Ecn 115b

Definition of Malthusian Trap

-Equilibrium level of population sustainable by access to resources

What types of aid are more valuable and why?

-Loans are not as valuable as grants -Tied aid (aid that is marked for specific spending) is less valuable • especially if country is required to spend it on a foreign vendor

What were the various solutions to the crisis?

-Paris Club(rich countries) offered "Toronto Terms" 1. partial cancellation of debt, up to 1/3 of non-concessional loans 2. reduced interest rates 3. extended maturity of payments(25 years) in exchange, country had to agree to IMF "stabilization policies" -Debt-for-equity swap -Debt-for-nature swap

What is the Harrod-Domar model?

-Rapid capital accumulation is the key. -There is a link between investment and growth such that if you have a target for growth, there exists a required investment rate to achieve that growth.

Know the assumptions of the H-O model.

-assume labor, land, and capital are equally productive but each country is endowed with more or less of each factor

Stiglitz (2000)

-developing countries should not open their financial system to short term borrowing from foreign sources. "race car engine in an old beat up car"

Traditional approach

-development is an increase in Gross National Income at rates of 5% to 7% or more annually

Know Mishkin's four stages on the road to a banking and currency (twin) crisis.

-financial liberalization -run up to currency crisis -currency crisis -full financial crisis

run up to currency crisis

-higher interest rates abroad undermines credit quality => less lending, tight credit, failing companies

What was the advantage of having "specialists" (or specialization) in your civilization?

-it will lead to greater efficiency

What makes the Fertile Crescent a unique birth place of food production?

-largest zone of Mediterranean climate -great variation in altitudes so a lot of experimentation with crops -diversity in wild foods -domesticable animals -less competition from hunter and gatherer lifestyle

Know the assumptions of the Ricardo's Absolute Advantage and Comparative Advantage models.

-opportunity costs are constant

Know the dangers of having a currency that is unstable. (exchange rate fluctuations and having a lender of last resort)

-people do not want to hold your currency. citizens look to foreign currency -government can't act as lender of last resort -vulnerable to shifts in exchange rates

Debt-for-equity swaps

-sale of questionable developing country debt to private institutions in secondary trading markets. the buyer(foreign corp.) trades the IOU for a local or state owned asset.

What were the five pillars of Sach's plan to establish a market economy?

-stabilization -liberalization -privatization -social safety net -institutional harmonization

export platform

-taking advantage of lower factor prices in a developing country, a firm locates just the assembly abroad. The products are then exported to the home market for consumption or other developed country markets

Solow Model

-technological change is the key to long-run growth.

What is special about the axis of Eurasia? Why did it turn out to put Eurasia in such an advantageous place?

-the east-west orientation of the continent meant food producing technology moved faster

What are some of the social changes present in the transition to an industrialized society?

-urbanization: fewer farmers -changing gender roles, falling birth rates, job opportunities for women, delayed marriage -empowering of women

Understand how balance is achieved

-use reserves to balance accounts

Gross National Happiness

-use survey data where people are asked how they feel about their well being over time

Foreign Portfolio Investment

foreigners buying shares of domestic companies

capital account

+Direct private investment (Foreigners investing in capital in your country) +foreign loans (foreign aid and loans from banks from private or public sources) -increase in foreign assets of the domestic banking systems -resident capital outflow (domestic money sent to foreign investments)

current account

+Exports -Imports +net investment income (earned income on investments-interest paid) -debt service payments (interest and dividends on debt issued) +net remittances and transfers (people working abroad send money home) -if a current account is + then there is a current account surplus -if a current account is - then there is a current account deficit

Second World (Socialist world)

-1/3 of global population -USSR, China, Cuba, N. Korea, eastern European states under soviet control -central planning -separated themselves from first world -want to keep sovereignty while still participating in global economic prosperity -take part in trade -take advantage of global capital

Be able to discuss the study by Aitken and Harrison (1999) of Venezuelan firms.

