1) Start with a quick reminder for readers who last course in world history is lost in the mists of time. What was the Silk Road?
\”The original Silk Road initially developed under the Han Dynasty in China, which ruled from 206BCE to 220CE. For the next 1000 years or so, the Road (or, more accurately, the various routes) linked China with India, Central Asia, Rome (for a while) and, eventually, the Arab Caliphate involving trade in everything from spices and silk through to precious stones, ponies and slaves. The great Eurasian empires that developed during this period became mutually dependent. It all went wrong when the Mongols, under Genghis and Kublai Khan, managed to spread not just total brutality but also bubonic plague across the Eurasian land mass. Connections were severed and the various routes fell into disuse. Later, as the European nations developed their ocean-going fleets, the case for expensive land-based trade across Asia economically collapsed. Unlike the original, the Southern Silk Road won’t only be confined to Asia and Europe. It stems from connections over land, across the sea, through the air and within the electronic ether. And because the costs of transportation and communication have collapsed in recent decades, it is much more geographically diverse, offering the potential to create hitherto-unimaginable linkages between Asia, the Middle East, Africa and Latin America. If it is able to advance, the Southern Silk Road will radically alter the dynamics of the global economy in the years ahead. The economic centre of gravity is about to undergo a major shift.\”
2) On a timeline of U.S. per capita economic growth, China, Mexico and Brazil have about the per capita GDP that the U.S. had in 1940. India has about the per capita GDP that the U.S. had in 1882. Here\’s the figure. (On the vertical axis, GK$ refers to Geary-Khamis dollars, which is a purchasing power parity exchange rate.) However, in the last 10 years, India has caught up with 30 years of U.S. per capita growth, and China has caught up with 50 years of U.S. per capital growth.
3) Foreign direct investment has exploded in size, and the top recipients of inflows of foreign direct investment have changed substantially.
Using the standard UNCTAD data on foreign direct investment, the U.S. economy had the highest inflows in 1980, 1990, 2000, and 2009. But from 1980 to 2000, the level of those FDI inflows to the U.S. economy rose by a multiple of 18–before sagging back in the economic turmoil of 2009. But perhaps more interesting is that if one looks at the top 10 recipients of FDI inflows, one China and Hong Kong don\’t appear in 1980 or 1990. By 2000, China is 9th in FDI inflows and Hong Kong is 7th. By 2009, China is 2nd in FDI inflows and Hong Kong is 4th–and together, they would exceed total FDI inflows to the U.S. economy. Also by 2009, the Russian Federation, Saudi Arabia, and India are all in the top 10 for FDI inflows. Here\’s the table:
4) Predictions for continued long-run growth in China, India, Brazil, and elsewhere have a buried assumption that their growth will become far less dependent on the buying power of high-income countries, and instead far more dependent on growth generated internally or by trading with each other.
King writes: \”Excluding the possibility of trading with Mars or Venus, there are two primary options: either more of each emerging nation’s growth comes from internal sources or more comes from the emerging nations connecting economically with each other. The developed world simply won’t be big enough to accommodate the emerging world’s ambitions and expectations.\”
Los Angeles Magazine has a lively and well-informed article, \”Between the Lines\” written by Dave Gardetta about the history and present of parking in Los Angeles with frequent reference to one of my secret heroes, although I\’ve never met him,: the economist Donald Shoup. (Thanks to Alex Tabarrok at Marginal Revolution for the pointer here.) Here are a few excerpts:
\”In the United States hundreds of engineers make careers out of studying traffic. Entire freeway systems like L.A.’s have been hardwired with sensors connecting to computer banks that aggregate vehicle flow, monitor bottlenecks, explain congestion in complicated algorithms. Yet cars spend just 5 percent of their lives in motion, and until recently there was only one individual in the country devoting his academic career to studying parking lots and street meters: Donald Shoup.\”
