Look before you leap: Why politicians may have a point to be hesitant about the gains from trade

this was a good point to be made. Speaking as an economist, I am always in favour of trade liberalisation. Same with being a banker. Anything that facilitates trade is something that I love because that helps my clients. But politicians are different and I quote the highlights from this paper.

• economists focus on overall welfare, politicians on the income distribution.

• market liberalization increases welfare and changes the income distribution.

• politicians implement distortionary policies to mitigate the distributional effects.

• with inaccurate information, ambiguous net welfare effects may result.

• politicians may have a point when being hesitant about market liberalization.

the abstract:

Economists emphasize the welfare gains of unrestricted trade, but politicians worry about the income distribution effects of increased competition. We show that the welfare gains of a trade shock become ambiguous if inaccurate information hinders optimal income redistribution with distortionary policy instruments. To be sure about the net welfare outcome of a compensated trade shock, the government must know the size of the trade shock and the corresponding size of the policy instrument that is needed to generate a balanced budget. If this is not the case, politicians may have a point when being hesitant about the gains from trade.

So when making arguments about free trade and trade liberalisation, one has to ensure that economists are speaking the same language..I believe that one of the reasons why the WTO deals are so difficult to achieve (besides needing the approval of all the 190 odd countries) is that the WTO is mainly run by economists while the decision makers are mainly politicians who will need to ratify the deal back home. And they are talking different language.

Argentine farmers announce fresh action

Remember what I said before about Argentina heading into economic problems? The problems for Argentina and rest of the world just went worse. I quote from the FT>

Argentine farmers yesterday announced a return to their roadblocks just over a month after a crippling 21-day strike sparked by a rise in export tariffs, causing an immediate spike in international grain prices.

News of another strike in Argentina, the world's third-biggest exporter of soyabeans and biggest of soya oil, immediately pushed soyabean futures up 2.5 per cent in Chicago to $12.96 a bushel.

Analysts say anything more than a few days of action by Argentine farmers, combined with strong buying by China ahead of the Olympic Games, would be enough to send prices back to record levels, as happened during the earlier Argentine farm strike in March.

The impact of the farm turmoil could also be more far-reaching: despite record world prices, Argentine farmers are already cutting back on wheat planting by up to 15 per cent this season because of the impact of tariffs and the government's decision to periodically close exports in a bid to keep domestic prices low.

There will be trouble ahead....

Only hope is that the WTO takes a stance on this very quickly, no other body has the governance or the authority to step in because individual country action will make matters worse.

Technorati Tags: Argentina,Agriculture,Inflation,Labour

Farmer Suicides in the UK and India

There is something wrong with the agricultural world these days when you can find farmer suicides in the UK as well as in India. This is a very complex issue and not something that you can fix very easily as it has gone global (Via the WTO, etc.) and very deep into various economic silo's. But when a farmer can commit suicide even in an advanced developed country such as the UK which is neck deep in subsidies, great financial systems, NGO's, suicide prevention lot, etc. etc. one wonders how far India can go...

All this to be taken with a grain of piquant salt!!!

There is a case for subsidies!

I personally do not like subsidies, they distort markets and and and, the usual economist provisio's. With one exception. When the question is for sheer survival, then subsidies are not just subsidies but humanitarian aid. This is why I am very jaundiced about the agricultural round of the WTO or the debates about child labour which are very sterile, theoritical and do not apply to real world, extreme poverty situations. But read here and consider the case of subsidies.

But remember, subsidies become relatively expensive too soon too fast. And then the usual problems of only few people getting subsidies, too much of deficit financing, etc. etc. happens.

All this to be taken with a grain of piquant salt!!!

The EU's sugar policy is also a total mess

I talked about the EU's fisheries policy being a mess, its regulatory impact analysis regime being totally unfit for purpose and now as it turns out, its sugar policy sucks. The FT reported:

Relations between the European Union and its former colonies soured further on Wednesday after Brussels was accused of “coercion” for planning to scrap a 30-year-old deal on sugar imports while talks continue on its replacement.

The European Commission said scrapping the measure by October 2009 was vital to ensure duty- and quota-free access for all 70-plus African, Caribbean and Pacific (ACP) countries when new EU trade rules came into effect.

The preferential access regime was ruled illegal by the World Trade Organisation, and a waiver granted in Geneva expires at the end of the year.

The EU is also struggling to remove 6m tonnes of domestic production by 2010, when the cut takes full effect, to bring European prices closer to world levels.

The road to hell is paved with good intentions, and this is what the pathetic EU subsidies have done to the 70 odd ACP countries (mostly African and Caribbean). It has made them dependent upon feeding on the public trough and left them indolent. Rest of the sugar producing countries managed to become more efficient and produce sugar with less effort and less cost. So now the situation is that the EU is struggling to reconcile its finances, its commitments to its previous colonies and its commitments to the WTO. I love it, couldn't have happened to a better organisation. Again, violate the laws of economics at your peril, you ignorant twits!

Technorati Tags: Europe , European Commission , WTO , Farming

Can Chinese Banks Compete After Accession to WTO?

