International Economics

International Economics

Li Yumei

Economics & Management School

of Southwest University

International Economics

Chapter 11

International Trade and Economic Development

Organization 11.1 Introduction 11.2 The Importance of Trade to

Development 11.3 The Terms of Trade and Economic

Development 11.4 Export Instability and Economic

Development 11.5 Import Substitution versus Export

Orientation 11.6 Current Problems Facing Developing

Countries Chapter Summary Exercises

11.1 Introduction This chapter examine the special trade problems

faced by developing countries Labor-intensive goods Terms of trade Import substitution and Export-orientation The international trade can contribute

significantly to the development of poor nations The importance of trade to development can give

rise to some special problems requiring joint action by both developed and developing nations

Disparities between developed and developing countries Trade disputes between developed and developing

countries

11.2 The Importance of Trade to Development

Trade Theory and Economic Development

Trade as an Engine of Growth The Contributions of Trade to Developm

ent International Trade and Endogenous Gro

wth Theory(内生性增长理论 ) Conclusion

Trade Theory and Economic Development Developed Countries and Developing Countries Developed countries are characterized in general by high

average real per capita income, a low proportion of the labor force in agriculture , high life expectancies, low rates of illiteracy, low rates of population growth, and high rates of growth in average real per capita income

Developing countries is the opposite characteristics of developed countries

Traditional Trade TheoryTraditional trade theory postulates that if each nation specializes in the production of the commodity of its comparative advantage, world output will be greater and ,through trade, each nation will share in the gains

Trade Theory and Economic Development Trade Theory and Developing Countries According to the trade theory, developing countries should focus on the production of primary goods and

export of raw materials, fuels, minerals and food to developed nations in exchange for manufactured products

Developing countries attack traditional trade theory as static and irrelevant to the development progress (except in short run)

1. One nation’s pattern of development is not determined once and for all, but must be recomputed as underlying conditions change or are expected to change over time

2. The dynamic benefits from industry can theoretically be incorporated into the original calculations of comparative advantage and into subsequent changes in comparative advantage over time

Trade as an Engine of Growth Figure 1

The Contributions of Trade to Development To the full utilization of underemployed domestic

resources (from inefficient production to inefficient production)

By expanding the size of the market, trade makes possible division of labor and economies of scale

Trade is the vehicle for the transmission of new ideas, new technology and new managerial and other skills

Trade stimulates and facilitates the international flow of capital from developed to developing nations

The Contributions of Trade to Development

For several large developing countries (Brazil, India and China), the importation of new manufactured products has stimulated domestic demand until efficient domestic production of these goods become feasible

International trade is an excellent antimonopoly weapon due to the greater efficiency by domestic production to meet the foreign producers ( especially keeping the low cost and price of intermediate or semi-finished products used as inputs in the domestic production of other commodities)

International Trade and Endogenous Growth Theory

Endogenous Growth Theory Romer (1986) and Lucas(1988) provide a more convincing a

nd rigorous theoretical basis for the positive relationship between international trade and long-run economic growth and development

Theory postulates that lowering trade barriers will speed up the rate of economic growth and development in the long run by

1. Allowing developing nations to absorb the technology developed in

advanced nations at a faster rate than with a lower degree of

openness

International Trade and Endogenous Growth Theory

2. Increasing the benefits that flow from research and development

3. Promoting larger economies of scale in production

4. Reducing price distortions and leading to a more efficient use of

domestic resources across sectors

5. Encouraging greater specialization and more efficiency in the

production of intermediate inputs

6. Leading to the more rapid introduction of new products and

services

Case Study 11-1 page 362

See the following tables

Conclusion

Although the level and the rate of economic

development depend primarily on internal conditions

in developing nations, international trade can

contribute significantly to the development process.

Some economists believed that international trade

and the functioning of the present international

economic system benefited developed nations at the

expense of developing nations

11.3 The Terms of Trade and Economic Development

The Various Terms of Trade Alleged Reasons for Deterioration in the

Commodity Terms of Trade Historical Movement in the Commodity

and Income Terms of Trade Conclusion

The Various Terms of Trade Types of Terms of Trade Commodity or net barter terms of trade(净贸易条件 ) Income terms of trade(收入贸易条件 ) Single factor terms of trade(单因素贸易条件 ) Double factor terms of trade(双因素贸易条件 )

Commodity or net barter terms of tradeIt is the ratio of the price index of the nation’s exports (PX) to

the price index of its imports (PM) multiplied by 100

N=(PX/ PM) 100

Income terms of tradeI =(PX/ PM) QX (QX the index of the volume of exports)

