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Trade and Development ECON 3508June 13 and 15, 2011 A.R. M. Ritter (Text, Chapter 12, pp. 564-593)

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Presentation on theme: "Trade and Development ECON 3508June 13 and 15, 2011 A.R. M. Ritter (Text, Chapter 12, pp. 564-593)"— Presentation transcript:

1 Trade and Development ECON 3508June 13 and 15, 2011 A.R. M. Ritter (Text, Chapter 12, pp. 564-593)

2 Outline I. Introduction Central Questions Changing and clashing conventional wisdoms II. Theories of Trade and Development: Does trade promote development? How? III. Problems of Primary Commodity Trade

3 I. Introduction Differing historical experiences with trade: Contrast Canada with Asia. L. Am, Caribbean and Africa Central Questions Does trade promote development? How? What types of policies are necessary for trade to promote equitable development? Changing and clashing conventional wisdoms 1930s;1950s; 1960s and 70s; 1980s and 1990s; 2000s

4 I.Introduction, contd Some Specific Questions Is growth in general and internationally a good thing? Are Multinational enterprises the principal beneficiaries? Does international economic integration simply intensify the exploitation of people in developing countries? Are workers in the high income countries and the countries themselves the losers when their industries relocate in developing countries? What are the environmental consequences of gung-ho international economic expansion? Is the US on the verge of major economic problems with negative consequences for the developing countries? Is China playing by the rules of the game? Is an integrated international economic system more vulnerable to crisis and collapse? Is globalization making those left behind worse off?

5 II. Theories of Trade and Development: How does trade promote development ? 1.Vent for Surplus idea, Adam Smith 2.Comparative Advantage (D. Ricardo) 3.Productivity Theory: (Dynamic) Trade permits increased specialization, technical change & innovation; development of economies of scale; and increased productivity 4.Stimulus to competition; curbs monopoly power

6 5. Technical transformation and transfer: –from exports into imported capital equipment that could not be produced domestically –(a magical transformation) 6. Basically, exports earn foreign exchange, permit imports, permit technological transfer, generate jobs and incomes, Generates tax revenues, & finance social programs support infrastructure development

7 Trade Pessimists: Arguments against trade as an engine of growth and development There are Numerous Problems re trade: –Declining Terms of Trade ?? –Price volatility for many export products –Protectionism in high income countries: tariff & non-tariff barriers; Still relevant? Only partly –Enclave character of some export activities –Low income elasticities of demand for some products, e.g. coffee, tea, cocoa, Synthetic substitutes –Over-dependence on single export products and vulnerability to international business cycle

8 MauritiusS. AfricaGhanaKenyaEthiopia Exports of G&S per capita, $US, 2005 1,100.1,456. GDP per capita PPP, 2005, $US 12,215.11,456.2,480. 1,240.1,066. Human Development Index, Rank among Countries 0.804 #65 0. 674 #121 0.553 #135 0.521 #148 0.406 #169 Multidimensional Human Poverty Index, Rank among LDCs (103 total) #27#55#65#60#105 Some Indicators for Economic and Social Progress for Some African Countries Implications? Exports provide an essential fuel for economic and social development

9 HaitiGuatemalaBrazilMexicoChile Exports of G&S per capita, $US, 2007 $54.40$520.80$838.00$2,583.00$4,114.00 GNI per capita PPP, 2010, $US $949$4,694$10,601 $13,971$13,562 Human Development Index, Rank among Countries (2010) 145116735645 Human Poverty Index, 2010.306.102.039.015n.a. Some Indicators for Economic and Social Progress for Some Latin American Countries Implications? Exports provide an essential fuel for economic and social development

10 But Note: 1.Different Types of Export Activity have different Development Implications The Enclave Phenomenon (See next chart, explained in class) 2. Resource Economy Syndrome or Petroleum Economy Syndrome or the Curse of Resource Wealth (Explained below)

11 Large-Scale Mining or Petroleum Small Scale "Peasant" Agricultural Exports (e.g. coffee, cocoa, tea) High Tech or Low-Tech Manufacturing; Plantations; Tourism;… Technology K-Intensive; high tech., limited job creation, Simple technology; labour intensive Production Linkages: Backward " (input provision) Strong links (machinery and equipment) often from MNCs in DMEs Limited but harness-able because tech is simple, " Forward" (output processing) Processing (beyond smelting) usually "market-oriented" Limited due to market- oriented processing in many cases Final Demand Linkages K-Intensity => high profits for owners; profit repatriation; limited jobs => limited income for locals Strong due to labour intensity and broad ownership Externalities Some transport benefits maybe; environmental costs often; Some training transferable elsewhere Limited training; but good for entrepreneurship; beneficial impacts on infrastructure " Fiscal Linkages" (tax revenues for support of Gov't programs Strong in many casesOK, but often not that strong Foreign Exchange Earnings Strong sometimes (petroleum) variable sometimes OK to variable Policies f or Increasing Net Benefits Harness linkages where possible; diversify on a resource base The Varying Development Implications of Some Types of Export Activity

12 Enclave Character of Large Scale Capital Intensive resource Projects : limited linkages to domestic economies Explain: –Backward Linkages (ability to provide the inputs needed for mining or oil) –Forward Linkages (ability to undertake further processing of the ores or petroleum) –Consumption Linkages Payments to people promoting increases in final demand) Depends on employment and income patterns and volumes

13 III. Problems of Primary Commodity Trade 1.Export Concentration in a Few Products Diversifying Export Patterns 2.Price Instability => Foreign Exchange Volatility Stabilizing Foreign Exchange Earnings 3.Declining Raw Material Prices? 4.The Resource Wealth Curse 5.Protectionism in Potential Markets

