Econ 314 Chapter 12
tactics for debt relief (6)
-debtors' cartel -restructuring (partial cancellation, reduced interest rates, extended payment schedule) -Baker plan(s) (1980's): -Brady plan (1989) -debt for equity swaps -debt for nature swaps -debt repudiation -most proposals only postpone the due date of debt
Trade theory and development: traditional arguments (5)
-trade stimulates economic growth -trade promotes international and domestic equality -trade promotes and rewards sectors of comparative advantage -International prices and costs of production determine trading volumes -outward-looking international policy is superior to isolation
General Agreement of Tariffs and Trade (GATT)
1947 international body Rules have not been balanced so far, trade protectionism of developed countries burdens the poorest countries agricultures. More than those on developed countries. A country eventually needs its own modern-sector firms.
Doha development Round
2001 - tilted the nominal focus to needs of developing world but talks remained stalled through end of 2010, a self-imposed deadline and were still deadlocked in 2014
85% of external debt caused by:
85% of external debt can be attributed to OPEC oil price increase, rise in $ interest rates, decline in export volumes from recession, and fall in commodity prices during 1973-1982.
Import Substitution
Advocates of Import Substitution - a deliberate effort to replace consumer imports by promoting industrialization - high tariffs and quotas on imports. Long run - domestic industrial diversification, balance growth, competitive prices.
6 assumptions scrutinized in factor endowment theory
All productive resources are fixed in quantity and constant in quality across nations, and are fully employed. - challenged by north-south trade models; porter's competitive advantage theory The technology of production is fixed (classical model) or similar and freely available to all nations (factor endowment model). Moreover the spread of such technology works to the benefit of all. Consumer tastes are also fixed and independent of the influence of producers (international consumer sovereignty prevails). - challenged by the Product Cycle theory; development of synthetic substitutes Within nations, factors of production are perfectly mobile between different production activities, and the economy as a whole is characterized by the existence of perfect competition. There are no risks or uncertainties. - this is limited by the structural realities in developing countries: increasing returns and exercise of monopolistic control over world markets; risk and uncertainty inherent in international trading arrangements The national government plays no role in international economic relations; trade is carried out among many atomistic and anonymous producers seeking to minimize costs and maximize profits. International prices are therefore set by the forces of supply and demand. - industrial policy is crafted by governments; commercial policies instruments (tariffs, quotas); international policies can result in uneven distribution of gains from trade Trade is balanced for each country at any point in time, and all economies are readily able to adjust to changes in the international prices with a minimum of dislocation. The gains from trade that accrue to any country benefit the nationals of that country. no consideration of 'learning theory' - unrealistic (example: impact of oil price hikes of the 1970's)
flexible exchange rates
Alternative - freely fluctuating - flexible exchange rates - responsive to the market Unpredictable, fluctuating, susceptible to speculation This can bring crises. Encouraged by IMF... Present international system of floating exchange rates is a compromise between fixed and fully flexible.
infant industry argument
Basic rationale - infant-industry argument. They need time to learn the business, learn by doing, and lower unit costs and prices. With time and protection, industry increases, now competitive with developed market prices.
assumption of fixed or diminishing returns to scale
By assuming either fixed or diminishing returns to scale - how much output expands when all inputs are proportionately increased - this neglects the phenomena of increasing returns to scale and decreasing costs of production. Large firms can exert monopolistic control over world markets. Economies of scale are common factor in determining trade patterns. Large-scale - control of world supply conditions.
classical comparative advantage theory of free trade
Classical comparative advantage theory of free trade is a static model based strictly on a one-variable factor (labor cost), complete-specialization approach to maximize gains from trade. David Ricardo and John Stuart Mill. Ricardo: Principles of Political Economy: extended free trade argument - should import even if the country is more efficient in the product's production than the country from which it is buying - look to see how much more efficient. if only comparatively efficient then import. ------one country can produce a good at a lower OPPORTUNITY COST than the other
customs union
Common external tariffs, free internal trade - customs union
common market
Common market - customs union plus free movement of labor and capital among states.
currency depreciation
Currency depreciation - decline over time in the value or price of one currency in terms of another as a result of market forces. Appreciation is gradual increase.
How Basic Transfer became negative (6)
D becomes very large so that d begins to decline as amortization rises relative to rates of new gross inflows-- the sources of foreign capital switch from long-term official flows on fixed, concessional terms to short-term variable rate private bank loans at market rates that cause r to rise-- The country begins to experience balance of payments problems as prices plummet and terms of trade fall A global recession or external shock, steep rise in U.S. interest rates, or sudden change in the value of the dollar. Loss in confidence in the ability of a developing country to repay resulting from points 2-3-4 Substantial capital flight by locals for political or economic reasons All 6 factors lower d and raise r
Debtor's cartel
Debt crisis questioned international financial system. Fear of Western nations economies being affected by defaulted debts, or Debtor's cartel - group of debtors to bargain with creditors . Rumors of default led to purchase of dollars, drive in value, making dollar debts worse.
