trade, development and growth aofinance ts

8/9/2019 Trade, Development and Growth AoFinance TS

http://slidepdf.com/reader/full/trade-development-and-growth-aofinance-ts 1/116

TRADDEVELOPMENT & GROW

Presented by:LIM SS (Jef)

+84 123 661 28! "efe#$%'6*'%-.



RATIONALE

• The overall purpose/goals of the module is tocritically examine the interrelationship betweenthe theoretical rationale for trade and its policyand practice in relation to the issues of

development of growth. This module is designedas a complement to the theories outlined in themodule Economics of International Trade by criticalexamination of the application of Trade theory in

dierent political and economic contextsespecially in relation to the impact of trade ondeveloping countries.



LEARNING O/T0OMES

T. e#5, -#'5'-$ $e, e5e e7'

• The competing perspectives on the role of trade infostering economic development and growth

• The experience of the impact of trade in dierent country

settings

• The evolution of the world trading system

• The challenges facing the world trading system



ASSESSMENT 9OR THE MOD/LE

There is .e assessment for this module

"ne individual in#course essay. The essayhas a maximum limit of $%%% words.

&ou will need to choose from .e of the

following essays



'ims of Essay

The aims of the individual essay are for the student to:

#'chieve a mastery of (ey concepts and theoretical perspectives

#)evelop the ability to apply concepts and theoretical perspectives

to policy problems

#'ppreciate con*icting perspectives on economic issues and to beable to explain them fairly and succinctly

#)evelop s(ills of drafting editing and re#drafting a document tomeet a clearly de+ned word limit

#)evelop good academic techni,ues with regard to referencingendnotes/footnotes and bibliographies.



Essay -

The old Washington consensus is over. Today we havereached a new consensus that we take global actiontogether to deal with the problems we face, that we willdo what is necessary to restore growth and jobs, that we

will take essential action to rebuild condence and trustin our nancial system and to prevent a crisis such asthis ever happening again.” 0ordon 1rown in his closingspeech at the 2ondon 0$% 3ummit in 'pril $%%45

Critically assess the lessons that appear to have been

learned from the critiue of the Washington Consensusand the e!tent to which real progress has been made indeveloping a new consensus for global action in relationto trade, development, growth and nancial stability



Essay $

• 6ow realistic is free trade in the realworld78 9ritically examine thecompeting perspectives about the

role and impact of trade indeveloping countries



Essay

• 9ritically examine the methods usedby successful developing countries inrelation to trade development and

growth and assess the relative rolethat institutions and mar(ets haveplayed8



Essay ;

• In the light of the recent 0lobal<inancial 9risis critically evaluate themain tas(s at both the national and

international level that need to beunderta(en if globalisation is to wor(in such a way as to build an inclusive

world economy8



Le-5#e 1

G.;'5'. Dee.e5



lobalisation ISS/ES



E-..'- Ie

P.e#5$W.# I-.eD'5#';5'.

E-..'- T#e



e D'#'5$ & P.e#5$ 0$-e



Integration of Economies

• T<e '-#e'#e'-e .=e-..'e . e-<

.5<e#• T<e ..#5'5'e

5. ;e ;e 5. ;$ e ' $-.5#$ ' 5<e>.#

• T<e ..#5'5'e=.# ;.# -'5 5. .-5e

$><e#e ' 5<e

Stock Markets are now accessiblefrom anywhere in the world!



Integration of Economies

• Me .';e ;$ – Technology

–

9ommunication networ(s – Internet access

– 0rowth of economic cooperation =trading blocs E> ?'<T' etc.5

– 9ollapse of @communismA

– Bovement to free trade



Trade versus 'id7

Trade has led to massive increasesin wealth for many countries.

• Bee@5 .=T#e – I-#ee

-<.'-e – G#e5e#

.5e5' =.##.>5<

– I-#ee

'5e#5'.e-..'e .=-e

– G#e5e#e.$e5..#5'5'e



Trade versus 'id7

How far does trade help childrenlike these?

• D'5e.= 5#e – I-#ee '

;e5>ee 5<e #'-< 5<e ..#

– D.'-e .=.; 5#e ;$5<e #'-<, .#5<e#<e'<e#e

-.5#'e – L-? .=

..#5'5'e =.#5<e ..# 5. ;e;e 5. <e

--e 5. #?e5–



9orporate Expansion

• M5'C5'..# 5#C5'.-.#.#5'.

(MN0 .# TN0)= businesses witha head,uartersin one country butwith businessoperations in anumber of others.

No matter where you go in the worldcertain businesses will always have apresence.



9orporate Expansion

• 0<#-5e#'5'- – E7'

#eee – L.>e#' -.5

– S.#-' #>5e#'

–

0.5#.' ?e$'e

– 0.5#. .=#.-e'

– G.;e-..'e

ontrolling supplies may be one reasonfor global e"pansion.



9orporate )omination

Shell and Nike#s activities have comeunder severe criticismin some $uarters.

• e$ Ie – De 5. 5<e

e'#.e5

–

E7.'55'. .=;.#

– M...$ .>e#

– E-..'-e#5'.

– N.C#ee>;e#e.#-e

– De 5.-5#e

http://www.sxc.hu/browse.phtml?f=download&id=33120



"ther Issues:

• A--.5;''5$.= G.;;'ee

•

I-#ee ;e5>ee #'-< ..# =e.5e5' 5e##.#'5#e-5'.

• E5<'-#e.';''5$ .=;'e

• Ef.#5 5. #e.e

5#e ;##'e#

There are plenty of people who believe thatglobalisation is a negative developmentprotests at the %& summits pollutionpoverty and concern over %M crops are 'ustsome of the issues.



