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Getting
Globalization
Right
Sustainability and Inclusive Growth in
the Post Brexit Age
Luigi Paganetto
Editor

Sustainability and Inclusive Growth
in the Post Brexit Age
123
Editor
Luigi Paganetto
FUET, Economics Foundation
University of Rome Tor Vergata
Rome, Italy
ISBN 978-3-319-97691-4 ISBN 978-3-319-97692-1 (eBook)

https://doi.org/10.1007/978-3-319-97692-1
Library of Congress Control Number: 2018951203
© Springer Nature Switzerland AG 2018

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Contents
Global Implications of U.S. Trade Policies for Reducing

Structural Trade Imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
D. Salvatore and F. Campano
The Dutch Disease in Reverse: Iceland’s Natural Experiment . . . . . . . . 13
Thorvaldur Gylfason and Gylfi Zoega
Skill Polarization and Inequality: Are They Real
and Inevitable? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Luigi Paganetto and Pasquale Lucio Scandizzo
Global Macroeconomic Effects of Exiting from Unconventional
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
P. Cova, P. Pagano and M. Pisani
On the Sources of Political Discontent in Europe . . . . . . . . . . . . . . . . . . 89
David Freyr Bjornsson and Gylfi Zoega
Land, Housing, Growth and Inequality . . . . . . . . . . . . . . . . . . . . . . . . . 119
Luigi Bonatti
Globalization and National Income Inequality: Observations
and Lessons from the U.S. Experience . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Danny M. Leipziger
Sustainable Economic Growth in the Euro Area: The Need
for a “Long View” and “Going Granular” . . . . . . . . . . . . . . . . . . . . . . . 175
Ettore Dorrucci
Does Access to Finance Improve Productivity? The Case
of Italian Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Adele Galasso, Francesco Gerotto, Giancarlo Infantino, Francesco Nucci
and Ottavio Ricchi
v
vi Contents
Is Italy on the Pathway for Achieving Sustainable Development

Goals? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Lorenza Campagnolo and Davide Ciferri
Incoming Labor-Product Society and EU Regional Policy . . . . . . . . . . . 241
Martino Lo Cascio and Massimo Bagarani
Globalization and Inclusive Growth: Can They Go Hand
in Hand in Developing Countries? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
Rupa Duttagupta, Sandra Lizarazo Ruiz, Angelica Martinez Leyva
and Marina Mendes Tavares
Global Implications of U.S. Trade Policies
for Reducing Structural Trade
Imbalances
D. Salvatore and F. Campano
Abstract The aim of this research is to assess the international transmission of trade
policies originating in the United States to its major trading partners, most of whom
are members of the G20. We began by estimating twenty-one macroeconomic models
of the G20 based on the national accounts (by expenditure) from the United Nations
Statistical Department. The baseline scenario is based upon a Harrod-Domar model
on the supply side and demand equations for household consumption, government
and imports. A 21 by 21 world trade matrix was constructed from the bilateral export
data also produced by the UN statistical department. This provided a mechanism
to estimate the exports of the national and regional models from the trade shares.
Based on the new exports, GDP is re-summed and the demand side of the economy
is re-estimated. This is continued until the system convergences. The final estimates
and the baseline estimates are compared to give an estimate of the impact of the
change resulting from the assumptions corresponding to the import policy.
Keywords Harrod-Domar model · Trade matrix · Basic scenario · U.S. import

policy · International transmission of trade policies
1 Introduction
In the United States, the share of imports in GDP has been annually higher than
the corresponding share of exports in GDP for decades (Fig. 1). Over the period
2000–2015, the average trade deficit was 3.87% of GDP, with no sign of improve-
ment. One way to reduce the national debt, is to reduce the external deficit and that
can be done either by reducing imports or increasing exports (or some combination
of both). Most developing Asian countries have been successful in narrowing their
D. Salvatore (B) · F. Campano

Department of Economics, Fordham University, Bronx, New York, USA
e-mail: salvatore@fordham.edu
F. Campano
e-mail: campano@fordham.edu
© Springer Nature Switzerland AG 2018 1

L. Paganetto (ed.), Getting Globalization Right,
https://doi.org/10.1007/978-3-319-97692-1_1
2 D. Salvatore and F. Campano
Fig. 1 U.S. trade shares in GDP, 2000–2015
external deficit by following the post-war Japanese model of export promotion, while
developing countries elsewhere did not do as well with import substitution policies.
However, part of the reason why import substitution policies have not worked in the
past in developing countries is the delay it takes to develop a comparative advan-
tage when the country lacks the technologies of the more advanced countries. So,
the question arises what happens if the United States (which has the most advanced
technology at its disposal) practices import substitution?
In this paper, we will simulate some of the results for the United States and its major
trading partners in the G20, if the United States reduced its imports. To this end, four
scenarios are estimated, namely: (1) a baseline scenario which is a continuation of
the 2000–2015 trends without any intervention on imports; (2) a non-discrimination
scenario where the US reduces its total import demand by 30%; (3) a discrimination
scenario where the US reduces its imports by 30% only from China, Germany and
Mexico (the nations with which the United States has the largest trade deficit), and
(4) the same discrimination scenario as above, but in which China, Germany and
Mexico retaliate by reducing their imports from the United States by 30%.
Global Implications of U.S. Trade Policies … 3
2 The Methodology
For each of the countries of the G20 a model to project the national accounts expen-
diture table to the year 2018 is estimated. This includes the rest of the European
Union (those members of the EU not included in the G20) as a group and the rest
of the world in another aggregate group. The rest of the world is an aggregation of
166 countries, but which only accounts for 15.4% of the US imports. Canada alone
accounts for 15.1% of US imports, China for 19.8%, Mexico 14.9% and Germany
6.1%. The rest of the EU accounts for 6.6%. The remaining 22.0% comes from the
other members of the G20. These figures are based upon the bilateral trade data for
2015 supplied by the United Nations Statistical Division. We also used the bilateral
export data to construct a 21 by 21 trade share matrix in which the columns are
the trade shares in the imports of the 21 countries and groups. When the matrix is
multiplied by the vector of total import demand of the 21 countries (and groups), the
vector of exports allocated to each country (or group) is obtained.
The expenditure models consist of a Harrod-Domar production function and three
demand equations driven by the projected GDP for each country (Van den Berg 2013;
Gana et al. 2013). These are used to obtain household consumption, government
expenditure and imports. As mentioned above, exports are determined by the trade
matrix shares. Investment shares in GDP are exogenous and based on the average
shares from 2000 to 2015. The estimated parameters for each country (and group)
are shown in the appendix.
3 The Baseline Projection
GDP is projected using the Harrod-Domar model. No assumption is made of any

change in trade policy in the United States or anywhere else. Table 1 shows the
projections for the United States in levels (in 2005 U.S. dollars) and each expenditure
component as a share of GDP. The projected growth rate which is based on the
estimated Harrod-Domar parameters is 1.65% per annum. The share of net exports
in GDP shows a tendency to decline slightly from a negative 3.6% in 2016 to negative
3.3% in 2018. A summary of the rest of the countries (and groups) for the baseline
is shown in Table 2. One of the goals of the new administration is to raise the growth
rate from 1.65% to above 3%. We will see in the other scenarios how much the
growth rate will change when the assumptions of each scenario are simulated.
4 Scenario 1: 30% Reduction in Imports—No

