International economics pearson series in economics 7th edition ebook pdf version

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Contents

v

International Economics James Gerber San Diego State University

SEVENTH EDITION

New York, NY

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For Monica and Elizabeth.

Vice President, Business Publishing: Donna Battista Director of Portfolio Management: Adrienne D’Ambrosio Director, Courseware Portfolio Management: Ashley Dodge Editorial Assistant: Michelle Zeng Senior Sponsoring Editor: Neeraj Bhalla Vice President, Product Marketing: Roxanne McCarley Director of Strategic Marketing: Brad Parkins Strategic Marketing Manager: Deborah Strickland Product Marketer: Tricia Murphy Field Marketing Manager: Ramona Elmer Product Marketing Assistant: Jessica Quazza Vice President, Production and Digital Studio, Arts and Business: Etain O’Dea Director of Production, Business: Jeff Holcomb Managing Producer, Business: Alison Kalil

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Acknowledgments of third-party content appear on the appropriate page within the text -OR- on page xxi, which constitutes an extension of this copyright page.

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Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only. Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors.

Library of Congress Cataloging-in-Publication Data Names: Gerber, James, author.

Title: International economics / James Gerber, San Diego State University.

Description: Seventh edition. | Boston: Pearson Education, [2018] Identifiers: LCCN 2016042070| ISBN 9780134472096 | ISBN 0134472098 Subjects: LCSH: International economic relations. | International economic integration. | International trade. | Commercial policy. | United States—Foreign economic relations.

Classification: LCC HF1359 .G474 2018 | DDC 337—dc23 LC record available at https://lccn.loc.gov/2016042070

10 9 8 7 6 5 4 3 2 1

ISBN 10: 0-13-447209-8 ISBN 13: 978-0-13-447209-6

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Brief Contents Preface

xvii

part 1

Introduction and Institutions

1

Chapter 1 Chapter 2

An Introduction to the World Economy International Economic Institutions Since World War II

2 17

Part 2

International Trade

41

Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8

Comparative Advantage and the Gains from Trade 42 Comparative Advantage and Factor Endowments 65 Beyond Comparative Advantage 94 The Theory of Tariffs and Quotas 116 Commercial Policy 138 International Trade and Labor and Environmental Standards 158

part 3

International Finance

183

Chapter 9 Chapter 10 Chapter 11 Chapter 12

Trade and the Balance of Payments Exchange Rates and Exchange Rate Systems An Introduction to Open Economy Macroeconomics International Financial Crises

184 214 250 276

part 4 Regional Issues in the Global Economy Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17

307

The United States in the World Economy The European Union: Many Markets into One Trade and Policy Reform in Latin America Export-Oriented Growth in East Asia China and India in the World Economy

308 334 365 392 421

Glossary Index

447 459

Suggested Readings are available at www.pearsonhighered.com vii

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CONTENTS Preface

PART 1 Chapter 1

xvii

Introduction and Institutions

An Introduction to the World Economy

Introduction: International Economic Integration Elements of International E­ conomic Integration

1 2 2

Vocabulary 15 • Study Questions 15

3

The Growth of World Trade 4 Capital and Labor Mobility 6 Features of Contemporary International Economic Relations 8 Trade and Economic Growth 10

Twelve Themes in International Economics

Capital Flows and the Debt of Developing Countries (Chapters 2, 9, and 12) 14 Latin America and the World Economy (Chapter 15) 14 Export-Led Growth in East Asia (Chapter 16) 14 China and India in the World Economy (Chapter 17) 15

11

The Gains from Trade and New Trade Theory (Chapters 3, 4, and 5) 11 Wages, Jobs, and Protection (Chapters 3, 6, 7, and 8) 11 Trade Deficits (Chapters 9, 11, and 12) 12 Regional Trade Agreements (Chapters 2, 13, and 14) 12 The Resolution of Trade Conflicts (Chapters 2, 7, and 8) 12 The Role of International Institutions (Chapters 2, 8, and 12) 13 Exchange Rates and the Macroeconomy (Chapters 10 and 11) 13 Financial Crises and Global Contagion (Chapter 12) 13

Chapter 2

International Economic Institutions Since World War II

Introduction: International Institutions and Issues Since World War II International Institutions A Taxonomy of International Economic Institutions

The Imf, the World Bank, and the Wto The IMF and World Bank The GATT, the Uruguay Round, and the WTO CASE STUDY: The GATT Rounds

Regional Trade Agreements Five Types of Regional Trade Agreements CASE STUDY: Prominent Regional Trade Agreements Regional Trade Agreements and the WTO For and Against RTAs

17 17 17 18

19 19 20 22

23 23 24 26 27 ix

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x

Contents

The Role of International Economic Institutions

CASE STUDY: Changing Comparative

28

The Definition of Public Goods Maintaining Order and Reducing Uncertainty CASE STUDY: Bretton Woods

29

Criticism of International Institutions

33

Sovereignty and Transparency Ideology Implementation and Adjustment Costs CASE STUDY: China’s alternative to the IMF and World Bank: The AIIB

33 34

29 31

35

Chapter 3

41 42

Adam Smith and the Attack on Economic Nationalism 42 A Simple Model of Production and Trade 44 Absolute Productivity Advantage and the Gains from Trade 44 CASE STUDY: Gains from Trade in Nineteenth-Century Japan 46

Comparative Productivity Advantage and the Gains from Trade The Production Possibilities Curve Relative Prices The Consumption Possibilities Curve The Gains from Trade Domestic Prices and the Trade Price

47 48 49 49 50 52

Absolute and Comparative Productivity Advantage Contrasted 53 Gains from Trade with No Absolute Advantage 54

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55

57 58

CASE STUDY: Losing Comparative

Advantage

60

Summary 62 • Vocabulary 62 • Study Questions 63

Comparative Advantage and Factor Endowments

Introduction: The Determinants of Comparative Advantage Modern Trade Theory

Comparative Advantage and the Gains from Trade 42

Introduction: The Gains from Trade

Comparative Advantage and “Competitiveness” Economic Restructuring

Chapter 4 36

Summary 37 • Vocabulary 38 • Study Questions 39

PART 2 International Trade

Advantage in the Republic of Korea, 1960–2010

The HO Trade Model Gains from Trade in the HO Model

Trade and Income Distribution

65 65 66 66 67

70

The Stolper-Samuelson Theorem 71 The Specific Factors Model 73 CASE STUDY: Comparative Advantage in a Single Natural Resource 75

Empirical Tests of the Theory of Comparative Advantage Extension of the Ho Model The Product Cycle CASE STUDY: United States–China Trade Foreign Trade versus Foreign Investment Off-Shoring and Outsourcing CASE STUDY: Off-Shoring by U.S. Multinational Corporations Migration and Trade

76 77 78 80 81 83 84 85

The Impact of Trade on Wages and Jobs 87 CASE STUDY: Do Trade Statistics

Give a Distorted Picture of Trade Relations? The Case of the iPhone 3G

89

Summary 90 • Vocabulary 91 • Study Questions 92

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Contents

Chapter 5

Beyond Comparative Advantage

Introduction: More Reasons to Trade Intraindustry Trade

94 94 95

Characteristics of Intraindustry Trade 96 The Gains from Intraindustry Trade 98 CASE STUDY: United States and Canada Trade 100

Trade and Geography

101

Geography, Transportation Costs, and Internal Economics of Scale 101 CASE STUDY: The Shifting Geography of Mexico’s Manufacturing 102 External Economies of Scale 103 Trade and External Economies 104

Industrial Policy Industrial Policies and Market Failure Industrial Policy Tools CASE STUDY: Clean Energy and Industrial Policy Problems with Industrial Policies CASE STUDY: Do the WTO Rules Against Industrial Policies Hurt ­Developing Countries?