The Emergenceof 0lobal Institutions

?otable global institutions include

• the World Trade "rgani#ation $WT"% which is

responsible for policing the world trading systemand ensuring that nations adhere to the rulesestablished in CT" treaties – In $%%D -- nations accounting for 4FG of

world trade were members of the CT"

• the &nternational 'onetary (und $&'(% whichmaintains order in the international monetarysystem



The Emergenceof 0lobal Institutions

• the World )ank which promotes economicdevelopment

• the *nited +ations $*+% which maintainsinternational peace and security developsfriendly relations among nationscooperates in solving internationalproblems and promotes respect for humanrights and is a center for harmoniHing theactions of nations



)rivers of 0lobaliHation

• There are two macro factors underlyingthe trend toward greater globaliHation

1. declining trade and investmentbarriers

2. technological change



)eclining Tradeand Investment 1arriers

• &nternational trade occurs when a +rmexports goods or services to consumers inanother country

• (oreign direct investment $(&% occurswhen a +rm invests resources in businessactivities outside its home country

• )uring the -4$%s and -4%s many nations

erected barriers to international trade and(& to protect domestic industries fromforeign competition




• -fter WW&& advanced Cestern countries beganremoving trade and investment barriers

• *nder -TT the forerunner of the CT"5 over -%%

nations negotiated further decreases in taris andmade signi+cant progress on a number of non#tari issues

• *nder the WT" a mechanism now exists for

dispute resolution and the enforcement of tradelaws and there is a push to cut taris onindustrial goods services and agriculturalproducts




• /ower trade barriers enable companies toview the world as a single mar(et andestablish production activities in optimallocations around the globe

• This has led to an acceleration in the

volume of world trade and investmentsince the early -4D%s




0rowth in Corld Berchandise Trade andProduction -4% # $%%



The Jole of Technological 9hange

• The lowering of trade barriers madeglobali#ation of markets and production atheoretical possibility technological

change made it a tangible reality

• 3ince Corld Car II there have been maKor

advances in communication, information processing, and transportation




• 2ower trade barriers enable companies toview the world as a single market andestablish production activities in optimallocations around the globe

• This has led to an acceleration in the

volume of world trade and investmentsince the early -4D%s



The 9hanging )emographicsof the 0lobal Economy

In the -4%s:• the >.3. dominated the world economy and

the world trade picture• the >.3. dominated world <)I• >.3. multinationals dominated the

international business scene• about half the world## the centrally planned

economies of the communist world## was

o limits to Cestern international business

Today, much of this has changed.



The 9hanging Corld "utputand Corld Trade Picture

• In the early 0123s the >.3. was the worldLsdominant industrial power accounting forabout 43.56 of world manufacturing

output

• 1y $%%F the >.3. accounted for only

$%.FG

• "ther developed nations experienced asimilar decline



The 9hanging Corld "utputand Corld Trade Picture

• Japid economic growth is now being experienced byemerging countries such as 9hina 1raHil IndiaJussia etcM

• <urther relative decline in the >.3. share of worldoutput and world exports seems li(ely

• <orecasts predict a rapid rise in the share of worldoutput accounted for by developing nations such as9hina India Indonesia Thailand and 3outh Norea

and a decline in the share by industrialiHed countriessuch as 1ritain Oapan and the >nited 3tates

• 3o companies may +nd both new mar(ets and newcompetitors in the developing regions of the world



The 9hanging <oreign)irect Investment Picture

• The share of world output generated bydeveloping countries has been steadily increasingsince the -4%s

• The stock of foreign direct investment totalcumulative value of foreign investments5generated by rich industrial countries has beenon a steady decline

• There has been a sustained growth in cross#border *ows of foreign direct investment

• The largest recipient of (& has been 9hina



The 9hanging ?ature ofthe Bultinational Enterprise

• The globaliHation of the world economy hasresulted in a decline in the dominance of *.7.rms in the global mar(etplace

–

In -4F ;D. G of the worldAs $% largestB?Es were >.3. +rms

– 1y $%% Kust $; of the worldAs -%% largest non#+nancial B?Es were from the >.3. - werefrom <rance -$ from 0ermany -$ were from1ritain and 4 were from Oapan and F of theworldAs largest -%% B?Es were from developingeconomies



The 9hanging Corld "rder

• Today many mar(ets that had been closed toCestern +rms are open

– The collapse of communism in Eastern Europehas created a host of export and investmentopportunities

– 8conomic development in China has createdhuge opportunities despite continued9ommunist control

–

(ree market reforms and democracy in 2atin'merica have created opportunities for newmar(ets and new sources of materials andproduction



The 0lobal Economyof the Twenty#<irst 9entury

• ' more integrated global economy presents new opportunities for +rms but itcan also result in political and economic

disruptions that may throw plans intodisarray



The 0lobaliHation )ebate

uestion: Is the shift toward a moreintegrated and interdependent globaleconomy a good thing7

• Bany experts believe that globali#ation is promoting greater prosperity in the globaleconomy, more jobs, and lower prices for

goods and services

• "thers feel that globali#ation is notbenecial



'nti#globaliHation Protests

uestion: Chat are the concerns of criticsof globaliHation7

• -nti9globali#ation protesters now turn up atalmost every maKor meeting of a globalinstitution

• Protesters fear that globaliHation is foreverchanging the world in a negative way



0lobaliHation Oobs and Income

• 9ritics of globaliHation worry that jobs in advancedeconomies are being lost to low9wage nations

• 3upporters of globaliHation disagree claiming thatthe benets of free trade outweigh its costs

– Chile some Kobs may be lost the economy asa whole is better o

• 3upporters argue that free trade will result incountries speciali#ing in the production of thosegoods and services that they can produce moste:ciently, while importing goods and servicesthat they cannot produce as eQciently and thatin doing so all countries will gain



