Blogger sells out to MSM!

thanks! (actually I have lost my CT login info again and can’t check it because I am on the road and away from my home PC).

while the gains from goods markets liberalisation are big and definitely there, the gains from capital account liberalisation are small and frustratingly difficult to detect, no matter what econometric techniques you bring to bear.

See, for example, “this excellent paper”:http://ist-socrates.berkeley.edu/~pog/academic/liberalization/ from Pierre-Olivier Gourinchas. Summary “here”:http://www.kieranhealy.org/blog/archives/2003/06/04/elusive-gains.

christ, there’s another one up now. I think I misunderstood the concept; I thought they were only going to publish a very few, so I put in a load of ideas with the plan that I would put the ones the Guardian rejected on CT or D^2D (sorry guys). But apparently not, so I need to rethink this plan.

Why not send “this photo”:http://cepa.newschool.edu/het/profiles/image/kalecki.gif.

I was going to send them a picture of me standing on a beach holding a beautiful ickle baby, but looking round the site everyone else seems to have gone for relatively sober headshots so I suppose I will too.

Surely you know better than to refer to the University of Chicago as “Chicago University”? At least I hope so.

A few notes:

1) I have no idea how acquiring a company by purchasing shares (or purchasing Rockefeller Center) is not investment in an economic sense. It represents a capital investment in hard assets. And the case that Daniel lays out in favor of restrictions on ownership — easier to get companies to obey domestic laws, control over tax base, etc. — would apply equally well to preventing Toyota from building a factory in the US as it would to preventing it from buying a company in the US.

2) Daniel’s narrative here just isn’t accurate. American economists, including most obviously Krugman, came out strongly against the attempted restrictions on Japanese investments in the late 1980s and early 1990s, framing it as an unnecessary restraint on trade, well before the MAI or these bogus WTO cases. And while I’m sure plenty of people who believe that the French government shouldn’t be orchestrating in-country mergers in order to block cross-border deals also support the MAI, I’m not one of them.

3) Most important, it seems a bit less than fair to accuse me of defining down “protectionism” when the one word I don’t use in the piece is “protectionism.”

In general, I wish people would comment on the article over at the Guardian site as it makes me look more popular and renders the chance of me ever making any money out of the thing less minimal. However.

1) No, I think Kevin is right here. Portfolio investment does not directly add to the capital stock of the national economy.

2) The late 1980s was not “well before” the MAI was a live issue. The idea of creating a global agreement on investment first got onto the table in the GATT Uruguay round; it was then hived off to the OECD. The principle only got the name “MAI” in 1995, but it was certainly there in the adminisphere in the 1980s. I also don’t agree at all that Krugman specifically saw Trade-Related Investment Measures (TRIMs) as either bad in themselves or equivalent to protectionism; it is very hard indeed to understand why he wrote a lot of the New International Trade Theory the way he did if that was what he thought.

(In any case, whatever your view on his question, surely to heck things like “the French government encouraging domestic mergers” ought to be thought of as more analogous to export subsidies than import tariffs).

3) in re “while I’m sure plenty of people who believe that the French government shouldn’t be orchestrating in-country mergers in order to block cross-border deals also support the MAI, I’m not one of them“, oh you never are James, you never are. But there are lots of people who are trying to push an MAI-type agenda and they are the ones who are happiest to see you helping to blur the distinction. In any case, why are you opposed to the MAI, if you really do think that investment controls are the same sort of thing as tariffs?

Well it is “investment” in the sense that it eases a capital constraint on the economy if there is one (by increasing the supply of hard money) and in this sense James is right to say that the Kenyans would love some portfolio investment. But if there is no effective capital constraint (which surely to hell there can’t be for the USA, UK, Spain or France) then it doesn’t create new capital assets and there is no guarantee that the person who sells you the Rockefeller Centre is going to reinvest the proceeds in a domestic capital asset – that’s the whole central insight of Keynesian economics.

Chris, why don’t you close comments and ask people to migrate (for DD’s sake)?

You mean, loosen controls so that D2 can easily flee this site and take the commenters with him? Personally, I favor protectionism.

By the way, while the Guardian continues to give space to horseshit like this (in which Glenn Reynolds appears to have the opinion that the Darfur Resistance Army is not armed), I daresay I will continue to post things on Crooked Timber, in order to preserve the illusion that I am in some way an intellectual peer of Chris, Harry and Kieran, rather than one of Reynolds (which is probably closer to the truth but we are talking about marketing here).

1) Krugman, from 1991: “There are two kinds of international investment. Portfolio investment, such as the purchase of U.S. government bonds by Japanese pension funds, aims to secure future income but does not establish working control of an asset. Direct investment, on the other hand, includes foreign purchase of companies and the creation of new subsidiaries. The good thing about direct investment is that it represents long-term commitment. The deals that are being blocked, and that I was writing about, involved the “foreign purchase of companies.” By Krugman’s criteria, and I think by any reasonable one, that distinguishes them from portfolio investment.

