The economy lab, the dark age of free trade theory, and the naive view on natural resources and economic development

Over at the Economy Lab in the Globe which Failed, which itself has gone from bad to worse, one of the economists they keep in their stable has either produced an extraordinarily naive analysis or a dishonest one.  I am going to go with naive for the sake of professional courtesy.  Not that that is the MO of economists but I am atheist fan of Jesus and not an economist…so here goes.

To be honest I can’t figure out which vintage trade model Gordon is using.  My informed gut tells me something like an off the shelve H-O-S intro text book model of free trade.  That would fit with his own vintage and the fact that he is an econometrician.  Although that creates a paradox because, as surely Gordn knows, the H-O-S free trade theorem preforms dismally–by even economic standards–in econometric work outs.  In layman’s terms: the work-horse model of free trade which is standard in introductory economics texts fails at a predictive level.

There are any number of reasons for this but just for fun here are few in no particular order:

1. The economies entering into trade were in a state of autarky (self sufficiency) and full employment.  Both of which are patently false.  More often than not nations pursue trade in the search for a remedy to chronic underemployment and unemployment and have already been engaged in trade.
2. Product and capital markets are perfectly competitive.  Again patently false.
3. Factors (capital and labour) are perfectly mobile within a national jurisdiction but not between.  You might get me to agree on labour but the whole point of neoliberal globalisation and its animating quintessential core is the free movement of capital.
4. As a corollary, capital (investors) is made up of 100% domestic nationals.  Extremely dubious assumption with respect to mining, oil and gas and a whole host of other sectors.
5. There are no firms.  While capital and labour are the only inputs (and resource endowments) there are no firms.  Just one large something or other allocating labour and capital according to their scarcities.  A model without firms that actually do the trading?  Bizarre me thinks.  This becomes particularly important with respect to determining who benefits from the gains of trade.
6. Capital is a natural endowment.  Which translated means that for the standard model the explanation is that some countries have lots of capital some do not.  Why that is; the model does not care.  But saying that you don’t care is far cry from saying anything remotely interesting.  Capital is after all nothing other than produced means of production in its physical form and its ephemeral and essential form a complex social relation.  Sorry I can’t really simplify that at this time.  But to get a sense of what I am getting at just recall that the origins of Canada is a colonial enterprise in which colonial settlement was driven by the desire to expropriate natural resources from the original inhabitants.  The origins of Canada, and its rich endowment of natural resources is thus the history of politically constituted property and not some “natural” process of economic development.

O.k. so that is that.  Of course the OEM version of free trade theory is going to be a predictive disaster.  Why anybody bothers to teach it outside of using it is an example of what happens when liberal geeks go wild is beyond me.  But let me do a real world work-out.

Let us take Newfoundland and Labrador as a historical case in point.  Here is region that has leaped from one natural resource boom to another and it has always ended in some form of administration.  The failure to develop a modern diversified economy in which resources play a role but not the primary role.  Contrast the fortunes of early diversifiers in the union, who did so via a tariff wall and you get the picture.

In Newfoundland and Labrador Gordon’s advice is being followed as the mining and oil and gas sectors account for around 40-45% of provincial output but only 4-5% of direct employment including temporary construction employment.  Neither the oil, nor the profits touch land (outside of royalties taxes and wage payments which are all relatively low) in that province because of the weak to non-existent processing of raw materials.

Gordon thinks this is the road map to economic success, I think it leads to ruin.  He is willing to bet standard trade theory on it, I am going with history.

Here is why.  Two seconds of reflection will reveal that in Newfoundland and Labrador almost every single assumption built into the standard free trade model is violated: most certainly 1 through 6 outlined above.  Perhaps most interestingly is that Newfoundland and Labrador would not have a comparative advantage in oil and gas had it not been for the federal and provincial governments.  I am sure Gordon was decrying Hibernia as white elephant back in the day.  The problem is today the two levels of government are fighting over the allocation of royalty payments as the project is paid in full and is churning out lucrative profits for all involved.

Maybe Gordon can write something about that in his next post to the Economy Lab.  I won’t hold my breath.  My discipline right or wrong and all that jazz.

