Year: 2017

The Middle East and North Africa region contains about half of the world\’s proven reserves of oil and natural gas. This has already proven to be a mixed blessing for economic growth in the region, and in a world economy where many countries are making efforts to reduce carbon-emitting sources of energy, a dependence on production of fossil fuels will be even more problematic. Abdelhak, Bassou, Mario Filadoro, Larabi Jaidi, Marion Jansen, Yassine Msadfa, and Simone Tagliapietra consider these isues in \”Towards EU-MENA Shared Prosperity,\” a report recently co-published by the European think tank Breugel and the Moroccan think tank OCP Policy Center (which receives funding through Office Chérifien des Phosphates, a Morocco-based mining company).

The report offers a reminder that while oil and gas money is intertwined with the economy of the Middle East and North Africa region, the energy resources are not evenly distributed across countries.  Countries like Libya, Iraq, and Saudi Arabia are highly dependent on oil, while others like Egypt and Jordan are actually oil importers.

For the oil-rich countries of this region, oil tends to be a very large share of government revenues and of exports. In Saudi Arabia and Kuwait, more than 60% of the citizen workforce (that is, not counting immigrant workers from other countries) work in the government sector.

But countries that are heavily dependent on natural resources, and especially oil reserves, have often found themselves without much economic growth. Around the world, Nigeria, Angola, Venezuela, and Saudi Arabia have examples of some extraordinary wealth for the few, but it\’s hard to make the case that This pattern is so common that it is sometimes called the \”natural resources curse\” or the \”Dutch disease,\” after Netherlands experienced a slowdown in economic growth after tapping into North Sea natural gas resources. For an overall discussion, I recommend the article by Anthony J. Venables,\”Using Natural Resources for Development: Why Has It Proven So Difficult?\” in the Winter 2016 issue of the Journal of Economic Perspectives. Or you can check an earlier blog post on the subject, \”The Natural Resources Curse\” (October 27, 2011), discussing an article by Jeffrey Frankel.

The present report looks at both economic and political causes of the resource curse. On the economic side, it cites \”Resource Curse Theory\”:

\”Richard M. Auty (1993) formulated the Resource Curse Theory to describe the reasons why natural resource-abundant countries often perform poorly in economic and political terms. He claimed this can happen for several reasons, such as the presence of weak institutions, commodity price volatility, conflicts and the so-called ‘Dutch disease’ – a perverse mechanism by which the increased revenues from natural resource discoveries lead to appreciation of the local currency, thus negatively affecting the exports of all other sectors in the economy.\”

They supplement this argument with \”rentier state theory\”:

Listening to complaints about the effects of globalization on the US economy, one might be tempted to believe that the US economy is more exposed to the pressures of global trade than most other countries, and that the US market is uniquely open to world trade. countries.

But these beliefs are not true. A common pattern is that large economies have lower levels of global trade relative to GDP–because so much of their economy happens inside their own  borders. Moreover, countries like the US with some geographic separation from most other substantial economies have less trade. Thus, the ratio of exports/GDP for the world economy is about 30%. But the export/GDP ratio for the US is only about 13%. Japan has an export/GDP ratio of about 17%. Canada is near the world average, with an export/GDP ratio of 31%, while Mexico is above the world average with an export/GDP ratio of 38%. For a small economy in the middle of the European Union, like Belgium, the export/GDP ratio is 84%.

Moreover, US markets are not especially open to international trade. The evidence comes from the fourth edition of the International Chamber of Commerce Open Markets Index 2017. The index rates 75 large economies across the world in four broad areas: observed openness to trade; trade policy settings; foreign direct investment (FDI) openness; and trade-enabling infrastructure. These scores are combined to a ranking on a scale from 1 (least open) to 6 (most open). The US economy is in a tie for 40th place in openness. Here are the rankings:

Among the group of larger economies around the world known as the G20, the US ranks 8th, behind Japan, Germany, Canada, Korea, and others in this measure of trade openness. In the more detailed analysis, the US scores higher in the categories of explicit trade policy and trade-enabling infrastructure, about average on openness to foreign direct investment, and below average on \”observed openness to trade.\”

Globalization and trade are forces of economic disruption and change, and those forces have grown stronger in recent decades. But the notion that the enormous US economy is vulnerable to international trade or especially buffeted by the winds of trade just doesn\’t hold up.

