So No One Loses When It Comes to Trade, Right?…Right?! Part II

Actually, there is somebody who loses out in the case of the cook coming to work at our place.

But for this story to make sense, please first read last Friday’s post, and then yesterday’s post. I’ll wait, there’s no hurry. Done? All right, here we go.

So, as I was saying, there is somebody who loses out in that little story. Who? The amateur cook inside of me. That part of my personality loses out, given the fact that I’m optimizing for my income. Society rewards me more for boring people about economics than it does for me cooking meals for my family. In order to maximize my family’s income, I spend more time boring people about economics, and less time on practicing my cooking skills.

The more time I spend boring people about economics, the better I get at this skill. The less time I spend in cooking up delicious meals for my family, the worse I get at that skill. And so over time, I become a (hopefully!) better teacher of economics, and not as good a cook as I might have been.

And so, as I said, the amateur cook in me loses out in this trade. Or put another way – and if you are an economist reading this, you were probably getting impatient for me to say this – the opportunity cost of being an econ teacher is not being an amteur cook at home.

But this is exactly why international trade is such a political hot potato! Because in the case of trade between countries, as opposed to trade between individuals, there are people who will lose out. If a university in the United States of America hires me to teach online classes to the students over there, there isn’t a hypothetical amateur cook who is losing out. There is an actual person in that country who could have taught this course, but is no longer able to because of me.

The university that hired me is better off, because it is able to hire the services of a teacher for lesser money. To the extent that I do about as good a job as the person I replaced, the students are (at least) indifferent. And given how strong the dollar is, I am certainly better off!

But it is not enough to say that both parties in this trade are better off (I and the university). A complete economic analysis should also include the person in the USA who is out of a job, and I would argue that one should also include what I find myself unable to do here in India as a consequence of teaching that course abroad. Both of these are the opportunity costs of this trade, and a complete economic anlaysis should include these aspects as well.

Even if you were to include this analysis, it still makes sense to go ahead with this trade. It isn’t for free (TINSTAAFL) – that is to say, there are opportunity costs, but even so, the world as a whole is better off.

But how diffused/concentrated are the gains from this trade in both countries? The dollar value of this trade – the gains from trade – might be such that the parties who are a part of this trade are better off. But is the number of people who are better off more than the number of people who are worse off?

Don’t think about this in the context of my examplein this blogpost. What about in the case of importing cheap Chinse goods into India? What about in the case of India exporting software to America? What about in the case of cheap textiles being imported into India from Bangaldesh? Are the dollar gains in case of such trade concentrated, and are the number of people unemployed more diffuse?

And if so, should we just shrug and say that this is the cost of doing business? Or should we institute a form of government that seeks to redistribute the gains from international trade? How well might such a scheme work – does our understanding of governments and their performance the world over fill us with optimism that they can perform this task efficiently?

More: who is likely to have a louder voice in public discourse? Will it be the people who gain from trade, or the people who lose from trade? Who is the government therefore more likely to listen to? Should we therefore abandon international trade altogether? What role should academicians play in this discourse? What role do they play in this discourse?

And it is this that makes the study of international trade so very fascinating. The realization that trade is a Very Good Thing, but that at the same time it is Definitely Not Without Costs. Increasing international trade, while minimizing the damage done to the domestic economy is the tightrope that many countries have walked in the past, and not all of them have been successful all the time. Throw into the mix cultural factors, political pressures and environmental concerns, and you have the recipe for an extremely fertile field of study.

But if you have thought that international trade is just plain awesome, with no downsides, you’re wrong. And if you’ve thought that international trade is just plain horrible, with no upsides, you’re wrong. Getting both sides to talk to each other, and figuring out where exactly we should be on the Say Only No To Trade – Say Only Yes To Trade spectrum is an ongoing battle that will never end.

Enjoy the ride, for what else is there to do?

A Tale of Two Sports

Sport 1:

The Associate nations won four out of 11 matches against the Test-playing sides in this tournament. These are the most they have won in any edition of the men’s T20 World Cup. There were also a few close games in the seven they lost; two matches were decided within a margin of less than 20 runs, and the other two with less than ten balls to spare. This was clearly an improvement on the previous editions.
The 2021 T20 World Cup had 15 matches where the Associate nations were matched-up against Full Members, and they ended up winning just two games – both during the first round. Among the 13 games won by the Full Members, six were by a margin of 45-plus runs and another five games by seven or more wickets or 25-plus balls to spare.

