible to the government.  Brazil has a long history of measuring informality through household surveys.  Informality provides greater job availability but no employment insurance to workers, thereby creating ambiguous effects on welfare.  In this environment, Ulyssea’s paper explores the labor market and welfare effects created by globalization shocks.  The framework provides a structural equilibrium model in which counterfactual analysis of the shocks can be performed.  A key finding of the paper is that a stricter crackdown on informality would have led to significantly more adverse welfare effects from the globalization shocks that hit Brazil in the early 1990s.  Their findings suggest that the informal sector does indeed play the role of shock-absorber in the Brazilian economy.

Political Institutions and Economic Development

Economic institutions are not all that matters in the determination of economic development.  An increasingly influential view holds that political institutions are important in the determination of economic institutions and hence economic performance, with particular emphasis on democracy.

Democracy and Economic Development

Marcus Eberhardt presented a paper that explored the robustness of the findings of a recent publication in the Journal of Political Economy by Acemoglu, Naidu, Restrepo and Robinson (ANRR) titled “Democracy Does Cause Growth.”  ANRR show that the long-run effects of democratization are a sizeable increase in per capita GDP of 20% or more. Eberhardt’s analysis relaxes two of the key assumptions that ANRR make, that there is a homogeneous parametric relationship between democracy and growth across all the countries in their sample, and that there is an absence of strong cross-sectional correlation.  His results indicate that the relationship between democracy and growth is in fact heterogeneous.  Specifying instead an alternative empirical approach adopted from the recent panel time series literature that allows for this heterogeneity, he finds that the economic magnitude of democratization on per capita GDP is 10%, thus still substantial but more modest than in the results of ANRR.

A controversial aspect of democracy concerns whether non-nationals have an effect on the outcome of national elections when institutional features are designed to prevent them from doing so.  The paper presented by Michele Valsecchi explored whether sanctions imposed on the Russian Federation by 37 other countries in response to Russia’s annexation of Crimea had an effect on the election of Vladimir Putin to the position of President of Russia in 2018.  As the paper explains, the general intention of sanctions is to cause a policy change by the country against which sanctions are imposed.  This might happen because people are made worse off by the sanctions and recognize that a change of policy would cause the sanctions to be lifted, leading the incumbent to respond accordingly.  Or it might happen because the sanctions make the incumbent so unpopular that they are voted out of power.  Valsecchi’s paper explores the latter possibility.  The paper estimates the relationship between the share of countries imposing a sanction in a region’s total trade or GDP on the change in vote share realized by Putin in the election.  The surprising finding of the paper is that the higher the share of countries imposing a sanction, the more Putin’s vote share increased!  This result supports the widely held opinion amongst economists that sanctions do not achieve their intended outcome of bringing about policy change, and can in fact backfire.

Recent research in political science suggests that the form of government, dictatorship or democracy, may play a role in determining the immigration rights that a country grants.  A dictatorship has an incentive to set lax immigration rights to bid down wages on behalf of capitalists, while a democracy has an incentive to set tight immigration restrictions to keep wages high on behalf of workers.  But this view struggles to explain why democracies are more inclined to grant naturalization rights, allowing immigrants to become citizens, while dictatorships are not.  The paper presented by Ben Zissimos put forward a model that provides an explanation.

The model adapts to an immigration setting a popular argument in economics that the purpose of a trade agreement is to enable the government to tie its hands against lobbying by protectionist pressures from interest groups.  The government would want to do this if the short-run compensation from lobbying is not sufficient to compensate it for the long-run distortions created, for which it is not compensated.  Drawing on this logic, the model that Zissimos presented could be used to show that the government may be better off committing to an institution that supports immigration in the long term, i.e. naturalization, thereby shutting down lobbying over immigration to some degree.  Moreover, the weaker is the government’s bargaining power, the lower is its short-run compensation from lobbying and so the more likely it is to gain from naturalization.  Crucially, a government will have less bargaining power vs the lobby if it is a democracy than a dictatorship.  The reason is that democracies typically have less bargaining power in an institutional environment where they are also constrained by the rule of law, while dictatorships are not typically so constrained.

Bibliography of Papers Presented with Links Where Available (Presenters’ Names Shown in Bold)

Reshad N. Ahsan, Laura Panza and Yong Song “Atlantic Trade and the Decline of Conflict in Europe: Evidence from 250 Years of Data”

Facundo Albornoz, Irene Brambilla, and Emanuel Ornelas “The Impact of Tariff Hikes on Firm Exports”

Xue Bai, Arpita Chatterjee, Kala Krishna and Hong Ma “Trade and Minimum Wages in General Equilibrium: Theory and Evidence“

Mostafa Beshkar and Ali Shourideh “Optimal Trade Policy with Trade Imbalances“

Roberto Bonfatti and Björn Brey “Trade Disruption, Industrialisation, and the Setting Sun of British Colonial Rule in India“

Oriana Bandiera, with Clare Balboni, Robin Burgess, Maitreesh Ghatak and Anton Heil “Why Do People Stay Poor?“

Francisco Costa, Fabien Forge, Jason Garred and João Paulo Pessoa “Hedging Climate Change: Yield Volatility, Crop Choice and Trade”

Fabrice Defever, José-Daniel Reyes, Alejandro Riaño and Gonzalo Varela “All These Worlds are Yours, Except India: The Effectiveness of Cash Subsidies to Export in Nepal“

David R. DeRemer “Agreements and Disputes over Behind-the-Border Non-Tariff Measures”

Rafael Dix-Carneiro, Pinelopi K. Goldberg, Costas Meghir, and Gabriel Ulyssea “Trade and Informality in the Presence of Labor Market Frictions and Regulations“

Markus Eberhardt “Democracy Does Cause Growth: Comment“

Ferdinand Eibl and Adeel Malik “The Politics of Partial Liberalization: Cronyism and Non-Tariff Protection in Mubarak’s Egypt“

Lisandra Flach, Michael Irlacher, and Florian Unger “Corporate Taxation, Multi-Product Firms, and International Trade“

Atisha Ghosh and Ben Zissimos “The Political Economy of Immigration, Investment, and Naturalization”

Roberg Gold, Julian Hinz, and Michele Valsecchi “To Russia with Love? The Impact of Sanctions on Elections”

Michele Imbruno “Importing under trade policy uncertainty: Evidence from China”
Note that Michele told us his paper had been accepted for publication after submission to the workshop and we were nevertheless happy to keep the paper on the program.