0lobaliHation 2abor Policiesand the Environment

•9ritics of globaliHation argue that that freetrade encourages rms from advanced nationsto move manufacturing facilities o;shore to lessdeveloped countries with la! environmental andlabor regulations

•3upporters of free trade point out that tougherenvironmental regulation and stricter labor

standards go hand in hand with economic progress and that as countries get richer as aresult of globali#ation, they raise theirenvironmental and labor standards

– 9#ee 5#e .e .5 e 5. .#e

.5'. ;.# e7.'55'., '5 e



0lobaliHation and?ational 3overeignty

• 9ritics of globaliHation worry that economic poweris shifting away from national governments andtoward supranational organi#ations such as theWT", the 8uropean *nion $8*%, and the *+

• 3upporters of globaliHation argue that the powerof these organiHations is limited to what nation#states collectively agree to grant

–

The organi#ations must be able to persuademembers states to follow certain actions

– Without the support of members, theorgani#ations have no power



0lobaliHation and the CorldAs Poor

• 9ritics of globaliHation argue that the gapbetween rich and poor has gotten wider and thatthe benets of globali#ation have not beenshared eually

• 3upporters of free trade suggest that the actionsof governments have made limited economicimprovement in many countries

– 'any of the world<s poorest nations are undertotalitarian regimes, su;er from endemiccorruption, have few property rights, areinvolved in war, and are burdened by high debt



Le-5#e 2

W<'5. 0.e



T<e -.e5'. >'. ' 5<e F

5<e W<'5. 0.e%

The term =Washington Consensus” was coined in 01>1.• Cashington 9onsensus is considered in a +rst

interpretation as the vision of the Washington main(inancial &nstitutions.

• "riginally the expression Cashington 9onsensus was coined

to capture the wisdom of the Washington9based &nstitutionsthe International Bonetary <und the Corld 1an( and the>3 Treasury5 behind the policies aimed to promotedevelopment in /atin -merica.

• 2ater on it has been applied to all developing and transitioncountries. This approach can be considered the result of the

criticisms made by mainstream economists of developmenteconomics.

• The ten policies prescriptions proposed by Cilliamson arebased on the assumption that competitive euilibriumtheorem can be applied for raising e:ciency of the markets.



• Cilliamson has captured the growing Cashington

9onsensus on what the developing countriesshould do.

• The assumption of the Cashington 9onsensus

was that it was impossible for markets tofunction, or at least to function well, and forindustries to become competitive in the globalmarkets because of macroeconomic imbalances.

• <rom the beginning of -44%s the focus of Corld1an( interventions and prescriptions shifted tomacroeconomic issues in order to:

• 0%?adjust? imbalances $e!ternal decit, 7tatebudget decit%@

• A% and change monetary policies $too

W<'5. 0.e



C'36I?0T"? 9"?3E?3>3: ' 1JIE<3>BB'J&

6ow it is commonly used7

)evelopment strategies based on marketfundamentalism

– EmphasiHing privatiHation liberaliHationand macroeconomic usually meaningprice5 stability

– )ownscaling and minimiHing the role of

government

Problems lie with both what was on theagenda and what was not



3tructural Jeforms

1. Tax reform• It is directed to lower marginal ta! rates and to

broaden the ta! base. This reform was needed alsofor replacing the revenue lost by trade reforms.

• ' good tax reform with the introduction of taxes

based on income was desirable. In many developingcountries tax systems are generally based only onthe introduction or e!tension of B-T $Balue9-ddedTa!%

2. Deregulation• This focused speci+cally on easing barriers to entry

and e!it not on abolishing regulations designed forsafety or environmental reasons or to govern pricesin a non#competitive industry.



3.Financial sector and Interest Ratesliberalization.• The goal was to build an e:cient banking system able

to intermediate internal capital ows eQciently. Thenecessary condition was a normative system ban(ingand contracts rules5. This reform could yield a realsocial bene+t in term of an improved allocation of

investment.• The agenda for nancial liberalisation went broader

than interest rates, to include most importantly theliberalisation of credit ows. 's Ooe 3tiglitH has oftenpointed out it should have needed to be supplementedby prudential supervision if it were not to lead almost

inexorably to +nancial crisis.

4.Trade liberalization• This reform is intended to get rid of uantitative

restrictions and to reduce tari;s progressively.•

The old import substitution policy based on internal+rms rotection brou ht to ineQcienc . "nce

3tructural Jeforms



.!rivatization of "tate o#ned enter$rises• The goal was to rise e:ciency and protability of the

privatised enterprises and to increase coverage andaccess to privatised utilities.

• "f course it matters a lot how privatisation is done: itcan be a highly corrupt process that transfers assets toa privileged elite for a fraction of their true value but

the evidence is that it brings bene+ts especially interms of improved service coverage5 when doneproperly and the privatised enterprise either sells into acompetitive mar(et or is properly regulated.

%. "ecure $ro$ert& rights• This was primarily about providing the informal sector

with the ability to gain property rights at acceptablecost. This protection will allow to obtain credit from theformal sector.

• The goal is to mobiliHe assets and to reduce the cost ofdefending property

3tructural Jeforms



Bacroeconomic Policies

'.Fiscal disci$line•

The goal is to reduce budget decits through a selectivereduction of e!penditures not social expenditures5.

• This was in the context of a region where almost allcountries had run large de+cits that led to balance ofpayments crises and high in*ation that hit mainly the poorbecause the rich could par( their money abroad.

(.Reordering $ublic ex$enditure $riorities• Priority should be given to expenditures with high

economic returns and aimed to improving incomedistribution in a pro9poor direction such as primary health

care, primary education and pro9growth e!penditures infrastructures5.

• This was not intended to cut the total amount ofexpenditures but only to direct them toward the socialones.



). *om$etitive exchange rate• ' devaluation of the e!change rate is

considered an instrument to fostering exportsgrowth.

