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EC 102.01 Final Exam – Aug 8, Monday 17:30 – 20:00 Venue to be announced soon! Exam will be comprehensive, including all chapters before Midterm 2 + new.

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Presentation on theme: "EC 102.01 Final Exam – Aug 8, Monday 17:30 – 20:00 Venue to be announced soon! Exam will be comprehensive, including all chapters before Midterm 2 + new."— Presentation transcript:

1 EC 102.01 Final Exam – Aug 8, Monday 17:30 – 20:00 Venue to be announced soon! Exam will be comprehensive, including all chapters before Midterm 2 + new chapters: Ch 12 – ALL Ch 14 – Section 2, Section 3, Section 4 Ch 13 – Section 1 (1.1, 1.2), Section 3, Section 4 Ch 15 – Section 2, Section 3

2 Outline Macroeconomic Issues and Applications Ch 14 – How Economies Grow and Develop Section 4 – Development Policies Ch 13 – The Global Economy Section 1 – Macroeconomics in a Global Context (1.1 and 1.2 only) Section 3 – Why Nations Often Resist “Free Trade”?

3 Development Policies Economic Growth: increases in aggregate levels of production and income; measured as the percentage change in GDP or GDP per capita from year to year Economic Development: more complex concept; referring to the process of moving from a situation of poverty to material plenty through investments in productive capacity and changes in organization of work

4 Development Policies Combinations of domestic policy and foreign interventions such as aid, loans, trade agreements Role of international institutions – e.g. World Bank both as source of capital and policy advice This role has mostly gone too far!! – pressure on developing countries to adopt particular set of policies as a condition of receiving loans. Controversies around the policies proposed

5 International Aid During much of 20th C – key bottleneck to development in poorer countries was believed to stem from inadequacy of financial capital Founding principle behind Bretton Woods Institutions (namely WB and IMF) – provision of capital in the form of loans (sometimes grants) to help less developed countries to catch-up Foreign aid – generally small portion of donor countries GDP (around 1 per cent) Bilateral aid – donors’ motivations (economical, political, development-related etc.)

6 International Aid Most of the multilateral support comes in the form of loans that has to be repaid with interest Developing countries have outstanding debt of 2 Trillion USD, 300 billion USD of which must be repaid annually to serve for interest and principal Crippling burden for poorest nations – HIPCs Funds also coming from NGOs, charities, independent medical groups (e.g. doctors without borders) – smaller in volume but often finance pilot projects

7 Structural Reforms Washington Consensus – structural reforms are precondition for recipient governments - fiscal discipline: no fiscal deficit; budgets should balance by developing reliable sources of tax revenues and limiting G. - market liberalization and privatization: removal of government-controlled industries, price controls and any other sources of intervention in markets - trade liberalization and openness to foreign I: removal of tariffs and other barriers to trade, capital controls and other restrictions of K-flows

8 Structural Reforms 1980s – 1990s:“stabilize, privatize and liberalize” governed the thinking of development policy- making Results??? Some succeeded but those who strictly followesd these recipe suffered most severe crises! China and India – did not follow the WC recipe; while increased market orientation, used high levels of trade protection, continued state control or guidance over important sectors of the economy Critiques and debates over WC – post-WC debate

9 Current Controversies 2005 – WB accepting some critiques about WC Market reform is not enough, should be complemented with strengthening institutions, promoting social equity, investing in human capital There is no “one-size-fits-all” IMF replaced SAP with poverty reduction policies creating more room for domestic policy makers for own development plans. Critiques – these are still not enough; need to balance free-market forces by government policies aiming at improving the equity of income distribution

10 Current Controversies Debate still continues Benefits of growth unvenly distributed across countries: BRICs vs. sub-saharan African countries Living standards and well-being far from being equal everywhere – simple models of economic growth fails to capture development challenges Issue of social justice is essential – if growth brings benefits which are unequally distributed, this is hardly a success!

11 The Global Economy Global Connections International trade flows: goods and services International income flows: capital incomes (profit, rent, interest), labour incomes (wage), transfer payments International transactions in assets: foreign bonds, foreign currencies, foreign assets International flows of people: migration International flows of technological knowledge International sharing of common environmental resources International economic system as a whole

12 The Global Economy Free trade: exchange in international markets that is not regulated or restricted by government Ricardian argument – both sides gain from specialization and free trade; efficiency, increased production and consumption, possible benefits of an integrated economy BUT neglect institutional, political, social and environmental context! Free trade may work against national or global well-being

13 Major Policy Tools Set of policy tools to control the degree of “openness” -Trade Ban: preventing M or X of goods and services -Trade Quota: quantitative restriction over the quantity of the goods of services to be traded -Tariff: taxes imposed on M or X. -Trade-related subsidies: payments to producers to encourage more production, either for X or as a substitute for M. -Capital Controls: regulation of intn’l transactions involving assets. to attract FDI => FTZ: designated area where foreign- owned manufacturers operate free of taxes, tariffs etc.

14 Why Resist Free Trade? 1 – protecting domestic industries and jobs from foreign competition Use of trade policies such as tariffs, quotas and subsidies “beggar-thy-neighbour” approach: trying to gain at the expense of others’ benefits; “trade wars”. Despite liberalization attempt, still use of protectionist policies – at least piecemeal. Trade relations – power and dominance

15 Why Resist Free Trade? 2 – tariffs as a source of government revenue Hard to collect taxes on incomes and property 3 – industrial policy as a strategy for growth Dynamic efficiency overall – changing mix of productive capabilities Infant industry argument: use of trade policies to protect selected domestic industries from foreign competition until become “mature” enough to compete on the world markets May be harmful if not carefully manipulated

16 Why Resist Free Trade? 4 – military and food security May limit trade for security reasons 5 – diversification Uncertainty due to variation in terms of trade; some diversification may be wise – use of trade policies to encourage more variety in production of goods and services 6 – labour, environmental and safety standards Minimum standards for pay and safety on the job + environmental standards and safety standards for consumer goods. Race to the bottom – compete in low-cost business

17 Why Resist Free Trade? 7 – “unfair”??? Few debates on legitimacy of trade restriction GMO products: imports being banned by EU Dumping: selling at low prices Labour Standards: “unfair competition” over workers of rich countries Usually a matter of political economy – WTO negotiations and dispute resolution practices Doha Round – intended to take into account the needs and interests of poorer countries; agricultural products – little progress

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