Debt-for-Nature Swap
Debt-for-Nature Swap - exchange of foreign debt for larger quantity domestic debt used to finance the preservation of nature. Since 2000, been used a bit. Problem with most tactics, is that they require private international banks to endorse these policies. Many are hesitant.
wage-price spiral
Devaluation of currency can lead to increased wage demands. This pushes production costs and local prices higher → wage-price spiral - a vicious cycle.
9 areas of Economic impacts of the financial crisis on developing countries
Economic Growth- developing countries less affected at first but then U.S growth increased world interest rates, threatening growth rates. As financial conditions tighten and commodity prices stabilize, potential growth is lower. Exports fell drastically, world trade volume too. It rebounded 2011. U.S. seeks to establish higher savings, reduce deficits, associated with fewer imports. Emphasis turned to South-South trade. Commodity revenues rebounded with increases in both prices and quantities. But prices then peaked, they may fall further as China decelerates. Export expansion will be more limited in coming years FDI inflows fall but increase from other developing countries - more resilient than rich country FDI. Developing countries receive now more than half of FDI inflows Developing-Country Stock Markets first flew, but are now deepening and rising Aid has declined compared to remittances, FDI, and portfolio investment flows. Strong political pressures against increase in aid in donor countries. Real levels of aid decreasing harms the poor, they are isolated from markets and depend on assistance. Aid depends on donor nation growth. Distribution of Influence among Developing Countries - East Asia growing, Africa lags, Latin America in the middle. China, Brazil realized they had increased global influence, but there is growing economic inequality among developing nations. Heightened by crisis Worker remittances - 336 billion $ in 2008 ... it fell and then recovered. Important factor in the progress of poverty reduction. Poverty - Crisis affected earnings more than employment. Aftermath- poverty increased. It is higher than it would have been without crisis. Not falling in Africa importantly. Health and education: excess deaths in poor households, rural areas, concentrated among girls, deteriorations in schooling, child labor, health services.
1989 Brady Plan
Freer markets, writing down about 20% of principal, conversion of bank loans into new bonds with reduced principal or interest rates (backed by IMF and WB), debt buybacks for cash, debt or equity swaps( 16 countries) -allow commercial banks to exchange their illiquid claims/loans on developing countries into liquid tradable instruments (Brady bonds), allowing them to get debt off their balance sheets -Brady bonds issued in USD mostly by LA countries in the late 80's Slide 29
Paris Club arrangements (Toronto terms) (3)
Gave creditors 3 proposed options for alleviating debt: -partial cancelation of ups o one third of anonconcessional loans -reduced interest rates -extended (25-year) maturity of payments to generate cash flow savings for debtor countries
WTO
Geneva-based watchdog and enforcer of international trade agreements since 1995.
absolute advantage example
Germany vs Kenya example (cars vs fruits) -- absolute advantage - production of a commodity with the same amount of real resources as another producer but at a lower absolute unit cost.
industrial policy
Governments are often partisan players in industrial policy (deliberate effort by governments to guide the market by coordinating and supporting specific industrial activities). Can create comparative advantages where none existed. Only practiced in East Asia.
IMF stabilization policies (4)
IMF restrictive fiscal and monetary policies - before agreeing to lend. Four basic components of the program -Liberalization of foreign exchange and import controls -Devaluation of the official exchange rate -Anti-inflation program -Hospitality for FDI and opening of economy
Industrialization strategy approach
Industrialization strategy approach -- school of thought in trade and development that emphasizes the importance of overcoming market failures through gov policy to encourage technology transfer and exports of progressively more advanced products.
international reserves
International Reserves - Country's balance of gold, hard currencies, and special drawing rights used to settle international transactions.Drawn on to pay bills and debts, increased with deposits representing net export sales and capital inflows.
