Sometimes appearances are everything

The headlines following the G-7 and World Bank-IMF meetings this last week were not all about global imbalances, the changing role of the World Bank in poverty reduction, growing unease about globalization, or calls for reform of the IMF. No, they have also been focused on the relationship of the president of the World Bank to a former Bank employee, and the manner in which he has handled the appearance of conflict of interest in managing the departure of this romantic interest when he took over at the Bank. Who needs substance, when you can have scandal?

If you work for the U.S. government as a civil servant, you need to follow a certain set of rules guiding ethical behavior. If you look closely at those rules, you will find that they do not really proscribe behavior that is unethical. Rather the rules proscribe the appearance of such behavior. I was, at one time, baffled by those rules. They are made by a Congress who generally and explicitly exempt themselves from those same ethics rules (so that they can and do continue to run ethically amok, individually and collectively.) Yet the rules do serve a purpose. For the electorate to have faith in the workings of the government, they must believe it is ethical and fair. An ethical and fair regime populated by career employees that appear corrupt will be crippled in its operations. You can vote out unethical congressman and parliamentarians. A functioning civil service shows much more inertia in terms of (potential and actual) employee turnover. For this reason, it is a necessary though not efficient condition that civil servants appear to be free of corruption, regardless of the tabloid-based entertainment provided by politicians. Indeed, if a politician wants to go after the civil service, he will attack its reputation in this regard individually or collectively (witness Reagan's attack on the U.S. civil service in the 1980s, and the Valerie Plame affair more recently).

In a similar vein, international civil servants must also appear operationally honest. This is especially true for the man/woman tasked with running the World Bank. The Bank, among other tasks, has appointed itself a promoter of good governance. It cannot do this, and has no credibility if it tries, under present circumstances. If there is the appearance of corruption around its top employee -- aka Bank President Paul Wolfowitz -- then that employee must go. If he is going to stay, it simply has to be the case that doubts about his ethical character can be fully removed. If they cannot, then regardless of the actual ethical qualities of the situation, he must go.

Now maybe the Bush administration is playing a deep game, and their strategy is to attack the World Bank from within by piling it from the top down with corrupt leadership. I do not believe they are capable of actually managing such a game (though if they were they would try). But regardless of whether the present situation is deliberate or accidental, it must end.

Simplicity -- a screed in two paragraphs

I have been reading a recent short book by Timothy Gowers, on mathematics and models and such (Mathematics: a very short introduction). In it he makes a point I agree with: "When devising a model, one tries to ignore as much as possible about the phenomenon under consideration, abstracting from it only those features that are essential to understanding it..." This is from a mathematician effectively explaining that there is a special art in good science, since theoretical models are by definition simplifications and abstractions. I made a similar point in a 1997 book, when discussing partial equilibrium models: "By definition partial equilibrium models do not take into account many of the factors emphasized in general equilibrium trade theory. While this is the root of the practical limitations of applied partial equilibrium modeling, it is also the source of its basic advantage... It may be difficult to justify... more complex and less transparent models, when they may yield only margin extensions of the basic insights drawn from simpler approaches." The critical thing is that good models (theoreical or empirical) offer useful simplifications. Musicians (Charles Mingus: "Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that's creativity." ) and super-mega-geniuses (Albert Einstein: "Everything should be made as simple as possible, but not simpler.") would agree. But apparently not all members of the tribe of trade theorists. Some would, though. Some of my favorite theory papers are by Krugman. His papers can display a brilliant ability to boil down potentially complex and difficult issues to sharp, clear expositional models. His 1980 AER paper on gains from trade, in a world with identical two countries with identical tastes, endowments, and technologies and only one sector, for example, is brilliant. So is his explanation of linkages between productivity growth and the process of job creation and construction, using the example of hot dogs and buns. (from an editorial in Slate). Yes you can make the model in his AER paper more complicated, and subsequent literature has. But the basic point is best seen in a simple structure.

So what do you say when referees, and journal editors who should know better, send you letters and reports that basically say "the point you make is clear, and a relevant one, and the model is simple and clear. However, the referees feel you should use a more complicated model...because it will make the theory more interesting"? What? Interesting as in more complicated, harder to follow, with a more circuitous mathematical path to the same basic results? This is definitely where we step out of the realm of math and science, and into the realm of fashion trends and complexity for the sake of complexity. Complexity with the purpose of making what we are doing look too hard and complicated for others to grasp. In terms of models, minimalism (where possible) should be the rule. If it is not necessary, don't build it in. And if your model is too complicated to explain anything with, well... I told you so. Enough said.