Adam Jakubik and Roberta Piermartini “How WTO Commitments Tame Uncertainty”

Ahmad Lashkaripour and Volodymyr Lugovskyy “Scale Economies and the Structure of Trade and Industrial Policy“

Giovanni Maggi and Ralph Ossa “Are Trade Agreements Good for You?“

Beatriz Manotas-Hidalgo, Fidel Pérez-Sebastián, and Miguel Angel Campo-Bescós  “Reexamining the Role of Income Shocks and Ethnic Cleavages on Social Conflict in Africa at the Cell Level“

Devashish Mitra (Syracuse University), Hoang Pham (Syracuse University), Beyza Ural Marchand “Skills and International Trade: Intergenerational Mobility in Vietnam”

Niclas Moneke “Infrastructure and Structural Transformation: Evidence from Ethiopia“

Lena Sheveleva “Minimal Model of Multi-product Firms“

Hâle Utar “Firms and Labor in Times of Violence: Evidence from the Mexican Drug War“

 

Summary of the 5th InsTED Workshop at Syracuse University

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We would like to thank The Department of Economics and the Maxwell School of Citizenship and Public Affairs, Syracuse University, for hosting and sponsoring the 5th InsTED Workshop.  We are also grateful for sponsorship and organizational support from the Moynihan Institute of Global Affairs, as well as sponsorship from the Program for the Advancement of Research on Conflict and Collaboration (PARCC) and the University of Exeter Business School.  The workshop took place at the Maxwell School from May 15th-16th 2018.  Special thanks go to Kristy Buzard and Devashish Mitra as joint chairs of the local organizing committee, and Juanita Horan for her extremely helpful interactions with everyone.

The program comprised of 18 papers ranging over four broad topics at the intersection of institutions, trade and economic development.  The first was global value chains, focusing on how they are determined at the firm level, and what their implications are for economic outcomes, especially in the developing world.  The second topic examined ongoing concerns about the implications of trade integration for income distribution, with emphasis on a developing country perspective.   The third concerned the interaction between trade integration or other institutional reform and resource allocation.  The fourth was on institutional constraints on international trade policy, including a look at the implications of restrictions imposed by the World Trade Organization.  There now follows a summary of all the papers presented at the workshop, organized under these four topic headings.  A bibliography, together with links to papers where available, is provided at the end.  Please note that for brevity the summary mentions presenters’ names but not those of their co-authors.  This information is contained in the bibliography.

Global Value Chains: Their Determinants and Implications

The spread of global value chains (GVCs) over the last thirty years or so has been a key new feature of the current wave of globalization, and important for the integration of developing countries into the world economy.  At the broadest level, the spread of GVCs has been facilitated by innovations in information and communication technology, the deepening of trade liberalization and ongoing reduction in transport costs, and political developments principally involving the fall of the iron curtain.  But in this globally more integrated environment, there is growing appreciation that firm-level decisions play a critical role in the determination of how global value chains actually form.  The outcome of these decisions has been characterized in terms of GVCs forming either as ‘spiders’, where a central ‘body’ imports inputs for assembly from various ‘legs’ that originate in different countries, or where a product is assembled sequentially along the length of a ‘snake’.  Such trade in intermediate inputs now accounts for 70% of global trade, spanning not just developed but developing countries as well.

The keynote address by Pol Antràs discussed his research project to model how firm-level extensive margin sourcing decisions are made, that give rise to the formation of GVCs.  His motivation of the need for a new model was that the canonical Melitz model renders firm export decisions tractable by assuming constant (exogenous) marginal costs, while firm import decisions are made specifically to lower marginal costs which are therefore endogenous.  The interdependence in a firm’s extensive margin import decisions complicates the firm’s problem considerably.  In the case of a spider, this involves a combinatorial problem with 2J possible choices, where J denotes the number of possible source countries.  In the case of a snake, the problem is similarly complex.

Antràs presented two papers, which provide tractable ways to model firm decisions in the cases of spiders and snakes respectively in ways that can be estimated structurally in the data.  In the case of spiders, the modelling approach is to apply an iterative algorithm that exploits complementarities in the decision of a firm to import from particular markets, and uses lattice theory to reduce the dimensionality of the firm’s optimal sourcing strategy problem.  The results show that while the ‘China shock’ resulted in an overall decline in domestic sourcing by US firms, the most productive firms actually increased domestic sourcing due to the cost savings derived through sourcing from China.  In the case of snakes, where the value chain is sequential, Antràs showed that the lead firm’s problem becomes one of solving the least cost path through a sequence of suppliers.  By applying a different algorithm the paper shows that, other things equal, it is optimal to locate relatively downstream stages of production in relatively central locations.  He then discussed counterfactual exercises that illustrate how changes in trade barriers affect the extent to which various countries participate in domestic, regional or global value chains, and traces the real income consequences of these changes.  Using this approach, substantial income gains are shown to arise from the increased participation of low-income countries in GVCs.

A key question motivating the literature on the extensive margins of trade is whether better firm performance gives rise to exporting or, conversely, exporting improves firm performance.  A particular form of this question is as follows: if offered the opportunity to export through a marketing arrangement in a developed country, can firms in developing countries upgrade the quality of the goods they produce and export, thereby increasing their incomes?  Rocco Macchiavello presented a paper on the case of the Nespresso sustainable quality program in Colombia.  The dataset constructed for the paper matches detailed administrative data on the universe of Colombian Coffee farmers with transaction-level data along three stages in the coffee chain, from the export gate to the farm gate.  Machiavello and his collaborators find that the program induced farmers to upgrade their coffee plantations, expand their farms as well as production, increase the quality of the coffee produced, and the loyalty of their marketing arrangement.  Most notably, a price premium of approximately 5-8% is fully transmitted along the supply chain, from the export gate to the farm gate, thereby bringing significant income gains to farmers in the developing world.  This paper therefore adds to the evidence supporting the view that gaining the opportunity to export can indeed enhance firm performance.

While GVCs can potentially increase incomes by creating cost advantages and quality improvements, there is widespread concern that cost advantages may be gained through lax environmental and labor regulation in countries where suppliers are located.  Sebastian Krautheim presented a paper studying this issue both theoretically and empirically.  In the model of his paper, a Northern firm can save costs by outsourcing to a Southern supplier that uses a cost-saving but unethical technology.  Contracts are incomplete, so that a firm has limited control over unethical technology choices of suppliers along the value chain.  The technology is a credence characteristic, in that consumers care about it but cannot know what it is.  However, the model features a non-governmental organization (NGO) that can reveal the technology being used.  Using the unethical technology creates an incentive to increase scale, but this also increases the probability of being detected by the NGO.  The paper provides empirical support for the model’s prediction that a high cost advantage of ‘unethical’ production in an industry and a low regulatory stringency in the supplier’s country favor international outsourcing as opposed to vertical FDI.

Trade Integration and Income Distribution

There has long been a concern that deeper trade integration causes an increase in inequality.  This is the focus of the famous Stolper-Samuelson Theorem, which arises directly from the classic Hecksher-Ohlin model and in a wider set of settings as well.  It predicts that if, compared to the South, skilled labor is relatively abundant in the North while unskilled labor is relatively scarce, then deeper trade integration will drive an increase in inequality in the North and a decrease in the South.  Previous academic debates tended to focus on the rise in inequality in the North, and the extent to which trade integration with the South was ‘to blame’.

