USA as Third World

Over the last thirty or so years the US has gone from economic preeminence to being a middle-tier third world country that has a few economic bright spots, but also many basic deficiencies.  As someone who has traveled quite a bit in Europe and Asia it seems like a fair observation, but I have found some resistance among American friends to this idea -- although East Asian and European acquaintances generally agree with the view that the US is a middling third world country. This is an important (if frequently implicit) debate because understanding how far the US has fallen, while very painful for Americans, is a necessary first step if Americans are to generate the national consensus necessary for implementing needed economic reforms.

What evidence is there that the US has fallen from first world status? Among other deficiencies (the absurd health care and higher education systems come to mind), the US has virtually no system of high speed rail, an antiquated electrical grid that frequently fails in inclement weather, and highways that are universally unlit, an oddity not found in East Asia or Europe. Almost all roads, and even most interstate highways are potholed. The subway systems in the major cities, San Franciso, New York, Washington and Chicago look grungy and old fashioned. As embarrassing as US infrastructure is today, it will continue to deteriorate into the indefinite future, given that infrastructure funding has fallen to historically low levels: as a share of GDP investment in infrastructure is about a third what the US now spends on defense. China spends more than four times as much and Europe spends more than twice as much. Buildings in US cities mostly look dilapidated and there are large populations of homeless people (at least 650,000) and large numbers of people forced to live in run down shacks and trailer parks (1.4 million US families survive on $2 or less a day).This is an admittedly grim assessment, but it is one that is shared by many foreign and American observers, and was the focus of a front page article in the German magazine Der Spiegel in November 2012. As Der Spiegel's German writers observed in the wake of Hurricane Sandy:

"The power lines in Brooklyn and Queens, on Long Island and in New Jersey, in one of the world's largest metropolitan areas, are not underground, but are still installed along a fragile and confusing above-ground network supported by utility poles, the way they are in developing countries. (emphasis added)"

Comparing Subways: Shanghai versus New York

Shanghai Subway (Left) versus New York (Right) in 2012. Notice the marble, and bright lighting in Shanghai and the plexiglass which protects passengers. This difference is a matter of life and death. In New York City, passengers may be pushed (or throw themselves) to their death on the exposed subway tracks.

Because these are just general impressions, I decided to also look for harder statistical data to see if these impressions might be justified. In terms of high speed rail, the US accounts for a little over 2% of the world total and is far, far behind its aspirational rivals in Europe and East Asia, and (surprisingly) even lags behind countries not historically viewed as US economic peers:

Kilometers of High Speed Rail
China: 6,403 (+4,234 km under construction)
Japan: 2,664 (+424 km under construction)
France: 2,407  (+757 km under construction)
Germany: 1,334 (+428 km under construction)
Saudi Arabia: 550 (under construction)
Turkey: 447 (+300 km. under construction)
Morocco: 200 (under construction)
USA: 362 (+0 km. under construction)

Source: International Union of Railways

In terms of per capita industrial production, the US also appears to be a middle-tier developing country. Though the US is vastly more industrialized than the world's poorest countries (Haiti, Guatemala, Burkina Faso) there is also an extraordinary gap between the US and the world's industrial leaders. As the graphs included in this post show, in terms of per person auto, and especially, steel, production, the advanced countries of East Asia (Japan, South Korea, Taiwan, China) and central Europe (Germany), are in a league of their own.


The US noses ahead of desperately poor developing countries such as Indonesia and India, but lags far behind upper-tier developing world countries like Iran and Mexico. Russians can take special satisfaction in besting the US in both categories by a considerable amount, even though many Americans continue to demonstrate undisguised condescension towards Russia.

An honest assessment of how far the US has fallen is a necessary (if painful) prerequisite to recognizing that US economic policies have largely failed. We should remember that the worst business failures are executives who take world champion companies and destroy them. The same can be said for economic ideologies. US economic policy can thus be viewed as a more dramatic failure than the policies pursued by countries that were poor on independence and have remained poor (most of Sub-Saharan Africa and many parts of Asia and Central America). Whatever the US has been doing over the last generation (and opinions on how to characterize US policy differ) we can agree that the policies of the last thirty or so years have transformed the US from the world's undisputed economic leader into a middling third world country.

A 180-degree course correction is needed. The sooner the better.

Not the United States.