Time for crazy ideas -- part 2 (spaghetti or spiderwebs?)

In a previous post, I suggested that we give up on agriculture in order to complete the Doha Round. I want to focus here on the bread-and-butter business of the World Trade Organization -- prospects for negotiations to reduce merchandise tariffs. For the impatient, the punch line is a call for either zero manufacturing tariffs by the OECD on an MFN basis, or else an OECD-based plurilateral agreement in the WTO for zero tariffs in manufactured goods. For the more patient, read on.

In the run-up to the NAFTA in the 1980s, the word on the street was that multilateralism was in trouble. More bluntly, the catchphrase was "GATT is dead." Unable to win sufficient points with the EC on agriculture, and the developing world on services, the U.S. focused instead on a bilateral strategy. An important added ingredient in the policy mix was the belief that a major Asian trading partner (Japan) was unfair and kept its currency low to promote exports. So the U.S. turned to its neighbors -- Canada and Mexico. Intellectually, we had Jagdish Bhagwati condemning NAFTA and Paul Krugman selling the idea of strategic trade policy. In fact, this does not sound so different from the present day. Yes, the EC was smaller than the EU. And yes the U.S. Congress is railing against China instead of Japan. Yet multilateral trade negotiations in Geneva are again stuck, and impatient negotiators are working on relatively easy bilateral agreements to take their minds off the impasse in Geneva. The U.S. has signed a deal with Korea, while the EU is busy negotiating with Korea as well. Asian parties are also talking (again) of regional solutions --though so far this has been dominated by bilateral agreements. The web of bilateral and regional agreements grows increasingly complex.

There are important differences between the previous dance of regional agreements on the grave of multilateralism, and the current one. The spider's web of regional agreements now in place has done serious damage to the basic non-discrimination principle of the trading system. (This is commonly referred to as a spaghetti bowl rather than a web, usually as in "Prof. Jagdish Bhagwati has called this the Spagheti bowl..." Sorry, but I do not think a bowl of pasta sounds sufficiently sinister. So, since this is my space, I will use the spiderweb metaphor...) When the GATT was set up, a founding principle was the idea that small countries should be treated as equal to big ones, so that there would be no side deals that might lead to a repeat of colonial trading empires or to unbalanced (and unfair) negotiations between unequal partners. Any pretension that this is still the case is gone. The EU now actively uses preferential trading arrangements (can we call this a neo-colonial trading system yet?) to push its agenda in developing Africa, while the U.S. now routinely incorporates trade deals in its geopolitical maneuvers. In this way the US tries to tie Jordan and Egypt and Central America with commercial bindings. With the exception of a few of these agreements, none, individually, really matter much for the U.S. and EU. Trade agreements with Botswana and Jordan and Costa Rica and Israel are not going give a big boost to the economies of Europe and North America. Rather, the logic is geopolitical. In the Cold War era, the OECD Members all saw a global trading system as an important strategic asset in keeping the west united against the communist threat. Clearly, this no longer holds. The result is the use of free trade agreements to cement bilateral political deals. This has led, predictably, to FTA burnout. The U.S. Congress is tired of the recent string of regional trade agreements. They cost political capital to support, and the economic benefits are not all that big. Similarly, while the European Commission pushes ahead with regional agreements, the European electorate also appears to suffer from globalization burnout. And we clearly do not have a Bill Clinton to drive the GATT/WTO negotiating round home this time around.

In a sense, the irony of trade as a geopolitical tool in the Cold War was that trade was removed in an important way from the political arena. I do not mean that it was not a political issue. Rather, the push for a broad multilateral system coincided with post-World War II efforts to dismantle bilateral trading systems that were an offspring of old colonial empires. It also meant that the U.S. perceived its foreign policy interest to include promoting liberal trade regimes. So trade was less bilateral (and so less a tool of bilateral and partisan dealings.) The non-discrimination clause of the GATT was important here. It helped to prevent a slide back into the economic underpinnings of centuries of trade-based military conflict involving European commercial empires. (Just think of the Dutch and British wars in the Indies, the Opium War, the British and French Wars, everyone looting the Spanish empire, Japan and its East Asian Co-prosperity Sphere vs the West, England in the Indian subcontinent, &tc &tc). Given the apparent long-run historical implications of bilateralism, we should be worried by its vigorous revival.

