I don’t know anything about the particular case of net production. I think that the general argument against aid is similar to the typical argument for protectionism, which I think is something like:
Local production creates local infrastructure, know-how, human capital, etc.
Over the long run this benefits the region much more than it benefits the producers or consumers themselves.
So the state has reason to subsidize local production / tax imports.
If you have usual econ 101 models (including rational expectations), then variability itself doesn’t cause any trouble, the only problem is from these positive externalities. These externalities could be pretty big, it’s plausible to me that they are much larger than the direct benefits to producers and consumers.
I am skeptical about armchair Econ-101 reasoning unless it is also supported by empirical data. Many things can go wrong. (Also, it has a flavor of “map over territory”.) For example:
The models are based on some assumptions, which is necessary to create models, but in real life the assumptions may be wrong so much that it changes the outcome. The players are supposed to be 100% rational and all-knowing; the transactions are supposed to be completely friction-less; it is assumed that the market is the only game in town. So when this perfect market notices that e.g. there is an opportunity to sell more food, -- POOF! -- and there is instantly a new farm with food to sell. In reality, people may be slow to notice, risk-averse in face of uncertainty, they may be tons of bribes or paperwork necessary to start a new farm, growing the food may require a lot of time, and if too many food producers happen to belong to a minority ethnicity it might result in their genocide. When Econ 101 says “there shall be a balance”, it usually does not specify how long do we have to wait for its coming: days, weeks, years, or centuries? (“The market can stay irrational longer than you can stay solvent.” In case of Africa, longer than you and your clan can survive.)
It is easy to notice some relevant forces, and miss others. (The archetypal example.)
Seems to me that some armchair conclusions can be weakened or even reverted simply by reasoning “one level higher”. Is increasing human capital a good thing? Sounds uncontroversial, ceteris paribus, but suppose I wave a magical wand and every African magically acquires a PhD in anti-malaria net making. I would still suppose they would have a problem to feed their families. And I wouldn’t be too surprised to learn afterwards that there are still not enough anti-malaria nets produced.
Sorry for providing a fully general counter-argument. But this is exactly my point: with enough sophistication, you can make Econ-101 arguments either way. I have already seen a clever Econ-101 argument against the anti-malaria nets. What I need is a reality check.
I’m confused: why doesn’t variability cause any trouble in the standard models? It seems that if producers are risk-averse, it results in less production than otherwise.
Uncertainty about future aid introduces a cost, and certainly recipients will be better off if aid is predictable.
But if there were no externalities from production, then I think the presence of variable aid still always makes you better off on average than no aid. Worst case, you need to invest in net-producing capacity anyway (in case aid disappears), which you can finance by charging higher prices if free nets disappear.
The main problem with that is that if aid disappears, there will be a wealth transfer from net consumers to net producers. Given risk aversion, that stochastic transfer is bad for everyone. So you’d either want to insure against aid variability, or purchase an option on nets in advance. If you can’t do either of those things but nets can be stored, then you can literally manufacture the nets in advance and sell them to people who are concerned that net prices may go up, and that’s still a Pareto improvement. If you can’t do that either, then you could lose, but realistically I think rational expectations is the weaker link here :)
Does the “typical argument for protectionism” you cite claim that protectionist policy increases the total amount of local production (creating a steady-state trade surplus)? Or does it merely shift local production from comparatively-advantaged-to-produce-locally goods to comparatively-advantaged-to-import ones (hopefully ones with greater externalities to local production)?
There’s a relevance to the anti-aid argument: The first-order effect of steady-state aid is to create the effect of a steady-state trade deficit on production without an effect on the current account. If the total externalities to local production are larger than the consumer value of goods, then this effects a welfare transfer from the aid recipient to the aid sender.
But the general-equilibrium effect is a shift of the recipient’s local production away from the received goods towards the marginally-efficient goods. If the marginally-efficient goods have sufficiently greater externalities to local production than the received goods, then this might be a net win. (Where “sufficiently” here depends on elasticities of production and consumption.)
