Category: Equitablog

China’s market crash means Chinese supergrowth could have only 5 more years to run

Posted on by Brad DeLong
Mapping China s Growth Infographics on What Will China s Growth Look Like in 2020 Business Insider

Now that 90 days have passed, from the Huffington Post from Last August: China’s Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run

Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese economy. I have said–always–that Chinese supergrowth has at most ten more years to run, and more probably five or less. There will then, I have said, come a crash–in asset values and expectations if not in production and employment. After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic: its productivity rate will be little more than the 2%/year of emerging markets as a whole, catch-up and convergence to the North Atlantic growth-path norm will be slow if at all, and political risks that cause war, revolution, or merely economic stagnation rather than unexpected but very welcome booms will become the most likely sources of surprises.

I was wrong for least twenty-five years straight–the jury is still out on the period since 2005. And that makes me very hesitant, now that a crash–even if, perhaps, not the crash I was predicting–is at hand, to count China and its supergrowth miracle out.

Economic Destabilization Financial Meltdown and the Rigging of the Shanghai Stock Market Global Research Centre for Research on Globalization

A great deal of China super-growth always seemed to me to be just catch-up to the norm one would expect, given East Asian societal-organizational capabilities. China had been far depressed below that norm by the misgovernment of the Qing, the civil wars of the first half of the twentieth century, the Japanese conquest, and the manifold disasters of rule by paranoid Parkinson’s Disease-sufferer Mao Zedong. Take convergence to that East Asian societal-capability norm, the wisdom of first Deng Xiaoping, then Jiang Zemin in applying the standard Hamiltonian gaining-manufacturing-technological-capability-through-light-manufacturing-exports development strategy (albeit on a world-historical scale), and a modicum of good luck, and China seemed understandable. There thus seemed to me to be no secret Chinese institutional or developmental sauce.

Given that, I focused on how China lacked the good-and-honest-government, the societal trust, and the societal openness factors that appear to have made for full convergence to the U.S. frontier in countries from Japan and Singapore to Ireland and France. One of the few historical patterns to repeat itself with regularity over the past three centuries has been that, wherever governments are unable to make the allocation of property and contract rights stick, industrialization never reaches North Atlantic levels of productivity.

Fast economic convergence is a myth in Europe and in emerging economies

Sometimes the benefits of entrepreneurship are skimmed off by roving thieves. Sometimes economic growth stalls. Sometimes profits are skimmed by local notables, who abuse what ought to be the state’s powers for their own ends. China–in spite of all its societal and cultural advantages–had failed to make its allocation of property rights stick in any meaningful sense through the rule of law. Businesses could flourish only when they found party protectors, and powerful networks of durable groups of party protectors at that.

Another headwind for China in the future is that, as the very sharp young whippersnapper Noah Smith1 points out, the Hamiltonian manufactures-export strategy is played out, not just for poorer countries wishing to emulate China but for China in the future. Historically, the Hamiltonian strategy of moving farmers to factories and setting them to work using imported manufacturing technology is the only reliably-successful development strategy, because manufacturing technology is the only one that can be reliably imported–you buy the machines to make the products, you buy the blueprints for the products to be made, and with a few engineering coaches hired from abroad you are in business. But that requires that people outside your country buy your low-priced manufactures. And the world has reached a point at which demand for manufactured goods is no longer highly elastic. Already James Fallows2 reports on Chinese entrepreneurs lamenting how the real profits flow to the owners of scarce natural resources or the owners of brands and of design and engineering resources, leaving those who actually make the manufactured goods with only crumbs.

Greece or Chile thus seemed to me to be China’s most-likely future, and it always seemed to me it would take quite a while to get there.

Yet, so far, contrary to my expectations for more than a generation, China has hitherto kept growing and growing rapidly even without anything a North Atlantic economic historian would see as the rule of law. It has had its own system of what we might call industrial neofeudalism. Instead of property and contract rights the king’s judges will enforce, Chinese entrepreneurs have protection via their fealty to connection-groups within the party that others do not wish to cross. It is, in a strange way, almost like the libertarian fantasy in which you hire your own personal police department in a competitive market come to life. Such a system should not work: Party connection-groups should find themselves unable to referee their disputes. The evanescence of their positions should lead them into the same shortsighted rent-extraction logic that we have seen played out over and over again in Eastern Europe, sub-Saharan Africa, Southeast Asia, South Asia, and Latin America. And yet, somehow, in China, eppur si muove.