1+.,iberalization of FDI-s ino#s• 'ccording to the $ gaps model: -5 in a +rst

period trade decit is binding imports arehigher than exports5 in a second period saving

gap is binding saving is higher thaninvestment5.• In the +rst period a foreign in*ow of capital is

needed to accelerating growth.

Bacroeconomic Policies



02"1'2 9"?3E?3>3 '1">T T6EC'36I?0T"? 9"?3E?3>3

The Cashington 9onsensus has provedneither necessary nor su:cient for successfuldevelopment

–

8ven if each of its policies made sense for particular countries at particular times

'ny future consensus cannot be made just inWashington

'ny new framework must provide better andgreater adaptation to the circumstances ofthe countries involved

T6E 9"?TJ'3T 1ETCEE? E'3T '3I' '?) 2'TI?



T6E 9"?TJ'3T 1ETCEE? E'3T '3I' '?) 2'TI?'BEJI9' '?) T6E <J'&I?0 "< T6E

C'36I?0T"? 9"?3E?3>3

>nli(e 2atin 'merica East 'sia did not followCashington 9onsensus policies in some importantrespects. They

- Were slow to liberali#e capital markets

- Were slow to liberali#e trade- -dopted strong government industrial policies,

including creating some successful governmententerprises

Policy dierences account for much of the performancedierences between East 'sia and 2atin 'merica:

# 'ore growth and faster growth

9 )enets of growth more widely shared

9 -nd more stability $the only e!ception being the011D crisis, from



3">J9E3 "< <'I2>JE3

/ie# of the econom&

# Including the relationship betweeneconomic success and political and social

stability/structures 0bectives

- ?ot Kust increases in 0)P

- 1ut achieve sustainable e,uitabledemocratic development



3">J9E3 "< <'I2>JE3

*onfusions bet#een ends and means• The pursuit of rapid privati#ation in the former 3oviet

>nion

– 9ontributed to the enormous increase in ine,uality

– 9ompromised the legitimacy of private rights

– 'nd did not lead to faster economic growth

• Capital market liberali#ation9# supposed8 to lead tomore stability growth

– did not lead to faster economic growth

– but did lead to more instability

–

Even the IB< has begun to recogniHe the problems – Bight have had predicted eects in models with

perfect information and in+nitely lived individuals

• 1ut would not in models with credit rationing and+nitely lived individuals

• Evidence supports latter view



C'36I?0T"? 9"?3E?3>3 '?) E>'2IT&

ustications for ignoring e5uit& - It was argued that one could separate

e,uity and eQciency considerations andeconomics should Kust focus on eQciency

- Trickle9down economics meant that thepoor gain if growth is pursued and attained

- There were really no trade9o;s”9 thesingle best policy would bene+t everyone

9ould essentially leave economicpolicyma(ing to technocrats to +nd that;e5 .'-$



These arguments are neither theoretically or empirically

correct 'odern theories emphasiHe that e,uality and eQciency

cannot be separated

– -gency theory

– The arguments for land reform

•

7harecropping attenuates incentives just as ta!es do Cashington 9onsensus policies did serve the interests of

technocrats

– 'nd established special interests Too much faith in markets

-Even under the best of circumstances there is noreason to believe markets are consistent with social justice

- 1ut even if one did not care about e,uity distributionof income there is an important role for governmentbecause of market failures

PJ"12EB3 CIT6 T6E3E O>3TI<I9'TI"?3



IBP"JT'?9E "< E>IT& 65uit& is an 7end8 in itself

- 0)P a bad measure of success

• 0)P can increase even as the country gets poorer

# 2atin 'merican debt

- Jesource depletion environmental degradation

- 1etter to focus on ??P

- Even better to ta(e account of liabilities

There can be rich countries #ith $oor $eo$le

- 1etter to focus on median income

- Bedian household income in the >3 is declining even

as 0)P increases 65uit& $romotes gro#th and even e9cienc&

– 1etter use of human resources

– 3ocial and political sustainability



B'JNET <'I2>JE3

"ne of the most important +ndings of moderneconomic theory is that with imperfect informationand imperfect risk markets that is @alwaysA thecase5 mar(ets are not eQcient e.g. 0reenwald#3tiglitH5 – 'dam 3mith was @wrongA – The reason the invisible hand often seems

invisible is that it is not there – Exempli+ed by problems of con*icts of interest

herding behavior bubbles that were evident inthe 4%s

• Cith massive misallocation of resources duringthe boom

• 'nd massive losses from under performance ofthe economy after bursting of bubble

– Estimated in excess of R- Trillion

B'JNET <'I2>JE3 I? )ESE2"PI?0



B'JNET <'I2>JE3 I? )ESE2"PI?09">?TJIE3

Eroblems are particularly signicant in developingcountries

Bar(ets also by themselves do not producee:cient outcomes when technology is changing

or when there is learning about markets – S-< $'- #.-ee #e 5 5<e <e#5 .=

ee.e5

– T<e#e #e '.#55 e75e#'5'e ' -< $'-#.-ee

– G'' #'e 5. '.#55 #.e =.# .e#e5

"uccessful 6ast :sian countries recognizedthis role – The Cashington 9onsensus policies did not

3 T6E J"2E "<



3ummary: T6E J"2E "<0"SEJ?BE?T I? T6E E9"?"B&

There is an important role ofgovernment in developing countriesnot only to

- address market failures• 3uch as controlling con*icts of interest

• 'nd ensuring the safety and soundness of the+nancial system

-

promote growth and development• Through education and technology

B5 . 5.- promote euity, provide safety nets

3">J9E3 "< <'I2>JE "< T6E



3">J9E3 "< <'I2>JE "< T6EC'36I?0T"? 9"?3E?3>3

1ecause the Cashington 9onsensus did notunderstand the limitations of markets, itfocused on too limited a set of instruments

