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09/12/2019

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EricDragon9

In the paper, “Institutional Barriers and World Income Disparities” (Wang, Wong, Yip, 2018), the underlying reasons behind why 10 countries labeled “fast-growing economies” have succeeded in economic growth that has outpaced the U.S. growth rate over the past 50 years or more and why 10 countries labeled “development laggards” have failed to grow at as fast a pace as the fast growing economies. The paper goes into dividing these 10 development laggards into two groups: the trapped economies and the lag-behind countries. The trap countries experienced multiple poverty traps, while some of the lag-behind countries actually started off in a better position than the fast-growing economy countries.
One trend that caught my attention was the high prevalence of an agriculturally based economies in the development laggards countries, such as Côte d’Ivoire, Kenya, and Comoros. Having a primarily agriculture based economy rarely produces significant GDP growth since their main exports are commodities. This results in very little profit margin, since there is no distinguishing factor to prevent other players from entering the market and lowering prices until there is no profit left in the industry. To further exacerbate this issue, is that there is little structure for innovation in the agricultural sector, since these countries have relatively underdeveloped technology sectors. While innovations may be able to reduce the production costs temporarily, once those practices are adopted by the rest of the producers, margins will become slim again. This causes their economies to be heavily reliant on consumer demand, thus when that falls like it did for cacao in Côte d’Ivoire and it did for tea, coffee, and cotton for Kenya, those countries are left at the whim of the market and will see a decline in that sector.
This need to pivot economies from an agricultural base to a more industrial base was noticed by the mentioned in the article and how these countries tried to implement that transition seemed to be the difference between elevated levels of growth and poor economic growth. The two main policy mistakes seem to be overprotectionism and focusing on an import-substitution industry over an export driven economy. Using excessive or needless protective fiscal policies such as tariffs can lead to local companies becoming inefficient and causing their goods and services to be more expensive. This makes things harder for consumers and other companies that rely on the protected companies. Furthermore, by protecting industries excessively from world competition, those companies fail to innovate and may waste resources that should have been devoted to R&D to lobby the government. The focus of establishing import-substitution industries is also an inefficient path to growing an economy. When a country doesn’t allow free trade, it causes the prices of goods and services to increase, which can result in inflation, which hampers the economy even more. Also, the industries that some countries tried to replace were heavy industries that had little margins to begin with. The fast growth economies often focused on high tech industries, which have a lot of potential for high margins and encourage a lot of investment into R&D, which further stimulates the economy. By devoting so many resources into an already saturated industry that requires a lot of capital to establish, the lag-behind countries are essentially wasting potential investments in high tech industries or a more specialized industry that the country could have a competitive advantage in. Thus, this could cause the decline of the economy. In contrast, an export driven economy induces firms to increase competitiveness and brings monetary capital into the economy.

Colby Boudreau

The amount of factors that go into the performance of an economy is staggering, and really demonstrates how difficult of a job it is to run a country and improve it. While things such as corruption, financial crisises, natural disasters, health issues, and poor infrastructure are all enormous factors, I found the idea that an agricultural society is considered a poverty trap extremely interesting. To me, agriculture has always seemed to be crucial due to the fact that without the farmers no one would have anything to survive on. But reading through the article opened my eyes to how truly volatile an economy that mainly relies on agriculture can be. Most crops likely don’t have a large profit margin, and countries that are stuck in that trap most likely do not have the leverage to make a change in those margins. I also began to realize how much the prices of crops and agriculture can fluctuate, along with the different yields and demands that they receive from different nations. However, as I started to understand why agriculture is can be considered a poverty trap and contribute to a struggling economy, I also started realizing that a possible solution would be to start diversifying the different areas that the economy is focused on. If a country can successfully do that, the other areas of the economy can support the nation when the agriculture is experiencing its volatility. The question is, how do we spur these laggard countries into beginning to diversify and improve their economy? As the article mentioned, many of these underdeveloped countries suffer from corruption, recession, and much more. But for me, it seems like the classic question of the chicken or the egg, which came first? Is the country corrupt because it is poor, or is it poor because it is corrupt? The poorer a country is, the more likely they seem to suffer from corrupted government and other economically destructive events, and the more difficult it becomes to right the ship. This ties into the other thing that surprised me, which was that the fastest growing countries all had export focused economies, and used that to spur exponential growth. It seems like these two things are tied together, because as a country begins to diversify away from an unsustainable and unprofitable economy, they will naturally begin to find things that other countries want to import. The real question is, how do we begin to spur this change and create a forward movement in these countries that leads to them escaping the poverty trap and finally improving their economy?