TRIMs Agreement SCM Agreement TRIPS Agreement

105 106 108 109 110

111 112 112 113

Summary 113 • Vocabulary 114 • Study Questions 114

The Theory of Tariffs and Quotas

116

Introduction: Tariffs and Quotas

116

Chapter 6

Analysis of a Tariff Consumer and Producer Surplus Prices, Output, and Consumption Resource Allocation and Income Distribution CASE STUDY: A Comparison of Tariff Rates Other Potential Costs The Large Country Case

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116 117 118 120 122 124 125

Effective Versus Nominal Rates of Protection CASE STUDY: The Uruguay and Doha Rounds

Analysis of Quotas Types of Quotas The Effect on the Profits of Foreign Producers Hidden Forms of Protection CASE STUDY: Intellectual Property Rights and Trade

xi

126 127

129 130 130 132 133

Summary 135 • Vocabulary 135 • Study Questions 136

Chapter 7 Commercial Policy Introduction: Commercial Policy, Tariffs, and Arguments for Protection Tariff Rates in the World’s Major Traders The Costs of Protectionism

138

The Logic of Collective Action CASE STUDY: Agricultural Subsidies

142

Why Nations Protect Their Industries

145

138 139 141 143

Revenue 145 The Labor Argument 146 The Infant Industry Argument 147 The National Security Argument 148 The Cultural Protection Argument 148 The Retaliation Argument 148 CASE STUDY: Traditional Knowledge and Intellectual Property 149

The Politics of Protection in the United States Antidumping Duties Countervailing Duties Escape Clause Relief Section 301 and Special 301 CASE STUDY: Economic Sanctions

151 151 153 153 154 154

Summary 156 • Vocabulary 157 • Study Questions 157

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Contents

Chapter 8

International Trade and Labor and Environmental ­Standards 158

Introduction: Income and Standards Setting Standards: Harmonization, Mutual Recognition, or Separate?

158 159

CASE STUDY: Income, Environment,

and Society

161

Labor Standards

162

Defining Labor Standards CASE STUDY: Child Labor Labor Standards and Trade Evidence on Low Standards as a Predatory Practice CASE STUDY: The International Labour Organization

Trade and the Environment Transboundary and NonTransboundary Effects CASE STUDY: Trade Barriers and Endangered Species

Alternatives to Trade Measures

163 164 166 167 168

170 170 172

173

Labels for Exports 174 Requiring Home Country Standards 175 Increasing International Negotiations 176 CASE STUDY: Global Climate Change 177 Summary 179 • Vocabulary 180 • Study Questions 180

Introduction to the Financial Account

188

Types of Financial Flows 188 MyEconLab Real-time Data 189 Limits on Financial Flows 194 CASE STUDY: The Crisis of 2007–2009 and the Balance of Payments 195

The Current Account and the Macroeconomy The National Income and Product Accounts Are Current Account Deficits Harmful?

CASE STUDY: Current Account Deficits in the United States

International Debt CASE STUDY: Odious Debt

196 197 202 203

205 206

The International Investment Position 208 Summary 209 • Vocabulary 210 • Study Questions 210

APPEnDIx A: Measuring the International Investment Position APPEnDIx B: Balance of Payments Data

211

Bureau of Economic Analysis International Financial Statistics Balance of Payments Statistics

212 212 212

APPEnDIx C: A Note on Numbers

212

213

Chapter 10 Exchange Rates and

Exchange Rate Systems 214

Part 3 International Finance

183

Trade and the Balance of Payments

184

Introduction: The Current Account

184

The Trade Balance The Current and Capital Account Balances MyEconLab Real-time Data

185

Chapter 9

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185 187

Introduction: Fixed, Flexible, or In-Between?

Exchange Rates and Currency Trading

214 215

Reasons for Holding Foreign Currencies Institutions Exchange Rate Risk

216 217 218

The Supply and Demand for Foreign Exchange Supply and Demand with Flexible Exchange Rates

219 219

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Contents

Exchange Rates in the Long Run Exchange Rates in the Medium Run and Short Run CASE STUDY: The Largest Market in the World

220

The Long Run

xiii

266

CASE STUDY: Argentina and the

224 228

Limits to Macroeconomic Policy

Macro Policies for Current Account Imbalances

267

269

The Real Exchange Rate Alternatives to Flexible Exchange Rates

230

Fixed Exchange Rate Systems CASE STUDY: The End of the Bretton Woods System

233

Macroeconomic Policy Coordination in Developed Countries 272

236

Summary 273 • Vocabulary 274 • Study Questions 275

Choosing the Right Exchange Rate System

232

238

CASE STUDY: Monetary Unions

240 Single Currency Areas 242 Conditions for Adopting a Single Currency 243 CASE STUDY: Is the NAFTA Region an Optimal Currency Area?

245 Summary 246 • Vocabulary 247 • Study Questions 247

APPEnDIx: The Interest Rate Parity Condition

248

Chapter 11 An Introduction to

Open Economy Macroeconomics

Introduction: The Macroeconomy in a Global Setting Aggregate Demand and Aggregate Supply Fiscal and Monetary Policies

250 250 251 256

Fiscal Policy Monetary Policy CASE STUDY: Fiscal and Monetary Policy during the Great Depression

256 257

Current Account Balances Revisited

262

259

Fiscal and Monetary Policies, Interest Rates, and Exchange Rates 263 Fiscal and Monetary Policy and the Current Account 264

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The Adjustment Process CASE STUDY: The Adjustment Process in the United States

Chapter 12 International Financial

Crises

Introduction: The Challenge to Financial Integration Definition of a Financial Crisis Vulnerabilities, Triggers, and Contagion Vulnerability: Economic Imbalances Vulnerability: Volatile Capital Flows How Crises Become International: Contagion CASE STUDY: The Mexican Peso Crisis of 1994 and 1995

Domestic Issues in Crisis Avoidance Moral Hazard and Financial Sector Regulation Exchange Rate Policy Capital Controls CASE STUDY: The Asian Crisis of 1997 and 1998 Domestic Policies for Crisis Management

Reform of the International Financial Architecture A Lender of Last Resort Conditionality Reform Urgency

269 271

276 276 277 279 280 281 282 283

286 287 288 288 290 294

295 296 297 298

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xiv

Contents

CASE STUDY: The Global Crisis

of 2007

299

Summary 302 • Vocabulary 304 • Study Questions 304

The Treaty of Rome Institutional Structure

PART 4 Regional Issues in the Global Economy 307 Chapter 13 The United States in the

World Economy

Introduction: A Changing World Economy Background and Context The Shifting Focus of U.S. Trade Relations CASE STUDY: Manufacturing in the United States

The Nafta Model Demographic and Economic Characteristics of North America Canada–U.S. Trade Relations Mexican Economic Reforms The North American Free Trade Agreement Two NAFTA-Specific Issues CASE STUDY: Ejidos, Agriculture, and NAFTA in Mexico

New and Old Agreements Labor and Environmental Standards Investor-State Relations Jobs and Trade Agreements CASE STUDY: The African Growth and Opportunity Act

Many Markets Into One

Introduction: The European Union

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336 337 338 338

Deepening and Widening the Community in the 1970s and 1980s 340 Before the Euro

The Second Wave of Deepening: The Single European Act

340

342

CASE STUDY: The Schengen

308 308 309 310 311

314 314 315 317 319 320 322

324 325 327 328

Agreement The Delors Report Forecasts of the Gains from the Single European Act Problems in the Implementation of the SEA CASE STUDY: The Erasmus+ Program and Higher Education

The Third Wave of Deepening: The Maastricht Treaty Monetary Union and the Euro Costs and Benefits of Monetary Union The Political Economy of the Euro CASE STUDY: The Financial Crisis of 2007–2009 and the Euro

Widening the European Union New Members CASE STUDY: Spain’s Switch from Emigration to Immigration

The Demographic Challenge of the Future

343 344 345 346 348

349 350 351 353 354

358 358 359

360

Summary 362 • Vocabulary 363 • Study Questions 363

330

Summary 331 • Vocabulary 332 • Study Questions 333

Chapter 14 The European Union:

The Size of the European Market The European Union and its Predecessors

Chapter 15 Trade and Policy Reform

in Latin America

334 334

Introduction: Defining a “Latin American” Economy Population, Income, and Economic Growth

365 365 366

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Contents

Import Substitution Industrialization Origins and Goals of ISI Criticisms of ISI CASE STUDY: ISI in Mexico

Macroeconomic Instability and Economic Populism Populism in Latin America CASE STUDY: Economic Populism in Peru, 1985–1990

The Debt Crisis of the 1980s

368 368 371 372

374 375 376

377

Proximate Causes of the Debt Crisis Responses to the Debt Crisis

377 378

Neoliberal Policy Reform and the Washington Consensus

381

Stabilization Policies to Control Inflation Structural Reform and Open Trade CASE STUDY: Regional Trade Blocs in Latin America The Next Generation of Reforms CASE STUDY: The Chilean Model

381 383 384 386 387

Summary 389 • Vocabulary 390 • Study Questions 390

Chapter 16 Export-Oriented Growth

in East Asia

Introduction: High-Growth Asian Economies Population, Income, and Economic Growth A Note on Hong Kong

The Role of Industrial Policies

392 394 396

396

Shared Growth Rapid Accumulation of Physical and Human Capital Rapid Growth of Manufactured Exports Stable Macroeconomic Environments The Institutional Environment CASE STUDY: Worldwide Governance Indicators

396

403 405 407

409 409 410 412

The Role of Manufactured Exports

413

The Connections between Growth and Exports 413 Is Export Promotion a Good Model for Other Regions?

