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1
International Trade and Prosperity: Who Benefits?
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
2
Mercantilists:
Wealth = Gold
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
3
(Some) Modern gold-standard advocates):
Wealth = Gold = Dollars
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
4
Proposition:
Wealth = Happiness
But, “happiness” is at best fuzzy and at worst completely
immeasurable.
Use a proxy that is correlated with people who report that they
are happy.
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
5
Proposition:
Wealth = Happiness
Happiness reflected in “Consumption”
But, goods and services don’t fall from the sky; they must be
purchased.
In order to consume, we need money (purchasing power).
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
6
Proposition:
Wealth = Happiness
Happiness reflected in “Consumption”
“Consumption” requires Money (purchasing power)
Whence comes money?
1.
2.
3.
4.
Sell labor
Sell assets  sell past labor
Borrow  sell future labor
Inherit  sell someone else’s past labor
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
7
Proposition:
Wealth = Happiness
Happiness reflected in “Consumption”
“Consumption” requires Money (purchasing power)
Money accrues to those who sell Labor
Labor and production are two views of the
same phenomenon.
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
8
Proposition:
Wealth = Happiness
Happiness reflected in “Consumption”
“Consumption” requires Money (purchasing power)
Money accrues to those who sell Labor
Labor = Production
A country’s well-being is reflected in its
level of production.
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
9
Qualifying issues:
1. Who summons the production (public vs. private)?
2. How many people consume the fruits of production?
3. What is the distribution of goods (income)?
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
10
Equity is Compatible With Wealth
$45,000
$40,000
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
R2 = 0.16
$15,000
$10,000
$5,000
$0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: World Bank and United Nations Statistics Division
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
11
Measure of Production:
Per-capita GDP in US Purchasing Power Parity Dollars
Per-capita GDP = Production per person
US PPP $ = Convert foreign GDP into US dollar equivalent,
but convert using PPP, not the exchange rate.
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
12
Does size matter?
$45,000
$40,000
$35,000
Per-capita GDP (US$)
USA
$30,000
$25,000
$20,000
India
$15,000
R2 = 0.00
$10,000
$5,000
$0
0
100
200
300
400
500
600
700
800
900
1,000
Population (millions)
Source: United Nations International Financial Statistics
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
13
Does size matter?
$45,000
$40,000
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
$15,000
R2 = 0.00
$10,000
$5,000
$0
0
100
200
300
400
500
600
700
800
900
1,000
Population (millions)
Source: United Nations International Financial Statistics
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
14
Does size matter?
Classic cases:
India  17% of world population, but 1% of world output
Japan  2% of world population, but 12% of world output
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
15
How about resources?
$45,000
$40,000
USA
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
R2 = 0.01
$15,000
$10,000
Russia
$5,000
$0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Millions
Area (sq km)
Source: United Nations International Financial Statistics and CIA World Factbook
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
16
How about resources?
$45,000
$40,000
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
R2 = 0.00
$15,000
$10,000
$5,000
$0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Millions
Area (sq km)
Source: United Nations International Financial Statistics and CIA World Factbook
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
17
How about resources?
Classic cases:
Russia
 16% of world surface, but 1% of world output
Germany  0.3% of world surface, but 6% of world output
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
18
Access to water?
$45,000
$40,000
$35,000
Per-capita GDP (US$)
USA
$30,000
R2 = 0.04
$25,000
$20,000
$15,000
Canada
$10,000
$5,000
$0
0.0
50.0
100.0
150.0
200.0
250.0
300.0
Thousands
Coastline (km)
Source: United Nations International Financial Statistics and CIA World Factbook
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
19
Access to water?
$45,000
$40,000
R2 = 0.04
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
0.0
50.0
100.0
150.0
200.0
250.0
300.0
Thousands
Coastline (km)
Source: United Nations International Financial Statistics and CIA World Factbook
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
20
Access to water?
Classic cases:
Indonesia  8% of world coastline, but 0.6% of world output
France
 0.5% of world coastline, but 4% of world output
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
21
Climate?
$45,000
$40,000
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
$15,000
2
R = 0.19
$10,000
$5,000
$0
1.0
2.0
3.0
4.0
5.0
Climate (1=Desert, 2=Arid, 3=Temperate, 4=Subtropical, 5=Tropical)
Source: United Nations International Financial Statistics and CIA World Factbook
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
22
Economic Freedom?
$45,000
$40,000
…accompanies greater income
Per-capita GDP (US$)
$35,000
R2 = 0.62
$30,000
$25,000
$20,000
$15,000
More economic freedom…
$10,000
$5,000
$0
1.0
2.0
3.0
4.0
5.0
Index of Economic Freedom (1 = Free, 5 = Repressed)
Source: United Nations International Financial Statistics and Heritage Foundation
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
23
“Poorest” 50% of Countries
$2,500
Per-capita GDP (US$)
$2,000
$1,500
R2 = 0.19
$1,000
$500
$0
1.0
2.0
3.0
4.0
5.0
Index of Economic Freedom (1 = Free, 5 = Repressed)
Source: United Nations International Financial Statistics and Heritage Foundation
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
24
“Richest” 50% of Countries
$45,000
$40,000
$35,000
Per-capita GDP (US$)
R2 = 0.49
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1.0
2.0
3.0
4.0
5.0
Index of Economic Freedom (1 = Free, 5 = Repressed)
Source: United Nations International Financial Statistics and Heritage Foundation
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
25
What About Climate?
