Download Poverty concepts and measures

Globalization, Growth, and Trade
Lectures 15-16:
More on Specific Factors Model (SFM) &
Dutch Disease
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Review of SFM Model
•
M
uT
•
uA
MA
pA
•
MT
p*
•
•
Lm
L
0
Lx
LA
•
XA
•
XT
X
•
•
LT
L
1
Changes in Factor Earnings (A->T)
(w/pM)T
slope =
M
pA
 MA
(w/pM)A
T
M

L
LA

LT
0

 XA
 TX
pT
YA YT X

45o
L
2
Gains and losses from trade in SFM
 Nominal factor returns: w, rX, rM
 Real factor incomes: relative to index of all consumer
prices, such as CPI = pxapm1-a , a = budget share of X
Effect of a rise in
px/pm on:
Nominal income
Capitalists Landowners
(Km)
(Kx)
Workers
(L)
lose
gain
gain
If a  1
lose
gain
lose?
If a  0
lose
gain
gain?
Real income:
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Growth and policy experiments
 Growth: What happens when the labor force grows? When
either sector’s capital stock expands?
 Related questions:
 Productivity improvement: What happens when producers adopt
new, improved technologies?
 Policies: What happens when integration with world market is
conditioned, e.g. by a tariff?
 Effects on production, resource allocation, aggregate income,
income distribution?
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Endowment growth - prod’n fn
What happens when the labor force grows?
When either sector’s capital stock expands?
Y
Y
Y1
Y1
Y0
Y0
0
L0
L1
Labor force growth
L
0
L0
L
Sectoral capital growth
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Labor Force Growth and the PPF
M
•
u1
• u2
q1 •
q2 •
p = –px/pm
X
• Labor force growth increases maximum achievable production
in each sector (PPF shift need not be symmetric)
• As drawn here, which sector is relatively labor-intensive? Why?
• At constant p, what happens to real factor returns?
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Labor Force Growth and Income
M
uT
uT
MT
pT
XT
L
X
LT
L
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Labor force growth and income distribution
 When the labor force grows but capital remains fixed
in each sector, what happens to wages?
 What happens to returns to specific factors?
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Specific Factor Growth (FDI) and PPF
M
• u2
• u1
q1 •
q2 •
p = –px/pm
X
• Growth of endowment of sp. factor in exportables increases maximum
achievable production in that sector only.
• Rybczinski effect: output of M sector must decline (why?)
• At constant p, what happens to real factor returns?
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SE Asia: growth & dev. in open economies
 Thailand’s trade and FDI-driven economic boom
 Indonesia’s oil wealth and “Dutch Disease”
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Manufactured exports - developing countries
 Which countries industrialize, and why?
 Endowments: cheap labor, infrastructure, resourcescarce (?)
 Relatively stable macroeconomic & political conditions
 Lower barriers to investment and importation of inputs
 Early industrializers: Japan, Taiwan, Korea…
 Size of domestic market prohibited closed-economy
growth  export orientation
 Capital raised from domestic savings
 Later industrializers: Thailand, Malaysia, VN
 Same export orientation, but using foreign capital
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Thailand: growth & poverty decline
 In Thailand, growth was really fast in 1985-97
 During this decade, trade/GDP rose and so did
FDI/GDP, especially from E. Asia
 Poverty also declined very fast
 Inequality did not increase much
 Can we use SFM to understand these trends?
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What factors contribute to poverty decline?
1. Overall economic growth
2. Direct anti-poverty policies
3. Indirect effects of international integration
 Job creation, esp. low-skilled labor
 Internal migration