It\’s just a fact that blacks fare worse than whites in the US labor market using basic comparisons like average wage levels or unemployment rates. However, controversy arises in the possible explanations for these differences. It\’s easy enough to put forward potential hypotheses. For example, does the wage gap mostly represent discrimination by employers between equally well-qualified applicants? Or does it reflect a lower average level of education for black workers, which in turn might in part trace back to societal discrimination in housing patterns or methods of school funding? Is it differences in occupational choices, which might in part trace back to patterns of expectations in social networks?

The big questions are hard to answer. But Mary C. Daly, Bart Hobijn, and Joseph H. Pedtke set the stage for a more insightful discussion in their short essay, \”Disappointing Facts about the Black-White Wage Gap,\” written as an \”Economic Letter\” for the Federal Reserve Bank of San Francisco (September 5, 2017, 2017-26). Here are  a couple of figures showing the black-white wage gap, and then seeking to explain what share of that gap is associated with differences in state of residence, education, part-time work, industry/occupation, and age. The first figure shows the wage gap for black and white men; the second for black and white women.

Here are some thoughts on these patterns:

1) The black-white wage gap is considerably larger for men (about 25%) than for women (about 15%). Also, the wage gaps seem to have risen since the 1980s.

2) The three biggest factors associated with the wage gap seem to be education level, industry/occupation, and \”unexplained.\”

3) The \”unexplained\” share is rising over time time. As the authors explain: \”Perhaps more troubling is the fact that the growth in this unexplained portion accounts for almost all of the growth in the gaps over time. For example, in 1979 about 8 percentage points of the earnings gap for men was unexplained by readily measurable factors, accounting for over a third of the gap. By 2016, this portion had risen to almost 13 percentage points, just under half of the total earnings gap. A similar pattern holds for black women, who saw the gaps between their wages and those of their white counterparts more than triple over this time to 18 percentage points in 2016, largely due to factors outside of our model. This implies that factors that are harder to measure—such as discrimination, differences in school quality, or differences in career opportunities—are likely to be playing a role in the persistence and widening of these gaps over time.\” The authors also cite this more detailed research paper with similar findings.

4) In looking at the black-white wage gap for women, it\’s quite striking that this gap was relatively small back in the 1980s, at only about 5%, and that observable factors like education and industry/occupation explained more than 100% of the wage gap at the time. But as the black-white wage gap for women increased starting in the 1990s, an \”unexplained\” gap opens up.

5) It is tempting to treat the \”unexplained\” category as an imperfect but meaningful measure of racial discrimination, but it\’s wise to be quite cautious about such an interpretation. On one side, the \”unexplained\” category may overstate discrimination, because it doesn\’t include other possible variables that affect wages (for example, one could include previous years of lifetime work experience, or length of tenure at a current job, scores on standardized tests, or many other variables). In addition, the variables that are included like level of education are being measured in broad terms, and so it is possible that, say, a blacks and whites with a college education are not the same in their skills and background. On the other side, the \”unexplained\” category could easily understate the level of discrimination. After all, education levels and industry/occupation outcomes don\’t happen in a vacuum, but are a result of the income, education, and jobs of family members. For this reason, noting that a wage gap is associated with some different in education or industry/occupation may reflect aspects of social discrimination. The kinds of calculations presented here are useful, but they don\’t offer final answers.

In short, the black-white wage gap is rising, not falling. The wage gap is also less associated with basic measures like level of education or industry/occupation than it was before. I can hypothesize a number of explanations for this pattern, but none of my hypotheses are cheerful ones.

For those who need a dose of economics with their end-of-summer Labor Day family cookout (and really, don\’t we all need that?), here\’s a sampling of some earlier posts.

1) \”Origins of Labor Day\” (September 7, 2015)

The first Labor Day march and celebration almost didn\’t happen, for lack of a band. Also, was Maguire or McGuire the one who had the idea for such a holiday?

The more they are instructed the less liable they are to the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people, besides, are always more decent and orderly than an ignorant and stupid one. … They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it.