It ignored: – 2and reform

– Industrial policies

– 3trengthening the +nancial sector

– Improving education

– 9ompetition policy

– 0overnance issues in both the public andprivate sector



PJ"12EB3 CIT6 B'9J" P"2I9&

Problems re*ected in macro policy an area inwhich it was concerned5

# Too narrow a view of objectiveFcontrollingination

- 0ood policy also loo(s at growth and employment

- 9ontrolling in*ation does not automatically lead to fastergrowth

- 'nd indeed it may hamper long run growth• 2ower 0)P now is associated with lower 0)P long into the

future

-

7tabili#ation and growth policies areinterconnected• Jelying on interest rates in crises limits use of debt

• Cea(ens +nancial mar(ets and impairs eQciency ofallocation of capital



PJ"12EB3 CIT6 B'9J" P"2I9&

Gey role of nance in growth is ignored – Ba(ing credit available at a;ordable terms

– Chat matters is both availability and lendingrate not Kust T#1ill rate5

•

reenwald and 7tiglit#, +ew Earadigm inmonetary economics

• &mportance of reducing T9)ill rates and spreads

• Hegulatory policy, competition policy andstandard macro9economic policy instruments allhave to be employed



• /ip9service to issues of distribution – better safety nets

– or improved female education

• 8mphasis on second generation of reforms – Items left o in earlier agenda

• In particular about governance issues

• 7tep in the right direction

•

1ut does not deal with fundamentalinadeuacies in the current approach

1EC'JE "< C'36I?0T"? 9"?3E?3>3 E/*7

9'3E I? P"I?T: TJ'?3P'JE?9& '?) T6E



9'3E I? P"I?T: TJ'?3P'JE?9& '?) T6EE'3T '3I'? 9JI3I3

• The IB< and the >.3. Treasury while pushing the

transparency agency remained among the leasttransparent of public institutions

• The ;" Treasur& had even resisted reforms in the;nited "tates that #ould have im$rovedtrans$arenc& of accounting frame#or<s in the

;.".= e.g. related to stoc< o$tions

• The last set of countries to be aicted by +nancialcrises 3candinavia5 were among the most transparent

•

Chen the debate about transparency turned toCestern institutions hedge funds and secret ban(accounts the >3 Treasury opposed – >orried about 7 excessive trans$arenc&8 – /etoed ?before )@11A the 06*D initiative on

ban< secrec& .

9'3E I? P"I?T T6E TJ'?3P'JE?9&



9'3E I? P"I?T: T6E TJ'?3P'JE?9&'0E?)'

• >hile continuing to inveigh againstcorru$tion= the develo$ed countrieshave refused to ta<e eas& ste$s that

#ould ma<e such corru$tion moredi9cult

– li(e allowing tax deductions only for paymentsto governments that are @publishedA andadopting other measures such as theextractive industries transparency initiative.5



?EE) "< JE<"JB3

• Heforming the lobal (inancial system – To ma(e it more stable

– To reduce the ris(s facing the developingcountries

• 1y reforming the global reserve system

• 'nd developing better mechanisms for shifting ris(

• &n the global trading system – The sham of the @development roundA

• Perhaps most importantly: in globalgovernance

' P"3T W-7J&+T"+ C"+78+7*7



' P"3T W-7J&+T"+ C"+78+7*7 9"?3E?3>3

• Ce need a new framewor( to guide us in answering both ofthese ,uestions

Eee5 .= 5<e P.5 >ashington *onsensus 0.e

• Im$ortance of e5uit&

• Im$ortance of em$lo&ment

• Balanced role of government and mar<et

– !romoting and regulating mar<ets

– !roviding institutional and $h&sicalinfrastructure

– !romoting education= innovation and

technolog&



B"JE T6'? T6E"J&

The ideas are not Kust of academic importance but areof relevance to every maKor aspect of public policyUevenaecting technical issues li(e how we measure success$E, green E, median income% and measure budgetdecits

Chat we measure aects what we eventually do

:ccounting Distortions

IB< accounting practices continue to put a roadbloc( inthe way of mar(et based land redistribution

'ccounting practices can force8 privatiHations

9"?92>)I?0 JEB'JN3



9"?92>)I?0 JEB'JN3

• )evelopment is possible but clearly not easy

• E,uitable sustainable and democratic developmentmay even be more diQcult

• Policies do matter

• The intellectual framewor( for thin(ing about policies

provided by the Cashington 9onsensus was badly*awed

• There are other frame#or<s

– Core rooted in economic theor&

– :nd historical ex$erience

– >hich= at least in other countries= have#or<ed better

• Faster= more sustainable gro#th

• Core e5uitabl& shared

• These $rovide the basis of the !ost >ashington



Le-5#e 3

0'-

Ne.-'- T<e.#'e

0 ' E ' P '5' E



0'- E-..'- P.'5'- E-..$

The pursuit of economic growth and development as a

socially desirable goal is contemporaneous with the rise ofcapitalism as an economic system and with theemergence of the industrial revolution5.

T>. .;"e-5'e .= classical $olitical economists 'e-..'- ''#$ #e

1. to ex$lain the reasons for ra$id economic

ex$ansion of total economic #ealth thataccom$anied industrialization

2. to ex$lain the enigma of the extreme of #ealthand $overt& that attended this $rocess

Who are the classical $political% economistsI• 'dam 3mith

• Thomas Balthus

• )avid Jicardo

• Oohn 3tuart Bill

• Narl Barx



F

• The classical assumed that capitalism representedthe highest achievement of human development andit was a =natural order.”

– except for Barx and Bill

• eoclassical economists ?after the 1('+sA – 'gainst the radical implications of Barx – shifted the emphasis from the broader

macroeconomics of growth and development to anarrower concern with the allocation of a +xed,uantity of scarce resources to their best use withgiven institutions.