Sport 2:

Perhaps one of the most striking aspects of the World Cup has been the willingness of the so-called weaker teams to advance further up the pitch to win the ball in opposition territory.
A defining part of Saudi Arabia’s shock 2-1 win over Argentina was the remarkably high defensive line, which not only rattled the opposition but also caught them offside a total of 10 times – leading to three disallowed goals. Japan’s second-half turnaround against Germany was built around a similar high press. In one of the more under-the-radar results, Tunisia’s well-earned draw against Denmark came from the same risky approach.
Teams that chose to sit back and wait for counter-attacking opportunities alone – like Iran, Costa Rica, and Serbia – all faced big defeats.

  1. Small sample size, I know. But leave aside statistical rigor for the moment. Would it be right to assume that weaker teams are gradually getting better over time? Is this a hypothesis worth examining? Why has men’s tennis been telling us a very different story for the past two decades?
  2. The IE article talks about the specific tactics and strategies that have benefited the weaker teams in the football World Cup. What (if any) common strategies and tactics, have there been to the weaker teams that did well in the T20 World Cup?
  3. How might (and how should) the stronger teams adapt to these new strategies by the weaker teams when it comes to football? What about the stronger cricket teams?
  4. Playing the riskier strategy seems to be, counter-intuitively, the better (not necessarily safer!) thing to do, and you could argue that this is true for weaker nations in both sports. What does this say about the nature of both sports today? How much of this can be explained using game theory (what should be your rational strategy as the coach of a weaker team in a tournament such as this? What should be your rational strategy, given your best guess re: the previous question, as the coach of a stronger team in a tournament such as this?)
  5. Whatever our answers to these questions, how do they help us understand the world around us better today? Do they help us understand, say, geopolitical conflicts better? Corporate takeovers? If yes, how? If not, why not?

One of the random questions I recieved in class yesterday was about me asking five random questions to the students for a change instead. I had fun being on the other side for a change, and I’m going to enjoy pondering over these questions over the weekend.

If you think you “get” international economics, try deciphering China’s data

I wish you good luck:

Incentives Matter, the International Trade Edition

A chart and a paragraph from The Economist to get us started today. First, the chart:

I’ve been a student of economics for a little more than two decades, and the one thing that is quite familiar to me in this chart is how large China’s share is in US imports (that’s what the “17” at the bottom right of the chart represents. Spend some time going over the rest of the numbers on the right of this chart, and come to the realization that China is about 50% more than all of the other nations on this chart combined.)

Being a student of economics in these past two decades makes it inevitable that some notions of how the world works and functions will get deeply ingrained. And the idea that China will be much larger in everything compared to, often, the addition of all other countries performances has become a useful rule of thumb. Note that I am not advocating forming such a rule for the future – I’m simply saying this has been the case for the past two decades.

But as the Nobel Laureate said, the times, they’re a-changin’:

Yet Mr Trump’s tariffs seem to have played an important role. According to recent analysis of industry data by Chad Bown of the Peterson Institute for International Economics, a think-tank, China’s share of America’s imports rose from 36% to 39% this year in goods not covered by tariffs. For goods subject to a 7.5% tariff, however, China’s share sank from 24% to 18%. And for those hit by a whopping 25% tariff, which covers lots of it equipment, China’s share of imports fell from 16% to 10%. Overall America is now much less dependent on Chinese goods, from furniture to semiconductors. (Emphasis added)

This post isn’t about whether Trump should have imposed those tariffs or not, nor is it about whether those tariffs have been worth it. That is an important topic, but we’re going to skip over it in today’s post. Today is just a reaffirmation of a principle of economics:

When something becomes more expensive, there will be lesser demand for it.

That, of course, is just another way to state the law of demand. You can draw a curve, if you like, or you can phrase it the way I did, or you can write out a paragraph that gives an application of the law, like The Economist did. But the next time you read people opining about whether Policy X will work or not, ask yourself how the incentives have been realigned as a consequence of the new policy.

By how much will demand go down (elasticity), should this policy be implemented or not (geopolitics), and what might be the impact of this policy on China and America and other nations (international trade) are all excellent questions, and they will keep all manner of professionals busy for decades to come.

