Wednesday, January 30, 2008

Economic Development in Iraq

Yesterday, VMI hosted Hon. Robert M. Kimmett, Deputy Secretary of the Treasury to give some "remarks" about the Treasury's involvement in economic development in Iraq. His speech was dignified, and well-written, but clearly had been vetted for reasons of security, and probably politics. He remarked how the Treasury has taken an elevated role in helping develop Iraq economically, as our military helps them remain secure militarily.

One important issue in the development of Iraq is the role of oil and natural resources, and the risk of contracting a "Dutch Disease" or "resource curse" whereby profits generated by high prices and favorable terms of trade in the resource sector for exports essentially "crowds out" private investment in the manufacturing sector. So, when we met, I asked him about it whether this was a risk for Iraq, and answered, "no…" and went on to list a number of sectors in which Iraq has seen substantial progress. They included (in no particular order): the construction of roads, the building of schools, hospitals, and agriculture. But, with the exception of agriculture, sectors mostly represent "public goods," and most countries for which the resource curse is applied DO see impressive development in the provision of these public goods. Examples include Dubai, Saudi Arabia, and even Norway.

What is more troubling is how this economic structure might contribute to perpetuation of ethnic tensions. Put in broad terms, when there are factions in a society that identify on ethnic grounds, violence and tensions tend to arise on two fault lines: (1) they arise on the basis of control over the rents received from some strategic resource, and; (2) the ability to control the provision of public goods and confiscate their use for your own faction (and, exclude their use from the other).

Tuesday, January 29, 2008

The State of Trade in the Union

Mr. Bush, like a number of other closet isolationists out there called tonight for us to "level the playing field" with respect to trade. Essentially what he means by this is that we should negotiate trade agreements and push other countries to open their own economies to us before we'd be willing to open our own. I think that this is a good idea in principle, and it is a well-documented fact that developing countries (those "cheap labor" countries Lou Dobbs reviles so) have higher levels of trade restrictions than the US and other high income countries. However, making the ultimatum that we will not open if you do not match us misses two important points: First, trade is not a zero-sum game and even unilateral openness improves welfare both at home and abroad, and second, his insistence that developing countries reciprocate ignores the historical foundations of GATT (now the WTO) and the provisions and principles of the treaties on trade entered into by the US since World War II.

I'll pass on the virtues of unilateralism versus multilateralism, because it will bore those who have read past posts on trade. The basic history of trade restrictions in developing countries goes roughly as follows. A lot of people rightly worry that export-biased growth can lead to lead to a secular decline in export prices (a deterioration in the terms of trade), especially for developing countries whose comparative advantage is typically in primary commodities like sugar, coffee, bananas, oranges, or even oil (before OPEC). This deterioration can lead to a welfare reduction for these countries, even when real output (physical quantity of goods) is increasing. This is the basic "Prebisch Thesis." It was thought that restricting trade, and therefore substituting industrial imports from rich countries for domestic production, would help in the industrialization and development process. It was a fancy version of the old "infant industry" argument for tariffs, but it was much more convincing and coherent because the Prebisch Thesis was well supported by empirical evidence. But as with the old infant industries, these babies essentially never grew up. In addition one thing that was neglected was that growth (even in a primary commodity sector) can have the potential of freeing up economic resources to expand and diversify the economy. The eventual result, in the best case scenario, can create enough momentum for a developing economy, that auto makers in India eventually begin outsourcing to the US and the UK (which actually happened a couple weeks ago, by the way).


Monday, January 28, 2008

This Little Piggy…

For the second year in a row, President Bush is on the warpath over "earmark spending" commonly known as "pork projects." These add-ons are frustrating and are a nice straw man for a grouchy executive. Yet how significant are they?

Earmark "pork" spending was about $17 billion in 2007; the federal budget deficit was $450 billion, give or take a billion here or there. Discretionary spending is budgeted money that the President negotiates into the budget and over which he (or perhaps she at some point in the future) has discretion. In 2000, federal discretionary spending was about $584 billion; by 2007, it was $1.05 trillion – George Bush, defender of small government has almost doubled his own personal corner of the budget, according to the Economic Report of the President. By contrast, Bill Clinton, that tax-and-spend liberal, entered office with discretionary spending at $531 billion; when he left it was $584 billion. That amounts to a 12.5% increase in 8 years compared with Bush's 90%+ increase in just 7.

Mr. Bush says he favors workers and small business, yet the combined budgets of Commerce, Labor and the Small Business Administration fell (in nominal terms) from $18.3 billion to $17.8 billion. Facing threat from climate change, wildfires, and rising energy prices, the combined spending on the Interior, Energy and the EPA went from $33.8 billion to $23.5 billion. Of course the 800 point elephant in the room is international discretionary spending, which is largely going to the war in Iraq. I've consistently believed that regardless of what you believe about the war in Iraq or the global war on terror, I've never thought that Iraq was the theater that gave us the most "Bang" for our federal buck – I still do, and the explosion in discretionary spending underscores that point. I'm not saying that I disagree with Mr. Bush (and other tax-cutting, big-spending republicans like Richard Nixon and Ronald Reagan) in principle that smaller government is good. Rather, I'd say that I want conservatives to start being true to their rhetoric.