5.0
4.5
Index of Economic Freedom
4.0
3.5
2
R = 0.10
3.0
2.5
2.0
1.5
Coincidentally, countries with temperate climates have
greater than average economic freedom.
1.0
1.0
2.0
3.0
4.0
5.0
Climate (1=Desert, 2=Arid, 3=Temperate, 4=Subtropical, 5=Tropical)
Source: Heritage Foundation and CIA World Factbook
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
26
What is Economic Freedom?
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
27
(Lack of) Economic Freedom is a composite measure of:
•
•
•
•
•
•
•
•
•
•
Restrictive trade policy
Fiscal burden of government
Government intervention in the economy
Monetary policy (price instability)
Restrictions on capital flows and foreign investment
Banking and finance regulation
Wage and price controls
Suspension of property rights
Economic regulation
Proliferation of black markets
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
28
In Perspective:
• The US ranks 4th in Economic Freedom behind
Singapore and New Zealand.
• Singapore’s Economic Freedom Index is 40% “better”
than that of the US.
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
29
Restrictive Trade Policy
$45,000
$40,000
USA
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
$15,000
R2 = 0.31
$10,000
$5,000
$0
1.0
2.0
3.0
4.0
5.0
Trade Policy (1 = Very Low Tariffs, 5 = Very High Tariffs)
Source: United Nations International Financial Statistics and Heritage Foundation
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
30
Price Instability
$45,000
$40,000
USA
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
$15,000
R2 = 0.46
$10,000
$5,000
$0
1.0
2.0
3.0
4.0
5.0
Monetary Policy (1 = very low inflation, 5 = very high inflation)
Source: United Nations International Financial Statistics and Heritage Foundation
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
31
Wage and Price Controls
$45,000
$40,000
USA
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
$15,000
R2 = 0.24
$10,000
$5,000
$0
1.0
2.0
3.0
4.0
5.0
Wage and Price Controls (1 = very few controls, 5 = many controls)
Source: United Nations International Financial Statistics and Heritage Foundation
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
32
Suspension of Property Rights
$45,000
$40,000
USA
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
2
R = 0.56
$15,000
$10,000
$5,000
$0
1.0
2.0
3.0
4.0
5.0
Property Rights (1 = many rights, 5 = few rights)
Source: United Nations International Financial Statistics and Heritage Foundation
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
33
Banking/Finance Regulation
$45,000
$40,000
USA
Per-capita GDP (US$)
$35,000
$30,000
$25,000
$20,000
2
R = 0.32
$15,000
$10,000
$5,000
$0
1.0
2.0
3.0
4.0
5.0
Banking/Finance Regulation (1 = few regulations, 5 = many regulations)
Source: United Nations International Financial Statistics and Heritage Foundation
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
34
Problems:
• Correlation is not causation.
Example: Pepsi does not cause hepatitis!
Example: Babies should sleep on their backs!
No, their fronts!
No, their backs!
Example: Most shark attacks occur in 3 to 4 feet of water!
Example: Poor readers make erratic eye movements.
• The Index of Economic Freedom is rigged by markethappy conservatives!
• There’s more to life than beer and pizza.
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
35
Solution:
• Look at the change in per-capita GDP over time and
compare this to the change in economic freedom over
time.
• Find an alternate data set acceptable in other partisan
quarters.
• Find a data set that measures more than just income.
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
36
Human Development Index
Data covers 159 countries over 23 years.
Published by the UN Development Programme.
Composite measure of:
1. Life expectancy
2. Educational enrollment
3. Adult Literacy
4. Per-capita income
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
37
Predicted Impact of Trade Growth on HDI
0.35
Human Development Index
0.3
0.25
0.2
0.15
0.1
0.05
0
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Year
Maximum 5-year Trade Growth
Median 5-year Trade Growth
Minimum 5-year Trade Growth
Source: United Nations Development Programme, and Quinlivan and Davies, “The Impact of Trade on Social Welfare”
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
38
Predicted Impact of Trade Growth on HDI
Not only is freer trade associated with greater per-capita income, but:
1. Consistently over time and over countries, past augmentations
of free trade are associated with future growths in HDI.
2. Per-capita income is only a fraction of HDI. Factors having
the majority of influence on HDI are: life expectancy, literacy,
and education.
3. HDI measure is maintained by United Nations Development
Programme.
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
39
International Trade and Prosperity: Who Benefits?
• Prosperity accrues disproportionately to those countries
with greater economic freedom.
• Prosperity is not a “zero-sum” game. The prosperity that
accrues to one country is not taken from another – the
prosperity is generated.
• Prosperity is a “positive-sum” game. Trade allows moreprosperous countries to become more interdependent
with less-prosperous countries. All countries benefit.
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
40
What is the Implication for Government?
• Economic freedom is one of the most powerful engines
for prosperity and equality. But, without government,
there can be no economic freedom.
• Government aids markets by defining and defending
freedoms.
• Not “government or market” but “government for
market.”
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002
41
International Trade and Prosperity: Who Benefits?
Antony Davies, Ph.D.
John F. Donahue Graduate School of Business
Duquesne University
U.S. House of Representatives, August 30, 2002