Review: International Trade and Finance: Some Key Issues

8/25/2010
REVIEW
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-1
International Trade and

Finance: Some Key Issues
• Many developing countries rely heavily on
exports of primary products with attendant risks
and uncertainty
• Many developing countries also rely heavily on
imports (typically of machinery, capital goods,
intermediate producer goods, and consumer
products)
• Many developing countries suffer from chronic
deficits on current and capital accounts which
depletes their reserves, causes currency
instability, and a slowdown in economic growth
1
8/25/2010
Five Basic Questions about

Trade and Development
• How does international trade affect
economic growth?
• How does trade alter the distribution of
income?
• How can trade promote development?
• Can LDCs determine how much they trade?
• Is an outward-looking or an inward-looking
trade policy best?
The Importance of Exports to

Different Developing Nations
• Importance of exports to developing

nations
• Exports of LDCs are much less
diversified than those of developed
countries
2
8/25/2010
Demand Elasticities and Export

Earning Instability
• Low income elasticity of demand for primary

products
• Low price elasticity of demand and supply
• Export earnings instability
The Traditional Theory of

International Trade
• Comparative advantage
– specialization
• Relative factor endowments and international
specialization: the Neoclassical model
– Ricardo and Mill (static model)
– Heckscher and Ohlin (factor endowment theory)
• Different products require productive factors in different ratios
• Countries have different endowments of factors of production
3
8/25/2010

International Trade
• Main conclusion of the neoclassical model is that
all countries gain from trade
• World output increases with trade
• Countries will tend to specialize in products that
use their abundant resources intensively
• International wage rates and capital costs will
gradually tend toward equalization
• Returns to owners of abundant resources will rise
relatively
• Trade will stimulate economic growth

International Trade
• Trade theory and Development: The Traditional
Arguments
– Trade stimulates economic growth
– Trade promotes international and domestic equality
– Trade promotes and rewards sectors of comparative
advantage
– International prices and costs of production determine
trading volumes
– Outward-looking international policy is superior to
isolation
4
8/25/2010
The Critique of Traditional Free-Trade

Theory in the Context of Developing-
Country Experience
• The following assumptions of the
Neoclassical model must be scrutinized:
– Fixed resources, full employment, and
international factor immobility
– Fixed, freely available technology and
consumer sovereignty
– Internal factor mobility and perfect competition
– Governmental non-interference in trade
Some Conclusions on Trade Theory

and Economic Development Strategy
• Trade can lead to rapid economic growth under

some circumstances
• Trade seems to reinforce existing income
inequalities
• Trade can benefit LDCs if they can extract trade
concessions from developed countries
• LDCs generally must trade
• Regional cooperation may help LDCs
5
8/25/2010
Trade Strategies for Development:

Export Promotion versus Import
Substitution
• Export promotion: looking outward and seeing trade
barriers
– Primary-commodity export expansion, limited demand
• Low income elasticities
• Low population growth rates in developing economies
• Decline in prices implies low revenue
• Lack of success with international commodity agreements
• Development of synthetic substitutes
• Agricultural subsidies
– Primary-commodity export expansion, supply rigidities
• Expanding Exports of manufactured goods: Some
successes

Substitution (IS)
• The IS industrialization strategy & results
– Protected industries get inefficient & costly
– Foreign firms benefit more
– Subsidization of imports of capital goods tilts pattern of
industrialization & contributes to BOP problems
– Overvalued exchange rates hurt exports
– Does not stimulate self-reliant integrated
industrialization
6
8/25/2010

Substitution
• Standard argument for tariff protection
– Sources of revenue
– Response to chronic BOP problems
– Help foster industrial self-reliance
– Greater control over economic destinies
• Must be applied selectively and wisely
Trade Optimists and Trade Pessimists:

Summarizing the Traditional Debate
• Trade pessimist arguments

– Limited growth of world demand for primary exports
– Secular deterioration in terms of trade
– Rise of “new protectionism”
• Trade optimist arguments
– Trade Liberalization promotes competition and
efficiency
– Generates pressure for product improvement
– Accelerates overall growth
7
8/25/2010
Trade Optimists and Trade Pessimists:

