Links for 21st March, 2019

  1. “In a 2011 paper, trade-policy researchers Anwarul Hoda and Shravani Prakash analyzed the impact of “the proclivity of the U.S. administration to leverage the GSP program to achieve its economic and political objectives.” They found that with major developing-country trading partners “the reciprocity requirement has proved to be ineffectual.” In 1992, the U.S. stopped India’s preferential access for chemicals and pharmaceuticals in an effort to improve intellectual-property protection. New Delhi shrugged off the pain, and waited for a World Trade Organization agreement before amending its patent law, the researchers noted.”
    Andy Mukherjee doesn’t think the removal of the GSP support by the USA will have any meaningful impact on India’s exports to that country. He also cites an interesting paper (which I haven’t read yet), which seems to say essentially the same thing.
  2. “The opportunity is simple to describe but requires real effort to achieve: the community must enforce systems that build the external costs into the way that the industrialist does business. Faced with an incentive to decrease bycatch, waste or illness, the industrialist will do what industrialists always seek to do–make it work a little better, a little faster, a little more profitably.Industrialism can’t solve every problem, but it can go a very long way in solving the problems that it created in the first place.”
    Seth Godin (whose blog is a remarkable thing, by the way) gives his take on externalities, and makes the case that economists take a far too restrictive, anti-septic view of the problem. I’m putting words into his mouth, but that’s how I interpret it – and I’d agree. Certain problems can be identified best by economists, but perhaps the solutions lie outside the textbook. A useful article to read for starting discussions around externalities, the Coase theorem, Elinor Ostrom’s work, the role of culture in economics.
  3. “When it comes to the institutional framework, there are obviously massive differences between India and China. Any leader in India must contend with parliament, the courts and state governments. Also known as democracy. That limits how quickly stuff can get done. It can also save politicians from serious mistakes. China has competing interests and constituencies as well, but it’s not the same sport, let alone ballpark.”
    The article is about India’s less than stellar economic growth in the previous quarter, but that paragraph above was important to me. India is a functioning democracy, China anything but. That has it’s advantages, and its disadvantages – to both. A point worth remembering in many ways – one of which part of the focus of this article.
  4. “In the process, Netflix has discovered something startling: Despite a supposed surge in nationalism across the globe, many people like to watch movies and TV shows from other countries. “What we’re learning is that people have very diverse and eclectic tastes, and if you provide them with the world’s stories, they will be really adventurous, and they will find something unexpected,” Cindy Holland, Netflix’s vice president for original content, told me.”
    Farhad Majoo in the NYT about why Netflix is such a good thing. It’s a useful article to understand the impact Netflix is having the world over – but also a good article to learn about pricing, the implications of pricing, content discovery on Netflix.
  5. “For several years, India’s banks have been in the spotlight over their problematic lending to prominent industrialists. Now the mutual funds and non-bank lenders — who have taken increasingly important roles in the credit system amid the banks’ woes — are coming under similar scrutiny. That is good for the development of the Indian financial sector. But it is yet another headache for some hard-pressed members of the promoter class.”
    Simon Mundy in the FT on how the IBC has provided teeth to creditors in India – which is genuinely good news. But the transition is unlikely to be smooth, and there may well be some unexpected skeletons waiting to tumble out of the closet. A good read for finance, bankruptcy and non-bank lending in India.

On the Importance of Trade

So if getting rich is the point of economics, it begs a very important question. How?

That is, how does one go about getting rich? And economists have a one word answer to that question: trade. It is trade that makes us rich. It is trade that differentiates us from all other living things on this planet. It is trade, and this is no hyperbole, that defines who we are.

Because it is through trade that we are able to get from others (peaceably and through voluntary exchange) that which we cannot produce, while giving to still others that which we can. In simpler words: I’ll do what I can, and you’ll do what you can, and then lets trade.

This is by no means an original idea. Quite the opposite, in fact. And yet it remains an understated, undefended idea that doesn’t receive its fair share in the spotlight. But it needs to be said, explained and emphasized: trade is good. When we trade, we’re richer. As was explained last time around: we’re both richer.

And so an economist will (or should, at any rate) say that self-dependence is not a good thing. Voluntary trade with foreigners is good. Voluntary trade within a national boundary or outside of it – it doesn’t matter, it makes the people involved in that trade better off. And so the more that people trade, the richer they, and therefore the country they belong to, get.

The average Indian earned about 900 dollars in a year in 1947. Getting independence mattered for self-evident reasons, but it mattered in an economic sense as well, because trade was rather more voluntary after that. And that worked, because by the mid 1980’s, the average Indian was earning about 1350 dollars per year. That is, the average Indian was 50% richer by then.

But when trade was not just voluntary but also free of the encumbrances that our own government used to impose on us, that is, after the economic reforms of 1991 – why, then the average Indian was able to earn about 6000 dollars per year. From the mid-1980’s until today, the average Indian was 450% richer. That’s a lot of %!

Think about what we spoke about in the previous post: we’d want India to have rapid, stable, inclusive, sustainable growth within the framework of a political democracy. If that’s the dish you want to cook, then you need that all important ingredient: voluntary trade.

What voluntary trade does is that guarantees growth, and rapid growth, at that. That much is undeniably true. China after 1978, South Korea for the last four decades of the twentieth century, Singapore after 1965, and even India after 1991 – they’re all conclusive proof that trading more leads to more, and more rapid, growth.

Trade, unfortunately, does not necessarily guarantee the other three adjectives: it does not guarantee stable, inclusive or sustainable growth. That’s why the economics profession exists, and that’s why I get to write (and you get to read!) many, many more blog posts.

But hey – without trade, we got no story to tell. Remember that.