Wage effects
Remittances
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Thailand: direct anti-poverty policies
 Policies addressing opportunity, security, and
community
 Opportunity: increasing labor productivity through
education and training
 Security: stabilizing incomes against shocks (e.g.
economic recessions)
 Community: building local capacity for economic
development and protection for poor
 These direct policies had only mixed success
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Indirect policies: globalization
as anti-poverty measure
 Globalization after about 1984:
 FDI inflows
 Trade liberalization
 Other pro-trade measures
 Job creation through FDI and specialization in L-intensive
tradables sectors
 Change in structure of exports and employment: gr of L-
intensive mfg
 Transmission of gains: wage growth in non-ag and in ag/rural
areas
 These structural changes associated with globalization
appear to account for the largest share of poverty
alleviation progress in Thailand
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Economy-wide spread of wage growth
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Conclusions: Thailand
 Labor-intensive growth, e.g. of manufacturing, has
direct and immediate effects on poverty
 FDI was mostly efficiency-seeking: E. Asian
manufacturers looking for cheap labor
 FDI increased stock of manufacturing sector capital
 This raised total labor demand and encouraged ruralurban migration (spread of gains)
 With prices mostly stable, real wages increased
steadily through early 1990s
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Break time!
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Resource Curse: Overview
(http://en.wikipedia.org/wiki/Resource_curse)
 Countries with rich natural resource bases have
worse growth and development outcomes. Why?
 One reason: “Dutch Disease”:
 1960s: Oil/gas discoveries by Holland
 Huge export “boom” from oil/gas sales, but…
 Severe domestic inflation
 Loss of manufacturing jobs and investment
 Same phenomenon seen in other oil-rich countries
 Are these changes all linked?
 Specific factors model: increase in natural resource
capital… effects on economy?
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Nontraded goods and “real exchange rate”
 SFM can explain structural change but not inflation
 Need a 3rd sector – nontraded goods, with prices
endogenous
 Examples of NT goods; characteristics of markets
 Goods may be non-traded (or effectively so) for intrinsic reasons,
or because of policy interventions
 D=S in domestic market; price must adjust to clear market
 Demand for NT goods is usually elastic w.r.t. income
growth
 Therefore, rise in income means rise in pN/pX and pN/pM
 Why do we care?
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Demand and Supply in T and NT Sectors
 Non-Tradable Sector
D’
D
S
P
 Tradable sector
D’
P
D
p’
S
p*
q* q’
Q
S slopes up and p NT rises w/
increase in demand.
Q
S is flat because p in T sector is
set in world markets.
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The ‘real’ exchange rate
 Real exchange rate = price of N goods in terms of all T
goods (= pN/pT)
 RER is endogenous, even if prices of all T goods set in
world mkts (‘small country assumption’)
 It conveys effects of changes in one sector, or in
aggregate income, to other sectors


