textbook pt 3 ch 13-17
US international trade is a smaller share of its GDP bc of
large population and economy
in what year ddid the US produce its highest output of manufactured goods?
last year
ISI policies were often made worse by
the tendencies of many countries to elect or support economic populists. Populists favored economic growth and redistribution while ignoring economic constraints such as government budgets and foreign exchange shortages.
The major characteristics of economic growth in the export-oriented Asian economies
(1) increasing equality (2) rapid accumulation of savings and high rates of investment (3) rapid increases in levels of schooling (4) rapid growth of manufactured exports (5) stable macroeconomic environments
characteristics of economic growth (decline) in Latin America's
-High levels of inequality -Macroeconomic instability -Inward orientation
characteristics of economic growth in the East Asian export economies
-Improved equality -Stable macroeconomic policies/fundamentals -Promotion of exports
Mexico 1982-89 debt crisis (the lost decade) causes
-heavy borrowing from foreign banks -weak tax systems -rising world interest rates -dependency on oil prices, which dropped lost decade: sovereign debt problems compounded by negative growth, banking & currency crises, & hyperinflation
main causes of 1982 debt crisis
-increases in lending during the 1970s -the external shocks of interest rate hikes and primary commodity price decreases, especially oil. The faulty macroeconomic policies of many Latin American governments during the late 1970s and early 1980s made them more vulnerable to the shocks.
chinese rapid growth of imports and exports
-manufacturing sector is extremely competitive and relies on technology imports & has a strong comparative advantage in the production of goods that need abundant supplies of low-wage labor -exports: mostly low-technology goods or high-technology goods assembled in China from imported parts, although this is changing and strong industrial upgrading is taking place.
China is one of the few formerly communist countries that did not suffer a loss of output during its transition to the market economy bc
-more cautious approach to reforms -large agricultural sector. When it began its reforms, about 70 percent of its labor force was in agriculture, much of it very low productivity. A loss of workers to that sector did not result in a decline in output.
EU full membership requirements
-stable democratic government -stable market-based economies -formal adoption of EU's laws and regulations (aka ACQUIS COMMUNAUTAIRE (EU standards & monetary laws)
Future challenges of EU
-the effects of an aging population -the development of a policy towards new immigrants from outside the EU -creation of a mechanism for sharing the risks of recession and economic crisis.
the most lasting effects of the 1982 debt crisis
-the forgone output due to the recessions of the 1980s -the deep economic reforms that have taken place in country after country. These reforms are key to explaining the return of capital flows to Latin America. Reforms vary by country, both in kind and degree, but they mark a historical shift away from the protectionist and interventionist policies of ISI and economic populism and toward more open and market-oriented policies.
2 judicial branches of EU
1. Court of Justice of the European Union 2. European Court of Auditors.
2 executive bodies of EU
1. European council: 27 national leaders that set the policy agenda 2. European commission: proposes and implements legislation *sole right to initiate EU laws and the same right as the national governments to submit proposals.
indian reforms forces/causes
1. USSR setbacks and dissolution (was India's primary trade partner) 2. success of several East Asian countries 3. financial crisis caused by heavy govt borrowing (gulf war created inadequate foreign reserves)
EU 2 largest expenditures
1. agricultural support- 37% of budget 2. cohesion funds- 50% of budget (funding to support regional development, directed towards new, LD members. funds infrastructure and environmental projects)
3 characteristics of successful policy in export-oriented Asian economies
1. clear performance criteria 2. institutional mechanisms to monitor & enforce compliance 3. low costs so non targeted sector don't suffer
2 legislative branches of EU
1. council of European Union (aka council of minsters): specific industry/sector ministers from each nation 2. European parliament: 705 members (proportional to country size), only directly elected government body
steps taken to implement SMP
1. elimination of physical barriers (ie border customs) 2. elimination of technical barriers (ie different standards) 3. elimination of fiscal barriers (ie differences in taxes)
maintenance of a stable macroeconomic environment requires
1. fiscal discipline 2. acceptance of the resource constraints that limit a government
post 1982 crisis economic reform features
1. governments implemented stabilizations plans to stop inflation and control budge deficits 2. most countries privatized government owned parts of their economies 3. trade policies became more open and less discriminatory against exports known as neoliberal model bc it represented a partial return to 19th century European liberalism which favored free markets and minimal government intervention in the economy
ISI unintended outcomes that caused inefficiencies
1. governments misallocated resources 2. exchange rates were often overvalued 3. policy biased towards urban areas 4. income inequality worsened 5. widespread rent seeking
gains from SEA
1. increase in competition & economies of scale 2. expand trade (reduction in barriers) 3. reduce costs
chinese sources of comparative advantage in manufacturing
1. low wage & low skilled labor abundance 2. large domestic market 3. coastal areas/geographic advantage
2 legislative branches of EU: European parliament: 3 main responsibilities
1. passing laws 2. supervising other EU institutions 3. passing final budget
india 3 key areas of reform
1. permits 2. privatization 3. international trade and investment (movement away from ISI)
US trade agreement categories
1. preferential agreements (one side makes unilateral concession to the other, used by MDCs to grant preferential access to LDCs) (goal: promote trade and economic development) 2. TFIA/BIT (mechanics to discuss trade, investment, and disputes)
The three main goals of trade reform post 1982 crisis
1. reduce the anti-export bias of trade policies that favored production for domestic markets over production for foreign markets 2. raise the growth rate of productivity 3. make consumers better off by lowering the real cost of traded goods.