Inward-looking development policies
Inward-Looking Development Policies: stress the need for nations to evolve their own styles of development to control their own destiny. Greater self-reliance can be accomplished by keeping out multinational enterprise.
free trade area
Just free internal trade, tariffs if you want - free trade area.
managed float
Managed float - fluctuating exchange rate but allows central bank intervention
new protectionism
New Protectionism - developed countries against manufactured exports of developing nations - due to low prices of manufactured products, competitive market
odious debt
Odious debt - concept in the theory of international law holding that sovereign debt used by an undemocratic government in a manner contrary to the interest of its people are deemed invalid. Odious debts in Africa - debt forgiveness has gained wide international support. Jayachandran and Kremer: proposal for an independent commission to declare regimes illegitimate and certain debt odious -reduce ability of illegitimate regimes to borrow -lower interest rates for illegitimate governments
four categorizations of trade strategies
Primary outward-looking policies (encouragement of agricultural and raw-materials exports);;;; Secondary outward-looking policies (promotion of manufactures);;;; primary inward-looking policies (mainly agricultural self-sufficiency);;;;; Secondary inward-looking policies (Manufactured commodity self-sufficiency through import substitution)
limitations of export promotion: looking outward and seeing barriers (6 barriers and dynamics preventing export growth)
Primary-commodity export expansion, limited demand -low income elasticity -low population growth rates in developing economies -decline in prices implies low revenue (some periods of price spikes but long run trend has been downward) -lack of success with international commodity agreements -development of synthetic substitutes -agri subsidies primary commodity export expansion, supply rigidities
IMF/World Bank loans conditions
Requires restrictive fiscal and monetary policies Stabilization policies -- Structural Adjustment Loans - loans in support of measures to remove excessive government controls, make factor and product prices reflect scarcity values, and promote market competition. These are packages of conditionality - requirements imposed for loans. Designed to reduce demand and reduce the inflationary pressures contributed to overvalued exchange rate. influenced by the Washington Consensus
growth poles
The state can counteract disproportionate regional distribution of the benefits of economic growth in domestic economies. If growth poles expand rapidly (economically advanced regions), governments can modify this by legislation, taxes, transfer payments, subsidies, social services, regional development programs, and more. But there is no effective international government - uneven gains from trade can become perpetuated. Even more by uneven power of national governments that promote and protect their own interests.
trade creation
Trade Creation - shift in the location of production from higher cost to lower cost member states. minimizes costs of production
trade diversion
Trade Diversion - shift in the location of production of formerly imported goods from a lower cost non member state to a higher cost member state. undesirable, shifts to less efficient industries, but some anticipate benefits.
enclave economies and importance of GNI
Trade gains not always accrued to nationals. There are enclave economies in developing countries, with foreign owned operations. Foreigners pay low rents, bring their own capital and skilled labor, hire unskilled workers, and barely affect rest of economy. Multinational corporation and developing country government powers to be considered. Distinction between Gross Domestic Product and Gross National Income GNI more important for benefits of foreign trade Trade can be conducted between rich nations and nationals of rich nations exploiting poor countries! Export performance is deceptive - who owns the factors?
trade optimists vs. Pessimists (general arguments)
Trade optimists - Benefits of free trade, open economies, export promotion Trade Pessimists - Greater protection, developing countries gain little from Export oriented open economy. READ FULL ARGUMENTS FOR EACH
Free trade
Trade without barriers. Promote static economic efficiency and optimal resource allocation. Exists more in theory than in practice.
balance trade
Traditional theory - flexible prices that adjust to supply and demand, terms of trade adjust to equate supply and demand for a country's exports and imports, exports always equals imports... with balance trade no problems arise, but rapid increase of international oil prices in 70s created deficits and trade and was major problem for countries.
HO model's prediction of US export basket
US is richly endowed with a wide variety of factors: natural resources, skilled labor, and physical capital Expectation: US will export agri products (especially those requiring skilled labor and capital) and machinery and industrial goods (requiring physical capital and scientific and engineering skills) Result: Major US exports include grain with small labor and large capital; and commercial aircraft with physical capital and skilled labor
factor price equalization
Under factor endowment theory 2. Given identical technologies of production throughout the world, the equalization of domestic product price ratios with the international free trade price ratio will tend to factor price equalization - the proposition that factor prices among trading partners will tend to equalize - across trading countries. Wages rise in labor abundant LDC, and price of capital declines due to diminished production of manufactured goods. Rest of world, opposite.
Vent-for-Surplus theory of International Trade
Underutilized human resources create the opportunity to expand productive capacity and GNI at little or no real cost by producing for export markets products that are not demanded locally. Known as Vent-for-Surplus theory of International Trade. When economy opened up, consumption and imports increase. Figure 12.2
undervalued exchange rate
Undervalued exchange rate- strongly export promoting. Raises local prices that firms receive for goods that can be exported relative to prices of nontradable goods, motivating a reorientation of firms to exporting. Official rate set at a level lower than its real value. Good for export-oriented growth - maybe development.
