Book review - "Struggling with Success: Challenges Facing the International Economy" by Anne O. Krueger

Book review - "Struggling with Success: Challenges Facing the International Economy" by Anne O. Krueger

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In this volume, Anne Krueger, one of America’s most distinguished economists and public servants, has assembled a significant body of her research and analysis, dating from 1997 to the present. The individual chapters have varied origins: some were speeches, others conference papers, journal articles, or book chapters. Several of the original papers have been revised in light of more recent events; and one chapter, a ‘farewell’ address to the IMF, had not previously been published. 

The impetus for the collection stems from doubts over globalization and multilateral institutions engendered by the 2007–09 financial crisis and recession. In the preface, Krueger laments that ‘it has become fashionable to assert that globalization was an, if not the, underlying cause of the crisis . . . [S]ome have concluded that globalization has gone too far, and needed to be reversed in one or more critical dimensions.’ She notes that it is often forgotten ‘how great the benefits of globalization have been’, and that the purpose of this collection was to ‘assemble material that might remind the critics of the successes of globalization . . . and to point to some of the challenges that must be addressed if we are to improve the functioning of the system’. For Krueger, then, the goal should not be ‘reversing globalization’, but to ‘find ways to strengthen the domestic and international economic policies to reduce the costs, including the costs of crises’. 

The collection is divided into four main parts. Part I consists of three chapters that describe the status of globalization and its benefits. It is intended to ‘set the stage’ for the policy analysis in subsequent chapters. Part II focuses on policy reform itself, with the goal of illustrating the overall role of economic policy and the political and institutional constraints that can deflect or water down necessary changes. Within this section are chapters with more detailed analysis of the impact of the Asian financial crisis, with South Korea providing a case study. A separate chapter provides contrasting case studies of economic reform in Brazil and Turkey. Part III contains the most specialized analyses. It consists of two chapters on sovereign debt and sovereign debt restructuring, including details of Anne Krueger’s specific proposal for a sovereign debt restructuring mechanism (SDRM). Part IV is devoted to multilateralism and the governance of the international economy. It includes separate chapters on the three central post World War II multilateral institutions: the World Bank, the GATT/WTO, and the IMF. In each case, Krueger explains the original purpose, the current operations, and the prospects for the future role of the three pillars of multilateralism. Chapter 14 addresses questions concerning the future of multilateralism in an era when doubts have been raised about the viability of the World Bank, WTO, and IMF. Krueger ends with a staunch defense of multilateral solutions and institutions in meeting future challenge to the international economy.

One great benefit from Krueger’s own career stands out throughout the papers – the happy marriage of academic excellence with the practical sensibility derived from ‘real world’ experience as First Deputy Managing Director at the IMF and Chief Economist at the World Bank. The result, as the above chapter descriptions demonstrate, is a richly informed commentary on some of the most important and vexing analytic and policy questions of the postwar decades. There is space here for only several illustrations. 

Donning an economic historian’s hat, in the first chapter of Part I Krueger traces the technological changes in transportation and communication that gathered force after 1800 and underpinned the modern period of globalization. Previously, most people lived their lives within four or five miles of their birthplace, and there was little commerce beyond local communities. It has been estimated that real wages in England showed little gain between 1200 and 1800, and overall living standards in Europe changed little from Roman times.

The arrival of the steam engine that fueled rail and ship travel, combined with major advances in communication with the telegraph and telephone in the nineteenth century, dramatically uplifted economies and societies. Combined with a reduction in barriers to commerce among states, the result was a rapid increase in living standards throughout the nineteenth and twentieth centuries. Life expectancy in the United Kingdom and other European countries as late as 1800 was less then 40 years; today it has approximately doubled. Real wages in the developed countries today are 10–20 times higher than they were in 1800, with the steepest long-run increases coming to unskilled workers. 

Krueger notes that ‘few would argue with the proposition that those in the industrial countries are better off today than were their parents, who in turn were better off from their parents, and so on’. But she takes the argument a step further, adding in the achievement of much of the developing world in the past half century. Since the mid- 1970s, the average rate of economic growth in developing countries has been over 5%, and in the most productive economies of East Asia, per capita income doubled every decade from the 1960s through the 1990s. The increase in economic growth has resulted in a dramatic rise in living standards, even in those countries that were late to reform. In India, for instance, where economic growth lagged for much of the period, life expectancy jumped from around 30 years in the late 1940s to 64 years in 2005. Literacy rates, which stood at 20–30% in the 1940s, rose to 60–80% in poor countries by the turn of the century. Paced by China’s turn to market reform and more liberal trade policy after 1979, developing world poverty rates dropped substantially: in China itself in the last decades of the twentieth century, poverty was reduced by 300 million people.

