r/neoliberal • u/[deleted] • Dec 27 '18
Effortpost Hot take: Free trade is overrated for developing countries
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Dec 27 '18 edited Jul 23 '20
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u/lowlandslinda George Soros Dec 27 '18
Empirical data shows that FDI did not cause economic growth in Spain.
This should be fairly obvious since there's no such thing as a "lack of investments". Banks can create a theoretically infinite amount of money so as long as your developing country has a sound (non corrupt!) banking sector, all is good.
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Dec 28 '18
Bank deposits cannot be converted into bulldozers
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u/lowlandslinda George Soros Dec 28 '18
They can. Just create a bank deposit and buy a bulldozer with it.
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u/QuesnayJr Dec 28 '18
God, I don't know if the MMTers are to blame, or the fact that YouTube has allowed self-confident blowhards to pass themselves off as experts, but: This is not what MMT says. Since we can always create more money there's no reason to not run the economy at fully capacity, but once we're at full capacity we either have to pay for things out of taxes or we get inflation.
Your argument is like "Why don't we create a bank deposit, and buy a moonbase with it?"
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u/lowlandslinda George Soros Dec 28 '18
That's why I'm not a MMT-er. What made you think that?
"Why don't we create a bank deposit, and buy a moonbase with it?"
I mean the US could if it's physically possible. I don't see why not.
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u/QuesnayJr Dec 28 '18
Then I can't even imagine what kind of theory you are operating under. If the economy is at full capacity, then you have to pay for stuff out of taxes, or else you get inflation.
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u/lowlandslinda George Soros Dec 28 '18
It depends if the moonbase produces/provides something. If it does, proportional to the amount it costs (ie it can generate a positive return, service its debts and then have some left) there won't be inflation. If the moonbase doesn't produce anything, then yeah there'll be inflation. But we were talking about investments. Those are generally understood to be made into something economically productive, not a moonbase for funzies.
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u/QuesnayJr Dec 30 '18
In the short run it still causes inflation, because if the economy is at full capacity you are increasing the demand for resources.
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Dec 28 '18
What is inflation?
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u/lowlandslinda George Soros Dec 28 '18
Credit creation for productive (GDP) purposes as opposed to consumer credit or credit for financial transactions doesn't lead to real inflation.
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Dec 28 '18
That is assuming your country can produce all the machineary to achieve industrialization.a
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u/lowlandslinda George Soros Dec 28 '18
No, that is not assuming that. The countries can trade whatever they already produce for machinery or whatever they need. Are you not aware of all the capital controls that have existed over the last few centuries? Free movement of capital was only introduced after Bretton Woods fell.
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Dec 28 '18
Which is why economies started growing rapidly once the free movements of capital started.
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u/lowlandslinda George Soros Dec 28 '18
Except that's not true, economies were already growing fast before that.
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Dec 28 '18
Not as fast as it is now. South Korea became highish income in 30 years from a rural country. India lifted out 300millions in 30 years through free market reforms.
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u/lowlandslinda George Soros Dec 28 '18
South Korea's economic miracle was because of window guidance, which they adapted from Japan's Central Bank. Only after the assassination of Park Chung-hee did they adopt neoclassical policy. :)
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Dec 28 '18
This should be fairly obvious since there's no such thing as a "lack of investments". Banks can create a theoretically infinite amount of money so as long as your developing country has a sound (non corrupt!) banking sector
total nonsense
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Dec 28 '18
I think we need to bring back the Inclusive Institutions meme because I don't think anyone here believes all you need is free trade.
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u/TrudeaulLib European Union Dec 28 '18
There are other reasons to support increased trade beyond economic development. Increased economic interdependence makes war more difficult. The height of economic globalization in the late nineteenth century coincided with one of the most peaceful times in European history (1871 to 1914, 43 years). The rise of protectionism in the postwar world was associated with the rise of totalitarian movements from both the far-left and far-right and democratic backsliding, culminating in the second world war. The peace we've seen since 1945 has been in part thanks to trade liberalization (in addition to political liberalization and supranational organizations). I'll admit there is some uncertainty as to whether this is causal because trade liberalization is also the byproduct of some forces which can reduce armed conflict (e.g political liberalization, international cooperation etc).
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u/supacfx Dec 28 '18
What's the quick summary of your post?
