Climate economics (UG): International environmental agreements in theory

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Why the Romans profited from their empire but the British did not from India

The British did not develop India because that would made it a worthwhile prize for another to steal. Rome face no serious rivals so we could take a long-term view on investing in colonies.

A prosperous colony is an attractive colony to conquer so imperial army and navy resources would have deployed to defending it. Prosperous locals and locally recruited troops can switch loyalties.

An empire full of prosperous colonies makes you an attractive target for other European powers to gang up on and divide the spoils. This may explain why some colonial powers had mixed feelings about developing their colonies. Robert Lucas observed that:

Stagnation at income levels slightly above subsistence is the state of traditional agricultural societies anywhere and any time. But neither did the modern imperialisms—the British included—alter or improve incomes for more than small elites and some European settlers and administrators…

The main economic event of the late 20th century was this diffusion of the Industrial Revolution to non-European societies (begun in Japan half a century earlier), a diffusion that will surely continue throughout the 21st century. A central question is why it did not begin much earlier, during the colonial period, at the same time that the Industrial Revolution was spreading throughout Europe.

France lost its once vast North American colonies through wars. Many colonies changed hands after the countless European wars as part of peace settlements.

Australia was first colonised in 1788 as a penal colony. Very expensive to do, but the British did fill-up the only valuable part – Sydney harbour – with 60,000 mainly riffraff and low life.

This penal colony for a number of decades made the only valuable part of Australia more unattractive to other European powers to conquer. Doug Allen explains:

In the case of Australia, the hypothesis might appear silly. How much reduction in the first-best value to a continent can come from 60,000 convicts?

However, one must keep in mind that the only value of Australia at the end of the eighteenth century was from Sydney Harbour, Norfolk Island, and a few other strategic locations.

On these margins, the convicts could lower the value considerably … After the War of 1812 Britain realized the strategic significance of Bermuda and subsequently established a penal colony there.

Deirdre McCloskey pointed out that by the middle of the 19th century, British traded with India with few opportunities for exploitation. What was the price of that?

The cost of protecting the Empire devolved almost entirely on the British people. (A century earlier the British had likewise paid for the defense of the first empire, in what is now the United States; the colonials refused to pay as little as a small tax on tea for imperial defense.)

British taxpayers 1877-1948 paid for the half of naval expenditure that was for imperial defense, a by no means negligible part of total British national income each year. They paid for the Boer War. They paid for the imperial portions of World Wars I and especially II. They paid for protection of Jamaican sugar in the 18th century and protection for British engineering firms in India in the 19th. They paid and paid and paid.

What were the vaunted benefits to the British people? Essentially nothing of material worth. Bananas on their kitchen tables that they would have got anyway by free trade. Employment for unemployable twits from minor public schools. The joy of seeing a quarter of the land area on world maps and globes printed in red. Economically, it did not matter. Public education mattered a great deal more to British economic growth, as did a tradition of industrial and financial innovation, and a free society in which to prosper…

Rich countries are rich mainly because of what they do at home, not because of foreign trade, foreign investment, foreign empire, past or present.

 

The Dutch disease for the benefit of #GarethMorgan @stevenljoyce

I am putting in a Official Information Act request to see if anyone advise ministers that a export promotion target results in a matching increase in imports along with a large appreciation in the New Zealand dollar. Did New Zealand dodge the Dutch disease from this foolhardy export promotion policy? The Dutch Disease story is one of sectoral shifts.

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In the 1960s, with fixed exchange rates under the Bretton Woods system, the Netherlands discovered off-shore natural gas. As natural gas was extracted, it increased domestic income and spending. Investment was redirected toward the natural gas sector. Dutch wages and prices began to rise gradually. The Dutch guilder became overvalued in real terms, their industrial products became uncompetitive, and the manufacturing sector shrunk. This phenomenon of de-industrialization in the presence of rich natural resources was called the Dutch disease. They got natural gas but lost manufacturing.

In the late 1970s and early 80s, the UK experienced similar de-industrialization under a floating exchange rate regime. They discovered and exploited the North Sea oil fields. Since the global oil price was rising, the UK was expected to earn a great amount of foreign exchange in the future. But even before these earnings were realized, the British pound appreciated suddenly in both nominal and real terms. This damaged the British manufacturing sector.

Source: MF model – float

If there is an increasing demand for New Zealand exports if the Business Growth Agenda target of increasing New Zealand exports was successful, there is an increase in demand for New Zealand dollars to pay for these exports. This will result in an appreciation of the New Zealand dollar making imports cheaper. This will switch demand for New Zealand competing industries to these imports.

This process of currency appreciation and expenditure switching will continue until export match exports again. There is nothing wrong with an export boom as long as it is based on comparative advantage rather than subsidies.