-4000 Venezuelan firms (1976 - 89) -Positive relationship between increased foreign equity participation and plant performance -Productivity in domestically owned plants in same industry declines with foreign investment. "market stealing affects" -Joint ventures, where a foreign partner joined a domestic firm, there were significant productivity advantages for the local firm * in sum, gains from the joint ventures were higher than losses from market stealing. Gain was small.

Be prepared to discuss Rodrik's concerns regarding the reality behind policy reform in developing countries in the 1980s. (to the extent that it was discussed in class and discussion)

-42 countries received loans from world bank during 1980's, intended to reform trade regimes (money tied to reform) -do not oversell trade reform as a cure-all for economic problems -an abysmal trade regime will drive a country into economic ruin but good trade policy can't make a poor country rich -if you over sell trade then countries could give up on it too soon

Why is capital unimportant in the long-run but possibly important in the short run?

-Adding more capital can increase growth rates in the short run when there is a shortage of capital but technological change sets the path for long-run economic growth

Know the trends in balance of payments in the developing countries in the last 30 years

-Before 1980: Rapid industrialization-Large current account deficits. Capital account surpluses made up the difference, private loans - international banks Public loans - world bank, Direct investment by multi nationals. Oversell developing countries accumulated foreign reserves b/c current account + capital account = positive numbers -During 1980s: Current accounts were still negative 1. fall in overall commodity prices 2. global recession in 81-82 / 91-93 3. increased protectionism 4. Overvalued exchange rates Capital accounts (falling) 1. using developing country debt servicing payments, capital flight

Capability approach

-How many different choices does someone have?

Synthetic indicators

-Human Development Index: using a basket of indicators of varying weights in order to get an understanding of development progress -life expectancy at birth -mean years of schooling -GNI -inequality

Debt-for-nature swaps

-IOU is exchanged for preservation of a natural resource

What are some countries that have tried the above strategies?

-Import: Chile, Peru, India, Philippines, Ghana -Export: S. Korea, Taiwan, Singapore, Hong Kong

How did the crisis make the debt burden larger?

-Led to increase demand for U.S. dollar -Led to increase in market value of U.S. dollar -Increase dollar denominated debt->made crisis worse

Understand the impact of Mexico's decision in 1982.

-Mexico stopped paying -Fear for developed country financial systems-Latin American debt alone exceeded the net assets of largest U.S. banks -Led to increase demand for U.S. dollar -Led to increase in market value of U.S. dollar -Increase dollar denominated debt->made crisis worse

Why did the concept of the "financing gap" fail to guide developing economies properly?

-No stable link between investment and growth -Diminishing returns to scale -each country is different -debt burden, made problems worse

Know the various disadvantages of specializing in agricultural goods (commodities, consumption goods) and how this form of specialization can lead to very slow or stagnant economic growth.

-Prebisch-Singer Hypothesis: in the long-run, prices for primary product exports on world market tend to fall relative to prices of manufactured goods. -developing countries have to export more and more to keep up with the same level of imports over time -Engel's law: demand for staple goods grow more slowly than income so growth in staple foods will lag behind overall economic growth -new technologies reduce consumption of raw materials which decrease growth in these industries -primary producers face greater competition on developing countries, sensitive to weather, subject to rapid changes in foreign demand

Be prepared to discuss Dornbusch's article. He outlines examples of success in both export promotion and import substitution for particular developing countries. What are the conditions that are important to this success? (to the extent that it was discussed in class and discussion)

-Protection is bad, we know it will be destructive for economic growth -Sudden open trade is also problematic -When east and west Germany were united East German industrial production fell 50%, mass unemployment -A closed country (w/tariffs and quotas) needs to open gradually -1st move from quotas to an uniform high tariff -2nd as economy grows, lower step by step the uniform tariff -gradual path to reform

New approach in Global Politics

-UN Millennium Development goals: focus on bottom 40% of income distribution in each country. They need to feel gains from development. Put the developing countries in a position to design their own development.