In her keynote address, Nina Pavcnik presented her literature review that assesses the current state of evidence on how international trade shapes inequality and poverty.  Her review focuses mainly on developing countries, reflecting the fact that there is now more evidence in that context, but her discussion drew parallels to the empirical evidence on developed countries as well.  Her review also discusses perceptions about international trade in over 40 countries at different levels of development, including perceptions on trade’s overall benefits for the economy, trade’s effect on the livelihood of workers through wages and jobs, and trade’s contribution to inequality.  In framing the review, she noted that while most studies of developed countries focus on import shocks, studies of developing countries present evidence on export shocks as well to provide a more nuanced picture.

One insight that emerges from Pavcnik’s review is that losers from trade liberalization tend to be geographically concentrated and persistent over time because the costs are large.  Another insight is that worker-firm affiliation matters for how individuals are affected by trade liberalization.  Better performing firms tend to be better equipped to respond to the opportunities arising from trade liberalization.  Declines in industry employment from import competition are concentrated in less productive firms and workers.    A third insight is that one cannot ignore the effects of the informal sector in developing countries.  In some cases, international trade supports economic development by promoting the transfer of labor from inefficient informal firms to more efficient formal firms.  In others, especially where labor markets are poorly functioning or government support for those displaced from employment by trade is absent, the informal sector can serve as a coping mechanism for trade shocks.  Pavcnik noted that these outcomes are in some cases at significant variance to the predictions derived from the classic H-O model, especially because it does not have a role for firms.  The main policy recommendation to come out of her review was that governments must support workers and not jobs, because it is inevitable that the gains from trade are realized through the destruction of jobs, and the costs to workers are substantial.

The program featured two papers that studied the effects of trade policy in India.  The paper presented by Beyza Ural Marchand studies the distributional implications, with a particular focus on the poor, by asking: ‘what would be the distributional effects of eliminating the current protectionist structure?’  Thus her focus is on the welfare implications of a move from current trade policies to free trade.  The welfare effects are estimated through household expenditure and earnings effects of liberalization. The results indicate that Indian trade policy is pro-poor through the earnings channel, as its elimination leads to higher welfare losses for poorer households. But it is pro-rich through the expenditure channel, as its elimination leads to higher welfare gains for poorer households.  On balance, surprisingly, Marchand finds that Indian trade policy is regressive overall.

The paper presented by Ariel Weinberger investigates the liberalization episode in India during the 1990’s, which has been characterized by large and unexpected changes in trade and foreign investment policies.  Contrary to what might have been expected, given the secular decline in labor shares since the 1980s, his paper finds that trade reforms mostly raised the labor-to-capital relative factor shares in India. A reduction in capital tariffs and liberalization of FDI raise the share of income paid to labor relative to capital. His results reveal access to foreign capital as a new mechanism through which openness affects factor shares: imported capital augments technical change and potentially reduces rental rates, both of which raise the relative labor share.  Weinberger and his collaborator attribute the observed overall decline in the labor share to domestic deregulation policies and credit expansion.

Richard Chisik reversed the direction of enquiry relative to the papers above.  Rather than look at the effects of trade on inequality, his paper considers the effect of inequality on trade.  The prior literature notes that a foreign transfer may generate a ‘Dutch disease’ type effect in the recipient country: a transfer brings about a real exchange rate appreciation via an increase in wages that can reduce the size of the manufacturing sector.  This may reduce manufacturing exports or even eliminate a comparative advantage in manufacturing altogether.  In this literature, remittances have been considered isomorphic to foreign aid in causing the Dutch disease. Chisik’s paper questions this apparent similarity.  His paper argues that, whereas aid generates a Dutch disease effect, remittances can lead to growth of manufacturing.  The reason is that (ironically) aid tends to go to wealthier individuals who spend the money on non-traded services, which does appreciate the real exchange rate and shrinks the manufacturing sector, while remittances tend to go to poorer individuals who spend on manufactures which tends to increase the size of that sector.  The differing effects on the relative size of the manufacturing sector have, in turn, different bearings on comparative advantage.  The paper presents econometric results supportive of their model.

Rather than focus directly on trade and inequality, Ben Zissimos looked at how the inequality created by international trade can threaten the survival of dictatorships, especially in the face of world price shocks.  In his paper, the survival of dictatorships is taken to be a bad thing because they tend to support extractive economic institutions that fail to promote economic development.  The theory developed in the paper predicts that, in food exporting dictatorships, a world food price spike can provoke the threat of revolution.  Dictatorships are predicted to respond by making transfers using export taxes, hence defusing the threat of revolution and forestalling democratization.  The prior literature on institutions and development has tended to focus on the use of domestic redistributive taxation for the purposes of defusing the threat of revolution.  But the paper presented by Zissimos draws on evidence to suggest that dictatorships do not install domestic redistributive capacity for fear that it will be used to tax away their wealth.  Trade taxes, which are available to dictators, are used instead for this purpose.  Hence the paper proposes a new motive for the use of trade policy.  It also provides econometric results supportive of the predictions of the model.

Trade and Resource Reallocation Effects of Trade Integration and Institutional Reform

As tariffs have been reduced through multilateral trade rounds and the formation of free trade agreements, attention has shifted to other measures such as product standards, intellectual property protection, and infrastructure in an effort to facilitate integration where appropriate.

The paper presented by Walter Steingress quantifies the heterogeneous trade effects of harmonizing standards on product entry and exit as well as export sales.  Using a novel and comprehensive database on cross-country standard equivalences, the paper identifies standard harmonization events.  To track harmonization events, the paper presents a new correspondence table between the International Classification for Standards (ICS) and Harmonized System (HS) codes.  The results Steingress reported show that, on average, standard harmonization leads to a 0.5% increase in export sales. This effect is driven by an increase in the intensive margin, a decrease in prices and an increase in the quantities sold.  The paper argues that these results are compatible with a theoretical framework where standard harmonization leads to higher fixed costs as companies have to adapt to the new standards, but simultaneously reduced variable costs, thus increasing overall trade flows.

In her paper, Magdalene Silberberger broaches the impact of trade liberalization on health, safety and environmental (HSE) standards.  She and her collaborator ask whether tariff liberalization causes ‘regulatory chill’, meaning that countries are reluctant to implement HSE standards, or instead causes a race to the top as governments seek to use standards as non-tariff barriers to trade.  Her paper analyzes annual country-by-industry data on notifications of changes in sanitary and phytosanitary standards by WTO members. The results suggest that the impact of increased trade pressure depends on whether domestic producers are likely to gain or lose from a change in standards. Regulatory chill is the dominant response in most countries, but countries in which producers can adapt to standards relatively cheaply appear to race to the top.  Consequently, that paper concludes that tariff liberalization is associated with a divergence in standards across countries.