Now I do believe that after this stock market crash China is likely to have another five to ten years of very healthy growth. The party can redistribute income from the rich to the middle and the poor, and from the coasts to the interior. Mammoth demand from an enriched urban middle class and peasantry can provide business for all of China’s factories that otherwise would be selling into an export market with lower-than-expected demand elasticity. The interior can be brought up to the manufacturing productivity standards of the coast.

But that, I think, is the last trick the Chinese government can play to keep anything like Chinese supergrowth going. And after it is played, China will–unfortunately–more likely than not become another corrupt middle-income country in the middle-income relative development trap.

I have been wrong about the duration of China’s growth miracle for all of my adult life. But I am confirmed in my forecast when I read the thoughts of very sharp China perma-bull Stephen Roach3:

There are many moving parts in China’s daunting transition…. While progress on economic rebalancing is encouraging, China has put far more on its plate: simultaneous plans to modernize the financial system, reform the currency, and address excesses in equity, debt, and property markets… [plus] an aggressive anti-corruption campaign, a more muscular foreign policy, and a nationalistic revival couched in terms of the “China Dream.”… The economic-reform strategy [could be] stymied by the lack of political will in a one-party state…. History is littered with more failures than successes in pushing beyond the per capita income threshold that China has attained. The last thing China needs is to try to balance too much on the head of a pin. Its leaders need to simplify and clarify an agenda…

Therefore I once again say: China’s supergrowth has five more years to run. And, after it ebbs, China’s success at grasping the future depends not on economic growth but on political reform–the establishment of the rule of law and an open society rather than the rule of the CCP and a closed party elite–and only after successful political transition might economic growth and convergence resume.

For kids’ future, money does matter

Posted on by Bridget Ansel
(AP Photo/Sue Ogrocki)

Money may not be able to buy happiness, but a new working paper suggests that it can have significant effects on children’s mental health and personality traits—particularly for our country’s most vulnerable kids.

The study—by Randall Akee of UCLA, Emilia Simeonova of Johns Hopkins University, and Jane Costello and William Copeland of Duke University—looks at a group of child and adolescent members of the Eastern Band of Cherokee Indians using data from the Great Smoky Mountains Study of Youth. Four years into the study, a casino opened on the reservation, and the Eastern Cherokee tribal government distributed a share of the profits—about $4,000—to each adult member of the tribe annually. These families, who averaged an annual income of $22,145 before the casino opening, saw a whopping 20 percent boost in their earnings.

This income increase provided researchers with an unusual glimpse into the ways in which money can directly affect children’s outcomes—especially those already suffering from behavioral problems and poor mental health.

Researchers have established that developing certain personality traits and cognitive skills at a young age go a long way in affecting one’s future health and well-being. And poor children are much more likely to suffer from mental and physical health problems that can limit their ability to learn and navigate the world as they grow older. But many of these past studies focus on early-childhood interventions, in large part due to the fact that cognitive skills—such as memory, reasoning, perception, and intuition—are only malleable at a very early age. This begs the question: What kinds of policies might help older disadvantaged children and teenagers?

Akee and his team point out that the kinds of mental health and personality traits that are associated with positive life outcomes—such as better physical health, educational attainment, and lifetime earnings—are still flexible at this time in a child’s life. And, while other studies have looked at how participation in education or social programs affects such traits, research has yet to establish a direct connection between extra unearned cash (unrelated to a parent’s job) and a child’s behavioral health.

The authors compared adolescents who resided in households that received the extra income by age 16 to those who received it later, or not at all. And the effects were dramatic: The extra income significantly lowered behavioral and emotional disorder among the studied children and adolescents. There were also large improvements in two personality traits that social scientists have linked to long-term positive life outcomes: Conscientiousness was boosted by 42.8 percent of a standard deviation, and agreeableness by 30.6 percent.

It is not completely clear how the money brought about these changes in such a profound way, although Akee and his co-authors have some ideas. Their work found a marked change in the parents’ mental health, as well as their relationship with the child and spouse. All of these changes have strong effects on children’s well-being. Households living outside the reservation were also more likely to move to higher-income areas. Research has established that one’s neighborhood has a direct effect on childhood outcomes. The authors found that, among the small subpopulation that did move, part of the improved mental well-being was due to the better neighborhood.