Discrimination
In this scenario, we assume that the United States can successfully reduce its imports
by 30%. It manages to do this by import substitution and by increasing domestic
Table 1 Baseline scenario—historical and projected U.S. expenditure variables (levels in millions
of 2005 U.S. dollars)
t Y C G I X M
2000 11,553,316 7,537,905 1,766,932 2,685,143 1,191,944 1,628,608
2001 1,166,6074 7,728,087 1,829,451 2,568,647 1,122,299 1,582,410
2002 11,874,444 7,927,027 1,900,210 2,584,667 1,102,948 1,640,408
2003 12,207,733 8,177,153 1,934,392 2,687,434 1,122,403 1,713,649
2004 12,669,888 8,494,837 1,964,330 2,888,042 1,231,867 1,909,188
2005 13,093,720 8,794,100 1,980,050 3,040,750 1,308,900 2,030,080
2006 13,442,886 9,060,970 2,001,853 3,111,320 1,427,163 2,158,420
2007 13,681,971 9,263,160 2,029,793 3,042,408 1,559,407 2,212,797
2008 13,642,076 9,238,330 2,081,207 2,829,860 1,648,857 2,156,178
2009 13,263,437 9,108,828 2,159,172 2,351,843 1,503,855 1,860,261
2010 13,599,256 9,275,229 2,161,648 2,576,443 1,682,737 2,096,801
2011 13,817,045 9,475,817 2,104,292 2,650,459 1,798,017 2,211,540
2012 14,124,336 9,605,853 2,085,790 2,834,082 1,859,463 2,260,852
2013 14,334,721 9,763,844 2,033,852 2,910,167 1,911,483 2,284,625
2014 14,701,679 1,013,208 2,021,736 3,046,703 2,006,358 2,386,325
2015 15,083,356 10,331,038 2,054,909 3,184,503 2,008,557 2,495,650
2016 15,332,549 10,362,811 2,162,800 3,350,929 2,029,853 2,573,844
2017 15,585,858 10,534,016 2,182,209 3,406,289 2,103,725 2,640,380
2018 15,843,353 10,708,048 2,201,939 3,457,891 2,183,490 2,708,016
Shares of GDP
2007 100.0 67.7 14.8 22.2 11.4 16.2
2008 100.0 67.7 15.3 20.7 12.1 15.8
2009 100.0 68.7 16.3 17.7 11.3 14.0
2010 100.0 68.2 15.9 18.9 12.4 15.4
2011 100.0 68.6 15.2 19.2 13.0 16.0
2012 100.0 68.0 14.8 20.1 13.2 16.0
2013 100.0 68.1 14.2 20.3 13.3 15.9
2014 100.0 68.1 13.8 20.7 13.6 16.2
2015 100.0 68.5 13.6 21.1 13.3 16.5
2016 100.0 67.6 14.1 21.9 13.2 16.8
2017 100.0 67.6 14.0 21.9 13.5 16.9
2018 100.0 67.6 13.9 21.9 13.8 17.1
Table 2 Baseline expenditure projections for 2018 (in millions of 2005 U.S. dollars)
Y C G I X M
USA 15,843,353 10,708,049 2,201,939 3,457,891 2,183,490 2,708,016
China 7,697,523 2,837,647 1,230,870 3,614,998 2,531,987 2,517,979
Canada 1,459,205 827,011 294,262 342,144 544,616 548,828
Japan 5,150,134 2,898,536 998,695 1,100,294 957,816 805,206
Germany 3,403,903 1,807,810 636,971 649,361 1,838,454 1,528,692
France 2,478,169 1,374,338 596,983 589,611 728,765 811,528
United 2,958,074 1,868,276 602,283 566,405 834,645 913,534
Kingdom
Italy 1,819,686 1,087,907 357,890 304,793 529,466 460,371
Rep. of 1,426,562 663,932 206,603 457,973 763,454 665,401
Korea
India 2,087,784 1,129,056 207,720 825,451 551,097 625,540
Argentina 307,929 210,661 34,924 68,373 59,197 65,226
Australia 1,082,979 617,402 187,021 332,516 275,687 329,647
Brazil 1,245,463 811,883 220,333 259,511 237,629 283,893
Indonesia 618,364 370,826 55,711 151,115 228,624 187,911
Mexico 1,171,674 799,504 125,654 263,848 403,713 421,044
Russian 1,081,882 597,138 148,417 275,365 422,368 361,406
Fed.
Saudi 541,135 169,637 138,868 158,960 318,610 244,940
Arabia
South 366,629 232,419 78,225 76,827 100,990 121,832
Africa
Turkey 797,567 545,719 104,942 160,899 203,766 217,759
EU rest 586,2478 3,088,869 1,222,979 1,386,835 3,424,009 3,260,215
Residual 7,768,589 4,419,584 1,056,495 2,070,814 4,606,436 4,384,740
investment in some of the industries, such as the shoe industry or the automobile
industry, where at one time the US was self-sufficient but has since lost a good
share of the domestic market to globalization. The revival of these industries is done
without the intention of targeting any other nations exports to the United States—it
is simply a reduction of the total imports to the United States by modernizing the
selected industries. In such a case, we will assume all other countries will have the
same share of total US imports as in the baseline, but the total imports will be lower.
When we iterate this scenario to convergence, we get the result as shown in Table 3.
For the United State, GDP rises to $16,806,629 million as compared with
$15,843,353 million in the baseline. This is about 6.1% higher for GDP, house-
hold consumption and investment. The larger GDP implies more government spend-
ing (both federal and state). However, the convergence levels only reduce imports by
23.5%, not the full 30% as targeted. Furthermore, exports are also reduced by 27.4%.
Table 3 Scenario 1: 30% reduction in U.S. imports in 2018, with no discrimination (in millions of
2005 U.S. $)
Y C G I X M
USA 16,806,629 11,359,098 2,275,747 3,668,131 1,584,642 2,072,726
China 8,491,383 3,120,653 1,335,805 3,987,819 2,842,142 2,789,489
Canada 1,275,051 722,641 254,708 298,965 444,537 445,396
Japan 5,279,774 2,953,216 1,031,669 1,127,991 1,021,714 853,505
Germany 3,625,411 1,874,497 680,643 691,617 2,169,117 1,791,066
France 2,321998 1,287,729 548,198 552,455 624,753 690,747
United 2,328,318 1,470,531 472,421 445,820 580,447 639,859
Kingdom
Italy 2,081,875 1,213,326 381,924 348,709 713,918 575,618
Rep. of 1,546,951 708,496 225,877 496,622 862,345 746,167
Korea
India 1,298,597 718,425 135,215 513,429 281,747 349,591
Argentina 345,690 236,494 39,408 76,758 71,011 77,789
Australia 1,022,151 582,724 176,499 313,839 247,570 298,149
Brazil 1,213,895 791,304 215,511 252,934 224,318 269,816
Indonesia 660,261 394,916 59,875 161,353 246,714 202,198
Mexico 1,144,463 780,936 122,879 257,720 388,404 405,164
Russian 1,260,557 695,757 158,933 320,842 552,140 466,859
Federation
Saudi 506,192 158,683 128,046 148,695 291,705 220,830
Arabia
South 300,742 190,651 61,461 63,020 74,772 89,027
Africa
Turkey 711,079 488,330 93,289 143,451 175,537 189,100
EU rest 6,156,6752 3,228,218 1,289,393 1,456,449 3,751,854 3,569,672
Residual 8,406,414 4,782,446 1,145,123 2,240,834 5,074,676 4,834,427
Overall, the trade gap is reduced from −$524,525 to –$488,084 million. Hence the
foreign deficit is reduced from 3.3 to 2.9%. Hence, this outcome would be beneficial
for the United States.
Since we are assuming that trade shares do not change, those countries which
send a large proportion of their total exports to the United States will be affected the
most by the reduction in total U.S. imports. These include Canada whose proportion
of exports to the US is 76.8% and Mexico whose exports to the US is 81.2% of
its total. China’s exports to the United States are only 18% of its total and Germany
exports only 9.6% of its total exports to the United States. As a result of this scenario,
Canada’s GDP decreases by 12.6% as compared to the baseline and Mexico’s GDP
decreases by 2.3%. On the other hand, both China’s and Germany’s GDP increase
over the baseline by 10.3% and 6.5%, respectively. The United Kingdom, which
sends 16.6% of its exports to NAFTA, faces a 21.3% decline in its GDP relative
to the baseline. The lowering of the U.K.’s GDP causes a lowering of its import
demand, so that countries such as Australia and India which depend on the U.K.’s
imports are affected negatively. Italy, which sends 8.7% of its exports to the United
States and 12.3% of its exports to Germany, experiences a GDP growth of 14.4%
over the baseline. France’s GDP, on the other hand, decreases 6.3% relative to the
baseline.
5 Scenario 2: The United States Reduces Its Import Share

from China, Mexico and Germany, and These Countries
Do Not Retaliate
In this scenario (Table 4), we simulate the result if the United States reduces its import
share from China, Mexico and Germany by 30% and these countries do not retaliate.
Such an action causes the GDP of the United States to increase by about 0.7% and,
as a result, its total imports will not be lower, but increase by about 1%. However, the
amounts imported from China, Germany and Mexico decrease by 30%. Net exports
as a percentage of GDP remains above 3%, which is slightly lower than the baseline.
The resulting change in GDP relative to the baseline for China would be −2.7%, for
Germany −0.1% and for Mexico −13.7%. Canada would benefit with an increase
of exports to the United States of 16.6%.
6 Scenario 3: The United States Lowers Imports

from China, Mexico and Germany by 30%, and These
Countries Retaliate
This scenario is similar to scenario 2 above, but in this case China, Germany and
Mexico retaliate by also reducing their import share from the United States by 30%.
In this case, the total exports of the United States decrease from $2,219,551 to
$2,054,775 million, or by 7.4%. This causes a lower GDP and lower total imports
for the United States. Now net U.S. exports as a percentage of GDP remain above 3%
of GDP. Furthermore, the level of GDP is 2.8% lower than the baseline projection
for the United States, 1.7% lower than the baseline for China, and 15.4% lower than
the baseline for Mexico. On the other hand, Germany’s GDP is 0.5% higher than
under the baseline projection and Canada’s 8.7% higher (Table 5).
7 Conclusions
Our model indicates that the United States can reduce its trade imbalance, but it
should not try to reduce it by using protectionist policies. Targeting major trading
Table 4 Scenario 2: the United States lowers imports from China, Mexico and Germany by 30%,
with no retaliation (in millions of 2005 U.S. dollars)
Y C G I X M
USA 15,947,674 10,778,556 2,209,932 3,480,659 2,219,551 2,735,417
China 7,492,019 2,764,386 1,203,706 3,518,487 2,457,230 2,447,694
Canada 1,624,238 920,544 329,709 380,8„40 635,115 641,521
Japan 5,248,291 2,939,937 1,023,661 1,121,265 1,006,264 841,776
Germany 3,402,123 1,807,274 636,620 649,021 1,835,233 1,526,584
France 2,517,350 1,396,066 609,223 598,933 755,343 841,830
United 3,060,840 1,933,181 623,474 586,082 877,674 958,193
Kingdom
Italy 1,850,955 1,102,865 360,757 310,030 551,663 474,115
Rep. of 1,455,863 674,779 211,294 467,380 787,638 685,059
Korea
India 2,177,689 1,175,835 215,979 860,997 583,086 656,976
Argentina 314,205 214,954 35,669 69,767 61,279 67,314
Australia 1,093816 623,580 188,896 335,843 281,074 335,258
Brazil 1,264,929 824,572 223,306 263,568 246,389 292,573
Indonesia 641,612 384,193 58,022 156,796 238,778 195,839
Mexico 1,011,033 689,889 109,272 227,673 311,694 327,298
Russian 1,098,191 606,140 149,377 279,516 434,359 371,032
Federation
Saudi 554,335 173,775 142,956 162,837 328,916 254,048
Arabia
South 376,289 238,543 80,682 78,851 105,023 126,641
Africa
Turkey 818,941 559,902 107,821 165,211 211,346 224,842
EU Rest 5,967,031 3,138,378 1,246,575 1,411,569 3,540,290 3,370,162
Residual 7,982,312 4,541,173 1,086,193 2,127,784 4,764,343 4,535,422
partners with quotas can lead to negative results for all parties concerned. This is
especially true for countries like Canada and Mexico whose exports to the United
States are the bulk of their exports. China and Germany spread their exports more
globally, and are not as dependent on their exports to the United States, as Canada
and Mexico do. Consequently, import sanctions against them do not disrupt their
economies as much as sanctions against the NAFTA partners. Nevertheless, sanctions
against China and Germany do not help the U.S. situation because it is unlikely that
these nations would not retaliate, and this could hurt the United States more than
hurt them. A better approach for closing the U.S. trade gap is to revitalize those
industries that it has given up decades ago. To do this, it would be necessary to
produce the products that the United States now imports more efficiently than the
countries that are exporting them to the United States. This implies a technological
update which lowers domestic costs for products that are more in line with tastes of
Table 5 Scenario 3: the United States lowers imports from China, Mexico and Germany by 30%,
and they retaliate (in millions of 2005 U.S. dollars)
Y C G I X M
USA 15,395,565 10,405,402 2,167,628 3,360,159 2,054,775 2,590,396
China 7,567,003 2,791,118 1,213,617 3,553,701 2,483,909 2,473,339
Canada 1,585,670 898,685 321,425 371,797 613,852 619,858
Japan 5,271,608 2,949,772 1,029,592 1,126,246 1,017,037 850,463
Germany 3,420,899 1,812,927 640,322 652,603 1,863,103 1,548,824
France 2,534,605 1,405,636 614,613 603,039 766,700 855,175
United 3,080,806 1,945,791 627,591 589,905 885,002 966,870
Kingdom
Italy 1,861,893 1,108,097 361,759 311,863 559,239 478,923
Rep. of 1,474,204 681,568 214,231 473,267 802,648 697,362
Korea
India 2,192,293 1,183,434 217,321 866,771 587,437 662,083
Argentina 317,804 217,417 36,097 70,566 62,319 68,512
Australia 1,106,347 630,724 191,064 339,691 286,812 341,747
Brazil 1,274,993 831,132 224,843 265,664 250,596 297,060
Indonesia 648,370 388,079 58,693 158,448 241,476 198,143
Mexico 991,561 676,602 107,286 223,288 300,421 315,934
Russian 1,108,897 612,049 150,007 282,241 442,057 377,350
Federation
Saudi 561,236 175,939 145,093 164,865 334,220 258,809
Arabia
South 379,783 240,758 81,571 79,584 106,337 128,381
Africa
Turkey 828,861 566,484 109,158 167,212 214,370 228,129
Eurest 6,018,581 3,162,789 1,258,209 1,423,763 3,597,871 3,424,371
Residual 8,083,556 4,598,770 1,100,261 2,154,772 4,837,845 4,606,801
U.S. consumers. This can be done for consumer goods, investment goods as well as
for energy products (i.e. solar panels, wind turbines and shale oil). Likewise, more
export promotion of U.S. services and less dependence on foreign suppliers would
help. Once the domestic industries become lower-cost and more efficient producers,
they would be able to compete in the global market place and the U.S. trade imbalance
will naturally improve and correct itself.
Appendix
See Tables 6 and 7.
Table 6 Production function parameters