Having established the case on balance for the enduring benefits of globalization, in a separate chapter Krueger provides an explanation of the connection between trade policy and economic development, or more specifically the evolution of research and experience (‘How We Learn’) that ultimately produced the adoption of trade and economic policy more conducive to growth. She notes that the broad consensus among policymakers and economists at the end of World War II was heavily tilted toward state action to control aggregate demand and regulate private markets. This meant that trade policy for development was based upon ‘import substitution’, or a goal of domestic production for import-competing goods through whatever level of trade protection found necessary. She poses the question of how the economics profession, which took as one of its key tenets the principle of comparative advantage, could have embraced such protectionist prescriptions. In answering this question, and the further puzzle of how and why policy changed to a new consensus by the 1990s, Krueger first describes the initial ‘stylized facts’ that governed postwar thinking – free trade would preclude industrialization, and ‘surplus’ labor was a free good, as examples. She then traces the combination of actual experience and empirical economic research that led to new thinking based on more advanced economic models that challenged the premises and working of the old consensus – citing along the way the work of Jagdish Bhagwati, Harry Johnson, Max Corden, Bela Belassa, Robert Baldwin, and Krueger herself, among others. Thus, new research refuted the argument that free trade would condemn developing countries to specialization in agricultural commodities, and that superficially plausible infant industry theories could succeed against the power of rent seeking by skillful political operators and the inability of bureaucracies to mange such interventions effectively.

Central to the changing research landscape was the actual experience of an increasing number of developing countries, particularly the startling economic growth rates achieved by a number of East Asian countries. Starting with Taiwan, but continuing with South Korea, Hong Kong and Singapore, these economies demonstrated that – in contrast to import substitution and selected infant industry interventions – opening up the economy by reducing barriers to imports and providing evenhanded export incentives would enhance growth rates and overall economic performance. 

The final part sets forth the achievements and challenges to multilateralism: here, focus will be limited to the multilateral trading system and the World Trade Organization. Though a strong supporter of the WTO, Krueger is clear-eyed about the difficulties of squaring the ‘economics vs. politics’ in multilateral negotiations. She points out that, for economists, in most circumstances, countries which lower their trade barriers benefit, irrespective of the actions of other countries. Yet in the GATT/WTO world, countries that reduce barriers expect that they will ‘get something in return’. For politicians and for political scientists, this reciprocity-based mercantilism represents the ‘genius’ of the system, as it harnesses exporting interests to the negotiations to offset import-competing producers.

Krueger concedes that this dynamic was an important element in the large reductions in border barriers after 1945. But she argues that this dynamic no longer works well, as evidenced by the decade-long logjam in the WTO Doha Round. For instance, many inside the border issues – such as services and regulatory policy – do not lend themselves to a ‘concession’ framework. Further, she contends that a politically based concessions approach has been a major factor in the rise of bilateral and plurilateral preferential trade agreements (PTAs). This in turn has made it harder to achieve multilateral liberalism, given that exporters will act to protect their preferences and have less interest in pushing for multilateral liberalization in the WTO.

She is dubious of the attempts at grand reform bargains and argues instead for piecemeal reforms. Among her suggestions are: moving away from WTO consensus decision-making to a supermajority system; adopting some form of weighted voting, with the volume of world trade and population as criteria; establishment of an Executive Council as an intermediate body; streamlining the dispute settlement system to produce more expeditious decisions; and, last but not least, tightening the rules for PTAs to bring them more in line with the multilateral system. 

This last point relating to PTAs forms the basis for suggestions for further research. For over a decade, Anne Krueger (and Jagdish Bhagwati) have sounded the alarm against the movement away from multilateralism toward bilateral and plurilateral PTAs. Alas, to no avail: there are now over 500 PTAs notified to the WTO and the number keeps growing. Over the past few years, there has been a good deal of analysis of the reach and impact of these agreements on world trade and trade policy. Krueger touches on these issues here, but it would be a great benefit to future trade policymakers if she returned in the future to an analysis of the dangers (or not) of this phenomenon to continuing trade and investment liberalization.

Another area that Krueger alludes to but which has come very much to the fore as an analytic and policy challenge concerns the steep rise of supply chains and the huge increase in trade in parts and components. Among the issues that beg for analysis are: the implications for current international trade statistics that only count final products; to what degree do the multiple value-added components of a finished good (viz., a computer) increase the negative or at least unintended consequences of many trade remedy actions; and does the ‘new’ trade of supply chains necessitate amendment to current trade theory? 

In short, despite covering a lot of ground in these selections, there are still important analytic challenges for Krueger to tackle in a future collection.

Citation: Claude Barfield (2013). World Trade Review, 12, pp 607610 doi:10.1017/S1474745613000086

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