This passage comes at the end of a more extended discussion. For additional context, here\’s a longer cut from paragraphs 183-190:

But though the common people cannot, in any civilized society, be so well instructed as people of some rank and fortune, the most essential parts of education, however, to read, write, and account, can be acquired at so early a period of life that the greater part even of those who are to be bred to the lowest occupations have time to acquire them before they can be employed in those occupations. For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education.

The public can facilitate this acquisition by establishing in every parish or district a little school, where children may be taught for a reward so moderate that even a common labourer may afford it; the master being partly, but not wholly, paid by the public, because, if he was wholly, or even principally, paid by it, he would soon learn to neglect his business. … There is scarce a common trade which does not afford some opportunities of applying to it the principles of geometry and mechanics, and which would not therefore gradually exercise and improve the common people in those principles, the necessary introduction to the most sublime as well as to the most useful sciences.

The public can encourage the acquisition of those most essential parts of education by giving small premiums, and little badges of distinction, to the children of the common people who excel in them. …

A man without the proper use of the intellectual faculties of a man, is, if possible, more contemptible than even a coward, and seems to be mutilated and deformed in a still more essential part of the character of human nature. Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. The state, however, derives no inconsiderable advantage from their instruction. The more they are instructed the less liable they are to the delusions of enthusiasm and superstition, which, among ignorant nations, frequently occasion the most dreadful disorders. An instructed and intelligent people, besides, are always more decent and orderly than an ignorant and stupid one. They feel themselves, each individually, more respectable and more likely to obtain the respect of their lawful superiors, and they are therefore more disposed to respect those superiors. They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition, and they are, upon that account, less apt to be misled into any wanton or unnecessary opposition to the measures of government. In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it.

James V.  Schall, who has long been a Professor Political Philosophy at Georgetown University, has argued that students have obligations to teachers, not just the other way around. Specifically, these obligations are \”trust, docility, effort, thinking.\” It\’s one of those claims that I\’m not sure I agree with 100%, but I agree with it enough to pass it along as worthy of reflection. This is an excerpt from Chapter 3 of Schall\’s 1988 book, Another Sort of Learning.

Students have obligations to teachers. I know this sounds like strange doctrine … [Let me state the obligations of students. The first obligation, particularly operative during the first weeks of a new semester, is a moderately good will toward the teacher, a trust, a confidence that is willing to admit to oneself that the teacher has probably been through the matter, and, unlike the student, knows where it all leads. I do not want here to neglect the dangers of the ideological professor, of course, the one who imposes his mind on what is. But to be a student requires a certain modicum of humility.

Yet to be a student also requires a certain amount of faith in oneself, a certain self-insight that makes a person realize that he can learn something that seems unlearnable in the beginning. This trust in the teacher also implies that the student, if he has trouble understanding, makes this known to the teacher. Teachers just assume that everything they say or illustrate is luminously clear. A student does a teacher a favor by saying, \”I do not understand this\”. But the student should first really try to understand before speaking. … 

The student ought to have the virtue of docility. He owes the teacher his capacity of being taught. We must allow ourselves to be taught. We can actually refuse this openness of our own free wills. This refusal is mostly a spiritual thing with roots of the profoundest sort in metaphysics and ethics. … When a teacher, crusty as he may be, sees his students leave his classroom for the last time at the end of some fall or spring semester, he wants them to carry with them not so much the memories of his jokes – though he hopes they laughed – or his tests, but the internal possession of the subject matter itself. The student ought to become independent of the teacher to the point of even forgetting his name, but, not the truth he learned. …

So the student owes to his teacher the effort of study. A good teacher ought to exercise a mild coercion on his students, a kind of pressure that takes into account their lethargy and fallenness and distractions, a pressure that indicates that the professor wants the students to learn, lets them know it is important, a pressure that has a purpose of guiding the students through the actual thought process, the actual exercise of the mind on the matter at hand. Few students, on being given The Republic of Plato or The Confessions of St. Augustine to read, will bounce right up to their room, shut off the stereo, cancel a date, and proceed to ponder the eternal verities in these books. The teacher who assigns such books – and a university in which they are not assigned has little claim to that noble name – always must wonder if the intrinsic fascination, the thinking through of such works will somehow reach into his students\’ minds. He hopes that the next time they read Plato or Augustine, they will do so because they want to, because they are challenged by them, and not because they might receive a C- grade if they do not.