A without prejudice rejoinder to the Minister of Finance

On Wednesday of last week the Minister of Finance for Newfoundland and Labrador Thomas Marshall was interviewed by CBC Central Morning about a report I did for the Newfoundland and Labrador Federation of Labour (NLFL).  In one respect, the fact that the minister was willing to go on the radio and respond to the report is a remarkable testimony to the health of the democratic debate in that province.  In what other province would the Minister of Finance get out of bed to respond to what he/she viewed (wrongly) as criticism coming from an out of province expert on behalf of organized labour in their province?  Few, if any I should think.  Thus the Honourable Minister is to be commended for his efforts.  That however is where the praise stops.

Politics is, of course, partly a game of perception and all too often that is all it is about.  And in this respect the minister’s interview amounted to little more than perception management via deflection and deception.  Now before I take up each of these in reverse order I should note that ministers rarely read policy briefs and reports.  Rather they are read by the experts in their department and then summaries are produced for them from which the minister may take notes.  I will therefore assume that the minister’s remarks are based on those summaries and I will further assume that any factual errors, distortions or deceptions were the product of some invisible technocrat(s) (in this case economists) working in the DoF.  Nevertheless, Canada and its provinces enjoy responsible government which ultimately means the buck stops with the minister.

To say that the minister came swaggering out of the gates would be to use a colourful style of prose that does not at all do a disservice to accurate description.  The minister made the rather shocking claim that my report– its observation and conclusions– were not based in fact—data or otherwise.  To be clear he did not merely claim that he disagreed with the data or the conclusions drawn; he said the report was absent of data and facts and a mere assertion of opinion.  Apparently Statistics Canada data, studies by the Conference Board of Canada, experts such as Paul Krugman (Nobel prize in economics), Robert Shiller, Ken Rogoff, Carmen Reinhart, Armine Yalnizyan, and indeed data collected from the minister’s own budget publications do not count as solid data and analyses.  Further where the minister does tacitly concede that I used data, he says that it is Canadian data and those facts and trends do not apply to Newfoundland and Labrador.

Let me take up each of these claims in turn.  First, the minister is of course at liberty to disagree with the data and the conclusions drawn from it, but it is an abuse of his liberty to claim that the conclusions and opinions offered are not based on data.  In the first section of my report I focussed on what I called the primary distribution of income (that between profits and wages) and the secondary distribution of income (that between different classes of salary earners).  As to the first, the minister initially dismissed my argument, substantiated by statistics Canada data I should add, that Newfoundland and Labrador have an exceptionally high inequality in the distribution of income when viewed from the division of profits and wages (these measures were all drawn from StatsCan data).  Indeed, what I showed in Graph 3 of my report was that Newfoundland and Labrador had the highest level of inequality in the primary distribution of income of any Canadian province including the other resource intensive provinces.  It is also exceptional in sense that it is not just a little bit higher but higher by over a third than Alberta.

However, when the minister was pressed on the primary distribution of income between wages and profits by the host of Central Morning Leigh-Anne Power (13m35s), the minister’s started to shuffle and argued that the profits of the oil and gas sector should be taken out of the GDP because the profits were exceptionally high in this sector and not in the others (14m45s).

This is a truly bizarre approach to my mind.  If we took oil and gas out of Alberta’s aggregate profit data I suspect they too would fall in line with the Canadian average; if we took potash out of Saskatchewan’s aggregate profits I would guess that Saskatchewan profits would be lower than the average; and I suppose we could do the same exercise and take the FIRE (Finance, Insurance and Real Estate) profits out of Ontario’s profits and then we would see a much different (lower) share of profits in GDP.  There are two problems with this approach.

If we do as the minister suggests and take the most profitable sectors out of the calculation of profits as a share of GDP or wages then the Canadian average will also be lower.  What the minister, or perhaps rather his advisers, seem to want to do is take their big profit centre out of the profit calculation and then compare that average to the unadjusted Canadian average thus sending the national average up and the Newfoundland and Labrador average way down.  I can think of several reasons why the minister would want to do this but none of them have anything to do with making systematic scientific comparisons.

Second, I will take my approach over his: profits are profits and there is nothing exceptional about the profits generated out of natural resources.  Save for the fact that the sector directly employs relatively few workers because it is a capital intensive sector.  That I should have thought was rather the point.  Even if you paid every worker in the sector two times what they were earning now it would not solve problem of the incredible amount of value being extracted from the oil and gas sector and how little of it stays in the hands of the citizens of the province.