Debt-for-Equity Swap
central bank of host country redeems debt in local currency at exchange rate between face value and secondary market value of the paper -foreign company uses local currency to make the approved investment via purchase of shares or an injection of capital strategy to reduce the real value of external debt by exchanging equity in stocks or bonds at large discounts. Encourages private investment in local-currency assets Latin America used a lot Flip side- foreign investors buy state owned assets at major discounts 36% of all debt conversions
Debt repudiation
countries stop paying debts
Debt conversion programs
debt-equity swap converts a developing country into equity via foreign investment (direct or portfolio) in a domestic firm -once project is approved, the company purchases the developing country's foreign debt on the secondary market at less than face value -recently, several developing countries have used extensive conversions of private commercial debt to promote foreign investment, reduce debt, conduct privatization and further other development projects
Price elasticity of demand
demand in relation to change in price - also low -- this can cause large price fluctuations. These elasticity phenomena contribute to export earnings instability - fluctuations in export earnings on commodities. Lower and less predictable rates of economic growth.
Outward-Looking Development Policies
encourage not only free trade but also the free movement of capital, workers, enterprises, and students, the multinational enterprise, an open system of communications
pre 1980 development strategy
encouraged large current account deficits (imports of capital and intermediate goods) Made possible by large resource transfers: -foreign aid -FDI -Loans from international Banks -Loans from MNC
Export earnings instability
fluctuations in export earnings on commodities. Lower and less predictable rates of economic growth.
Baker Plans (1980's
free markets, debt rescheduling by WB and others, bonds backed by US treasury
Macroeconomic instability and course of action
situation in which a country has high inflation, rising budget and trade deficits, and a rapidly expanding money supply. Course of action - renegotiate loans with private international banks. Stretch out payment period for principal and interest, or obtain additional favorable financing.
Balance of payments
summary statement of a nation's financial transitions with the outside world
Heavily indebted poor countries (HIPCs)
the poorest and most heavily indebted countries - eligible for special debt relief. Initiative in 1996 by G8... elaborate process to qualify. G8 then agreed to set aside $100 billion if HIPCs pursued sound policies and committed to reducing poverty. (Poverty reduction strategy papers). Track record. Progress was slower, disappointing results until 2005. Now 35/39 countries receive debt relief. Private lenders still want money back. Qualifications difficult.
Net capital inflow
(gross inflow minus amortization on past debt Equation- Net capital inflow = Fn, D = accumulated foreign debt, d % rate increase in D. FN = dD Interest paid each year on debt, r is average rate of interest so that rD measures total annual interest payments. Basic Transfer (BT) is net capital inflow minus interest payments or
Standard argument for tariff protection(5)
-sources of revenue -response to chronic BOP problems -help foster industrial self-reliance (general IS) -greater control over economic destinies -infant insudtry argument -must be applied selectively and wisely
Porter's Competitive Advantage theory
-traditional trade theory applies only to basic factors (unskilled labor, physical resources) -but creation of advanced factors (knowledge resources, specialized infrastructure) is the first priority --cetral task to "escape for straightjacket of factor-driven national advantage"
chronic payments deficits can be ameliorated by a currency devaluation
-difference between depreciation and devaluation -higher import prices result in an inflationary wage-price spiral -distributional effects
four basic components of IMF stabilization program
-liberalization of foreign exchange and imports control -devaluation of the official exchange rate -stringent domestic anti-inflation program -opening up of the economy to international commerce -policies hurt the lower- and middle-income groups the most
trade pessimist arguments (4)
-limited growth of world demand for primary exports -secular deterioration in terms of trade -specializing in comparative advantage inhibits industrialization, skills accumulation and entrepreneurship -rise of new protectionism; WTO benefits limited in practice
ISI results (5)
-protected industries get inefficient and costly -foreign firms benefit more -subsidization of imports of capital goods tilts pattern of industrialization and contributes to balance of payments (BOP problems -overvalued exchange rates hurt exports -does not stimulate self-reliant integrated industrialization
Chronology of the Debt Crisis (5)
1) Abolition of gold standard (1970's): caused uncertainty in financial markets and caused OPEC to raise price of oil by 70% 2) Explosion of petrodollars (1970's) - because of oil price increase, OPEC nations had huge amounts of $$ deposited in banks, the banks invested money in developing nations who needed $$ to buy oil, which left no capital to invest in infrastructure (see the cycle) 3) Spiraling inflation (1970's & 80's) - which drove up interest rates on these loans, increasing from 5-15% 4) declining currency values - as economies of debtor nations grew worse, their local currencies lost value (+50%) compared to the Yen and USD, this meant loans doubled as well 5) Falling commodity prices - the goods that these countries could sell declined in value which meant they had to pay higher prices for imports and sell more to pay off their debts slides 20 and 21***
Export Promotion
Advocates of Export Promotion - expand export volume by increasing incentives, decreasing disincentives, and generating positive foreign exchange and balance of payments. Importance of substituting large world markets for narrow domestic markets, distorting effects of protection, successes of export-oriented economies in East Asia. Distinction between strong and weak promotion.