Thus, the student owes the teacher trust, docility, effort, thinking.

I spend most of my working life, and even a disturbingly high share of my private life, trying to move back and forth from academic jargon to a more widely-shared human vocabulary. Maximillian Alvarez offers some pungent thoughts on the temptation of academics to become entombed in their jaron in \”The Accidental Elitist: Academia is too important to be left to academics,\” posted February 22, 2017 at The Baffler website. At this time this was written, Alvarez was a PhD candidate in History and Comparative Literature at the University of Michigan.

\”There’s a huge difference, for instance, between defending academic jargon as such and defending academic jargon as the typical academic so often uses it. … It’s not that things like specialized disciplinary jargon are inherently bad or unnecessary. They are bad, however, when they’ve traveled into that special category of identity markers, which so often allow people in contemporary academia to at least act like their primary purpose is to confirm their identity as academics. Like the tweed jacket, things like jargon help form a template of accepted behaviors and traits that qualify one’s identity as an academic, and such qualification becomes the primary justification for keeping them around. You’re not an academic unless you use a certain kind of jargon when you speak and write; you’re not an academic unless you publish in certain journals, etc.

\”The scales tip a certain way and being an academic becomes less about what you do, how you do it, and whom you do it for, and more about where you do it and how you look and sound doing it. There are still other, more noble parts of the profession (advancing human knowledge, shaping the minds of tomorrow, etc.), but on a daily basis they can slip unnoticed into the background of secondary concerns. … The sinister part of all this, then, occurs when, even if you don’t realize it, you end up being more willing to serve your public image and professional ego than you are inclined to put yourself out for the sake of other people. …

\”The perpetual conceit of academics in the humanities is that translating their work into a more accessible vernacular will “dumb down” what are necessarily complex subjects. Important stuff will be lost. Behind this conceit, though, is an implicit presumption from just about every academic that they could perform this kind of translation if pressed to. It has been one of the great sources of my disillusionment with academia to realize that a staggering majority of jargonauts, when pressed, actually can’t. …

\”[M]any academics will subconsciously fall back on the “complex” nature of our work as a way to put normies back in their place and get them to stop asking questions. Remember, we’re neurotic, anxious, self-conscious people. We have our own defense mechanisms and will do much to deflect the realization that very often, the problem is not that our work is so complex that it can only be understood through disciplinary jargon, but that we can’t or don’t want to do the work of “putting it in terms others would understand.” Or, even worse, we fear that making ourselves easier to understand will take away some of our social capital, our special aura as keepers of the densest secrets. We fear that, if we actually could explain our dissertation and book projects to others in simple, but still precise, ways, we might face that most troubling question—“So what?”—without being able to come up with a remotely plausible answer.\”

In ordinary life, when a listener cannot understand what someone has said, this is the usual exchange: 

Listener: I cannot understand what you are saying. 

Speaker: Let me try to say it more clearly. 

But in scholarly writing in the late 20th century, other rules apply. This is the implicit exchange:

Reader. I cannot understand what you are saying. 

Academic Writer. Too bad. The problem is that you are an unsophisticated and untrained reader. If you were smarter, you would understand me. 

The exchange remains implicit, because no one wants to say: \”This doesn\’t make any sense,\” for fear that the response, \”It would, if you were smarter,\” might actually be true. 

While we waste our time fighting over ideological conformity in the scholarly world, horrible writing remains a far more important problem. For all their differences, most right-wing scholars and most left-wing scholars share a common allegiance to a cult of obscurity. Left, right and center all hide behind the idea that unintelligible prose indicates a sophisticated mind. The politically correct and the politically incorrect come together in the violence they commit against the English language.  …

Ten years ago, I heard a classics professor say the single most important thing — in my opinion–that anyone has said about professors: \”We must remember,\” he declared, \”that professors are the ones nobody wanted to dance with in high school.\”

