Trade and Development

ECON 3508 June 13 and 15, 2011A.R. M. Ritter

(Text, Chapter 12, pp. 564-593)

OutlineI. Introduction

Central QuestionsChanging and clashing conventional

wisdoms

II. Theories of Trade and Development: Does trade promote development? How?

III. Problems of Primary Commodity Trade

I. Introduction Differing historical experiences with trade:

• Contrast Canada with Asia. L. Am, Caribbean and Africa

Central Questions• Does trade promote development? How?• What types of policies are necessary for trade to

promote equitable development?Changing and clashing conventional wisdoms

1930s; 1950s; 1960s and 70s;

1980s and 1990s; 2000s

I. Introduction, cont’dSome Specific Questions

• Is growth in general and internationally a “good thing”?• Are Multinational enterprises the principal beneficiaries?• Does international economic integration simply intensify the

exploitation of people in developing countries?• Are workers in the high income countries and the countries

themselves the losers when their industries relocate in developing countries?

• What are the environmental consequences of gung-ho international economic expansion?

• Is the US on the verge of major economic problems with negative consequences for the developing countries?

• Is China playing by the rules of the game?• Is an integrated international economic system more vulnerable to

crisis and collapse?• Is “globalization” making those left behind worse off?

II. Theories of Trade and Development: How does trade promote development?

1. “Vent for Surplus” idea, Adam Smith2. Comparative Advantage (D. Ricardo)3. “Productivity Theory”: (Dynamic)

Trade permits • increased specialization, • technical change & innovation;• development of economies of scale; and • increased productivity

4. Stimulus to competition; curbs monopoly power

5. Technical transformation and transfer: – from exports into imported capital equipment

that could not be produced domestically – (a “magical transformation”)

6. Basically, exports •earn foreign exchange, •permit imports, •permit technological transfer, •generate jobs and incomes, •Generates tax revenues,

& finance social programs

•support infrastructure development

“Trade Pessimists:” Arguments against trade as an engine of growth and development

There are Numerous Problems re trade:– Declining Terms of Trade ??– Price volatility for many export products– Protectionism in high income countries: tariff & non-

tariff barriers; Still relevant? Only partly– Enclave character of some export activities – Low income elasticities of demand for some

products, e.g. coffee, tea, cocoa,• Synthetic substitutes

– Over-dependence on single export products and vulnerability to international business cycle

Mauritius S. Africa Ghana Kenya Ethiopia

Exports of G&S per capita, $US, 2005

1,100. 1,456. 179. 109. 16.20

GDP per capita PPP, 2005, $US

12,215. 11,456. 2,480. 1,240. 1,066.

Human Development Index, Rank among Countries

0.804#65

0. 674 #121

0.553#135

0.521#148

0.406#169

Multidimensional Human Poverty Index, Rank among LDCs (103 total)

#27 #55 #65 #60 #105

Some Indicators for Economic and Social Progress forSome African Countries

Implications? Exports provide an essential fuel for economic and social development

Haiti Guatemala Brazil Mexico Chile

Exports of G&S per capita, $US, 2007

$54.40 $520.80 $838.00 $2,583.00 $4,114.00

GNI per capita PPP, 2010, $US

$949 $4,694 $10,601 $13,971 $13,562

Human Development Index, Rank among Countries (2010)

145 116 73 56 45

Human Poverty Index, 2010

.306 .102 .039 .015 n.a.