As the minister quite rightly points out (inadvertently), when resource extraction is done by large corporations (given the capital to labour ratios) the only significant place to recover that wealth is at the level of corporate taxes and royalties.  The problem is that in Newfoundland and Labrador the extraction agreements were written in such a way that specific changes to the existing royalty regime are militated against leaving the general level of corporate taxes (and or new deals) to do the heavy lifting.  As an aside, I actually think if the political will was there they could design the corporate tax regime to get at the super profits being derived out of the natural resource sector without actually raising the general level and remain well within the remit of previous agreements.

The minister will then go on to say if you look a the Statistics Canada data that workers in the province were doing quite well as total labour compensation had increased by 87 % between 1997 and 2010.  That figure seems a little high as the Statistics Canada Data I have (Table 384-0001) shows total labour compensation increasing by 81% between over the 1997-2009 period.  But let us assume that  we are simply working off two different Statistics Canada time series so that it may be possible that his figure is correct: wages may indeed have increased by 6% in the subsequent year.  However, what the minister fails to note is that although total labour compensation increased by 81% between 1997-2009 profits increased by…wait for it…765%.  No, that was not a typo.  If ever there was a scientifically appropriate time to deploy the word “gobsmacking” now surely is that time.  If we look at the same time span GDP grew by about 137%.  So yes workers wages have increased but not nearly as fast as GDP growth and at around 10% of the rate of growth of profits.  Again that was the central finding of the report: prosperity has not been equally distributed.

As to the more narrow claim by the minister that income inequality had actually gone down in Newfoundland and Labrador over the last decade he is technically right both in absolute in comparative terms.  The only problem is that in my report I actually noted that, but also noted that was in the context of increasing income inequality so the Newfoundland and Labrador record was not that great. And further I noted that because of the last recession poverty rates had gone up in the province.  I doubt very much his data disputes my data; it is just that he wants some credit where credit is due: granted.

If the minister had actually bothered to read my report or listen to the interview I had done a week earlier he would have known that I went out of my way to point out that oil and gas were skewing the numbers. That is, relative to the total provincial economy the sector was over-sized.  And that was a problem because there was a limit to how much the primary redistribution could be altered through wage gains and because of the precariousness of relying too heavily on a non renewable resource from a revenue point view.  In combination it creates a compelling argument about why the government needs to capture more of that surplus and aggressively diversify the economy.  Moreover, I also went out of my way in the radio interview to congratulate the government on a couple of things I thought they had got right.  True I did not spend 4 of 10 minutes listing their accomplishments but that was not what my report was about.

I do not know why the minister thought he needed to argue that the report I authored was not based on facts and serious arguments.  Anyone who spent 2 minutes with the end notes would know that for a policy brief it exceeds the usual standards.  Given that Statistics Canada data, studies by the Conference Board of Canada, arguments made by experts such as Paul Krugman (Nobel prize in economics), Robert Shiller, Ken Rogoff, Carmen Reinhart, Armine Yalnizyan, and indeed data collected from the minister’s own budget publications failed to impress Tom or the economists working for the Department of Finance it might just suggest that they are merely partisans.  The question is, partisans in what war?

That the minister felt it necessary to take up valuable airspace with a rehearsal of the well worn and by now totally discredited supply side dogma is a bit of a tell.  The supply side dogma says that profits rule all, and profits are all that matter.  This Dogma reached its zenith in the great financial crisis of 2007-2008 from which the global economy has yet to recover.  That Canada skipped over the most egregious effects of the crisis was a fortuitous twist of fate.  That Tom still clings to this dogma is a shame.

All is not lost: from what I understand Tom has an ongoing gig with Department of Finance.  I look forward to hearing what he has to say in the future as this was a “without prejudice” rejoinder.

Interview on CBC Central Morning

CBC Radio Central Newfoundland Morning aired an interview they did with me about inequality and the future of development in Newfoundland and Labrador.  The pod cast can be found here.  It is the last of the three interviews on the podcast (16min 38sec mark).  The first interview is about the salmon festival and KISS.  I always thought I should do a project with Gene Simmons.