2 elements specific to export-oriented Asian economies governments policy control
1. resources only provided as long as the company meant specific export requirements 2. governments placed macroeconomic stability above industrial policies
convergence criteria: 5 indicators fo readiness to adopt a single currency
1. stable exchange rates 2. control/low inflation 3. harmonize long-term interest rates 4. reduce government deficits 5. reduce government debts
export-oriented Asian economies governments most common areas of intervention
1. targeting of specific industries (industrial policies) 2. directed credit 3. export promotion
EU budget composed of/ how EU gets money
1. tariffs 2. EU share of national value added taxes (VAT) 3. payment from each member country based on size of its economy (the largest source of funds, 70% of total revenue)
2 key elements of policy enforcement to avoid corruption/rent-seeking
1. well-educated bureaucracy 2. bureaucracy insulated from political process & commitment to shared growth
EU stage one
1957, EEC (European economic community) -involved agreements over free/open trade for coal and steel (ECSC) (1951) & European atomic energy community (EAEC or Euratrom), goal of developing nuclear dingy for peaceful purposes (1955) -treaty of Rome (post WW2, goal of rebuilding war-destroyed economies and preventing another war/further destruction original vision: political union via economic integration
European Monetary System (EMS)
1979 exchange rate system that linked ECC currencies. significantly deepening, tied each currency rate to the weighted value of others. replaced in 1999 by the Euro.
indian economic reform
1980s, but more strongly in 1991. led to much higher growth rates in both countries. -privatized state-owed industries -increased efficiency -reduced red tape -made business more competitive led by Manmohan Singh
schengen agreement
1985 eliminate custom controls (passports etc) at boarders FREE movement of PEOPLE
baker plan
1985, in response to Mexican crisis: organize a renewed lending program by commercial banks issue: most banks w/ latin American loans were trying to reduce their exposure to that region, not increase it
single European act (SEA)
1987 act that created a COMMON MARKET among EC members, implemented in 1993
delors report
1989 president of EC's plan to achieve an economic market via 300 steps. led first to the creation of a COMMON MARKET under the SEA aka single market program (SMP) key element under SEA: four freedoms -free movement of goods, services, capital, & labor *AKA the change from customs union to common market*
Brady plan
1989 intended to help indebted developing countries, offered a modest amount of debt relief *did NOT end the debt crisis but was a significant step towards stability (countries that used it were deemed more credible)
treaty on European Union (aka Maastricht treaty)
1992 agreement that deepens EU integration from a common market to an ECONOMIC UNION lead to name change and creation of common currency
china and india NTM
ADD & quotas *india is/was more protectionist than china
EU original 6 members
Belgium, Fra, Germ, Ita, Luxembourg, and netherlands
chinese economic reform: dual track strategy
Communism to capitalism via local market reforms to certain geographical or economic sectors while maintain govt planning for remainder of economy reform caused after a long period of instability and unhappiness with communist rule (communist china emphasis on self sufficiency in all goods and services)
Subsidiarity
EU authority is limited to TRANSNATIONAL affairs ie, environmental
the largest, oldest, and most integrated market/regional agreement
EU, 1957 27 members, created in several stages
Import Substitution Industrialization (ISI)
Economic development strategy that emphasizes production of domestic goods that subsidizes imports. Decrease imports and exports. major weakness: discriminate against exports *reason for long boom in Mexico's economic growth pre 1982
indian rapid growth of imports and exports
Exports of Indian business services and computer and information services have taken off since the middle of the 1990s. This type of trade in services represents a new area of trade but is another application of the theory of comparative advantage. production of business services and computer and information services is supported by its English-speaking engineers and technicians.