415 CASE STUDY: Asian Trade Blocs 416

Is There an Asian Model of Economic Growth?

417

Summary 419 • Vocabulary 420 • Study Questions 420

World Economy

392

403

Targeting Specific Industries Did Industrial Policies Work?

CASE STUDY: HCI in Korea

Chapter 17 China and India in the

General Characteristics of Growth

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Fiscal Discipline and Business– Government Relations CASE STUDY: Doing Business in the Export Oriented Asian Economies Avoiding Rent Seeking CASE STUDY: Were East Asian Economies Open?

xv

Introduction: New Challenges Demographic and Economic Characteristics Economic Reform in China and India The Reform Process in China Indian Economic Reforms Shifting Comparative Advantages CASE STUDY: Why Did the USSR Collapse and China Succeed?

421 421 422 426 427 428 429 431

397

China and India in the World Economy 432

398

433 434 435 437

399 400 401

Chinese and Indian Trade Patterns Tariffs and Protection Current Account Balances Looking Forward

Four Issues

439

Services

439

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Contents

Manufacturing Resources Multilateral Institutions Unresolved Issues The Choices Ahead

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440 441 441 442 443

Summary 444 • Vocabulary 445 • Study Questions 445

Glossary 447 Index 459

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Preface International Economics is designed for a one-semester course covering both the micro and macro components of international economics. The Seventh Edition continues the approach of the first six editions by offering a principles-level introduction to the core theories, together with policy analysis and the institutional and historical contexts of international economic relations. My goal is to make economic reasoning about the international economy accessible to a diverse group of students, including both economics majors and nonmajors. My intention is to present the consensus of economic opinion, when one exists, and to describe the differences when one does not. In general, however, economists are more often in agreement than not.

New to the Seventh Edition This Seventh Edition of International Economics preserves the organization and coverage of the Sixth Edition and adds a number of updates and enhancements. New to this edition: ■■ All tables and graphs have been updated.

■■ New case studies are added in Chapter 2 on the Asian Infrastructure and Invest-

ment Bank; Chapter 5 on industrial policies targeting clean energy technology; and Chapter 16 on the Worldwide Governance Indicators.

■■ Chapter 9 on the balance of payments has incorporated the accounting revisions of the IMF and the implementation of the revisions by the U.S. Bureau of Economic Analysis. The changes recommended by the IMF are mostly terminology, but also in the presentation of debits and credits. Chapter 9 also adds a new appendix on the terminology of numbers: billions, thousands of millions, milliards, and trillions.

■■ The discussion of financial crises in Chapter 12 is presented in terms of vulnerabilities and triggers, following the terminology used by former Fed Chairman Ben Bernanke, among others.

■■ Chapter 16 has dropped the World Bank’s now-dated terminology and focus on the High Performance Asian Economies in favor of a more empirically determined set of high growth, export oriented East Asian economies.

■■ Chapter 17 is focused on India and China, exclusively. xvii

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Preface

■■ The discussion of trade and jobs in Chapters 4, 13, and 17 is more nuanced

and reflects the growing challenge to the consensus that trade is not the cause of manufacturing’s decline in high-income countries.

Hallmarks of International Economics Several features of International Economics distinguish it from the many excellent texts in the field: ■■ First, the approach is broader than the theoretical apparatus used by

e­ conomists. Economic theory is covered and its mastery is essential, but most readers grasp theory more completely when it is presented along with real-world applications. To this end, I have supplemented economic theory with case studies and other content ranging from the role of economic institutions and the analysis of international economic policies to the recent history of the world economy and the challenges facing different geographical regions as they become more economically integrated internationally .

■■ Second, the objective of covering both the micro and macro sides in a onesemester course necessitates paring back the coverage of theory in order to focus on the central concepts. As all instructors are aware, many theoretical topics are of secondary or tertiary importance, which can pose a problem for students who may lack the needed breadth and depth of understanding to rank topics by their relative importance.

■■ Third, International Economics provides richer historical and institutional detail than most other texts. This material illuminates the relationships between economic theory and policy, and between economics and the other social sciences.

■■ Fourth, I have organized Part 4 of the book into five chapters, each focused on a geographic area as follows: North America with emphasis on the United States, the European Union, Latin America, East Asia, and India and China. These chapters offer students the chance to broaden their understanding of world trends and to observe the intellectual power of economic theory in practice.

Flexibility of Organization A text requires a fixed topical sequence because it must order the chapters one after another. This is a potential problem for some instructors, as there is a wide variety of preferences for the order in which topics are taught. The Seventh Edition, like the previous editions, strives for flexibility in allowing instructors to find their own preferred sequence.

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xix

Part 1 includes two introductory chapters that are designed to build vocabulary, develop historical perspective, and provide background information about the different international organizations and the roles they play in the world economy.

Some instructors prefer to delve into the theory chapters immediately, reserving this material for later in the course. There is no loss of continuity with this approach.

Part 2 presents the micro side of international economics, while Part 3 covers the macro side. These two parts can easily be reversed in sequence if desired.

Part 2 includes six chapters that cover trade models (Chapters 3–5) and commercial policy (Chapters 6–8). A condensed treatment of this section could focus on the Ricardian model in Chapter 3, and the analysis of tariffs and quotas in Chapters 6 and 7. Chapter 8 on labor and environmental standards can stand on its own, although the preceding chapters deepen student understanding of the trade-offs.

Part 3 covers the balance of payments, exchange rates, open-economy macroeconomics, and international financial crises. Chapter 11 on open economy macroeconomics is optional. It is intended for students and instructors who want a review of macroeconomics, including the concepts of fiscal and monetary policy, in a context that includes current accounts and exchange rates. If Chapter 11 is omitted, Chapter 12 (financial crises) remains accessible as long as students have an understanding of the basic concepts of fiscal and monetary policy. Chapter 12 relies most heavily on Chapters 9 (balance of payments) and 10 (exchange rates and exchange rate systems).

Part 4 presents five chapters, each focused on a geographic area. These chapters use theory presented in Chapters 3–12 in a similar fashion to the economics discussion that students find in the business press, congressional testimonies, speeches, and other sources intended for a broad civic audience. Where necessary, concepts such as the real rate of exchange are briefly reviewed. One or more of these chapters can be moved forward to fit the needs of a particular course.

Supplementary Materials The following supplementary resources are available to support teaching and learning.

■■ In recognition of the importance of the Internet as a source of timely infor-

mation, the MyEconLab offers Web links for each chapter of International Economics. These links, complete with descriptions of the content available at each site, provide easy access to relevant, current data sources.

Other Supplements Leonie Stone of State University of New York (SUNY) at Geneseo, has revised the ­TestGen and Instructor’s Manual to bring it up to date with the text. The TestGen is available for download on the Instructor’s Resource website. The Instructor’s ­Powerpoints are also available online as an additional resource.

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Preface

MyEconLab MyEconLab has been designed and refined with a single purpose in mind: to create those moments of understanding that transform the difficult into the clear and obvious. With comprehensive homework, quiz, test, and tutorial options, instructors can manage all their assessment needs in one program.

MyEconLab for International Economics, Seventh Edition offers the following resources for students and instructors: ■■ All end-of-chapter questions from the text are available in MyEconLab. ■■ Personal study plans are created for each individual student based on per-

formance on assigned and sample exercises.

■■ Instant tutorial feedback on a student’s problem and graphing responses

to questions.

■■ Interactive learning aids, such as Help Me Solve This (a step-by-step tuto-

rial), help the student right when they need it.

■■ News articles are available for classroom and assignment use. Up-to-date news articles and complementary discussion questions are posted weekly to bring today’s news into the classroom and course.

