Download Lecture 18

Lecture 18
Don DeVoretz
Trade as an “Engine of Growth’
Some Best and Worst Practices?
1
Case for Free Trade
• Empirical Evidence: 1990’s to present
– China: trade related growth has reduced poverty
– Asian Tigers, Trade as an “Engine of Growth”
– India, Brazil and Russian
• Trade, FDI plus Domestic markets
2
Case Against Free Trade
• Empirical Evidence: Con 1990’s to present
– Mexico:
• NAFTA and collapse of Peso
• Emigration and destabilization
– Argentina:
• Dollarized economy
• Emigration and destabilization
– Asian Tigers
• Capital Flight and collapse of economies
3
Overvalued Exchange Rates
• Why have most LDCs opted for Overvalued
Exchange Rate ?
– Overvalued exchange rates reduce price of Ms
• 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
Some Indicators of Trouble
• Balance of Trade
– Income and Price terms of Trade
• Balance of Payments
–
–
–
–
Capital Flight
Direction of FDI
Size of remittances
Aid
5
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 ?
6
Corruption and Overvaluation
7
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 1980s by
.5% per annum.
• 3. Case for Aid is close
foreign exchange gap
8
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 LDCs to simply
buy back debt ?
9
Strategy III: Political Struggles
• Lobby DCs to
a. lower effective rates of
protection in DCs
b. or supply special funds
from IMF or multi-lateral
banks
c. debt forgiveness
• Loans from IMF and others on
concessionary terms
10
Strategy IV: Restructuring ?
• Inward-looking commercial policies ?
• Ingredients:
• Low effective rate of protection
– 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 positive or negative
11
Actual Effective rates
•
•
•
•
Country
Pakistan
India
Thailand
– Singapore
– South Korea
Average Effective Rate
356 %
69%
27 %
22 %
-1%
12
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
13
Arguments For Tariff Protection
•
•
•
•
Tariff duties are major source of revenue
Import restrictions rebalance payments
Reduce economic dependence
Encourage foreign firms to come behind
tariff wall
- How have these arguments panned out in
history ?
14
Outward-looking Policies
•
•
•
•
•
Zero effective rates
No quantity restrictions
Convertible currencies
Fluctuating exchange rates
Membership in WTO: play by the rules ?
15
Trade Optimists
•
•
•
•
•
•
Produces competition
Increases efficiency, technical change
Attracts foreign capital
Generates foreign ex for food
Ends rent-seeking and corruption
Equal access to resources
16
Trade Pessimists
• High effective rates in developed countries
• Mfg. is oligopolistic
• Low income elasticity of demand for LDC
products
• LDC exports grow slowly
• LDC terms of trade declining
17
End of Show
18