2) Krugman in 2000, writing on the hysteria over Japan: “In the 1980’s we reacted badly to the prospect of large-scale foreign ownership of American companies — a reaction that was all the sillier because America had always ridiculed foreigners who expressed similar concerns about our multinationals.” That sounds a lot like someone who thought blocking foreign ownership was a bad idea. More to the point, Krugman routinely writes (or wrote) lines “those of us who still believe in the extraordinary merits of free markets in goods, services, and long-term capital.” As far as NITT goes, we know that Krugman quickly came to the conclusion that while theoretically feasible, in practice it was so hard to do well that, in his words, strategic trade theory shouldn’t be taught in school.

3) As far as the MAI goes, I was under the impression that it would have effectively abolished (or made very difficult to keep in place) domestic environmental and labor-market regulations, among other things. This seems to me like a bad idea.

I have no idea how acquiring a company by purchasing shares (or purchasing Rockefeller Center) is not investment in an economic sense.

Recall that the phrase which bothered me was: “investors acquire a firm or build a factory” (emphasis mine). There are two different senses of “investment” involved here, are there not? Matteradamn whether you refer to them as the financial sense and the economic sense, or by some other pair of labels, but it is surely better not to conflate them. Your next sentence stressed the importance of investment for economic growth. Nobody would dispute that building a factory typically contributes to economic growth. Even if the factory closes down within a few months, its construction will have boosted economic activity to some extent and it will probably find a new owner – it represents an addition to the capital stock. Whether the purchase of an existing asset will boost economic growth is quite another matter. Maybe it will, maybe it won’t. There is no presumption that new owners are smart owners – in the case of corporate takeovers quite a lot of evidence suggests the opposite.

The reason why I think this matters is that I encounter a lot of people who think that what’s good for stockbrokers must be good for the economy and that just ain’t so. The West German economy managed to grow very nicely for quite a while without being a great playground for “investors”, but it did have a very healthy level of investment which is a quite different thing.

I’m not sure that limitations on labour are getting worse; I certainly agree that they’re bad, but I’m not aware of anyone seriously arguing otherwise.

Kevin, you’re right that there is a difference between acquiring a firm and building a factory. But as the Krugman quote above suggests, acquiring a firm is not the same as portfolio investment, either. And while it’s true that any individual purchase of an existing asset won’t necessarily boost economic growth, I think a rule that keeps assets from ending up in the hands of the people that value them most highly is almost certain to retard it.

But as the Krugman quote above suggests, acquiring a firm is not the same as portfolio investment, either

If Krugman did say that he’s wrong in the relevant sense. Looking at the quote he’s talking about something else (the liquidity of the claim and its creation of a potential negative capital account item in the future), not whether it adds to the productive output of the economy. Selling a factory between domestic residents doesn’t increase output, does it?

I think a rule that keeps assets from ending up in the hands of the people that value them most highly is almost certain to retard it

Yes, certainly; this tendency is unfortunately, plainly obvious everywhere except the data.

…and Bhagwati has been harping on this point for years

Just to pick up on Z’s point, I still don’t really see how opposing developed-country capital controls means supporting the abolition of domestic labor-market and environmental regulations. The two seem to me to be clearly analytically distinct. If you own a business in a country, you need to obey the laws of that country — what’s untenable about this rule even in a world of free capital markets?

I’d add “standing agreements”, though that may not be an entirely distinct category.

abb1:
“If they are so bad so obviously, then why do we need an organization dedicated to removing them? Apparently they aren’t bad for everyone.”

They’re just fine for those rich people that own the companies that don’t get exposed to international competition. Those same people who are likely to have the money to influence the politicians as to whether there should be tariffs or not.

But from your other comments here that isn’t really a class I’d expect you to be supporting.

To take the US Steel industry as our example. Most within the metals industry don’t actually ascribe the problems to foreign competition. Rather, to domestic competition from new technology. Firms like Nucor have developed processes to make higher grades of steel from recycled scrap. This has meant less need for the integrated mills with their hugely expensive blast furnaces.

So, should we have tariffs on the exploitation of such new technology? So as to avoid the harm to, as you correctly note, those US Steel workers?

Stating that competition can only be meaningful when all operate under the same labor laws is a little extreme. Do you seriously mean that the sweat shop worker should not get $40 a month, that she should go back to the paddy field and get only $10 a month because employers won’t or can’t buy her the same $10,000 a year’s worth of medical insurance that an American worker gets?

The point about mercantilism, protection and so on is not that they do not favour certain interests within a nation state. They do, clearly. Which is in fact precisely the argument. They favour certain narrow groups within that State, rather than the wider public. Which is why “tariffs are bad” is an impeccably liberal position to hold. Those who benefit from them are not the great unwashed and it is that very same great unwashed that we’re supposed to be aiding.