\”Shoup is 73 years old. He drives a 1994 Infiniti but for the last three decades has steered a 1975 Raleigh bike two miles uphill daily in fair weather, from his home near the Mormon temple to the wooded highlands of UCLA’s north campus. … This year Shoup’s 765-page book, The High Cost of Free Parking, was rereleased to zero acclaim outside of the transportation monthlies, parking blogs, and corridor beyond his office door in UCLA’s School of Public Affairs building. He wasn’t surprised—“There’s not even a name for what I do,” he says. Shoup, however, does not lack for acolytes. His followers call themselves Shoupistas, like Sandinistas, and on a Facebook page they leave posts suggesting parking meters for prostitutes and equations that quantify the contradiction between time spent cruising for free parking versus the “assumed time-value” cited to justify expanding roadways. (The hooker stuff is more interesting.)\”
\”After 36 years, Shoup’s writings—usually found in obscure journals—can be reduced to a single question: What if the free and abundant parking drivers crave is about the worst thing for the life of cities? That sounds like a prescription for having the door slammed in your face; Shoup knows this too well. Parking makes people nuts. “I truly believe that when men and women think about parking, their mental capacity reverts to the reptilian cortex of the brain,” he says. “How to get food, ritual display, territorial dominance—all these things are part of parking, and we’ve assigned it to the most primitive part of the brain that makes snap fight-or-flight decisions. Our mental capacities just bottom out when we talk about parking. …”
\”L.A. has been a wellspring for a parking guru like Shoup to become self-realized. Our downtown contains more parking spaces per acre than any other city in the world and has been adding them at a rate of about 1,000 a year for a century. … Whereas a skyscraper of a million square feet in New York may be required to have 100 parking spaces, an equal-size structure in L.A., like the U.S. Bank Tower, is compelled by the city to provide closer to 1,300 spaces. The maxim is wrong: L.A. wasn’t built around the car. It was built around the parking lot…. L.A. sits on a mountain-size surplus of parking it doesn’t know what to do with. … San Francisco or New York might have ten times the parking each has now if they had buildings like 1100 Wilshire, where the first 15 floors are all garage. But the downtown areas of those cities won’t allow it. L.A. mandates it. In Los Angeles we attend dinner parties and wish out loud for more pedestrian-friendly neighborhoods, increased urban density, more mass transportation, less congestion, less air pollution, less reliance on our cars—and cheap, abundant parking wherever we go.\”
For those who would like a taste of Shoup, but don\’t quite feel up to 765 pages on The High Cost of Free Parking, I recommend Shoup\’s lead essay in the April 2011 issue of Cato Unbound: Free Parking or Free Markets. Some excerpts follow, although for much more detail and vivid examples from specific cities you need to click through to the essay:
\”Cities should set the right price for curb parking, because the wrong prices produce bad results. Where curb parking is underpriced and overcrowded, a surprising share of traffic can be cruising in search of a place to park. Sixteen studies conducted between 1927 and 2001 found that, on average, 30 percent of the cars in congested traffic were cruising for parking. … Free curb parking in a congested city gives a small, temporary benefit to a few drivers who happen to be lucky on a particular day, but it creates large social costs for everyone else every day. To manage curb parking and avoid the problems caused by cruising, some cities have begun to adjust their curb parking prices by location and time of day to produce an 85 percent occupancy rate for curb parking, which corresponds to one vacant space on a typical block with eight curb spaces. …\” \”Drivers want to park free, and that will never change. What can change, however, is that people can want to charge for curb parking. The simplest way to convince people to charge for curb parking in their neighborhood is to dedicate the resulting revenue to paying for added public services in the neighborhood, such as repairing sidewalks, planting street trees, and putting utility wires underground. That is, the city can offer each neighborhood a package that includes both performance-priced curb parking and the added public services financed by the meters. Performance pricing will improve the parking and the revenue will improve the neighborhood. …\”