■■ Real-Time Data Analysis These exercises allow instructors to assign problems that use up-to-the-minute data. Each RTDA exercise loads the appropriate and most currently available data from FRED, a comprehensive and up-to-date data set maintained by the Federal Reserve Bank of St. Louis.

Exercises are graded based on that instance of data, and feedback is provided.

■■ An enhanced Pearson eText available within the online course materials and offline via an app. The enhanced eText allows instructors and students to highlight, bookmark, and take notes.

■■ Prebuilt courses offer a turn-key way for instructors to create a course that includes prebuilt assignments distributed by chapter.

■■ Auto graded problems and graphs for assignments.

■■ A powerful gradebook, flexible and rich with information, including student and class data on assignment performance and time on task.

■■ Advanced communication tools provides students and instructors the capability to communicate through e-mail, discussion board, chat, and ClassLive.

■■ Customization options provide new and enhanced ways to share documents, add content, and rename menu items.

■■ Temporary access for students who are awaiting financial aid; a seventeenday grace period of temporary access.

■■ One place for students to access all of their MyLab courses. Students and instructors can register, create, and access all of their MyLab courses, regardless of discipline, from one convenient online location: www.pearsonmylab.com.

For more information, please visit www.myeconlab.com.

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xxi

Acknowledgments All texts are team efforts, even single-author texts. I owe a debt of gratitude to a large number of people. At San Diego State University, I have benefited from the opportunity to teach and converse with a wide range of students. My colleagues in San Diego and across the border in Mexico have been extremely helpful. Their comments and our conversations constantly push me to think about the core economic ideas that should be a part of a college student’s education, and to search for ways to explain the relevance and importance of those ideas with greater clarity and precision. Any failure in this regard is, of course, mine alone.

I am deeply grateful to Neeraj Bhalla, Nicole Suddeth, Sree Meenakshi R, and the MyEconLab team.

Finally, my gratitude goes to the numerous reviewers who have played an essential role in the development of International Economics. Each of the following individuals reviewed the manuscript, many of them several times, and provided useful commentary. I cannot express how much the text has benefited from their comments.

Mary Acker Iona College

Laura Brown University of Manitoba

Jeff Ankrom Wittenberg University

Albert Callewaert Walsh College

David Aschauer Bates College

Tom Carter Oklahoma City University

H. Somnez Atesoglu Clarkson University

Srikanta Chatterjee Massey University, New Zealand

Titus Awokuse University of Delaware

Craig Depken II University of North ­Carolina, Charlotte John Devereaux University of Miami K. Doroodian Ohio University Carolyn Evans, Santa Clara University

Jen-Chi Cheng Wichita State University

Noel J. J. Farley Bryn Mawr College

Don Clark University of Tennessee

Ora Freedman Stevenson University

Richard T. Baillie Michigan State University

Raymond Cohn Illinois State University

Mina Baliamoune-Lutz, University of North Florida

Peter Crabb Northwest Nazarene University

Lewis R. Gale IV University of Southwest Louisiana

Mohsen Bahmani-Oskooee University of Wisconsin, Milwaukee

Eugene Beaulieu University of Calgary Ted Black Towson University Bruce Blonigen University of Oregon Lee Bour Florida State University Byron Brown Southern Oregon University

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David Crary Eastern Michigan University Al Culver California State University, Chico

Kevin Gallagher Boston University Ira Gang Rutgers University John Gilbert Utah State University James Giordano Villanova University

Joseph Daniels Marquette University

Amy Jocelyn Glass Texas A&M University

Alan Deardorff University of Michigan

Joanne Gowa Princeton University

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Preface

Gregory Green Idaho State University

Mary Lesser Iona College

Raj Roy University of Toledo

Thomas Grennes North Carolina State University

Benjamin H. Liebman Saint Joseph’s University

Michael Ryan Western Michigan University

Winston Griffith Bucknell University Jane Hall California State University, Fullerton Seid Hassan Murray State University F. Steb Hipple East Tennessee State University Paul Jensen Drexel University Ghassan Karam Pace University George Karras University of Illinois at Chicago Kathy Kelly University of Texas, Arlington Abdul Khandker University of Wisconsin, La Crosse Jacqueline Khorassani Marietta College Sunghyun Henry Kim Brandeis University Vani Kotcherlakota University of Nebraska at Kearney Corrine Krupp Michigan State University Kishore Kulkarni Metropolitan State College of Denver Farrokh Langdana Rutgers University Daniel Y. Lee Shippensburg University

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Susan Linz Michigan State University Marc Lombard Macquarie University, Australia Thomas Lowinger Washington State University Nicolas Magud University of Oregon Bala Maniam Sam Houston State University

George Samuels Sam Houston State University Craig Schulman University of Arizona William Seyfried Winthrop University Eckhard Siggel Concordia University David Spiro Columbia University

Mary McGlasson Arizona State University

Richard Sprinkle University of Texas, El Paso

Joseph McKinney Baylor University

Ann Sternlicht Virginia Commonwealth University

Judith McKinney Hobart & William Smith Colleges Howard McNier San Francisco State University Michael O. Moore George Washington University Stephan Norribin Florida State University William H. Phillips University of South Carolina Frank Raymond Bellarmine University Donald Richards Indiana State University John Robertson University of Kentucky Community College System

Leonie Stone State University of New York at Geneseo Carolyn Fabian Stumph Indiana University, Purdue University, Fort Wayne Rebecca Summary Southeast Missouri State University Jack Suyderhoud University of Hawaii Kishor Thanawala Villanova University Henry Thompson Auburn University Cynthia Tori Valdosta State University Edward Tower Duke University

Jeffrey Rosensweig Emory University

Ross vanWassenhove University of Houston

Marina Rosser James Madison University

Jose Ventura Sacred Heart University

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Preface

Craig Walker Oklahoma Baptist University Michael Welker Franciscan University

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Jerry Wheat Indiana State University

Chong K. Yip Georgia State University

Laura Wolff Southern Illinois University, Edwardsville

Alina Zapalska Marshall University

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PA R T

1

Introduction and Institutions

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C h a p ter

1

An Introduction to the World Economy

Learning Objectives After studying this chapter, students will be able to: 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

1.2 Compute the trade-to-GDP ratio and explain its significance.

1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

1.4 List the three types of evidence that trade supports economic growth.

INTRODUCTION: INTERNATIONAL ECONOMIC INTEGRATION In August of 2007, a crisis erupted in the housing sector of the United States. At the time, few people realized that the subprime mortgage crisis would become a demonstration of international economic integration or that it would push the world economy to the brink of collapse. The crisis grew through the remainder of 2007 and into 2008, so that by the summer nearly all high-income economies were in deep distress. Contagion from the crisis spread like an epidemic as banks and other financial firms collapsed and solvent firms stopped lending. The scarcity of credit caused difficulties for businesses that could not find financing for their day-to-day operations while, at the same time, consumers cut back on their spending and businesses cut back on new investment. By the end of 2008, economies around the world were in recession, with the notable exceptions of China, India, and the major oil producers.

This episode is the most dramatic instance since the Great Depression of the 1930s of a crisis leading to severe economic recession in many countries around the world. It is, however, only one of several recent examples of crises spilling across national borders. The Russian Crisis of 1998–99, the Asian Crisis of 1997–98, the Mexican Crisis of 1994–95, the Latin American Debt Crisis of 1982–89, and a number of others caused major damage to financial systems, businesses, and households, both in the places where they originated and in many other countries.

The international integration of national economies has brought many benefits to nations across the globe, including technological innovation, less expensive products, and greater investment in regions where local capital is scarce, to name a few. But 2

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it has also made countries vulnerable to economic problems that have become more easily transmitted from one place to another. Given that the benefits and costs of international economic integration are surrounded by controversy, it is worth clarifying what we mean by the term international economic integration, or globalization in the economic sphere. To help us understand these forces better, a historical perspective is also useful.

ELEMENTS OF INTERNATIONAL ECONOMIC INTEGRATION LO 1.1 Discuss historical measures of international economic integration with data on trade, capital flows, and migration.

LO 1.2 Compute the trade-to-GDP ratio and explain its significance.

LO 1.3 Describe three factors in the world economy today that are different from the economy at the end of the first wave of globalization.

LO 1.4 List the three types of evidence that trade supports economic growth.