Some Indicators for Economic and Social Progress forSome Latin American Countries

Implications? Exports provide an essential fuel for economic and social development

But Note:

1. Different Types of Export Activity have different Development Implications

The “Enclave” Phenomenon(See next chart, explained in class)

2. “Resource Economy Syndrome” or “Petroleum Economy Syndrome” or the “Curse of Resource Wealth”(Explained below)

Large-Scale Mining or Petroleum

Small Scale "Peasant" Agricultural Exports (e.g. coffee, cocoa, tea)

High Tech or Low-Tech Manufacturing;

Plantations; Tourism;…

Technology K-Intensive; high tech., limited job creation,

Simple technology; labour intensive

Production Linkages: Backward" (input

provision)

Strong links (machinery and equipment) often from MNCs in DMEs

Limited but harness-able because tech is simple,

"Forward" (output processing)

Processing (beyond smelting) usually "market-oriented"

Limited due to market-oriented processing in many cases

Final Demand Linkages

K-Intensity => high profits for owners; profit repatriation; limited jobs => limited income for locals

Strong due to labour intensity and broad ownership

Externalities Some transport benefits maybe; environmental costs often;

Some training transferable elsewhere

Limited training; but good for entrepreneurship; beneficial impacts on infrastructure

"Fiscal Linkages" (tax revenues for support of Gov't programs

Strong in many cases OK, but often not that strong

Foreign Exchange Earnings

Strong sometimes (petroleum) variable sometimes

OK to variable

Policies f or Increasing Net Benefits

Harness linkages where possible; diversify on a resource base

The Varying Development Implications of Some Types of Export Activity

Enclave Character of Large Scale “Capital Intensive” resource Projects :

limited linkages to domestic economies

Explain:– “Backward Linkages” (ability to provide the inputs

needed for mining or oil)

– “Forward Linkages” (ability to undertake further processing of the ores or petroleum)

– “Consumption Linkages” Payments to people promoting increases in final demand)

Depends on employment and income patterns and volumes

III. Problems of Primary Commodity Trade

1. Export Concentration in a Few ProductsDiversifying Export Patterns

2. Price Instability => Foreign Exchange Volatility

Stabilizing Foreign Exchange Earnings3. Declining Raw Material Prices?4. The “Resource Wealth Curse”5. Protectionism in Potential Markets

Problems of Primary Commodity Trade cont’d

1. Export Concentration in a Few Products– The historical pattern– Recent Trends– The evidence– The problem:

(price instability; price trend; market dependence)– Economic Diversification: urgent but difficult;

– diversify into other primary commodities: agri, food, mineral

– Diversify into manufactures for export to neighbours and DMEs.

– Easy to say; hard to do; synonymous with the whole task of development

Export Concentration, Selected Countries. 2005 (Percentage of Total Exports)

Country Main Export Other ExportsBotswana Diamonds 88.2% Nickel 8.1Chad Oil 99.9%Ghana Cocoa 46 Manganese 7.2Kenya Tea 16.8 Flowers 14.2Nigeria Oil 92.2S. Africa Platinum. 12.5 Coal 8; Gold 7.9Tanzania Gold 10.9 Fish 9.7; Copper 8.6Zambia Copper 55.8 Cobalt 7Sub-Saharan Africa Oil 49.2 Diamonds 12.6; Nickel 7.8

Problems of Primary Commodity Trade, cont’d

2. Price Instability => Foreign Exchange Volatility– Evidence– Causes: Supply and Demand Explanation:

Graphical explanation in class• Price in-elasticities of both supply and demand

in the short run• Supply side disruption, especially for

agricultural commodities;• Demand side disruption, especially for mineral

products

• Consequences for Developing Countries:

Price instability => Foreign exchange instability=> national macroeconomic instability =>

unstable tax revenues for government => public sector management problems and general problems of ““boom and bust”

• Policy Options:

– Compensatory Financing” by IMF Facility:Already in operation; partial amelioration of

instability of F.Xch.