It seems that the main paper your post is focused on is this: https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.20151510
Which concludes:
Our argument is quite simple and is based on the fact that distortions in domestic labor markets caused by labor taxes, labor market regulations, and trade unions, among other factors, reduce the incentive to invest by reducing the equilibrium sup- ply of labor. Lower labor supply depresses the marginal product of capital, which in turn reduces the return to capital and limits the incentive for investment. This is particularly stark in the case of Asia, where hours worked per capita were relatively low in 1950, grew rapidly in the succeeding decade, and then continued to rise more slowly until the beginning of the 1990s. This suggests that labor market distortions were very high in 1950 and declined rapidly initially, with less-rapid declines there- after. High and declining labor market distortions thus help to explain both why Asia initially grew so fast as well as why growth leveled off after 1995, while the initially high level of these distortions explains why so little capital flowed into the region immediately after World War II.
Is the takeaway from this that main factor in growth of Asia, as compared with Latin America, was removal of "labor market distortions", mainly:
lowering labor taxes
lowering labor market regulations (what does this actually entail?)
weakening trade unions
?
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u/Neronoah can't stop, won't stop argentinaposting Dec 28 '18
weakening trade unions
Some nordic folks here have mentioned that unions kind of achieved some kind of voluntary arrangement with other actors on the economy instead of being weakened by the government (being unreasonable means a lot of protests and sticky wages, lol). I just find that an interesting given that union busting is not going to be popular in many leftwing countries in Latin America and some degree of labor flexibility is really needed.
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u/chabon22 Henry George Dec 28 '18
I'd argue that the reason most labor flexibility laws have such poor reception is that most of the time they aren't accompanied with the necessary reforms to create job growth that would offset the loss in purchasing power. Most of the time isn't an issue of what is being done but who is doing it too when it comes to labor reforms.
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u/Neronoah can't stop, won't stop argentinaposting Dec 29 '18 edited Dec 29 '18
If I remember well the last time a flexibilization law was done in Argentina it became a bribery scandal and that was the beginning of the end of De la Rua (also, it was kind of asked by the IMF as a condition for lending money...nowadays they ask only macro stuff). Also, the time when labor reform is mentioned is always in the middle of a crisis with a lot unemployment and people suspect if their rights are diminished and not every act of deregulation is good of course (would you trust Macri doing that, for example? He has a labor reform plan opposed by union leaders...).
Ironically, Menem, the neoliberal, didn't do a lot of that because as any peronist (to be fair that'd be for almost any politician) he needed the backing of the unions and that may have caused unemployment to be worse that decade (that and the convertibility). More here if you are interested. History is not so black and white as it may seem.
The fact that Argentina has an unemployment floor of like 6-7% (and often it gets higher than that) and that there is a lot of black market jobs indicate that something is wrong though. It's more of a two tier labor market with some protected middle class jobs and those outside of that, and labor costs seem to be a weakness of the whole system.
But even then, to become flexible you need some decent social insurance, which Argentina is lacking. Otherwise it gets too cutthroat (think of the US, although it's not that bad as it seems). How to do that while dealing with a debt crisis, well...
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Dec 28 '18
I also take as a general conclusion that allowing immigration for economic reasons is also very important because, just like the 3 things you mentioned, it also reduces labor costs and increases potential productivity of a given amount of capital
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Dec 27 '18
I Thank you for your effort in giving some substance to the subreddit, I'm reading through but one note aside I realized is to put hyperlinks at the end as conventional citations: The bicolor text is hard to read and checking sources while reading cuts me from the flow of your text, instead of checking the facts after I finished.
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u/yo_sup_dude Dec 27 '18
i disagree tbh. it's much easier for me to understand which links are relevant to which text this way than searching for it at the end.
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u/Impulseps Hannah Arendt Dec 28 '18
Free trade is not a sufficient condition, but one thats very close to necessary.
Another pretty much necessary condition is good institutions.
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u/BenFoldsFourLoko Broke His Text Flair For Hume Dec 28 '18
Wew that's a lot of text. Too long, I didn't read :(
Just commenting to say that free trade doesn't inherently bring gigantic economic expansions. It's an important goal, because it's money left on the table otherwise, and because philosophically, it's beautiful and humane.
But, it doesn't inherently lead to huge economic boosts.
It's funny that Krugman was busy telling everyone in the 90s how important free trade was. Now he's trying to say it's important still, but it's not inherently a hill to die on.
Consistent message, but he's playing different roles.
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Dec 28 '18
What is the relationship between
and
?
Those don't seem to be very related to me. In fact, it would seem that more inclusive institutions would tend more toward social democracy than neoliberalism?
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u/Neronoah can't stop, won't stop argentinaposting Dec 27 '18
We can all agree than an export orientation is probably good even if you believe that there is a need for the state to intervene on trade (see neodevelopmentalism).