How India lost the cotton war to the British

First the paper.

During the early modern period, India was the world's main producer of cotton textiles, with a substantial export trade. Indian textiles were exported to Britain on a large scale from the seventeenth century.² By the early nineteenth century, however, Britain had become the world's most important cotton textile producer, dominating world export markets, and even exporting to India.³ This dramatic change in international competitive advantage, which must surely rank as one of the most important developments of the industrial revolution period, is often described entirely in terms of developments within Britain, without any reference to India, and with little or no reference to factor prices.⁴ This paper attempts to redress the balance.

……..

As early as the seventeenth century, an unskilled labourer earned four to five times as much in Britain as in India.¹⁰ In the middle of the nineteenth century, an unskilled labourer earned less than twice as much in America as in Britain.¹¹ Similarly, the British unskilled silver wage during the second half of the eighteenth century was also less than twice as high as in much of western Europe.¹² The Anglo-Indian factor price comparison is of particular importance in cotton textiles, where India was Britain's major competitor. ………However, there appears also to be a second reason, arising from a reluctance to characterize Britain as a high-wage economy during the industrial revolution, a period where the focus has been on the slow growth rather than the high level of British wages…….The story of Anglo-Indian competition in cotton textiles begins with the growth of cloth imports into Britain via the East India Company from the seventeenth century. The new cloths, patterns, and designs became increasingly fashionable and thus threatened the livelihood of domestic producers of fine woollens and linens, which were the closest substitutes for printed cottons from India.¹⁷ The pressure from these groups led to protective legislation that remained in force between 1701 and 1774, and opened up new opportunities for British manufacturers via a strategy of import substitution.¹⁸ However, high silver wages in Britain meant that cotton textiles produced domestically using labour-intensive production methods could not compete with Indian goods in third markets. This stimulated a two-stage process of technological change.

First, high wages led to the adoption of a more capital-intensive technology in Britain. Second, this choice of technology resulted in a faster rate of productivity growth in Britain, because of the greater incentive to devote resources to improving technology where capital intensity is higher. This is consistent with the positive relationship between capital intensity, resources devoted to research and development, and the rate of technological progress, highlighted in Schumpeterian models of economic growth.¹⁹ This effect can be explained partly by the greater learning potential on capital-intensive technology.²⁰ In Britain, however, the effect was amplified by the existence of an effective patent system.²¹

There was thus a stronger incentive to devote resources to innovation in the machine-intensive industry of Britain, compared with the labour-intensive industry of India. As productivity increased in the machine-intensive British cotton textile industry and stagnated in India, a shift in competitive advantage occurred. However, the shift was delayed in international markets during the late eighteenth and early nineteenth centuries by a temporary rise in raw cotton prices in Britain, as the increase in production put pressure on factor markets. The shift of competitiveness in the Indian market was delayed further by transport costs, which prevented the British from breaking into the Indian market on a large scale until after 1830

And this is again a rather salutary lesson about how one has to keep running after productivity, invest in people, equipment and technology improvements. Also interesting, and something not quite discussed, is how the import protection works. As it did in the 18th century UK.

India does the stupid thing, it has import protection, but doesn't do anything to invest. So the opportunity costs increases all the time and we become poorer and poorer. At this moment, China is eating India’s lunch…guess the old adage, people who do not learn from history are condemned to repeat it.

Economists find evidence for famous hypothesis of ‘comparative advantage’

Proving old Ricardo’s concept of “comparative advantage” is interesting.

I quote:

David Ricardo’s concept of “comparative advantage” is one of the most famous and venerable ideas in economics. Dating to 1817, Ricardo’s proposal is that countries will specialize in making the goods they can produce most efficiently — their areas of comparative advantage — and trade for goods they make less well, rather than making all kinds of products for themselves.
As a thought example, Ricardo proposed, consider cloth and wine production in England and Portugal. If English manufacturers are relatively better at making cloth than wine, and Portugal can produce wine more cheaply than England can, the two countries will specialize: England will concentrate on making cloth, Portugal will focus on making wine, and they will trade for the products they do not produce domestically.

So how did they do it?