Three policy options of central banks to maintain the official rate of exchange (set to USD)
Accommodate excess demand by running down reserves of foreign exchange Borrowing additional foreign exchange abroad and incurring debts Attempt to curtail excess demand for foreign exchange by pursuing commercial policies and tax measures (tariffs, quotas, licensing) designed to lessen the demand for imports. Regulate and intervene in the foreign-exchange market by rationing the limited supply of available foreign exchange to "preferred" customers.
synthetic substitutes
Development of synthetic substitutes for primary products - commodities that artificially produced but can be substituted for natural products like wool cotton rubber. This makes developing world's market shares fall. Technology is not fixed.
North-south trade models
Challenged with alternative dynamic models that emphasize factor accumulation and uneven development. → North-South Trade Models which focus on trade relations between rich and poor specifically - higher Northern growth rates, further capital accumulation, and South grows slower. Capital mobility also considered from south to north, and income elasticities of demand.
gains from trade
Governments often reinforce unequal distribution - gains from trade - the increase in output and consumption resulting from specialization and free trade - there is still no super agency to protect and promote interests of weaker countries in international trade. Strategy should consider developed world power.
Developing nations have a variety of policy options to face deficits (5)
Export expansion or limiting imports for current account balance. Foreign-exchange rate alteration, currency devaluation that lowers export prices and increases import prices. Seek World Bank or IMF loans - can delay the problem and involves restrictive fiscal and monetary policies (reduce demand and inflationary pressures) Improve balance on capital account by encouraging more private foreign direct or portfolio investment, borrowing from international commercial banks, or seeking more public foreign assistance. Modify the detrimental impact of chronic balance of payments deficits by expanding their stock of official monetary reserves. How?
current account vs capital account
Current account - reflects market value of country's visible (commodity trade) and invisible (shipping services) exports/imports. Capital account - The portion of a country's balance of payments that shows the volume of private foreign investment and public loans that flow in and out of country. Current account deficits compensated by a surplus of capital account, but debt burden becomes acute. Deficits on both accounts have led to a depletion of international monetary reserves, currency instability, and a slowdown in economic growth.
Debt crisis background (2) When do debt servicing difficulties arise? (3) ORIGINS (4)
Debt service defined as paying off of principal and accumulated interest --> can be met from export earnings, curtailed imports or further external borrowing Debt service payments likely to be in foreign currency Difficulties arise if: -export earnings decline -interest rates rise -local currency devalue against the currency of the debt -OPEC OIL PRICE INCREASE; INCREASED BORROWING; EXCESS OF IMPORTS; LAGGING EXPORTS
Devaluation
Devaluation - lowering of the official exchange rate between one country's currency and all other currencies. Lowering foreign currency price of exports (more foreign demand) and raising domestic currency price of imports (lowering domestic demand) - improved trade balance. Devaluation key part of IMF stabilization.
Economic integration (6)
Developing countries should go beyond trade and move to economic integration - the merging to various degrees of the economies and economic policies of two or more countries in a region. Better to trade among developing countries working together to establish quality standards Opportunity for industries that have not yet been established to take advantage of large scale production economies made possible by expanded markets. Low costs A defensive response to decreased access to export due to protectionism. Viewed as a mechanism to encourage a rational division of labor among a bloc, each of which is too small to benefit from a division. Other: Landlocked developing countries viewed as safer locations for investment when they join a bloc with a country with access to the sea. Small island developing countries - greater capabilities. Regional economic integration reduces the chances of war.
Explanation of Taiwan's success
Emphasis on education, infrastructure, land reform, high rates of savings and investment, constructive foreign influences, industrialization strategy, free market, 1960s boom, export-led growth strategy, direct American aid used in investment, Taiwanese culture productivity and work ethic, entrepreneurship, and survival instinct to defend against China. All conditions work together, necessary but not sufficient. education, Infrastructure, Land reform Much more here - go back to notes page 22
Benefits vs. criticisms of Globalization
Pros: -wealth -jobs -tech -lower prices -availability of goods Cons: -off-shoring of business service to ohs to lower wage countries -growing trade deficits -slow wage growth -environmental and social impacts
Primary-Commodity Export Expansion: Limited Demand/supply.