The Doha Round is supposed to promote the interests of developing countries. Negotiators have tried to follow past GATT negotiating rounds, with the adoption of a tariff cutting formula. Yet, it is proving almost impossible to fit a formula to the varied tariffs of developed and developing countries. In addition, our spider's web of regional agreements (ok, you can call it a spaghetti bowl) has created conflicting incentives for developing countries. This system helps some countries by discriminating against others. In many cases it helps the poor by hurting the not-quite-as-poor. It also confuses matters with complex requirements for rules of origin. These are necessary because, given an FTA, there is otherwise a risk of transshipment. There is evidence that rules of origin prevent takeup up notional trade preferences, or at least impose costs that eat significantly into their benefits.

There may be a simpler way to move forward, without the need to balance formula coefficients across North and South. It is time for the high-income countries to simply declare zero tariffs for all manufactured goods. In one step, this would present a maximum concession to developing countries, eliminate entirely the need for rules of origin, and greatly simplify the administrative costs of doing trade. It would also undo recent damage linked to FTAs, preferential North-South deals, and the return of bilateralism. Most multinational firms in the OECD (computer manufacturers, motor vehicle manufacturers, &tc) would embrace such a simplifiction of the rules they face. Indeed this is exactly what happened with the Information Technology Agreement. It started with 29 members, and now has 70, covering 97% of trade in information technololgy products. A similar approach could be followed collectively across the OECD either simply as binding commitments, or perhaps as a plurilateral agreement. (A plurilateral agreement would be one that applied to all signatories.) The advantage of a plurilateral is that simple conditions could be set for developing countries (such as flat tariffs in a band of 8 to 10 percent, for example, with a schedule for reduction) to immediately sign on, and to realize benefits today from a concrete commitment to rationalize their own policies tomorrow. It would also take the wind out of the sails of conspiracy theorists that argue that poor countries are poor because of OECD protection. (As an aside, most import protection against developing countries is imposed by other developing countries.) Such an approach could set in motion a tremendous, relatively automatic rationalization of trade rules. Unlike bilateral agreements with small countries and city-states, such an agreement would be worth spending political capital in Washington or Brussels to promote.

But what about all the fans of FTAs? How would they feel about such a WTO-based approach. In a sense, this is one logical path mapped out by the intra-OECD FTAs that now include, in various combinations, the U.S., Canada, Mexico, Korea, Australia, and New Zealand. Indeed, one could pitch this when necessary as a super-FTA, with pre-defined membership criteria. They could have their FTAs and the WTO too.

Further reading:

• "Comments in the Financial Times on the U.S.-Korea FTA.," M. Wolf, J. Bhagwati, F. Bergsten, A. Sapir, D. Vines, and more leading characters in this drama. There is even a bit of he-said she-said between Bhagwati and Bergsten. This is good stuff!


• "America's Bilateral Battle Against Free Trade," J. Bhagwati on the real risks posed by the emphasis on regionalism instead of multilateralism, Financial Times, April 2007.


• "Who's Afraid of an All-Out Trade War? We'll Do Okay if Push Comes to 'Shove Off'," P. Krugman on the joys of trade wars circa 1990 (or as Peter Sellers would say, "how I learned to love trade wars...")


• "The Regionalism Debate: An Overview," A. Panagariya, published in World Economy, June 1999, 477-511.


• "Liberalizing Trade in the Developing Countries," A. Panagariya, takes apart the neo-protectionist arguments in the antiglobalization/NGO school of thought, published in Foreign Policy, September/October 2005.


• "Preference Erosion and Multilateral Trade Liberalization," J. Francois, B. Hoekman and M. Manchin, final version published in The World Bank Economic Review 2006 20(2):197-216. Takes a critical look at how much scope there really is for preference erosion, and quantifies rules of origin costs in the context of EU preference schemes.


• "Clothes Without an Emperor: Analysis of the Preferential Tariffs in ASEAN," M. Manchin and A. Pelkmans, 2007. Offers evidence that Asian tariff preferences have largely been a farce, eroded almost completely by rules or origin and related compliance costs.