But again, that’s for another day. Today’s post is about helping you realize that the law of demand is one way to understand incentives, and (don’t stop me even if you have heard this before) it is about chanting a mantra that all economics students would do well to internalize:

Incentives Matter

Atif Mian on Pakistan

We live in a troubled neighborhood and in scary times.

David Samuels Interviews Edward Luttwak

and what an excellent, enjoyable read this was!

I hadn’t read anything by David Samuels before, and my reading list is now considerably expanded. The reason I bring this up is because this is one of those rare interviews where you find yourself wanting to learn at least as much about the interviewer as you do about the interviewee!

But speaking of the interviewee, this is where you can learn more about Edward Luttwak. Here is an old article written by him that I am currently struggling with (and I mean that as a compliment). And here is a longish profile of Luttwak in The Guardian.

The interview was wide-ranging, detailed and I’m not sure I got all the references and implications (and don’t get me wrong, that is a wonderful thing). My notes follow.

  1. As with Mark Mobius yesterday, so with Edward Luttwak today. Travel, especially at a young age, really matters.
  2. The sociology of playing with the children of the Mafia bosses was fascinating
  3. The anticipated rolling over of the Ukrainian forces, why it didn’t happen, and the parallels with the fighting in the first world war reminded me of parts of Adam Tooze’s very long essay about the D-Day landings.
  4. Warfare 4.0 reminds me very strongly of Industry 4.0, because I understand neither of them.
  5. The art of acquiring information by looking, thinking and inferring is a valuable one in other fields too. Savor the bit about figuring out how to kill a general.
  6. “One book I’ve never written, is “The Impact of the Arrival of Nicotine and the Scientific Revolution.” A big jump in intellectual achievement that took place among Europeans, all of whom smoked. The social history of nicotine begins with the sharpening of the brain. I stopped smoking long ago but still I miss it.”
    I don’t smoke, but this reminded me of the story about mandated caffeine breaks.
  7. If you read enough Frederick Forsyth novels, you will eventually come to be familiar with two words: elint and humint. Electronic intelligence and human intelligence. Luttwak is, to put it mildly, disparaging towards elint, and it is interesting to draw parallels between this and Mark Mobius’ insistence that nothing beats traveling and seeing things for yourself.
  8. “Well, how I would like it [The Ukrainian war] to end is with a weak and contemptible compromise. I would like it to end with the Russians being offered the opportunity to have a properly supervised plebiscite in Luhansk and Donetsk oblasts, and may the best man win. Putin can turn around and tell the Russian people he won a great victory, the right of plebiscites for the poor Russians. If he loses the plebiscites, so be it. To have a plebiscite you have to have first a negotiation, which requires an armistice. To have an armistice you have to have a cease-fire. The moment there is a cease-fire, you lift all the sanctions, so that the Russians have a reason to respect the cease-fire. Lift them all at once. And that’s how we get out.”
  9. “In Vladivostok, there is a wonderful female scholar at the Navy University, this is the university run by the Russian Navy. She wrote an article about Chinese border policy and about active claims and dormant claims. In that article, she says that the Chinese are advancing many territorial claims against the Japanese, for the Senkakus, against the Philippines, against the Indonesians for the Natuna offshore, and for almost the whole of Arunachal state in India and part of Ladakh. Then she said, “And then there are the dormant claims that will be activated when the Chinese feel strong enough to do so.” Two of them, the most important, are the Treaty of Aigun in 1858 and the Beijing Convention of 1860, involving the transfer of the maritime provinces to Russia.”
  10. “Now, the official translation of Vladivostok into Chinese is a straight transliteration, Fúlādíwòsītuōkè, that is Vladivostok in Chinese characters. But unofficially, they use Haishenwai, which is not of course Chinese, it’s Manchurian, because the whole Chinese claim to Manchuria, Tibet, and Xinjiang is bogus because they were all under Manchu rule when the Chinese themselves were under the rule of the Manchu. It’s like Sri Lanka claiming to rule India because both were ruled by the British, and this false claim is the basis of everything there.”
    Also huh.
  11. His reasoning for why “Taiwan is off the table” is fascinating, precisely because the previous answer emphasizes Xi’s ego. Does economics trump (pun not intended) ego? Or is it the other way around?
  12. David Saul’s very long question about America is a great read, never mind the answer. And the Biden-Obama equation was an eye-opener for me.