IMF "Stabilization Policies"

-abolition or liberalization of foreign exchange and import controls -devaluation of official exchange rate -strict anti-inflation policy: raise interest rates and reserve requirements, cut government spending, increase taxes, abolish wage indexing, promote freer markets, greater hospitality to foreign investment, open up to trade

Be able to recognize who has absolute advantage and comparative advantage in a numerical, two-country example.

-absolute advantage: country that produces more should specialize in that -comparative advantage: country that has lowest opportunity cost should specialize in that

What are the advantages and disadvantages of a developing country encouraging FDI?

-advantages for the developing country: domestic investment is falling short of desired investment, foreign investment can fill the financial gap, can bring in foreign exchange to fill a foreign exchange gap, local gov can get tax revenue from these multinational, spill overs in technology and knowledge -Ways in which FDI has been disappointing: can crowd out domestic investment (prices are higher for domestic firms b/c they are competing for resources, often monopoly agreements w/ government restrict local developments of firms, often firms get tax incentives to locate in a community, often firms don't reinvest profits as a domestic firm would, argument that there are few technological spill overs and that domestic firms have been hurt by foreign firms, promote interests of a small group at the top, inappropriate consumption patterns promoted by the multinational to get a piece of the market, Ex. nestle, Participate in transfer pricing

Be able to understand and calculate "basic transfer"

-are we accumulating or losing reserves as a result of our borrowing -BT = ( d * D - r * D ) -d = rate of increase of debt -D = total debt burden -r = rate on interest on debt -If d > r then BT>0 gaining foreign reserves -If d < r then BT<0 losing foreign reserves

Understand the events leading up to the debt crisis of the 1980s

-before 1970s: most lending was concessional (low rates, long terms) through public sources (high d low r) -during 1970s: 1st oil shock commercial lending to developing countries increased 1. OPEC profits soaring, banks had money to lend 2. This borrowing made up falling exports non-concessional loans: 1971: 40% developing country 1979: 77% -by end low d high r

Understand and be prepared to discuss the definition of the Import Substitution Strategy.

-by closing economy to imports, domestic industry will grow to provide these goods. once established, they will be competitive with the rest of the world. -1st, domestically produce formerly imported products that are simple -2nd, expand to more complex manufacturers. -use high tariffs and low quotas to protect domestic production. -overvalue currency

Be able to graph a tariff and quota and discuss the numbers assigned to various points on the graph.

-check graph in notebook

Be able to graph the production possibilities frontier of a country in autarky and then with trade.

-check graph in notebook

Be able to identify, in general, which country will specialize in which good in a two country, two good example.

-check graph in notebook

What are the differences between the model of comparative advantage and the Heckscher-Ohlin model in terms of the impact of opening a developing country to international trade relationships?

-comparative advantage: developing country would specialize completely -H-O: complete specialization will not occur

How does this model apply to developing countries in general? Would we imagine that they would completely specialize in one good or another?

-complete specialization will not occur -as factors become more scarce, prices will rise making factors relatively more expensive

Why have we seen a transition from hunting and gathering to food production?

-decline in availability of wild foods -increase availability of domesticable wild plants -development of technologies for collecting, processing and storing wild foods, baskets, roasting, etc. -autocatalytic process of increase food production and increase population -the food producers were more numerous and could displace or kill hunters and gatherers

What were the consequences of WWI on the various centers of power in the world?

-destabilized Russian Tsarist regime->eventually led to communist control of 1/3 world population -financial instability in Europe: debt, destruction of Ottoman and Hapsburg empires->small successor states fighting w each other -allied claims for reparation payments from Germany->Great Depression, WW2

What were the problems with the various solutions to the crisis?

-developed "powerful" countries forcing the government policies in developing countries and owning some of their most valuable assets

What are the characteristics of an animal that make it possible to domesticate?

