Columns
2019 & 2018
Will economic history repeat itself?
I believe in cycles: business cycles and historical cycles. After all, history repeats itself. Not necessarily exactly like past events, but somehow like them. This also applies to major economic events, such as the retreat from free trade. I believe that the present wave of protectionist tendencies will eventually lead to a fresh call for free trade.
The end of global free trade seems near. The beginning of the end started, just a few years ago, with President Trump’s announcement to increase import tariffs on steel and aluminium. The World Trade Organisation (WTO), established in 1995, came under threat. Its Appellate Body was already seriously weakened in its composition, in that only three of the seven judges were left. Now that two more judges ended their term, America obstructs their replacement, as the US argues that the Appellate Body is encroaching on America’s sovereignty. This important appeal body is rendered toothless.
Is this the end of the WTO and the spirit of multilateralism at large? Not necessarily; the WTO is still equipped with panels of experts that help resolve trade disputes between WTO members. Nonetheless, I fear that, for the moment, WTO’s role is seriously diminished, which is unfortunate as trade conflicts between WTO members can no longer be finally settled by the Appelate Body. What is now likely to happen is an escalation of trade conflicts.
WTO’s diminished role is not just caused by the hollowing out of the Appellate Body’s functioning, it is also the result of the recent wave of protectionist measures taken by governments, not seldom of a populist variety, in reaction to negative effects of globalisation, such as massive job losses in their countries.
Another undermining force against global free trade is the proliferation of regional trade agreements. A few notable examples: not long ago, NAFTA, the old trade agreement between the US, Canada and Mexico, was replaced by the US-Mexico-Canada Agreement. A trade agreement between the European Union and Japan was signed in February 2019. As for the developing world, a huge free trade agreement, including 44 sub-Saharan African countries, is in the making. In Latin America, there is MERCOSUR, a trade agreement between six South American countries. And regarding Asia, in 2017, the US withdrew from the Trans Pacific Partnership (TPP). Japan took the initiative to revive TTP.
True, it is devilishly difficult to have a global free trade regime in which all member countries act on a global level playing field. Unfortunately, there is no such thing, since countries are different regarding the composition of their economies, their level of development, comparative advantages, and respective international political leverage. But negotiations can help overcome these differences in the spirit of multilateralism: one of give and take, as successfully applied in the past. For example, since the end of the Second World War, the average tariff fell from 40% in 1947 to some 6% now. Not a small achievement! But not everybody won, which fed negative attitudes against international free trade and globalisation at large. This dissatisfaction already erupted in 1999 during the WTO meeting held in Seattle. To date, the mood is moving towards protectionism.
Yet, I believe that the spirit of multilateralism will reappear in the future. This is because it happened before. Let us take globalisation; it is not a new phenomenon. The first globalisation wave happened in the period 1870-1914, which triggered unprecedented economic growth and prosperity at the time. Another example: during the Great Depression of the 1930s, one country after another adopted protectionist policies, to shield their home market from negative external influences. The sad result was that international trade fell dramatically, leading to more and more economic and social misery. Wise political leaders such as President Roosevelt and Prime Minister Churchill, inspired by the ideas of economists like John Maynard Keynes, agreed that after the Second World War a better international monetary and trade system had to be established. In 1944, this led to the creation of the International Monetary Fund and the World Bank. And, in 1947 to the establishment of the General Agreement on Tariffs and Trade, that provided the basis for the creation of the WTO some forty years later. All of them institutions reflective of the spirit of multilateralism.
Economic historians analysed the consequences of protectionist policies in the past. Initially, they resulted in economic successes, but in the longer term the consequences were disastrous, as the pre-World War II economic misery demonstrated. In short, protectionism is bad for economic growth, employment, and productivity - three critical ingredients for the creation of prosperous and happy societies. Once the negative economic consequences of the present protectionist wave will be exposed, I am convinced that a renewed call for free trade will be heard, and actions will be taken to repair the damage done to international trade.