Grows more slowly than world trade. Income elasticities of demand Population growth rates slowing down, no expansion from this Price elasticity of demand - less total revenue International commodity agreements - formal agreement to coordinate supply to maintain price stability of a commodity - have not fared well. They require cooperation and compromise. Most either fail or are ignored. Development of synthetic substitutes - competition, growing sector Growth of agricultural protection in developed countries -subsidies, tariffs Supply side: Structural rigidity of rural production Uneven distribution of export earnings Also foreign aid can ruin prices Thus limited expansion in primary product export
export dependence (hidden costs and risks)
Hidden costs of oil sector - enclave economy, reduced exports in other sectors Tourism is also an exported service. Paid for by other countries. Sudden loss can also be devastating (Arab Spring) -diversification advantageous
5 questions about Trade and Development
How does international trade affect the rate, structure and character of economic growth? -Critical: Trade can be an important stimulus, Where opportunities for profitable exchange arise, foreign trade can cause economic growth. How does trade alter income distribution within a country and among different countries? Is trade a force for international and domestic equality or inequality? Under what conditions can trade help a nation to achieve its development objectives? Can a developing country by its own actions determine how much it trades or which products and services it sells? Should a developing country adopt an outward-looking, inward-looking, or some combination of both in the form of regional economic cooperation and strategic export policies? Answers will not be uniform. Countries differ in resources, preferences, technologies, scale economies, institutions, and growth capacity.
exchange rate effects of ISI
Impact on primary product exports - to import cheap capital, overvalued exchange rates, price of exports rises... because of official exchange rate (set by bank) Free-Market Exchange rate - determined by the supply and demand) Artificial lowering of price of capital goods, raising price of exports Local farmers less competitive, profits of capital owners improved, less income equality. Favors urban sector and high income groups.
exchange control
Regulate and intervene in the foreign-exchange market by rationing the limited supply of available foreign exchange to "preferred" customers. designed to restrict the outflow of domestic currency and prevent a worsened balance of payments position by controlling the amount of foreign exchange that can be obtained one form of ISI figure 12.4 Overvalued currencies reduce the return to local exporters and to import-competing industries that are unprotected by heavy tariffs or physical quotas. They have a tendency to exacerbate balance of payments and foreign-debt problems by cheapening imports while making exports more costly.
Monopolistic vs. oligopolistic market control
Monopolistic market control - single producer of one industry or oligopolistic market control - small number of rival firms dominate These can manipulate world prices and supplies in their own private interest. Instead of competition, there is joint producer activities and oligopolistic bargaining - determinants of quantity in the international economy. From perspective of LDCs trying to diversify their economies, phenomenon of increasing returns - a disproportionate increase in output that results from a change in the scale of production - and product differentiation - attempts by producers to distinguish their product from similar ones through advertising and design changes - combined with power of large multinational corporations means that rich can take advantage of these economies of scale and differentiated products to dominate world markets.
economic unions or regional trading blocs
Nations join together to form economic unions - full integration of two or more economies - or regional trading bloc - economic coalition with liberalized internal trade and uniform restrictions on external trade designed to promote integration and growth.
Tariff structure and effective protection
Nominal Rate of Protection - ad valorem tariff rate - Tariff rate = t, p' = price with tariff, p= without tariff T = (p'-p)/p Effective rate of protection shows percentage by which the value added (amount of final value added at each stage) at a particular stage of processing in a domestic industry can exceed what it would be without protection. Effective rate = (v'-v)/v ---- v' and v = value added per unit of output with and without protection Effective rate = t/(1-a) ---- a is proportionate value of importable inputs Most economists argue that effective rate is a more useful concept - shows net effect on form of restriction on imports of its outputs and inputs. They have fallen substantially since mid 1980s.
product cycle of international trade
Other theory assumption - technology transfer to developing countries. Certain countries can follow the product cycle of international trade - progressive replacement of more developed countries by less developed countries in the production of manufactures of increasing complexity. They use lower wages to move from low tech to high tech production and fill manufacturing gaps. -challenge to traditional free trade theory
positive (credit) vs. negative (debts) effects
Positive Effect (Credits): exports, investment income, remittances, aid, loans, foreign sale of stocks or bonds Negative Effect (Debts): imports, investment/payment in another country, aid/gifts/loans given abroad table 13.2 ***
Comparative advantage
Production of a commodity at a lower opportunity cost than any of the alternative commodities that could be produced. Impossible to produce all consumption requirements, so profitable to engage in activities which agents are best suited for and have comparative advantage in terms of their natural abilities and resource endowments. Exchange any surplus of these commodities for products that others may be relatively more suited to produce. Phenomenon of specialization - concentration of resources in the production of few commodities. Concept of relative cost and price difference is basic to the theory of international trade. Comparative advantage principle asserts that a country should specialize in the export of the products that i can produce at the lowest relative cost.
commodity terms of trade
Ratio between the price of a typical unit of exports and the price of a typical unit of imports - commodity terms of trade - Px/Pm Commodity terms of trade deteriorates if export prices decline relative to import prices even though both may rise. Can be confirmed that prices of primary commodities has declined relative to manufactured goods. Terms of trade worsen over time for non oil developing countries while developed countries improve.
