Abhijit Banerjee & Shit Economics.

Scroll excerpts the following from Good Economics for Hard Times: Better Answers to Our Biggest Problems, by Abhijit V Banerjee and Esther Dufflo

Does inequality fall in poorer countries when they open up to trade?

No. A poorer country is one closer to bare subsistence. Inequality decreases when productivity falls because more people are at the subsistence level- perhaps being kept alive by foreign aid. Opening up to trade tends to increase productivity. This raises inequality because a lot of people aren't productive or are stuck in involuted agricultural Malthusian shitholes.

There are in fact relatively few cross-country studies on this subject, reflecting a pattern we will see again and again – trade economists have tended to stay away from thinking about how the pie is shared, despite (or perhaps because?) Samuelson’s early warning that, in rich countries at least, trade could come at the expense of the workers.

The fact that that are few shite studies reflects the fact that there is a limited market for shite.  Trade economists tend to stay away from thinking. That is why they are economists rather than rich. Samuelson was as stupid as shit. He thought the Soviet Union might overtake the US in terms of standard of living. As late as 1980, he was predicting that the USSR would overtake the US economically between 2002-2012. In the 1989 edition of his classic textbook he wrote- “The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.”

Opening up trade means that the real per unit labor cost in 'rich countries' must come down for tradable goods and services. Thus, productivity must rise much faster than wages. There could be structural and regional unemployment in the industry as less efficient enterprises are squeezed out. On the other hand, those affected could be compensated by transfers. Medium to long term even the unemployed might end up better off than under a protectionist system.

But all this is commonsense. The fact is, any change in economic policy will have some winners and some losers. Opening up trade means some workers lose out in the short run. There are no exceptions to this rule because any change of any sort will end up being good for some and bad for others. Why? Some people are stupider or unluckier than others. Suppose the weather changes. It starts to rain heavily. Smart people may have already gone indoors because they saw the rain clouds thickening. Some unlucky people may not be able to get indoors. Some stupid people may not understand that shouting at the Heavens to stop pissing down on them won't do any good. They may catch pneumonia and die.

There are exceptions, but not ones that inspire confidence: a recent research report by two members of the IMF’s staff finds that countries that are close to many other countries, and as a result trade more, tend to be both richer and more equal.

All 'research reports' by shitheads are worthless.

They ignore the inconvenient fact that Europe is where there are many small countries which trade a lot with each other, and those countries tend to be both richer and more equal, but probably not primarily because they trade a lot.

Rubbish! They would be as poor as shit and run by a kleptocratic nomenklatura if they did not trade a lot.

One other reason to be sceptical of this rather optimistic conclusion is that

it was arrived at by IMF shitheads.

it flies in the face of what we know from a number of individual developing countries. In the last three decades, many low to middle income countries have opened up to trade.

In the last three centuries every country which is now rich moved from being low to middle income through trade. Income distribution became more unequal and this permitted populations to rise rapidly. When they stopped rising, real incomes even for the poorest rose sufficiently to permit Social Insurance and Compulsory Education and so forth, such that productivity rose faster than real wages. Thanks to 'total wars', the administrative capacity of the State greatly increased. There was a period when reported inequality fell because of high marginal rates of tax. But there was a compensating 'wage drift' as well as a 'divorce between ownership and control' such that those at the top received all sorts of corporate perks. But this was inefficient and ended in the 'stagflation' of the Seventies.

Strikingly, what happened to their income distribution in the following years has almost always gone in the opposite direction of what the basic Stolper-Samuelson logic would suggest.

The Stolper-Samuelson theorem says a rise in the relative price of a good will lead to a rise in the real return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the real return to the other factor. Nobody believed it. The 'real return' to a factor depends on its transfer earnings. These two cretins could see with their own eyes that Society colluded to keep opportunities out of the reach of large classes of people. Land, Capital & Entrepreneurship, too, could be subject to all sorts of legal and illegal constraints.

Low to middle income countries- like India- took and still take a lot of trouble to ensure that the real return to factors of production is low so that 'rents' are maximized. Protectionism was just one method. 'Opening up to trade' simply meant the State taking its boot off the throat of some people who, if they were smart, then got rich. This worsened income inequality because vast sections of the country were still stuck in a Malthusian trap. India added 400 million to the population in the last 30 years. It wasn't those who were climbing out of poverty who contributed to this. It was those who were left behind. To keep these people alive, inequality had to increase because, as Lenin said, in a Socialist country employment is on the basis of ability while remuneration is on the basis of contribution. In other words, the able can rise up both career wise and in terms of remuneration. Only after technology has so improved, or people have become so saintly, that everybody only works for the pleasure of it would each be rewarded according to their need as opposed to the value of what they produce. China's economic ascent began when Xue Muqiao, its most famous economist, insisted that property arrangements should reflect productive forces. Party theorist Du Runsheng said, "a principle of Marxism is that every change in the relations of ownership is an inevitable outcome of the development of new productive forces which can no longer fit in with the old relations of ownership". First, agriculture was freed from the commune system. Then industry and construction and so forth were freed up. Inequality blossomed. Absolute poverty declined for hundreds of millions. Great wealth was generated. Long term, this did not mean that Trade took a larger slice of GDP. In 1985 it was 20 percent. Now it is about 18 percent.