Peter de Haan December 2019
Poor Economics and the 2019 Nobel Prize for Economics
Poor economics is the title of a book written by two of the three economics 2019 Nobel Prize laureates: Abhijit Banerjee and Esther Duflo. The third laureate is Michael Kremer. All three have done ground-breaking and down-to-earth research on poverty.
For various reasons it was a remarkable choice indeed of the Nobel Committee to award the prize to researchers having developed field techniques to better understand what works, and what not, in the fight against poverty. It was also remarkable that Ester Duflo was awarded the prize, as at 46 years of age, she is not only the youngest economist ever to receive the prize, but also the second female economist to have been awarded the prize. The first one was Elinor Ostrom who received the award way back in 2009 (by the way Ostrom was a political scientist). The third reason for the Committee’s remarkable choice is that in the past the prize was typically awarded to economists having developed highly sophisticated theories or models, whereas this time around, down-to- earth field research got the prize.
I was particularly happy with the Committee’s choice of three development economists, as I am about to publish a book about the history of development economics, in which the contributions of Banerjee and Duflo are presented as well.
Now, what down-to-earth work have Kremer, Banerjee and Duflo developed to better understand the thorniest challenge of development: poverty and how to counter it. Around the middle of the 1990s, Harvard professor, Michael Kremer conducted field experiments in Kenya, copying methods used so far by chemists and biologists: randomized control trials. Kremer chose schools that were randomly divided into two groups: one undergoing a policy intervention, and the second group not. Kremer tested, among others, how additional textbooks, deworming treatments, or financial incentives for teachers, would influence pupils’ progress. The randomized control trial approach, provides a clear insight in what works and what not in development work for the poor.
Abhijit Banerjee and Esther Duflo (both professors at the Massachusetts Institute of Technology) used Kremer’s randomized control trial approach in quite a number of developing countries. The couple (they are married) studied various approaches in health care, education, microcredit, entrepreneurship, and adaptation of new technologies, to find out which approach would be most effective.
When I first heard of their work, I was very happy because in my long career in development cooperation I observed time and again that successive approaches to poverty alleviation were applied without before finding out whether these approaches would work; quite often they did not. Now intended approaches can be tested on their effectiveness, thanks to Banerjee and Duflo.
One of the central themes of my forthcoming book about the history of development economics is that each developing country is different, implying that a one-size-fits-all development approach does not work. Instead, tailor-made approaches are much more effective that take into consideration the specific political, economic, and cultural context of the country, region, or development project area.
In the case of randomized control trials among small groups, one can question what works for a small group, would also work for a broader population. The solution chosen by Banerjee and Duflo is quite simple: scaling up the randomized trials over time to create greater confidence in their outcome, so that they are valid for larger areas than the trial area only.
The addition of randomized control trials to development the economists’ toolbox is very welcome and necessary. But is this new instrument enough to ban poverty from the face of the earth? I don’t think so. True, what these trials do is making development work on the micro level much more effective. But if the macroeconomic situation in the country at hand is not improving, the gap between rich and poor will not disappear. So, what is also needed to lift the 10% of the world’s population, surviving on $1.90 per day, out of poverty is macroeconomic tools that help policy makers designing economic policies for developing countries to enter the globalised market, to invest in technological innovation, and the like. In short, policies to improve the economy’s productivity. Because, in the end, the more productive the economy, the higher the incomes of the population, and - given fair income redistribution policies - the higher the income of the poorer sections of society.
Peter de Haan October 2019
Economists and leisure
Now that the end of this year is approaching and holidays await us, I am not going to bother you with subjects like employment challenges and economic growth models. No, this column is a light-hearted one, which hopefully will cheer you up.
A lot of people believe that economists are a dull species; they are number crunchers and are doing equations all the time. Well, I am afraid that this belief is wrong! To prove my point, let me tell you what hobbies they have and what special characters some of them were. The most notorious character by far was Thorstein Veblen, who lived around the turn of the 19th century in America and invented the term the leisure class. Veblen’s main interest, besides economics, was women. This may sound strange, as he was the most ugly person one can imagine, but he had a lot of charm. On top of that he was a very good economist and was invited to become a professor of economics at Harvard University. After having been entertained by fellow economists there, he had a last night dinner with Harvard President Lawrence Lowell who used the occasion to bring up, in a subtle way, Veblen’s most noted drawback. Lowell said: ‘You know, Dr. Veblen , if you come here, some of our professors will be a little nervous about their wives’. To which Veblen replied: ‘They need not worry, I have seen their wives’.