Sources:

International Organization of Motor Vehicle Manufacturers
International Union of Railways
World Bank Development Indicators
World Steel Association

American Society of Civil Engineers. 2012. Report Card for America's Infrastructure. 
http://www.infrastructurereportcard.org/ 

Clyde Prestowitz. May 24, 2011. "First to Third World in One Lifetime." Foreign Policy  http://prestowitz.foreignpolicy.com/posts/2011/05/24/first_to_third_world_in_one_lifetime

Der Spiegel. November 5, 2012. "Divided States of America: Notes on the Decline of a Great Nation." http://www.spiegel.de/international/world/divided-states-of-america-notes-on-the-decline-of-a-great-nation-a-865295.html

Gabriel Thompson. December 13, 2012. "Could you survive on $2 a day?" Mother Jones.
http://www.motherjones.com/politics/2012/12/extreme-poverty-unemployment-recession-economy-fresno

Protectionism & the Chinese Economic Miracle

It is sometimes argued that the success of East Asia results from an embrace of neoliberal laissez faire economics. Analysts point to the high ratio of imports and exports to the size of East Asian economies as evidence that these countries were extraordinarily "open" to the global economy and thus able to rush past the countries of Sub-Saharan Africa and Latin America which were generally wealthier, in per capita income terms, fifty years ago than all of the East Asian economies.

This argument cannot be sustained by the historical record. Most of the economies of East Asia have protected their domestic markets. State-sponsored or state-owned companies in these countries then used the profits (economic rents) generated from the domestic markets to subsidize manufactured exports to the West, and most importantly to the United States. In this way, these countries were able to swiftly move up the economic and technological ladder, shifting into high-return activities characterized by enormously high  technological and economic barriers to entry. In a classic article from 1993, Robert Wade explored this pattern in the cases of South Korea and Taiwan. [1]

This pattern holds not only for South Korea and Taiwan, but also the historically all-important case of China. China retained high import tariffs well into the 1990's (at least fifteen years into the "Reform and Opening" period) and even in 2012 Chinese tariffs for most categories of industrial goods range from three to ten times the levels of US tariffs, even though China is considerably more industrialized than the United States, and is in important respects more developed than its largest export market.

The first graph below shows average Chinese tariff rates for 1992. In the second graph, I compare Chinese average tariffs in 2012 with comparable US averages by industrial product category.

[1]  Robert Wade. 1993. "Managing Trade: Taiwan and South Korea as Challenges to Economics and Political Science." Comparative Politics. 25(2): 147-167.

Urban Bias & the US trade deficit in fruits and vegetables

Beginning in the 1970's, and accelerating in the 1980's, the sub-field of development economics in Anglophone universities was taken over by neo-classical economists. One major element in the neo-classical economists' critique of the earlier perspective, which emphasized industrialization and society-wide dynamic structural change, focused on the purportedly anti-agrarian policies, or "urban bias" that resulted from industrial policies. This attack lent the neo-classical critique a populist flavor and positioned them as sympathizers of downtrodden peasants in Africa and Latin America.

Prominent contributions in this literature included work by economist Michael Lipton and Harvard University political science professor Robert Bates. Urban bias was a common element in a number of studies produced by the World Bank after Ann Krueger took over and expelled developmentalists and those supportive of industrial policy (including a former professor of mine, Swarthmore's Larry Westphal, a Korea expert).

The basic argument of the urban-bias literature was that developing world governments had erred in following policies that reportedly reduced the incentive to invest in commercial agriculture. Farmers were taxed heavily so as to provide capital for urban industrialization, and governments intervened to lower the prices of food products to satisfy urban consumers. Having supposedly demonstrated the urban bias of Third World governments, scholars such as Robert Bates then developed a conceptually subtle argument rooted in the political incentives faced by these governments. Bates argued these governments favored urban areas because they were more vulnerable to threats from politically mobilized urbanites (particularly in capital cities) than they were from politically demobilized rural areas.

A number of scholars have challenged this analysis. T.J. Byres offered an early critique in the 1970's, challenging the empirical claim that third world governments discriminated against commercial agriculture. Byres argued that the urban bias thesis was rooted in a fundamentally flawed understanding of the nature of development. The urban bias critique is based on general equilibrium models of the economy, and emphasizes static allocative efficiencies. In contrast, development economics historically was rooted in earlier models that emphasize structural change and the shifting of surplus labor (ie the unemployed) from rural areas into higher productivity activities, largely in manufacturing. Industrial and manufacturing sectors tend to be more dynamic over time and are the engine of economy-wide technological progress. More recent empirical work by Dani Rodrik suggests that this earlier understanding is in fact correct. Rodrik has found that high growth economies in East Asia, and a few standout economies of Latin America (Brazil, Argentina, Mexico), have benefited from a shift of labor from low productivity agricultural and informal activities into the dynamic and fast growing industrial sector.

