This has all changed over the last 30 years. Geography has entered international economics. I can’t take any credit for the change. Krugman is the one who can.
Okay, so what was my idea? Perhaps the most ubiquitous and intractable obstacle plaguing all of empirical economics, especially macroeconomics, is the problem of causality. We observe that countries that engage in more international trade tend to benefit from higher incomes. But does trade cause growth or does growth cause trade? “Correlation need not imply causality.” In a 1999 article, David Romer and I used the gravity model of bilateral trade to try to solve the causality question. Newton’s theory of gravity says that the attraction between two bodies is proportionate to the product of their sizes and inversely related to the physical distance between them. The gravity theory of trade says that trade between two countries (or provinces) is proportionate to their sizes and inversely related to the economic distance between them. Size can be measured by population. Economic distance can be measured by geographic distance and other variables to capture transport costs, linguistic and political barriers, and so forth. The gravity model predicts bilateral trade quite well.14 In the paper with Romer, we used the gravity model, first, to come up with an exogenous predictor of each country’s overall level of trade and then to test whether economic growth, other things equal, had blessed those countries that were geographically well-situated for trade, versus those that were remote, landlocked, or otherwise encumbered. The answer was yes. We now felt better able to claim that, in the case of trade and growth, the relationship was indeed causal. A “point estimate” is that the difference between a hypothetical country with no trade (say, Burma) and one where exports plus imports total 200% of GDP (say Singapore) is by itself worth an 80% increase in income over 20 years.
I have used the geographic determinants of trade to address the causality problem in many other areas as well. “The Endogeneity of the Optimum Currency Area Criteria,” with Andy Rose, found that higher trade between a pair of countries leads to more synchronized business cycles. Another paper with Andy found that international trade is good for some measures of environmental quality, such as local air pollution, but not others, such as greenhouse gas emissions. A paper with Eduardo Cavallo found that countries that are more open to international trade were less likely to suffer severe financial crises.
Become an economist; see the world
My career has afforded me the luxury of indulging my geographic interests in a more tangible way as well. International economics does not, like the field of development economics, oblige one actually to spend time in countries without reliable running water and electricity, at least not for more than a few weeks at a time. But I have been able to travel widely, always on somebody else’s nickel. Some institution in the host country pays. (For years I competed against my brother regarding who had been to more countries.15 Eventually he dropped out, complaining that it was an unfair competition because my travels were so heavily subsidized.) Most trips are simply for conferences. But sometimes it is teaching, sometimes research, sometimes consulting.
It all started at the mid-point of my graduate studies at MIT. In 1976, Dick Eckaus and our other professors packed five of us -- Krugman, three other classmates, and me -- off to Portugal for a summer. I remember thinking, on the plane going over, “what do we know about advising a government?” The man we were to work for, Jose da Silva Lopes, Governor of the Central Bank, apparently thought the same thing, when we arrived in Lisbon and he saw how young we were. Eventually we proved, both to ourselves and to our host country, that we had something to offer after all. A little bit of economic reasoning can take you further than you might think.
One story from that first experience at advising long ago stands me in good stead, every year when I need to explain to my students the concept of seignorage. We were living in hotels. At the end of the first month, we had to pay the bill. But for bureaucratic reasons, the wire transfers we were expecting had not yet come through. We apologetically explained our problem to the Governor. Responding “no problem,” he summoned an aide who took us to the basement where the printing presses were turning out the national currency. They counted out enough escudos to tide each of us over. I don’t know if the Bank of Portugal ran the printing presses for an extra few seconds that day; if so, it was truly seignorage.
More of the important conferences take place in the United States and Western Europe than in the rest of the world. But the rest of the world is in some sense more interesting. The other places where I have become most involved (in the superficial way that we jet-setting international economists are accustomed to) include: Japan, Korea, China, Central Europe, the Gulf, Latin America, South Africa, and Mauritius. One benefit of having had what is by now a long line of students – first at Berkeley and now at Harvard -- is that one finds them years later all over the world (often in important positions of responsibility). It can make the trips especially interesting.
I got married, just as this book went to press. Kathy Moon is a smart and beautiful professor, who teaches political science at Wellesley College, not far away. By coincidence she, like I, was born in San Francisco. She is of Korean descent, and an expert on Asian-American relations. Perhaps, as occurred to me half a century ago in California, the next big leap is indeed to Asia.