This is an insight that lights up the universe–or at least the university. It is a proposition that every entering freshman should be told, and it is certainly a proposition that helps to explain the problem of academic writing. What one sees in professors, repeatedly, is exactly the manner that anyone would adopt after a couple of sad evenings sidelined under the crepe-paper streamers in the gym, sitting on a folding chair while everyone else danced. Dignity, for professors, perches precariously on how well they can convey this message: \”I am immersed in some very important thoughts, which unsophisticated people could not even begin to understand. Thus, I would not want to dance, even if one of you unsophisticated people were to ask me.\” 

Think of this, then, the next time you look at an unintelligible academic text. \”I would not want the attention of a wide reading audience, even if a wide audience were to ask for me.\” Isn\’t that exactly what the pompous and pedantic tone of the classically academic writer conveys? Professors are often shy, timid and even fearful people, and under those circumstances, dull, difficult prose can function as a kind of protective camouflage. When you write typical academic prose, it is nearly impossible to make a strong, clear statement The benefit here is that no one can attack your position, say you are wrong or even raise questions about the accuracy of what you have said, if they cannot tell what you have said. In those terms, awful, indecipherable prose is its own form of armor, protecting the fragile, sensitive thoughts of timid souls. …

Fortunately, we have available the world\’s most important and illuminating story on the difficulty of persuading people to break out of habits of timidity, caution and unnecessary fear. I borrow this story from Larry McMurtry, one of my rivals in the interpreting of the American West, though I am putting this story to a use that Mr. McMurtry did not intend. 

In a collection of his essays, \”In a Narrow Grave,\” Mr. McMurtry wrote about the weird process of watching his book \”Horseman, Pass By\” being turned into the movie \’\’Hud.\” He arrived in the Texas Panhandle a week or two after filming had started, and he was particularly anxious to learn how the buzzard scene had gone. In that scene, Paul Newman was supposed to ride up and discover a dead cow, look up at a tree branch lined with buzzards and, in his distress over the loss of the cow, fire his gun at one of the buzzards. At that moment, all of the other buzzards were supposed to fly away into the blue Panhandle sky. 

But when Mr. McMurtry asked people how the buzzard scene had gone, all he got, he said, were \”stricken looks.\”

The first problem, it turned out, had to do with the quality of the available local buzzards–who proved to be an excessively scruffy group. So more appealing, more photogenic buzzards had to be flown in from some distance and at considerable expense. 

But then came the second problem: how to keep the buzzards sitting on the tree branch until it was time for their cue to fly. That seemed easy. Wire their feet to the branch, and then, after Paul Newman fires his shot, pull the wire, releasing their feet, thus allowing them to take off. 

But, as Mr. McMurtry said in an important and memorable phrase, the film makers had not reckoned with the \”mentality of buzzards.\” With their feet wired, the buzzards did not have enough mobility to fly. But they did have enough mobility to pitch forward.
So that\’s what they did: with their feet wired, they tried to fly, pitched forward and hung upside down from the dead branch, with their wings flapping.

I had the good fortune a couple of years ago to meet a woman who had been an extra for this movie, and she added a detail that Mr. McMurtry left out of his essay: namely, the buzzard circulatory system does not work upside down, and so, after a moment or two of napping, the buzzards passed out. 

Twelve buzzards hanging upside down from a tree branch: this was not what Hollywood wanted from the West, but that\’s what Hollywood had produced. 

And then we get to the second stage of buzzard psychology. After six or seven episodes of pitching forward, passing out, being revived, being replaced on the branch and pitching forward again, the buzzards gave up. Now, when you pulled the wire and released their feet, they sat there, saying in clear, nonverbal terms: \”We tried that before. It did not work. We are not going to try it again.\” Now the film makers had to fly in a high-powered animal trainer to restore buzzard self-esteem. It was all a big mess; Larry McMurtry got a wonderful story out of it; and we, in turn, get the best possible parable of the workings of habit and timidity. 

How does the parable apply? In any and all disciplines, you go to graduate school to have your feet wired to the branch. There is nothing inherently wrong with that: scholars should have some common ground, share some background assumptions, hold some similar habits of mind. This gives you, quite literally, your footing. And yet, in the process of getting your feet wired, you have some awkward moments, and the intellectual equivalent of pitching forward and hanging upside down. That experience —  especially if you do it in a public place like a graduate seminar ­– provides no pleasure. One or two rounds of that humiliation, and the world begins to seem like a very treacherous place. Under those circumstances, it does indeed seem to be the choice of wisdom to sit quietly on the branch, to sit without even the thought of flying, since even the thought might be enough to tilt the balance and set off another round of napping, fainting and embarrassment.