Occupy Movement: Inequality in Newfoundland and Labrador

Apparently the policy brief I wrote for the Newfoundland and Labrador Federation of Labour has been picked up by the Occupy Wall Street movement.  The brief can be found here.  The money shot from that brief would be the graph below.

Hats off to the Newfoundland Federation of Labour for broadening the conversation about economic inequality and development.

 

The food insecure amongst us

Every year the UN-OCHA (Office for the Coordination of Humanitarian Affairs) says that 3-4 million (always different) subsistence farmers and pastoralists in a variety of different regions in Ethiopia are food insecure, and thus in need of food aid (out of a total population of 80 million) The Ethiopian government then holds a press conference and asks donors to pitch in. The number of food insecure in Ethiopia is roughly the same this year, and yet when reading the news reports in the Western media about famine in the Horn of Africa you would think something totally dramatic and different has been happening in Ethiopia this year.

On the other hand as a percentage of the population the numbers of food insecure people are substantially higher in southern Somalia where “access” to food insecure places is a key factor in donor activity in the region. When I say “access” what I mean is that getting physical access to southern Somalia is a key issue in donor efforts in the region. Southern Somalia is also controlled by Al Shabbab. And, well the powers that be have been trying to tame southern Somalis for the past 20 years, but without much success. Thus, in the past 20 years, we have had two formal military interventions (one US led and one led by Ethiopia) and myriad small scale regularly inflicted informal interventions, sometimes in the form of drones, sometimes coming as ak47s, etc. So between the war on terror, and the war on poverty it is hard to know why Somalia is in the news right now.  But also more difficult to know is what is happening in the Horn of Africa militarily, politically, and economically beyond sensational reports. But, certainly since there is always enough food to feed the people of the world, we must become cognizant of the fact that famine has its own specifec political-economy, as does war, and also news reportage. So, just as poor news reporting is never a disaster of an individual mind, famine is never a natural disaster. Bad institutional configurations produce both :)

Where does that leave us? I am not suggesting  a conspiracy theory. But when I start to put the pieces of this story together the Cassandra in me certainly hears grumblings of another military intervention in all of this news making activity. After all, what else can “access” mean?

In the mean time, though I am still waiting for a really good article/analyses on the framing of this years biggest “humanitarian disaster”, I see that other people have questions too. We are starting to get closer to a better analyses of this event with this blog post. Check it.

http://apeaceofconflict.com/2011/08/03/the-over-simplified-narrative-of-the-somali-famine/

IIlicit money flows

Not really into re-blogging articles but this essay effectively puts money laundering and corruption into context. It is useful for explaining key processes in the ‘the web of secrecy, collusions and the players that drive and sustain the world of illicit money flows’

http://pambazuka.org/en/category/features/75085

The MENA countries (Middle East and North Africa) and public choice

Just in case you were wondering how the firestorms in North Africa were being spun in the policy circles of the great powers, check out the latest highly instructive speech by the president of the World Bank (see link below). What Zoellick reminds us of is that street protests are really a demand to equitably distribute economic incentives  so that everyone can behave like economic maximizers. Indeed, he reminds us that economists can bring the political back into economics by reducing democracy to incentives that produce economically rational behaviour.

Apparently people are dying on the streets for the right to be incentivized so that they can behave like Homo Economicus! And what Homo E really is all about is self-evident too, so that the only problem until till now in the MENA countries is that the right incentives did not exist because Oriental desposts were too greedy and hoarded all the economic rewards that existed in the country.

Bloody clan system!

In any case now the World Bank has learnt its lesson. It now know knows that all human being are economically rational (secretly we are all moderns, it is just the clan system that keeps us down).

Thus, from now on the World Bank is willing to partner with anyone in the MENA countries (especially the women)who will free up the flow of incentives so that people all over MENA will become happier.

It is only rational.

Really?

And so the WB finds yet another way to absolve itself from thinking about market failure over the past 30 years in the MENA countries. And  so to0 it can really and truly keep the political away from the economic.

But also telling is that this market place of incentives and rewards is what Zoellick thinks democracy in the West is all about too.