This study by Akee and his team is especially important considering that one in five children in the United States now live below the federal poverty line—defined as $23,550 for a family of four in 2013. While the United States does provide government assistance to children through programs like Temporary Assistance for Needy Families, food stamps, and the Earned Income Tax Credit, these programs are tied to the work effort of the parents and can be difficult to access, sometimes imposing undue hardship on the working poor. There are some international conditional cash transfer policies and small U.S.-based experiments we can look to, which tie the benefit to health check-ups, school attendance, or other similar factors. The point, however, is that any policies that are in place are ones that center on the parent—not the child.

The study is not without its limits. For one, it looks at a single population, both culturally and geographically. And, while other studies have looked at interventions that are similar in size, they are not similar in duration—the casino benefit is a permanent change for this population. Akee and his team, however, undoubtedly give a boost to the argument that if we want to really improve children’s futures, money does matter.

Must-Read: Greg Ip: The False Promise of a Rules-Based Fed

Posted on by Brad DeLong

Must-Read: It does boggle my mind that John Taylor and Paul Ryan would take the 2004-today experience as suggesting that the Federal Reserve should be even loosely bound by any sort of policy “rule”:

Greg Ip: The False Promise of a Rules-Based Fed: “That suggests two possible outcomes…

…One, the Fed will repeatedly change the rule or deviate from it, which defeats the supposed purpose of the rule, which is for the Fed be predictable and constant. Or the Fed, to avoid invasive audits by Congress, might stick to the rule longer than it should until the economic consequences are intolerable. Stanley Fischer… once said of exchange-rate rules: ‘The only sure rule is that whatever exchange-rate system a country has, it will wish at some times that it had another one.’ Similarly, history suggests that if the Fed is forced to adopt a rule for monetary policy, it will eventually have to abandon it. The only question is how costly that process is likely to be.

Must-Read: Branko Milanovic, Peter H. Lindert, and Jeffrey G. Williamson: Pre-Industrial Inequality

Posted on by Brad DeLong

Must-Read: And the ‘winner’ for all time–in terms of success at extracting as much wealth from the workers as possible given resources, population, and technology–is Mughal India in 1750!

Branko Milanovic, Peter H. Lindert, and Jeffrey G. Williamson: Pre-Industrial Inequality: “Is inequality largely the result of the Industrial Revolution?…

…Or were pre-industrial incomes as unequal as they are today? This article infers inequality across individuals within each of the 28 pre-industrial societies, for which data were available, using what are known as social tables. It applies two new concepts: the inequality possibility frontier and the inequality extraction ratio. They compare the observed income inequality to the maximum feasible inequality that, at a given level of income, might have been ‘extracted’ by those in power. The results give new insights into the connection between inequality and economic development in the very long run.

Ye Olde Inæqualitee Shoppe Pseudoerasmus Https pseudoerasmus files wordpress com 2014 09 blwpg263 pdf

Today’s Economic History: Steve Roth: Did Money Evolve? You Might (Not) Be Surprised

Posted on by Brad DeLong

Today’s Economic History: Roth is very good on “money” defined as a unit of account.

But there are, of course, other perfectly-fine definitions of “money”: “means of payment”, “medium of exchange”, “that which you need to hold to take advantage of or avoid suffering from market disequilibrium”, “even store of value”.

To say that the definition attached to how you use the word “money” is the only correct definition and that everyone with a different definition is doing it wrong–well, that’s just doing it wrong yourself…

Steve Roth: Did Money Evolve? You Might (Not) Be Surprised: “The earliest uses of money in recorded civilization were not coins…

…or anything like them. They were tallies of credits and debits (gives and takes), assets and liabilities (rights and responsibilities, ownership and obligations), quantified in numbers. Accounting. (In technical terms: sign-value notation.)

Tally sticks go back twenty-five or thirty thousand years. More sophisticated systems emerged six to seven thousand years ago (Sumerian clay tablets and their strings-of-beads predecessors). The first coins weren’t minted until circa 700 BCE — thousands or tens of thousands of years after the invention of ‘money.’

These tally systems give us our first clue to the nature of this elusive ‘social construct’ called money: it’s an accounting construct. The earliest human recording systems we know of — proto-writing — were all used for accounting.* So the need for social accounting may even explain the invention of writing.