\”Requiring ample parking does give us all the free parking we want, but it also distorts transportation choices, debases urban design, damages the economy, and degrades the environment. Some cities have begun to remove minimum parking requirements, at least in their downtowns, for two reasons. First, parking requirements prevent infill redevelopment on small lots, where fitting both a new building and the required parking is difficult and expensive. Second, parking requirements prevent new uses for many older buildings that lack the parking spaces required for the new uses. A search of newspaper articles about minimum parking requirements found 129 reports of cities that have removed off-street parking requirements in their downtowns since 2005. … Minimum parking requirements may be our most disastrous experiment ever in social engineering, and ceasing to require off-street parking is not social engineering…. If cities remove off-street parking requirements, they will have to charge performance prices for the curb spaces to prevent spillover, but this will produce another great benefit: All the money paid for curb parking will become a new revenue stream to pay for local public services. Curb parking will become too valuable not to meter. Removing the parking requirements for both housing and offices can produce a cascade of benefits: shorter commutes, less traffic, a healthier economy, a cleaner environment, and more affordable housing…. The upside of the mess we have made is that we have an accidental land bank readily available for job-adjacent housing. This land is now locked up in required parking, but if cities remove their unwise parking requirements we can reclaim land on a scale that will rival the Netherlands. … Some people assume that America has a freely chosen love affair with the car. I think it was really an arranged marriage. By recommending minimum parking requirements in zoning ordinances, the planning profession was both a matchmaker and a leading member of the wedding party.\”
It\’s a basic pattern in economics, drummed into the head of every intro student, that when the price of a good rises, people tend to consume less of it; conversely, when the price of a good falls, people tend to consume more of it. Sure, there are some goods that are more responsive to changes in price than others. Sure, there may even be short-term exceptions like when a high price entices a few buyers looking for a high-status good. But even then, if the price keeps rising, the quantity demanded drops off.
But there\’s one exception to this rule, called a Giffen good, where a higher price causes demand for the good to rise. Until very recently, I had always told students when explaining this case that the example was a theoretical curiosity, without real-world application. I may have to change that.
The Giffen good was named by Alfred Mashall in his Principles of Economics, with the first edition published in 1890. Marshall explains the conventional wisdom that when the price of a good rises, quantity demanded falls, and vice versa. But he adds (Book III, Chapter VI): \”There are however some exceptions. For instance, as Sir R. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with, each must be treated on its own merits.\”
To spell out the underlying logic in modern terms, every price change has two effects on people: 1) it causes them to want to substitute away from what is now relatively more expensive and toward what is now relatively cheaper; and 2) it alters the buying power of their income. Most of the time, these two effects reinforce one another: that is, a higher price for a good makes people want to consume less of that good both because it\’s now relatively more expensive, and also because the higher price has reduced the buying power of their income.
But now consider what economists call an \”inferior good,\” which is a good that people tend to buy more of as their income falls. Standard examples of an inferior good might be something like hamburger or oatmeal. Imagine further a very poor society, in which people spend a lot of their income on one source of food: in Marshall\’s example, that one source of food is bread; in the example often used long-ago when I was in college, it was potatoes in Ireland in the 19th century. Imagine that the price of that staple food rises. Usually, a higher price means less of that good consumed. But Giffen good is an inferior good, and the reduction in the buying power of people\’s incomes as the price rises (together with the lack of cheaper food alternatives, because for poor people this is already the cheapest alternative) means that they shift toward buying more of the good, rather than less.
