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Intl Micro

by: Madie Schinner

Intl Micro ECN 160A

Madie Schinner
GPA 3.57


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This 8 page Class Notes was uploaded by Madie Schinner on Tuesday September 8, 2015. The Class Notes belongs to ECN 160A at University of California - Davis taught by Staff in Fall. Since its upload, it has received 32 views. For similar materials see /class/191898/ecn-160a-university-of-california-davis in Economcs at University of California - Davis.


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Date Created: 09/08/15
Lecture 10 Trade Policy in Developing Countries Introduction I There is a great diversity among the developing countries in terms of their income per capita I Why are some countries so much poorer than others The belief that the lg to economic development was creation of a strong manufactuqu sector Creation of a strong manufacturing sector requires active public policy including that of protection from international competition TABLE 104 Grnss Dnmestic Product Per Capila 2003 dollars United States 376 Japan 345 Germany 25250 Singapore 21230 South Korea 120 Mexico 6230 China 1100 1 India 530 Source World Bank Gains from Trade are not large and have a level effect versus growth effects How Big are the Costs of Protection Net National Loss from protection as a percentage of GDP 2 X tariff rate t X percentage change in imports X import share of GDP 2XtXAMXMGDP Let s Suppose t10 Will result in 20 reduction in M and that MGDP 10 Then NNLGDP 05 X 010X 02 X 010 01 of GDP not very large TABLE 92 Estimated Cost of Protection as 8 Percentage nl National Income Brazil 966 95 Turkey 1978 54 Philippines 1978 54 United States 1983 026 Sources Brnzii Bela Balussa The Sll39ur lure qumrecrian in Develaping Countries Bah limore The Johns Hopkins Press l97i Turkey and Philippines World Bank The World DEl elIIllleIll qun I 987 Washington DC World Bank 1987 Unltcd Slates David Tar and m ris E Morkrc AggrL39galu Cz m the United Slam ufTurijfv Hill Qilt ll m Irvmm Washington 1313 Federal Trade Commission I984 C A Economic Growth and International Trade I Using trade policy how can a developing country achieve income per capita in advanced countries I Free trade would increase GDP 10 at most I Need to industrialize But how By ISI strategy ImportSubstituting Industrialization I ISI has been the most prominent strategy among developing countries I Four arguments are made in favor of ISI 73 L 4 Infant industry argument The developing country argument taxing imports is the only way government can raise revenues for any kind of economic development program such as health education and so forth Cheap information argument Replacing imports of manufacturing is a way of using cheap and convenient market information Large country argument A large organization of countries replacing imports can bring better terms of trade effects than expansion of export industries Also large countries can manufacture in plants large enough to take advantage ofeconornies ofsc e Why not encourage both import substitution and exports ImportSubstituting Industrialization A tariff that reduces imports also necessarily reduces exports Until the 1970s many developing countries were skeptical about the possibility of exporting manufactured goods In many cases importsubstituting industrialization policies dovetailed naturally with existing political biases Table 1072 Exports as 21 Percentage of National Income 1999 Capyngth mu PeusanEnvcath in Brazil 8 India I 1 United States 12 apan ll Germany 27 South Korea 42 I32 202 Singapore Source World Bank World Development Report Washington DC World Bank 2001 Slide mu I Why ISI didn t work the way it was supposed to Importsubstituting industrialization led to 7 High rates of effective protection 7 Inef cient scale of production 7 Higher income inequality and unemployment Example In India after 20 years of economic plans between the early 1950s and the early 1970s its per capita income was only a few percent higher than before TAB LE 103 E ecrive ares oi Protectinn for Manulacruring in India and Brazil India Brazil Lane 19805 126 77 Late 19905 40 19 r A u quotI 39 39 39 39 F on omy of Brazil Since 1987 Working I erAmerican Development Bank 2004 mm Rodrik and Arvind Subrami From 39Hindu Growlh m Produc uvily Sur c The Mystery ofrhc lndmn Grmvm Transrunn Inmmmionnl Mon curry Fund Working Paper 2002 I Change of trade policy orientation Until late 50s Taiwan used ISI but then switched to a policy that encouraged exports and it subsequently