Country ICOR I/Y Growth rate
United States 13.20 21.83 1.65
China 4.63 46.96 10.13
Canada 12.15 23.45 1.93
Japan 24.65 21.36 0.87
Germany 16.91 19.08 1.13
France 22.27 23.79 1.07
UK 12.01 19.15 1.59
Italy 16.75 16.75 1.00
R. Korea 8.21 32.10 3.91
India 5.22 39.54 7.57
Argentina 5.73 22.20 3.87
Australia 10.54 30.70 2.91
Brazil 6.37 20.84 3.27
Indonesia 4.42 24.44 5.53
Mexico 9.64 22.52 2.34
Russia 6.47 25.45 3.93
Saudi Arabia 6.92 29.38 4.24
South Africa 6.60 20.96 3.17
Turkey 4.54 20.17 4.45
EU Rest 17.90 23.66 1.32
Residual 6.24 26.66 4.27
Table 7 Demand functions’ parametersa

Consumption Government Imports
Country Intercept MPC/APC Intercept Slope Intercept Slope
U. States 0 0.6758701 987,989.3 0.076622 −1,453,526.3 0.262668
China 93,534.05 0.356493 213,388.03 0.132183 −114,674.05 0.342013
Canada 0 0.5667544 −19,156.5 0.24787 −270,749 0.56166
Japan 72,6250.1 0.421792 −311,247 0.254351 −1,113,559 0.372566
Germany 783,023.8 0.301062 −341,35.8 0.197158 −2,503,200.5 1.184491
France 0 0.5545778 −177,162 0.312386 −1,105,061 0.773389
UK 0 0.6315852 −7,698.97 0.206209 −371,965 0.434573
Italy 217,457 0.478352 191,086.9 0.091666 −339,483 0.439556
R. Korea 135,878.6 0.3701585 −21,786.4 0.160098 −291,638 0.670871
India 42,737.88 0.520321 −15908.64 0.091873 −104,479 0.349662
Argentina 0 0.6841216 −1,643.22 0.118752 −37,218.9 0.332691
Australia 0 0.570096 −323.22 0.17299 −231,136 0.517815
Brazil 0 0.6518723 30103.39 0.1527377 −271,468 0.4459071
Indonesia 15,271.93 0.5749909 −5749.09 0.0993916 −22,949.7 0.340998
Mexico 0 0.6823603 −6168.66 0.101978 −262,715 0.5835741
Russia 0 0.5519442 84,743.17 0.058855 −277,115 0.590195
Saudi Arabia 0 0.3134842 −28,722 0.3097 −128,431 0.689977
South Africa 0 0.6339345 −15,058 0.254433 −60,708.3 0.497887
Turkey 16,496.38 0.663546 −2,517.85 0.134734 −46,526.9 0.331365
Rest of EU 312,792.2 0.473533 −100,118 0.225689 −2,904,732 1.051594
Residual 0 0.5689044 −22,981.7 0.138954 −1,092,364 0.705032
a R-squares and t statistics furnished upon request
References
Gana, J. L., Hickman, B. G., Lau, L. J., & Jacobson, L. R. (1979). Alternative approaches to linkage
of national econometric models. In J. A. Sawyer (Ed.), Modeling the international transmission
mechanism. North-Holland, New York.
Van den Berg, H. (2013). Growth theory after Keynes, part I: The unfortunate suppression of the
Harrod-Domar model. The Journal of Philosophical Economics VII:1.
The Dutch Disease in Reverse: Iceland’s
Natural Experiment
Thorvaldur Gylfason and Gylfi Zoega
Abstract For a long time, abundant natural resources brought Iceland a high and
volatile real exchange rate with adverse effects on manufacturing and services. Dur-
ing 2003–2008, another national treasure, the sovereign’s AAA rating, was used by
privatized banks to attract foreign capital, elevating the real exchange rate even fur-
ther. The financial collapse and the associated collapse of the currency in 2008 left
the country with a large foreign debt which offset some of the effect of the natural
resources on the real exchange rate. In effect, this was the Dutch disease in reverse
as witnessed, in particular, by a massive increase in the number of tourists following
the financial collapse. This paper discusses the behavior of the exchange rate of the
Icelandic króna before and after 2008 as well as its relationship to natural resources,
capital flows, output, exports and imports, including tourism.
Keywords Natural resource curse · Dutch disease · Financial crisis
JEL Classification F41 · O23 · O33
Gylfi Zoega—Member of the Monetary Policy Committee of the Central Bank of Iceland. We thank
Benedikt Goderis, Gylfi Magnússon, Fredrick Van der Ploeg, Hamid Raza, Ron Smith and Ragnar
Torvik for helpful comments on earlier versions of this paper and also Yu-Fu Chen for his comments
as well as research assistance. The views expressed are our own and do not necessarily reflect the
views of the Central Bank of Iceland. An earlier version of the paper appeared as OxCarre Research
Paper 138, Oxford Centre for the Analysis of Resource Rich Economies, Oxford University, May
2014.
T. Gylfason · G. Zoega (B)

Department of Economics, University of Iceland, Saemundargata 2, Reykjavik, Iceland
e-mail: gz@hi.is
T. Gylfason
e-mail: gylfason@hi.is
T. Gylfason
CESifo, Munich, Germany
G. Zoega
Birkbeck College, University of London, Malet street, London wc2e 7hx, UK
© Springer Nature Switzerland AG 2018 13

L. Paganetto (ed.), Getting Globalization Right,
https://doi.org/10.1007/978-3-319-97692-1_2
14 T. Gylfason and G. Zoega
Rarely does the opportunity arise for economists to revisit their theories using data
from natural experiments. The recent economic history of Iceland offers such an
opportunity. We refer to the literature, relaunched by Sachs and Warner (1995),
on various aspects of the potentially adverse effects of natural resource discover-
ies on employment and investment as well as on economic growth. The inverse
cross-country relationship between natural resources and growth has been broadly
confirmed in several studies1 while questioned by others.2
The literature on the macroeconomic consequences of natural resources highlights
several channels through which economic growth can be retarded. These include rent
seeking,3 the Dutch disease,4 poor governance,5 political or ethnic conflict,6 corrup-
tion,7 autocracy,8 excessive borrowing9 and low levels of education.10 Ross (2011),
van der Ploeg (2011), Frankel (2014) and Venables (2016) survey the literature.
If learning-by-doing occurs mostly in the secondary (i.e., manufacturing and ser-
vices) export sector and not in the primary (i.e., natural-resource-based) sector, a large
and volatile primary sector will adversely affect the production of tradable goods by
increasing real wages and the real exchange rate, lowering the relative price of trad-
able goods (i.e., exports and import-competing goods) and hampering employment,
investment and growth.11 Insofar as the trouble with abundant natural resources has
to do with the real appreciation of the currency, the depreciation resulting from the
sudden stop of a capital inflow and a financial crash can be viewed as a bout of the
Dutch disease in reverse.
Recent events offer us an opportunity to reassess the validity of this thesis. It has
for some time been well understood that foreign aid shares an important property with
natural resource discoveries in that aid constitutes an unrequited transfer emerging
like manna from heaven.12 In the past, aid-receiving countries such as Zambia have
seen their currencies appreciate as a result of aid inflows. Further, like resource
windfalls, aid inflows have about them an aura of ‘other people’s money’ which,
1 See, e.g., Sachs and Warner (2001), Gylfason and Zoega (2006), Collier and Goderis (2012) and
Sala-i-Martin and Subramanian (2013).
2 See Brunnschweiler and Bulte (2008), Lederman and Maloney (2008), Alexeev and Conrad (2009)
and James (2015).

3 See Paldam (1997), Tornell and Lane (1999), Auty (2001), Mehlum et al. (2006a, b) and Robinson
et al. (2006).
4 See Corden (1984), Corden and Neary (1982), Van Wijnbergen (1984) and Herbertsson et al.
(2000).
5 See Baland and Francois (2000), Tornell and Lane (1999), Torvik (2002), and Boschini et al.
(2007).
6 See Easterly and Levine (1997) and Hodler (2006).
7 See Arezki and Brückner (2011) and Arezki and Gylfason (2013).
8 See Ross (2001), Collier and Hoeffler (2009) and Tsui (2011).
9 See Mansurian (1991) and Manzano and Rigobon (2007).
10 See Gylfason (2001).
11 See Gylfason and Zoega (1999).
12 See Younger (1992), Burnside and Dollar (2000), Svensson (2000) and Djankov et al. (2008) and
also Deaton (2013, Chap. 7).

The Dutch Disease in Reverse: Iceland’s Natural Experiment 15
like lottery winnings, as well as due to their transitory and often volatile nature, may
seem easier to fritter away than one’s own hard-earned incomes. This may explain
why natural resource abundance does less harm to growth in democracies with good
policies than elsewhere (Burnside and Dollar 2000).13
Reputation mining as described by Akerlof and Shiller (2015) can be viewed
the same way as other forms of resource depletion. During exuberant credit booms
inflows of foreign credit can exert a similar manna-from-heaven effect on its recip-
ients as resource windfalls and foreign aid.14 Admati and Hellwig (2013, Chap. 9)
describe the considerable hidden subsidies that banks deemed too big to fail extract
from taxpayers through implicit or explicit government guarantees. With its gross
foreign debt rising from 100% of GDP in 2002 to nearly 700% in mid-2008, Ice-
landic banks, aided and abetted by the government, used the sovereign’s AAA rating
to attract huge private capital inflows during 2003–2008 in the wake of their privati-
zation of 1998–2003 followed by a sudden stop and a subsequent capital outflow.15,16
The inflows, mostly in the form of short-term bank credits, were accompanied and,
indeed, spurred by a persistent, policy-induced appreciation of the currency intended
to keep a lid on domestic inflation through a high-interest-rate policy aiming also to
attract foreign funds. While earlier work showed how abundant natural resources (or,
specifically, a heavy reliance on natural resources) had the effect of slowing down
investment and growth (Gylfason and Zoega 2006), recent events offer an opportunity
to analyze the effects of a capital outflow that offset the effects of the primary sector
on the real exchange rate as well as on secondary output and growth by reversing the
earlier appreciation of the currency.
Figure 1 shows the evolution of the nominal (trade-weighted) exchange rate,
defined as the domestic currency price of foreign currency so that an increase in the
index indicates depreciation. The gradual appreciation of the Icelandic króna until
2008 was interrupted in the spring of 2006 when the capital inflow stopped briefly,
and was reversed in the spring of 2008 when the capital inflow suddenly turned into
an outflow, followed by a collapse in October 2008. The sudden stop was triggered by
the world financial crisis, in particular the collapse of Lehman Brothers. The collapse
wiped out the foreign currency market by bankrupting all market participants; hence
the exchange rate series in Fig. 1 terminates in October 2008. Before and after the
crash, the burden of the large foreign debt lowered the exchange rate by a half in
13 Gylfason and Zoega (2003) and Goderis and Malon (2011) consider the relationship between
natural resources and inequality.
14 Benigno and Fornaro (2014) use the term ‘financial resource curse’ to describe episodes of
abundant access to foreign capital coupled with weak productivity growth.