China entered into the WTO in 2001. While critics were howling that the entry of China will collapse the world trading system and all that nice jazz, the impact has been much more muted. Mainly because China's low cost manufacturing led export strategy and large commodity import strategy meant that the large trading partners ranging from Australia, Japan, EU, USA etc. were able to navigate this bump with minimal distress. Plus most of the partners were already doing much business with China anyway.

That said, it also opened up Chinese to international competition and given the dicey situation of the Chinese banks, that gave rise to the biggest concern.

Here comes a research paper which talks about whether Chinese banks can compete after the accession to WTO. The authors say no, but I am not so sure. If you look at say India, Indonesia, South Korea or any other similarly located or similar sized/shaped banking structure country, they have managed to go for WTO accession without screwing up their domestic banking industries.

I have supervised several Chinese students who have researched on this area as well as couple of students who looked at comparative performance of banks post WTO accession and found that the government will be highly protectionist and careful of its domestic banking sector.

If nothing else, the foreign banks will tread very very carefully in managing their market entry into China and the last thing they want is unrestricted competition which knocks the domestic banks off course.

All this to be taken with a grain of piquant salt!!

Technorati Tags: Banking , China , WTO

 

Xu, L., & Lin, C.-T., Can Chinese Banks Compete After Accession to WTO?, Journal of Asian Economics (2007),
doi:10.1016/j.asieco.2007.09.001

Abstract
Our answer is no, not at least without fundamental changes on the roles of Chinese banks and on the current unfavourable bank regulations towards domestic banks. As a result of China’s accession to World Trade Organization (WTO), foreign banks could compete directly with Chinese banks with little barriers from December 2006. We argue that foreign banks’ expertise and experience in modern banking activities coupled with their interests and regulatory advantages in the traditional Renminbi (RMB) business will lead to a loss of RMB deposits and loans from local banks. Given that Chinese banks are currently ridden with large nonperforming loans and low capital adequacy, the foreign bank entry will exert further pressure on the banks’ profitability and solvency. It is likely that the health of Chinese banks will deteriorate
further in the post-WTO era.

How the Shrimp Tariff Backfired

This is a brilliant exposition of how the law of un-intended consequences works when governments try to protect certain sectors against market standards and rules of economics. I have talked about this law many times, but not in this case of shrimps.

So lets see what happened? by taking this action, the taxpayer spent more money on subsidies, the targeted countries got upset with USA, more shrimp came in anyway, and the domestic producers got hammered even more, the reputation of USA as a principled free trader took a knock and at end of the day? USA lost on all counts. Are the democrats listening?

watershed development in rural areas

A very interesting paper crossed my inbox, which related to how one can develop watersheds in rural areas. This is obviously not for countries and regions who are blessed with good irrigation or don't need irrigation. But in the majority of the world, agricultural irrigation and water is required, crucial and becoming dangerously difficult/expensive as time goes on. More importantly, the development of the watershed has vast social implications for any government (emerging or developed country) as it directly hits either food production or rural employment/economies. The measurement of the social impact is difficult but this paper address that need. But I would like to quote some bits from the paper.


“The real area of focus has to be our unirrigated and dry land areas. Watershed development and rain water harvesting hold out immense promise in addressing this issue … I would like to make it perfectly clear that our vision of Indian agriculture continues and will continue to be based on smallholder farming.”
Dr. Manmohan Singh, Prime Minister of India, March 2005.

“An estimated 27% of farmers did not like farming because it was not profitable. In all, 40% felt that, given a choice, they would take up some other career.”
National survey of farmers in rural India, July 2005.

Quite interesting as to how the government in the form of the prime minister is aiming at and what a very large proportion of the farmers are thinking about. This is a major gap, and this is why countries such as India are so heavily interested in agriculture. Just because farmers would like to take up another career does not mean that they CAN! (because of lack of opportunities, lack of education, lack of funding.......). This also explains why India is so anal about the current WTO round negotiations. There is NO WAY that India can lower barriers to agricultural trade to the extent demanded by the EU and USA as we are talking about the impact being on hundreds of millions of very poor farmers. With a non-existent to zero safety net, India is happy to live with unproductive (compared to western mechanised farming) farmers, expensive inputs, high subsidy and uneconomic farming.

R.A. Hope, Evaluating Social Impacts of Watershed Development in India, World Development, Volume 35, Issue 8, August 2007, Pages 1436-1449. (http://www.sciencedirect.com/science/article/B6VC6-4P248GD-1/2/fd79508c9f9bd87341c41193ff203830)
Abstract: Summary Watershed development is an important policy instrument for rural development in many developing countries. However, evidence of the distribution and magnitude of social impacts attributable to watershed interventions is often ambiguous. This study uses a propensity score matching method to estimate social impacts on gross agricultural returns and domestic water collection times from treatment and control watershed data in the state of Madhya Pradesh, India. Results illustrate how matching methods can objectively estimate social impacts of watershed development across intended beneficiary groups. This promotes improved understanding of the performance of current watershed projects and provides inputs for the appropriate design of future rural development interventions.
Keywords: Asia; India; propensity score matching; rural development; watershed development