To arrive at this conclusion, Costinot and Donaldson identified a data source that let them quantify nations’ potential productivity: The Food and Agriculture Organization (FAO), an arm of the United Nations, analyzes farming conditions globally, estimating potential agricultural productivity based on factors such as soil type, climate and water availability.
Costinot and Donaldson looked at the numbers from an FAO model of yields of 17 crops on 1.6 million plots of land in 55 countries to examine whether countries specialize in the way Ricardo believed. That is, if a country’s terrain allows it to grow wheat more productively than grapes, comparative advantage suggests that specialization will occur. So Costinot and Donaldson compared the predicted output of crops in each of the 55 countries (based on the FAO data and on prevailing prices) with the actual output of those crops.
The numbers show that Ricardo was right — to an extent, anyway. Costinot and Donaldson analyzed the results so that if the real world worked just as Ricardo supposed, the correlation between productivity and output would be 1.000. Instead, the logarithmic correlation they found was 0.212, with a margin for error of 0.057.

Cool, eh? I will be using this in my own business anyway. Pretty neato…I work in the business of financing international trade, so this will help me identify where we can concentrate matters

Argentina Bans Book Imports due to ‘Human Health Concerns’

lol, talk about being stupid..These Argies are really muppets. I quote

The new rules for importing books and any artwork is justified: the care of human health. At least today they justified the third vice president of the Industrial Union of Argentina, Juan Carlos Sacco, who warned that it may be dangerous "handle" a book that contains amounts of lead greater than 0.05 and 0.06 percent.

In a radio interview, Sacco categorically denied that Argentina is prohibited to import books,although the new provision of the Internal Trade Secretariat generate delays in receiving artwork purchased abroad.

With the new rules, every buyer should check the Ezeiza airport customs that the ink does not contain publications amounts of lead greater than 0.05 and 0.06 percent in its chemical composition.

"Resolution 453 is of an environmental nature," said Sacco in dialogue with radius 10, and explained that it can be "dangerous" if a book is handled with the greatest amount of lead allowed. "One fingering the book. And possibly put the finger in the language to change the blade. This is a serious step," said industry response to a question of journalist Marcelo Longobardi.

Sacco declined it locks the import of graphics. "There is nowhere in the slightest any regulatory prohibition to bring out books," he said, adding that the standard also intends to promote the production of books in the country.

"In the last five years were imported 140 thousand tons of books for $ 550 million. And in 2011 we had an imbalance of 78 percent, about $ 125 million against," Sacco explained

The Economist reports

Ms Fernández, like her husband and predecessor, Néstor Kirchner, has relentlessly pursued economic growth. This is getting harder. Public finances have fallen into deficit thanks to bloated subsidies used mainly to keep utility and transport tariffs low. As the current-account surplus diminishes, the government has imposed curbs on imports and stricter capital controls. The latest protectionist measure requires buyers of books from foreign websites to collect them personally from the airport and pay a fee of up to $80.

Guess what? no books being imported. At all. Do they want to convert Argentina into an Arab country or what?

Kenya facing starvation and famine

Food prices are already creating havoc with the food budgets and public distribution systems of various emerging markets (and creating problems with inflation in the developed countries as well). So the last thing you would expect is for countries to add to the problem, no?

No, Kenya has now managed to do that after the near civil war in the country. I quote:

Kenya, recovering from months of political violence, faces a looming food shortage and the current grain reserve could last only until August, a newspaper warned on Monday.
The Daily Nation said tribal fighting and revenge killings touched off by the disputed December 27 presidential elections had depopulated the countryside with farmland left fallow during the current planting season.
Scant rain had exacerbated the problem, it said.
"Although rain has fallen in some parts of the country, these are not auguries of good harvests this season, and the country is headed for acute food shortages in the next few months," the Nation warned in an editorial.
It spoke of "insecurity in Kenya’s breadbasket - the vast area in Western Province and North Rift where maize and other grains like wheat do well," adding that rioters had torched granaries while gangs evicted farmers from their land.
"As a result, all the maize-producing areas are about to experience record deficits this season," it said.
According to experts as well as the government, the country may be faced with a five million-bag food deficit, wiping out the current grain reserves by August, the daily said.

Given the fact that the FAO is running out of budgets to purchase food, there is aid fatigue, food exports are being clamped down (see here for example) , where on earth does Kenya think its going to get food aid from? Here's one possible source. And still nothing from the UNSC

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

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?