As for hobbies, let’s take former Central Bank Governor Zhou Xiaochuan. Now that he is enjoying his retirement, I am sure he devotes a lot of time to his hobby: music! This is remarkable hobby for an economist, as in my book From Keynes to Piketty, one doesn’t come across other economists who seem to like music. However, most of them were certainly fond of the arts. The greatest art lover of all, without any doubt, was John Maynard Keynes. Apart from establishing a theater in Cambridge (which still exists) he loved ballet. In fact, he married Lydia Lopokova, the Russian prima ballerina of the famous Diaghilev ballet-troupe, which was touring Britain. During the Great War (1914-1918) Keynes was working at the British Ministry of Finance. He was in charge of managing the war debts that other countries had with Britain. When France had difficulties in repaying their debt, Keynes suggested that they repay by way of French Impressionist paintings. Keynes himself was a collector of French Impressionists, by the way. Another hobby of his was collecting old books and manuscripts; a hobby which he shared with Friedrich Hayek. It was Keynes who at an auction acquired the writings of the famous physicist Isaac Newton, and thus saved them for Britain. And towards the end of his life Keynes managed to have the distinguished Saddlers Wells dance company move to Covent Garden, London’s famous opera house of which he was a board member.
Another economist who cast his nets wider than purely economics was John Kenneth Galbraith. When he was America’s Ambassador to India (an appointment he got through his friend President John Kennedy), Galbraith started to take an interest in 16th to 18th century Indian painting. He co-authored a book entitled: Indian painting : The Scenes, Themes and Legends. He also wrote a novel about an ambitious Harvard professor (a portrait not of himself, he stressed).
When looking at a photograph of Milton Friedman, one cannot escape from the thought that he really looked like an economist: he was small, bald, and bespectacled. But he was a formidable economist; a prolific writer and feared debater. In his spare time he liked to analyse people’s handwriting; he was an amateur graphologist. Once, he visited Keynes’s home in Cambridge, where he stumbled upon a handwritten letter. He studied the handwriting and concluded that the writer must have been an artist. His conclusion was spot on as the letter was written by Keynes’s wife, the former Russian ballerina!
Tibor Scitovsky wrote The Joyless Economy, in which he lamented Americans’ lack of the joy in life, despite the fact that America was the richest country on earth. His remedy to overcome joylessness was to develop an appreciation of the arts: a good play, a concert, a ballet, a visit to a picture gallery, what have you. Surely, Scitovsky’s advice was firmly based upon his own love of the arts! In his younger days, new institutional economist, Douglass North contemplated becoming a professional photographer. Lucky for us economists, he decided to become an economist. He was awarded the economics Nobel Prize way back in 1993, and kept photography as a hobby.
I can go on, but let me end with development economist Hollis Chenery. He hailed from a family that groomed race horses. The family was so successful that they produced a big champion by the name of Secretariat (a funny name for a race horse, when you come to think of it). Nonetheless, Secretariat became the first horse in 25 years to win three famous races in the United States. After his third win, Hollis Chenery led the horse down the walkway to the winner’s circle where the crowd gave Secretariat a standing ovation. There was even a Hollywood movie made of Secretariat. Unfortunately, Chenery did not appear in it.
In concluding, I must confess that I don’t have a hobby myself. Despite this serious drawback, I wish you all the best in the coming year!
Peter de Haan December 2018
Doughnut Economics
Doughnut Economics is written by British economist Kate Raworth. The book’s cover includes an endorsement which says that this book is as exciting as John Maynard Keynes’s General Theory when that book came out in 1936, triggering a revolution in economics. As I paid much attention to Keynes’s masterpiece in my own book From Keynes to Piketty, I eagerly read Doughnut Economics. This column tells you about its contents.