Massoud Karshenas has added to Byres earlier critique by noting that in much of the empirical literature on urban bias, the degree of urban bias was heavily influenced by the degree of currency overvaluation. In a detailed examination of a World Bank study on South Korea, Karshenas found that the degree of currency overvaluation closely follows World Bank economists' estimation of urban bias, which in Korea's case was high in the early and mid-1960's and then fell off dramatically. Currency overvaluation is an extremely poor and misleading proxy for urban bias, because maintaining an overvalued currency simultaneously harms all tradable goods sectors, including manufacturing in addition to agriculture.

This, strangely enough, leads us back to the old bugbear of neoclassical economics: mercantilism. Dani Rodrik, an economist based at Harvard University, has suggested that one of the fastest ways for poor countries to become wealthier is to foster economy-wide structural change. As a practical matter, the easiest way to do this is to maintain a dramatically undervalued currency for several decades, as the successful industrializers in East Asia have done. An extraordinarily undervalued currency makes all tradable good -- both agricultural and industrial -- hyper competitive in international markets. It functions according to mercantilist precepts as a tax on imported products and a subsidy to exports simultaneously.  This helps to explain anamolies such as why the US runs a trade deficit in fruits and vegetables with China, a country with very little water, and very little arable land that is also located four to seven thousand miles away from most US consumers. The undervalued Chinese currency equally subsidizes manufactured goods such as computers, clothing and furniture exported to the US as well as apples, tomatoes and fruit juice. Thus, a water and land rich economy, the United States, has a large trade deficit in fruits and vegetables with a country that has very little water and very little arable land.

Sources:

T. J. Byres. 1979. "Of Neo-Populist Pipe-Dreams: Daedalus in the Third World and the Myth of Urban Bias." The Journal of Peasant Studies. 6(2): 210-244.

Massoud Karshenas. 1996. "Dynamic economies and the critique of urban bias." The Journal of Peasant Studies. 24(1-2): 60-102.

America's informal economy rising

One of the features of many third world economies is that a large percentage of the labor force is involved in what economists call the "informal" sector. These are individuals, frequently migrants to urban areas, that do not have formal jobs, but instead work on the streets carrying out various menial tasks, such as cleaning car windows, selling cigarettes or candy, or hawking newspapers. In countries without a welfare system and with tiny industrial sectors, these individuals survive - precariously - by juggling a variety of menial jobs or becoming involved in criminal activities.

Unfortunately, as the US has deindustrialized and formal sector employment has shrunk as a percentage of the total labor force (there are fewer jobs in the US in 2012 than twelve years ago) many people are turning to the informal sector. A writer with Businessweek recently wrote up his experience working in the informal sector in San Francisco, where online sites such as Taskrabbit helped him locate a variety of extremely low paid short term jobs.

Unless the US reindustrializes, tragically, this is the future that awaits many millions of formerly middle class Americans.

Meanwhile on the Pampas....

Argentina is booming! The laggard of the Western Hemisphere has now become one of the world's high growth milagros! According to the World Bank, in 2011, Argentina's economy expanded by 8.9% --- in 2010 Argentina grew by 9.2%. Since 2003 average growth rates have ranged between 6.8 to 9.2% year after year. The global financial crisis did cause growth to dip to 0.9% in the annus horribulus of 2009, but for almost a decade Argentine growth rates have rivaled those of China and India.

Argentina's growth has been led by manufacturing, and Argentina is the most industrialized nation in the Western Hemisphere in terms of the share of manufacturing in the total size of the economy. As the chart below shows, after the dramatic economic crisis of 2001-2002, manufacturing rebounded sharply. Average annual growth in manufacturing value added since 2002 has been extremely robust. Of course, this begs the question: why has manufacturing in Argentina grown so fast?

A lot of credit is due old-fashioned mercantilism. As today's WTO complaint by the US makes clear, Buenos Aires has been bringing extraordinary pressure on foreign companies who sell to Argentina to also expand industrial production within the country. In addition, Argentina's currency has become much more competitive over the last decade. In the 1990's Argentina dollarized its economy, and committed itself to an exceedingly overvalued peso-dollar exchange rate of 1:1. Since this policy was abandoned in 2002, Argentina's currency has lost 75% of its value against the dollar. In 2011, one dollar bought roughly 4 pesos, compared to just 1 peso in 2001. To get a sense for the magnitude of this change, this is the equivalent of shifting from the current US dollar to Chinese yuan exchange rate of roughly $1 = 6.5 yuan to an exchange rate of $1 = 1.6 yuan. In the US case, were the US dollar to lose 75% of its value against the yuan, the price of Chinese imports to the US would quadruple overnight and the US would instantaneously become a much, much more competitive location for manufacturing.

Postindustrial America: Cleveland, Ohio

Postindustrial America: Baltimore, Maryland