The wages of the low-skilled workers, who are abundant in these countries (and should therefore have been helped), fell behind relative to those of their higher skilled or better-educated counterparts.

How is this surprising? Low skilled people have low transfer earnings. High skilled people have high transfer earnings. If a country is stagnating, smart and skilled people have to emigrate if they want better pay. The opening up of trade means better opportunities at home.

Still, in absolute terms, even the low-skilled did much better than previously. Furthermore, they saw the value of having fewer kids and trying to get them English medium education.

Between 1985 and 2000, Mexico, Colombia, Brazil, India, Argentina, and Chile all opened up to trade by unilaterally cutting their tariffs across the board. Over the same time period, inequality increased in all of those countries, and the timing of these increases seems to connect them to the trade liberalisation episodes.

Inequality did not increase. If money has diminishing marginal utility, it is likely that it fell. One type of way of estimating inequality did rise. But that approach was foolish. People didn't care about that sort of inequality. They wanted the chance for their kids or their grand-kids to have a shot at being rich.

For example, between 1985 and 1987, Mexico massively reduced both the coverage of its import quota regime and the average duty on imports. Between 1987 and 1990, blue-collar workers lost 15% of their wages, while their white-collar counterparts gained in the same proportion.

This is false. Everybody's wages rose but those who were more skilled got a bigger rise. Thus, though a low-skilled person might have been 15% better off, the gap between him and the better-skilled had increased to 30 percent.

Other measures of inequality followed suit.

Mexico suffered a 'Lost decade' because of Leftist profligacy made possible by the 'resource curse' of high oil prices. It is significant that 'measures of inequality' give high marks for terrible economic mismanagement while frowning upon sensible policies which can lift people out of poverty on a sustainable basis.

The same pattern, liberalisation followed by an increase in the earnings of skilled workers relative to the unskilled, as well as other measures of inequality, was found in Colombia, Brazil, Argentina, and India.

It is a good thing if skilled workers get paid a lot more than the unskilled. This provides an incentive to acquire skills. If your job could be done by a monkey, you should understand that you need to be saving up or going to night school because sooner or later you will be paid peanuts.

Finally, inequality exploded in China as it gradually opened up starting in the 1980s and eventually joined the World Trade Organization in 2001.

China lifted more people out of absolute poverty in a shorter time than any country in history. It also turned the demographic corner.
Why? From about 1978 onward, its leaders visited foreign countries and discovered that China was 'backward'. They wanted to become equal to Singapore and Taiwan and so forth. Mimetic effects caused them to seek to decrease inequality with respect to their neighbors.

Indian politicians and economists, on the other hand, had always known India was as backward as shit. They wanted to increase India's inequality with respect to its neighbors in the name of reducing inequality within India. The Gandhian ideal was for everyone to go around half naked. The Nehruvian ideal was for the private sector to be as trammeled by red tape as the Government bureaucracy.

Deng Xiaoping decided he wanted to quadruple Chinese per capita income within two decades. Why? He wanted to reduce inequality as between China and Taiwan and South Korea and so forth. How did the Chinese go about it? For a start, they didn't listen to stupid Indian economists. They first looked at economists seeking to correct the familiar problems of Bureaucratic Socialism. The famous Bashan Conference in 1985 was a personal triumph for, the Hungarian, Janos Kornai. Another very important figure was Edward Lim of the World Bank. McNamara had insisted on working with Vietnam and this impressed the Chinese. They were also attentive to the Hungarian experience of working with the World Bank.The reformists in China trusted Lim- whose father was very poor (and thus of 'good class background) but had managed to stowaway on a ship to the Philippines and thus rise up- and could see that markets could be used to help the people, rather than siphon off money to urban centers and into the maws of Wall Street. They even made a movie about the World Bank's insisting on International Competitive Bidding for a new dam they were financing. The old chief engineer is against this- more particularly when a Japanese firm wins the bid- but his daughter is in love with a young engineer with radical views... Anyway, the Jap turns out to be a good egg and the dam gets built in half the time and so all's well that ends well.