Hecksher-Ohlin neoclassical factor endowment trade theory
Refined in 20th century to account differences in factor supplies. Hecksher-Ohlin neoclassical factor endowment trade theory postulates that countries will tend to specialize in the production of the commodities that make use of their abundant factors of production. This model assumes all countries have access to the same technological possibilities for all commodities. If domestic factor prices are the same, all countries would use identical methods of production and have the same relative domestic product price ratios and factor productivities. Basis for trade arises because countries are endowed with different factor supplies. Labor is cheap in labor abundant countries, these countries have a relative cost and price advantage over countries with expensive labor in commodities that are labor-intensive (primary products) and they should export surplus in return for capital-intensive goods. Trade is therefore means for a nation to capitalize on its abundance through more intensive production of commodities with these resources and relieve its factor shortage through importing commodities that use large amounts of its relatively scarce resources. when a country enjoys relative abundance of a factor, the factor's relative cost is less than in counreis where the factor is relatively scarce --> country's comparative advantage lies in the production of goods that use relatively abundant factors
3Implications of Table 12.3 (introduction of tariff)
Short run, consumers are penalized, higher prices and lower consumption Tariff redistributes income from consumers to producers Long run, every one benefits from industrialization, price falls below world price, exports, tariffs removed, consumers benefit, taxes replace tariffs...
How to Modify the detrimental impact of chronic balance of payments deficits by expanding their stock of official monetary reserves.
Special Drawing Rights - by IMF... to supplement gold and dollars in settling accounts. Paper gold. With the growth in world trade, IMF in 1970 created SDRs to perform many of the functions of gold and dollars. They are values of yen, $, pounds, euro, and constitute claims on the IMF. Eventually, all international financial settlements conducted in SDRs
international commodity agreements
formal agreement to coordinate supply to maintain price stability of a commodity - have not fared well. They require cooperation and compromise. Most either fail or are ignored
Rich-nation economic and commercial policies that matter for developing countries (3)
Tariff and nontariff barriers Adjustment assistance for displaced workers in developed country industries General impact of rich-country domestic economic policies
protective trade policies (3)
Tariffs - fixed percentage tax on the value of an import Quota - quantity limit on any item import Subsidy - payment to producers to support industry, expand employment, increase production, reduce prices
exclusion of risk and uncertainty
Traditional theory also assumes the exclusion of risk - probabilities of various outcomes are known, but not actual outcome - and uncertainty - neither the actual outcome or probabilities are known - in international trade. May not be in a country's interest to invest in primary product exportation because of history.
primary product exports
est of the developing world - GDP from primary product exports - products derived from all extractive occupations - farming, lumbering, fishing, mining, quarrying, foodstuffs, and raw materials. -oil 70% of some countries' income - hidden costs
current account (Chapter 13)
export and import of goods and services, investment income (C), debt service (sum of interest payments and repayments of principal on external public and publicly guaranteed debt) payments, and private and public net remittances and transfers. The merchandise trade balance and adding flows of net investment income received from abroad. A-B+C - D + E = F, current account balance -see table 13.1 for variables CA - FA - Official reserve = 0 Allows us to analyze the impact of various commercial policies. CA deficit: CA < 0 --> country borrows from world or reduces cash position CA surplus: CA>0 --> country lends to the rest of the world or increases cash position BoP deficit refers to CA - Financial Account and its impact on Official reserves
arguments in favor of export industrialization strategy (5)
exports facilitate tech transfer through contracts with foreign firms -learning by doing (or watching) effect -performance rigorously tested when firms attempt to export -export targets more visible -Hausmann, Hwang, Rodrik: exporting a mix of goods predicts higher growth -exort industrial policy may help overcome market failures in the process of technological progress
Amortization
gradual repayment of debt principal
Globalization
increasing integration of national economies into expanding international markets. A process. Leads to global economic policy making - rapid growth of knowledge and innovation, faster growth, efficiency. But, inequalities may be widened, environmental degradation, increasing dependence on core. Upside for LDCs of globalization is high. Upside for LDCs of globalization is high. Poorest countries International investment is falling. Formal processes of trade liberalization are key to encouraging globalization -
Prebisch-Singer hypothesis
long term decline in terms of trade of primary-commodity exporters due to a combination of low income and price elasticities of demand. This decline would result in an ongoing transfer of income from poor to rich countries that could be fought only by efforts to protect domestic manufacturing industries through a process that came to be known as import substitution. Developing countries have been trying to diversify into manufactures exports. Slow and costly start but East Asian Tiger successes, China, now manufactured goods share of exports has risen strongly. Unfortunately, relative prices within manufactures has diverged- basic vs advanced products. Price of textiles, low skilled electronics -- down.