15 See Gylfason et al. (2010), Benediktsdottir et al. (2011), Johnsen (2014) and Gylfason (2015,
2016).
16 See Calvo (1998) and Calvo et al. (2004) on how a sudden stop in international credit flows may
cause financial and balance-of-payments crises. Calvo and Reinhart (2000) recommend dollarization
as a way to eliminate the problems caused by the sudden reversal of capital inflows. Calvo (2007)
argues that emerging economies should intervene in the credit market rather than relying solely on
interest rates as a policy tool to reduce the likelihood of a sudden stop. Lane and Milesi-Ferretti
(2008) discuss the impact of capital inflows on domestic variables.
Source: Central Bank of Iceland.
Fig. 1 Evolution of the nominal exchange rate 2003–2008
nominal terms and a third in real terms,17 offsetting some of the adverse effects of
the primary sector on employment, investment and output in the secondary (i.e.,
non-primary) sector.
Our main aim here is to use Iceland’s recent experience to illustrate the strong
relationship between the real exchange rate and the current account of the balance
of payments, a relationship that ‘elasticity pessimists’ have often questioned. A sub-
sidiary aim is to show how volatility in primary (i.e., natural-resource-based) exports
as well as in foreign capital flows makes exchange rates volatile and thereby also
other macroeconomic variables that depend on exchange rates. We do this by drawing
a parallel between the way in which the exploitation of natural resources as well as
of Iceland’s high credit rating before the 2008 collapse increased the recorded value
of the Icelandic króna and the way in which the collapse of the credit rating in 2008
(as if fish stocks had collapsed!) led to a sudden collapse also of the króna, which in
turn facilitated a recovery of employment, investment and output. By 2016, output
was at last restored to its 2007 level in terms of purchasing-power-parity-adjusted
US dollars per capita.18
Meanwhile, the króna gradually regained lost ground. In 2015, the IMF considered
the real exchange of the króna to be roughly in equilibrium (IMF 2016, Box 2,
17 Specifically, from 2007 to 2009 the real exchange rate fell by 35% based on relative consumer
prices at home and abroad and by 50% based on relative unit labor costs. Source: Central Bank of
Iceland, see http://hagtolur.sedlabanki.is/data/set/1wui/#!display=table&ds=1wui!1z9x=1.3.
18 Source: World Bank, World Development Indicators.
p. 11). From mid-2015 until early 2017, the króna appreciated in real terms by 25%
based on relative consumer prices and by 21% based on relative unit labor costs
(source: Central Bank of Iceland), restoring the real exchange rate to its 2007 extent
of overvaluation or thereabouts.
In the next section we briefly review the recent economic history of Iceland.
We then present a simple stochastic model intended to capture relevant elements of
the Dutch disease by showing how the volatility of primary output affects the real
exchange rate and hence also total (i.e., primary plus secondary) output. The model
sets the stage for—or, if you prefer, aims to illuminate—our empirical account of
the encouraging effects of the collapse of the real exchange rate surrounding the
financial crash of 2008 on secondary output, especially via foreign tourism which
has expanded by leaps and bounds. The number of foreign tourist arrivals in 2016
was 1.8 million, more than five times Iceland’s population, up from 0.3 million in
2000 when the number of tourists bypassed the number of inhabitants.
1 Background
Iceland is unique among OECD countries in that the ratio of Iceland’s exports of
goods and services to GDP was stuck at about a third from 1870 (this is not a misprint)
until 2008 when its three main banks collapsed. Why did Iceland’s exports remain
stagnant for so long at such a low level relative to GDP? All other OECD countries saw
their exports grow more rapidly than GDP, especially after 1960 when liberalization
of trade in goods and services gained momentum. For example, Denmark’s export
ratio rose from 32% in 1960 to 52% in 2007 while Iceland’s export ratio remained
stuck at about a third (Fig. 2a). With a population that is just one-sixteenth of that
of Denmark, Iceland, like other very small open economies, would need a much
higher export ratio than Denmark to finance the importation of things that Iceland
is too small to produce. Denmark is a significant high-tech producer, Iceland is not.
Moreover, Iceland is marred by oligopolies unencumbered by foreign competition.
For example, the combined market share of the three largest banks is still well above
90% and the same applies to the three largest insurance companies, oil retailers, and
sellers of building materials.
Iceland was until 2008 a high-real-exchange-rate country, its overvalued currency
holding back exports and thereby also imports except insofar as imports were financed
by foreign borrowing. In 2007, a year before the crash, the IMF considered the króna
overvalued by 15–25% in real terms (IMF 2007). Even so, two months before the
crash in September 2008, the IMF reported (IMF 2008): “[t]he long-term economic
prospects for the Icelandic economy remain enviable.” The IMF overlooked the
danger posed by the overvaluation of the króna as well as by the huge inflows of
short-term capital before the eruption of the 2008 crisis. Looking back, the IMF’s
Independent Evaluation Office (2011, Box 4, p. 15) was not amused.
Exports 1960-2015 Manufactures exports 1962-2015

(% of GDP) (% of total exports)
60 70
50 60
50
40
40
30
30
20
20
10 10
0 0
Denmark Iceland Denmark Iceland
Source: World Bank, World Development Indicators.
Fig. 2 Exports of goods and services and manufactures
The systemically high real exchange rate, a condition we associate with the Dutch
disease, can be traced to several causes, including high inflation19 and an abundance
of natural resources, mainly fertile fishing grounds but also energy. Export subsidies
to the fishing industry, direct at first through the government budget, then indirect
through gratis allocation of highly valuable and macroeconomically consequential
common-property fishing rights to select vessel owners, increased the supply of
foreign exchange, lowering its price and increasing the real exchange rate. Other
factors reinforced the effect of the primary sector on the real exchange rate, including
the protection of agriculture against imported farm products, an arrangement that
reduced the demand for foreign exchange, lowering its price and thereby exerting
upward pressure on the real exchange rate. Further, the high real exchange rate skewed
the composition of exports by hampering the development of, for example, high-tech
export industries like those that emerged in Scotland, Ireland and Norway next door.
Mostly, Iceland’s exports were, and remain, resource-based (fish and aluminum)
and thus mostly low-tech, a common symptom of the Dutch disease (Fig. 2b).20 A
currency can remain overvalued for long periods just as a pendulum continues to tilt
the same way as long as the wind blows from the same direction.
19 Since 1960, Iceland has had the OECD region’s second highest average rate of inflation, second
only to Turkey. High inflation has often been seen to go along with high real exchange rates because
the government hesitates to devalue the currency as expectations of inflation are not anchored and
devaluation is likely to encourage inflation. As a result the government resorts to foreign borrowing
instead, a common scenario in Africa and Latin America, for example.
20 In 2012, fish products accounted for 27% of total export earnings in Iceland, aluminum for 22% and
foreign tourism, 24% (source: Statistics Iceland). Kristjansdottir (2012) describes the determinants
of the geographical pattern of Iceland’s export trade.
Import volume 2000-2015 Domestic credit provided by the banking

(2000 = 100) sector 1960-2015 (% of GDP)
180 350
160 300
140
250
120
100 200
80 150
60
100
40
20 50
0 0
Fig. 3 Imports and domestic credit
Recent events offer an opportunity to assess the effects of the collapse of the real
exchange rate. Surrounding the financial crash of 2008 the collapse of the Icelandic
króna made exports jump from a third of GDP to 60% of GDP (Fig. 2a), and caused
imports to plunge (Fig. 3a) in keeping with the elasticity approach to the balance
of payments (Goldstein and Khan 1985). The fact that GDP fell by 8% after the
crash shows that the hike in the export ratio stems mostly from a sharp increase in
export earnings. Likewise, the fact that import volume contracted by 44% suggests
a strong effect of the currency depreciation on imports on top of a much smaller
income effect. Even so, the behavior of the real exchange rate of the króna before
and after the crash accords well with the asset market approach to exchange rates
(Branson 1977) which predicts that increased foreign borrowing to finance imports
of goods and services causes the currency, on impact, to appreciate in real terms.
The reaction of Icelandic exports and imports to the large depreciation of the
króna in 2008 resembles the response of exports and imports in South-East Asian
countries to the collapse of their currencies in 1997. Figure 4 shows the evolution
of export earnings and import volumes during a period spanning five years before
and after the financial crisis in South-East Asia (t 1997) as well as in Iceland (t
2008).
The financial crash in Iceland was preceded by the privatization of the country’s
banking system and a subsequent capital inflow from 2003 to 2008 that propelled
the real exchange rate to new heights and fueled the stock market and the housing
market as well as a boom in consumption and investment through a current account
deficit averaging 14% of GDP. Real equity prices increased by 35% per year during
this period, a record surpassed only by Cyprus, and real estate prices rose by 12%
Exports before and after currency collapse Import volume before and after currency
(% of GDP) collapse (2000 = 100)
80 200
Iceland
70
Indonesia
60 150
Korea, Rep.
50
Thailand
40 100
30 Iceland
20 50 Indonesia
Korea, Rep.
10
Thailand
0 0
t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5
Note: For Iceland, t = 2008, whereas for Indonesia, Korea and Thailand we set t = 1997.
Fig. 4 Exports and imports in Iceland and South-East Asia
per year.21 The current account deficit rose from 5% of GDP in 2003 to 16% in 2007.
The growth of per capita GDP went from 1.8% in 2003 to 6.6% in 2004, 6.0% in
2005, 1.8% in 2006 and 3.6% in 2007 before turning negative three years in a row,
2008–2010. Unemployment dropped to 2.3% of the labor force 2007. Gross foreign
debt grew from a stable level of about 60% of GDP in the 1990s to nearly 700% before
the collapse in mid-2008. Because the inflow of capital was unsustainable, and also
because the Central Bank’s foreign exchange reserves, in a violation of the Giudotti-
Greenspan rule, had fallen to 7% of the short-term foreign liabilities of the banking
system, the expansion was bound to end in a sudden stop. The reversal of capital
flows in 2008 caused the currency to tank, consumption and GDP to fall, investment
to plummet from 27% of GDP to 19% of a lower GDP,22 real imports of goods and
services to contract by more than 60% from 2006 to 2009 (recall Fig. 3a showing the
volume of merchandise imports), bank lending relative to GDP to contract by 54%
from 2007 to 2012 (Fig. 3b) and equity prices to plunge by, yes, 95% from peak to
21 The OMX15 covering the 15 largest corporations increased by a factor of six over the same period
and nearly by a factor of nine from its bottom in 2001 to its peak value in 2007. See Aliber (2011)
and Halldorsson and Zoega (2010).
22 Net investment, i.e., gross investment minus depreciation, was negative from 2009 to 2012.
Gross investment 1965-2015 Adjusted net saving 2005-2015

(% of GDP) (% of GNI)
45 20
40
35 15
30
25 10
20
15 5
10
5
0
0
-5
Fig. 5 Investment and adjusted net saving
trough.23,24 By 2011, real estate prices in the Reykjavík area had receded back to
their 2004 level in real terms.25
The boom before the crash of 2008 masked an underlying structural weakness
illustrated by a comparison between gross investment and adjusted net saving (Fig. 5).
As defined by the World Bank (2006), adjusted net saving aims to measure the real
difference between production and consumption by adjusting net saving for changes
in human capital (measured by spending on education and innovation) and depreci-
ation or depletion of natural resources (e.g., through energy or mineral depletion). A
comparison of the two panels of Fig. 5 shows that, before the crash, despite Iceland’s
investment boom, adjusted net saving in Iceland was far below that of Denmark even
without including estimates of natural resource depletion, a controversial subject.
This finding reflects Iceland’s long-standing aversion to saving and correspondingly
strong propensity to borrow, a common characteristic of high-inflation countries.
In sum, Iceland’s experience before and after the fall mirrors the three-stage
experience of many other countries in similar circumstances (Reinhart and Rogoff
2009). First, large capital inflows, mostly bank credits, elevated the value of the
currency well beyond its historical state of structural overvaluation. Second, the
sudden reversal of capital flows and the associated debt overhang made the currency
23 Sources: Statistics Iceland (hagstofa.is), Central Bank of Iceland (sedlabanki.is), World Bank,
World Development Indicators, and Trading Economics (tradingeconomics.com/iceland/stock-ma
rket). See also Halldorsson and Zoega (2010).
24 Gylfason et al. (2010) and Gylfason (2015) compare economic conditions in the Nordic countries
during these years.