Summarizing the Traditional Debate
• The industrialization strategy approach to export

policy
– Focus on government interventions to encourage
exports (industrial policy)
– Without proper attention to incentives, industrial policies
may be counterproductive too (South Korean case)
– WTO rules and industrial policies
– Competence and political authority of governments
South-South Trade and Economic

Integration: Looking Outward and
Inward
• Regional trading blocs (economic unions) & the
globalization of trade
– NAFTA (North American Free Trade Agreement)
– MERCOSUR (Mercado Común del Sur OR
Southern Common Market)
– SADC (Southern African Dev’t Community)
– ASEAN (Association of Southeast Asian Nations)
– Local conditions matter
– Do blocs promote growth or retard the progress of
globalization
8
8/25/2010
Does international trade and

openness really reduce
poverty?
Benefits of trade
liberalization:
1. Leads to cheaper imports, thus lowering production
costs
2. Leads to growth in industrial sector.
3. Leads to greater returns to capital and to skilled labor.
4. May lead to lower domestic prices, allowing poor to
consume more.
5. Affects regional/ national income growth, which may
indirectly affect poverty inequality by giving governments
more resources to use on social spending.
6. Does not directly affect poverty inequality.
9
8/25/2010
Consensus view:
1. Trade liberalization was part of the strategies of many
new successful economies. However, it was not the
most important part of their strategy.
2. Many nations (China, Korea, India) started by protecting
their industries first before liberalizing trade.
3. Some nations (Vietnam) have relatively closed
economies, yet are growing well.
4. Many nations which are open to trade still experience
high income inequality.
5. Trade liberalization generally affects national or regional
growth, but not income inequality.
6. More important factors are committed government, good
infrastructure, innovation, and increasing returns to
private investors.
Consensus view:
7. Each country should be allowed to pursue country-
specific strategies which could best suit them.
8. Governments should use a mix of direct and indirect
taxes to compensate for the loss of revenues from tariffs.
9. Trade rules should favor the least developed countries
for now. Trade rules should also allow for diversity.
10. Openness to trade and investment should be done
eventually, but only after a country has developed its
domestic business environment. This will allow
countries to have better terms of trade.
11. Protectionism should be encouraged, at least while a
country is still developing.
12. Market access is important.
10
8/25/2010
Financial Crisis
• What are the key impacts of the crisis?

• What are the transmission mechanisms?
• To what do you attribute the resilience of the
Asian countries?
Understanding the underlying reasons for the improved resilience:
First, Asian economies on the whole have built more shock absorbers and
reduced the number of shock amplifiers in their economies
Stronger Financial Sector

Political Stability
Improved Regulatory Policies
Second, increased diversity of demand helped some Asian economies as

well
Domestic demand drivers helped diversify sources of demand
Third, improved macro-economic policy regimes including substantially

improved central bank credibility contributed to greater resilience
Fourth, while not apparent from the data, we also believe that the supply
side forces unleashed by economic reforms have lent substantially
greater economic growth momentum to many economies
This higher momentum makes it more difficult for an external shock to throw
an economy off a growth track.
11
8/25/2010
Incomplete “decoupling”: Multiple mechanisms link Asia to global markets

Impact of the crisis to Asian economies

Different key transmission mechanisms and
explanations Phase 1A & 1b
12
8/25/2010

explanations Phase 2A

explanations Phase 2A cont.
13
8/25/2010

explanations Phase 2B
Foreign Direct Investments: Role of

FDIs in developing countries
--GROUP 3
• Fill the gap between desired investment &
domestically mobilized saving
• Increase the tax revenues
• Improve management, technology, & labor
skills in host countries
• Break the vicious cycle of underdevelopment
• Great sources of capital
14
8/25/2010
Importance of FDIs
1. Source of capital
2. Avoid foreign government pressure on
local production
3. Circumvent trade barriers
4. Making the move from domestic export sales
to a locally-based national sales office
5. Capability to increase total production capacity (access to
new technology, products, skills and financing)
6. Opportunities for co-production, joint ventures with local
partners, joint marketing arrangements, licensing, etc;
Costs of FDI
1. Reinforcement of dualism
2. Consumption of luxury goods
3. Capital intensive techniques
4. Displacement of indigenous production
5. High travel and communications expenses
6. The differences of language and culture
7. Chance that a company may lose out on its
ownership to an overseas company.
15
8/25/2010
Impacts on poverty / economic

