Thursday, January 30, 2014

Rodrik, Piketty, Milanovic and European federalism

The costs and benefits of secession for a relatively rich region like Catalonia cannot be disentangled from the the issue of European federalism. By such federalism, I mean democratic (and not technocratic) common decisions applied to a selection of key policies for countries in the Eurozone, along the lines of the proposal for a budget commission by Thomas Piketty. That would imply the de facto elimination of national borders on these issues.
An article by the economist Rodriguez Mora and co-authors illustrates the ‘border effect’ in international trade. If Catalonia were to secede and a new border was created, exchange with the rest of Spain would decline to a level similar to that between Portugal and Spain. The article calculates that the cost of this decline in trade would reach 9 per cent of GDP, which is more than the fiscal deficit that Catalonia would save relative to the rest of Spain. The authors also find that the border effect is in general substantial between pairs of European countries, even in the context of the single market and the currency union.
Critics have said that the reduction in trade between Catalonia and the rest of Spain would take time, and even in the long run it is hard to imagine that Spaniards would lose the ability to interact with Catalans (who speak Spanish and do not have any personal reason not to trade with Spaniards), and that any decline would be compensated for by increased trade with other (presumably European) countries.
But trade is not something that just happens without institutional pre-conditions. If the gradual reduction in trade with the rest of Spain is compensated for by an increase in trade with the rest of the EU, it would mean (unless one thinks that trade does not need supporting mechanisms) that relations with the rest of the EU would have to include institutions that facilitate the volume of trade that Catalonia has built with Spain over centuries.
(See the whole article here, in EUROPP)

Sunday, January 26, 2014

Intolerant nationalists calling a journalist "imbecile"

Matt Moffett from the Wall Street Journal has published a pretty balanced report on the drive for independence in Catalonia. In this piece, he describes the support for independence of some Catalan economists, and the disagreement with them of some other very prestigious economists (and another one, familiar to the readers of this blog). A twit reflects a reaction that is typical of some intolerant nationalist quarters when you don't dance to their tune: "you must be an imbecile when you pronounce yourself about a country whose history you don't know. Matt Moffett is the proof." Of course, this piece in the Wall Street Journal reflects once again the failure of the Catalan secessionists to obtain any relevant international support for their cause. As the article says, the support of some intellectuals for this cause reflects more that they are nationalist rather than they are intellectuals (economists in this case). I do not agree with all the piece says. I would have wished that he talks more about the federalist alternative, as the Financial Times did, but overall, as I said, I think it is quite balanced. So the fact that it ignites such intolerant reactions in the social networks can give you an idea of what happens when someone openly and totally disagrees with them.

Wednesday, January 22, 2014

Political capture and economic inequality

A new report by Oxfam illustrates the clear links between the political power of the rich and increasing inequalites. If you do not think this is a problem, reflect about this: the 85 richest individuals in the world have the same wealth as the 3.5 billion poorest people on the planet. Here is what the report says:
"This massive concentration of economic resources in the hands of fewer people presents a significant threat to inclusive political and economic systems. Instead of moving forward together, people are increasingly separated by economic and political power, inevitably heightening social tensions and increasing the risk of societal breakdown. Oxfam’s polling from across the world captures the belief of many that laws and regulations are now designed to benefit the rich. A survey in six countries (Spain, Brazil, India, South Africa, the UK and the US) showed that a majority of people believe that laws are skewed in favor of the rich. The impact of political capture is striking. Rich and poor countries alike are affected. Financial deregulation, skewed tax systems and rules facilitating evasion, austerity economics, policies that disproportionately harm women, and captured oil and mineral revenues are all examples given in this paper. The short cases included are each intended to offer a sense of how political capture produces ill gotten wealth, which perpetuates economic inequality"

