Trade & Development II: - PowerPoint Presentation

Slide1

Trade & Development II:Economic Reform

International

Political Economy

Prof. Tyson RobertsSlide2

Brief history globalization & development

Mercantilism (1500s-1700s)

Classical liberalism (1800s– early 1900s )

World Wars & interwar period (1914-1945)

Breakdown of free trade system, nationalist, fascist & communist movements

Structuralism, ISI policies

Embedded Liberalism (1945 – 1970s)

Bretton Woods institutions: WTO, IMF, GATT

“Big Push”

Neoliberalism (1980s-2000s)Slide3

Causes of Shift from Structuralism to Neoliberalism

Economic imbalances from ISI

East Asian countries with export-oriented policies outperforming other developing countries

Financial crisis in late 1970s/early 1980s forces developing countries to reform – World Bank & IMF push neoliberal reformsSlide4

$2

$1

$1Slide5

Assume the world equilibrium price for cocoa is $2. How much would Ghana cocoa farmers be willing to produce?

Price of cocoa

3

2

1

2

6

4

S

C

D

C

Quantity of Ghanaian CocoaSlide6

Assume the world equilibrium price for cocoa is $2. How much would Ghana cocoa farmers be willing to produce?

Price of cocoa

3

2

1

2

6

4

S

C

D

C

Quantity of Ghanaian CocoaSlide7

How would cocoa farmers respond if the government sets the producer price at $1?

Price of cocoa

3

2

1

2

6

4

S

C

D

C

Quantity of CocoaSlide8

How would cocoa farmers respond if the government sets the producer price at $1?

Price of cocoa

3

2

1

2

6

4

S

C

D

C

Quantity of CocoaSlide9

Ghana’s producer price was consistently below the international price from the mid-1950s – 1980sSlide10

Cocoa production held up ‘til ~1970 (trees), then fell for 15 years

Cocoa production dominance switched hands from Ghana to Cote d’Ivoire (where producer prices were higher)Slide11

Overvalued exchange rates and industrialization

Why would an overvalued exchange rate facilitate industrialization?

How would the market-based response of manufacturers, farmers, international traders, or bureaucrats undermine development?

Use supply and demand diagramSlide12

12

Number of Dollars

S

$

D

$

Overvalued exchange rates (which makes foreign currency cheaper) lowers costs of imported capital good and inputs

Cedis

per $

Fewer dollars needed to buy foreign goodsSlide13

13

Number of Dollars

S

$

D

$

But overvalued exchange rates (which makes foreign currency cheaper) makes domestic goods more expensive

Cedis

per $

Fewer foreign buyers want to buy more expensive exportsSlide14

14

Number of Dollars

S

$

D

$

Demand for foreign currency exceeds supply of foreign currency => shortage of foreign currency, opportunity for rent seeking

Cedis

per $Slide15

What policies need to accompany overvalued exchange rates for ISI to work?

Trade barriers on manufactured goods

Tarriffs

, import quotas, etc.

But…

If the state is weak, government officials corrupt, exceptions will be made for the politically connected

As global trade increases, increasingly difficult to target trade barriersSlide16

Results of State Intervention Policies

1960s-70:

High government spending, commodity prices enabled growth

Debt build-up

State intervention + weak state => Poor governance, corruption, inefficient firms, etc.

1979:

Increase in interest rates & oil prices, global recession, fall in commodity prices => crisisSlide17

1970s & 1980s: Latin America & Africa: Good to Flat

East Asia Booms

GDP/capita

growth

1960s

& 70s

1980s

Latin America

2.3%

-0.3%

Sub-Saharan

Africa

1.4%

0.2%

Middle East & N. Africa

3.7%

-1.3%

East Asia

5.2 %

5.0%

South Asia

1.2%

2.0%Southeast Asia3.1%

3.3%

Source: pwt_grgdpch for countries with

pwt_pop>1000Slide18

Some lessons from “Asian miracle”

Macroeconomic stability promotes investment in capital & education

Low inflation encourages savings & investment

Competitive exchange rates promote investment in manufacturing

High domestic savings enables little foreign borrowing

Low budget deficits enable private borrowing & signal stable tax ratesSlide19

Some lessons from “Asian miracle”

Export orientation enables sustainable economic growth

World market enables economies of scale

World competition force improvements in efficiency

Foreign currency earnings reduce risk from global financial crisisSlide20

Why would governments continue to pursue ISI policies when they result in trade & budget deficits & stagnant growth?

Winners from ISI policies oppose economic reform

ISI policy supporters can solve collective action problems more easily than reform supporters

Urban vs. rural

Private goods vs. public goods

Government vs. private citizens

Reform becomes possible when benefits from ISI are exhausted Slide21

Shift in economic development paradigm

Post-independence:

Problem: Lack of capital, market failures (poverty trap, etc.)

Solution: Aid and state intervention

Post-debt crisis:

Problem: State intervention created inefficiencies

Solution: Conditional aid to encourage withdrawal from state intervention to allow market forces to workSlide22

Washington Consensus

Fiscal discipline

Shift public spending from subsidies & bureaucracy to health, education, infrastructure

Tax reform

Liberalize interest rates

Competitive exchange rate

Trade liberalization

Liberalization of inward investment (e.g., FDI)

Privatization

Deregulation

Property rights Slide23

Neoliberalism success?

Many studies find structural adjustment policies did not increase growth

Pro-neoliberal argument

Short term downturn followed by growth

Strict application of SAPs did lead to success

Anti-neoliberal argument

Macroeconomic stability & trade helps, but…

The state still plays an important role

“Keep the windows open, but don’t forget the mosquito screen” Slide24

Post-Washington Consensus ?

Underinvestment in education & healthcare has human & economic costs

IMF/WB response: PRSPs

Neoliberal policies don’t necessarily => growth

“Good” policies with weak institutions => poor results

Order of reforms matters

The state plays an important role in development

State is necessary to create efficient markets, etc

.

Developmental industrial policies can work

if

there is sufficient state capacity & good governanceSlide25

An example of state-facilitated markets:Singapore’s healthcare system

Universal healthcare coverage

Spends 4% of GDP on healthcare (vs. 17% in US)

1/3 of healthcare expenses paid by individuals (vs. 1/10 in US) => encourages price competition

Ministry of Health publishes hospital price information

Healthcare savings accounts mandated by government (20% of wages by employees, 13% by employers)

Gov’t-

provided safety net for the

poor

Gov’t subsidizes

80%

of costs in acute care

hospitalsPublic sector provides 80% of acute care; private sector provides 80% of primary careSlide26

Conclusions

ISI

did

enable industrialization

Some argue that this laid the groundwork for future growth for some successful economies

For many others, ISI created imbalances that undermined later growth, especially if…

Secondary ISI instead of export substitution

Weak state (captured by uncompetitive interests)

Low state capacity (bureaucratic quality, etc.)Slide27

Conclusions

Long-term growth appears to be facilitated by

Integration in the world trade market (but not

too

open?)

Pro-export policies in agriculture and/or replacement of ISI with export orientation

Stable macroeconomic policies (inflation, exchange rate, budget deficit)

State capacity, investment in education, public

health, infrastructure

, R&D, etc. Slide28

Midterm Prep

Review readings & lecture slides

Self-test using reading quizzes

Self-test using class exercises (in slides) & problem sets

Cheat sheet: index card, double sided, handwritten

Get lots of sleep, bring a drinkSlide29

Questions?