Lucas Flood

In Wang, Wong, and Yip’s work, “Institutional Barriers and World Income Disparities,” the authors provide compelling comparative analysis of the domestic and international policies utilized in various countries around the world. In particular, Wang, Wong, and Yip do an excellent job analyzing the effects of international trade barriers on the GDPs of developed and developing nations. Addressing trade barriers in such a way is fascinating in light of recent political discussions surrounding trade. While the evidence from China and India would seem to indicate the value of limiting trade protectionism, both Democrats and Republicans in the United States have recently expressed interest in expanding trade protections. Although Democrats tend to approach the issue from a human rights perspective and Republicans from the perspective of unfair trade practices, a considerable percentage of leaders from both parties seem to agree that tariffs have a place in the modern American economy. However, developed nations have frequently engaged in aggressive protectionism throughout history, often at the expense of developing nations. If opening trade opportunities benefits emerging economies, as Wang, Wong, and Yip suggest, the increasing rhetoric in favor of trade protections holds great significance.
While the authors of “Institutional Barriers and World Income Disparities” addressed trade protections from a purely economic perspective, it is interesting to compare the underlying reasons behind certain proposed trade protections to Amartya Sen’s approach to developmental economics. In the case of China, some American policy proposals have been put forward in an attempt to address human rights concerns, particularly for workers. Because protecting human rights clearly enhances human freedom, it is difficult to imagine Sen being in opposition to the furtherance of human freedom and development. Of course, Wang, Wong, and Yip do distinguish between unnecessary and necessary trade protectionism. Nevertheless, it would have been interesting to see Sen’s ideas about human freedom in the context of the economic liberalization touted so highly by Wang, Wong, and Yip.
In Wang, Wong, and Yip’s work, “Institutional Barriers and World Income Disparities,” the authors provide compelling comparative analysis of the domestic and international policies utilized in various countries around the world. In particular, Wang, Wong, and Yip do an excellent job analyzing the effects of international trade barriers on the GDPs of developed and developing nations. Addressing trade barriers in such a way is fascinating in light of recent political discussions surrounding trade. While the evidence from China and India would seem to indicate the value of limiting trade protectionism, both Democrats and Republicans in the United States have recently expressed interest in expanding trade protections. Although Democrats tend to approach the issue from a human rights perspective and Republicans from the perspective of unfair trade practices, a considerable percentage of leaders from both parties seem to agree that tariffs have a place in the modern American economy. However, developed nations have frequently engaged in aggressive protectionism throughout history, often at the expense of developing nations. If opening trade opportunities benefits emerging economies, as Wang, Wong, and Yip suggest, the increasing rhetoric in favor of trade protections holds great significance.
While the authors of “Institutional Barriers and World Income Disparities” addressed trade protections from a purely economic perspective, it is interesting to compare the underlying reasons behind certain proposed trade protections to Amartya Sen’s approach to developmental economics. In the case of China, some American policy proposals have been put forward in an attempt to address human rights concerns, particularly for workers. Because protecting human rights clearly enhances human freedom, it is difficult to imagine Sen being in opposition to the furtherance of human freedom and economic development. Of course, Wang, Wong, and Yip do distinguish between unnecessary and necessary trade protectionism. Nevertheless, it would have been interesting to see Sen’s ideas about human freedom in the context of the economic liberalization touted so highly by Wang, Wong, and Yip.

Lucas Flood

In Wang, Wong, and Yip’s work, “Institutional Barriers and World Income Disparities,” the authors provide compelling comparative analysis of the domestic and international policies utilized in various countries around the world. In particular, Wang, Wong, and Yip do an excellent job analyzing the effects of international trade barriers on the GDPs of developed and developing nations. Addressing trade barriers in such a way is fascinating in light of recent political discussions surrounding trade. While the evidence from China and India would seem to indicate the value of limiting trade protectionism, both Democrats and Republicans in the United States have recently expressed interest in expanding trade protections. Although Democrats tend to approach the issue from a human rights perspective and Republicans from the perspective of unfair trade practices, a considerable percentage of leaders from both parties seem to agree that tariffs have a place in the modern American economy. However, developed nations have frequently engaged in aggressive protectionism throughout history, often at the expense of developing nations. If opening trade opportunities benefits emerging economies, as Wang, Wong, and Yip suggest, the increasing rhetoric in favor of trade protections holds great significance.
While the authors of “Institutional Barriers and World Income Disparities” addressed trade protections from a purely economic perspective, it is interesting to compare the underlying reasons behind certain proposed trade protections to Amartya Sen’s approach to developmental economics. In the case of China, some American policy proposals have been put forward in an attempt to address human rights concerns, particularly for workers. Because protecting human rights clearly enhances human freedom, it is difficult to imagine Sen being in opposition to the furtherance of human freedom and economic development. Of course, Wang, Wong, and Yip do distinguish between unnecessary and necessary trade protectionism. Nevertheless, it would have been interesting to see Sen’s ideas about human freedom in the context of the economic liberalization touted so highly by Wang, Wong, and Yip.