Dams and toll expressways and other such infrastructure projects were done through International Competitive Bidding which meant knowledge transfer of best practice which in turn meant China would become the biggest infrastructure exporter twenty years down the line. In India, obviously, there would be judicial challenges and allegations of bribery and the whole thing would hang fire for decades as costs escalated while worthless economics Professors wrote op-eds about how better infrastructure would increase inequality and butt fuck the environment and so forth. Meanwhile, in China, Zhu Rongji was breaking the 'iron rice bowl' and shaking out inefficient enterprises. He was tough on corruption and this made him popular. Zhu's major reforms occurred around the time Manmohan Singh supposed reforms came into force. But Zhu was a conviction politician who was ready to take tough decisions. Singh was a minion of the dynasty. That is why India fell further and further behind China. Still, not even Modi has Deng or Zhu's toughness. What to do, yaar? India is like that only- soft state innit?

One reason China could do massive infrastructure was because it could do very effective resettlement of displaced people. This did not prove to be a humanitarian disaster because the Communist Party is cadre based and can quickly respond to events on the ground. Ultimately, this means 'concurrency' type deadlocks- which plague India- are resolved by speedy executive action rather than dragging on through the courts. India does have a tradition of cadre based parties but they become dynastic and prefer to instrumentalize grass roots agitations in a cynical manner. It was hoped that 'panchayat raj'- i.e. devolving power to village councils- would neutralize a mischievous type of interessement by publicity seeking agitators but, sadly, no such outcome has come to pass.

According to the World Inequality Database team, in 1978, the bottom 50% and the top 10% of the population both took home the same share of Chinese income (27%). The two shares starting diverging in 1978, the poorest 50% taking less and less and the richest 10% taking more and more. By 2015, the top 10% received 41% of Chinese income, while the bottom 50% received 15%.

This is a good thing. It reflects the fact that China can still grow a great deal more. Clearly those who have gotten richer also have, in proportionate terms, more money to invest and, given their proven track-record of backing winners, chances are they will continue to do so.

Of course, correlation is not causation. Perhaps globalisation per se did not cause the increase in inequality.

Mimetic effects- China imitating its richer neighbors so as to stop being so unequal to them- caused the contribution of the able to rise and this inequality to worsen. The less able could not have babies like crazy because the Government would punish them. Thus, absolute poverty fell enormously.

Trade liberalisations almost never take place in a vacuum: in all these countries, trade reforms were part of a broader reform package.

Sadly, the depth of the reforms was seldom sufficient.

For example, the most drastic trade policy liberalisation in Colombia in 1990 and 1991 coincided with changes in labor market regulation that were meant to substantially increase labor market flexibility.

Previously, it was illegal to hire a guy on a contract for less than a year. The Colombians had an odd system where formal workers paid into a social insurance scheme which subsidized informal workers. Obviously, this created an incentive for both employers and employees to go in for various types of fixed contracts or informal 'self-employed' relationships.

One big driver of inequality was associated with Trade- viz Narco traffic. Pablo Escobar sure liberalized the fuck out of trade in cocaine.

Mexico’s 1985 trade reform took place amidst privatisation, labor market reform, and deregulation.

As we mentioned, India’s 1991 trade reform was accompanied by the removal of the industrial licensing regime, capital market reforms, and a general shift of power and influence to the private sector. China’s trade liberalisation was of course the capstone of the massive economic reform undertaken by Deng Xiao Ping, which legitimised private enterprise in an economy where it had been almost forbidden for thirty years.
It is also true that Mexico and other Latin American countries opened up exactly at the time when China was also opening up, and therefore they all faced competition from a more labor abundant economy. Perhaps that was what hurt the workers in these economies.

What hurt the workers in those economies was working shitty jobs in shithole countries rather than emigrating or becoming a gangster.

So it is difficult to show anything definitive about trade by just comparing countries, because both growth and inequality could depend on so many different factors, trade being just one of those ingredients, or indeed an effect rather than a cause. There has however been some fascinating within-country studies that do throw a shadow over the Stolper-Samuelson theorem.
Looking at different regions within countries clearly reduces the number of potential things going on at the same time that might obscure the effect of trade; there is usually a single policy regime, a shared history, and common politics, which make the comparisons more convincing. The problem is that the central predictions of trade theory, by their very nature, encompass every market and region in the economy, and not just the ones where imports come in or exports take off.
In the Stolper-Samuelson view of the world there is one unique wage for every worker with the same skills. A worker’s wage does not depend on his sector or region, only on what he brings to the table. This is because the steel worker in Pennsylvania who loses his job because of foreign competition should move immediately to wherever he can find a job, to Montana or to Missouri, to plating fish or making fisher-plates. After brief transitions, all workers with the same skills will earn the same.
If this were true, then the only legitimate object of comparison for learning about the impact of trade would be the entire economy. We would not learn anything by comparing workers in Pennsylvania with workers in Missouri or Montana because they would all have the same wage.
Rather paradoxically, therefore, if one believes the assumptions of the theory, it is almost impossible to test it, since the only impact one observes is the impact at the country level, and we just demonstrated the many pitfalls of cross-country comparisons and country case studies.