Alfred Marshall attributed this idea to Robert Giffen, who was a financial writer who moved from journalism (including a stint in the early years of the Economist magazine) to being a government adviser on statistical questions. The attribution may be overly generous. As far as I know, the concept has not been found in any of Giffen\’s books or writings. But the terminology stuck, along with the idea that this was a very rare occurence. In Chapter 8 of my Principles of Economics textbook (and I encourage teachers and students of economics to check it out here), I wrote: \”However, no study has ever found conclusive evidence of a Giffen good in the real world. A famous economist named Francis Ysidro Edgeworth summed up the situation regarding Giffen goods in this way in 1914: `Only a very clever man would discover that exceptional case; only a very foolish man would take it as the basis of a rule for general practice.`\” [My notes to myself say that the Edgeworth quotation is from p. 9 of a book called ”On the Relations of Political Economy to War.\”]
Well, it seems that the development economics literature has now produced strong evidence of a real-world example of a Giffen good. The December 2011 issue of the Region magazine from the Federal Reserve Bank of Minneapolis has a lively interview with Esther Duflo about her work. The whole interview is worth reading, but one point that jumped out at me was her commentary about the evidence for a Giffen good. Here\’s Duflo, taking the possibility of real-world Giffen goods quite seriously:
\”A recent example of this is an experiment by Rob Jensen and Nolan Miller, where they look at the effect on consumption of changes in the price of rice. If you decrease the price of rice, will people consume more rice or less rice? In the real world, it’s very difficult to know that because whenever the price of rice decreases, that’s the result of a combination of supply and demand factors, and isolating variation in the price of rice as purely exogenous is essentially impossible.So you need an experiment to know, and in fact they found something very interesting when they did this experiment in one place in China where rice is a very important part of the food basket for the poor. And they found that when the price decreased, people ate less rice, not more rice, which means rice is a Giffen good …
\”I think you can’t dispute the fact that rice, in this particular place in China, is a Giffen good…. Yes, it doesn’t mean that rice is a Giffen good here in the United States. I’m not interested in that question. But the fact that there is one Giffen good somewhere I think makes this interesting. It is incremental knowledge for how we think about the world and is very, very, very important for what we think about the poor and food. And in particular, in the policy domain, it shows that policies that subsidize the price of staples—which is quite common—might be counterproductive from the view of getting people to eat more. It still might be good for the poor, because they consume a lot of staples, and subsidizing a staple improves their income. But if the objective was to make people eat more, that’s not necessarily the way.
\”That does not mean that it would be true in India, but the very fact that there is this possibility means that we want to investigate this question more. And we can try a similar experiment elsewhere to see in what conditions this will reproduce. With a Giffen good, the advantage is that we have a very established theory that helps us think what’s likely to be a Giffen good. It has to be something that is a very big part of the budget so that the income effect is large. And it must be an inferior good. That gives us a sense of, in another place, how would we go about looking for a good that’s likely to have the same characteristics? Maybe there are no Giffen goods here because no goods have those characteristics. But maybe if we went to Ethiopia, it would be whatever is the staple food there. We can see what’s the share of this staple in people’s budgets and get some idea of what we are looking for.\”
The research paper to which Duflo is referring is Robert Jensen and Nolan Miller. 2008. “Giffen Behavior and Subsistence Consumption.” American Economic Review 98 (4): 1553-77.
Economic growth has taken off in India. But among economists, there are a variety of puzzles about when growth really took off, why it took off, and thus about how sustainable the growth will be. Ashok Kotwal, Bharat Ramaswami, and Wilima Wadhwa seek to untangle these issues in \”Economic Liberalization and Indian Economic Growth: What’s the Evidence?\” which appears in the December 2011 issue of the Journal of Economic Literature. (The journal is not freely available on-line, but many students and faculty will have on-line access through their library, or as part of their membership in the American Economic Association.)
Much of the controversy over India\’s growth arises because certain dates don\’t line up neatly. India undertook a highly publicized wave of deregulation and market-opening starting in 1991. Main steps included a sharp reduction in limits on imports and on foreign direct investment into India, as well backing away from state control of many industries, including notably banking, insurance, and telecommunications. However, the surge of economic growth in India predated that wave of reforms–thus leading to controversy over the role of those reforms in the surge of economic growth. The first figure shows the rising level of growth in India\’s overall GDP; the next figure shows the break from trend in per capita GDP. In both cases, it certainly looks as if the upswing started in the 1980s, rather than after 1991.
India\’s growth pattern is clearly not the same growth pattern that has worked across east Asia: including Japan, countries like Korea and the other east Asian \”tigers,\” and now China. Their growth was built on sky-high rates of national savings, which translated into enormous capital investment. It was also built on a widespread commitment to raising levels of education, and to transferring technology into the country. The governments of these countries then offered support for what started out as low-wage manufacturing directed at export markets, in which workers moved from agriculture to manufacturing, and then gradually worked up to higher-wage manufacturing.
