Sunday, 6 November 2011

Economic Diplomacy in a Changing World by Maxime Verhagen and Henk Bleker in HJD

To solve this issue, we see an increasing role for economic diplomacy. Domestic policy influences the economies of trading partners, which should remind us that all countries are in this together and therefore need to work jointly to find a solution in the G20, International Monetary Fund (IMF), EU or any other multilateral framework that offers the opportunity to ensure strong, balanced and sustainable growth. 20

20. See P.A.G. van Bergeijk, On the Brink of Deglobalization: An Alternative Perspective on the Causes of the World Trade Collapse (Cheltenham: Edward Elgar, 2010); and S.J. Evenett, B.M. Hoekman and O. Cattaneo (eds), The Fateful Allure of Protectionism: Taking Stock for the G8 (London: World Bank and CEPR, 2009).

Revenge of the mainstream? Veronica Rappoport in the Journal of Economic Literature

Veronica Rappoport of Columbia University published a 2+ page review in the Journal of Economic Literature. Vol. XLIX (September 2011), 747-9 The review is highly critical and thus recommended for further reading: 
... he consciously maintains an intuitive analysis, avoiding overtheoretical arguments and overlooking thoroughness in favor of clarity in the empirical sections. This goal is not always achieved; important points are often ignored or lost in spurious details, and the most up-to-date evidence is either absent or misrepresented. As a result, this book fails to serve as a survey on the empirical work on the Great Trade Collapse or as a bridge between scholarly work and the general audience.
The review gives three concrete examples of literature that was not included:

  • Chor, Davin, and Kalina Manova. 2010. “Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis.” National Bureau of Economic Research Working Paper 16174.
  • Haddad, Mona, Ann Harrison, and Catherine Hausman. 2010. “Decomposing the Great Trade Collapse: Products, Prices, and Quantities in the 2008–2009 Crisis.” National Bureau of Economic Research Working Paper 16253.
  • Paravisini, Daniel, Veronica Rappoport, Philipp Schnabl, and Daniel Wolfenzon. 2011. “Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data.” National Bureau of Economic Research Working Paper 16975. 

Veronica is completely right in her verdict that On the Brink of Deglobalisation that went to the press in March 2010 did not include these references that all appeared after July 2010 (and yes, I did not refer to Victoria's paper that appeared in april 2011, that is even more than one year after the book that she reviews was printed). This neglect of  literature leads Veronica to conclude:
However significant some of the wellknown shortcomings of aggregate data may be, the field of international trade has worked hard to overcome them over the past decade, producing a wealth of literature utilizing firm, product, and sector level data. Van Bergeijk appears not to have assimilated any of this work. 

IIn contrast On the Brink of Deglobalization treats the micro and meso data literature that existed at the time of writing fairly (I do give a critical interpretation of that evidence that is different from Veronica's reading) and in particular discuss why this strand of the literature overlooked the fact that uncertainty was the key driver of the shock. 
All in all Veronica's review shows that it will be difficult to get the message of the book appreciated. Many trade economists have already assimilated the mainstream explanation and  if the mantra is not exactly repeated they distrust the scientific content. A clear example is Veronica's assertion that 
A reader might finish the book and not know that, during the Great Recession, real world trade dropped proportionately more than world GDP. 
Actually the reader of On the Brink of Deglobalization cannot miss the point that both the Great Depression of the 1930s and the Great Recession that started in 2007  were characterized by reductions in the trade to GDP ratio. This is not the actual wording of the mainstream of course, but in terms of content it is exactly the same. Indeed On the Brink of Deglobalization discusses the relation between trade and GDP (and between trade and value added) extensively in several chapters. It provides many alternative explanations for this stylized fact and for the observation that the extent of trade collapse differed a lot between countries after correcting for the GDP shock and the composition of trade.