Scale, Countries and Organizations

Excerpt 1:

“The Rise and Decline of Nations” put forth Mancur Olson’s theory to explain macroeconomic growth. Why do some countries grow quickly and others slowly? Why do some countries grow quickly at some times and slow at others? Though he doesn’t claim that it is the only factor, he answers that a main reason for this effect is that over time, in stable countries with unchanged boundaries, distributional coalitions (interest groups, collusive organizations) start to form and grow. The longer the country is stable, the more distributional coalitions it will have. These groups influence politics to gain benefits for their group, thereby imposing economic inefficiencies on the country.

Excerpt 2:

If you compare a Starbucks of ten years ago to a current one, they’re virtually the same. Compare this to the originals in Seattle, and the difference is startling.
The same goes for the design of a typical McDonald’s.
Apple launched the Mac with about a dozen full-time people working on its development. Today, they have more than a thousand times as many engineers and they haven’t launched a groundbreaking product in a while.
The same goes for Google. And Slack.
It’s not just famous big brands. Just about every organization hits a point where the pace of innovation slows as scale increases.

On the face of it, these might not seem very (or even at all) similar, but if you ask me, the underlying commonality is that both excerpts are talking about why and how continuing to grow at the same rate once you’re talking about a large organization (or a country) is very difficult.

Seth lists out a number of possible reasons for why firms innovate less over time:

  • Technical debt (shortcuts taken to make sure things work for now, future complications be damned)
  • Handshake overhead (the article I’ve linked to refers back to Seth’s post, but also has an interesting application of the idea)
  • Customer commitments (existing customers would prefer that you stick with the tried and tested, rather than try new things)
  • Partner preferences (same point as above, but with folks/organisations you work with, not customers)
  • Wall street’s fear (don’t rock the boat, go with what works)
  • Managerial anxiety (when leadership is replaced with bureaucracy that much rather do the bare minimum rather than experiment and try risky things)

Seth goes on in his post to talk about potential solutions to this problem. He mentions two things:

  • Boring as a strategy: iterative improvements on a regular drip schedule, and nothing out of the ordinary, ever.
  • Structural bankruptcy: by which he means one should ‘spin off the cash cow’ and go do something new with a brand new team.

Can these ideas be applied to nations? That is, can these solutions work to arrest the decline of nations? The decline of nations is a hard thing to define, let alone measure, but I think I am safe in assuming that we ‘kind of know it when we see it’. That won’t pass muster in a classroom discussion, let alone an academic paper, but you’ll allow me this laxity in a blog post, I hope. Here’s a thread that might help explain what I’m trying to get at.

I don’t know if these ideas can be applied to nations, but it is certainly true that (some, but not all) nations have a problem that needs addressing:

Andreessen’s essay ends with a call for mentorship, social pressure, and a realignment of priorities. “Every step of the way, to everyone around us, we should be asking the question, what are you building?” He writes. “What are you building directly, or helping other people to build, or teaching other people to build, or taking care of people who are building? If the work you’re doing isn’t either leading to something being built or taking care of people directly, we’ve failed you.”
I don’t think that’ll be enough. So let me end with my answer to Andreessen’s question: What should we build? We should build institutions biased toward action and ambition, rather than inaction and incrementalism.

But the problem lies in that fact that ‘spinning off the cash cow and doing something new with a brand new team’ might be possible in a firm, but is all but impossible in a country with a democratically elected government, and that is (almost certainly) a good thing:

But that means doing the difficult work of reforming existing institutions that aren’t going anywhere. You can’t sidestep the existence of the government, as too many in Silicon Valley want to do. You have to engage with it. You have to muster the political power to rebuild parts of it. And then you need to use the government to make markets competitive again.

It makes me tired just thinking about what that paragraph means in practice, let alone trying to figure out how to come up with a plan for it… and definitely let alone trying to implement a plan like that. But it is oh-so-necessary, and not just for the United States of America.

The Rise and Decline of Nations, by Mancur Olson is a great book to read (but take your time over it, please). Read it, and reflect on how to use the ideas in that book to either arrest or prevent a decline in your own nation.

But also reflect on how that book has the power to help you explain why the organization you are working for may be in decline, and that, for me, makes this book a truly great one:

The persuasiveness of a theory depends not only on how many facts are
explained, but also on how diverse are the kinds of facts explained. Darwin’s
theory offers insights into the origin and evolution of creatures as diverse as
whales and bacteria, and this makes it more convincing than if it could explain
only mosquitoes, however many millions of mosquitoes might be satisfactorily
explained. If a theory explains facts of quite diverse kinds it has what William
Whewell, a nineteenth-century writer on scientific method, called
“consilience.” Whewell argued that “no example can be pointed out, in the
whole history of science, so far as I am aware, in which this consilience…has
given testimony in favor of an hypothesis later discovered to be false.