25 Source: Registers Iceland (skra.is/Markadurinn/Talnaefni).
collapse. Third, the depreciation of the currency in real terms made imports plunge
while providing a strong boost to exports, both old and new. The dramatic reversal
of capital flows in 2008 offers us an opportunity to gauge the effects of a lower real
exchange rate on the secondary sector. We revisit our stochastic model of the Dutch
disease in Sect. 2 to describe the first two stages of the process and to prepare for the
empirical account of the effects of the exchange rate on exports and output in Sect. 3.
2 A Prototype Model
Tradable output is produced in both the primary sector and the secondary sector. The
primary sector utilizes a natural resource and is subject to fluctuations. In Iceland, the
natural resource is mainly fish stocks that yield an annual output that fluctuates from
year to year, based mostly on natural factors. Further, there are capital inflows and
outflows. Both fluctuations in primary output and in capital flows affect the secondary
tradable sector, i.e., manufacturing and services. The volatility of the primary sector
and capital flows makes the real exchange rate fluctuate, which affects the relative
price of the secondary-sector tradable output, or secondary output in short, as we will
show. Moreover, an abundance of natural resources affects secondary employment,
output and investment through wages.26 The stock of external debt also has an effect
on these variables through the real exchange rate. In a way, natural resource rents
have an impact similar to the inflow of foreign capital while external debt works in
the opposite direction due to the outflow of interest and amortization payments. Our
main aim here is to show how the volatility of primary production causes exchange
rate volatility which in turn makes secondary output and hence also total output
volatile as well. This matters because output, especially in countries that depend
significantly on volatile natural resources, needs, like assets, to be assessed in two
dimensions: level and volatility.
2.1 Output and Employment in the Secondary Sector
Profits in the tradable sector measured in terms of nontradables are
λt K tα (e(wt /wt )Nt )β R 1−α−β − wt Nt (1)
where K is the stock of capital, N is employment, R denotes a fixed factor such as

land and infrastructure, e is the level of industry-wide productivity and α < 1 and β
26 Themodel of this section differs from that in Gylfason et al. (1999) by having two factors
of production rather than only labor. Here, however, we do not derive the growth effect of the
abundance of natural resources but only the effect on the level of primary and secondary output.
< 1.27 The real exchange rate λ = pT /pN is defined as the price of tradable goods in
terms of nontradables. An increase in λ denotes a real depreciation of the currency.
Wages in the primary sector affect secondary-sector wages. The (strictly concave)
function e(wt /wt ) measures worker effort as a function of the ratio of secondary-
sector wages to wages paid in the primary sector, w̄, which we take as given. We
assume the following functional form for e, invoking Solow’s elasticity condition
(Solow 1979)

w − bw̄ κ
e ,0 < κ < 1 (2)
bw̄
where b is a measure of the attractiveness of jobs in that sector; b < 1 suggests that
jobs in the secondary sector are preferable to jobs in the primary sector.
The representative firm has to determine the optimal level of wages and employ-
ment at each point in time, w and N, and can costlessly hire or fire workers. The
first-order condition for wages generates the following solution for secondary-sector
wages
bw̄
w (3)
1−κ
so that a higher primary-sector wage, a lower disutility of working in that sector

and greater responsiveness of effort to relative wages as measured by κ all make
secondary-sector wages go up. The first-order condition for employment follows
α
N λ 1−β K 1−β w− 1−β Z
1 1
(4)
1 1−α−β β
with Z β 1−β R 1−β e 1−β . The equation determines optimal employment for a given
stock of capital, the real exchange rate and real wages, in addition to land, capital
and productivity.28
Equation (4) and the production function (1) give short-run output supply as
a function of the real exchange rate and primary-sector wages holding the stock
of capital fixed. If primary and secondary-sector wages are initially equalized, the
supply function is
β β
Y S λ 1−β K 1−β w− 1−β B
1
(5)
1−α−β β 1
where B R 1−β β 1−β e 1−β . It follows that secondary output depends on the real
exchange rate, which, as we now will show, depends on the output of the primary
sector as well as the real wage in the primary sector.
27 Depreciation of capital is assumed away.

28 Paldam (1997) describes the impact of the Dutch disease in Greenland through wages.
2.2 Primary Output and Capital Flows
Primary output, including the inflow of foreign currency, is stochastic and follows a
Brownian motion subject to random productivity shocks described by Eq. (6), and
is independent of the real exchange rate;
dy P ηdt + σ dW (6)
√
Here dW represents the increment of a Wiener process εt dt, ε having a zero
mean and a unit standard deviation, i.e., E(dW ) 0 and V (dW ) dt. The drift
term ηdt reflects the growth of primary output or a rising level of capital inflows
while the stochastic term σ dW represents the vicissitudes of commodity prices that
make primary output rise or fall at random and of international capital markets that
can make a capital inflow quickly reverse itself during a sudden stop, thus creating
uncertainty about output in the primary sector.
2.3 The Intertemporal Budget Constraint and the Real

Exchange Rate
The external budget constraint equates the sum of the present discounted value of
the difference between future output of primary goods Y p and tradable goods from
the secondary sector Y S , on the one hand, and of tradable goods consumption C T ,
on the other hand, to the current stock of net foreign debt D. A capital inflow relaxes
the constraint in the short run by enabling a country to service its short-term debt
with a smaller current account surplus.
There is an infinite number of paths satisfying the intertemporal budget constraint.
Instead of solving for the optimal path, we posit a simple rule that satisfies the
constraint, making saving r a function of the sum of the output and foreign exchange
earnings of the primary sector Y P including net capital inflow (i.e., inflows of foreign
currency) and output from the secondary sector Y S less consumption c:
rt ytP + ytS − ct (7)
where yP log(Y P ), yS log(Y s ), c log(C T ) and r is an exogenous parameter that