level of savings in the export-oriented Asian economies
HIGHER than in many parts of the world. S=I, more savings = more investment, which means more rapid accumulation of physical capital. *mobilizing and allocating resources: fundamental for economic growth
savings & income growth
INTERDEPENDENT cycle of rapid income growth caused by high savings which leads to high rates of investment which feeds into a second round of income growth and high savings
European Currency Unit (ECU)
NOT a currency and NOT used in transactions. monetary unit of account used by euro
differences between china and india economic growth
Indian economic growth lags Chinese. China: -moved large numbers of workers out of the countryside and agriculture into low-wage, low-skilled manufacturing India: -has not yet experienced a similar transformation and more than half its labor force remains in agriculture where productivity is low and poverty is high
major US export/import markets (after CA, ME, & China)
Japan, germany, UK, & South Korea
second most important trading partner with the United States
Mexico Mexico sought an FTA with the United States as a way to lock in economic reforms and attract foreign capital for investment.
terms of trade (TOT)
average of a country's exports divided by the average price of imports (a decline in the terms of trade means that each unit of exports buy less imports) &aka export pessimism (raw material prices falling, as income rises people buy less raw materials and more manufactured goods)
largest bilateral trade agreement in the world
US & canada bc: -shared border, common history, & similar culture
One of the key elements of policy is
a stable macroeconomic environment, including: -inflation control -moderate budget deficits -manageable foreign debt -credible exchange rates.
investment in human capital endowments in the 8 export-oriented Asian economies
constituted an ongoing shift in the comparative advantages of those nations so that new investments pushed new production lines
most positive SEA impact
convergence of income levels
EU deepning
increasing level of cooperation between members countries. economic and noneconomic activities that cause increased levels of integration of the national economies
Economic growth under ISI
adequate but ultimately led to: -an inefficient manufacturing sector -excessive rent seeking -overvalued exchange rates -a concentration of resources on the urban sector.
primary determinants of social spending in virtually all countries
age structure of population old people: vote more and need more healthcare, ie increase in public spending
Without financial capital inflows to finance their current account deficits
countries must eliminate the deficit through a combination of increased exports and reduced imports. The policies that accomplish this are expenditure switching and expenditure reducing policies.
Eastward expansion of the EU
created problems in the areas of agricultural policy, governance, and income differences.
the export-oriented Asian macroeconomic polices generally characterized as
pragmatic and flexible (deficits and debts remained manageable)
result of 1982 debt crisis
became extremely difficult to borrow internationally
Chinese economic reform
began in 1978, much deeper reforms that in India led to much higher growth rates in both countries. transition away from socialism and public ownership towards capitalism and private ownership. led by Deng Xiaoping (gradual and steady dismantle of state and communist party control, in part bc of lack of information/experience and fear of reaction from conservative anti-reformers)
industrial polices
broad: policies that alter a nation's endowment in a way that does not favor particular industries narrow: the targeted development of specific industries targeted industrial policies attempt to change the comparative advantage of a nation through the alteration of its industrial structure.
United States' closest ally and most important trading partner
canada bc: -language, cultural heritage, and proximity 3 successive agreements: -1. Auto Pact in 1965 -2.Canada-United States Free Trade agreement in 1989 -3. the North American Free Trade Agreement in 1994
US top 3 trading partners
canada, Mexico, china (representing more than 1/3 of total US trade)
foreign trading corporations (FTC)
communist china economic system where all foreign trade was controlled by 12 enterprises attached to various govt branches. all imports and exports went through the FTC and were strictly regulated
state capitalism
economic organization where the national govt takes an active role in shaping market outcomes to ensure they serve the national interest *china & india both use
economic populism
economic polices emphasizing growth and redistribution that simultaneously de-emphasize inflation risks, deficit finance, external constraints, and reactions of economic agents 3 initial conditions: 1. dissatisfaction w/ status quo 2. policy makers reject traditional constrains on macro policy 3. policymakers promise to rise wages (while freezing profits) and to restructure the economy by expanding domestic production initial result: increase in growth rates and wages next: inflation & budget deficit final: massive capital flight end: real wages are lower and intervention by IMF
the export-oriented Asian economies moving away from ISI to export promotion attributed to
education policies that favored primary and secondary school. created widespread literacy and adaptable skilled workforce
export growth causes faster GDP growth because
export growth causes the overall capacity of the economy to grow faster than it would have if production was focused on goods for the domestic market.