Yet when scholars get out of graduate school and get Ph.D.\’s, and, even more important, when scholars get tenure, the wire is truly pulled. Their feet are free. They can fly wherever and whenever they like. Yet by then the second stage of buzzard psychology has taken hold — and they refuse to fly. The wire is pulled, and yet the buzzards sit there, hunched and grumpy. If they teach in a university with a graduate program, they actively instruct young buzzards in the necessity of keeping their youthful feet on the branch.

This week before Labor Day, news about economics tends to be scarce, while academics and teachers are looking ahead to the next term. In that spirit, I\’m going to spend the week passing along some thoughts about academia and hyper-specialization.

Individual research papers can be elegant, in their own way. But do they add up to a cohesive structure of knowledge? Are academic researchers even trying to accomplish this broader goal? Gerald F. Davis finds an elegant way to pose this question in an \”Editorial Essay: What is Organizational Research For?\” which appeared two years ago in the Administrative Science Quarterly (2015: 60:2, pp. 179-188):

San Jose, California is home to one of the most peculiar structures ever built: the Winchester Mystery House, a 160-room Victorian mansion that includes 40 bedrooms, two ballrooms, 47 fireplaces, gold and silver chandeliers, parquet floors, and other high-end appointments. It features a number of architectural details that serve no purpose: doorways that open onto walls, labyrinthine hallways that lead nowhere, and stairways that rise only to a ceiling. 

According to legend, Sarah Winchester, the extremely wealthy widow of the founder of the Winchester rifle company, was told by a spiritual medium that she would be haunted by the ghosts of the people killed by her husband’s rifles unless she built a house to appease the spirits. Construction began in 1884 and by some accounts continued around the clock until her death in 1922. There was no blueprint or master plan and no consideration of what it would mean to reach completion. The point was simply to keep building, hence the sprawling and incoherent result. 

Is the Winchester Mystery House a good house? It’s certainly beautiful in its own way. Any given room might be well proportioned and full of appealing features. A stairway might be made of fine wood, nicely joined and varnished, and covered in a colorful carpet. Yet it ends in a ceiling and serves no useful purpose other than keeping its builders busy. In assessing whether a house is good, we have to ask, ‘‘Good for what? Good for whom?’’—the questions we would ask about other kinds of constructions. An airport is designed for a specific function, is built according to a blueprint, and is straightforward to evaluate, although evaluations might vary widely depending on people’s experience with the realized design. A cathedral has a plan that might take decades to realize, with adjustments along the way, guided by a shared vision for what its realization will be. But for the Winchester Mystery House, the act of building was an end in itself. It is a paradigmatic folly, according to one find on a Google search, ‘‘a costly ornamental building with no practical purpose.’’ 

The field of organization studies might be compared to a sprawling structure. There can be little doubt that a lot of activity goes into constructing the field: according to the Web of Knowledge, over 8,000 articles are published every year in the 170+ journals in the field of ‘‘Management,’’ adding more and more new rooms. The questions of good for what and good for whom are worth revisiting. There is reason to worry that the reward system in our field, particularly in the publication process, is misaligned with the goals of good science: we often reward novelty over truth. As a result, we may look more like a mystery house than a cathedral.

The general lesson here seems to me to apply to economics, and probably to a number of other fields as well, at least in the social sciences and humanities. As Davis goes on to note: \”[S]cholars give different answers to the question ‘What is good for the advancement of our knowledge?’ versus ‘What is good for the advancement of a scholar’s career?\’ The misalignment between individual career incentives and the advancement of our science is the source of much mischief.\”

Global value chains have been on the rise. Roughly one-third of international trade is \”traditional\” trade, in which all of production happens in one country and all of consumption happens in another. About two-thirds is either a \”simple\” global value chain, in which \”value added crosses national borders only once during the production process, with no indirect exports via third countries or re-exports or re-imports\” or a \”complex\” global value chain, in which the value-added crosses national borders at least twice. The Global Value Chain Development Report 2017, which has the theme of \”Measuring and Analyzing the Impact of GVCs on Economic Development,\” explores these issues and others. The report is published a stew of groups, with participants from the World Bank Group, the Institute of Developing Economies, the Organisation for Economic Co-operation and Development, the Research Center of Global Value Chains headquartered at the University of International Business and Economics, and the World Trade Organization. It consists of an \”Executive Summary\” by David Dollar followed by eight chapters written by various contributors.