-diet: herbivores and omnivores, less costly to raise them -growth rate: grow quickly then more opportunity to have greater food supply -cannot have problems breeding in captivity -cannot have nasty disposition, hippo -cannot have tendency to panic -social structure: comfortable with a leader

What are the characteristics special to a crop? (enhanced wild plants)

-earliest Fertile Crescent crops:grains and pulses -fruits and nut trees: 3 years to bear fruit -fruit trees requiring grafting: pears and apples -"weeds": beets, oats, rye, lettuce

How does the early development of food production and early arrival of domesticated animals set up a region to be a powerful dominator (one with guns, germs and steel)?

-early development of food production->vast enough production to provide surplus->large, dense, sedentary, stratified societies->accumulate global power w/guns, germs, and steel to dominate other societies and accumulate wealth

How does this model of comparative advantage apply to developing countries in general?

-find the good where they have the comparative advantage -identify the partner -developing country would specialize completely

World Bank

-founded in 1944 as the international bank for reconstruction and development -finance reconstructions of Europe after WW2 -today, the world bank lend to middle income countries at market rates: international development association - uses donated money to provide highly concessional loans below market rates and long terms and grants to low income countries. They provide development advising as well -critique of world bank that they: give uncoordinated loans give bad advice focus on interest of rich countries

International Monetary Fund

-founded in 1944 bretton woods conference which re-established an international system of stable currencies -after 1970s when Bretton woods fell apart, IMF provides temporary financing to countries facing significant balance of payments problems (short on money to pay debts) goal is to stabilize currency -critique: IMF puts countries in crisis in even greater crisis Their rigid requirements for developing countries to get loans keep countries from growing

What was the process of the spread of industrialization?

-from England to certain colonies: North America, Australia, New Zealand. similar climates, transfer of technologies, easy. locals were pushed out or killed -Northwestern Europe->Southwestern Europe: began where climate, natural resources, disease environment, political and social conditions favorable. spread quickly after serfdom ended, constitutional governance, railways -spread to Latin America, Africa, Asia: confrontational tumultuous. rich, powerful European powers exploited poorer and less powerful regions. increase living standards came at a cost

What are the trends in FDI in the last 20 years?

-growing rapidly -Greater share of all resources flows -Created very large companies -350 largest corporation control more than 40% of global trade -developing economies look very small relative to multi national corporations -UN currently working to bring these folks to the table -developing world is becoming more active as a source of FDI (instead of just a destination)

What are some problems that arise with import substitution?

-high tariffs led to inefficient domestic firms -overvalued currency led to destruction of existing export markets

What are the advantages of opening your capital markets when done correctly?

-if we open our domestic financial system we get: -ease in borrowing (gov and ind) -eases conduct of domestic monetary policy -harder to manipulate and restrict financial flows domestically with an open financial system -more transparency

What is the role of disease in empowering a region?

-if you have more immunities then your population will be healthier and can survive more. also you could bring disease to other regions that are not immune.

What are the main differences between the two strategies?

-import substitution closes off trade -export promotion encourages trade

Corrected GDP

-income is added or subtracted depending on people's willingness to pay for an alternative

Why, according to this model, is trade a good thing? (Don't forget to mention that factor prices tend to equalize)

-increase demand for labor in developing countries specializing in labor intensive goods->wages will rise -increase demand for capital in developed countries specializing in capital intensive goods->increase rental rate on capital -less inequality between factors of production across these countries -no need for active trade policy

What was the impact of the second oil shock of 1979?

-increase oil prices, increase import bills -increase interest rates -decrease export earnings -decrease commodity prices -really big "r", try to keep up rate of increase in borrowing ->more massive borrowing, massive debt service obligations, therefore trouble

Has the application of the Solow model to developing economies worked?

-investment in machinery can be helpful only if the technology available has created a shortage of capital -this short-run catching up to long-run growth rates can be achieved this way -technology can easily transfer and some countries are still poor

How does domestication of animals earn more calories than hunting?