– eQciency as the focus of economics –

more static and marginalist perspective foreconomics – interest in the ,uestion of growth and

development has disappeared from view for ,uitesome time.

A S'5<



:n in5uir& into the ature and *auses of the>ealth of ations= 1''%

• -naly#es the newly emerging economic systemK capitalismor the market economy

• /ikens its operation to the =invisible hand”

-s every individual, .., endeavors as much as he can both toemploy his capital in the support of the domestic industry,and so to direct that industry that its produce may be ofgreatest value@ every individual necessarily labors to renderthe annual revenue of society as great as he can. Jegenerally, indeed, neither intends to promote the public

interest, nor knows how much he is promoting it ...heintends only his own gain, and he is in this, as in manyother cases, led by an invisible hand to promote an endwhich was no part of his intention. $7mith 01D5K 4A5@ CLK03M%

S'5< V'e> .



S'5< V'e> .E-..'- Dee.e5

1asic tenets of 9apitalist production thatfosters 0rowth and )evelopmentaccording to 3mith:

•Competition

• ivision of labor

• Technological progress

•

(ree trade• The law of capital accumulation

T<. M5<



:n 6ssa& on the !rinci$le of !o$ulation= 1')(

• Population grows in a geometric progression while

• 'gricultural output can only increase in

arithmetic progressionV such that• <eeding the population would become

increasingly more e!pensive a tas(

• This would mean misery for a majority of

the population who are poor• The system $capitalism% would end up in a

crisis

D' R'-#.



!rinci$les of !olitical 6conom& andTaxation= 1(1'

• the la# of eventuall& diminishing returns

implications similar to Balthus in terms of thedilemmas of the capitalist growth proces5V yet

• the theor& com$arative advantage

implies free trade through open economies wouldhelp to escape the dilemmas posed by the law ofdiminishing returns.5

Theory which suggests that unrestrictedexchange bet#een countries #ill increasetotal #orld out$ut if each countr& tends tos$ecialize in those goods that it can $roduceat relativel& lo#er costs com$ared to its $otential trading $artners.



R'-#. T<e.#$ .= 0.#5'e A5eA e#'- e7e 5. e7' 5<e '#5e .= =#ee 5#e

A B 5< E P < 3FF FFF ; < 5 5 5 '5<



Ae B.5< E P <e 3FF,FFF ;.# <.# 5. 5#5 >'5<K P#eC5#e ;.5< ''e 5<e'# 5'e e$ ;e5>ee -.5< >'e #.-5'.

P.#5 E

Be=.#e T#e 0.5< W'e 0.5< W'e

P#.-5'. &0.5'.

- -DF - -$%

A=5e# T#e

P#.-5'. % F% %

T#e 0ets-

0ives - 0ives - 0ets -

0.5'. - $%D -F -

G' =#.T#e0.5#$

% W$%D W- W ;-

G' =#.

T#eW.#

Pre trade wine: -$

Post trade wine: F%

Pre trade cloth: -

Post trade cloth: -

9#ee T#e --.#' 5. 0.#5'e A5e



D

Bee@5 A 0#'5'e .= 5<e 0.#5'eA5e T<e.#$ .= 9#ee T#e

• Sery static analysis which assumes that overtime the terms of trade between wine and clothwill remain the same.

– "n the contrary historically what happened

with E and P was that the terms of trade verymuch favored clothV such that E had a de+nitetrade advantage.

– P stuc( with wine production and importingcloth was put in a position of ever increasingtrade de+cit.

• dynamic or created comparative advantage asopposed to static comparative advantage

– the 'sian tigers.

A 0'- M.e .= E-..'-G 5<



G#.>5<A#e5e #.-5'. =-5'.

=(N, L, , T)

where ? X natural resourcesV 2 X laborV N X capitalV T X technolog

subject to the following restrictions f ? f 2 f (Y%V f ?? f 22 f (N Z %then

5 = NN5 + = LL5 + = ? 5 + = TT5

assume 1. dN/dt = 0; dL/dt = q(dK/dt)

where q >0 = the no of works required for each unit of capita;

!. f " = 0;

then rewrite e,.n as

5 ( = L + = ? )5

A 0'- M.e .= E-..'-



D

M A 0'- M.e .= E-..'-

G#.>5<

• The rate of economic growth depends on the rateof physical capital accumulation.

– The faster physical capital accumulates, fasteris economic growth.

• the limit on the rate of growth: diminishingreturns.

– f / decreases as / rises, until eventually the

point when per capita income reaches a steadystate level.

# M#7



*a$ital= 1(%'= 1((= 1()4

•

does not assume capitalism to be immutable ornatural order of society rather one stage of asocietyAs historical development

• capitalism will also ultimately brea( down andevolve into a dierent system

•

agrees with 3mithAs analysis of capitalism as animmensely dynamic system driven by the law ofcapital accumulation characteriHed by division oflabor and technological progress

• yet is critical of the one sided distribution

exploitation of labor by capital85 that results inthe capitalist growth process• a relatively high#level of income per capita in a

capitalist economic environment is a preconditionfor the evolution of a new future economicsystem

Me#-5''5 T<e.#$



Me#-5''5 T<e.#$

• To export is good to import is to be avoided• Chen you exported you receive payment =

currency based on gold standard

• 1est thing to do is export as much as possible

to gain as much gold as possible

• Problem with this theory is that excludes thefact that in some cases it is good to import

•

If you completely refuse to import thepopulation will have to do without certainconsumer items

Traditional Theory of International



Traditional Theory of International Trade

• 9omparative advantage – specialiHation

• Jelative factor endowments and

international specialiHation: the?eoclassical model – Jicardo and Bill static model5