In contrast, as the JEL authors explain (footnotes omitted): \”However, Indian economic growth, during 1980–2004, seems to have little in common with the so-called “Asian Model.” Its savings rate has improved over time but has not reached the East Asian level. Its growth so far has not been driven by manufactured exports. Nor has it attracted massive inflows of foreign investment. There is no industrial policy targeted toward developing specific industries. On the contrary, it is the service sector that has led the charge in the Indian growth experience. Another aspect of the Indian experience that makes it very different from that of other Asian countries is that, despite a fast growing nonagricultural part of the economy, the share of agriculture in the total labor force has declined very slowly. In fact, the agricultural labor force in absolute numbers has increased since the 1980s, dampening the process of poverty decline.\”
There are competing interpretations of what happened to India\’s economy in the 1980s. One view is that the growth of that decade was largely an unsustainable bubble based on unsustainably high government deficits. Another view is that the country was already going to through an attitudinal shift away from the overt socialism of the 1970s, and so that even before the reforms of 1991, seeds of economic change were bearing fruit. Those who want chapter and verse on this dispute can start with the fair-minded presentations of both sets of argument in the JEL article.Here, I\’ll focus on the take-off of services in India, and the concern that growth from this source is not spreading across India\’s economy..
The cenrrality of services in India\’s economic growth is quite clear: \”Within the sector, business services (which includes software and information-technology-enabled services), banking, and communications have grown on average at more than 10 percent per year in the 1990s. On the other hand, some other services, such as railways and public administration, have grown more slowly … As a result, while the services share of GDP is nearly 60 percent, its share of employment is barely 30 percent. …However, the most noticeable feature of service sector growth has been the remarkable expansion of its exports, which grew faster (at 17.3 percent annually) than either GDP (at 7.5 percent) or the services GDP through the 1990s (at 9.2 percent). … Until the most recent financial crisis, this sector has been growing at 35 percent per annum. Though as yet software sector is only a small part of the GDP and a negligible part of the total employment, it has been the most dynamic sector in India …\”
It seems clear that the wave of deregulation in 1991–which allowed imports of high tech equipment, investment by foreign companies (like software companies), along with economic connections to other countries in telecommunications, banking, and finance– was essential to the growth of India\’s services sector. But India\’s surge of economic growth also came out of some other factors. The country had built up a reservoir of highly-skilled engineers back in the 1970s and 1980s, many of who had educational and commercial connections in high-income economies, and who were thus ready to take advantage of the economic openings when they occurred. A huge number of potential workers in India spoke English, and thus could provide various kinds of administrative support and staff \”call centers.\”
The ironic outcome is that India is typically referred to as a development success story, while at the same time the country has a larger number of the world\’s poor than any other.Indeed, there are concerns that India is not educating much of its population nearly well enough for it to have any hope of participating in this form of economic growth. In a phrase I once heard, India is part southern California, and part sub-Saharan Africa. Here is a flavor of the summing up from Kotwal, Ramaswami, and Wadhwa:
\”It is clear from the earlier sections that the growth episode in India since the 1980s is not another instance of state-driven growth in Asia. Instead, it is the coincidence of the ready availability of new technologies and having the skilled manpower that would be necessary to take advantage of these new technologies. Technology transfers in the 1980s and early 1990s took place mostly through easier and cheaper access to imported machinery that was made possible by trade liberalization. Improved communications (especially cell phones) and the diffusion of the Internet were other technologies that played a big role in driving growth from the mid-1990s on. It is inconceivable that, without the breakup of government monopolies and the advent of competition in the communication sector, there would have been a revolution in communication technology in India. …
\”Indeed, one major feature of India’s development pattern is that the share of agriculture in employment has not come down rapidly. In fact, the absolute amount of labor in agriculture has risen continuously in India while it fell in all countries now developed during their comparable development phases. An important component of growth—moving labor from low to high productivity activities—has been conspicuous by its absence in India. Also, as the labor to land ratio grows, it becomes that much more difficult to increase agricultural wages and reduce poverty. …
\”If we consider double the poverty level ($2.16 per day), a staggering 80 percent of India’s population was poor in 1983 and the number is about the same in 2004. This is a startling fact and indicates that there are two Indias: one of educated managers and engineers who have been able to take advantage of the opportunities made available through globalization and the other—a huge mass of undereducated people who are making a living in low productivity jobs in the informal sector—the largest of which is still “agriculture.” The most direct impact on the second India could only come about through improvements in agricultural productivity. … In general, the productivity improvements in the informal sector depend crucially on access to credit, know-how, and skills and therefore on the quality of institutions. India’s future will depend a great deal on how these institutional improvements shape up.\”
As 2012 begins, it seems useful to summarize–both for myself and for readers–what I\’m doing on this blog and my perception of how it\’s working.