depends on the level of net foreign debt. We then choose the value of saving r so that
the external budget constraint is satisfied. Thus, the higher the level of external debt
D, the greater is the external surplus r required to service the debt.29 The choice of
this saving rule simplifies the derivations to follow while making the real exchange
29 Equation
(7) implies that the sum of the growth rates of primary and secondary (tradable) output
always equals the rate of growth of (tradable) consumption.
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we have some interest. I think that as white men we have. Do we not
wish for an outlet for our surplus population, if I may so express
myself? Do we not feel an interest in getting at that outlet with such
institutions as we would like to have prevail there? If you go to the
Territory opposed to slavery and another man comes upon the same
ground with his slave, upon the assumption that the things are equal,
it turns out that he has the equal right all his way and you have no
part of it your way. If he goes in and makes it a slave Territory, and
by consequence a slave State, is it not time that those who desire to
have it a free State were on equal ground? Let me suggest it in a
different way. How many Democrats are there about here [“A
thousand”] who left slave States and came into the free State of
Illinois to get rid of the institution of slavery? [Another voice—“A
thousand and one.”] I reckon there are a thousand and one. I will ask
you, if the policy you are now advocating had prevailed when this
country was in a Territorial condition, where would you have gone to
get rid of it? Where would you have found your free State or
Territory to go to? And when hereafter, for any cause, the people in
this place shall desire to find new homes, if they wish to be rid of the
institution, where will they find the place to go to?
Now irrespective of the moral aspect of this question as to whether
there is a right or wrong in enslaving a negro, I am still in favor of
our new Territories being in such a condition that white men may
find a home—may find some spot where they can better their
condition—where they can settle upon new soil and better their
condition in life. I am in favor of this not merely (I must say it here
as I have elsewhere) for our own people who are born amongst us,
but as an outlet for free white people every where, the world over—
in which Hans and Baptiste and Patrick, and all other men from all
the world, may find new homes and better their conditions in life.
I have stated upon former occasions, and I may as well state again,
what I understand to be the real issue in this controversy between
Judge Douglas and myself. On the point of my wanting to make war
between the free and the slave States, there has been no issue
between us. So, too, when he assumes that I am in favor of
introducing a perfect social and political equality between the white
and black races. These are false issues, upon which Judge Douglas
has tried to force the controversy. There is no foundation in truth for
the charge that I maintain either of these propositions. The real issue
in this controversy—the one pressing upon every mind—is the
sentiment on the part of one class that looks upon the institution of
slavery as a wrong, and of another class that does not look upon it as
a wrong. The sentiment that contemplates the institution of slavery
in this country as a wrong is the sentiment of the Republican party. It
is the sentiment around which all their actions—all their arguments
circle—from which all their propositions radiate. They look upon it as
being a moral, social and political wrong; and while they contemplate
it as such, they nevertheless have due regard for its actual existence
among us, and the difficulties of getting rid of it in any satisfactory
way and to all the constitutional obligations thrown about it. Yet
having a due regard for these, they desire a policy in regard to it that
looks to its not creating any more danger. They insist that it should
as far as may be, be treated as a wrong, and one of the methods of
treating it as a wrong is to make provision that it shall grow no
larger. They also desire a policy that looks to a peaceful end of
slavery at some time, as being wrong. These are the views they
entertain in regard to it as I understand them; and all their
sentiments—all their arguments and propositions are brought within
this range. I have said, and I repeat it here, that if there be a man
amongst us who does not think that the institution of slavery is
wrong, in any one of the aspects of which I have spoken, he is
misplaced and ought not to be with us. And if there be a man
amongst us who is so impatient of it as a wrong as to disregard its
actual presence among us and the difficulty of getting rid of it
suddenly in a satisfactory way, and to disregard the constitutional
obligations thrown about it, that man is misplaced if he is on our
platform. We disclaim sympathy with him in practical action. He is
not placed properly with us.
On this subject of treating it as a wrong, and limiting its spread, let
me say a word. Has any thing ever threatened the existence of this
Union save and except this very institution of slavery? What is it that
we hold most dear amongst us? Our own liberty and prosperity.
What has ever threatened our liberty and prosperity save and except
this institution of slavery? If this is true, how do you propose to
improve the condition of things by enlarging slavery—by spreading it
out and making it bigger? You may have a wen or cancer upon your
person and not be able to cut it out lest you bleed to death; but surely
it is no way to cure it, to engraft it and spread it over your whole
body. That is no proper way of treating what you regard a wrong. You
see this peaceful way of dealing with it as a wrong—restricting the
spread of it, and not allowing it to go into new countries where it has
not already existed. That is the peaceful way, the old-fashioned way,
the way in which the fathers themselves set us the example.
On the other hand, I have said there is a sentiment which treats it
as not being wrong. That is the Democratic sentiment of this day. I
do not mean to say that every man who stands within that range
positively asserts that it is right. That class will include all who
positively assert that it is right, and all who like Judge Douglas treat
it as indifferent and do not say it is either right or wrong. These two
classes of men fall within the general class of those who do not look
upon it as a wrong. And if there be among you any body who
supposes that he, as a Democrat, can consider himself “as much
opposed to slavery as anybody,” I would like to reason with him. You
never treat it as a wrong. What other thing that you consider as a
wrong, do you deal with as you deal with that? Perhaps you say it is
wrong, but your leader never does, and you quarrel with any body
who says it is wrong. Although you pretend to say so yourself you
can find no fit place to deal with it as a wrong. You must not say any
thing about it in the free States, because it is not here. You must not
say any thing about it in the slave States, because it is there. You
must not say anything about it in the pulpit, because that is religion
and has nothing to do with it. You must not say any thing about it in
politics, because that will disturb the security of “my place.” There is
no place to talk about it as being a wrong, although you say yourself
it is a wrong. But finally you will screw yourself up to the belief that if
the people of the slave States should adopt a system of gradual
emancipation on the slavery question, you would be in favor of it.
You would be in favor of it. You say that is getting it in the right
place, and you would be glad to see it succeed. But you are deceiving
yourself. You all know that Frank Blair and Gratz Brown, down there
in St. Louis, undertook to introduce that system in Missouri. They
fought as valiantly as they could for the system of gradual
emancipation which you pretend you would be glad to see succeed.
Now I will bring you to the test. After a hard fight they were beaten,
and when the news came over here you threw up your hats and
hurrahed for Democracy. More than that, take all the argument
made in favor of the system you have proposed, and it carefully
excludes the idea that there is any thing wrong in the institution of
slavery. The arguments to sustain that policy carefully excluded it.
Even here to-day you heard Judge Douglas quarrel with me because I
uttered a wish that it might some time come to an end. Although
Henry Clay could say he wished every slave in the United States was
in the country of his ancestors, I am denounced by those pretending
to respect Henry Clay for uttering a wish that it might some time, in
some peaceful way, come to an end. The Democratic policy in regard
to that institution will not tolerate the merest breath, the slightest
hint, of the least degree of wrong about it. Try it by some of Judge
Douglas’s arguments. He says he “don’t care whether it is voted up or
voted down” in the Territories. I do not care myself in dealing with
that expression, whether it is intended to be expressive of his
individual sentiments on the subject, or only of the national policy he
desires to have established. It is alike valuable for my purpose. Any
man can say that he does not see any thing wrong in slavery, but no
man can logically say it who does see a wrong in it; because no man
can logically say he don’t care whether a wrong is voted up or voted
down. He may say he don’t care whether an indifferent thing is voted
up or down, but he must logically have a choice between a right thing
and a wrong thing. He contends that whatever community wants
slaves has a right to have them. So they have if it is not a wrong. But
if it is a wrong, he cannot say people have a right to do wrong. He
says that upon the score of equality, slaves should be allowed to go in
a new Territory, like other property. This is strictly logical if there is
no difference between it and other property. If it and other property
are equal, his argument is entirely logical. But if you insist that one is
wrong and the other right, there is no use to institute a comparison
between right and wrong. You may turn over every thing in the
Democratic policy from beginning to end, whether in the shape it
takes on the statute books, in the shape it takes in the Dred Scott
decision, in the shape it takes in conversation, or the shape it takes in
short maxim-like arguments—it everywhere carefully excludes the
idea that there is any thing wrong in it.
That is the real issue. That is the issue that will continue in this
country when these poor tongues of Judge Douglas and myself shall
be silent. It is the eternal struggle between these two principles—
right and wrong—throughout the world. They are the two principles
that have stood face to face from the beginning of time; and will ever
continue to struggle. The one is the common right of humanity and
the other the divine right of kings. It is the same principle in
whatever shape it develops itself. It is the same spirit that says, “You
work and toil and earn bread, and I’ll eat it.” No matter in what
shape it comes, whether from the mouth of a king who seeks to
bestride the people of his own nation and live by the fruit of their
labor, or from one race of men as an apology for enslaving another
race, it is the same tyrannical principle. I was glad to express my
gratitude at Quincy, and I re-express it here to Judge Douglas—that
he looks to no end of the institution of slavery. That will help the
people to see where the struggle really is. It will hereafter place with
us all men who really do wish the wrong may have an end. And
whenever we can get rid of the fog which obscures the real question—
when we can get Judge Douglas and his friends to avow a policy
looking to its perpetuation—we can get out from among that class of
men and bring them to the side of those who treat it as a wrong.
Then there will soon be an end of it, and that end will be its “ultimate
extinction.” Whenever the issue can be distinctly made, and all
extraneous matter thrown out so that men can fairly see the real
difference between the parties, this controversy will soon be settled,
and it will be done peaceably too. There will be no war, no violence.
It will be placed again where the wisest and best men of the world
placed it. Brooks of South Carolina once declared that when this
Constitution was framed, its framers did not look to the institution
existing until this day. When he said this, I think he stated a fact that
is fully borne out by the history of the times. But he also said they
were better and wiser men than the men of these days; yet the men
of these days had experience which they had not, and by the
invention of the cotton-gin it became a necessity in this country that
slavery should be perpetual. I now say that, willingly or unwillingly,
purposely or without purpose, Judge Douglas has been the most
prominent instrument in changing the position of the institution of
slavery which the fathers of the Government expected to come to an
end ere this—and putting it upon Brooks’s cotton-gin basis—placing
it where he openly confesses he has no desire there shall ever be an
end of it.
I understand I have ten minutes yet. I will employ it in saying
something about this argument Judge Douglas uses, while he
sustains the Dred Scott decision, that the people of the Territories
can still somehow exclude slavery. The first thing I ask attention to is
the fact that Judge Douglas constantly said, before the decision, that
whether they could or not, was a question for the Supreme Court.
But after the court has made the decision he virtually says it is not a
question for the Supreme Court, but for the people. And how is it he
tells us they can exclude it? He says it needs “police regulations,” and
that admits of “unfriendly legislation.” Although it is a right
established by the Constitution of the United States to take a slave
into a Territory of the United States and hold him as property, yet
unless the Territorial Legislature will give friendly legislation, and,
more especially, if they adopt unfriendly legislation, they can
practically exclude him. Now, without meeting this proposition as a
matter of fact, I pass to consider the real Constitutional obligation.
Let me take the gentleman who looks me in the face before me, and
let us suppose that he is a member of the Territorial Legislature. The
first thing he will do will be to swear that he will support the
Constitution of the United States. His neighbor by his side in the
Territory has slaves and needs Territorial legislation to enable him to
enjoy that Constitutional right. Can he withhold the legislation which
his neighbor needs for the enjoyment of a right which is fixed in his
favor in the Constitution of the United States which he has sworn to
support? Can he withhold it without violating his oath? And more
especially, can he pass unfriendly legislation to violate his oath?
Why, this is a monstrous sort of talk about the Constitution of the
United States! There has never been as outlandish or lawless a
doctrine from the mouth of any respectable man on earth. I do not
believe it is a Constitutional right to hold slaves in a Territory of the
United States. I believe the decision was improperly made and I go
for reversing it. Judge Douglas is furious against those who go for
reversing a decision. But he is for legislating it out of all force while
the law itself stands. I repeat that there has never been so monstrous
a doctrine uttered from the mouth of a respectable man.
I suppose most of us (I know it of myself) believe that the people of
the Southern States are entitled to a Congressional Fugitive Slave law
—that is a right fixed in the Constitution. But it cannot be made
available to them without Congressional legislation. In the Judge’s
language, it is a “barren right” which needs legislation before it can
become efficient and valuable to the persons to whom it is
guarantied. And as the right is Constitutional I agree that the
legislation shall be granted to it—and that not that we like the
institution of slavery. We profess to have no taste for running and
catching niggers—at least I profess no taste for that job at all. Why
then do I yield support to a Fugitive Slave law? Because I do not
understand that the Constitution, which guaranties that right, can be
supported without it. And if I believed that the right to hold a slave in
a Territory was equally fixed in the Constitution with the right to
reclaim fugitives, I should be bound to give it the legislation
necessary to support it. I say that no man can deny his obligation to
give the necessary legislation to support slavery in a Territory, who
believes it is a Constitutional right to have it there. No man can, who
does not give the Abolitionists an argument to deny the obligation
enjoined by the Constitution to enact a Fugitive Slave law. Try it now.
It is the strongest Abolition argument ever made. I say if that Dred
Scott decision is correct, then the right to hold slaves in a Territory is
equally a Constitutional right with the right of a slaveholder to have
his runaway returned. No one can show the distinction between
them. The one is express, so that we cannot deny it. The other is
construed to be in the Constitution, so that he who believes the
decision to be correct believes in the right. And the man who argues
that by unfriendly legislation, in spite of that Constitutional right,
slavery may be driven from the Territories, cannot avoid furnishing
an argument by which Abolitionists may deny the obligation to
return fugitives, and claim the power to pass laws unfriendly to the
right of the slaveholder to reclaim his fugitive. I do not know how
such an argument may strike a popular assembly like this, but I defy
any body to go before a body of men whose minds are educated to
estimating evidence and reasoning, and show that there is an iota of
difference between the Constitutional right to reclaim a fugitive, and
the Constitutional right to hold a slave, in a Territory, provided this
Dred Scott decision is correct. I defy any man to make an argument
that will justify unfriendly legislation to deprive a slaveholder of his
right to hold his slave in a Territory, that will not equally, in all its
length, breadth and thickness, furnish an argument for nullifying the
Fugitive Slave law. Why, there is not such an Abolitionist in the
nation as Douglas, after all.
MR. DOUGLAS’S REPLY.
Mr. Lincoln has concluded his remarks by saying that there is not
such an Abolitionist as I am in all America. If he could make the
Abolitionists of Illinois believe that, he would not have much show
for the Senate. Let him make the Abolitionists believe the truth of
that statement and his political back is broken.
His first criticism upon me is the expression of his hope that the
war of the Administration will be prosecuted against me and the
Democratic party of this State with vigor. He wants that war
prosecuted with vigor; I have no doubt of it. His hopes of success,
and the hopes of his party depend solely upon it. They have no
chance of destroying the Democracy of this State except by the aid of
federal patronage. He has all the federal office-holders here as his
allies, running separate tickets against the Democracy to divide the
party, although the leaders all intend to vote directly the Abolition
ticket, and only leave the greenhorns to vote this separate ticket who
refuse to go into the Abolition camp. There is something really
refreshing in the thought that Mr. Lincoln is in favor of prosecuting
one war vigorously. It is the first war I ever knew him to be in favor
of prosecuting. It is the first war I ever knew him to believe to be just
or Constitutional. When the Mexican war was being waged, and the
American army was surrounded by the enemy in Mexico, he thought
that war was unconstitutional, unnecessary, and unjust. He thought
it was not commenced on the right spot.
When I made an incidental allusion of that kind in the joint
discussion over at Charleston some weeks ago, Lincoln, in replying,
said that I, Douglas, had charged him with voting against supplies for
the Mexican war, and then he reared up, full length, and swore that
he never voted against the supplies—that it was a slander—and
caught hold of Ficklin, who sat on the stand, and said, “Here, Ficklin,
tell the people that it is a lie.” Well, Ficklin, who had served in
Congress with him, stood up and told them all that he recollected
about it. It was that when George Ashmun, of Massachusetts,
brought forward a resolution declaring the war unconstitutional,
unnecessary, and unjust, that Lincoln had voted for it. “Yes,” said
Lincoln, “I did.” Thus he confessed that he voted that the war was
wrong, that our country was in the wrong, and consequently that the
Mexicans were in the right; but charged that I had slandered him by
saying that he voted against the supplies. I never charged him with
voting against the supplies in my life, because I knew that he was not
in Congress when they were voted. The war was commenced on the
13th day of May, 1846, and on that day we appropriated in Congress
ten millions of dollars and fifty thousand men to prosecute it. During
the same session we voted more men and more money, and at the
next session we voted more men and more money, so that by the
time Mr. Lincoln entered Congress we had enough men and enough
money to carry on the war, and had no occasion to vote for any more.
When he got into the House, being opposed to the war, and not being
able to stop the supplies, because they had all gone forward, all he
could do was to follow the lead of Corwin, and prove that the war was
not begun on the right spot, and that it was unconstitutional,
unnecessary, and wrong. Remember, too, that this he did after the
war had been begun. It is one thing to be opposed to the declaration
of a war, another and very different thing to take sides with the
enemy against your own country after the war has been commenced.
Our army was in Mexico at the time, many battles had been fought;
our citizens, who were defending the honor of their country’s flag,
were surrounded by the daggers, the guns and the poison of the
enemy. Then it was that Corwin made his speech in which he
declared that the American soldiers ought to be welcomed by the
Mexicans with bloody hands and hospitable graves; then it was that
Ashmun and Lincoln voted in the House of Representatives that the
war was unconstitutional and unjust; and Ashmun’s resolution,
Corwin’s speech, and Lincoln’s vote, were sent to Mexico and read at
the head of the Mexican army, to prove to them that there was a
Mexican party in the Congress of the United States who were doing
all in their power to aid them. That a man who takes sides with the
common enemy against his own country in time of war should
rejoice in a war being made on me now, is very natural. And in my
opinion, no other kind of a man would rejoice in it.
Mr. Lincoln has told you a great deal to-day about his being an old
line Clay Whig. Bear in mind that there are a great many old Clay