– 6ec(scher and "hlin factor endowment

theory5• )ierent products re,uire productive factors in

dierent ratios

• 9ountries have dierent endowments of factors ofproduction

Trade with Sariable <actor Proportions



Trade with Sariable <actor Proportionsand )ierent <actor Endowments

Trade with Sariable <actor Proportions and



Trade with Sariable <actor Proportions and)ierent <actor Endowments continued5




9opyright [ $%%4

Pearson 'ddison#Cesley.'ll rights reserved. -$#4-

ad o a eo y o e a o a Trade

• Bain conclusion of the neoclassical modelis that all countries gain from trade

• Corld output increases with trade• 9ountries will tend to specialiHe in

products that use their abundantresources intensively

• International wage rates and capital costswill gradually tend toward e,ualiHation

•

Jeturns to owners of abundant resourceswill rise relatively• Trade will stimulate economic growth




y Trade

• Trade theory and )evelopment: The Traditional 'rguments

– Trade stimulates economic growth

– Trade promotes international and domestic

e,uality – Trade promotes and rewards sectors of

comparative advantage

– International prices and costs of production

determine trading volumes – "utward#loo(ing international policy is

superior to isolation

The 9riti,ue of Traditional <ree#Trade Theory in



e 9 ,ue o ad o a ee ade eo ythe 9ontext of )eveloping#9ountry Experience

• The following assumptions of the?eoclassical model must bescrutiniHed:

– <ixed resources full employment andinternational factor immobility

– <ixed freely available technology andconsumer sovereignty

– Internal factor mobility and perfectcompetition

– 0overnmental non#interference in trade




, ythe 9ontext of )eveloping#9ountry Experience

– 1alanced trade and international priceadKustments

– Trade gains accruing to nationals





• <ixed Jesources <ull Employmentand the International Immobility of

9apital and 3(illed 2abor – 9hallenged by ?orth#3outh trade models

– Bichael PorterAs 9ompetitive 'dvantagetheory

– Sent for 3urplus theory





• <ixed <reely 'vailable Technologyand 9onsumer 3overeignty – 9hallenged by the Product 9ycle theory

– )evelopment of synthetic substitutes fordeveloping country exports





• International <actor Bobility Perfect9ompetition and >ncertainty: IncreasingJeturns Imperfect 9ompetition and Issues

in 3pecialiHation – 3tructural realities in developing countries

– Increasing returns and exercise of monopolisticcontrol over world mar(ets

– Jis( and uncertainty inherent in internationaltrading arrangements





• The 'bsence of ?ational0overnments in Trading Jelations – )e+nite role for 3tate

– Industrial policy is crafted bygovernments

– 9ommercial policies instruments taris,uotas5 are state constructs

– International policies can result inuneven distribution of gains from trade





• 1alanced Trade and InternationalPrice 'dKustments –

>nrealistic oil price hi(es of the F%s5





• Trade gains accruing to nationals – Enclave economies are promoted by

trade

– )ierence between 0)P and 0?Ibecomes important

3ome 9onclusions on Trade Theory and



Economic )evelopment 3trategy

• Trade can lead to rapid economic growthunder some circumstances

• Trade seems to reinforce existing income

ine,ualities• Trade can bene+t 2)9s if they can extract

trade concessions from developedcountries

• 2)9s generally must trade

• Jegional cooperation may help 2)9s



Le-5#e 4

W.# T#e S$5e

Chy trade agreements7



Chy trade agreements7

>h& trade agreements existE• 1arriers to trade generate pro+t opportunities: it

pays o to lower barriers.• It is not only the theory of comparative

advantage. 3omeone will always potentially pro+t

from free trade.• The bene+ts of international trade are nothing

else than the bene+ts of exploiting arbitrageopportunities price dierences5

If this is true= #h& free trade is not $ervasive

in the #orldE• 3econd#best arguments for protection: Bar(etfailures are compensated by trade policy

• The government has a sta(e: Electoral and taxearnings.

•

Jedistribution

Preferential trade agreements



Preferential trade agreements

Balance of these forces result in $referentialtrade agreements ?!T:-sA of dierentdegrees.

• (ee trade agreement : groups of countries reduceor eliminate taris or impediments to importsfrom other countries in the group.

• Custom unions: In addition to the previous casecountries co#ordinate to set a common externaltari to imports from the rest of the world.

•8conomic #one: <ree movement of resources notonly merchandises and services.

• !roblem Too many small groupsN. Coordinationfailure

The 9hallenges \ Eects of 0lobalisation



• 2)9s 2east )eveloping 9ountries5 have long been dependenton the developed world

• )eveloped countries are increasingly dependent onthe 2)9s for natural resources and new markets

• ?ational Economies are increasingly integrated

• 2essens power of sovereign states especially for the2)9s

• Imperative for /Cs to band together 0$% 9airns0roup JT's Jegional Trade 'uthority5 PT's Preferential Trade

'greement5M5

• <inancial &nstability $risk of contagion%

• 'igration of /abour internally and externally5

• )evelopment can be evenOuneven both inter and intracountries

9riti,ue of Corld <inancial Trading 3ystem



• @The overall achievements of the mar(et are deeplycontingent on political and social arrangements< $7en, 0111%

• @The discontent with 0lobalisation arise not Kust fromeconomies seeming to be pushed over everything else butbecause a particular view of economics9marketfundamentalism9is pushed over all other views< $7tiglit#,A33A%

• 1iHarrely the only countries to have followed textboo(theory are some of the worldAs wea(est economies forced toopen their borders by the World )ank and the &'(< $enny,A334%

• ?eed for states to nurture education, health and land reform

• 3peed and se,uencing yesM.but structures important as well

• Trade can be bene+cial but only with the appropriateinstitutional framework at the national and supranationallevel

