Open Economies

To mark Peter’s passing, we invited both our European and US panels to express their views on aspects of his work. We asked the experts whether they agreed or disagreed with the following statements, and, if so, how strongly and with what degree of confidence:

(a) The introduction of even small trade frictions between neighboring countries can result in significant economic damage, particularly to smaller exporting firms.

(b) A national economic boom based on natural resources is likely to harm other sectors of the economy, particularly manufacturing firms.

Of our 43 US experts, 37 participated in this survey; of our 48 European experts, 37 participated – for a total of 74 expert reactions.

Trade frictions and exporting firms

On the first statement about the economic damage that the introduction of small trade frictions can cause to smaller exporting firms, a majority of respondents on both panels agree, although agreement is stronger among the European panel. Weighted by each expert’s confidence in their response, 30% of the European panel strongly agree, 49% agree, 21% are uncertain, and 0% disagree. Among the US panel (again weighted by each expert’s confidence in their response), 61% agree, 36% are uncertain, and 3% disagree.

Overall, across both panels, 29% strongly agree, 54% agree, 15% are uncertain, and 3% disagree (the totals don’t always sum to 100 because of rounding).

Among the short comments that the experts are able to include in their responses, several consider the wording of the statement insufficiently specific. For example, Pinelopi Goldberg at Yale, who expresses ‘no opinion’, says: ‘Not clear what “small” trade frictions are and what “significant” economic damage means.’

Three panelists who opt for ‘uncertain’ in their response contribute similar views: David Autor at MIT comments: ‘This is predicted by theory. But frictionless trade between industrial countries is non-existent. So, what does adding a “small” friction mean?’ His MIT colleague Daron Acemoglu states ‘”Significant” here is very unclear. It can have a proportionately large effect on small firms, but unclear in the aggregate.’ And Caroline Hoxby at Stanford adds: ‘I tend to agree with the spirit of this query, but “small” trade frictions seem too poorly defined for me to give an answer. 1%, 5%, 10%?’

Ricardo Reis at the London School of Economics also refers to the wording although he agrees with the statement – ‘”Significant” is in the eye of the beholder, but literature has quantified multiple relevant channels’ – directing us to studies of the US gains from trade and the consequences of globalization. Pete Klenow at Stanford also provides a reference: to a study of the impact of trade on intra-industry reallocations and industry productivity.

Among other panelists who agree or strongly agree with the statement, some provide reasons why it might be true. Larry Samuelson at Yale states: ‘ The presence of a home bias, in various forms, suggests that even small frictions can be important.’ Christopher Udry at Northwestern adds: ‘Because, for example, network effects can generate feedback that reinforces the small frictions.’ And Jan Pieter Krahnen at Goethe University Frankfurt comments: ‘An example can always be constructed that confirms the statement – the question is whether it generalizes to very generic settings.’

Although expressing agreement, Franklin Allen at Imperial cautions: ‘There are complex potential trade-offs here. Frictions can prevent exports but they also prevent imports with an ambiguous net effect.’ And Patrick Honohan notes that an absence of trade frictions is rare: ‘Some cross-border frictions are usual. The almost frictionless situation in the EU is the exception – Brexit displays the result.’

Oliver Hart at Yale, who says he is uncertain, adds: ‘Under classical conditions small frictions have second order effects. So it depends on how important price rigidities, etc., are.’ And Robert Hall at Stanford disagrees with the statement in more ways than one, commenting: ‘Small frictions have small effects. And we should not be concerned with harm to firms or industries, only to people.’

Dutch disease

On the second statement about the harm that a natural resources boom can cause to other sectors of the economy (sometimes called ‘the natural resource curse’ or ‘Dutch disease’), just over two-thirds of respondents across both panels agree. Weighted by each expert’s confidence in their response, 12% of the European panel strongly agree, 58% agree, 25% are uncertain, 2% disagree, and 4% strongly disagree. Among the US panel (again weighted by each expert’s confidence in their response), 5% strongly agree, 54% agree, 37% are uncertain, and 4% disagree.

Overall, across both panels, 6% strongly agree, 62% agree, 29% are uncertain, and 2% disagree.

Among the comments, Pol Antras at Harvard, who agrees, makes explicit the link to Peter’s most cited paper, written with Max Corden: ‘This is one of Peter Neary’s great contributions to Economics, particularly exploring various channels through which it can happen. RIP.’ So too does Oliver Hart, although he opts for ‘uncertain’: ‘My reading of the classic Corden-Neary paper is that the effects can be ambiguous.’

Among those who agree or strongly agree, some explain potential mechanisms. Patrick Honohan explains: ‘Due not only to sectoral competition for labor, but also to the way natural resources tend to attract venal politicians.’ Robert Shimer at Chicago notes: A natural resource boom drives up wages and other non-tradable prices, but this doesn’t mean it is inefficient!’ And Pete Klenow suggests: ‘Such booms crowd out employment in other sectors’, adding a link to evidence from giant oil discoveries.

Ricardo Reis, who says he is uncertain – ‘ It seems to depend on the country’s circumstances, and especially on the policies adopted in response’ – also provides some references: to a survey of the natural resource curse; a study of Dutch disease in Indonesia; and another of modern America.

Many panelists comment on how the outcome from a natural resource boom depends on the policy response. Among those who agree with the statement, Jean-Pierre Danthine at Paris School of Economics concludes: ‘Although appropriate policies can be used to counter the impact.’ And Larry Samuelson says: ‘Much depends on how the resource boom is handled; we have examples of cases that have worked well and examples of disasters.’

Two others who agree with the statement mention the case of Norway, widely seen as a case that has worked well. Charles Wyplosz at the Graduate Institute, Geneva, notes: ‘Aka Dutch Disease. Unless government owns resource and invest proceeding abroad, the Norwegian way.’ And Marco Pagano at Università di Napoli Federico II says: ‘It very much depends on the economic policy response: see Norway as a counter-example to the well-known “curse of raw materials”.’

Several panelists who say they are uncertain have similar views. Franklin Allen states: ‘The outcome depends on a number of characteristics such as the size of the economy. Result may hold for small ones but maybe not large ones.’ And Jan Pieter Krahnen says: ‘It all depends whether or not the other sectors can adjust smoothly to the rise in factor prices driven by the boom in some sectors.’

Similarly, Kenneth Judd at Stanford comments: ‘Discovery of natural resources will reallocate factors of production, but no more so than other changes.’ And Daron Acemoglu notes: ‘The answer would be yes for manufacturing that does not use the resource in question as input. Otherwise, it could be positive.’

Three panelists who express uncertainty return to the role of politics and policy: Sergei Guriev at Sciences Po says: ‘The impact on other sectors depends on the quality of economic and political institutions and on policy response to the boom.’ Hilary Hoynes at Berkeley notes: ‘Whether this were true or not would depend on many underlying factors such as presence of authoritarian versus democratic rule.’ And Torsten Persson at Stockholm University comments: ‘Hinges on economic and political structure (resource curse can operate via politics). Norway may not be hit, even though Nigeria may be.’

Finally, Robert Hall disagrees with the statement: ‘Countries with net exports of natural resources enjoy net benefits from favorable shifts in the terms of trade.’ And Kjetil Storesletten at the University of Oslo strongly disagrees: ‘Manufacturing firms can benefit from a resource boom if they can provide equipment servicing resource industry. Norway provides an example.’

All comments made by the experts are in the full survey results for Europe and the US.

Romesh Vaitilingam
@econromesh
July 2021