Shifting the focus from standards to patents, Tom Zylkin explored the effects of cross-border patents on international trade.  His paper highlights an ambiguity as to what one might expect here.  On the one hand, a firm might file a patent in another country because it wants to protect a good that it plans to export there.  On the other hand, the reason for filing a patent in another country might be that the firm wants to produce a good there instead of exporting it.  So, he argued, cross-border patents could be complements or substitutes to trade.  Using a highly disaggregated database of all patents filed in and out of developed and developing countries, his paper provides the first systematic analysis of how bilateral trade responds to bilateral filings.  It reports results suggesting large roles for geographic as well as industry-level heterogeneity, suggestive of competing motivations for cross-border patenting.  Patents promote bilateral exports—and negate bilateral imports—in high-demand elasticity industries, but can have the opposite effect in industries where the products are primarily used as intermediate inputs and/or between countries that are not far apart geographically.

The final two papers in this section consider the effects on economic performance of fundamental changes to the domestic economic and political environment.  Mingzhi (Jimmy) Xu‘s paper studies the aggregate and distributional impacts of China’s high-speed railway (HSR) network.  China’s HSR is a passenger rail network that covers 29 of the country’s 33 provincial-level administrative divisions and exceeds 25,000 km/16,000 miles in total length, accounting for about two-thirds of the world’s high-speed rail tracks in commercial service.  Xu argued that HSR connection generates productivity gains by improving firm-to-firm matching efficiency and leading firms to search more efficiently for suppliers.  His paper first provides reduced-form evidence that access to HSR in China significantly promotes exports at the prefecture level.  It then constructs and calibrates a quantitative spatial equilibrium model to perform counterfactuals, taking into account trade, migration, and outsourcing. The quantitative exercise reveals that the construction of HSR between 2007 and 2015 increased China’s overall welfare by 0.46%, but was also associated with an increase in national inequality. In addition, the paper finds that gains from HSR are larger when labor migration costs are higher, implying that the HSR project is well suited to a country like China, which features high internal migration barriers.

Ama Baafra Abeberese’s paper considers the implications of democratic reform for firm productivity, and in particular the impact of President Suharto’s unexpected resignation from the Presidency of Indonesia in 1998, after more than three decades in the post.  The basic idea underpinning the paper is that politicians can create high entry barriers for firms in order to collect rents from those that do enter.  Arguably, since this concentrates the gains from economic activity, democratically elected politicians will be less able to create such barriers without being displaced from office, and so the environment under democracy should be more competitive.  However, the effect on firm productivity is ambiguous since a more competitive environment may make it more difficult for firms to become established.  Baafra’s paper uses the fact that, in Indonesia, local mayors’ terms were asynchronous.  This asynchronicity of terms means that the paper can identify variation in the productivity of firms operating under mayors appointed by Pres. Suharto versus mayors who were democratically elected after Suharto stepped down.  The main result Baafra presented was that democratization did in fact boost productivity, and more so in industries that were shown to be politically connected to the Suharto regime and hence presumably more sheltered when he was in office.

Institutional Constraints on Trade Policy

While it might be collectively rational for countries to adopt free trade, it is often individually rational for a government to adopt some degree of trade protection.  This observation has been used to provide motivation for why governments sign up to institutional measures that constrain their abilities to set trade policy unilaterally, often in the form of a trade agreement.  This way of thinking forms the basis for the literatures on the purpose of the General Agreement on Tariffs and Trade (GATT), now absorbed into the Articles of the World Trade Organization (WTO), as well as the purpose of preferential trade agreements.

David DeRemer opened the discussion of these issues at the workshop with a paper that provides a new framework for thinking about international trade agreements in modern trade environments such as those involving offshoring, and rent seeking by foreign governments.  These are environments that extend beyond those which standard models of trade agreements are set up to consider.  His presentation started out by taking a stance on what distinguishes modern trade negotiation environments from the earlier era.  The new framework he developed focuses on how trade agreements help countries to escape from prisoner’s dilemmas in which each government disregards the effects of local price, as opposed to world price, changes on trading partners.  He argued that, typically, these local prices matter because they affect foreigners’ producer surplus or value-added.

His paper considers trade agreements that achieve the stable end-point of reciprocal negotiations, meaning a situation where neither government can gain from policy changes that affect net export value equally.  The paper shows this end point is Pareto efficient for governments, so it is a suitable prediction for the trade negotiation outcome.  This stable and efficient outcome for modern trade environments yields new predictions that are consistent with empirical evidence.  For example, more politically organized exporters with large supply elasticities compel governments to undertake greater reductions in cooperative import tariffs from trade negotiations.  In this setting, governments jointly pursue gains for exporters to the extent that they would assess losses for domestic firms from import competition to be outweighing gains for consumers.

Woan Foong Wong’s paper focused specifically on the main WTO rules that govern free trade agreement (FTA) formation.  Her paper is based on a three country ‘competing exporters model’, where any two countries compete to export a given product to the third country.  An FTA can then be formed between two countries, leaving the third one out, or all three countries can adopt global free trade, with the outcome being endogenously determined.  FTA formation under Article 24 of the GATT/WTO requires that external tariffs not be raised, and all internal tariffs be removed.  Wong’s paper examines the implications of the requirement to remove internal tariffs by comparing the outcome when this requirement is adhered to with when it is relaxed.  She showed that requiring FTAs to eliminate internal tariffs makes the non-member better off although it simultaneously reduces the likelihood of achieving global free trade by encouraging free-riding on its part.  The reason is that setting lower internal tariffs creates an incentive for members to set lower external tariffs, since they compete more aggressively for the third market, which benefits the non-member.  This problem is avoided by customs union members who, unlike FTA members, coordinate their external tariff.  Therefore, surprisingly, in the case of FTA formation removing the ‘free internal trade requirement’ increases the parameter space where global free trade is a stable outcome.

Other papers at the workshop undertook econometric work to explore the implications of trade agreement formation.  The paper presented by Kishore Gawande undertook the first econometric test of the commitment-based theory of trade agreements.  The idea of this theory is that import-competing sectors where industry interest groups know they can lobby the government for protection will end up with tariffs set above efficient levels and over-investment in capital.  But if governments realize that they cannot receive sufficient compensation for such long-run distortions, they may choose to sign a trade agreement and thus tie their hands to efficient trade policy, thereby shutting down lobbying altogether.  Gawande’s presentation reported econometric results testing this theory against industry-level and firm-level data, and found supportive evidence for the model in the data.

Yifan Zhang‘s paper investigates the impacts of trade liberalization on household behavior and other outcomes in urban China resulting from that country’s entry to the WTO in 2001.  The identification strategy employed in the paper exploits regional variation in the exposure to the resulting tariff cuts.  The paper finds that workers in regions initially specialized in industries facing larger tariff cuts experienced relative declines in wages. Households responded to these income shocks in several ways. First, household members were found to work more, especially if they moved into the non-tradable sector. Second, young adults were more likely to live longer in the parental household, and so average household size increased. Third, households tended to save less. These changes in bahavior were interpreted as being motivated by attempts by households to buffer themselves against the negative wage shocks induced by trade liberalization.