Kate Raworth is fond of making drawings to explain what she has in mind, hence the image of a doughnut: this round fried sweet dumpling with a hole in the middle. It certainly helps to visualize her message which is that economic growth cannot go on without breaking through our ecological ceiling: the space beyond the outer ring of the doughnut. If that happens, irreparable damage will be done to Earth’s regenerative capacity. This is by no means an unrealistic perspective as consumption levels in high-income countries already have long exceeded what Earth can sustain.
What about the whole in the middle of the doughnut? If we would end up in this hole, the social foundation of human well-being would be lost and critical human deprivation - including water, energy and food shortages – will prevail. In short, we have to make sure that all of us live between the outer ring of the doughnut, the ecological ceiling, and the inner ring, representing our social foundation. The space between these two rings, i.e., doughnut itself, is the safe and just space for humanity to live.
Now, the question is how can we make sure that we all can live in this safe space? The author’s answer is that there are seven ways to achieve this, ranging from thinking critically about economic growth, income and wealth distribution, and the creation of a regenerative system, rather than a degenerative system which is killing the sources of its own sustenance.
Doughnut Economics is critical of mainstream economics – in particular of market- and growth-promoting neoclassical economics, as promoted by Friedrich Hayek and Milton Friedman. Raworth is also critical of development economists such as Walt Rostow who projected ongoing economic growth in his famous stages of economic growth model. Instead, she argues that the proceeds from unrestricted economic growth will not ‘trickle down’, resulting in more inequality in income and wealth. Even more disturbing: it will further undermine the earth’s regenerative capacity. So, the challenge for 21st century economists is to say goodbye to old, mainstream economic theories and propose new regenerative designs that make new technologies feasible as investments. Instead of asking how much financial value can we extract from an investment, the question should now be: how many diverse benefits can we create, ranging from environmental, social, and redistributive benefits?
Making such a design work, calls for a different role of the market, the state and society. But a regenerative design can only function if it is underpinned by a regenerative economic design. Raworth sketched such a design for production processes. It looks like a butterfly: one wing represents regeneration of the inputs of biological nutrients (soil, plants, animals) and the other wing represents restoration of the inputs of technical nutrients (plastics, synthetics, and metals). Production runs on renewable energy –from solar, wind, wave, biomass and geothermal sources, while eradicating all waste, as this recycled waste is re-used as the source material for a new round of production. In short: the blue-print of a circular economy! Next to the role of innovative architects, industrial ecologists and product designers, there is a key role for economists: to design the economic policies and institutional innovations which provide the right incentives to unleash the great potential of this circular economy.
The book provides many initiatives which fit into a system moving us into the doughnut, so to speak– the safe and just space for humanity. For example, the book commends the Chinese government for investing billions of dollars in renewable energy. The Chinese Development Bank finances the world’s biggest deployment of wind and solar parks. In the financial realm there is, for instance, Evergreen Direct Investing, which delivers acceptable financial returns from mature low - or even no-growth -enterprises.
The question of a million is: should economies stop growing? After all, economies are growth- addicted. Raworth argues that we should be agnostic about growth. What does this mean? It means, in her own words, economies that promote human prosperity whether GDP is going up, down, or holding steady. Yet, she concludes that we have to develop economic designs that enable nations coming towards the end of their economic growth and to learn to thrive without it. In the end, the limit to growth lies in the carrying capacity of the living world.
Doughnut Economics is littered with inspiring examples like the ones I just mentioned. Unfortunately, they are still ‘nibbling at the edges’, so to speak. Kate Raworth’s interesting ideas deserve wide support to turn these examples into mainstream approaches. This can happen, I believe, when a combination of firm global political leadership (the 2015 Paris Climate Accord is a step in the right direction), correct pricing of products and services, which include costs of damage done to the environment, and broad public support are coming together to make sure that, sooner rather than later, we will live within the safe space of the doughnut.
Peter de Haan February 2018