VII. B Trade and Development andVII.C . Primary Commodity Trade

ECON 3508 November 30 and December 2

(Source: See 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; 1940s; 1950s; 1960s and 1970s;

1980s and 1990s; 2000s and 2010s ??

I. Introduction, cont’dSome Specific Questions

• Does international economic integration via trade simply intensify the exploitation of people in developing countries?

• Are Multinational enterprises the principal beneficiaries?• 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 “globalization” making those left behind worse off?• Is an integrated international economic system more

vulnerable to crisis and collapse?• Is China playing by the rules of the game?

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

1. Most Basically: Exports • earn foreign exchange, • permit imports, • permit technological transfer, • generate jobs and incomes, • Generates tax revenues, & finances social programs• support infrastructure development

2. Exports enable technological transformation: – from exports into imported capital equipment that could

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

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

3. “Vent for Surplus” idea, Adam Smith4. Comparative Advantage (D. Ricardo)5. “Productivity Theory”: (Dynamic)

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

6. Product Cycle approach: • DMEs do the R&D, become the first producers, • Other countreies learn the technology, become lower

cost producers and capture the market. • Example: China woith almost all products, now computers

and aircraft.

4. Comparative AdvantageBasic idea:• Countries have different “factor endowments” (range and

qualities of natural, human and capital resources)• The production of different types of product require different

types of land, labour and capital.• Countries should focus their resource allocation on those

products for which they have a comparative advantage.• Unfettered or “free” trade will lead to countries producing those

products for which they have a comparative advantage• All trading partners will gain if countries focus on, and export

those products for which they have a comparative advantage.

NOTE: Omit the graphical analysis of p. 616, Figure 12.1

Problems with the Comparative Advantage Theory

1. All the problems of primary commodity trade (examined below)

2. Agglomeration economies and increasing returns to scale can lead to concentrations of production in certain locales.

3. Monopoly and oligopoly market control can limit spread of technologies and production processes to other countries.

4. Multinational corporations can shape the international division of labour and patterns of production worldwide

5. Who receives the gains from trade? Local citizens, foreign enterprises, foreign workers, foreign land-holders?

6. The enclave character of some foreign-owned export activities may lead to the expatriation of profits with minimal linkages to the nation where they are located.

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

There are Numerous Problems re trade:– Over-dependence on single export products and

vulnerability to international business cycle– Price volatility for many export products– Declining Terms of Trade ??– Low income elasticities of demand for some

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

– “Enclave character” of some export activities – Protectionism in high income countries: tariff & non-

tariff barriers; Still relevant? Only partly

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 re Impacts of Trade on Development:

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 later below)

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

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, not captured by LDCs

Limited but harness-able because tech is simple,

"Forward" (output processing)

Processing (beyond smelting) usually "market-oriented“, not captured by most LDCs

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 in LDCs

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

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 problems:

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

2. Price Instability => Foreign Exchange Volatility

– 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

2. Price Instability Causes: Supply and Demand Explanation: Graphical explanation, IN CLASS

An Empirical “Short term” Supply Curve for Copper

Source: World Mine Cost Data Exchange

An Empirical “Short term” Supply Curve for Petroleum

• 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 “Prebisch Singer Hypothesis”)

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;Explain

2010-2013: price recovery;Explain

2014-2015, renewed reductionsExplain

Problems of Primary Commodity Trade, 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.

4. The Paradox of Plenty aka “Resource Curse”

Variations:From “Dutch Disease”

with impacts via exchange rate and perhaps pricesNetherlands and North Sea Gas; Alberta and Canada with oil and gas ?

To “Oil Economy Syndrome” with extreme economic impacts

(Saudi Arabia and other oil producers)

To “Resource Wealth Curse”with economic impacts plus political impacts

(Chad, Venezuela?)

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

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”

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. Norway, 1990-2013; Canada in the 1950s,)

• Major oil exporting countries such as Saudi Arabia, UAE, 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”

• Alberta and Canada, in 2006-2008 and 2014-2015 with tar sands and oil prices

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

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 agricultural

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

• Protectionism among developing countriesGenerally, the severity of this problem has diminished with general trade liberalization