This ‘accounting’ invention is a human manifestation of, and mechanism for, reciprocity instincts whose origins long predate humanity. It’s an invented technique to do the counting that is at least somewhat, at least implicitly, necessary to reciprocal, tit-for-tat social relationships. It’s even been suggested that the arduous work of social accounting — keeping track of all those social relationships with all those people — may have been the primary impetus for the rapid evolutionary expansion of the human brain. ‘Money’ allowed humans to outsource some of that arduous mental recording onto tally sheets.

None of this is to suggest that explicit accounting is necessary for social relationships. That would be silly. Small tribal cultures are mostly dominated by ‘gift economies’ based on unquantified exchanges. And even in modern societies, much or most of the ‘value’ we exchange — among family, friends, and even business associates — is not accounted for explicitly or numerically. But money, by any useful definition, is so accounted for. Money simply doesn’t exist without accounting.

Coins and other pieces of physical currency are, in an important sense, an extra step removed from money itself. They’re conveniently exchangeable physical tokens of accounting relationships, allowing people to shift the tallies of rights and responsibilities without editing tally sheets. But the tally sheets, even if they are only implicit, are where the money resides.

This is of course contrary to everyday usage. A dollar bill is ‘money,’ right? But that is often true of technical terms of art. This confusion of physical tokens and other currency-like things (viz, economists’ monetary aggregates, and Wray’s ‘money things’) with money itself make it difficult or impossible to discuss money coherently.

What may surprise you: all of this historical and anthropological information and understanding is esoteric, rare knowledge among economists. It’s pretty much absent from Econ 101 teaching, and beyond. Economists’ discomfort with the discipline’s status as a true ‘social science,’ employing the methodologies and epistemological constructs of social science — their ‘physics envy’ — ironically leaves them bereft of a definition for what is arguably the most fundamental construct in their discipline. Likewise for other crucial and constantly-employed economic terms: assets, capital, savings, wealth, and others.

Now to be fair: a definition of money will never be simple and straightforward. Physicists’ definition of ‘energy’ certainly isn’t. But physicists don’t completely talk past each other when they use the word and its associated concepts. Economists do when they talk about money. Constantly.

Physicists’ definition of energy is useful because it’s part of a mutually coherent complex of other carefully defined terms and understandings — things like ‘work,’ ‘force,’ ‘inertia,’ and ‘momentum.’ Money, as a (necessarily ‘social’) accounting construct, requires a similar complex of carefully defined, associated accounting terms — all of which themselves are about social-accounting relationships.

At this point you’re probably drumming your fingers impatiently: ‘So give: what is money?’ Here, a bloodless and technical term-of-art definition:

The value of assets, as designated in a unit of account.

Which raises the obvious questions: What do you mean by ‘assets’ and ‘unit of account’? Those are the kind of associated definitions that are necessary to any useful definition of money. Hint: assets are pure accounting, balance-sheet entities, numeric representations of the value of goods (or of claims on goods, or claims on claims on…).

Must-Reads Up to Midnight on November 30, 2015

Posted on by Brad DeLong
  • Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas: Global Imbalances and Currency Wars at the ZLB
  • Willem Buiter: Transferring Robot Incomes to the People: “the scope for automation is actually greater, probably, in cerebral work than in physical work…” :: The distribution of wealth; the distribution of income; the distribution of utility–and, possibly, the distribution of eudaimonia…
  • Ricardo Hausmann: The Import of Exports: “To survive and thrive, societies need to pay special attention to those activities that produce goods and services they can sell to non-residents…” :: There is a very interesting argument made here about the export sector as the key link…
  • Ben Thompson: Selling Feelings: “Now… time and money… must… be invested in getting even closer to customers and more finely attuned to exactly why they are spending their money on you…” :: So how do we build an information-age economy in which producers have incentives to learn as much as they can about consumers to successfully anticipate them without also giving them an even bigger incentive and capability to deceive them?
  • Jonathan Moreno: Explaining the “History of Technology” Series, and Equitable Growth
  • Paul Krugman: Demand, Supply, and Macroeconomic Models: “If you came into the crisis with a broadly Hicksian view of aggregate demand you did quite well…. What hasn’t worked…is our understanding of aggregate supply…” :: A key factor Krugman omits in which standard Hicksian-inclined economists’ predictions have fallen down: the length of the short run…
  • Noah Smith: Unlearning conomics: “Right now we’re in the middle of an empirical revolution in econ, and… common theories are just not matching reality very well…” :: Noah Smith is pushing me towards thinking that Econ 1 needs to teach *a lot more than supply-and-demand plus macroeconomic externalities that can be dealt with by stabilizing monetary and maybe fiscal policy…*
  • Eric Chyn: Moved to Opportunity: The Long-Run Effect of Public Housing Demolition on Labor Market Outcomes of Children: “Displaced children are 9 percent more likely to be employed and earn 16 percent more as adults…” :: Huh. It now looks like the huge benefits that got us excited back in the “moving to opportunity” policy days may have been an underestimate…