growth
Indirect
• economic growth which results in the
improvement of living standards due to the
increase in GDP, improvement of technology
and productivity, as well as the economic
environment.
Direct
• Increase in employment and the reduction of
people living below the poverty line resulting
from the increase in the demand for
employment, and the improvement of
workforce and safety nets.
Determinants of FDI
16
8/25/2010
Foreign Aid
• How important is foreign aid for developing

economies in relation to their other sources
of foreign exchange receipts?
• What is the impact of foreign aid on
economic growth?
• Does foreign aid cause adoption of harmful
economic policies?
Development Planning
Planning is more than just the formulation of quantitative

economic targets. It is often described as a process. What
is meant by planning process and what are some of its
basic characteristics? Refer to the Philippine case.
Examine the key components of the Phil. Development
Plan.
Why is development planning necessary?
What features of the political process make effective
development policymaking so difficult?
Why is development participation not used more often
despite its potentially decisive role in ensuring the success
of development policies?
17
8/25/2010
! "
Decentralization: Key points & lessons – Group 6
#
#
$ #
%
%
#
18
8/25/2010
Decentralization: Key points & lessons – Group 6
#
&
'
(
'
#
) *
+
The Growth Controversy:

Critical Questions
• What is the extent of relative inequality,

and how is this related to the extent of
poverty?
• Who are the poor?
• Who benefits from economic growth?
• Does rapid growth necessarily cause
greater income inequality?
19
8/25/2010
The Growth Controversy:

Critical Questions
• Do the poor benefit from growth?

• Are high levels of inequality always
bad?
• What policies can reduce poverty?
• What’s so bad about inequality?
The Range of Policy Options:

Some Basic Considerations
• Areas of intervention
– Altering the functional distribution
– Mitigating the size distribution
– Moderating (reducing) the size distribution at
upper levels
– Moderating (increasing) the size distribution at
lower levels
20
8/25/2010
The Range of Policy Options:

Some Basic Considerations
• Policy options
– Changing relative factor prices
– Progressive redistribution of asset ownership
– Progressive taxation
– Transfer payments and public provision of
goods and services
Summary and Conclusions: The

Need for a Package of Policies
• Policies to correct factor price distortions

• Policies to change the distribution of assets,
power, and access to education and
associated employment opportunities
• Policies of progressive taxation and directed
transfer payments
• Policies designed to build capabilities and
human and social capital of the poor
21

Review: International Trade and Finance: Some Key Issues

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Review: International Trade and Finance: Some Key Issues

Uploaded by

Copyright:

Available Formats

8/25/2010

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-1

International Trade and

Five Basic Questions about

The Importance of Exports to

• Importance of exports to developing

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-4

Demand Elasticities and Export

• Low income elasticity of demand for primary

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-5

The Traditional Theory of

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-6

The Traditional Theory of

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-7

The Traditional Theory of

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-8

The Critique of Traditional Free-Trade

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-9

Some Conclusions on Trade Theory

• Trade can lead to rapid economic growth under

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-10

Trade Strategies for Development:

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-11

Trade Strategies for Development:

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-12

Trade Strategies for Development:

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-13

Trade Optimists and Trade Pessimists:

• Trade pessimist arguments

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-14

Trade Optimists and Trade Pessimists:

• The industrialization strategy approach to export

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-15

South-South Trade and Economic

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-16

Does international trade and

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-17

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-18

• What are the key impacts of the crisis?

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-21

Understanding the underlying reasons for the improved resilience:

Stronger Financial Sector

Second, increased diversity of demand helped some Asian economies as

Domestic demand drivers helped diversify sources of demand

Third, improved macro-economic policy regimes including substantially

Incomplete “decoupling”: Multiple mechanisms link Asia to global markets

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-23

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-24

Different key transmission mechanisms and

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-25

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-26

Different key transmission mechanisms and

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-27

Foreign Direct Investments: Role of

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-28

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-29

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-30

Impacts on poverty / economic

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-31

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-32

• How important is foreign aid for developing

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 12-33