Economist's View: "Productivity vs. Employment Growth: A Zero-Sum Game?"

Economist's View: "Productivity vs. Employment Growth: A Zero-Sum Game?"

I've had arguments about my dad about "productivity". I think the term is often used as an instrument, when it is actually a goal (productivity being output/worker over a period of time). Want to boost productivity, then you have to increase the output/worker ratio. When you hear news that "productivity is up 3.3%", you have to ask if the workers are working harder/smarter, or there is some new technology involved (hi Solow!). I think it is obvious than in any optimized production system (where marginal returns to labor at at their peaks), an increase in employment will decrease productivity and vice-versa, unless there is also a technological or administrative change. This is why I find it curious that economists laud productivity gains at the same time that we see employment (and compensation) losses without looking at the overall effect (and the distributional problem).

It's one of these discussions that I like to have over some beers.

Logistics Performance Index

From the World Bank's Logistics Performance Index:
Latin America needs better logistics for commerce


Correlation (not causality) of income and logistic performance:

Chavez

At my previous job, I once told someone that I thought that Chavez would lose once he overreached. Thankfully, it seems that Venezuelans thought that trying to be an emperor was overreaching, and voted to reject his reforms. I'm still dismayed that it was this close.

Topics

Some things I will be working on:
-A newsletter for CEPAL identifying the major topics/risks for commercial activity in Latin America
-The role of commerce on growth and development
-Take a look at cascading tariff structures and their impact on protection rates
-Innovation and commerce. I would love to have enough data to work on product space dynamics in Latin America
-Better visual presentations for the division

Personal update

In the last two months, a lot has changed in my personal and professional lives. I changed jobs, from being a country risk economist at the US Exim Bank, to being an economist with CEPAL - ECLAC in Chile, and doing commerce and integration work. This change will allow me to work in topics that are more germane to "development", as I look at the interaction of commerce and social indicators of development. But this will be an uphill battle.

Some observations on my first month here: Chile is a "westernized" country (at least the capital is). I haven't found any good restaurants yet. Despite its modernized facade, the bureaucracy is immense and stifling. Competition seems to exist mainly in the marketing side of commerce, not in actual value.

CEPAL can improve how it presents information. The culture of PowerPoint is deeply ingrained here, and a lot of the workload involves created these presentations, instead of conducting original and rigorous research. Part of this seems related to lack of funding for some projects, and the need to constantly hire consultants as opposed to using the existing staff. This is particularly acute given the influx of new hires in the last year or so, and the need for a more dynamic management of their duties.

But the people here are brilliant and dedicated. I'm going to like it here.

Thoughts on regulation

In his recent Oped at the NY times, Krugman makes the point that the lack of sufficient regulations in the face of agressive "financial innovation" has allowed for the current confusion in financial markets. I agree entirely with his point. But before anyone accuses me of defending excessive regulation, let me clarify my position on the topic. I believe that regulation exists to enable the flow of information to market players. I don't think that government should be telling the markets what to do (beyond a limited role as a social agent). To the extent that markets can create conditions whereby information is not available, the system will lead to situations like the current "subprime crisis".

Enron, the current (housing) crisis, the Great Depression, etc all have roots on a similar dynamic: the lack of available information created a misalignment between expectated risk/return and the revealed risk/returns. You can argue for caveat investor, but that is just a recepie for volatility.

Economist's View: FRB Dallas: Is Latin America Saying Adios to Market-Friendly Reforms?

Economist's View: FRB Dallas: Is Latin America Saying Adios to Market-Friendly Reforms?

We need to separate out the term "leftist" and the term "anti-market". Just as government intervention can be anti-competitive, the lack of regulation in the face of strong market power also has a detrimental effect on competition.

Dani Rodrik's weblog: Asian growth versus African growth

Dani Rodrik's weblog: Asian growth versus African growth

In a recent email exchange, I was reminded of a post by Rodrik on his blog where he points to a study by Imbs and Wacziarg that shows that economic specialization occurs as a country grows out of poverty.

Here is Rodrik:

What's the big deal, you might say. Well, it is a big deal if you have been brought up on the idea that the key to economic growth for poor countries lies in specialization according to comparative advantage. If that simple recipe were true, countries that are getting richer would be producing a narrower range of goods, not a broader range. It takes a lot of mental gymnastics to square this stylized fact with the standard comparative advantage arguments. A far simpler interpretation is that the key to growth is the acquisition of production capabilities in an increasing range of goods, in a way that is often in tension with what comparative advantage would dictate. Here is a paper that tries to make these ideas more precise.