Whigs down in this region. It is more agreeable, therefore, for him to
talk about the old Clay Whig party than it is for him to talk
Abolitionism. We did not hear much about the old Clay Whig party
up in the Abolition districts. How much of an old line Henry Clay
Whig was he? Have you read General Singleton’s speech at
Jacksonville? You know that Gen. Singleton was, for twenty-five
years, the confidential friend of Henry Clay in Illinois, and he
testified that in 1847, when the Constitutional Convention of this
State was in session, the Whig members were invited to a Whig
caucus at the house of Mr. Lincoln’s brother-in-law, where Mr.
Lincoln proposed to throw Henry Clay overboard and take up Gen.
Taylor in his place, giving, as his reason, that if the Whigs did not
take up Gen. Taylor the Democrats would. Singleton testifies that
Lincoln, in that speech, urged, as another reason for throwing Henry
Clay overboard, that the Whigs had fought long enough for principle
and ought to begin to fight for success. Singleton also testifies that
Lincoln’s speech did have the effect of cutting Clay’s throat, and that
he (Singleton) and others withdrew from the caucus in indignation.
He further states that when they got to Philadelphia to attend the
National Convention of the Whig party, that Lincoln was there, the
bitter and deadly enemy of Clay, and that he tried to keep him
(Singleton) out of the Convention because he insisted on voting for
Clay, and Lincoln was determined to have Taylor. Singleton says that
Lincoln rejoiced with very great joy when he found the mangled
remains of the murdered Whig statesman lying cold before him.
Now, Mr. Lincoln tells you that he is an old line Clay Whig! Gen.
Singleton testifies to the facts I have narrated, in a public speech
which has been printed and circulated broadcast over the State for
weeks, yet not a lisp have we heard from Mr. Lincoln on the subject,
except that he is an old Clay Whig.
What part of Henry Clay’s policy did Lincoln ever advocate? He
was in Congress in 1848–9, when the Wilmot proviso warfare
disturbed the peace and harmony of the country, until it shook the
foundation of the Republic from its centre to its circumference. It
was that agitation that brought Clay forth from his retirement at
Ashland again to occupy his seat in the Senate of the United States,
to see if he could not, by his great wisdom and experience, and the
renown of his name, do something to restore peace and quiet to a
disturbed country. Who got up that sectional strife that Clay had to
be called upon to quell? I have heard Lincoln boast that he voted
forty-two times for the Wilmot proviso, and that he would have voted
as many times more if he could. Lincoln is the man, in connection
with Seward, Chase, Giddings, and other Abolitionists, who got up
that strife that I helped Clay to put down. Henry Clay came back to
the Senate in 1849, and saw that he must do something to restore
peace to the country. The Union Whigs and the Union Democrats
welcomed him the moment he arrived, as the man for the occasion.
We believed that he, of all men on earth, had been preserved by
Divine Providence to guide us out of our difficulties, and we
Democrats rallied under Clay then, as you Whigs in nullification time
rallied under the banner of old Jackson, forgetting party when the
country was in danger, in order that we might have a country first,
and parties afterward.
And this reminds me that Mr. Lincoln told you that the slavery
question was the only thing that ever disturbed the peace and
harmony of the Union. Did not nullification once raise its head and
disturb the peace of this Union in 1832? Was that the slavery
question, Mr. Lincoln? Did not disunion raise its monster head
during the last war with Great Britain? Was that the slavery question,
Mr. Lincoln? The peace of this country has been disturbed three
times, once during the war with Great Britain, once on the tariff
question, and once on the slavery question. His argument, therefore,
that slavery is the only question that has ever created dissension in
the Union falls to the ground. It is true that agitators are enabled
now to use this slavery question for the purpose of sectional strife.
He admits that in regard to all things else, the principle that I
advocate, making each State and Territory free to decide for itself,
ought to prevail. He instances the cranberry laws, and the oyster
laws, and he might have gone through the whole list with the same
effect. I say that all these laws are local and domestic, and that local
and domestic concerns should be left to each State and each
Territory to manage for itself. If agitators would acquiesce in that
principle, there never would be any danger to the peace and harmony
of the Union.
Mr. Lincoln tries to avoid the main issue by attacking the truth of
my proposition, that our fathers made this Government divided into
free and slave States, recognizing the right of each to decide all its
local questions for itself. Did they not thus make it? It is true that
they did not establish slavery in any of the States, or abolish it in any
of them; but finding thirteen States, twelve of which were slave and
one free, they agreed to form a government uniting them together, as
they stood divided into free and slave States, and to guaranty forever
to each State the right to do as it pleased on the slavery question.
Having thus made the government, and conferred this right upon
each State forever, I assert that this Government can exist as they
made it, divided into free and slave States, if any one State chooses to
retain slavery. He says that he looks forward to a time when slavery
shall be abolished everywhere. I look forward to a time when each
State shall be allowed to do as it pleases. If it chooses to keep slavery
forever, it is not my business, but its own; if it chooses to abolish
slavery, it is its own business—not mine. I care more for the great
principle of self-government, the right of the people to rule, than I do
for all the negroes in Christendom. I would not endanger the
perpetuity of this Union, I would not blot out the great inalienable
rights of the white men for all the negroes that ever existed. Hence, I
say, let us maintain this Government on the principles that our
fathers made it, recognizing the right of each State to keep slavery as
long as its people determine, or to abolish it when they please. But
Mr. Lincoln says that when our fathers made this Government they
did not look forward to the state of things now existing; and
therefore he thinks the doctrine was wrong; and he quotes Brooks, of
South Carolina, to prove that our fathers then thought that probably
slavery would be abolished by each State acting for itself before this
time. Suppose they did; suppose they did not foresee what has
occurred,—does that change the principles of our Government? They
did not probably foresee the telegraph that transmits intelligence by
lightning, nor did they foresee the railroads that now form the bonds
of union between the different States, or the thousand mechanical
inventions that have elevated mankind. But do these things change
the principles of the Government? Our fathers, I say, made this
Government on the principle of the right of each State to do as it
pleases in its own domestic affairs, subject to the Constitution, and
allowed the people of each to apply to every new change of
circumstances such remedy as they may see fit to improve their
condition. This right they have for all time to come.
Mr. Lincoln went on to tell you that he did not at all desire to
interfere with slavery in the States where it exists, nor does his party.
I expected him to say that down here. Let me ask him then how he
expects to put slavery in the course of ultimate extinction every
where, if he does not intend to interfere with it in the States where it
exists? He says that he will prohibit it in all the Territories, and the
inference is, then, that unless they make free States out of them he
will keep them out of the Union; for, mark you, he did not say
whether or not he would vote to admit Kansas with slavery or not, as
her people might apply (he forgot that as usual, etc.); he did not say
whether or not he was in favor of bringing the Territories now in
existence into the Union on the principle of Clay’s Compromise
measures on the slavery question. I told you that he would not. His
idea is that he will prohibit slavery in all the Territories and thus
force them all to become free States, surrounding the slave States
with a cordon of free States and hemming them in, keeping the
slaves confined to their present limits whilst they go on multiplying
until the soil on which they live will no longer feed them, and he will
thus be able to put slavery in a course of ultimate extinction by
starvation. He will extinguish slavery in the Southern States as the
French general did the Algerines when he smoked them out. He is
going to extinguish slavery by surrounding the slave States, hemming
in the slaves, and starving them out of existence, as you smoke a fox
out of his hole. He intends to do that in the name of humanity and
Christianity, in order that we may get rid of the terrible crime and sin
entailed upon our fathers of holding slaves. Mr. Lincoln makes out
that line of policy, and appeals to the moral sense of justice and to
the Christian feeling of the community to sustain him. He says that
any man who holds to the contrary doctrine is in the position of the
king who claimed to govern by divine right. Let us examine for a
moment and see what principle it was that overthrew the Divine
right of George the Third to govern us. Did not these colonies rebel
because the British parliament had no right to pass laws concerning
our property and domestic and private institutions without our
consent? We demanded that the British Government should not pass
such laws unless they gave us representation in the body passing
them,—and this the British government insisting on doing,—we went
to war, on the principle that the Home Government should not
control and govern distant colonies without giving them
representation. Now, Mr. Lincoln proposes to govern the Territories
without giving them a representation, and calls on Congress to pass
laws controlling their property and domestic concerns without their
consent and against their will. Thus, he asserts for his party the
identical principle asserted by George III. and the Tories of the
Revolution.
I ask you to look into these things, and then tell me whether the
Democracy or the Abolitionists are right. I hold that the people of a
Territory, like those of a State (I use the language of Mr. Buchanan in
his letter of acceptance), have the right to decide for themselves
whether slavery shall or shall not exist within their limits. The point
upon which Chief Justice Taney expresses his opinion is simply this,
that slaves being property, stand on an equal footing with other
property, and consequently that the owner has the same right to
carry that property into a Territory that he has any other, subject to
the same conditions. Suppose that one of your merchants was to take
fifty or one hundred thousand dollars’ worth of liquors to Kansas. He
has a right to go there under that decision, but when he gets there he
finds the Maine liquor law in force, and what can he do with his
property after he gets it there? He cannot sell it, he cannot use it, it is
subject to the local law, and that law is against him, and the best
thing he can do with it is to bring it back into Missouri or Illinois and
sell it. If you take negroes to Kansas, as Col. Jeff. Davis said in his
Bangor speech, from which I have quoted to-day, you must take
them there subject to the local law. If the people want the institution
of slavery they will protect and encourage it; but if they do not want
it they will withhold that protection, and the absence of local
legislation protecting slavery excludes it as completely as a positive
prohibition. You slaveholders of Missouri might as well understand
what you know practically, that you cannot carry slavery where the
people do not want it. All you have a right to ask is that the people
shall do as they please; if they want slavery let them have it; if they
do not want it, allow them to refuse to encourage it.
My friends, if, as I have said before, we will only live up to this
great fundamental principle, there will be peace between the North
and the South. Mr. Lincoln admits that under the Constitution on all
domestic questions, except slavery, we ought not to interfere with the
people of each State. What right have we to interfere with slavery any
more than we have to interfere with any other question? He says that
this slavery question is now the bone of contention. Why? Simply
because agitators have combined in all the free States to make war
upon it. Suppose the agitators in the States should combine in one-
half of the Union to make war upon the railroad system of the other
half? They would thus be driven to the same sectional strife. Suppose
one section makes war upon any other peculiar institution of the
opposite section and the same strife is produced. The only remedy
and safety is that we shall stand by the Constitution as our fathers
made it, obey the laws as they are passed, while they stand the
proper test and sustain the decisions of the Supreme Court and the
constituted authorities.
Speech of Hon. Jefferson Davis, Senator from
Mississippi,
On retiring from the United States Senate. Delivered in the Senate
Chamber January 21, 1861.
I rise, Mr. President, for the purpose of announcing to the Senate
that I have satisfactory evidence that the State of Mississippi, by a
solemn ordinance of her people in convention assembled, has
declared her separation from the United States. Under these
circumstances, of course my functions are terminated here. It has
seemed to me proper, however, that I should appear in the Senate to
announce that fact to my associates, and I will say but very little
more. The occasion does not invite me to go into argument; and my
physical condition would not permit me to do so if it were otherwise,
and yet it seems to become me to say something on the part of the
State I here represent, on an occasion so solemn as this. It is known
to Senators who have served with me here, that I have for many years
advocated as an essential attribute of State sovereignty, the right of a
State to secede from the Union. Therefore, if I had not believed there
was justifiable cause; if I had thought that Mississippi was acting
without sufficient provocation, or without an existing necessity, I
should still, under my theory of the government, because of my
allegiance to the State of which I am a citizen, have been bound by
her action. I, however, may be permitted to say that I do think she
has justifiable cause and I approve of her act. I conferred with her
people before that act was taken, counseled them then that if the
state of things which they apprehended should exist when the
convention met, they should take the action which they have now
adopted.
I hope none who hear me will confound this expression of mine
with the advocacy of the right of a State to remain in the Union and
to disregard its constitutional obligations by the nullification of the
law. Such is not my theory. Nullification and secession so often
confounded are indeed antagonistic principles. Nullification is a
remedy which it is sought to apply within the Union and against the
agents of the States. It is only to be justified when the agent has
violated his constitutional obligation, and a State, assuming to judge
for itself denies the right of the agent thus to act and appeals to the
other States of the Union for a decision; but when the States
themselves and when the people of the States have so acted as to
convince us that they will not regard our constitutional rights, then,
and then for the first time, arises the doctrine of secession in its
practical application.
A great man who now reposes with his fathers and who has been
often arraigned for a want of fealty to the Union advocated the
doctrine of Nullification because it preserved the Union. It was
because of his deep-seated attachment to the Union, his
determination to find some remedy for existing ills short of the
severance of the ties which bound South Carolina to the other States,
that Mr. Calhoun advocated the doctrine of nullification, which he
proclaimed to be peaceful, to be within the limits of State power, not
to disturb the Union, but only to be a means of bringing the agent
before the tribunal of the States for their judgment.
Secession belongs to a different class of remedies. It is to be
justified upon the basis that the States are sovereign. There was a
time when none denied it. I hope the time may come again when a
better comprehension of the theory of our government and the
inalienable rights of the people of the States will prevent any one
from denying that each State is a sovereign, and thus may reclaim
the grants which it has made to any agent whomsoever.
I therefore say I concur in the action of the people of Mississippi,
believing it to be necessary and proper, and should have been bound
by their action if my belief had been otherwise; and this brings me at
the important point which I wish, on this last occasion, to present to
the Senate. It is by this confounding of nullification and secession
that the name of a great man whose ashes now mingle with his
mother earth, has been invoked to justify coercion against a seceding
state. The phrase “to execute the laws” was an expression which
General Jackson applied to the case of a State refusing to obey the
laws while yet a member of the Union. That is not the case which is
now presented. The laws are to be executed over the United States,
and upon the people of the United States. They have no relation with
any foreign country. It is a perversion of terms, at least it is a great
misapprehension of the case, which cites that expression for
application to a State which has withdrawn from the Union. You may
make war on a foreign State. If it be the purpose of gentlemen they
may make war against a State which has withdrawn from the Union;
but there are no laws of the United States to be executed within the
limits of a Seceded State. A State finding herself in the condition in
which Mississippi has judged she is; in which her safety requires that
she should provide for the maintenance of her rights out of the
Union, surrenders all the benefits, (and they are known to be many)
deprives herself of the advantages, (they are known to be great)
severs all the ties of affection (and they are close and enduring)
which have bound her to the Union; and thus divesting herself of
every benefit, taking upon herself every burden, she claims to be
exempt from any power to execute the laws of the United States
within her limits.
I well remember an occasion when Massachusetts was arraigned
before the Bar of the Senate, and when then the doctrine of coercion
was rife, and to be applied against her because of the rescue of a
fugitive slave in Boston. My opinion then was the same as it is now.
Not in the spirit of egotism, but to show that I am not influenced in
my opinion because the case is my own, I refer to that time and that
occasion as containing the opinion which I then entertained and on
which my present conduct is based. I then said, if Massachusetts,
following her through a stated line of conduct, chooses to take the
last step which separates her from the Union, it is her right to go, and
I will neither vote one dollar nor one man to coerce her back; but will
say to her, “God speed,” in memory of the kind associations which
once existed between her and the other States. It has been a
conviction of pressing necessity, it has been a belief that we are to be
deprived in the Union, of the rights which our fathers bequeathed to
us, which has brought Mississippi into her present decision. She has
heard proclaimed the theory that all men are created free and equal,
and this made the basis of an attack on her social institutions; and
the sacred Declaration of Independence has been invoked to
maintain the position of the equality of the races. That Declaration of
Independence is to be construed by the circumstances and purposes
for which it was made. The communities were declaring their
independence; the people of those communities were asserting that
no man was born—to use the language of Mr. Jefferson—booted and
spurred to ride over the rest of mankind; that men were created
equal—meaning the men of the political community; that there was
no divine right to rule; that no man inherited the right to govern;
that there were no classes by which power and place descended to
families, but that all stations were equally within the grasp of each
member of the body politic. These were the great principles they
announced; these were the purposes for which they made their
declaration; these were the ends to which their enunciation was
directed. They have no reference to the slave; else, how happened it
that among the items of arraignment made against George III. was
that he endeavored to do just what the North has been endeavoring
of late to do—to stir up insurrection among our slaves? Had the
Declaration announced that the negroes were free and equal how was
it the Prince was to be arraigned for stirring up insurrection among
them? And how was this to be enumerated among the high crimes
which caused the colonies to sever their connection with the mother
country? When our constitution was formed, the same idea was
rendered more palpable, for there we find provision made for that
very class of persons as property; they were not put upon the footing
of equality with white men—not even upon that of paupers and
convicts, but so far as representation was concerned, were
discriminated against as a lower caste only to be represented in a
numerical proportion of three-fifths.
Then, Senators, we recur to the compact which binds us together;
we recur to the principles upon which our government was founded;
and when you deny them, and when you deny to us, the right to
withdraw from a government which thus prevented, threatens to be
destructive of our rights, we but tread in the path of our fathers when
we proclaim our independence, and take the hazard. This is done not
in hostility to others, not to injure any section of the country, not
even for our own pecuniary benefit, but from the high and solemn
motive of defending and protecting the rights we inherited, and
which it is our sacred duty to transmit unshorn to our children.
I find in myself, perhaps, a type of the general feeling of my
constituents towards yours. I am sure I feel no hostility to you,
Senators from the North. I am sure there is not one of you, whatever
sharp discussion there may have been between us, to whom I cannot
now say, in the presence of my God, “I wish you well,” and such, I am
sure, is the feeling of the people whom I represent towards those
whom you represent. I therefore feel that I but express their desire
when I say I hope, and they hope for peaceful relations with you,
though we must part. They may be mutually beneficial to us in the