Olson, M. (2008). The rise and decline of nations. In The Rise and Decline of Nations. Yale University Press.

On State Capacity

A student of mine and I have been sending each other papers, books and articles on state capacity, and it has been a very enjoyable exchange, with lots of interesting stuff to read and ponder upon.

What is state capacity, you ask?

Here’s a definition that I came across recently, and I think it does a very good job:

“State capacity is the ability to design and execute policy effectively”

That quote/definition is by Brink Lindsey, and he’s got a recently published paper on the topic that is worth reading.

That paper’s executive summary has another definition of state capacity, with an explanation for why it matters so much in the rest of the paragraph that follows:

State capacity refers to the government’s ability to do its job effectively: to raise taxes, maintain order, and provide public goods. A series of calamities during the 21st century—the Iraq War, Hurricane Katrina,
the financial crisis, and most recently the COVID-19 pandemic—have made it painfully clear that American state capacity is not what it once was. This deficit not only undermines effective public policy in a wide variety of important domains; with our republic now so deeply polarized, it threatens the legitimacy and continued vitality of liberal democracy as well.

Matters so much, that is, in an American context, although my argument is that state capacity matters in all countries, at all points of time.

Consider China, for example:

State capacity is a difficult concept to make concrete: a government’s ability to do stuff is obviously important, but how to tell if it is high or low? As a useful overview over at the Broadstreet blog shows, the most common way to measure state capacity in general is to measure fiscal capacity: the government’s ability to extract revenue from the economy. This makes sense historically, as the growth over the last few centuries of governments’ ability to do things like wage wars and provide social benefits went hand-in-hand with the development of tax systems and debt markets.
For the 20th century onward, the authors suggest a more precise metric: “To measure the fiscal capacity of the modern state, we use the share of income tax revenue in total tax revenue, as the collection of the income tax calls for high administrative capacity to ensure compliance.” This is an interesting choice, as on this measure China is a real edge case.

Read the rest of the blog post to understand why China is an edge case, and reflect on how difficult it is to define and measure state capacity. But that being said, never, ever underestimate its importance.

But why, you might wonder, is state capacity so important? Why can’t we rely on markets to get the job done? Well, this is where things get really tricky. But let’s begin with a simple question, and one that you’ve been asked before on these pages:

What are you optimizing for?

That is, when you say that one should rely on markets to get the job done, you need to be clear about what the job is, and you need to be clear about your metrics for considering said job to be one that is well done.

Say you, as part of the leadership in your country, would like to have a well functioning steel industry. You would like this industry to be robust, resilient, competitive, with a large presence (at least eventually) of domestic producers – and you would like it to be profitable. How do you make that happen?

Or, if you would like to be very specific, how did a country like South Korea get its steel industry up and running?

It was not easy getting the Pohang plant financed and built. The Korean government tried three times in the 1960s to move the project ahead, presenting different, detailed plans. But equipment suppliers would not advance credit and financiers – including the World Bank – would not lend to the kind of large-scale, integrated operation that the Koreans wanted. A World Bank report published in November 1968 cited the failures of major integrated steel projects in Brazil, Mexico, Turkey and Venezuela. In the end, Park financed Pohang by using Japanese war reparations. He put his favourite student from his teaching days at the Korean Military Academy, a 43-year-old general called Park Tae Joon, in charge. The younger Park had already turned around a state mining company. Each day workers at Pohang were lined up in front of the main, corrugated-iron site office and told that Japanese reparations money was being used for the project and that it was preferable to die rather than suffer the humiliation of wasting the money.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (pp. 116-117). Grove Atlantic. Kindle Edition.

This is a book I have recommended before, and will recommend again. It just is that good a read. In the paragraphs that follow, Studwell goes on to explain the factors that made POSCO such a huge success.

  1. A focus on scale from the get-go, but married to a step-by-step approach
  2. Being open to technical advice from abroad, but never being reliant on only one source
  3. A gargantuan appetite to learn more about the industry
  4. A relentless focus on exporting the steel that was produced
  5. Subsidies for the plant – they only had to ask, and they got (subject to the fourth point above being met!)