And I quote: “These [incentives] are not luxuries reserved only for developed countries. They reflect on the quality of governance. They improve public policy. They signal integrity. They communicate respect for the public. They treat public office as a trust.  They may sound political, but they are certainly economic.

These topics are part of the economics of public choice.  The public choice theorists cautioned us to think about how governments really work, compared with how we might wish them to work.  The public choice advocates have called for better incentives and opportunities for citizens to monitor government more effectively.  They are right.”

(Zoellick, April 2011)

What an innovative vision of humanity!

To find out more about how the World Bank spins protest from 1848 until 2011, follow the link (and yes, Zoellick really does mention 1848):

http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22880264~pagePK:34370~piPK:42770~theSitePK:4607,00.html

The Problem with Africans and Arabs

April update. This blog post was turned into a full article. Published here: http://www.pambazuka.org/en/category/features/71735

———

The way the term Arab is being thrown around these days is enough to give a person reason to pause while celebrating the victories of the people of Tunisia, Egypt and Libya. After all, in the present revolutionary context in North Africa there has been a deliberate effort to erase the fact that Libya, Tunisia and Egypt are all continental African countries. Moreover, to call one’s self Black or African or Arab is to use identity markers that are not indigenous to Africans or even the vast majority of people we now call Arab. The question then is who uses these identities and when? No doubt, mobilizing these identities can be useful for making certain kinds of political claims that advance the needs of African and Arab peoples (pan-Africanism, the Arab league etc). But still, we need to always ask for whom is this mobilization happening.

Cutting off the historical ties between so called Arabs and so called Africans (by which we mean black people, as if those kinds of people are easily identifiable) is a trick of Orientalist historiography (in the way Edward Said uses the term). And investigating the problem of Orientalist methodology is not just about raising the bogeyman of identity politics, rather what ends up happening is that Orientalist methods are often blindly adopted to conceal the multiple historical, political, and economic ties that connect so called black people to browner looking people. For example, Yemenie ancient and contemporary history has deep connections with Somalis, Eritreans and Ethiopians across the Red Sea (20 km),  but the way the story gets told you would think Yemen was closer to Libya, and that the West Side of the Red Sea could be skipped in any story about Arabs. I would venture to say this is ridiculous. And I really don’t think we should accept Orientalist methods when thinking about what is an Arab or an African.

In fact niether Arab identity or black identity is self-evident. Instead, the parameters of identity are negotiated and connected to multiple political and economic processes. We need to be vigilant about how identity is produced as a sediment of various political, economic and social processes and not simply assert it as something given. That can only sound defensive and silly. The fact of the matter is that Egypt as a modern nation-state is deeply connected to the developmental ambitions and contradictions set in play by Mohammed Ali and his off spring, who were the first non-western leaders who really tried to catch up with the industrialised West. But because his project was intimately tied to Sudan, chattel slavery, and cotton production, one cannot separate the developmental trajectories of Egypt from its larger continental African connection and questions of race. After all, from the late 19th century until the mid-1950’s Sudan and Egypt were run as one country. It was Nasser’s revolution that really brought an end to Anglo-Egyptian rule in Sudan. In fact Nasser’s regime was an attempt to resolve the contradiction of the developmental trajectories set in place by Mohammed Ali, Ali’s off spring and their Anglo-Egyptian condominium; the promise of nationalism, of course being that you could democratize development on behalf of the nation’s people. But as such, Egyptian independence was always tied to a very ambivalent relationship to Sudan and vice-versa. On the other hand, Sadat and Mubarak are failed attempts at speaking to these very same developmental patterns that have historical roots. So, we need to be cognizant of how those developmental trajectories map onto notions of race, and regionalism, because it tells us much about how social and political contradictions are resolved. Egypt’s African developmental trajectories also need to be seriously thought through if this present revolution is not going to simply sink back into neo-liberal hell. After all the revolution in present day Egypt signals the failure of post-colonial arrangements, but it also signals the failure of a 3rd world project that Nasser articulated in tandem with the Nkrumah(s), and the Tito(s), etc. Partly this project failed because it was elitist, but more importantly that elitism failed to interrogate national developmental trajectories and to build a truly inclusive popular nationalism (as our friend Franz Fanon might say).