As regular readers know, my approach in this blog has been a little different. I\’m not trying to react to headlines or the news cycle. I\’m not linking to op-ed pieces. Instead, my approach as the Conversable Economist is to point out something that I\’ve read by economists that interested me. Most days I draw on a report or article I\’ve read by an economist: from the Federal Reserve banks, the Congressional Budget Office and the Government Accountability office and other U.S. government websites, the IMF and the World Bank, the U.S. and foreign think tanks, and from academic publications. My posts often includes some direct quotations and tables or figures. I\’m typically posting once a day, five days a week–maybe an extra post or two some weeks. The posts are often fairly long, averaging about 1,000 words.
I imagine that Conversable Economist readers had an office down the hall from me. When heading off to lunch, or to pick up the mail, or heading off to the parking lot at the end of the day, we would ask if the other person had seen anything interesting that day, and be willing to listen a few minutes to the response. As explain in a post last September, I Want to Be Your Weak Tie, my goal is not to rehash the topic-du-jour of the blogosphere one more time, with my own dose of snarky. Instead, I\’m aware that sitting at my desk as managing editor of the Journal of Economic Perspectives gives me an eclectic reading list, and I\’m trying to pass along some thoughts and insights that readers who don\’t have such peculiar jobs might not otherwise see.
Or in the more high-falutin\’ explanation I offer on my FAQs page, the \”Conversable Economist\” name is drawn from an essay by David Hume, who lamented the \”separation of the learned from the conversable world.\” Hume wrote: “I cannot but consider myself as a kind of resident or ambassador from the dominions of learning to those of conversation, and shall think it my constant duty to promote a good correspondence betwixt these two states, which have so great a dependence on each other.”
Evaluating whether this blog is a \”success\” seems to involve both personal and external considerations. On the personal side, I\’m enjoying writing most of the posts. The blog is giving me an excuse that when I see a reference to a report or to a paper, I have reason to track it down. Over time, I\’m building up a personal on-line library of what I\’ve read and making it easier for myself to locate it. It\’s a lot easier to do a search on the blog for an article or a figure I remember seeing than it is to hunt around the shelves of my office where I may or may not have left a print-out or a photocopy for myself.
Externally, the number of pageviews seems to be growing steadily. I started the blog in late May, and in November and December, I was averaging about 500 page-views per day, a total that both pleases me and leaves me dissatisfied. I\’ve also gotten complimentary feedback from at least some readers, for whom what I\’m trying to do clearly strikes a chord. I\’ve heard from readers who appreciated having figures and tables posted in a jpeg format, so that it was easy to copy them over for Powerpoint slides and use in lectures. Perhaps the nicest comment was from an old friend of mind who wrote something like: \”Your blog is like having a personal shopper at Niemann-Marcus. You collect the good stuff one wouldn\’t necessarily see and lay it out.\”
The main tradeoffs for the blog are a cost of time, to track items down and to write them up, and a modest cost in terms of stress–worrying at the start of a week what I\’ll do that week, or worrying near the start of a vacation whether I have enough items to post while I\’m gone to fill out the week. I know the world won\’t end if I miss a day or three, now and again. But I take some modest pride in the fact that I\’ve been able to stick to to my five-days-a-week schedule. My plan is to try the blog for about a year, and then evaluate how the costs of time weigh against the internal and external benefits.
If you have some words of encouragement or feedback or criticism about the website, whether as a regular or an occasional reader, I would be glad to hear from you. Are the posts fairly readable? Should I try to make them shorter, or perhaps divided into several shorter posts? (I\’m not going to make the posts longer!) Is the inclusion of figures and tables useful or annoying? The e-mail address is .