Most people would agree that the major economies of the world are more integrated than at any time in history. Given our instantaneous communications, modern transportation, and relatively open trading systems, most goods can move from one country to another without major obstacles and at relatively low cost.

For example, most cars today are made in fifteen or more countries after you consider where each part is made, where the advertising originates, who does the accounting, and who transports the components and the final product. Nevertheless, the proposition that today’s economies are more integrated than at any other time in history is not simple to demonstrate. It is clear that our current wave of economic integration began in the 1950s, with the reduction of trade barriers after World War II. In the 1970s, many countries began to encourage financial integration by increasing the openness of their capital markets. The advent of the Internet in the 1990s, along with the other elements of the telecommunications revolution, pushed economic integration to new levels as multinational firms developed international production networks and markets became ever more tightly linked.

Today’s global economy is not the first instance of a dramatic growth in economic ties between nations, however, as there was another important period between approximately 1870 and 1913. New technologies such as transatlantic cables, steam-powered ships, railroads, and many others led the way, much as they do today. For example, when the first permanent transatlantic cable was completed in 1866, the time it took for a New York businessperson to complete a financial transaction in London fell from approximately three weeks

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to one day, and by 1914 it had fallen to one minute as radio telephony became possible.

We have mostly forgotten about this earlier period of economic integration, and that makes it easier to overestimate integration today. Instantaneous communications and rapid transportation, together with the easy availability of foreign products, often cause us to lose sight of the fact that most of what we buy and sell never makes it out of our local or national markets. We rarely pause to think that haircuts, restaurant meals, gardens, health care, education, utilities, and many other goods and services are partially or wholly domestic products. In the United States, for example, about 83.4 percent of goods and services are produced domestically, with imports (16.6 percent) making up the remainder of what we consume (2014). By comparison, in 1890 the United States made about 92 percent of its goods and services, a larger share than today, but not radically different.

The question as to whether we are more economically integrated today or some period in the past is not academic. Between the onset of World War I in 1914 and the end of World War II in 1945, the world economy suffered a series of humanmade catastrophes that de-integrated national economies. Two world wars and a global depression caused most countries to close their borders to foreign goods, foreign capital, and foreign people. Since the end of World War II, many of the economic linkages between nations have served to repair the damage done during the first half of the twentieth century, but there is no reason to think that events might not cause a similar decoupling in the future.

Understanding international economic integration requires us to define what we mean by the term. Economists usually point to four criteria or measures for judging the degree of integration, which are trade flows, capital flows, people flows, and the similarity of prices in separate markets. The first three points are relatively self-explanatory, while the similarity of prices refers to the fact that integrated economies have price differences that are relatively small and are due mainly to differences in transportation costs. Goods that can move freely from a low-cost to a high-cost region should experience price convergence as goods move from where they are plentiful and cheap to where they are relatively scarcer and more expensive. All of these indicators—trade flows, factor (labor and capital) movements, and similarity of prices—are measures of the degree of international economic integration.

The Growth of World Trade Since the end of World War II, world trade has grown much faster than world output. One way to show this is to estimate the ratio of exports by all countries to total production by all countries. In 1950, total world exports—which are the same as world imports—are estimated to have been 5.5 percent of world gross domestic product (GDP), a measure of total production. Sixty-three years later, in 2013, they were approximately 30 percent of world GDP, nearly six times more important relative to the size of the world economy. One important measure of international trade in a nation’s economy is the sum of exports plus imports, divided

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by the GDP. Specifically, it is the value of all final goods and services produced inside a nation during some period, usually one year. The trade-to-GDP ratio is represented as follows: Trade to GDP ratio = (Ex ports + Im ports) , GDP The ratio does not tell us about a country’s trade policies and countries with higher ratios do not necessarily have lower barriers to trade, although that is one possibility. In general, large countries are less dependent on international trade because their firms can reach an optimal production size without having to sell to foreign markets. Consequently, smaller countries tend to have higher ratios of trade-to-GDP. Figure 1.1 shows the trade-to-GDP ratio for four countries between 1913 and 2013. The decline in trade between the onset of World War I and 1950 is clearly visible in each country, as is the subsequent increase after 1950. Another pattern shown in Figure 1.1 is the smaller ratios for the United States and Japan, which have the largest populations, and the much higher ratio for the Netherlands, which has the smallest population in the sample. In general, smaller countries trade more than larger ones since they cannot efficiently produce a wide range of goods and must depend on trade to a greater extent. For example, if the Netherlands were to produce autos solely for its own market, it would lack economies of scale and could not produce at a competitive cost, whereas the U.S. market can absorb a large share of U.S. output. Hence, the trade-to-GDP ratio measures the relative

FIGURE 1.1

Trade-to-GDP Ratios for Four Countries, 1913–2013

180

Trade to GDP Raio

160 140 120 100 80 60 40 20 0 1913 Netherlands

1950 United Kingdom

1973 Japan

2013 United States

Data from Maddison, A. (1991). “Dynamic Forces in Capitalist Development” and The World Bank, World Integrated Trade Solution, © James Gerber.

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importance of international trade in a nation’s economy, but it does not provide any direct information about trade policy or trade barriers.

Figure 1.1 gives a historical overview of the decline and subsequent return of international trade after World War II, but it obscures important changes in the composition of trade flows from early in the twentieth century to those at the end of the century. Before World War I most trade consisted of agricultural commodities and raw materials, while current trade is primarily manufactured consumer goods and producer goods (machinery and equipment). Consequently, today’s manufacturers are much more exposed to international competition than was the case in 1900. In addition, much of the growth of world trade since 1950 has been accomplished by multinational corporations. With production sites in multiple countries and inputs that pass back and forth between affiliates, multinational corporations have become dramatically important. This trend has been supported and encouraged by the telecommunications revolution and transportation improvements that have lowered the costs of coordinating operations physically separated by oceans and continents. And finally, it has also become possible to coordinate service operations such as accounting and data processing from a great distance. In sum, trade today is qualitatively different than in 1913, and the growth of the trade-to-GDP ratio since 1950 does not tell the whole story.

Capital and Labor Mobility In addition to exports and imports, factor movements also are an indicator of economic integration. As national economies become more interdependent, labor and capital should move more easily across international boundaries. Labor, however, is less mobile internationally than it was in 1900. Consider, for example, that in 1890 approximately 14.5 percent of the U.S. population was foreign born, while in 2010, the figure was 12.9 percent. In 1900, many nations had open door immigration policies, and passport controls, immigration visas, and work permits were exceptions rather than rules. The movement of people was severely restricted by the two world wars and the Great Depression of the 1930s. In the 1920s, during the interwar period, the United States sharply restricted immigration with policies that lasted until the 1960s, when changes in immigration laws once again encouraged foreigners to migrate to the United States.

On the capital side, measurement is more difficult, since there are several ways to measure capital flows. The most basic distinction is between flows of financial capital representing paper assets such as stocks, bonds, currencies, bank accounts, and flows of capital representing physical assets such as real estate, factories, and businesses. The latter type of capital flow is called foreign direct investment (FDI).

To some extent, the distinction between the two types of capital flows is immaterial because both represent shifts in wealth across national boundaries and both make one nation’s savings available to another.

When we compare international capital flows today to a century ago, there are two points to keep in mind. First, savings and investment are highly correlated.

That is, countries with high savings tend to have high rates of investment, and low

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savings is correlated with low investment. If there were a single world market in which capital flowed freely and easily, this would not necessarily be the case. Capital would flow from countries with abundant savings and capital to countries with low savings and capital, where it would find its highest returns. Second, a variety of technological improvements increased capital flows in the 1800s, as they are doing today. Transoceanic cables and radio telephony have already been mentioned, but capital flows also increased in the late 1800s because there were new investment opportunities such as national railroad networks and other infrastructure, both at home and abroad.

If we compare the size of capital flows today to the previous era of globalization, flows today are much larger but mainly because economies are larger. Relative to the size of economies, the differences are not great and may even favor the 1870 to 1913 period, depending on what is measured. Great Britain routinely invested 9 percent of its GDP abroad in the decades before 1913, and France, Germany, and the Netherlands were as high at times. For significant periods, Canada, Australia, and Argentina borrowed amounts that exceeded 10 percent of their GDP, a level of borrowing that sends up danger signals in the world economy today. In other words, it is hard to make the argument that national economies have a historically unprecedented level of international capital flows today.

