1 Developement, Doha cycle, Carnegie model, and all that ! Jean-Marc Boussard INRA/CIRAD Paris, France

2 Whats new with the Carnegie model ? Methodology : Methodology : Better data sources and processing Better data sources and processing Including recent policy developments Including recent policy developments Unemployment considerations Unemployment considerations Conclusions : Conclusions : Benefits of liberalization much smaller Benefits of liberalization much smaller Winners and losers (the poor) Winners and losers (the poor) Should not be neglected, because: Should not be neglected, because: Compensations unfeasible Compensations unfeasible Benefits small even with full liberalization Benefits small even with full liberalization And yet… And yet…

3 And yet, the Carnegie model is unduly optimistic The basic assumptions : The basic assumptions : 1/ All prices equate marginal costs 1/ All prices equate marginal costs 2/ All factor prices equate marginal productivity 2/ All factor prices equate marginal productivity Remark : implies unskilled wage at minimum subsistence cost, as in Malthus Remark : implies unskilled wage at minimum subsistence cost, as in Malthus Is this tenable ? Two remarks : Is this tenable ? Two remarks : 1/ Small liberalization benefits means either : 1/ Small liberalization benefits means either : Present situation better than expected, or : Present situation better than expected, or : Wrong model Wrong model 2/ From a dynamic point of view : 2/ From a dynamic point of view : Bankers should lend to the poor, because of high capital productivity Bankers should lend to the poor, because of high capital productivity Should result in similar techniques everywhere, and the end of poverty Should result in similar techniques everywhere, and the end of poverty This is not what one can observe This is not what one can observe Bankers lend to the rich, because they are more likely to reimburse.. Bankers lend to the rich, because they are more likely to reimburse.. Yet, rates of loans to the poor are large Yet, rates of loans to the poor are large Underscores the high marginal productivity of capital for the poor Underscores the high marginal productivity of capital for the poor A paradox which should be resolved ! A paradox which should be resolved !

4 Resolving the paradox Neither a farmer, a banker, or any other entrepreneur is sure of the future Neither a farmer, a banker, or any other entrepreneur is sure of the future Means that risk is important and prevents borrowing Means that risk is important and prevents borrowing The poor are more risk averse and need borrowing The poor are more risk averse and need borrowing Higher risk aversion known since Bernoulli Higher risk aversion known since Bernoulli Needs for borrowing a consequence of poverty Needs for borrowing a consequence of poverty Agricultural prices are more volatile Agricultural prices are more volatile Because of the rigidity of demand Because of the rigidity of demand Means that price risk is especially important Means that price risk is especially important

5 Agricultural prices are more volatile: Retail price index in large American cities; Base 100 = January 1966 Constant US $ (deflated by implicit GNP deflator); Sources : Economagic.com;

6 Capital accumulation as the central problem of development No development without capital Real, not financial capital, private (machines, etc.. ) or public (infrastructures, education, etc....) Real, not financial capital, private (machines, etc.. ) or public (infrastructures, education, etc....) The only possibility for increasing the productivity of labor The only possibility for increasing the productivity of labor In agriculture, would allow for shifting manpower from food to other goods production, as was done in Europe or in the US. In agriculture, would allow for shifting manpower from food to other goods production, as was done in Europe or in the US. Poor farmers as development target : Poor farmers as development target : Deprived of capital; Deprived of capital; Cannot invest from own income : must borrow Cannot invest from own income : must borrow Cannot borrow because of especially large risk Cannot borrow because of especially large risk Hence, risk management the key factor Hence, risk management the key factor Practiced by European and American governments since the 16 th century (Cromwell; Roosevelt) Practiced by European and American governments since the 16 th century (Cromwell; Roosevelt) Ignored from models ! Ignored from models ! Forbidden by WTO and international organizations Forbidden by WTO and international organizations

7 In conclusion : which model for trade and development ? WTO should devote attention to risk management and long run considerations WTO should devote attention to risk management and long run considerations Using models capable of evaluating the benefits of stabilization Using models capable of evaluating the benefits of stabilization Models should be designed differently Models should be designed differently Dynamic components (for development id a dynamic problem) Dynamic components (for development id a dynamic problem) Risk components Risk components Financial components including : Financial components including : –Individual borrowing –rate of exchange and FDIs. Role of State in investment Role of State in investment –In present models, governments are just parasites –Now public investment crucial for public goods (research, roads, etc..), risk bearing and long run commitments

8 Thank you for your attention !