-it provides a stable amount of food rather than having to hunt for wild animals with no guarantee

Foreign Direct Investment

-large corporations building operations in developing countries -one country making a physical investment (building a factory in) another country. There exist a parent company and a foreign affiliate together forming a "multinational corporation." The parent must have 10% or more ownership of the ordinary shares or voting power of an incorporated firm -US was the most important foreign director investor from 1945 - 1960. FDI has spread and recently came in at = 28% of global GDP

financial liberalization

-liberalizing a rotten banking system i. excessive risk taking by inexperienced financial institutions ii. Ineffective regulation by naïve, inadequate, underpaid, or corrupt regulators iii. Rapid growth of credit fueled by easy access to foreign funds iv. As losses mount (people not paying back loans) => cutbacks in lending => bank failures => further cut backs in lending =>more risk by bankers to get their money back

1989 Brady Plan, what was it and how did it impact future debt restructuring?

-linked partial debt forgiveness to guarantees from IMF and World Bank...so countries needed to follow IMF rules. -by 1992, 10 countries borrowed through IMF. "special drawing rights" is IMF money

vertical FDI

-locate a stage of production abroad -Often in developing countries a US firm will establish an export platform

How can a country attract FDI?

-lower inflation => more FDI -low tariffs => more FDI -low corruption => more FDI -more GDP => more FDI -higher wages => more FDI

How does he feel about opening capital markets?

-no conclusive evidence that an open financial sector (one that allows you to borrow foreign money) helps economic growth in developing countries. -There is conclusive evidence that opening the financial sector can lead to more frequent and severe economic crises

What was special about "Britain" that made it important for the industrial revolution?

-open -socially mobile -political liberty -one of the centers of the scientific revolution -geographically blessed: island economy, close to European continent, rivers that you could navigate, good for agriculture, proximity to North America, coal for powering industrial revolution

Third World

-post colonial countries -not 1st or 2nd world -industrialize on their own -want to keep sovereignty while still participating in global economic prosperity -take part in trade -take advantage of global capital

What are the main reasons that countries fail to grow?

-poverty trap: too poor to save and invest -physical geography: high transportation costs as a result of terrain -fiscal trap: government cannot collect taxes. too much debt to initiate spending -governance failure: weak rule of law -cultural barriers: isolating ethnic groups, women -geopolitics: interference from outside -demographic trap: too many kids -lack of innovation: market is too small for new products to launch

horizontal FDI

-replica of the original operation located abroad in order to serve the domestic market -helpful when tariff barriers are high -possible when skill sets needed can be found in foreign country -helpful when transportation cost are high. Soft drinks are cheap to make expensive to ship -potential loss of the trade secrets or tech -close proximity to the market can be advantageous (marketing, customer services, sales force) => better market penetration

What are the main differences in sedentary and hunter/gatherer lifestyles?

-sedentary lifestyle meant that they would not have to hunt for their food and waste calories in hunting. they started eating wild grains which could provide enough calories from early food producers.

What are the big five domesticated animals? Know that they have been the same ones for thousands of years.

-sheep, goat, cow, pig, horse

Know the conditions under which export promotion will work well or will fail.

-some countries faced problems with government being too easy with their lending to the firms -overall this philosophy was very successful

Why, according to these models, is trade a good thing?

-specialization leads to efficiency. "get more stuff"

What would this model of comparative advantage advise a developing country to do, why? (Would we imagine that they would completely specialize in one good or another?)

-specialize completely -find good that they have the comparative advantage in

Know the big problem that Agenor and Aizenman (2008) have with foreign aid and the implications for its efficiency?

-study effect of aid volatility • 1.volatility in aid is relatively high compared to other flows • 2. information content of aid commitment is predicting actual flows is either • 3. project aid is volatile and pro cyclical as a result: 1. Many projects go unfinished 2. The project leaders lower their level of desired funding. This leads to less funding and perpetuates slow growth * need more transparency in giving aid

Be comfortable with the definitions of tariff, quotas, subsidies, preferential fixed exchange rates and industrial policy.