POSCO, the South Korean steel producer, is now a globally recognized brand name, and is a behemoth on the global stage, let alone South Korea. The South Korean steel industry may not be very competitive (there are only three players), but it is robust, it is resilient, has domestic producers, and is profitable.

And as Studwell’s book makes clear, this needed the presence of the state. Left to its own devices, there would likely have been no domestic steel industry in South Korea.

Was the approach adopted by the South Korean government perfect? Nope. Did it tick all the boxes? Nope. Could a different approach by either the South Korean government itself, or by South Korean industry have done a better job?

That’s the devil of it where economics is concerned, because we will never know. We can’t go back in time, try a different approach and compare the results – all we can do is hypothesize, or compare South Korea’s experience with that of other countries, all the while keeping in mind that it will never be an apples to apples comparison.

But I will say this much and I think there is a broad consensus on this: state led industrial policy matters. What shape it should take, to what extent and for how long, and whether different countries should have different industrial policies are topics that will provide employment and educative opportunities (of an excellent kind!) for years to come.

But industrial policy? It really, really matters.

Ezra Klein’s point in his essay is about American state capacity (and naturally so, of course). This is how he ends his essay:

Democrats spend too much time and energy imagining the policies that a capable government could execute and not nearly enough time imagining how to make a government capable of executing them. It is not only markets that have failed.

My point, if you are a student of economics anywhere in the world is this: it is not only America that needs to think deeply about this topic.

Interesting Times Indeed

Shown here are two people who, in my opinion, have perhaps done more for India than anybody else. That’s the kind of remark that can keep Twitter going for days, but I would honestly be surprised if these two didn’t make at least the top ten for most people.

Who are they? M.S. Swaminathan on the left, and Norman Borlaug on the right. And what, you might ask, are they famous for? Almost every student in India is likely to say “The Green Revolution!” by way of response, and they wouldn’t be incorrect.

Read the entire Wikipedia article, because it is quite the story. And if, after reading the article, you still wish to learn more, consider reading a book called The Wizard and the Prophet:

In November 1963, Swaminathan received the next shipment of Borlaug’s wheat: 220 pounds each of four commercially released varieties and samples of another 600 breeding lines that were promising but not yet commercially available. IARI researchers divided the wheat among five-acre plots in four different experimental stations. The results were remarkable. Indian farmers typically reaped less than half a ton per acre. The four Mexican varieties yielded a per-acre average of about a ton and a half, and some plots came in at almost two tons.

Mann, Charles C.. The Wizard and the Prophet: Two Groundbreaking Scientists and Their Conflicting Visions of the Future of Our Planet (Kindle Locations 6706-6710). Pan Macmillan. Kindle Edition. (Emphasis added)

How and why India (and other nations) fell short in terms of food production, Borlaug’s research in Mexico, and the fascinating story of how both Borlaug and his wheat made it to Asia is told incredibly well in the book (there is much more in the book besides, and I mean that as a compliment), and I would strongly recommend you read it.

Their work has gone a very long way towards making sure that the so called Malthusian Trap hasn’t really been a problem for most countries.

But well, we live in interesting times.

Russia and Ukraine supply 28% of globally traded wheat, 29% of the barley, 15% of the maize and 75% of the sunflower oil. Russia and Ukraine contribute about half the cereals imported by Lebanon and Tunisia; for Libya and Egypt the figure is two-thirds. Ukraine’s food exports provide the calories to feed 400m people. The war is disrupting these supplies because Ukraine has mined its waters to deter an assault, and Russia is blockading the port of Odessa.
Even before the invasion the World Food Programme had warned that 2022 would be a terrible year. China, the largest wheat producer, has said that, after rains delayed planting last year, this crop may be its worst-ever. Now, in addition to the extreme temperatures in India, the world’s second-largest producer, a lack of rain threatens to sap yields in other breadbaskets, from America’s wheat belt to the Beauce region of France. The Horn of Africa is being ravaged by its worst drought in four decades. Welcome to the era of climate change.
All this will have a grievous effect on the poor. Households in emerging economies spend 25% of their budgets on food—and in sub-Saharan Africa as much as 40%. In Egypt bread provides 30% of all calories. In many importing countries, governments cannot afford subsidies to increase the help to the poor, especially if they also import energy—another market in turmoil.