Must-Read: Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas: Global Imbalances and Currency Wars at the ZLB

Posted on by Brad DeLong

Must-Read: Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas: Global Imbalances and Currency Wars at the ZLB: “[What are] the consequences of extremely low equilibrium real interest rates in a world…

…with integrated but heterogenous capital markets, and nominal rigidities[?]…. (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses. (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap—a phenomenon we dub the ‘reserve currency paradox’. (iii) Beggar-thy-neighbor exchange rate devaluations stimulate the domestic economy at the expense of other economies. (iv) While more price and wage flexibility exacerbates the risk of a deflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession. (v) (Safe) Public debt issuances and increases in government spending anywhere are expansionary everywhere, and more so when there is some degree of price or wage flexibility. We use our model to shed light on the evolution of global imbalances, interest rates, and exchange rates since the beginning of the global financial crisis.

Must-Read: Willem Buiter: Transferring Robot Incomes to the People

Posted on by Brad DeLong
Actor Arnold Schwarzenegger poses for photographers at a preview of the film ‘Terminator: Genisys’. (AP Photo/Jacques Brinon)

Must-Read: The distribution of wealth; the distribution of income; the distribution of utility–and, possibly, the distribution of eudaimonia, of lives worth living if we reject the hardline Benthamite pushpin-as-good-as-poetry position. For example, Milanovic, Lindert, and Williamson (2010) convincingly paint a picture in which (a) pre-industrial inequality in wealth is very large, (b) pre-industrial inequality in income is moderate, and (c) pre-industrial inequality in utility is very large indeed. I think that this is a large part of what Willem Buiter is groping towards:

Willem Buiter: Transferring Robot Incomes to the People: “I’m more an optimist on technological change than some…

…who argue that the low-hanging fruit on the Tree of Knowledge has all been plucked. That we’ve done fire, we’ve done the wheel, we’ve done horsepower, and, you know, coal, electricity, chemicals, and all we have now is the tail-end of the boring ICT revolution, robotics, artificial intelligence and biotechnology, that is just a big yawn. I think this is completely wrong….

We haven’t begun to scratch the surface yet of many of the applications of ICT, robotics, artificial intelligence, and everything that goes with it, is going to create huge social, political problems. But in terms of wealth creation, you know, it’s the ultimate thing if you do this right. If you get the distributional aspects right, and don’t turn the world into an economy where the owners of capital and a few winner-take-all entrepreneurs are with all the money and the rest starve, I think technical progress is not the issue….

It’s always true that existing jobs are wiped out in a hundred years, but it’s going to go much faster now, in twenty years time, maybe half the existing jobs in the service sector, the white collar jobs, are going to be gone. Because the scope for automation is actually greater, probably, in cerebral work than in physical work. It’s very hard to get robots to walk properly. It’s much easier to make them think really fast. So I think this is going to be the real challenge. You know, unless we blow ourselves up in religious extremism…. This is going to be the real challenge we have to face, avoid the Piketty nightmare, although he got his analysis wrong…

Is the lack of paid leave partly to blame for declining U.S. labor force participation?

Posted on by Bridget Ansel
Couple with their newborn son, by Andy Dean, veer.com<br />

While once seen as an obscure “women’s issue,” policymakers and celebrities alike are increasingly arguing that paid family leave in the United States is a necessity in the 21st century.

Many businesses agree, with everyone from Netflix to Spotify jumping on the bandwagon and providing some of their employees with paid leave. Yet these are partial, private-sector solutions that, while a good first step, do not necessarily address the national problem. A new working paper released by the Organisation for Economic Co-operation and Development suggests that the United States’ failure to implement such policies on a federal level—as opposed to the other OECD countries—is generating consequences for our economy that go far beyond a single family.