Here, I want to focus on some discussion from the report about how the benefits of global value chains are distributed, and the idea of the \”smile curve.\” Consider a value-added chain which starts off with the production of new technology and high-tech components. These parts are then combined with other lower-tech inputs, like pieces of molded plastic and small flashing lights, during a manufacturing process. Finally, the finished product is marketed and sold to consumers, together with certain kinds of after-sales servicing. The \”smile curve argument is that as most of the economic gain from this global supply curve is collected at the front end (new technology and high-tech components) and at the back end (marketing and sales), with less of the economic gain collected in the middle stages (lower-tech components and manufacturing).

\”The vertical axis plots labor compensation per hour in the country-sector, indicating high- versus low-value-added activities. The horizontal axis plots the total forward linkage–based production length between global consumers of electrical and optical equipment and a specific participating industry in the corresponding GVC.

\”The logic of the smile shape is as follows. Research and design activities for critical components of the electrical and optical equipment occur early in the production process (left side of the figure). These knowledge activities tend to be high-value-added activities in GVCs and tend to be carried out in more advanced economies. For example, in the 1995 curve Japan and the United States (JPN28 and USA28) are in the upper left corner, reflecting the high-value-added contributions from these two countries’ financial services sector. The Chinese industry that manufactures the good, Chinese electrical and optical (CHN14), is at the bottom point of the curve, reflecting assembly activity at low wages. The activities closest to the consumer are marketing, logistics, and after-product servicing.

\”These market knowledge industries are also high value added, as shown by the upward-sloping part of the smile curve on the right. And they tend to be carried out in advanced economies, where the mass consumption products are eventually purchased by households. The comparison of the same country-sector export in 1995  and 2009 reveals that the smile curve for this product has deepened. Compensation in the USA28 industry rose from about $25 an hour to $60 an hour, whereas Chinese wages remained very low on the smile curve. But the bubble that shows the total value added produced by CHN14 expanded about 10-fold. China may have held a low position in the value chain throughout this period, but it brought a huge number of workers from its impoverished countryside to work in the related factories. 

\”Figure 3 captures anxieties felt by both rich and poor countries in contemplating contemporary trade. Rich-country electorates worry that manufacturing is being hollowed out—that is, that semiskilled production jobs have moved to developing countries or, to the extent that such jobs still remain in advanced economies, have suffered downward pressure on wages. Poor countries worry that they are trapped in low-value-added activities and are locked out of the higher value-added activities in
design, key technological inputs, and marketing.\”

Dollar draws some implications for  who benefits within a given economy from participation in global value chains. He writes:

\”These findings do not permit drawing strong causal conclusions, but the analysis is consistent with a story in which the benefits from GVC-related trade have been distributed highly unevenly. For the United States the big winners appear to be high-skilled workers and multinational corporations. GVCs have enabled them to benefit from enormous productivity gains in developing countries such as China. Ordinary workers in the United States have not seen much (if any) benefit. In China ordinary workers have benefited. Even at the beginning of the period factory wages in China were far ahead of rural incomes. And those wages doubled over 15 years. The wage gains are a driving factor behind the impressive decline of absolute poverty in China. Relatively speaking, however, the big benefits in China accrued to the small number of high-skilled workers and to the owners of capital, including foreign investors. …

\”[I]n developing countries deeply involved in GVCs, virtually the entire population benefits from the expanded trade and faster growth, though not all to the same extent. In developed countries, by contrast, the benefits of expanded international trade and investment are highly concentrated among the very skilled in the workforce and the owners of capital. Both groups are already high up in the income distribution, and globalization increases their share of the pie.\”