While the relative quantity of capital flows today may not be that much different for many countries, there are some important qualitative differences. First, there are many more financial instruments available now than there were a century ago. These range from relatively mundane stocks and bonds to relatively exotic instruments such as derivatives, currency swaps, and others. By contrast, at the turn of the twentieth century, there were many fewer companies listed on the world’s stock exchanges and most international financial transactions involved the buying and selling of bonds.

A second difference today is the role of foreign exchange transactions. In 1900, countries had fixed exchange rates and firms in international trade or finance had less day-to-day risk from a sudden change in the value of a foreign currency.

Many firms today spend significant resources to protect themselves from sudden shifts in currency values. Consequently, buying and selling assets denominated in foreign currencies is the largest component of international capital movements.

For example, according to the Bank for International Settlements in Geneva, Switzerland, daily foreign exchange transactions in 2013 were equal to $5.3 trillion.

In 1973, at the end of the last era of fixed exchange rates, they were $15 billion.

The third major difference in capital flows is that the costs of foreign financial transactions have fallen significantly. Economists refer to the costs of obtaining market information, negotiating an agreement, and enforcing the agreement as transaction costs. They are an important part of any business’s costs, whether it is a purely domestic enterprise or a company involved in foreign markets. Due to sheer distance, as well as differences in culture, laws, and languages, transaction costs are often higher in international markets than in domestic ones. Today’s lower transaction costs for foreign investment mean that it is less expensive to move capital across international boundaries.

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The volatile movement of financial capital across international boundaries is often mistakenly regarded as a new feature of the international economy. Speculative excesses and overinvestment, followed by capital flight and bankruptcies, have occurred throughout the modern era, going back at least to the 1600s and probably earlier. U.S. and world history show a number of such cases. Financial crises are not a new phenomenon, nor have we learned how to avoid them—a fact driven home by the recent subprime mortgage crisis.

Features of Contemporary International Economic Relations While international economic integration has been rapid, it does not appear to be historically unprecedented. The trade-to-GDP ratio is about 50 percent higher in the U.S. economy than it was in 1890, and manufacturers and service providers are more exposed to international forces. Labor is less mobile than in 1900 due to passport controls and work permits, but capital is more mobile and encompasses a larger variety of financial forms. Prices in many U.S. and foreign markets tend to be similar, although there are still significant differences. In quantitative terms, the differences between today and a hundred years ago may not be as great as many people imagine, but qualitatively, a number of additional features of the world economy separate the first decade of the twenty-first century from the first decade of the twentieth.

Deeper Integration High-income countries have low barriers to imports of manufactured goods. There are some exceptions (processed foodstuffs and apparel), but as a general rule import tariffs (taxes on imports) and other barriers such as quotas (quantitative restrictions on imports) are much less restrictive than they were in the middle of the twentieth century. As trade barriers came down during the second half of the twentieth century, two other trends began to intensify economic integration between countries. First, lower trade barriers exposed the fact that most countries have domestic policies that are obstacles to international trade. National regulations governing labor, environmental, and consumer safety standards; rules governing investment location and performance; rules defining fair and unfair competition; rules on government “buy-national” programs; and government support policies for specific industries—all have little impact on trade until formal trade barriers start to fall and trade volume increases. These policies were not implemented to protect domestic industries from foreign competition, and as long as tariffs were high and trade flows were limited, they did not matter much to trade relations. Once tariffs fell, however, many forms of domestic policies began to be viewed as barriers to increased trade. Economists sometimes refer to the reduction of tariffs and the elimination of quotas as shallow integration and negotiations over domestic policies that impact international trade as deep integration. Deep integration is much more contentious than shallow integration and much more difficult to accomplish since it involves domestic policy changes that align a country with rules that are created abroad, or at least negotiated with foreign powers.

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DANCE ON STILTS AT THE GIRLS’ UNYAGO, NIUCHI

Newala, too, suffers from the distance of its water-supply—at least the Newala of to-day does; there was once another Newala in a lovely valley at the foot of the plateau. I visited it and found scarcely a trace of houses, only a Christian cemetery, with the graves of several missionaries and their converts, remaining as a monument of its former glories. But the surroundings are wonderfully beautiful. A thick grove of splendid mango-trees closes in the weather-worn crosses and headstones; behind them, combining the useful and the agreeable, is a whole plantation of lemon-trees covered with ripe fruit; not the small African kind, but a much larger and also juicier imported variety, which drops into the hands of the passing traveller, without calling for any exertion on his part. Old Newala is now under the jurisdiction of the native pastor, Daudi, at Chingulungulu, who, as I am on very friendly terms with him, allows me, as a matter of course, the use of this lemon-grove during my stay at Newala.

FEET MUTILATED BY THE RAVAGES OF THE “JIGGER” (Sarcopsylla penetrans)

The water-supply of New Newala is in the bottom of the valley, some 1,600 feet lower down. The way is not only long and fatiguing, but the water, when we get it, is thoroughly bad. We are suffering not only from this, but from the fact that the arrangements at Newala are nothing short of luxurious. We have a separate kitchen—a hut built against the boma palisade on the right of the baraza, the interior of which is not visible from our usual position. Our two cooks were not long in finding this out, and they consequently do—or rather neglect to do—what they please. In any case they do not seem to be very particular about the boiling of our drinking-water—at least I can attribute to no other cause certain attacks of a dysenteric nature, from which both Knudsen and I have suffered for some time. If a man like Omari has to be left unwatched for a moment, he is capable of anything. Besides this complaint, we are inconvenienced by the state of our nails, which have become as hard as glass, and crack on the slightest provocation, and I have the additional infliction of pimples all over me. As if all this were not enough, we have also, for the last week been waging war against the jigger, who has found his Eldorado in the hot sand of the Makonde plateau. Our men are seen all day long—whenever their chronic colds and the dysentery likewise raging among them permit—occupied in removing this scourge of Africa from their feet and trying to prevent the disastrous consequences of its presence. It is quite common to see natives of this place with one or two toes missing; many have lost all their toes,

or even the whole front part of the foot, so that a well-formed leg ends in a shapeless stump. These ravages are caused by the female of Sarcopsylla penetrans, which bores its way under the skin and there develops an egg-sac the size of a pea. In all books on the subject, it is stated that one’s attention is called to the presence of this parasite by an intolerable itching. This agrees very well with my experience, so far as the softer parts of the sole, the spaces between and under the toes, and the side of the foot are concerned, but if the creature penetrates through the harder parts of the heel or ball of the foot, it may escape even the most careful search till it has reached maturity.

Then there is no time to be lost, if the horrible ulceration, of which we see cases by the dozen every day, is to be prevented. It is much easier, by the way, to discover the insect on the white skin of a European than on that of a native, on which the dark speck scarcely shows. The four or five jiggers which, in spite of the fact that I constantly wore high laced boots, chose my feet to settle in, were taken out for me by the all-accomplished Knudsen, after which I thought it advisable to wash out the cavities with corrosive sublimate. The natives have a different sort of disinfectant—they fill the hole with scraped roots. In a tiny Makua village on the slope of the plateau south of Newala, we saw an old woman who had filled all the spaces under her toe-nails with powdered roots by way of prophylactic treatment. What will be the result, if any, who can say?

The rest of the many trifling ills which trouble our existence are really more comic than serious. In the absence of anything else to smoke, Knudsen and I at last opened a box of cigars procured from the Indian store-keeper at Lindi, and tried them, with the most distressing results. Whether they contain opium or some other narcotic, neither of us can say, but after the tenth puff we were both “off,” three-quarters stupefied and unspeakably wretched. Slowly we recovered—and what happened next? Half-an-hour later we were once more smoking these poisonous concoctions—so insatiable is the craving for tobacco in the tropics.

Even my present attacks of fever scarcely deserve to be taken seriously. I have had no less than three here at Newala, all of which have run their course in an incredibly short time. In the early afternoon, I am busy with my old natives, asking questions and making notes. The strong midday coffee has stimulated my spirits to

an extraordinary degree, the brain is active and vigorous, and work progresses rapidly, while a pleasant warmth pervades the whole body. Suddenly this gives place to a violent chill, forcing me to put on my overcoat, though it is only half-past three and the afternoon sun is at its hottest. Now the brain no longer works with such acuteness and logical precision; more especially does it fail me in trying to establish the syntax of the difficult Makua language on which I have ventured, as if I had not enough to do without it. Under the circumstances it seems advisable to take my temperature, and I do so, to save trouble, without leaving my seat, and while going on with my work. On examination, I find it to be 101·48°. My tutors are abruptly dismissed and my bed set up in the baraza; a few minutes later I am in it and treating myself internally with hot water and lemon-juice.