I don’t know anything about the particular case of net production. I think that the general argument against aid is similar to the typical argument for protectionism, which I think is something like:
Local production creates local infrastructure, know-how, human capital, etc.
Over the long run this benefits the region much more than it benefits the producers or consumers themselves.
So the state has reason to subsidize local production / tax imports.
If you have usual econ 101 models (including rational expectations), then variability itself doesn’t cause any trouble, the only problem is from these positive externalities. These externalities could be pretty big, it’s plausible to me that they are much larger than the direct benefits to producers and consumers.
I am skeptical about armchair Econ-101 reasoning unless it is also supported by empirical data. Many things can go wrong. (Also, it has a flavor of “map over territory”.) For example:
The models are based on some assumptions, which is necessary to create models, but in real life the assumptions may be wrong so much that it changes the outcome. The players are supposed to be 100% rational and all-knowing; the transactions are supposed to be completely friction-less; it is assumed that the market is the only game in town. So when this perfect market notices that e.g. there is an opportunity to sell more food, -- POOF! -- and there is instantly a new farm with food to sell. In reality, people may be slow to notice, risk-averse in face of uncertainty, they may be tons of bribes or paperwork necessary to start a new farm, growing the food may require a lot of time, and if too many food producers happen to belong to a minority ethnicity it might result in their genocide. When Econ 101 says “there shall be a balance”, it usually does not specify how long do we have to wait for its coming: days, weeks, years, or centuries? (“The market can stay irrational longer than you can stay solvent.” In case of Africa, longer than you and your clan can survive.)
It is easy to notice some relevant forces, and miss others. (The archetypal example.)
Seems to me that some armchair conclusions can be weakened or even reverted simply by reasoning “one level higher”. Is increasing human capital a good thing? Sounds uncontroversial, ceteris paribus, but suppose I wave a magical wand and every African magically acquires a PhD in anti-malaria net making. I would still suppose they would have a problem to feed their families. And I wouldn’t be too surprised to learn afterwards that there are still not enough anti-malaria nets produced.
Sorry for providing a fully general counter-argument. But this is exactly my point: with enough sophistication, you can make Econ-101 arguments either way. I have already seen a clever Econ-101 argument against the anti-malaria nets. What I need is a reality check.
I’m confused: why doesn’t variability cause any trouble in the standard models? It seems that if producers are risk-averse, it results in less production than otherwise.
Uncertainty about future aid introduces a cost, and certainly recipients will be better off if aid is predictable.
But if there were no externalities from production, then I think the presence of variable aid still always makes you better off on average than no aid. Worst case, you need to invest in net-producing capacity anyway (in case aid disappears), which you can finance by charging higher prices if free nets disappear.
The main problem with that is that if aid disappears, there will be a wealth transfer from net consumers to net producers. Given risk aversion, that stochastic transfer is bad for everyone. So you’d either want to insure against aid variability, or purchase an option on nets in advance. If you can’t do either of those things but nets can be stored, then you can literally manufacture the nets in advance and sell them to people who are concerned that net prices may go up, and that’s still a Pareto improvement. If you can’t do that either, then you could lose, but realistically I think rational expectations is the weaker link here :)
Seems possible, though malaria nets seems like such a niche industry that it wouldn’t result in much additional human or infrastructural capital
Does the “typical argument for protectionism” you cite claim that protectionist policy increases the total amount of local production (creating a steady-state trade surplus)? Or does it merely shift local production from comparatively-advantaged-to-produce-locally goods to comparatively-advantaged-to-import ones (hopefully ones with greater externalities to local production)?
There’s a relevance to the anti-aid argument: The first-order effect of steady-state aid is to create the effect of a steady-state trade deficit on production without an effect on the current account. If the total externalities to local production are larger than the consumer value of goods, then this effects a welfare transfer from the aid recipient to the aid sender.
But the general-equilibrium effect is a shift of the recipient’s local production away from the received goods towards the marginally-efficient goods. If the marginally-efficient goods have sufficiently greater externalities to local production than the received goods, then this might be a net win. (Where “sufficiently” here depends on elasticities of production and consumption.)