EU widening
extending the boundaries of the EU to include new members
china's current success dependent on
extremely high investment rates but too much investment = production that exceeds its ability to export or aboard the output, ie waste of resources
The primary development strategy of Latin America was adopted in the 1930s, 1940s, and 1950s:
import substitution industrialization (ISI) -focused on the inwardly oriented development of industries that could produce goods that would substitute for imports. goal: make the region less vulnerable to economic shocks from outside.
Populist policies generated
macroeconomic instability, which often led to hyperinflation and falling real wages.
stabilization policy
macroeconomic policies to cure inflation and reduce a government deficit (goal: stabilize macroeconomy)
ironic consequence of ISI
many countries became more vulnerable to economic shocks that originated outside of Latin America.
neoliberal model/neoliberalism
meaning varies from extreme free market fundamentalism to general proposition in favor of more market forces and less government regulation in managing the economy aka Washington consensus: set of polices to for LDCs by the US, IMF, World bank, & think tanks in Washington DC (in general favor market forces over government direction) issue: didn't really work, has not solved long term issues
Total Factor Productivity (TFP)
measurement of the quantity of output per unit of input. increases: overall productivity has improved and a given level of inputs will create more outputs TFP growth reflects changes in output that are unrelated to changes in capital or labor inputs but that are related to new technologies, innovation, and organizational improvements
Deliberation councils
mechanism for the private sector and government policymakers to exchange information and discuss policies. used by Japan, Korea, Malaysia, Singapore, and Thailand. quasi-legislative bodies that bring together public and private to coordinate information.
key issue not addressed in NAFTA
migration
orthodox model
minimizes government involvement in the economy to counter inflation: cut govt spending, reform tax system, limit creation of new money
post-reforms, both indian and chinese economic polices were
more market orientated and more active participants in the international economy *emphasized international economic integration through trade and investment as part of they reform strategies
It is impossible to accurately measure the effects of NAFTA on jobs and wages, but
most economists estimate a small, positive effect on job creation.
NAFTA (1994)
most important trade agreement for all three countries renegotiated in 2018/2020 and now called USMCA US contentions: labor policy, environmental policy and enforcement, and migration main impact/most important feature: increased trade, removed trade barriers also: 1. specifies NA goods subject to free trade (to prevent nonmembers from gaining access) 2. set dispute mechanisms 3. clauses on environmental and labor *model for other trade agreements, specifically about environmental and labor
competitive devaluation
one country devalues in order to capture the export markets of another country. a devaluation or depreciation in a currency with the intent to gain export markets -1979: EU members began to link currencies sto prevent radical fluctuation in currency values to prevent competitive devaluation
structural reforms policies
policies to increase role of market forces in a national economy. mainly microeconomic in nature
heterodox model
rejects the idea that money creation is a prime cause of inflation and hypotheses that inflationary expectations and wage and price indexing are more important
institutions in both india and china
relatively weak
Deliberation councils primary function
serve as a vehicle for business elites to have a strong voice in government policy (ensures their cooperation in overall economic strategy)
US: trade surplus in
services -travel, business services,& payments for intellectual property US goods exported: -83% manufactured items -7% oil, gas, & minerals -4.4% agricultural products -misc.
demographic transition
shift from high to low birth and death rates *characteristic of high-income industrial societies. have higher savings bc LESS KIDS
china post 2007/2009
shift towards an inward focused growth strategy that promotes domestic investment and houseful consumption as main drivers of economic growth
The end of the Cold War and the rise of emerging markets
shifted U.S. efforts toward more bilateral and plurilateral trade agreements.
chinese special economic zones (SEZs)
special regions in china to experiment w/ new economic policies. goal: limit initial impact of reforms on the domestic economy to prevent political backlash *modeled on EPZ (export processing zones, Mexico)
Exchange Rate Mechanism (ERM)
system adopted by the EC while using EMS. ERM= target zone exchange rate that allowed some flexibility within the fixed rates. Soft peg
the main contributor to economic growth in the export economies is
the extremely rapid accumulation of physical capital.
single currency became necessary after
the removal of capital controls under the SMP
The purpose of the investment agreements is
to create more secure property rights and to encourage foreign direct investment.