There is a long-held view in the trade policy literature that traditional tariff instruments and temporary protection (TP) measures such as anti-dumping and countervailing duties are substitutes. However, David J. Kuenzel argued in his presentation that there is only mixed empirical evidence for a link between tariff reductions and the usage pattern of antidumping, safeguard and countervailing duties. Based on recent theoretical advances, his paper argues that the relevant trade policy margin for implementing TP measures is instead the difference between WTO bound and applied tariffs, or ‘tariff overhang’ as it is often known. Lower tariff overhangs constrain countries’ abilities to raise their MFN applied rates without legal repercussions, independent of past tariff changes. Using detailed sectoral data for a sample of 30 WTO member countries during the period 1996-2014, Kuenzel finds strong evidence for an inverse link between tariff overhangs and TP activity. This result implies that tariff overhangs and TP measures are substitutes.  Based on this finding, he argues that this indicates the importance of existing tariff commitments as a key determinant of alternative TP instruments.

Bibliography of Papers Presented with Links Where Available (Presenters’ Names Shown in Bold)

Abeberese, A.B., P. Barnwal, R. Chaurey, and P. Mukherjee “Firms Under Dictatorship and Democracy: Evidence from Indonesia’s Democratic Transition.”

Aisbett, E., and M. Silberberger “Tariff Liberalisation and Protective Product Standards.”

Antràs, P., T.C. Fort and F. Tintelnot, “The Margins of Global Courcing: Theory and Evidence from US Firms.”

Antràs, P., and A. de Gortari, “On the Geography of Global Value Chains.”

Abeberese, A.B., P. Barnwal, R. Chaurey, and P. Mukherjee, “Firms under Dictatorship and Democracy: Evidence from Indonesia’s Democratic Transition.”

Baccini, L., H. Cheng, K. Gawande, and H. Jo, “The Political Economy of Trade Agreements: A Test of a Theory.”

Behzadan, N., and R. Chisik “The Paradox of Transfers: Distribution and the Dutch
Disease.”

Brunel, C., and T. Zylkin “Do Cross-Border Patents Promote Trade?”

Dai, M., W. Huang, and Y. Zhang, “How Do Households Adjust to Trade Liberalization? Evidence from China’s WTO Accession.”

DeRemer, D.R., “The Principle of Reciprocity in the 21st Century: New Predictions for Trade Agreement Outcomes.”

Gawande, K., and B. Zissimos, “How Dictators Forestall Democratization Using International Trade Policy.”

Herkenhoff, P., and S. Krautheim, “The International Organization of Production in the Regulatory Void.”

Kuenzel, D.J., “WTO Tariff Commitments and Temporary Protection: Complements or Substitutes?”

Leblebicioglu, A., and A. Weinberger, “Openness and Factor Shares: Is Globalization Always Bad for Labor?”

Machiavello, R., and M. Florensa, “Improving Export Quality and What Else? Nespresso in Colombia.”

Marchand, B.U., “Inequality and Trade Policy: Pro-Poor Bias of India’s Contemporary Trade Restrictions.”

Pavcnik, N., “The Impact of Trade on Inequality in Developing Countries.”

Saggi, K., W.F. Wong, and H.M. Yildiz, “Preferential Trade Agreements and Rules of the Multilateral Trading System.”

Schmidt, J., and W. Steingress, “No Double Standards: Quantifying the Impact of the Standard Harmonization on Trade.”

Xu, M., “Riding on the New Silk Road: Quantifying the Welfare Gain from High-Speed Railways.”

Dictatorship, Democratization, and Trade Policy

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By Ben Zissimos (University of Exeter Business School)

In a landmark paper, Daron Acemoglu and James Robinson argue that a key purpose of democratization is to resolve a commitment problem faced by a ruling elite under the threat of revolution.[1]  Their motivation focuses on 19th and early 20th Century Europe, during which time a number of countries in the region democratized, thus originating a number of today’s mature democracies.  The commitment problem that Acemoglu and Robinson characterize arises if the elite cannot make sufficiently large transfers within a single period, to compensate the rest of society for the gains that they would enjoy from a revolution.  If transfers must be made over multiple periods, and if the threat of revolution may dissipate prior to the transfers being completed, then the elite will not be able to credibly commit to transfers large enough to defuse the threat of revolution. By extending the franchise, the elite transfer power to set taxes to the rest of society.  Thus, democratization enables the elite to make a credible commitment to transfers over multiple periods sufficiently large to defuse the threat of a revolution.

In Acemoglu and Robinson’s model, domestic lump-sum redistributive taxation is the policy instrument used by the elite to make transfers from the elite to the rest of society.  This policy instrument simplifies the framework nicely in order to focus on the commitment role of democratization.  Yet subsequent research has shown that domestic fiscal capacity did not exist for redistributive taxation prior to extension of the franchise.  The power to tax is taken for granted in a great deal of mainstream public finance.  But, as Tim Besley and Torsten Persson note, a ruling elite may have an incentive not to install domestic fiscal capacity if they think it will facilitate redistribution from them to the rest of society.[2]  Supportive of this view, Toke Aidt and Peter Jensen show for the time period that Acemoglu and Robinson discuss, that countries in Europe and elsewhere typically did not have domestic redistributive taxation prior to extension of the franchise.  These observations open the door to a discussion of whether domestic redistributive income taxation could in fact have been used as part of a strategy to resolve the commitment problem through democratization.

In a recent paper, I identify the circumstances under which trade taxes, the capacity for which did exist in 19th-20th century Europe both prior to and after extension of the franchise, can be used to make such redistributions and hence resolve the commitment problem identified by Acemoglu and Robinson.[3]  I do this by combining Acemoglu and Robinson’s model with a classic Heckscher-Ohlin model with trade policy due to Wolfgang Meyer.[4]  The resulting new model yields insights that would not be available from either of the original models on their own.  For example, contrary to the recommendation of classical scholars, I show that when the group in power chooses its optimal trade policy, democratization may in fact go hand in hand with increased protectionism and a decline in economic efficiency.  This suggests that although democratization would broadly be regarded as desirable, it may have some adverse consequences.  In Acemoglu and Robinson’s original model, because taxation was lump-sum, policy changes associated with democratization could have no adverse efficiency implications.

My paper also identifies a new role for trade policy: that of maintaining political stability for a ruling elite regime.  Since the elite would always prefer to retain power (including the power to set trade taxes) rather than extend the franchise, the paper provides a way to think about when the elite can use trade policy to forestall democratization.[5] As an alternative to extending the franchise, the elite may be able to neutralize the threat of revolution and forestall democratization by making temporary concessions to the rest of society over trade policy, thus using trade policy to maintain their grip on power.  The framework that I develop makes it possible to delineate precisely where the elite face a commitment problem and hence must extend the franchise, and where they do not face a commitment problem and hence can use trade policy to forestall democratization.  I use the framework to motivate British and Prussian trade policy in the 19th Century, arguing that both of their ruling elites used trade policy to forestall democratization.