The effects are already being felt the world over, and as the article points out, this is likely to get much worse before it gets better, and for a variety of reasons. These are worth listing out:

  1. The war in Ukraine has resulted in supply chain disruptions
  2. Unexpected changes in weather patterns the world over. You may wish to debate the word “unexpected”, and I would be in agreement with you!
  3. Raging inflationary pressures due to loose monetary policies (how loose for how long with what effects is a topic that will turn into a miniature cottage industry in academia)
  4. A steep rise in oil prices, which impacts and is in turn impacted by 1., 2. and 3.

And the worst of it is that none of these factors look likely to subside anytime soon. And once you bake in the inevitable political response in most countries, you have found a way to make a bad problem worse:

Since the war started, 23 countries from Kazakhstan to Kuwait have declared severe restrictions on food exports that cover 10% of globally traded calories. More than one-fifth of all fertiliser exports are restricted. If trade stops, famine will ensue.

This is a story worth keeping track of, and you can be assured that all governments will be doing just that. Working through the myriad implications of multiple scenarios in a geopolitical situation as volatile as the one we’re going through right now is a migraine inducing thought, but it needs to be done.

Make no mistake, these are very interesting times indeed.

But on the plus side, imagine where we might have found ourselves today had the Green Revolution not taken place.

Read The Wizard and the Prophet, please.

Imports, Exports and GDP

“The key is to understand that imports are also included in consumption, investment, and government spending. The real GDP breakdown looks like this:

  • GDP = Domestically produced consumption + Imported consumption + Domestically produced investment + Imported investment + Government spending on domestically produced stuff + Government spending on imported stuff + Exports – Imports

So you can see that while imports are subtracted from GDP at the end of this equation, they’re also added to the earlier parts of the equation. In other words, imports are first added to GDP and then subtracted out again. So the total contribution of imports on GDP is zero.”

That is an excerpt from a lovely little write-up by Noah Smith on his Substack, and one that I’ll be using whenever I teach macro. It’s lovely for many reasons, but most of all for the reason that the bullet point goes a very long way towards making the point that a lot of folks miss: you don’t get rich by importing less.

When I say “you”, I mean the country in question – and this equation, written out this way, helps us understand why. If you’re a student of macro, and are under the impression that India will get richer if only we imported lesser, think about the definition of GDP:

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

If you think about it, how can imports possibly qualify as being produced within a country’s borders? As Noah says, the equation can also be written like this:

GDP = Domestically produced consumption + Domestically produced investment + Government spending on domestically produced stuff + Exports

Read the rest of Noah’s post, especially if you are a student of macroeconomics. It should help clear up a lot of basic, but important and often misunderstood ideas about GDP calculations.

Russia has stopped publishing detailed monthly trade statistics. But figures from its trading partners can be used to work out what is going on. They suggest that, as imports slide and exports hold up, Russia is running a record trade surplus.
On May 9th China reported that its goods exports to Russia fell by over a quarter in April, compared with a year earlier, while its imports from Russia rose by more than 56%. Germany reported a 62% monthly drop in exports to Russia in March, and its imports fell by 3%. Adding up such flows across eight of Russia’s biggest trading partners, we estimate that Russian imports have fallen by about 44% since the invasion of Ukraine, while its exports have risen by roughly 8%.

Think about the previous section, and try and answer this question: is Russia poorer or richer or unchanged because Russia isn’t importing as much, as measured by GDP and changes in GDP?

Well, Russia may be worse off, and Russians may be worse off. It’s leader?

As a result, analysts expect Russia’s trade surplus to hit record highs in the coming months. The iif reckons that in 2022 the current-account surplus, which includes trade and some financial flows, could come in at $250bn (15% of last year’s gdp), more than double the $120bn recorded in 2021. That sanctions have boosted Russia’s trade surplus, and thus helped finance the war, is disappointing, says Mr Vistesen. Ms Ribakova reckons that the efficacy of financial sanctions may have reached its limits. A decision to tighten trade sanctions must come next.
But such measures could take time to take effect. Even if the eu enacts its proposal to ban Russian oil, the embargo would be phased in so slowly that the bloc’s oil imports from Russia would fall by just 19% this year, says Liam Peach of Capital Economics, a consultancy. The full impact of these sanctions would be felt only at the start of 2023—by which point Mr Putin will have amassed billions to fund his war. (Emphasis added)

Macro is hard! But it also matters, especially at times such as these.