New Firm-level international Trade Research and the Developing Countries
mportance of understanding international trade patterns, competition within domestic industries, firm responses to open economies. A new approach. Too early to judge flexibility. Identify what factors cause firms in developing countries to export. Identify problems firms face at microeconomic level.
basic transfer
net foreign exchange inflow or outflow related to a country's international borrowing - quantitative difference between the net capital inflow (gross inflow minus amortization on past debt) and interest payments on existing accumulated debt. This is an important concept because it represent the amount of foreign exchange that is gained or lost each year from international capital flows. This turned very negative for LDCs in 1980s. AMOUNT OF FOREIGN EXCHANGE AND LDC IS GAINING OR LOSING EACH YEAR FROM INTERNATIONAL BORROWING Interest paid each year on debt, r is average rate of interest so that rD measures total annual interest payments. Basic Transfer (BT) is net capital inflow minus interest payments or BT = dD - rD = (d-r)D BT is positive if d>r, and the country gains foreign exchange. If r> d, BT negative, loss in foreign exchange. look at page 26 on process of how this becomes negative
trade optimists arguments (8)
promotes competition and efficiency -generates pressure for product improvement -accelerates growth -attracts foreign capital and expertise -generates foreign exchange for food imports if agricultural sector lags behind or in crisis -eliminates distortions caused by government interventions including corruptions and rent-seeking -promotes equal access to scarce resources -enables developing countries to take full advantage of reforms under the WTO
Multifiber arrangement
quotas by developed countries for imports of cotton, wool, synthetic textiles, clothing from developing countries. Lost $! Many implicit barriers remain. Trade agreements.
capital account (Chapter 13)
records the value of private FDI (by MNCs), foreign loans by private international banks, loans/grants from foreign governments (foreign aid), and multilateral agencies such as the IMF and World Bank. It subtracts resident capital outflow as well - capital flight - transfers of funds to a foreign country to avoid conditions in the source country. Big problem in the 1980s debt crisis. G + H - I - J = K ---- (G = FDI, H = foreign loans, I = increase in foreign assets of the domestic banking system, J = capital flight) again, table 13.1
Uruguay Round of 1995 (3)
reduced barriers in many sectors, established WTO. Three major provisions: -Developed countries cut tariffs on manufactures -Trade in agricultural products to be progressively liberalized -Textile barriers reduced Process degree tariffs remain in place Agricultural subsidies still harmful
Income elasticity of demand
responsiveness of demand to changes in income - is low in the case of primary products. Demand for products increases slower than rise in incomes of importers. For fuels, manufactured goods, income elasticity is relatively high. When incomes rise in rich countries, demand for manufactures goes up rapidly. Thus, relative price of primary products declines over time.
Aftermath of the debt crisis
result was that people of developing countries experienced decline in standard of living -mexico the average income dropped more than 40% 1982-8 -cost of buying food fro a family of 5 went from 41% of minimum wage to 161%
Dual or Parallel Exchange Rate
system with a highly overvalued and legally fixed rate applied to capital and intermediate-good imports and a second illegal, freely floating rate for imported luxury consumption, PResents serious problems of administration and promotes black market, corruption.
cash account (international reserves account) (L)
the balancing item that is lowered whenever disbursements on capital and current accounts exceed total receipts. M is errors and omissions, statistic inequality. Nations accumulate international cash reserves through hard currency (of a major industrial country), gold, or deposits with the IMF.
external debt
total private and public foreign debt owed by a country. Accumulation is a common phenomenon of developing countries and development stage when savings is low and imports of capital are needed. Prior to early 1970s - small external debt, concessional loans.
Conclusions of Trade Theory and Economic Development strategy (5)
trade can lead to rapid economic growth under some circumstances -trade seems to reinforce existing income inequalitites -trade can benefit developing countries if they can extract trade concessions from developed -developing countries generally must trade -regional cooperation may help developing countries
Barter Transactions
trading of goods for other goods in non-monetized economies. Implicit in all transactions is price.