The Various Terms of Trade Single factor terms of tradeS=(PX/ PM) ZX

ZX the productivity index in the nation’s export sector Double factor terms of tradeD=(PX/ PM) (ZX/ ZM) ZX the productivity index in the nation’s export sector; ZM the productivity index in the nation’s import sector Evaluation of the Types of terms of trade N, I and S are the most important. D does not have much

significance for developing nations and is very seldom N is the easiest to measure Developing nations tend to deteriorate the terms of trade

in over time

Alleged Reasons for Deterioration in the Commodity Terms of Trade

Productivity increases are reflected in lower prices in developing nations while higher wages and income of the workers in developed nations

In developed nations, workers can benefit from their own increasing productivity, meanwhile benefit from the increasing productivity of developing nations due to the lower prices of exported commodities

Different internal labor markets between developed (relatively scarce and labor unions) and developing (surplus labor, large unemployment, weak or non-existent labor unions) nations

Alleged Reasons for Deterioration in the Commodity Terms of Trade

The demand for the manufactured export tends to grow much faster in developing nations than the demand for the agricultural and raw material exports of developing nations

Due to the much higher income elasticity of demand for manufactured goods than for agricultural commodities and raw materials

Many developing nations have experienced a large increase in the share of manufactured exports in their total export, it makes the calculation of terms of trade more complicated

Historical Movement in the Commodity and Income Terms of Trade

Controversial Topic Prebisch and Singer research Other research Uncertain answer

See some data

Conclusion

The terms of trade in developing nations are not

certain due to the fluctuation of the imported and exported of commodities in the world market

In a certain period of time , the terms of trade in developing nations can be improved, and can be also deteriorated

The studies on the terms of trade in developing nations have no unique answer

11.4 Export Instability and Economic Development

Cause and Effects of Export Instability Measurements of Export Instability and Its

Effect on Development International Commodity Agreements Conclusion

Cause and Effects of Export Instability Developing nations may face large short-run fluctuations

in their export prices and earnings that could seriously hamper their development

Inelastic demand of the primary export Inelastic supply of the primary export Illustration (Figure 11.1 page 369) With D and S, the equilibrium price is P; If D decreases to D’ or S increases to S’, the price falls

sharply to P’; If D and S both shift , the price to P’’Conclusion: inelastic and unstable demand and supply curves for the primary exports of developing countries can lead to wild fluctuations in the prices that these nations receive for their exports

FIGURE 11-1 Price Instability and the Primary Exports of Developing Nations.

Measurements of Export Instability and Its Effect on Development Measurement of Export EarningsMacBean (1966) defined the index of instability of export earnings as the average percentage deviation of the dollar value of export proceeds from a five-year moving average and measured on a scale of 0 to 100 Export instabilityMacBean postulates that the greater export instability depended primarily on the type of commodities exportedE.G. The export of rubber, jute, and cocoa faced much more unstable export earnings than petroleum, bananas, sugar and Tabacco International Commodity Agreement Importance to stabilize the export earning of developing nations

International Commodity AgreementsThere are three basic types of international commodity agreements: Buffer Stocks(缓冲存货 ), Export Controls(出口管制 ), Purchase Contracts(购货合同 )

Buffer Stocks It involves the purchase of the commodity when the comm

odity price falls below an agreed minimum price, and the sale of the commodity out of the stock when the commodity price rises above the established maximum price. ( International Tin Agreement)

Disadvantages: (1) some commodities stored with high cost; (2) if the minimum price is set above the equilibrium level, the stock grows larger and larger over time

International Commodity Agreements

Export Control It seeks to regulate the quantity of a commodity exported

by each nation in order to stabilize commodity prices

Main Advantage: it avoids the cost of maintaining stocks

Main disadvantage: it introduces the inefficiencies and

requires all major exporters of the commodity participate

International Sugar Agreement, International Coffee Agreement

E.G. OPEC (See the table)

International Commodity Agreements

Purchase Contracts It is a long-term multilateral agreement that stipulate a

minimum price at which importing nations agree to purchase a specified quantity of the commodity and a maximum price at which exporting nations agree to sell specified amounts of the commodity

It can avoid the disadvantage of buffer stocks and export controls

Disadvantage: it results in a two-price system for the commodity

International Wheat Agreement

Conclusion

Only a few (International Coffee Agreement) of these are in operation today, and none seems particularly effective. One reason for this is that the very high operating costs and the general lack of the support from developed nations

Modest Compensatory Financing Scheme (set up in 1966 by IMF)