Three hours later, the thermometer marks nearly 104°, and I make them carry me back into the tent, bed and all, as I am now perspiring heavily, and exposure to the cold wind just beginning to blow might mean a fatal chill. I lie still for a little while, and then find, to my great relief, that the temperature is not rising, but rather falling. This is about 7.30 p.m. At 8 p.m. I find, to my unbounded astonishment, that it has fallen below 98·6°, and I feel perfectly well. I read for an hour or two, and could very well enjoy a smoke, if I had the wherewithal—Indian cigars being out of the question.

Having no medical training, I am at a loss to account for this state of things. It is impossible that these transitory attacks of high fever should be malarial; it seems more probable that they are due to a kind of sunstroke. On consulting my note-book, I become more and more inclined to think this is the case, for these attacks regularly follow extreme fatigue and long exposure to strong sunshine. They at least have the advantage of being only short interruptions to my work, as on the following morning I am always quite fresh and fit.

My treasure of a cook is suffering from an enormous hydrocele which makes it difficult for him to get up, and Moritz is obliged to keep in the dark on account of his inflamed eyes. Knudsen’s cook, a raw boy from somewhere in the bush, knows still less of cooking than Omari; consequently Nils Knudsen himself has been promoted to the vacant post. Finding that we had come to the end of our supplies, he began by sending to Chingulungulu for the four sucking-pigs which we had

bought from Matola and temporarily left in his charge; and when they came up, neatly packed in a large crate, he callously slaughtered the biggest of them. The first joint we were thoughtless enough to entrust for roasting to Knudsen’s mshenzi cook, and it was consequently uneatable; but we made the rest of the animal into a jelly which we ate with great relish after weeks of underfeeding, consuming incredible helpings of it at both midday and evening meals. The only drawback is a certain want of variety in the tinned vegetables. Dr. Jäger, to whom the Geographical Commission entrusted the provisioning of the expeditions—mine as well as his own—because he had more time on his hands than the rest of us, seems to have laid in a huge stock of Teltow turnips,[46] an article of food which is all very well for occasional use, but which quickly palls when set before one every day; and we seem to have no other tins left. There is no help for it—we must put up with the turnips; but I am certain that, once I am home again, I shall not touch them for ten years to come.

Amid all these minor evils, which, after all, go to make up the genuine flavour of Africa, there is at least one cheering touch: Knudsen has, with the dexterity of a skilled mechanic, repaired my 9 × 12 cm. camera, at least so far that I can use it with a little care.

How, in the absence of finger-nails, he was able to accomplish such a ticklish piece of work, having no tool but a clumsy screw-driver for taking to pieces and putting together again the complicated mechanism of the instantaneous shutter, is still a mystery to me; but he did it successfully. The loss of his finger-nails shows him in a light contrasting curiously enough with the intelligence evinced by the above operation; though, after all, it is scarcely surprising after his ten years’ residence in the bush. One day, at Lindi, he had occasion to wash a dog, which must have been in need of very thorough cleansing, for the bottle handed to our friend for the purpose had an extremely strong smell. Having performed his task in the most conscientious manner, he perceived with some surprise that the dog did not appear much the better for it, and was further surprised by finding his own nails ulcerating away in the course of the next few days. “How was I to know that carbolic acid has to be diluted?” he mutters indignantly, from time to time, with a troubled gaze at his mutilated finger-tips.

Since we came to Newala we have been making excursions in all directions through the surrounding country, in accordance with old habit, and also because the akida Sefu did not get together the tribal elders from whom I wanted information so speedily as he had promised. There is, however, no harm done, as, even if seen only from the outside, the country and people are interesting enough.

The Makonde plateau is like a large rectangular table rounded off at the corners. Measured from the Indian Ocean to Newala, it is about seventy-five miles long, and between the Rovuma and the Lukuledi it averages fifty miles in breadth, so that its superficial area is about two-thirds of that of the kingdom of Saxony. The surface, however, is not level, but uniformly inclined from its south-western edge to the ocean. From the upper edge, on which Newala lies, the eye ranges for many miles east and north-east, without encountering any obstacle, over the Makonde bush. It is a green sea, from which here and there thick clouds of smoke rise, to show that it, too, is inhabited by men who carry on their tillage like so many other primitive peoples, by cutting down and burning the bush, and manuring with the ashes. Even in the radiant light of a tropical day such a fire is a grand sight.

Much less effective is the impression produced just now by the great western plain as seen from the edge of the plateau. As often as time permits, I stroll along this edge, sometimes in one direction, sometimes in another, in the hope of finding the air clear enough to let me enjoy the view; but I have always been disappointed.

Wherever one looks, clouds of smoke rise from the burning bush, and the air is full of smoke and vapour. It is a pity, for under more favourable circumstances the panorama of the whole country up to the distant Majeje hills must be truly magnificent. It is of little use taking photographs now, and an outline sketch gives a very poor idea of the scenery. In one of these excursions I went out of my way to make a personal attempt on the Makonde bush. The present edge of the plateau is the result of a far-reaching process of destruction through erosion and denudation. The Makonde strata are everywhere cut into by ravines, which, though short, are hundreds of yards in depth. In consequence of the loose stratification of these beds, not only are the walls of these ravines nearly vertical, but their upper end is closed by an equally steep escarpment, so that the

western edge of the Makonde plateau is hemmed in by a series of deep, basin-like valleys. In order to get from one side of such a ravine to the other, I cut my way through the bush with a dozen of my men.

It was a very open part, with more grass than scrub, but even so the short stretch of less than two hundred yards was very hard work; at the end of it the men’s calicoes were in rags and they themselves bleeding from hundreds of scratches, while even our strong khaki suits had not escaped scatheless.

NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR MAHUTA

I see increasing reason to believe that the view formed some time back as to the origin of the Makonde bush is the correct one. I have no doubt that it is not a natural product, but the result of human occupation. Those parts of the high country where man—as a very slight amount of practice enables the eye to perceive at once—has not yet penetrated with axe and hoe, are still occupied by a splendid timber forest quite able to sustain a comparison with our mixed forests in Germany. But wherever man has once built his hut or tilled his field, this horrible bush springs up. Every phase of this process

may be seen in the course of a couple of hours’ walk along the main road. From the bush to right or left, one hears the sound of the axe— not from one spot only, but from several directions at once. A few steps further on, we can see what is taking place. The brush has been cut down and piled up in heaps to the height of a yard or more, between which the trunks of the large trees stand up like the last pillars of a magnificent ruined building. These, too, present a melancholy spectacle: the destructive Makonde have ringed them— cut a broad strip of bark all round to ensure their dying off—and also piled up pyramids of brush round them. Father and son, mother and son-in-law, are chopping away perseveringly in the background—too busy, almost, to look round at the white stranger, who usually excites so much interest. If you pass by the same place a week later, the piles of brushwood have disappeared and a thick layer of ashes has taken the place of the green forest. The large trees stretch their smouldering trunks and branches in dumb accusation to heaven—if they have not already fallen and been more or less reduced to ashes, perhaps only showing as a white stripe on the dark ground.

This work of destruction is carried out by the Makonde alike on the virgin forest and on the bush which has sprung up on sites already cultivated and deserted. In the second case they are saved the trouble of burning the large trees, these being entirely absent in the secondary bush.

After burning this piece of forest ground and loosening it with the hoe, the native sows his corn and plants his vegetables. All over the country, he goes in for bed-culture, which requires, and, in fact, receives, the most careful attention. Weeds are nowhere tolerated in the south of German East Africa. The crops may fail on the plains, where droughts are frequent, but never on the plateau with its abundant rains and heavy dews. Its fortunate inhabitants even have the satisfaction of seeing the proud Wayao and Wamakua working for them as labourers, driven by hunger to serve where they were accustomed to rule.

