1 Lectures Don DeVoretz Commercial Policies and International Trade and Finance:Best Practices ?

2 Strategy I Devaluation What are consequences of a 10% devaluation ? 1. real wages fall by 5% 2. GDP falls by 1 to 4 % 3. Inflation 1 to 10% 4. Need 15 % rise in foreign aid to most countries to offset effects of devaluation ?

3 Overvalued Exchange Rates Why have most LDC’s opted for Overvalued Exchange Rate ? –Overvalued exchange rates reduce price of M’s hope to get capital goods cheaper However, luxury items also cheaper –Consequence DUAL EXCHANGE RATES Argentina : two exchange rates: –overvalued for capital goods –undervalued for consumer goods Eventual Devaluation

4 Corruption and Overvaluation

5 Foreign Aid:Facts 1960 to present : a. $1.6 trillion in foreign Aid b. 40 % of developing world gets about twice the aid as poorest. 2. ODA from OECD has actually increased in early 1980's by.5% per annum. 3. 2% of aid went to primary health care and 1% to population growth.

6 Questions 1. Has aid relieved poverty? 2. Has aid helped countries who have received it ? 3. What constitutes foreign aid ? 4. Who supplies foreign aid ? 5. What is tied aid (1/2 of total) and what is added cost (15%).

7 Strategy II: Debt Repayment Buy -back debt: –Issue new Bonds to pay for old bonds which are at 40 % of ace value. –a. At what price? –Is it wise for LDC's to simply buy back debt ?

8 Strategy III Political Struggles Lobby DC's to a. lower effective rates of protection in DC’s b. or supply special funds from IMF or Multi-lateral banks c. Debt Forgiveness Loans from IMF and Others on concessionary terms

9 Strategy IV Restructuring ? Inward Looking Commercial Policies ? Ingredients: Effective rate of protection vs. Nominal Rate –Nominal rate T= !(p’-p)/p! where p’ and p are unit prices with and without tariffs –Effective rate G=[(v’-v)/v](100) where v’ and v are value added with and without tariffs. –Effective rate can be + or -

10 Actual Effective rates : 1990’s CountryAverage Effective Rate Pakistan356 % India69% Thailand27 % Singapore22 % South Korea-1%

11 Perverse Effects Of Effective Tariffs by Type of Good Developing Countries have: –High effective rates on final goods –Low effective rates on intermediate and capital goods Implications: – Backward Linkages can not develop –No development of a capital goods industries using labour intensive techniques

12 Arguments For Tariff Protection Tariff duties are major source of Revenue Import restrictions rebalance payments Reduces economic dependence Encourages foreign firms to come behind tariff wall.

13 Outward Looking Policies Zero Effective Rates No quantity restrictions Convertible currencies Fluctuating exchange rates Membership in WTO: play by the rules ?

14 Trade Optimists It produces competition Increased efficiency,technical change Attract foreign capital Generates foreign ex for food Ends rent seeking and corruption Equal access to resources

15 Trade Pessimists High efffective rates in Developed countries Mfg. Is olgopolistic Inelastic Demand for LDC’s exports Low income elasticity of demand for LDC products LDC exports grow slowly LDC terms of trade declining

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