Naked Economics Wheelan, Charles (books to read for 13 year olds TXT) 📖

company would get what it needs to justify the vaccine research: a return on investment, just as it does when developing drugs that consumers in rich countries will buy. (The British government has been thinking this way for a long time. In 1714, after two thousand sailors drowned when a fleet got lost, crashed into the rocky coast, and sunk, the British government offered 20,000 pounds to anyone who developed an instrument for measuring longitude at sea. The prize led to the invention of the chronometer.)17

The other hope for poor countries in the tropics, says Mr. Sachs, is to step out of the trap of subsistence agriculture by opening their economies to the rest of the world. He notes, “If the country can escape to higher incomes via non-agricultural sectors (e.g., through a large expansion of manufactured exports), the burdens of the tropics can be lifted.”18 Which brings us once again to our old friend trade.

Openness to trade. We’ve had a whole chapter on the theoretical benefits of trade. Suffice it to say that those lessons have been lost on governments in many poor countries in recent decades. The fallacious logic of protectionism is alluring—the idea that keeping out foreign goods will make the country richer. Strategies such as “self-sufficiency” and “state leadership” were hallmarks of the postcolonial regimes, such as India and much of Africa. Trade barriers would “incubate” domestic industries so that they could grow strong enough to face international competition. Economics tells us that companies shielded from competition do not grow stronger; they grow fat and lazy. Politics tells us that once an industry is incubated, it will always be incubated. The result, in the words of one economist, has been a “largely self-imposed economic exile.”19

At great cost, it turns out. The preponderance of evidence suggests that open economies grow faster than closed economies. In one of the most influential studies, Jeffrey Sachs, now director of The Earth Institute at Columbia University, and Andrew Warner, a researcher at the Harvard Center for International Development, compared the economic performance of closed economies, as defined by high tariffs and other restrictions on trade, to the performance of open economies. Among poor countries, the closed economies grew at 0.7 percent per capita annually during the 1970s and 1980s while the open economies grew at 4.5 percent annually. Most interesting, when a previously closed economy opened up, growth increased by more than a percentage point a year. To be fair, some prominent economists have taken issue with the study on the grounds (among other quibbles) that economies closed to trade often have a lot of other problems, too. Is it the lack of trade that makes these countries grow slowly, or is it general macroeconomic dysfunction? For that matter, does trade cause growth or is it something that just happens while economies are growing for other reasons? After all, the number of televisions sold rises sharply during extended spells of economic growth, but watching television does not make countries richer.

Conveniently for us, a recent paper in the American Economic Review, one of the most respected journals in the field, is entitled “Does Trade Cause Growth?” Yes, the authors answer. All else equal, countries that trade more have higher per capita incomes.20 Jeffrey Frankel and David Romer, economists at Harvard and UC Berkeley, respectively, conclude, “Our results bolster the case for the importance of trade and trade-promoting policies.”

Researchers have plenty left to quibble about. That is what researchers do. In the meantime, we have strong theoretical reasons to believe that trade makes countries better off and solid empirical evidence that trade is one thing that has separated winners from losers in recent decades. The rich countries must do their part by keeping their economies open to exports from poor countries. Mr. Sachs has called for a “New Compact for Africa.” He writes, “The current pattern of rich countries—to provide financial aid to tropical Africa while blocking Africa’s chances to export textiles, footwear, leather goods, and other labor-intensive products—may be worse than cynical. It may in fact fundamentally undermine Africa’s chances for economic development.”21

Responsible fiscal and monetary policy. Governments, like individuals, will get themselves in serious trouble if they consistently overspend on things that do not raise future productivity. At a minimum, large budget deficits require the government to borrow heavily, which takes capital out of the hands of private borrowers, who are likely to use it more efficiently. Chronic deficit spending can also signal other future problems: higher taxes (to pay back the debt), inflation (to erode the value of the debt), or even default (just giving up on the debt).

All of these problems are compounded if the government has borrowed heavily from abroad to finance its profligate spending. If foreign investors lose confidence and decide to take their money and go home—as skittish global investors are wont to do—then the capital that was financing the deficit dries up, or becomes prohibitively expensive. In short, the music stops. The government is left on the brink of default, which we have seen in countries ranging from Mexico to Turkey. (There is, by the way, some modest concern that this could happen to the United States.)

On the monetary side, Chapter 10 made clear the dangers of letting the money party get out of control. It happens often anyway. Argentina is the poster child for irresponsible monetary policy; from 1960 to 1994, the average Argentine inflation rate was 127 percent per year. To put that in perspective, an Argentine investor who had the equivalent of $1 billion in savings in 1960 and kept all of it in Argentine pesos until 1994 would have been left with the equivalent spending power of one-thirteenth of a penny. Economist William Easterly has noted, “Trying to have normal growth during high inflation is like trying to win an Olympic sprint hopping on one leg.”

Natural resources matter less than you would think. Israel, which has no oil to speak of, is a far richer country than nearly all of its