Lauren Paolano

Wang, Wong, and Yip’s article about the economies of fast-growing countries and “lagging” countries really caught my attention. It gave me a better understanding as why some countries are falling behind others which relates back to the “developing” countries vs the “developed” and the “underdeveloped” countries. I think the example of Thailand was extremely captivating in the Figure that Thailand’s relative income rose, except during the Asian financial crisis and the internet bubble periods. At first I thought, “why would their income have declined during the internet bubble period”? While reading further, I learned that Thailand is a heavily export-dependent country, with exports accounting for more than two-thirds of its GDP.
Last summer I had an internship at Tory Burch in the production department. We worked closely with our office in Hong Kong and it was interesting for me to see the differences in income and price level further impacting consumption quantity in both the United States stores and International stores. GDP has a major impact in our personal spending and forces consumers to decide what to spend their income on and how much of it will be spent based upon the current status of the economy.

Adrian Lam

Overall, I think this paper did a good job at revealing the many complexities and factors that drive economic growth/stagnation in various countries. At the beginning, I was a bit skeptical of the paper when it only examined how a couple variables were correlated with growth, such as relative TFP and the institutional barrier parameter. I also was a little confused by the equations they described under section 2 – the organizing framework - with all the different symbols and terms.

I believe that it is very difficult to pinpoint the key factors that enhance or retard development because each country represents a different scenario with a unique political, social, cultural, and economic environment. That is why I enjoyed the second half of the paper more when it went into specific reasons and events that may affected growth rates for each of the twenty countries. I am curious to see the Lorenz curves and Gini coefficients for these countries. Did rapid growth lead to more or less inequality in countries like India and China?

This paper helped me better understand why we always say “correlation, not causation”. Even the generalizations that fit the data, such as export-led open policy and high-tech promotion being development-enhancing factors, may not work for every country. I think that an extremely nuanced analysis of all factors affecting a country is required before we can truly understand what is going on. For example, I believe Hong Kong’s relationship dynamic with China is one significant factor that affects its economy. Currently, millions of Hong Kong citizens have been protesting for months on end in a fight for their democracy. This political crisis has caused violent riots to break out. As a result, many businesses, including the airport and subway, were disrupted, and many local business owners have been forced to shut down. In this manner, political factors have caused Hong Kong’s economic growth to be stunted.

After reading this paper, I also thought back to our discussion regarding artificial intelligence on Tuesday. I am curious to see how the rise in AI will affect the countries reliant on manufacturing jobs. This morning, I watched a recent debate from a summit in Shanghai between Elon Musk and Jack Ma on artificial intelligence. Musk believes that AI has capabilities way beyond humans, citing the ability of AI programs to beat the world’s best chess and GO players. He claims that if AI continue to outpace us, it will eventually take over all our jobs.

Meanwhile, Jack Ma does not view artificial intelligence as a threat. Rather, he believes there are some aspects of humans that make us uniquely distinct and beyond AI. Ma argues that humans should be more focused in the present, claiming that we should aspire to only work 3 days a week, 4 hours each day. We should spend the rest of the time completing activities that make us the most “human”, such as fostering our artistic and creative abilities that cannot yet be reproduced by algorithms.

Personally, I am more in line with Musk’s views. While I recognize Ma’s points, I think humans should be more future-oriented. Many jobs have already been automated, and I believe AI will continue to replace many workers in the next couple decades, especially in factories where robots may be more cost-efficient and less prone to making mistakes. This could potentially be a major hit to the countries with industrialized economies that have large manufacturing sectors, such as Hong Kong, Singapore, and Malaysia. I am curious to see how this plays out in the future, and I wonder if these countries can still maintain their high growth rates once AI enters the picture more.

