Sunday, April 27, 2008

A swing and a miss?

As you know, I love an internet beatdown as much or more than the next guy. However, Rodrik's attempt to put the Turkish hammer on Tyler Cowen's NYT piece is kind of a semi-whiff. Here's Dani:

The "free trade reduces prices" fallacy, yet again. This time the culprit is Tyler Cowen. In his column for the New York Times today, Cowen argues that freer trade in food commodities such as rice would boost global supplies and help reduce prices. He is probably right about the first, but not about the second. The effect of freer trade on domestic food prices depends on whether a country is a food importer or exporter. Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers. Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality.

The economics of what Rodrik is saying are indisputable: if we go from no trade to free trade, the exported good's relative price will rise in the exporting country and fall in the importing country.

However, it's not at all clear to me that Tyler ever says free trade lowers prices for everyone. The closest he comes is in the first paragraph:

Rising food prices mean hunger for millions and also political unrest, as has already been seen in Haiti, Egypt and Ivory Coast. Yes, more expensive energy and bad weather are partly at fault, but the real question is why adjustment hasn’t been easier. A big problem is that the world doesn’t have enough trade in foodstuffs.

So, maybe you could interpret that as being wrong. However, it surely does not say "trade lowers the price of the traded good for everyone", which is the error Rodrik claims he is making.

For me, it's too vague to make any claim about what economic theory or fallacy is underlying the paragraph. As it is the opening of an op ed, I suspect its main intent is to get our attention.

The article is actually about how the lack of free markets, market friendly government policies, and supporting infrastructure in a lot of developing countries can be extremely counterproductive in an ever more interconnected world, using rice as an example.

An increasing percentage of the world’s production, including that for agriculture, comes from poor countries. Over all, that’s good for rich countries, which can focus on creating other goods and services, and for the poor countries, which are producing more wealth. But it can slow the speed of adjustment to changing global conditions.

For example, if demand for rice rises, Vietnamese farmers — who remain shackled by many longstanding regulations of communism — aren’t always able to respond quickly. They don’t even have complete freedom to ship and trade rice within their own country.

Poorer countries also tend to be the most protectionist. To make matters worse, about half of the global rice trade is run by politicized state trading boards.

The reality is that many of today’s commodity shortages, including that for oil, occur because ever more production and trade take place in relatively inefficient and inflexible countries. We’re accustomed to the response times of Silicon Valley, but when it comes to commodities production, many of the relevant institutions abroad have only one foot in the modern age. In other words, the world’s commodities table is very far from flat.

Many poor countries, including some in Africa, could be growing much more rice than they do now. The major culprits include corruption in the rice supply chain, poorly conceived irrigation systems, terrible or even nonexistent roads, insecure property rights, ill-considered land reforms, and price controls on rice.

The ability of a country to grow rice depends not just on its weather, but also on its institutions. Burma, now Myanmar, was once the world’s leading rice exporter, but it is now an economic basket case and many of its people go hungry.

My own criticism of Tyler's piece would rely less on Heckscher-Ohlin and more on Pritchett: In terms of helping the world's poor, freer trade is a drop in the bucket compared to allowing increased labor mobility.

If you live in a country with "corruption, non-existent roads, insecure property rights and price controls" free trade is not going to help you. Leaving will help you. The best thing the rich countries could do for a Haitian or Egyptian would be to let them come and work in the rich world.


John Thacker said...

Certainly in the short run he's right (and considering the length of the growing season, the short run can be pretty important even with growing seasons being different in different places), but in the long run he does concede that free trade would increase global supply.

Surely the focus on relative prices is a bit ridiculous as well. If the country gets wealthier as a whole, a small relative increase in the price of an exported good (even with the supply increase, we'll assume that the new marginal supply produced is less efficient than the old, so price goes up a bit) is worth it.

Gabriel M said...

Immigration would help some people but unless you're willing to allow 5.8 billion people in the US, there's got to be something else.

Anonymous said...

Gabriel, I suspect that they would stop coming well short of 5.8 billion, for reasons having something to do with the impact of labor mobility on the price of labor in the sending and receiving countries, I believe.

Ivan Janssens said...

"Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers. Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality."

Now what's wrong with that? Isn't this just why we should have freer trade? The case for freer trade now becomes even stronger than in case it reduced prices for everyone. It's not a reality we should try to escape from.

James Hanley said...

"Freer trade would reduce prices of food (relative to other prices) only in countries that are food importers. Food exporters would experience a rise in the relative price of food, and there is simply no way of escaping that reality."

So does Rodrick believe that government-induced surpluses are good? If the restrictions on exports cause the price to fall, due to excessive domestic supply, rice growers will respond by reducing their production of rice, causing the price to rise again. So what's the difference, really, between a rise caused by government restrictions, and a rise caused by freer trade?

One other nitpick: Rodrick says whether prices rise or fall depends on whether the country is a food importer or exporter. That's a sloppy statement: she must mean whether the country imports or exports the particular food item, as all countries are both exporters and importers of food in general.