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Weekend reflections

December 31st, 2004

This regular feature is back on line. The idea is that, over the weekend, you should post your thoughts in a more leisurely fashion than in ordinary comments or the Monday Message Board.

Please post your thoughts on any topic, at whatever length seems appropriate to you. Civilised discussion and no coarse language, please.

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  1. harry clarke
    December 31st, 2004 at 08:35 | #1

    Paul Samuelson has written a startling paper in the Journal of Economic Perspectives showing how technical progress in a developing poor nation like China in a product that wealthy countries previously had a comparative advantage in (for example software production) can permanently impoverish the rich country it trades with by reducing real wages in that country. The effects identified are simply long-run Schumpeterian ‘creative destruction’. The source of the immiserisation is that wealthy country knowledge spreads to the rest of the world with trade.

    Bhagwati and 11 other economists responded in Business Week (December 27 2004) in the letters column with undisguised hostility. They stated that all Samuelson had pointed out was that productivity improvements outside the US in industries the US has comparative advantage can obviously hurt the US. ‘You have to be naïve to believe this can never happen. But you have to be even more naïve to think that the policy response to the reduced gains from trade is to give up the remaining gains as well’.

    IMO this seems an overly strong response since Samuelson does not say his argument implies a case for protection. ‘Even where a genuine harm is dealt out by the roulette wheel of evolving comparative advantage in a world of free trade, what a democracy tries to do in self defense may often amount to gratuitously shooting itself in the foot’.

    While the Samuelson result is strong it is not surprising. The failure of free trade to be mutually advantageous in this setting stems from the fact that developed country knowledge is a public good that developing countries do not pay for fully. I wonder if these types of arguments underlie US activism on the property rights enforcement front.

    The Samuelson argument is a gloomy note to finish 2004 with — at least for the supporters of unrestricted globalisation. Those in developed countries cannot assume their prosperity will increase when developing countries achieve their development goals. The game can become zero sum.

  2. kyan gadac
    December 31st, 2004 at 18:52 | #2

    Yushenko poisoning farce
    It’s a bit belated I know but the poisoning of Victor Yushenko(VY) in the run up to the recent elections is a big media lie. VY prbably had a severe case of rosacea bought on by heavy drinking. The presence of dioxin in his blood sample is dubious to say the least.
    The remarkable thing is that in spite of considerable documentation by Code Blue Blog no one in the western media has taken a critical look at this story. Anti war has a recent summary of Code Blue reports. Ah well, perhaps now, after he is safely installed -revelations will ensue. Happy New Year.

  3. kyan gadac
    December 31st, 2004 at 18:54 | #3

    the story at antiwar.com is here

  4. ray
    December 31st, 2004 at 19:52 | #4

    Just been watching “OutFoxed” on DVD. Thank goodness there aren’t enough smart right wing commentators in Australia for Rupert et al to replicate that here. It’s quite flabbergasting and sends a clear message why media ownership laws should be tightened and prevent this kind of stuff happening here. I suspect it will be a big ask however, as the Prime Minister aint about to defecate in his own garden.

    Ray

  5. harry clarke
    January 1st, 2005 at 10:58 | #5

    To return to an earlier topic when Goggle was listed a few months back its valuation was widely criticised (by many, including me) on this blog for being unrealistically high.

    It is worth commenting that its share price has since doubled to average around $165US. Accounting for the considerable risks, for example from successful attack by an alternative search vehicle Microsoft, it would need to provide annual returns of 20% annually to be competitively priced now. This would increase its market capitalization from $45 billion today to $278 billion by 2014. It would then be as big as Microsoft.

    Whether it can sustain this valuation is discussed in the December 13, 2004 issue of Fortune. Its either going to be a Microsoft style success story or one of the most overvalued stocks of the internet era.

  6. Uncle Milton
    January 1st, 2005 at 11:16 | #6

    Harry, it’s a bit ironic that Bhagwati should be criticising Samuelson for pointing out a case trade being immiserising, for Bhagwati made his name with a paper showing another case of immiserising trade, back in the ’50s.

    All this case shows is that once you step outside the textbook model then the simple predictions of the textbook model don’t always hold. It doesn’t mean that protection is a good policy to pursue, but there may be special cases where free trade is not optimal.

  7. harry clarke
    January 1st, 2005 at 11:40 | #7

    Milton, I think the general immiserisation thesis is that, in the presence of a distortion, a move to free trade can be immiserising. It is really a ‘second-best’ type of proposition that Bhagwati wrote endlessly on. Samuelson’s argument is a special case of this where knowledge spreads without being paid for as a consequence of trade.

    What I find interesting about the Samuelson argument is its plausibility not its theoretical originality. It restores the commonsense idea held by non-economists that as the developing world progresses to some extent we will lose out.

    As Samuelson stated clearly his argument does not imply a simple case for protection. Protection may make us lose out even more.

  8. Vee
    January 2nd, 2005 at 19:22 | #8

    Just dropped by to say wow Professor you’ve copped some criticism at Troppo in the last few weeks.

    That’s all as I have a few weeks of blog reading to catch up on.

  9. January 2nd, 2005 at 20:21 | #9

    Re – Vee’s comment about Troppo. The criticism has only been in the comments threads, recently from The Currency Lad for example, though I can’t think of too much else Quiggin related discussion. In my Troppo posts, I’ve linked to a few of John’s posts, but always in a positive context. Vee might be thinking about the debate over the precautionary principle with Don, of course. But that was friendly criticism.

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