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Getting Globalization Right

Sustainability and Inclusive Growth in

Yearning for Inclusive Growth and Development Good Jobs

Capitalism Global Change and Sustainable Development

The Palgrave Handbook of Conflict and History Education

Achieving Inclusive Growth in China Through Vertical

Growth Disparities and Inclusive Development in India

Sustainable Growth and Development of Economic Systems

Fiske Guide to Getting into the Right College 6th

Safety and Ethics in Healthcare: A Guide to Getting it

Getting Globalization Right

ISBN 978-3-319-97691-4 ISBN 978-3-319-97692-1 (eBook)

Library of Congress Control Number: 2018951203

© Springer Nature Switzerland AG 2018

Global Implications of U.S. Trade Policies for Reducing

Is Italy on the Pathway for Achieving Sustainable Development

D. Salvatore and F. Campano

Keywords Harrod-Domar model · Trade matrix · Basic scenario · U.S. import

D. Salvatore (B) · F. Campano

© Springer Nature Switzerland AG 2018 1

Fig. 1 U.S. trade shares in GDP, 2000–2015

3 The Baseline Projection

GDP is projected using the Harrod-Domar model. No assumption is made of any

4 Scenario 1: 30% Reduction in Imports—No

5 Scenario 2: The United States Reduces Its Import Share

6 Scenario 3: The United States Lowers Imports

See Tables 6 and 7.

Table 6 Production function parameters

Table 7 Demand functions’ parametersa

a R-squares and t statistics furnished upon request

Thorvaldur Gylfason and Gylfi Zoega

Keywords Natural resource curse · Dutch disease · Financial crisis

JEL Classification F41 · O23 · O33

T. Gylfason · G. Zoega (B)

© Springer Nature Switzerland AG 2018 13

and James (2015).

also Deaton (2013, Chap. 7).

abundant access to foreign capital coupled with weak productivity growth.

Source: Central Bank of Iceland.

Fig. 1 Evolution of the nominal exchange rate 2003–2008

Exports 1960-2015 Manufactures exports 1962-2015

Denmark Iceland Denmark Iceland

Source: World Bank, World Development Indicators.

Fig. 2 Exports of goods and services and manufactures

Import volume 2000-2015 Domestic credit provided by the banking

Denmark Iceland Denmark Iceland

Source: World Bank, World Development Indicators.

Fig. 3 Imports and domestic credit

Fig. 4 Exports and imports in Iceland and South-East Asia

Gross investment 1965-2015 Adjusted net saving 2005-2015

Fig. 5 Investment and adjusted net saving

during these years.

2.1 Output and Employment in the Secondary Sector

Profits in the tradable sector measured in terms of nontradables are

λt K tα (e(wt /wt )Nt )β R 1−α−β − wt Nt (1)

where K is the stock of capital, N is employment, R denotes a fixed factor such as

so that a higher primary-sector wage, a lower disutility of working in that sector

27 Depreciation of capital is assumed away.

2.2 Primary Output and Capital Flows

2.3 The Intertemporal Budget Constraint and the Real

rt ytP + ytS − ct (7)

where yP log(Y P ), yS log(Y s ), c log(C T ) and r is an exogenous parameter that

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