References

Daron Acemoglu and James A. Robinson (2000); “Why Did the West Extend the Franchise? Democracy, Inequality, and Growth in Historical Perspective.” Quarterly Journal of Economics, 115(4): 1167-1199. [Working paper version]

Daron Acemoglu and James A. Robinson (2006); Economic Origins of Dictatorship and Democracy.  Cambridge University Press, Cambridge.

Toke S. Aidt and Peter S. Jensen, (2009); “Tax Structure, Size of Government and the Extension of the Voting Franchise in Western Europe, 1860–1938.” International Tax and Public Finance, 16: 160-175. [Working paper version]

Timothy Besley and Torsten Persson, (2009); “The Origins of State Capacity: Property Rights, Taxation, and Politics.” American Economic Review, 1218–1244. [Working paper version]

Timothy Besley and Torsten Persson, (2014); “Why Do Developing Countries Tax So Little?” Journal of Economic Perspectives 28(4): 99–120. [Working paper version]

Sebastian Galiani and Gustavo Torrens (2014); “Autocracy, Democracy and Trade Policy.” Journal of International Economics,  93(1): 173-193. [Working paper version]

Wolfgang Mayer, (1984); “Endogenous Tariff Formation.” American Economic Review, 74(5): 970-985.

Ben Zissimos (2017); “A Theory of Trade Policy under Dictatorship and Democratization.” Journal of International Economics, 109: 85-101. [Working paper version]

Endnotes

[1] Acemoglu and Robinson (2000). See also Acemoglu and Robinson (2006) for a broader discussion.

[2] Besley and Persson (2009); see also Besley and Persson (2014)

[3] Zissimos (2017)

[4] Mayer (1984)

[5] Galianni and Torrens (2014) also have an element of this, in that an elite can choose between autarky and free trade to help maintain political stability.  In my paper, the full spectrum of trade policy between autarky and free trade can also be considered, including the trade policy revenue implications, making it possible to analyze incremental changes to trade policy.  This makes it possible to show how trade policy can be used to defuse the threat of revolution in the absence of all domestic fiscal capacity.  In turn this opens the door to a consideration of elite trade policy reactions to world price shocks.

Economics of Populism

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Social scientists regard globalization and technological progress as major contributors to the ongoing increase in job and income polarization in the United States and Europe. This increased inequality is thought to have reduced standards of living for the median voter in both regions.  Against this backdrop, the 2007-2008 financial crisis seems to have created a political and economic climate of populism on both the right and the left of the political spectrum.  Although populist politicians have emerged in the United States and Europe before, it is in developing countries and especially in Latin America that their influence on politics and economic policy has been the greatest throughout the 20th and 21st centuries.  It may now be that our understanding of the rising populist tide in developed countries can be informed by what we have learned about so-called traditional populism and neopopulism in the developing world.

Traditional populist leaders, whose greatest influence was in Latin America, claimed to hold a political position that supported ordinary citizens and tended to be against the private sector, foreign companies and multilateral international institutions.  They had strong and charismatic personalities and tended to operate outside the realm of traditional political parties and democratic institutions. Perhaps the best known of these was Juan Domingo Perón of Argentina.  Key features of a traditional populist economic program were protectionism and the promotion of economic growth and a reduction in inequality through expansionary fiscal and monetary policies, complemented by market controls and regulations.  Once a program was implemented, even though there was a short period of economic growth, bottlenecks developed causing unsustainable macroeconomic pressures: a rise in prices and a loss of competitiveness leading to balance of payments difficulties.  The typical outcome was a major macroeconomic crisis that hurt the poorer segments of society, which were the very groups that populist politicians had said they wanted to help.

The literature on populism attempts to explain the apparent paradox whereby voters choose a politician whose policies ultimately hurt their economic interests.  One line of research emphasizes the role of natural resources in providing revenues for politicians to buy popular support. In another line of research, signalling plays an important role.  For example, one model shows that a politician has an incentive to signal that he is left wing in spite of his political bliss point being to the right of the median voter’s.  Voters choose him based of his signal but he adopts right wing economic policies after he takes office.  A different model shows that a political candidate selects strategically a narrow set of issues to display to voters during his campaign in order to establish his credibility, e.g. focusing on domestic economic crisis instead of foreign policy.  There is empirical research that supports this last finding and moreover shows that candidates tend to spend more time on divisive issues during campaigning.

Although neopopulists in Latin America hold similar political positions to those of traditional populists (i.e. they tend to be against the private sector, foreign companies and multilateral institutions), the focus of their rhetorical attacks is on globalization.  A key innovation is that neopopulists appear to appreciate the importance of macroeconomic stability.  Instead of fiscal and monetary expansion they adopt targeted interventions aimed directly at redistribution, rather than macroeconomic expansion.  Examples of modern populist policy tools are: price controls on utilities, expropriation of foreign companies, import tariffs, export taxes, and exchange rate manipulation.

There are striking similarities between anti-globalization and nationalistic discourses of neopopulists from developing countries and the populists who are ascending in developed countries.  However, the populists of developed countries go beyond their developing country counterparts with their emphasis on the association between international trade and job losses at home, and on their support of anti-immigration policies.  The current debate is over whether populists in developed countries misrepresent the facts and their corresponding policy proposals in a way that gains political support and, if so, whether or not voters are able to see through this.  A key question is whether this works in the same way as in traditional populism or whether it represents a new approach.

 

 

Acemoglu, Daron, Georgy Egorov, Konstantin Sonin (2013) “A Political Theory of Populism,” Quarterly Journal of Economics, 128 (2): 771-805.

Autor, David, David Dorn and Gordon Hanson (2016) “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” Annual Review of Economcs, 8 (1): 205-240. [working paper version]

Ash, Elliott,  Massimo Morelli and Richard Van Weelden (2016) “Elections and Divisiveness: Theory and Evidence,” Working Paper.

Banks, Jeffrey (1990) ‘‘A Model of Electoral Competition with Incomplete Information,’’ Journal of Economic Theory, 50: 309–325.

Dornibusch, Rudiger and Sebastian Edwards (1990) “Macroeconomic Populism,” Journal of Development Economics 32: 247-277.

Edwards, Sebastian (2010) Left Behind: Latin America and the False Promise of Populism, University of Chicago Press.

Egorov, Georgy (2015) “Single-Issue Campaigns and Multidimensional Politics,” Working Paper.

Harrington, Joseph (1993) ‘‘The Impact of Re-election Pressures on the Fulfilment of Campaign Promises,’’ Games and Economic Behavior, 5: 71–97.

Masten, Egil, Gisle Natvik, Ragnar Torvik (2016) “Petro Populism,” Journal of Development Economics, 118: 1-12. [working paper version]

Ottaviano, Gianmarco and Giovanni Peri (2012) “Rethinking the Effect of Immigration on Wages,” Journal of the European Economic Association, 10 (1): 152-197.