To compensate the developing nations below the previous five-

year moving average of export earnings

11.5 Import Substitution versus Export Orientation

Development Through Import

Substitution versus Exports

The Experience with Import

Substitution

Recent Trade Liberalization and Growth

in Developing Countries

Conclusion

Development Through Import Substitution versus Exports

Industrialization Faster technological progress The creation of high-paying jobs to relieve the serious

unemployment and underemployment problems Higher multipliers and accelerators through greater

backward and forward linkages in production process Rising terms of trade and more stable export prices and

earnings Relief from balance-of-payments difficulties


Two Types of Industrialization Import-substitution industrialization

Advantages: (1) reduced risks to set up an industry to replace

imports; (2) easier to compete with foreign competitors; (3)

induced tariff factories to set up

Disadvantages: (1) domestic industries accustomed to

domestic protection; (2) leading to inefficient industries; (3)

more difficult to produce more capital-intensive and high

technological imports


Export-oriented industrialization

Advantages: (1) to overcome the smallness of the domestic

market to reach the economies of scale; (2) the production of

manufactured goods for exports requires and stimulates

efficiency throughout the economy; (3) the expansion of

manufactured exports is not limited by the growth of the

domestic market

Disadvantages: (1) it may be very difficult to set up export

industries to compete with foreign producers; (2) high

protection in the labor-intensive industries of developed

nations

The Experience with Import Substitution

Failure ExperienceSuch as, Argentina Heavy protection and subsidies to industry led to

excessive capital intensity and relatively little labor absorption

Import substitution led to the neglect of agriculture and other primary sectors and the decline of the earnings from the traditional exports

Import substitution aggravated the balance-of-payments problems

Case Study 11-4 page 375

Recent Trade Liberalization and Growth in Developing Countries

1980s developing nations began to liberalize trade and adopt an outward orientation

World Bank facilitated the planning and carrying out of trade liberalization programs with technical assistance and loans

Many of the liberalizing developing countries jointed the GATT/WTO

See the following table

New International Economics System

Conclusion

As for the industrialization strategy in developing nations, it is hard to judge whether the import- substitution strategy or the export-orientation strategy is better suitable for the economic development

Each of the import substitution and export orientation industrialization strategy has its own advantages and disadvantages

11.6 Current Problems Facing Developing Countries

Poverty in Developing Countries The Foreign Debt Problem of Developing

Countries Trade Problems of Developing Countries Conclusion

Poverty in Developing Countries



The Foreign Debt Problem of Developing Countries

Huge Foreign Debt For the growing demand in capital For the payment of high oil bills Renegotiation of the Debt Payment Schedules

with the Help of the IMF Reduced the debt burden of Latin America in

1989 Debt-relief plan by World Bank, IMF and

Individual Donor NationsCase Study 11-6 page 380

Trade Problems of Developing Countries

See Different Tables Trade Imbalance Trade Disputes Higher Oil Prices Poverty Terms of trade

Trade Imbalance

Trade Disputes

Higher Oil Prices

Poverty

Terms of Trade

Conclusion

The most serious problems facing developing nations today are: Poverty, especially Sub-saharan Africa Unsustainable foreign debt of the poorest devel

oping nations Protectionism of the developed nations against

developing nation’s exports

Chapter Summary

This chapter focuses on international trade on the

impact of the economic development in developing

nations. International trade has a positive impact on the

economic development International trade has a negative impact on the

economic development Two industrialization ways to facilitate the

economic development, each with advantages and disadvantages

Developing nations facing serious trade problems

Exercises

Discussion Problems:

Page 387 to 388 from 1 to 15 questions

ExercisesAdditional ReadingFor a discussion and evaluation of international trade as an engine of growth, see: R.Nurkse, “Patterns of Trade and Development,” in R.Nurkse,

ed., Problems of Capital Formation in Underdeveloped Countries and Patterns of Trade and Development (New York:Oxfor University Press, 1970) PP.163-226

J.Riedel, “Trade as an Engine of Growth in Developing Countries, revisited,” Economic Journal, March 1984,pp.56-73

For measurements of the commodity terms of trade of developing nations, see: United Nations, Relative Prices of Exports and Imports of Und

erdeveloped Countries (Lake Success, N.Y.: United Nations,1949)

Internet Materials

http://www.imf.org/external/pubs/ft/weo/2002/01/index.htm

http://www.unctad.org/en/pub/ps1tdr02.en.htm http://www.undp.org/hdr2002 http://www.wto.org http://www.oecd.org http://www.worldbank.org

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