In the case of Libya, then, we should be aware that Ghadaffi was a major player in African politics. So much so that he nearly convinced the African Union to move the seat of the organization to Libya. But again his involvement in politics was not just symbolic, Ghadaffi’s money and weapons are involved in nearly every major conflict on the continent from Sierre-Leone (whose rebels were known to consult the Green book) to the conflicts in Chad and Sudan. The political-economy of Libya is also such that it relies on the importation of large amounts of migrant labourers from the African continent as well as South Asia. Historically, of course, Tripoli was also an important destination in the trans-saharan trade routes (whose starting point lie in the forest regions of “darkest” Africa) bringing important trading goods to Libya that were then exported to the Mediterranean world and beyond. These historical ties are what Ghadaffi himself has mobilized in justification for why the AU should be based in Libya. In contrast to this we have been led to believe that there is a yawning gap between “black” mercenaries and the rest of civilized Libya. But, the claim about the use of black African mercenaries should be viewed with caution. After all, the constitution of Libya outside of an African context is an orientalist fallacy (and fantasy) that obscures the real histories of these places and can only play to a violently racist hand.

A few nights ago someone suggested to me that what tied Arabs together was a shared language and culture.  But spoken Arabic is not always intelligible to other Arabic speakers. In Oman, Yemen, Egypt, Sudan, Tunisia other linguistic practices exist which help form the locally spoken Arabic, but also remind us of other kinds of historical and cultural connections that make up these places (too diverse and complicated to get into now). I also remember being schooled by an Egyptian in Cairo, about why Egyptians are not Arabs. So again, I would venture to say things are complicated and this is not just a matter of identity politics. Instead, it seems that the afro-centrics speak a kernel of truth when they state that present historical methods tend to elide the myriad Afro-Arab connections. However, because the Afro-centrics refuse to periodize their claims, and because they make sweeping statements they end up projecting American history on to the rest of the world. Can we really accept the claim that so-called Arabs are inherently racist towards Black people? Yet, just because such a claim seems implausible it should not make it easy for us to dismiss the point that we need to pay attention to the way race has been operationalized in the framing of the present North African revolutions.

Indeed, because I don’t want to go afro-centric, I think it is better if we do some better dialectical thinking. So, while I would suggest that we need to not rewrite the history of the world as a footnote to America’s cultural wars, at the same time, we need to see that the rest of the world has increasingly come to see itself in highly racialised terms. This too needs to be explained (and only political-economy can explain it). But for now we also need to take seriously the kernel of protest and truth that the afro-centric folks speak about and build on it. Race does lie at the heart of many of these so called Arab revolutions in very complicated ways. Let’s not sweep this under the carpet in the name of self-righteous indignation or else we will add one more substantive reason for why these revolutions might come to nought.

Elleni Centime Zeleke
Adjunct Lecturer
African Studies
York University

The Loot and Scooters of Global Micro-Credit

I do not know if anyone was paying attention to the development debates of the late nineties and new millennium. The mainstream went whole hog on the idea of development from below via entrepreneurializing peasantries and urban slum-dwellers.

Indeed so illuminated by the idea of petty capitalism the Nobel committee gave one of its real Noble prizes, the Peace Prize for 2006, to Prof. Muhammad Yunus & Grameen Bank.

Of course in good time capitalistas with a social conscience, like George Soros, would get behind the idea and start financing large micro-credit investment houses. Of course capitalism being what is and regulations being what they are in India it appears the whole thing is turning into a giant Ponzi scheme which is fleecing the poorest of the poor.

But here is the twist, in India politicians and state officials are not suffering from ideological capture as they are elsewhere and have told their public to stop paying their loans. The New York Times reports that in one state over 90% of people have stopped servicing their micro-loans.

Here is what I take to be money quote from the NYT on globalized micro-finance:

“The money lender lives in the community,” he said. “At least you can burn down his house. With these companies, it is loot and scoot.”

Indeed, some of the anger appears to have been fuelled by the recent initial public offering of shares by SKS Microfinance, India’s largest for-profit microlender, backed by famous investors like George Soros and Vinod Khosla, a co-founder of Sun Microsystems.

Notice that the “he” in the above quote is a senior public official with the State government. Burning down the house of the money lender as a form of implicit social regulation. What a novel idea.