Storesletten, Kjetil (2000) “Sustaining Fiscal Policy through Immigration,” Journal of Political Economy, 108 (2): 300-323. [working paper version]

Break-up of Nations

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The Brexit vote on June 23rd 2016 highlights the basic fact that the costs and benefits of economic and political integration are unequally distributed across different social groups within a region.  Because integration has winners and losers, when decisions on sovereignty are taken through majority voting it is possible that a majority against integration emerges even if it is efficient to integrate.

To understand how the democratic process affects a region’s incentive to separate from a political jurisdiction, the starting point is the analysis of the trade-off between the benefits of large jurisdictions and the costs of heterogeneity in large populations.  On one hand, in large jurisdictions there are scale gains in the provision of public goods, gains from internal trade (when international trade is not free), and reductions in the costs of localized exogenous shocks.  On the other hand, the larger the population the more difficult it is for the government to satisfy their diverse demands for public goods since individuals are likely to have heterogeneous tastes and needs.  If the differences between individuals are significant, they may prefer to break away from the union in order to get public goods closer to their preferences.  The loss of efficiency arises because voters at the margins do not internalize the negative externalities imposed on others.  This leads to an equilibrium where there are too many small regions relative to a benchmark where the optimal number of regions is determined by a social planner who maximizes average world utility.

Because income redistribution is a fundamental decision-making variable for voters, research on secession also focuses on the role of conflicts that arise from differences in preferences over fiscal policy.  The logic is that poor agents favor high income tax rates and rich agents favor low rates, while the equilibrium tax rate is the one most preferred by the median voter. When the level of income varies across regions, the equilibrium tax rate in the union does not coincide with the preferred tax rate in each region.  Restrictions on regions’ freedom to set their own tax policies makes separation more tempting because the institutional constraint imposed by the union is relaxed.  Interestingly, when capital and labor are perfectly mobile, fiscal policies equalize across regions, which should defeat the purpose of seeking independence.  But in practice mobility is often sufficiently limited that fiscal policies across regions remain diverse.

Although existing research provides a deeper understanding of secessions, many research questions remain open.  For example, when is economic integration alone sufficient to ensure that a union will endure, and when is political integration helpful? What is the role of supranational institutions such as a supreme court?  Do the size of firms influence the likelihood of separation?

 

Alesina, Alberto and Enrico Spolaore (1997) “On the Number and Size of Nations“, Quarterly Journal of Economics, 112(4): 1027-1056.

Bolton, Patrick and Gérard Roland (1997) “The Breakup of Nations: A Political Economy Analysis” Quarterly Journal of Economics, 112 (4): 1057-1090.

Bolton, Patrick, Gérard Roland and Enrico Spolaore (1996) “Economic Theories of the Break-up and Integration of Nations“, European Economic Review, 40: 697-705.

Buchanan, James and Roger Faith (1987) “Secession and the Limits of Taxation: Toward a Theory of Internal Exit“, American Economic Review, 77 (5): 1023-1031.

Casella, Alessandra and Jonathan Feinstein (2002) “Public Goods in Trade: On the Formation of Markets and Jurisdictions“, International Economic Review, 43 (2): 437-462.

Ellis, Christopher and Silke Friedrich (2014) “Public Goods and the Dissolution of States” Working Paper.

Friedman, David (1977) “A Theory of the Size and Shape of Nations“, Journal of Political Economy 85 (1): 59-77.

Spolaore, Enrico (2013) “What is European Integration Really About? A Political Guide For Economists“, Journal of Economic Perspectives, 27 (3): 125-144.

Ruta, Michele (2005) “Economic Theories of Political (Dis)Integration“, Journal of Economic Surveys 19 (1): 1-21.

Wei, Shang Jin (1991) “To Divide or to Unite: A Theory of Secessions”, Mimeo, University of California at Berkeley.  [online version not available]

Do Ethnic Divisions Matter for Civil Conflict?

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Over the second half of the 20th century, civil conflicts (i.e. intra-state conflict) have become increasingly dominant and now account for a greater share of deaths and hardship than any other form of conflict (the main comparator being inter-state conflict).  Empirical research shows that economic variables, particularly poverty and income inequality, are important determinants of civil conflict and there are a variety of channels through which they take effect.  For example, in poor countries young men choose to join the conflict because their expected income from fighting is greater than the income that they would obtain from the labor market, especially if natural resources are under dispute.  On the other hand, low national income leads to weaker repressive capabilities of the state, making it unable to control insurgencies.

Although the earlier empirical evidence often highlights the association between economic conditions and civil conflict, there is limited understanding of how armed groups form and cohere.  A promising starting point is the analysis of ethnic ties and divisions, which are popularly viewed as the leading sources of group cohesion and inter-group civil conflict.  The two broad approaches on ethnic divisions are “primordialist” and “instrumental”.  The primordialist view takes the position that ethnic differences are deeply cultural, biological or psychological, and irreconcilable. The instrumental view treats ethnicity as a strategic basis for coalitions that seek a larger share of economic or political power.  Under either of these approaches, ethnicity can facilitate communication and cooperation within the group but at the same time it increases tensions between groups through asymmetric information and commitment problems.  But why ethnic groups themselves form and cohere in order to engage in violence is still an open question.

Blattman, Christopher and Edward Miguel (2010) “Civil War”, Journal of Economic Literature, 48:1, 3–57. [Working paper version]

Collier, Paul, and Anke Hoeffler (2004) “Greed and Grievance in Civil War”, Oxford Economic Papers, 56:563-595. [Working paper version]

Esteban, Joan,  Laura Mayora, and Debraj Ray (2012) “Ethnicity and Conflict: Theory and Facts”, Science 336: 858-865.

Esteban, Joan, and Debraj Ray (2011) “Linking Conflict to Inequality and Polarization”, American Economic Review, 101 (4):1345–74. [Working paper version]

Fearon, James, and David D. Laitin  (2003) “Ethnicity, Insurgency, and Civil War.” American Political Science Review, 97 (March): 75–90. [Working paper version]

Horowitz, Donald L. (2001) Ethnic Groups in Conflict, University of California Press.

Miguel, Edward, Shanker Satyanath, and Ernest Sergenti (2004) “Economic Shocks and Civil Conflict:  An Instrumental Variables  Approach”,  Journal of Political Economy, 112(4):725-753. [Working paper version]

Political Economy of Agricultural Policy

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The 2008 world food price spikes lead to conflict between the World Bank and food exporters.  Motivated by the prospect of food shortages, food exporting countries responded to the food price spikes by restricting their exports just at the time when countries already experiencing a shortage were looking to the world market for relief.  In a bid to further encourage exports, food importing countries in some cases even responded by implicitly subsidising imports.  These interventions amplified the price spikes and harmed consumers in the intervening countries and beyond.  Seeing export restrictions as the root of the problem, the World Bank asked the countries concerned to desist from such practices.  But with violence erupting on the streets, some governments felt that their hands were tied to the export restrictive measures.  There is an active debate in the literature seeking to understand the policy responses that accompanied and exacerbated the food price spikes.