Wednesday, January 15, 2014

The illusion of destiny

I have been reading Amartya Sen's book "Identity and Violence. The Illusion of Destiny." It is an essay that explains the diversity of identities that each of us has, and the dangers of focusing attention on only one of these identities. Sen argues that even moderates who try to fight identity fanatics often make the mistakes of accepting that there are separate identities, that the world can be partitioned into identities, or even worse into civilizations. An example of this is the theory of the "clash of civilizations," where it is claimed that the world can be explained more and more by the west and its values centered on freedom fighting its enemies from Islam and other anti-democratic identities in other latitudes. Sen makes a strong case against associating the west with freedom and democracy, by pointing out many examples in which the west has been associated to the opposite of them (the Inquisition, the Holocaust), and by giving several examples of democratic traditions in Asia, the Middle East or Africa. Amartya Sen's words: "To be sure, the assumption of singularity is not only the staple nourishment of many theories of identity, it is also (...) a frequently used weapon of sectarian activists who want the targeted people to ignore altogether all other linkages that could moderate their loyalty to the specially marked herd."

Wednesday, January 8, 2014

Small nations do very well in large federations

In 1957 the International Economic Association organized a conference to discuss about the economic consequences of the size of nations. The results were published in a volume in 1960 that I could find in my university's library. In the introduction, E.A.G. Robinson explained that although the issue had not been studied in depth until then, it deserved closer scrutiny, since national borders involved then significant discontinuities in terms of currencies, tariffs, communications, armies and population movements. The first article in the book was written by Simon Kuznets, who some years earlier had published his classical work on the relationship between development and inequality ("his" inverse U). It is interesting that in his article Kuznets does not say that small nations are better in any sense than larger nations, but that they face specific challenges, and that those small nations that succeed economically are those that are able to overcome their main drawbacks: lack of scale economies and lack of diversification. The usual way to overcome this was through trade openness and institutional innovation. The style of Kuznets was cautious and pragmatic. Some decades later, in a world where borders create much less discontinuities, a literature pioneered by Italian economists Alesina and Spolaore emerged extolling the virtues of small nations, as if it was possible or easy to suddenly become small. If following universalistic values we apply it to all the world, either we should increase the number of independent countries form 200 to 2000 perhaps, or we should shrink the world or Europe (so that they become small) if we believe in global or at least European federalism. Of course, in the world we observe a coexistence of very small, small, medium and large countries, and many of them are forging closer unions that create the institutional pre-conditions that are necessary for continued economic exchange. In Europe, many small nations seem mostly happy to be participating in the experiment of creating a Europe without borders.

Thursday, January 2, 2014

Milanovic reviews Piketty's book

Branko Milanovic published an interesting review of Thomas Piketty's book "Capital in the Twenty-First Century". This is one of the best experts in inequality reviewing another one. The review is very positive but reading it is an excellent complement of the book. Milanovic stresses that the theory of increasing inequality of Piketty goes against mainstream economics and economic history, which has mostly given a very positive view of economic development after the industrial revolution. Perhaps the most interesting aspect of the review is the doubts that Milanovic has about the low economic growth predicted by Piketty. Behind this prediction lies actually the optimistic view that developing countries will rapidly catch up and once all countries are in the technological frontier, growth will be low for everybody (and substantially below the rate of return of capital). Milanovic is not so optimistic about catching up, because he, having written extensively about between-countries inequality, is not so convinced that, say, Africa, will grow so fast. Neither of them raises the possibility of a third industrial revolution or of technological breakthroughs that will raise growth.
Milanovic stresses that the policy proposal (a global tax on capital) of Piketty is radical, but that it may be the only way to stop the increasing inequalities that threaten to make a joke of our democracies.Milanovic argues that this is a watershed book in economic thinking. These are his last words in this review: "When reading Piketty’s book, it is indeed hard to go back to thinking about anything else: one gets totally absorbed in it. This is perhaps the best compliment that the author of an almost thousand-page long economics book can ever expect to get. Don’t take this book on vacation: it will spoil it. Read it at home".