While various types of paid leave have become standard practice in almost all OECD countries, the United States is the only developed nation that does not have any legal right to take paid leave to care for a new child. Some U.S. businesses do offer paid leave as a benefit, but only 12 percent of private-sector workers are employed at such places. U.S. federal law does mandate 12 weeks of unpaid leave through the Family and Medical Leave Act, but only 60 percent of workers are eligible for this benefit because of various restrictions. And, among those who are eligible, many cannot afford to go without pay for that period of time.

For individual families, this is clearly problematic. Without the kinds of income support and subsidized child care that workers in other OECD countries rely on, many American parents are forced to go back to work too soon after the birth of their child. This has consequences for parent and child alike. Parents, especially women, are  more likely to experience poor health and depression when they return to work too soon. And poor care early in life can hurt children’s health and development, which can affect their well-being far into the future. On the other hand, as the cost of childcare continues to increase, many parents—and women in particular—find that continuing to work is not necessarily the most economically beneficial choice.

But these consequences create ripple effects that go far beyond an individual child or family. The working paper points out that as other OECD countries began implementing a suite of policies designed to help working parents over the past three decades, the United States did very little. At the same time, the United States has seen its labor force participation rank screech to a halt since 2000, with the nation dropping from 7th among 24 OECD nations to 17th today. While the aging Baby Boomer population is a major driver of the declining participation rate, the paper also points to our inability to help workers balance their home and work lives as a contributing factor.

U.S. women’s ability to continue working has suffered in particular. A study by Cornell University’s Francine D. Blau and Lawrence Kahn found that work-life policies explain about 28% of America’s declining female labor force participation rate relative to other OECD countries. This trend is not likely to reverse. In fact, the OECD predicts that, if all stays as it is, substantial labor force declines will continue for the next few decades, which could come at a considerable cost to U.S. economic performance. In contrast, the OECD found that eliminating the gender gap in workforce participation by 2025 could boost U.S. GDP per capita by 0.5 percentage points.

California, Rhode Island, and New Jersey have all implemented paid leave programs. While Rhode Island and New Jersey’s programs are fairly recent, California’s paid family leave policy has been in place for more than a decade, giving researchers a sufficient timeline to evaluate the policy’s effectiveness.

Different studies all find that California’s paid family leave program has increased the percentage of women who stay in the labor market post-birth. California’s paid leave program also seems to be good for business—or at least it does not harm it. Because the program does not directly cost employers—it is funded completely by employee contribution—it does not inflict a disproportionate burden on businesses. In fact, the great majority of California businesses reported that the policy had positive or neutral effects on employee turnover, absenteeism, and morale according to a survey done by the Center for Economic and Policy Research’s Eileen Appelbaum and the CUNY Graduate Center’s Ruth Milkman. Initial evaluations of the program in New Jersey report similar findings.

As the OECD paper points out, implementing a national paid family leave program in the United States—along with other family-friendly policies such as subsidized child care and paid sick days—could go a long way in helping more women stay in the labor force. Doing so could help offset the slowdown in the nation’s labor force participation rate, and contribute to stronger U.S. economic growth.

 

Must-Read: Ricardo Hausmann: The Import of Exports

Posted on by Brad DeLong
Photo of container stacks and port cranes by Andrey Kuzmin, veer.com

Must-Read: There is an interesting argument to be made here about how the speed of innovation in a sector is related to the extent of the market and thus of potential competition. And there is a very interesting argument made here about the export sector as the key link:

Ricardo Hausmann: The Import of Exports: “To pay for what they want from out-of-towners…

…they must sell them some of the things that they do know how to make…. The goods and services that a place can sell to non-residents have a disproportionate impact on its quality of life–and even its viability. A mining town becomes a ghost town when the mine closes, because the grocery store, the pharmacy, and the movie theater no longer have the capacity to buy the ‘imported’ food, medicine, and films they need. In contrast to non-tradable activities, a place’s export activities need to be pretty good to convince out-of-town customers–who have ample other options–to buy…. The higher the productivity and the quality of export activities, the higher the wages they can pay and still remain competitive….

To survive and thrive, societies need to pay special attention to those activities that produce goods and services they can sell to non-residents. Indeed, the need to act on new export opportunities and remove obstacles to success is probably the central lesson from the East Asian and Irish growth miracles.
Non-tradable activities are akin to a country’s sports leagues: different people like different teams. Those engaged in tradable activities are like the national team: we should all root for them–and organize ourselves to make sure they succeed.