-tariff: tax on imports or exports -quota: a limited quantity of a particular product that under official controls can be produced, exported, or imported. -subsidy: A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.

Be prepared to discuss the advantage of trade in the form of shared ideas and technology.

-the largest gain from trade is often technology. even where models are incorrect, we believe that technology transfers are an important result from trade. there is a transfer of ideas from rich to poor countries

GNI per capita

-this number takes into account population growth

What are the various ways that economic development has been quantified?

-traditional approach, GNI per capita, corrected GDP, gross national happiness, capability approach, synthetic indicators, new approach in global politics

Understand and be prepared to discuss the definition of the Export Promotion Strategy.

-use trade to access large international markets. this makes your firms more efficient and you grow faster -protection distorts prices and costs -1st, carefully choose goods you think will be in demand in rest of the world -2nd, carefully subsidize/promote these industries until they are capable of competing. the government will then not be needed.

First World

-western Europe, U.S., Japan

Be able to define remittances and discuss why they exist.

*people and capital are not mobile enough to result in the wage equality *wage levels in high income countries are about 5x wage levels in low income countries -migrants from poor to rich countries can send back wages to their families and impact consumptions and investment money is sent directly to families and is spent on: -keeping kids in school -Higher quality and quantity of food -better housing characteristics of remittances: -uneven - certain countries get majority of the money -increasing: -technology is improving -more migrants problems: some of this immigration is "irregular" or human trafficking policy makers help by: 1. Make payment transfers easy 2. Allow more migration

currency crisis

i. bad situation because people don't want to hold your currency. You have failing companies and banks => currency crisis (your currency loses value quickly) ii. You have a choice 1. raise interest rates, support currency, make it even harder for firms to borrow, more firms collapse and worsen crisis 2. do not raise interest rates (currency may collapse) companies with foreign loans can't pay back

full financial crisis

i. countries with a history of inflation and default go quickly from 3rd-4th stage => increase r and currency still falls => wipe out ii. Bankruptcies in countries w/ inadequate bankruptcy producer, inflation surges, currency tumbles => deep recession, then it spreads to neighboring countries

What are the advantages of an NGO providing aid?

• 1. An NGO is a religious group, private charity or foundations, research organization, federation, of nurses, teachers, doctors, engineers.. • 2. Increase from 1 billion to 14 billion from 1970 - 2005 • 3. Grown often within, developing countries • 4. Work better at a local level, not restricted by political rules • 5. Avoid the negative impression that comes with a development country affiliation. Get more acceptance

What are some of the problems with aid?

• 1. Can widen gap between rich and poor if misallocated • 2. Can serve elite groups and not overall development • 3. Substitute for local saving • 4. Substitute for local production • 5. Problems w/aid productivity means that aid will dry up • 6. Some feel that even with concessional loans, debt burden isn't worth it

What is the motivation for recipient countries to receive aid?

• 1. Close the financing gap or currency exchange gap if your country isn't doing enough investing or exporting • 2. With aid, they can develop relationship w/ developed countries (trade, better aid in future) • 3. Political regimes want spending money to gain popularity or regain popularity • 4. No one is going to say no to free money • 5. NGO's can take pressure off of providing healthcare, clean water... other services for the population.

What are to donor motivations for providing aid?

• 1. Protect prior investments in that country • 2. Opportunity to create new markets for your stuff and put yourself in a good position to exploit these markets • 3. Political influence that comes from giving aid to a developing country. Get that county on your side (could even be for political dominance ) • 4. Truly the motivation could be the desire to help people • 5. to look good to your own population • 6. Health concerns that disease will spillover borders • 7. Avoid spillovers from conflict

How is foreign aid defined? (What are official and unofficial flows?)

• public bilateral and multilateral development assistance (official) • private assistance provided by non-government organizations (unofficial aid)