– International Commodity Agreements? Mainly unviable

– National macroeconomic management? Difficult but possible

– Diversification around primary exports? Again difficult but possible for some countries

Problems of Primary Commodity Trade for LDCs, cont’d

3. Long term Declining Raw Material Prices?

The “Terms of Trade” Explanation and example in class

The Record• 1950-2000 steady decline in many primary

commodity prices; • Why? supply and demand side factors

Explanation

Problems of Primary Commodity Trade for LDCs, cont’d

2000-2008: Major increases: Why? supply and demand side factors at work;

Explain

– 2009: world recession => major price reduction;– 2010: price recovery;– See Charts and Tables

Sub-Saharan Africa, Trade and Price Indicators, Annual Percent Change

1992-2001

2002-2011

2008 2009 2010

Total Value, Exports +3.6 13.7 23.5 -30.8 +27.1

Total Value, Imports 3.4 13.9 21.8 -17.3 17.2

Unit Value, Exports -0.9 10.0 23.2 -25.7 +18.9

Unit Value Imports -0.7 6.3 11.8 -11.1 6.9

Terms of Trade -0.2 3.5 10.2 -16.4 +11.3

Problems of Primary Commodity Trade for Africa, cont’d

Consequences of Terms of Trade Decline

Solutions?

4. The Paradox of Plenty aka “Resource Curse”

The “curse”Resource wealth generates great revenues for governments

but also may tend to lead to relative economic stagnation and political problems – waste, corruption, political patronage systems, civil conflict & war

i.e. Perhaps: an inverse relationship between resource wealth and genuine development

Why? Economic factors: exchange rate, prices, econ. managementPolitical factors via

windfall revenues to Governments without need for accountability to tax-payers, and also

windfall revenues “up for grabs” among competing elites.

Oil in the Niger Delta, Nigeria: +/- 89% of Gov’t revenue +/- 25% of GDP about 95% of export earnings; 13% of oil revenues to oil-producing states Impoverishment and environmental problems for local peoples (the Ogoni

and other groups) Major Conflict in the Delta

A New Country in 2011:

South Sudan

The Phenomenon in Brief:Export “boom” caused by a sudden increase in oil export prices or in resource export volumes, leads to an appreciation of the exchange rate with negative consequences, such as

• a major reduction of traditional (pre-boom) exports;

• unemployment of the factors of production in the traditional export sector;

• an increased concentration on the resource export and reduced diversity of export structures;

• damage to import-competing exports;

Explanation A: “Dutch Disease” or “Oil Economy Syndrome”

Plus• an inflationary impact as the demand for

non-tradable products increases, which further affects the real exchange rate;

• irresponsible use or misuse of foreign exchange windfall receipts

Explanation, with diagram on the blackboardThe diagram represents the foreign exchange (in US

dollars) market from the perspective of an oil exporter, in this example, Nigeria.

Examples:• Spain during its glory days with silver and gold

inflows from pillage and later the rich mines of Mexico and South America from perhaps 1530 to 1700

• Countries undergoing a resource boom (e.g. Canada in a minor way in the 1950s, again in 2006-2008 with tar sands and oil prices)

• Major oil exporting countries such as Nigeria (with 92% of its exports as petroleum in 2004); Chad (99%) etc.

• The Netherlands after its North Sea natural gas boom and before the “Euro”

Explanation B: Other Economic Factors

• Volatility of Foreign Exchange Earnings and Tax Revenues affects economic management and performance

• Economic Policy Failures: – Waste the funds extravagantly when available;– Expand consumption – Reduce other non-mineral taxes– Undertake costly but unwise strategic investments

Explanation C. Socio-Political Origins:“Dutch Disease” becomes “Resource Curse”

• Increased potential for corruption• Rent-seeking and winning is more profitable than

productive economic actions;• Bad decision making: government does not have to

respond to tax payers because rents come resources;• Resource revenues feed patronage systems,

permitting authoritarian or predator regimes to remain in power;

• Conflict among elites, regions, ethnic groups may be intensified.

5. Protectionism in International Markets

• Note protectionism in High Income Countries:

• Minimal or no protectionism against fuels and minerals

• affects other DMEs and some LDC agri exporters the most;

• Affects African producers of Cotton in particular • Protectionism for manufactured products exists and

is damaging but has been reduced over the years

5. Protectionism in International Markets

• Protectionism and unfair trading practices among Developing Countries

• Note China’s exchange rate policy and manufactured export domination

• Protectionism among Developing countries