14 Problems of Primary Commodity Trade contd 1.Export Concentration in a Few Products –The historical pattern –Recent Trends –The evidence –The problem: (price instability; price trend; market dependence) –Economic Diversification: urgent but difficult; –diversify into other primary commodities: agri, food, mineral –Diversify into manufactures for export to neighbours and DMEs. –Easy to say; hard to do; synonymous with the whole task of development

15 Export Concentration, Selected Countries. 2005 (Percentage of Total Exports) CountryMain ExportOther Exports BotswanaDiamonds 88.2%Nickel 8.1 ChadOil 99.9% GhanaCocoa 46Manganese 7.2 KenyaTea 16.8Flowers 14.2 NigeriaOil 92.2 S. AfricaPlatinum. 12.5Coal 8; Gold 7.9 TanzaniaGold 10.9Fish 9.7; Copper 8.6 ZambiaCopper 55.8Cobalt 7 Sub-Saharan AfricaOil 49.2Diamonds 12.6; Nickel 7.8

16 Problems of Primary Commodity Trade, contd 2. Price Instability => Foreign Exchange Volatility –Evidence –Causes: Supply and Demand Explanation: Graphical explanation in class Price in-elasticities of both supply and demand in the short run Supply side disruption, especially for agricultural commodities; Demand side disruption, especially for mineral products




20 Consequences for Developing Countries: Price instability => Foreign exchange instability => national macroeconomic instability => unstable tax revenues for government => public sector management problems and general problems of boom and bust

21 Policy Options: –Compensatory Financing by IMF Facility: Already in operation; partial amelioration of instability of F.Xch. –International Commodity Agreements? Mainly unviable –National macroeconomic management? Difficult but possible –Diversification around primary exports? Again difficult but possible for some countries

22 Problems of Primary Commodity Trade for LDCs, contd 3.Long term Declining Raw Material Prices? The Terms of Trade Explanation and example in class The Record 1950-2000 steady decline in many primary commodity prices; Why? supply and demand side factors Explanation



25 Problems of Primary Commodity Trade for LDCs, contd 2000-2008: Major increases: Why? supply and demand side factors at work; Explain –2009: world recession => major price reduction; –2010: price recovery; –See Charts and Tables

26 Sub-Saharan Africa, Trade and Price Indicators, Annual Percent Change 1992- 2001 2002- 2011 200820092010 Total Value, Exports+3.613.723.5-30.8+27.1 Total Value, Imports3.413.921.8-17.317.2 Unit Value, Exports-0.910.023.2-25.7+18.9 Unit Value Imports-0.76.311.8-11.16.9 Terms of Trade-0.23.510.2-16.4+11.3

27 Problems of Primary Commodity Trade for Africa, contd Consequences of Terms of Trade Decline Solutions?

28 4. The Paradox of Plenty aka Resource Curse The curse Resource wealth generates great revenues for governments but also may tend to lead to relative economic stagnation and political problems – waste, corruption, political patronage systems, civil conflict & war i.e. Perhaps: an inverse relationship between resource wealth and genuine development Why? Economic factors: exchange rate, prices, econ. management Political factors via windfall revenues to Governments without need for accountability to tax-payers, and also windfall revenues up for grabs among competing elites.

29 Oil in the Niger Delta, Nigeria: +/- 89% of Govt revenue +/- 25% of GDP about 95% of export earnings; 13% of oil revenues to oil-producing states Impoverishment and environmental problems for local peoples (the Ogoni and other groups) Major Conflict in the Delta

30 A New Country in 2011: South Sudan

31 The Phenomenon in Brief: Export boom caused by a sudden increase in oil export prices or in resource export volumes, leads to an appreciation of the exchange rate with negative consequences, such as a major reduction of traditional (pre-boom) exports; unemployment of the factors of production in the traditional export sector; an increased concentration on the resource export and reduced diversity of export structures; damage to import-competing exports; Explanation A: Dutch Disease or Oil Economy Syndrome

32 Plus an inflationary impact as the demand for non-tradable products increases, which further affects the real exchange rate; irresponsible use or misuse of foreign exchange windfall receipts Explanation, with diagram on the blackboard The diagram represents the foreign exchange (in US dollars) market from the perspective of an oil exporter, in this example, Nigeria.

33 Examples: Spain during its glory days with silver and gold inflows from pillage and later the rich mines of Mexico and South America from perhaps 1530 to 1700 Countries undergoing a resource boom (e.g. Canada in a minor way in the 1950s, again in 2006-2008 with tar sands and oil prices) Major oil exporting countries such as Nigeria (with 92% of its exports as petroleum in 2004); Chad (99%) etc. The Netherlands after its North Sea natural gas boom and before the Euro

34 Explanation B: Other Economic Factors Volatility of Foreign Exchange Earnings and Tax Revenues affects economic management and performance Economic Policy Failures: –Waste the funds extravagantly when available; –Expand consumption –Reduce other non-mineral taxes –Undertake costly but unwise strategic investments

35 Explanation C. Socio-Political Origins: Dutch Disease becomes Resource Curse Increased potential for corruption Rent-seeking and winning is more profitable than productive economic actions; Bad decision making: government does not have to respond to tax payers because rents come resources; Resource revenues feed patronage systems, permitting authoritarian or predator regimes to remain in power; Conflict among elites, regions, ethnic groups may be intensified.

36 5. Protectionism in International Markets Note protectionism in High Income Countries: Minimal or no protectionism against fuels and minerals affects other DMEs and some LDC agri exporters the most; Affects African producers of Cotton in particular Protectionism for manufactured products exists and is damaging but has been reduced over the years

37 5. Protectionism in International Markets Protectionism and unfair trading practices among Developing Countries Note Chinas exchange rate policy and manufactured export domination Protectionism among Developing countries

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