• Hole of states is critical

The 9hallenge 'head



• ?eed for <inancial stability

• -44F 'sian 9risis

• $%%F#$%-- 0lobal <inancial Instability• 2ac( of 0lobal <inancial Jegulation

• <ailure of attempts in >3 and Europe to control the1an(ing 3ystem

• 0lobal structural imbalances• )"6'# a development agenda but collapsed at

9ancun brea(down at 9ancun5

• @The world economy is rapidly fracturing into

discriminatory and overlapping trade arrangementsprobably revolving around >3 E> and 9hina hubsA3ally $%%;5

• Jeform of the International <inancial 'rchitecture#enhanced credit lines

The 9hallenge 'head



The 9hallenge 'head

• )ebt reduction• CT" reform = TJIPs 0'Ts 'griculture

Protectionism in the )eveloped countries

• ?eed to focus on Trade and allow national states

to liberalise on their own terms• 0lobal re#structuring: coordinated macro#

economic responseV >3 raise savings rate#9hinacut it]V climate change and managementV need to

reduce Ine,uality to create and inclusive worldeconomy



)eveloping 9ountries in a

9hanging Trading 3ystem: Issues and9hallenges

Jegarding Industrial Taris

Introduction



Introduction

• 's the )oha )evelopment 'genda of the current CT"

round of negotiations continues many parties haveproposed the elimination of all industrial taris amongCT" Bembers.

• In response some developing countries have raisedthree maKor concerns about free trade in industrial

products.?1A 6liminating an im$ortant source of needed revenue

?2A 6roding existing trade $references

?3A Generating an inabilit& to com$ete #ithout tari $rotection

•

These concerns are understandable, but are largelycontradicted by the empirical evidence. &nstead,gradual elimination of tari;s, accompanied by soundmacroeconomic and scal policies to ensurecontinued a revenue stream, would eliminate asignicant ta! on economic development.

9oncerns 'bout 2oss of <iscal Jevenue



9oncerns 'bout 2oss of <iscal Jevenue

•

eveloping countries do rely on trade ta!es $mainlytari;s% more heavily than developed countries,although this reliance has diminished in recent years.

• In $%%%#$%%- -G of total d.c. revenue vs. -DG in -44-#-44$

• (or many reasons the gradual elimination of tari;s

will likely stimulate, rather than reduce, tari; andother revenue sources.• 3timulates imports via price reductions such that total

tari revenue actually increases: e.g. 0hana Balawi3enegal the Philippines Bexico and many 9aribbeannations.

• Increases trade#law compliance by removing incentives toavoid taxes through smuggling bribery underreportingimport values and misclassifying products for dutypurposes.

• 9reates dynamic economic gains through greater tradeand thus a more eQcient and productive economy whichin turn can enhance a countryAs overall tax revenue basis.

9oncerns 'bout 2oss of Preferences




• Trade preferences might benet certain rmsand industries in certain countries. )ut thebene+t in terms of greater exports is farsmaller than typically assumed.

• Three recent comprehensive studies have all

calculated that comprehensive tari; reductionin preference9granting countries would reduce

developing9country e!ports only very slightlyFcalculated declines in the value of developing9country e!ports are 3.A6, 3.56, and 0.D6.





• 7everal considerations e!plain the very smalldrop in developing9country e!ports from loss of

preferencesFand thus should mitigate concerns.• 03P 0ross 3tate Product5 programs entail high costs of

information compliance and conditionality that must be set

against any bene+ts.• 03P programs often do not cover many (ey products in which

developing countries li(ely have the greatest comparativeadvantages such as textiles and apparel.

• 03P programs often deter countries from their own tradeliberaliHation than(s to entrenched interests of the

advantaged.• 03P programs often supplant more eQcient trade lin(s with

other developing countries that would exist with freer trade. Thus what is good for one developing country in terms of03P#facilitated mar(et access may be bad for another interms of 03P#prevented mar(et access.

9oncerns 'bout Infant Industries8



9oncerns 'bout Infant Industries

• The argument that protection facilitates industrialdevelopment enKoys virtually no empirical support. Insteadtoday there is a large amount of evidence that precisely theopposite is true. /iberali#ation of trade and (& spur the

performance of rms in developing countries through three

important channels. • -ccess to new technology. D%G of all worldwide J\) is conducted in Kust

+ve "E9) "rganisation for Economic 9ooperation and )evelopment5countries a similar fraction is conducted within multinationals.

• -ccess to foreign capital. In recent years <)I has accounted for themaKority of total international funding for developing countries and hasalso been a more#stable source as well5.

• The discipline of product9market competition. There is a strong positivecorrelation between the exposure of developing#country +rms to globalbest practice and the productivity of these +rms.

• 1uild capacity with global engagement not without it.

Cho 6as 0lobal Integration 1ene+ted7



Cho 6as 0lobal Integration 1ene+ted7

• reater global engagement through trade and (&stimulates rm performance and overall growthFindeveloped and developing countries alike. &n recent

years, &T industries provide a clear e!ample of this.• 'alaysia has been liberaliHing its trade for decades including in

-44F by signing the IT'. Today Balaysia is widely regarded asone of the few developing countries that has been highlysuccessful in raising their shares in world manufacturing exportsand value added through participation in global productionnetwor(s such as those in electronics and computers.

• Costa Hica liberaliHed its trade and investment policies muchlater in the -44%s. 1ut since then the country has become

integrated into global production networ(s in multiple industriessuch as IT and medical devices with economy#wide bene+ts thathave been widely noted.

9onclusions



9onclusions

• There is ample theoretical and moreimportantly empirical evidence thatdeveloping countries will gain, not lose,from the gradual elimination of industrialtari;s.

• 9oncerns regarding +scal revenue existingtrade preferences and potential for

industrial development are largely notborne out by the evidence.

trade, development and growth aofinance ts

Documents