Over the longer term, supply side policies have depressed farmers’ incentives for some time.  The governments of many developing countries have taxed agriculture at significantly higher rates than other sectors or have taxed agriculture indirectly by overvaluing their currencies to pursue import-substitution industrialization strategies.  These policies clearly introduce price distortions.  It is an open questions as to whether these policies have a negative impact on growth and the income distribution.  If government interventions do have adverse effects, the question is why they are so prevalent in developing countries.  The political economy literature offers two main explanations.  One is that policymakers protect consumers in order to indirectly protect their positions in power.  The other is that governments are captured by vested interests in industry.

Anderson, Kym, Gordon Rausser, and Johan Swinnen (2013) “Political Economy of Public Policies: Insights from Distortions to Agricultural and Food Markets.” Journal of Economic Literature, 51(2): 423-77. [Working paper version]

Findlay, Ronald, and Kevin H. O’Rourke (2007) “Power and Plenty: Trade, War, and the World Economy in the Second Millennium.” Princeton and Oxford: Princeton University Press.

Hillman, Arye L (1982) “Declining Industries and Political-Support Protectionist Motives.” American Economic Review,72 (5): 1180–87.

Krueger, Anne O., Maurice Schiff, and Alberto Valdes (1991) “The Political Economy of Agricultural Pricing Policy“, Volume 1: Latin America; Volume 2: Asia; and Volume 3: Africa and the Mediterranean. Baltimore and London: Johns Hopkins University Press.

Martin, Will and Kym Anderson (2011) “Export Restrictions and Price Insulation During Commodity Price Booms” American Journal of Agricultural Economics, 94 (2): 422-427. [Working paper version]

Schonhardt-Bailey, Cheryl (2006) “From the Corn Laws to Free Trade: Interests, Ideas, and Institutions in Historical Perspective” Cambridge and London: MIT Press.

Swinnen, Johan F. M. (1994) “A Positive Theory of Agricultural Protection.” American Journal of Agricultural Economics, 76 (1): 1–14

World Bank (2007) “World Development Report 2008: Agriculture for Development” Washington, DC :World Bank.

Natural Resources and Political Stability

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There is increasing interest in how natural resources influence political stability. Under a dictatorial regime, political stability is determined by the ability of a ruling group to stay in power. If political power is the route to personal riches by the appropriation of natural resource income, remaining in power is that much more attractive. As well as facilitating personal enrichment, a dictator can use part of the income from natural resources to suppress opposition through various mechanisms. These include direct repression and undermining the formation of rival groups (“divide and rule”). In democracies, incumbent politicians can use natural resources to finance popular projects in order to increase their chances of remaining in power via reelection.

On the other hand, natural resources can also be a source of political instability. They create an incentive for the opposition to take over power, yielding access to natural resource rents.  Another possibility is for the opposition to seize a natural resource and use it to fund rebel activity. In both cases the survival of the political incumbent is less likely in the presence of natural resources. These sources of instability tend to be pervasive in non-democratic regimes.

Acemoglu, D., J.A. Robinson, and T. Verdier (2004); “Kleptocracy And Divide And Rule: A Theory of Personal Rule”, Journal of the European Economic Association, 2 (2-3): 162-192. [Working paper version]

Alexeev, M., and R. Conrad (2009); “The Elusive Curse of Oil” Review of Economics and Statistics, 91(3): 586-598.

Andersen, J. J., and S. Aslaksen (2013); “Oil and Political Survival.” Journal of Development Economics, 100(1): 89-106. [Working paper version]

Arezki, R., and T. Gylfason, (2013); “Resource rents, democracy and corruption: evidence from Sub-Saharan Africa” Journal of African Economies,  ejs036. [Working paper version]

Bhattacharyya, S., and R. Hodler, (2010); “Natural Resources, Democracy and Corruption” European Economic Review, 54 (4): 608-621. [Working paper version]

Bjorvatn, K., and M. R. Farzanegan, (2014); “Resource Rents, Power, and Political Stability” CESIFO Working Paper No. 4727.

Collier, P., and A. Hoeffler, (2004); “Greed and Grievance in Civil War” Oxford Economic Papers, 56: 563-95. [Working paper version]

Frankel, J. A., (2010); “The Natural Resource Curse: A Survey”, NBER Working Paper No.15836. Cambridge, MA: National Bureau of Economic Research.

Gallego, M., and P. Pitchik, (2004); “An Economic Theory of Leadership Turnover.” Journal of Public Economics, 88 (12): 2361-2382.

Lipset, S.M., (1960); Political Man: The Social Bases of Politics. Anchor Books, New York.

Mahdavy, H., (1970); “The Patterns and Problems of Economic Development.” Published in in M. A. Cook, (ed.); Rentier States: The Case of Iran, Studies in the Economic History of the Middle East, Oxford University Press, London, pp. 428-67.

Robinson, J.A., and R. Torvik, (2005); “White Elephants.” Journal of Public Economics, 89 (2-3): 197-210. [Working paper version]

Robinson, J.A., and R. Torvik, (2008); “Endogenous Presidentialism.” NBER Working Paper No. 14603, Cambridge, MA: National Bureau of Economic Research.

Robinson, J.A., R. Torvik and T. Verdier, (2006); “Political Foundations of the Resource Curse.” Journal of Development Economics, 79 (2): 447-468.

Sachs, J.D., and A. M. Warner, (1995); “Natural Resource Abundance and Economic Growth.” NBER Working Paper No. 5398. Cambridge, MA: National Bureau of Economic Research.

From Dictatorship to Democracy and Democratic Consolidation

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There is considerable debate over whether and how political institutions affect economic performance and vice versa. Does the form of government, democracy or dictatorship, have an important bearing on economic growth and efficiency, and how does growth affect the consolidation of democracy? Under what circumstances is democracy a spur for greater equality, and does inequality spur revolution? An apparently important aspect of this debate is how international influences through trade, the actions of international institutions, and political events in foreign countries, affect political regime change, say from dictatorship to democracy, and political consolidation on peaceful government after civil war or revolution.

Acemoglu D. and J. A. Robinson, (2001); “A Theory of Political Transitions.” American Economic Review, 91(4): 938-963. [earlier version]

Aidt T. and P. S. Jensen, (2012); “Workers of the World, Unite! Franchise Extensions and the Threat of Revolution in Europe, 1820-1938.” Cambridge Working Papers in Economics 1102, Faculty of Economics, University of Cambridge.

Aidt T., F. Albornoz and M. Gassebner (2012); “The Golden Hello and Political Transitions.” CESifo Working Paper Series 3957, , CESifo Group Munich.

Ellis C. J. and J. Fender (2011); “Information Cascades and Revolutionary Regime Transition.” Economic Journal 121(551): 763792.

Ornelas E. and X. Liu, (2012); “Free Trade Agreements and the Consolidation of Democracy.” Working Paper, London School of Economics.