However, as we saw with migration, labour markets tend to be sticky. People do not move even when labour market conditions would suggest that they ought to, and as a result, wages are not automatically equalised across the economy. There are in effect many economies inside the same country and it is possible to learn a lot by comparing them as long as the changes in trade policy affecting these sub-economies are not all the same.
Petia Topalova started from the idea that people may be stuck, both in a place and in a line of trade. Her research studied what happened in India after the massive trade liberalisation of 1991. It turned out that even though we think of “India liberalising”, there were very different changes in the trade policy that affected different parts of the country.
This is because even though eventually all the tariffs were brought down to more or less the same level, since some industries were much more protected than others to start with, there were much bigger reductions in tariffs for some industries.
Moreover, India has over 600 districts that differ enormously in terms of the kinds of businesses they are home to. Some are mainly agricultural; others have steel plants or textile factories. Since different industries fared differently, the liberalisation led to very different reduction in tariffs in different districts.
Petia constructed, for each Indian district, a measure of how much it was affected by liberalisation. For example, if one district mainly produced steel and other industrial manufacturing products, whose tariff dropped from almost 100% to about 40%, she would say that this district was strongly affected by liberalisation. If another district just grew cereals and oilseeds, whose tariff essentially did not change, it was almost unaffected.

Using this measure of exposure, she looked at what happened before and after 1991. The national poverty rate dropped rapidly in the 1990s and 2000s, from about 35% in 1991 to 15% in 2012. But, against this rosy backdrop, greater exposure to trade liberalisation clearly slowed poverty reduction – contrary to what the Samuelson-Stolper theory would tell us, the more exposed a particular district was to trade, the slower poverty reduction was in that district. In a subsequent paper Topalova also found that the incidence of child labour also dropped less in districts more exposed to trade than in the rest of the country.
The reaction to these papers in the economics profession was surprisingly brutal. Topalova ran into a barrage of very unfriendly questions which seemed to imply that she had the wrong answer, even if her methods were correct. How could trade actually increase poverty?
The theory tells us that trade is good for the poor in poor countries, so her data had to be wrong. Blackballed by the academic elite, Topalova finally took a job at the IMF, which, somewhat paradoxically given that they were the ones who had pushed for the massive liberalisation in the first place, was more open-minded about her research than the academic community.
Her paper was also rejected from the top economic academic journals despite the fact that it eventually inspired a literature dedicated to the debate: there are now many papers applying Topalova’s approach in other contexts and, incidentally, finding the same result, in Colombia, Brazil, and as we will see below, eventually the US. It was only several years later that she got some measure of vindication from academic economists when her findings won the “best paper award” for the American Economic Journal.

To anyone who knows India, Topalova's paper was Junk Social Science. The poverty rate in a district depends on the District Administration. If it is proactive, the rate goes up because bureaucrats work hard to classify people as 'BPL' so as to get money from the Center under various schemes. If the district is a shithole, they don't bother because gangsters will grab the money and the Audit will be a nightmare. Another factor has to do with districts which are participating more in trade having more resources for populist programs which give subsidized food and other necessities. This permits per capita expenditure to decline for the poorest. What Topalova actually claimed to have found was only this- ' the average real per capita expenditure in districts where employment was concentrated in industries exposed to larger tariff cuts grew relatively more slowly. This pattern was most pronounced among the poorest households in affected districts, with the estimated impact declining in magnitude and becoming statistically indistinguishable from zero at the upper end of the distribution of consumption.' 
It is also the case that savings grew in some places while dissaving occurred elsewhere because of migration of the breadwinner. However, anyone familiar with the Indian administration would place zero reliance on official figures because Administrative and 'populist' Political measures vary widely. Academics who rely on NSS data or try to figure out some other instrument may capture something of local significance but it is folly to draw any wider conclusions. Indeed it is foolish to read Academic papers as having any relationship with the real world. To take an example, Topalova thinks India has little or no migration- 'There is almost no geographical or cross-sectoral migration in rural India. Perhaps even more surprisingly, there is no sign of an upward trend in mobility after the 1991 reforms'. 
Wow! 120 million seasonal migrants means 25 percent of the working population. The woman is a credulous fool but Bannerji a greater cretin because he is a brown dude. His first two degrees where from India. He could see with his own eyes and hear with his own ears that there is massive geographical and cross-sectorial migration in India.

Abhijit Bannerjee does not represent 'Poor Economics', he incarnates 'Shit Economics'. What virtue can the profession now plausibly signal? It tells stupid lies which it is itself too stupid to recognize as stupid lies. Junk Social Science is now an addictive habit of coprophagy.