(Yes, I know, I’m a classical liberal, not a liberal, but in this instance the two philosophies should, at least, be urging the same behaviour.)

“But I think the case for restricting FDI in developed countries is very weak.”

Maybe, but the case for *allowing* FDI in developed countries is also rather weak. That is, it’s hard to see the positive benefits that come. One case where I think the results were positive was where Japanese auto companies got around tariffs by building plants here — but those benefits were related to the implicit lowering of tariffs.

If Surowiecki really can’t see the difference between financial speculation (writing somebody a check for something to transfer ownership) and real economic investment then he needs to switch careers. Of course, the heavily ideological pop economics of the 1990s (which probably influenced Surowiecki, since that’s when he broke in) often depended on blurring precisely that difference.

The appeal to Krugmanite authority doesn’t particularly help, since who knows the context of those quotes. If Krugman meant that foreign purchase of a company is not portfolio investment he is just clearly wrong. But my guess would be that he was driving toward a different point: that when you actually buy a majority interest in a company you are therefore more likely to use your control of that company to make real investments in the country through building new plants for the company, etc. So the two are not the same but they are correlated. Presumably a large ownership share of company stock means that your investment is less liquid, implying a longer term committment, so perhaps you will stick around and actually do something in the country. Well, maybe, but maybe not. Maybe you will sell off the company’s assets and then go invest the proceeds in some other country. One can argue this makes some contribution to the “destruction” part of “creative destruction”, and 90s-style free market ideology would probably say it is therefore productive labor, but it isn’t economic investment.

The second, and more important, point is that the arguments against allowing foreigners to acquire a company—whether they be the conventional nationalist arguments or Daniel’s arguments about law, social custom, etc.—apply equally well (or equally poorly) to barring foreigners from building factories in your country.

Um, no they don’t. The worst that can happen if a foreigner builds a factory is that it will fail. However given that there was no factory before, and economic activity will have occured, this is still preferable to no investment.

In contrast, if a foreigner buys a company and causes it to fail (or do worse than it did before) – then a reduction in economic activity has occurred as a result.

Clear distinction.

OK, so: tariffs and subsidies is a tool used to prevent capital from fleeing the country.

Restriction on ownership can only be used, it seems, to prevent foreign capital from entering the country.

So, Daniel is right – these are two different concepts, in fact they are exactly the opposite.

However, contrary to Daniel’s argument, the former seems much easier to justify than the latter; you probably do need a fair amount of sophistry and demagoguery in most cases to justify your refusal to allow foreign capital to flow into your country. You certainly want more capital, not less.

Does it make sense what I’m saying?

I’m a little surprised this thread is still going (albeit at a limping pace), but since it is let me try to clarify our disagreement here (and the point I was making in my last post):

Daniel and Cian have responded by saying there is a clear difference in economic terms between a foreigner buying a factory and a foreigner building a factory. I’m not disagreeing with that. I’m making a different point: the explanations of why it’s dangerous to allow foreign capital in apply equally well to a foreign investor building a factory as to one buying a factory. In Daniel’s original piece, the reasons he cited why a country might want to keep foreign investors out were: being able to govern foreign companies via domestic laws, more control over tax base, access to shipping and accounting records, desire not to be taken to WTO tribunal.

My point is that all of these concerns are just as applicable to a foreign company that’s building, rather than just buying, a factory.

Now, the argument then becomes, I suppose, a cost-benefit one: letting foreigners build a factory is bad (for reasons Daniel cites), but it’s good because it spurs economic activity, while letting foreigners buy a factory is bad (for reasons Daniel cites), and is of negligible value when it comes to economic activity. I don’t agree with this analysis — I think the negative effects of allowing in long-term foreign capital are negligible at best, and that the positive effects of foreign acquisitions can be meaningful — but my point in the last post was simply that when you’re talking about the dangers of allowing foreign investors in, you necessarily are talking about foreigners who want to build as well as buy.

James doesn’t disagree with what you, Cian. All he is saying now is that if you refuse foreign ownership of an existing factory, you’ll have to – on the same grounds – be reluctant to allow foreigners to build new factories as well. And if you refuse foreigners to build new factories, then you’ll have forgone that “some beneficial economic effect”. Thus subscribing to the argument for restricting foreign ownership is harmful from the pure economic standpoint. That’s all.

To assume that they won’t ever build any factories at all is more of a leap, it seems to me.

No, he is not assuming that the purchaser of a factory will necessarily build more factories, at least not in his most recent comments.

He is assuming that there will be at some point a foreigner who will want to build a factory and you will refuse – because you take your “social contracts and customs” argument seriously.

And this one incident will make your “social contracts and customs” argument harmful; never mind all other foreigners who only want to own, not build. Just a single foreigner who does want to build makes James’ case.