Now this sent alarm bells in my head when I first read it. First, I don't remember being taught that the key to development is comparative advantage. Only that comparative advantage can explain how a country that is less productive at everything, can still focus on a subset of products and gain from trade. I have always thought of comparative advantage as a tool to improve economic wellfare, not as the key to development.

Also, the point Rodrik is making doesn't include the case of countries growing as they produce a broader set of goods simply because they have better access to capital and can improve labor productivity. Sure enough, this point is made more eloquently by a commenter in Rodrik's site:

UPDATE: Roberto Porzecanski's comment below provides an opportunity for clarification. Roberto says the Imbs-Wacziarg result is consistent with trade models, insofar as countries that are growing through capital-deepening may end up producing a broader menu of goods as a result.

Think of low-hanging fruit.

Now, Rodrik also goes on to agree with this point but disagree that it explains the questions that arise as to the causality of specialization and growth: "If countries that are growing are those that are making use of comparative advantage while those that aren't are not, then you should see the growing group of countries becoming more specialized".

By this point assumes that the dataset includes countries that have pursued trade policy according to comparative advantage. I have never seen any policymaker pour over an analysis of the value-added chain or the factors of production for the country's commodities and use the results to formulate policies. Heck, I haven't even seen policymakers argue for a zero-tariff system given global and local realities.

Trade policy, in reality, probably has no relation to comparative advantage. It is the combination of economic interests and political power, as well as fiscal necessities, that push a government (particularly one in a poor country) to enact export taxes, cascading tariff structures, subsidies, etc.

But I don't want to be overly dismissive of the point Rodrik is making. I think it is a valid question to be asking and to examine empirically.

Comparative advantage and growth

In a recent email exchange (h/t Marco Llinas and Jim LaFleur), I was reminded of a post by Rodrik on his blog where he points to a study by Imbs and Wacziarg (available in the American Economic Review 2003) that shows that economic specialization occurs as a country grows out of poverty.

Here is Rodrik:

What's the big deal, you might say. Well, it is a big deal if you have been brought up on the idea that the key to economic growth for poor countries lies in specialization according to comparative advantage. If that simple recipe were true, countries that are getting richer would be producing a narrower range of goods, not a broader range. It takes a lot of mental gymnastics to square this stylized fact with the standard comparative advantage arguments. A far simpler interpretation is that the key to growth is the acquisition of production capabilities in an increasing range of goods, in a way that is often in tension with what comparative advantage would dictate. Here is a paper that tries to make these ideas more precise.

Now this sent alarm bells in my head when I first read it. First, I don't remember being taught that the key to development is comparative advantage. Only that comparative advantage can explain how a country that is less productive at everything, can still focus on a subset of products and gain from trade. I have always thought of comparative advantage as a tool to improve economic wellfare, not as the key to development.

Also, the point Rodrik is making doesn't include the case of countries growing as they produce a broader set of goods simply because they have better access to capital and can improve labor productivity. Sure enough, this point is made more eloquently by a commenter in Rodrik's site:

UPDATE: Roberto Porzecanski's comment below provides an opportunity for clarification. Roberto says the Imbs-Wacziarg result is consistent with trade models, insofar as countries that are growing through capital-deepening may end up producing a broader menu of goods as a result.

Think of low-hanging fruit.

Now, Rodrik also goes on to agree with this point but disagree that it explains the questions that arise as to the causality of specialization and growth: "If countries that are growing are those that are making use of comparative advantage while those that aren't are not, then you should see the growing group of countries becoming more specialized".

By this point assumes that the dataset includes countries that have pursued trade policy according to comparative advantage. I have never seen any policymaker pour over an analysis of the value-added chain or the factors of production for the country's commodities and use the results to formulate policies. Heck, I haven't even seen policymakers argue for a zero-tariff system given global and local realities.

Trade policy, in reality, probably has no relation to comparative advantage. It is the combination of economic interests and political power, as well as fiscal necessities, that push a government (particularly one in a poor country) to enact export taxes, cascading tariff structures, subsidies, etc.

My point is that there is a false dichotomy in the argument that since countries are growing without specialiation, comparative advantage is not important to growth. There are a number of potential "engines" of growth, and in the presence of market dynamics (the absence of strong central control), the economic agents will not be coordinated around a specialized good. I think the growing specialization that we beyond the inflection point is fascinating, and actually serves to bolster the argument for comparative advantage. But Rodrik is right that it begs the question of how does the economy benefit from greater diversification before settling in a specialized role? Rodrik's paper offers a model for this, with entrepreneurs engaging in economic innovation and information being disseminated, eventually leading to specialization.