Jack_curtis25

Jack Curtis
This article was very provocative and connected to many of the theories and principles I’ve learn in macro theory and international finance. What the article makes clear is how important productive investment is and how crucial stable monetary and fiscal policy are. All of the countries that have lagged behind have not implemented their transition to export oriented economies correctly, and have focused on import substitution while also failing to use proceeds for productive investments or creating the necessary institutions to handle the income inflows. As a result these countries run large CA deficits which also means that net foreign investment in the country is negative. With these developing economies they have a goods and services surplus but a large net negative income flows in the form of payment of debt, dividends, and other payments to foreigners. This often results in money not being saved or invested domestically which only compounds the country’s debt issues. The resulting deficit means that it may become difficult for the nation to repay their loans in the future as they are a net debtor. As a result animal spirits decrease and investment decrease, further compounding the problem. The fast growing economies have shown that using debt to make large productive investments while also opening up their economy to financial and trade liberalization reaps huge benefits for the country a decade or more down the line.
Another interesting aspect came from the case of Côte d’Ivoire where in a 50 year period from the 1960s to early 2000s their real GDP per capital didn’t increase at all. Part of the real why this happened lies in their population growth numbers. If the population is growing at more than 3% a year then in order to obtain a GDP per capital gain growth has to be above the population growth number. One of the risks that export oriented nation runs, which almost all developing nations are as their domestic consumer demand has not grown enough yet, is that they are very susceptible to changes in global macroeconomic shocks, as well as commodity and currency fluctuations. In the case of the nations which export cocoa, the depreciation in its price since the late 1970s have continued to have lasting effects.
Some questions I had were: why does import substitution not work? Does decreasing fertility rates link with higher GDP per capita growth? Does a nation having high fertility contribute to being stuck in a poverty trap?

Maggie Kidder

Wang, Wong, and Yip’s article explores why income disparities have widened between fast-growing economies and development laggards over the past five decades as well as the role that institutional barriers with relation to technology adoption have played in widening this gap. In particular, this article emphasizes the critical role that unnecessary trade protectionism and government misallocation have on slowing economic growth and the role that export-led open policy and foreign direct investment have on enhancing economic growth. I am not surprised that institutional barriers play a crucial role in income disparities because if a country has a faulty government in place, it is likely to be faulty in numerous ways and fail its citizens with various institutional shortcomings. Therefore, no matter how innovative, technological advancement will not be able to carry an economy on its own.

I am currently taking a politics course on Post-Communism and New Democracies, where I discovered that a country transitioning from a nondemocratic regime to a democratic regime achieves about a 20% higher real GDP per capita in the next 25 years. This intrigued me to further investigate the role that a democratic government has on economic growth and stability, especially since there has been an unprecedented rise of democracy around the world in the past fifty years. In 2016 the National Bureau of Economic Research published the working paper: “Democracy Does Cause Growth,” where I learned that democratization increases a country’s real GDP per capita by 20% in the long-run. Democracy supports future GDP growth by “encouraging investment, increasing schooling, inducing economic reforms, improving public good provision, and reducing social unrest.”

For instance, South Korea is one of the ten fast-growing economies and after it transitioned to democracy in 1988, its real GDP per capita grew by 4.7% between 1988 and 2008. In comparison, the six countries with the closest GDP per capita to South Korea in 1987 had an average growth rate of 2.6%. Furthermore, the five countries deemed “development laggards” all faced at least one wave of democratization and then democratic reversal throughout the past 50 years, which makes me curious on whether this had any influence. Although there are a multitude of other factors and one cannot assume democracy is an isolated influence on the significant rise in GDP per capita, it is a noteworthy correlation as the role of the government is deeply rooted in a country’s economic structure.

EC Myers

It is both fascinating and somewhat confusing to me that the fast-growing economies did so in such different ways. Hong Kong transitioned from a manufacturing economy to trading and service based economy. Singapore grew its economy by setting ceilings for nominal wages, which helped solve the exchange rate depreciation. South Korea boosted its economy by cheap credit lending and a liberalized financial sector. Taiwan through exports and the accumulation of trade surpluses. Similarly, Malaysia grew through international trade and manufacturing, as did Thailand as an export-dependent economy. Thailand additionally devalued their currency three times to solve their economic problems. Continuing with the pattern, China pursued an export-oriented growth strategy. India grew by shifting the economic attitude to favor private business. Both of the African countries, Botswana and Mauritius, new because of natural resources: diamonds and sugar production, respectively. Mauritius also boosted its economy with tourism. While it may be redundant to have listed what we all can read in the article, seeing them side by side was very interesting for me, as it shows the common threads in the economic boosts as well as the differences, especially in terms of economic policy.

Additionally, I expected there to be a much larger gap for the institutional barrier parameters as .4378, .4253, and .4965 do not seem all that different. However, the gap between the average TFPs of the fast growing (.8769) and slow growing (.6168) economies seem much more significant, which is what I would have expected.

Are we just comparing these countries to the United States because it is an economy that most are familiar with? What benefit do we get from comparing the growth rates to the US, rather than just to one another?

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