But the light, sandy soil is soon exhausted, and would yield no harvest the second year if cultivated twice running. This fact has been familiar to the native for ages; consequently he provides in time, and, while his crop is growing, prepares the next plot with axe and firebrand. Next year he plants this with his various crops and

lets the first piece lie fallow. For a short time it remains waste and desolate; then nature steps in to repair the destruction wrought by man; a thousand new growths spring out of the exhausted soil, and even the old stumps put forth fresh shoots. Next year the new growth is up to one’s knees, and in a few years more it is that terrible, impenetrable bush, which maintains its position till the black occupier of the land has made the round of all the available sites and come back to his starting point.

The Makonde are, body and soul, so to speak, one with this bush.

According to my Yao informants, indeed, their name means nothing else but “bush people.” Their own tradition says that they have been settled up here for a very long time, but to my surprise they laid great stress on an original immigration. Their old homes were in the south-east, near Mikindani and the mouth of the Rovuma, whence their peaceful forefathers were driven by the continual raids of the Sakalavas from Madagascar and the warlike Shirazis[47] of the coast, to take refuge on the almost inaccessible plateau. I have studied African ethnology for twenty years, but the fact that changes of population in this apparently quiet and peaceable corner of the earth could have been occasioned by outside enterprises taking place on the high seas, was completely new to me. It is, no doubt, however, correct.

The charming tribal legend of the Makonde—besides informing us of other interesting matters—explains why they have to live in the thickest of the bush and a long way from the edge of the plateau, instead of making their permanent homes beside the purling brooks and springs of the low country.

“The place where the tribe originated is Mahuta, on the southern side of the plateau towards the Rovuma, where of old time there was nothing but thick bush. Out of this bush came a man who never washed himself or shaved his head, and who ate and drank but little.

He went out and made a human figure from the wood of a tree growing in the open country, which he took home to his abode in the bush and there set it upright. In the night this image came to life and was a woman. The man and woman went down together to the Rovuma to wash themselves. Here the woman gave birth to a stillborn child. They left that place and passed over the high land into the valley of the Mbemkuru, where the woman had another child, which

was also born dead. Then they returned to the high bush country of Mahuta, where the third child was born, which lived and grew up. In course of time, the couple had many more children, and called themselves Wamatanda. These were the ancestral stock of the Makonde, also called Wamakonde,[48] i.e., aborigines. Their forefather, the man from the bush, gave his children the command to bury their dead upright, in memory of the mother of their race who was cut out of wood and awoke to life when standing upright. He also warned them against settling in the valleys and near large streams, for sickness and death dwelt there. They were to make it a rule to have their huts at least an hour’s walk from the nearest wateringplace; then their children would thrive and escape illness.”

The explanation of the name Makonde given by my informants is somewhat different from that contained in the above legend, which I extract from a little book (small, but packed with information), by Pater Adams, entitled Lindi und sein Hinterland. Otherwise, my results agree exactly with the statements of the legend. Washing?

Hapana—there is no such thing. Why should they do so? As it is, the supply of water scarcely suffices for cooking and drinking; other people do not wash, so why should the Makonde distinguish himself by such needless eccentricity? As for shaving the head, the short, woolly crop scarcely needs it,[49] so the second ancestral precept is likewise easy enough to follow. Beyond this, however, there is nothing ridiculous in the ancestor’s advice. I have obtained from various local artists a fairly large number of figures carved in wood, ranging from fifteen to twenty-three inches in height, and representing women belonging to the great group of the Mavia, Makonde, and Matambwe tribes. The carving is remarkably well done and renders the female type with great accuracy, especially the keloid ornamentation, to be described later on. As to the object and meaning of their works the sculptors either could or (more probably) would tell me nothing, and I was forced to content myself with the scanty information vouchsafed by one man, who said that the figures were merely intended to represent the nembo—the artificial deformations of pelele, ear-discs, and keloids. The legend recorded

by Pater Adams places these figures in a new light. They must surely be more than mere dolls; and we may even venture to assume that they are—though the majority of present-day Makonde are probably unaware of the fact—representations of the tribal ancestress.

The references in the legend to the descent from Mahuta to the Rovuma, and to a journey across the highlands into the Mbekuru valley, undoubtedly indicate the previous history of the tribe, the travels of the ancestral pair typifying the migrations of their descendants. The descent to the neighbouring Rovuma valley, with its extraordinary fertility and great abundance of game, is intelligible at a glance—but the crossing of the Lukuledi depression, the ascent to the Rondo Plateau and the descent to the Mbemkuru, also lie within the bounds of probability, for all these districts have exactly the same character as the extreme south. Now, however, comes a point of especial interest for our bacteriological age. The primitive Makonde did not enjoy their lives in the marshy river-valleys.

Disease raged among them, and many died. It was only after they had returned to their original home near Mahuta, that the health conditions of these people improved. We are very apt to think of the African as a stupid person whose ignorance of nature is only equalled by his fear of it, and who looks on all mishaps as caused by evil spirits and malignant natural powers. It is much more correct to assume in this case that the people very early learnt to distinguish districts infested with malaria from those where it is absent.

This knowledge is crystallized in the ancestral warning against settling in the valleys and near the great waters, the dwelling-places of disease and death. At the same time, for security against the hostile Mavia south of the Rovuma, it was enacted that every settlement must be not less than a certain distance from the southern edge of the plateau. Such in fact is their mode of life at the present day. It is not such a bad one, and certainly they are both safer and more comfortable than the Makua, the recent intruders from the south, who have made USUAL METHOD OF good their footing on the western edge of the CLOSING HUT-DOOR plateau, extending over a fairly wide belt of country. Neither Makua nor Makonde show in their dwellings anything of the size and comeliness of the Yao houses in the plain, especially at Masasi, Chingulungulu and Zuza’s. Jumbe Chauro, a Makonde hamlet not far from Newala, on the road to Mahuta, is the

most important settlement of the tribe I have yet seen, and has fairly spacious huts. But how slovenly is their construction compared with the palatial residences of the elephant-hunters living in the plain.

The roofs are still more untidy than in the general run of huts during the dry season, the walls show here and there the scanty beginnings or the lamentable remains of the mud plastering, and the interior is a veritable dog-kennel; dirt, dust and disorder everywhere. A few huts only show any attempt at division into rooms, and this consists merely of very roughly-made bamboo partitions. In one point alone have I noticed any indication of progress—in the method of fastening the door. Houses all over the south are secured in a simple but ingenious manner. The door consists of a set of stout pieces of wood or bamboo, tied with bark-string to two cross-pieces, and moving in two grooves round one of the door-posts, so as to open inwards. If the owner wishes to leave home, he takes two logs as thick as a man’s upper arm and about a yard long. One of these is placed obliquely against the middle of the door from the inside, so as to form an angle of from 60° to 75° with the ground. He then places the second piece horizontally across the first, pressing it downward with all his might.

It is kept in place by two strong posts planted in the ground a few inches inside the door. This fastening is absolutely safe, but of course cannot be applied to both doors at once, otherwise how could the owner leave or enter his house? I have not yet succeeded in finding out how the back door is fastened.

MAKONDE LOCK AND KEY AT JUMBE CHAURO

This is the general way of closing a house. The Makonde at Jumbe Chauro, however, have a much more complicated, solid and original one. Here, too, the door is as already described, except that there is only one post on the inside, standing by itself about six inches from one side of the doorway. Opposite this post is a hole in the wall just large enough to admit a man’s arm. The door is closed inside by a large wooden bolt passing through a hole in this post and pressing with its free end against the door. The other end has three holes into which fit three pegs running in vertical grooves inside the post. The door is opened with a wooden key about a foot long, somewhat curved and sloped off at the butt; the other end has three pegs corresponding to the holes, in the bolt, so that, when it is thrust through the hole in the wall and inserted into the rectangular opening in the post, the pegs can be lifted and the bolt drawn out.[50]

MODE OF INSERTING THE KEY

With no small pride first one householder and then a second showed me on the spot the action of this greatest invention of the Makonde Highlands. To both with an admiring exclamation of “Vizuri sana!” (“Very fine!”). I expressed the wish to take back these marvels with me to Ulaya, to show the Wazungu what clever fellows the Makonde are. Scarcely five minutes after my return to camp at Newala, the two men came up sweating under the weight of two heavy logs which they laid down at my feet, handing over at the same time the keys of the fallen fortress. Arguing, logically enough, that if the key was wanted, the lock would be wanted with it, they had taken their axes and chopped down the posts—as it never occurred to them to dig them out of the ground and so bring them intact. Thus I have