Directly, through relative price changes
Indirectly, through changes in factor prices
 RER rise: indicator of inflation relative to other
countries
--> changes in relative production costs
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Salter-Swann diagram
T
RER = -pN/pT
(yT, yN) = (cT, cN)
N
Note: All tradable goods in one index, on vertical axis
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2. Resource wealth
 Many dev. econs have relatively large resource
sectors (minerals, agric., forestry) producing
commodities for export to world mkts
 These sectors & their global markets have special
characteristics-- incl. volatility
 What happens to the structure and performance
of the economy when a resource sector
experiences a “boom” (price rise, new reserve
discovery, tech change)?
 What are the contradictions/risks of rapidly rising
income from a single booming sector?
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What do you think?
 ‘Income effect’: new income raises spending across
the board
 Rise in N prices: domestic inflation, wage rises
 Loss in profitability and jobs in T goods other than
the ‘booming’ sector
 Boom in gov’t revenues and spending
 G. consumption or investment?
 What about changes in factor returns?
 Labor, ‘capital’ in booming sector, etc.
 income distribution?
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Dutch Disease
 Could a natural resource boom lead to
“deindustrialization” (or “deagriculturalization”)?
 Why would a country like Venezuela export only oil
products and import basic goods like eggs?
 Why did Nigeria’s export agriculture sectors collapse in
the 1980s, and what were the consequences for incomes,
welfare and poverty?
 Why is Indonesia’s manufacturing sector now failing to
grow?
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3. Resource Boom Model
 3 Sectors:
1. Resource sector (oil, natural gas) - X
2. Tradable (Ag, Manuf) – M
3. All tradables together: T, so LT = LM + LX
4. Non-tradable (services, land) - NT
Example (NT): Haircuts, restaurants, health, educ.
 Small open economy, one mobile factor – labor
 X production uses a specific factor (oil reserves, mineral
reserves), M and N both use specific capital.
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Economy-wide labor allocation before energy export boom
1. LNTL0 is labor in
NT production
W
LT
LNT
LM
W
2. LTL0 is total
labor in T prod’n
3. LTa is labor in
manuf production
WO
4. aL0 is labor in
energy sector
LNT 
L0
a
 LT
5. w0 is econ-wide
wage rate
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Labor allocation after the boom: resource movement effect
LT
W
LT
LNT
LM
W
1. LNTL1 is labor in
NT production
2. LTL1 is total
labor in T prod’n
W1
w0
3. LTb is labor in
manuf production
4. bL1 is labor in
energy sector
LNT
L1
L0
a b
LT
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Labor allocation after the boom: incomes spending effect
W
LT
LNT’
LT
LNT
LM
W
2. Lab demand in
NT rises to LNT’
W2
W1
3. Higher wages
& labor costs for
all industries
w0
LNT
1. New spending
raises pNT
L1
L0
abc
LT
4. Manuf sector
costs rise,
output falls
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Implications of Dutch Disease
 Increased Dependence on Boom and Non-Tradable (NT) Sectors
 Increased vulnerability to price shocks
 World commodity markets are very volatile
 NT sector adjusts through prices more than quantities
 Higher risks of macro instability
 Rising NT prices means inflation and speculation (property
booms, unproductive investments)
 Decline of tradable sector
 Loss of comparative advantage is traditional industries (Nigeria
palm oil)
 May reduce potential for dynamic growth in manuf industries
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Resource Curse:
Lack of Diversification
 Basic logic of why?
 Dutch Disease model explains
 Expectations of easy wealth
 Incentives for entrepreneurs and innovators shifted to
wealth-grabbing
 Evidence of lack of diversification (boom sectors dominating
exports, Boom and non-tradables sector dominating GDP)
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Empirical Evidence on
Lack of Diversification
 Nigeria
 Petroleum, 95% exports, 20% GDP,
once a food exporter now importer,
 70% labor in agriculture, 17% of GDP.
 Ecuador
 Petroleum, 56% of exports, Bananas
12%
 Oil-mining, 24% of GDP
 Ag 6% GDP, 8% of labor
 Services 60% of GDP, 68% of Labor
 Iran
 Petroleum, 80% of exports,
 Ag 11% of GDP 30% of labor
 Unemployment 20%
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Resource Curse:
Rent-Seeking Behavior
 Huge incentives to capture the “rents” (excess profits of resources).
Foreign exploitation potential is high.
 Ex: $80/bbl of oil versus $8/bbl prod costs.
 Rents = Super-normal profits
 Political economy of country dominated by efforts to control &
capture rents.
 Crowds out other kinds of political and economic initiatives.
 Conflict becomes central (as does potential for dictators or
authoritarian regimes).
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Resource Curse:
Feeble Taxation Systems
 State control of resources (nationalization or taxation) reduces
need for development of other tax systems.
 Oil-rich countries get almost all of their government revenues from
state oil company or taxes.
 Lack of public commitment to taxation system makes
government vulnerable to volatile prices of oil or other leading
resource.
 Also undercuts commitment to public expenditures.
 Low investment in public education common in resource rich
countries (competitiveness of workers lower priority when resource
rents are main source of wealth).
 Low commitment to democracy as well if public sector not
viewed as carrying out allocation of people’s tax revenues.
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Resource Riches Not Always a Curse
 Empirical examples







U.S., Canada, Australia
Chile (copper, fruits, lumber)
Norway and Sweden
Botswana
Malaysia
Brazil
Vietnam?
 Why?





Types of resource riches (ag/ind. Links)
Types of institutions in place
Size of economy/diversity of production sectors
Timing of booms
Policy choices
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Summing up
 Growth and globalization have a complex relationship
 Understanding these requires careful analysis
 Simple models – heuristic devices (road maps)
 Heckscher-Ohlin – ‘benchmark’ model
 SFM: Extends H-O to take account of realities (natural
resources, limited adjustment capacity)
 Dutch Disease model: introduces macroeconomic
dimension with endogenous prices and many more
development/political economy stories
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Looking forward
 Tomorrow – quiz only
 Next week – one meeting (return hwks and quizzes;
discuss as needed)
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