achieved growth rates of above 10 per year South Korea used ISI until policy reforms in the early 60s increase its incentive for export and lowered its import barriers Its growth rate increased to about 10 It seems those countries that have emphasized manufacturing exports have experienced a higher growth rate High performance Asian economies HPAEs group of countries that achieved spectacular economic growth In some cases they achieved economic growth of more than 10 per year The Facts of Asian Growth The World Bank s de nition of HPAEs contains three groups of countries whose miracle began at different times 7 Japan alter World War II 7 The four tigers Hong Kong Taiwan South Korea and Singapore in the 1960s 7 Malaysia Thailand Indonesia and China in the late 1970s and the 1980s The HPAEs are very open to international trade xam le In 1999 exports as a share of gross domestic product in the case of both Hong Kong and Singapore exceeded 100 of GDP 132 and 202 respectively I Trade Policy in the HPAEs Some economists argue that the East Asian miracle is the payoff to the relatively open trade regime 7 The data in Table 104 suggests that the HPAEs have been protectionist than other less developing countries but they have by no means followed a policy of complete ee trade 7 Low rates of protection in the HPAEs helped them to grow but they are only a partial explanation of the miracle TABLE 104 Average Rates of Protection 1985 percent High performance Asian economies 24 Other Asia 42 South America 46 Sub Saharan Africa 34 Source World Bank The East Asian Miracle Economic Growth and Public Policy Oxford Oxford University Press 1993 p 300 Inward versus Outward orientation laissezfaire or free trade Tradables Nontradables and PPF QNT Gov Expenditure T gt PNTT gt RERi gt QTiamp QNTT l Nontradables RER NERPTWPNT RER NERPTWPNT Because of less Trade QT QT QT Tradables QNT T QNT Y RER Real Exchange Rate PTW PNT Ratio of tradebales at world prices PTW evaluated at domestic currency to domestic price of nontradable PNT NER Nominal Exchange Rate of domestic currency per unit of foreign currency Inward Orientation a mover towards the nontraded goods Policies that leads to RER Appreciation ie Ifa country print in u 39 439 the hinhtvt level A L39 mm mm fall in the value ofRER this is called RER apprzcmtmn This causes resources to of tiadables and an increase in the production of nontradables Some userul terminology Impartrsubs tllulmg policy ERmepmahhs gt ERPEXW This policy is also called lnward rlzntzd policy Here there is a bias against the tradable sector In exportrpmmotmg policy ERPrmmaos impapanies gt0 This is also called outwardrmlzrltzd policy Here there is a bias against thc productlml ofrltm tradables im r trade policy In laissezfaire momma ERPEWM 0 re are no policy distortions within the entire economy growth promoting Do these sectors have positive externalities Does freer trade promote higher economic growth The data says there is no relationship between the two rig elt Purm sinciatinn lat menGml llmldllupnl1DlIicl 05203 Gram luiiwiiiiai pail 7054752 mass 514731 import duties as so DHWDGHS I Growth and trade Policy Do countries with lower policy induced barriers to international trade grow faster once other relevant country characteristics are controlled for The answer is it depends In particular the answer varies depending on whether the forces of comparative advantage push the economy39s resources in the direction of activities that generate long run growth via extemalities in research and development expanding product variety upgrading product quality and so on or divert them from such activities Grossman and Helpman 1991 Feenstra 1990 Matsuyama 1992 and others have worked out examples where a country that is behind in technological development can be driven by trade to specialize in traditional goods and experience a reduction in its longrun rate of growth Such models are in fact formalizations of some very old arguments about infant industries and about the need for temporary protection to catch up with more advanced countries Implication For achieving higher growth rates identify and protect industries with positive extemalities I Industrial Policy in the HPAEs Several of the highly successful have pursued industrial policies from tariffs to government support for research and development that favor particular industries over others Most economists have been skeptical about the importance of such policies because 7 HPAEs have followed a wide variety of policies but achieved similarly high growth rates I Ranging from detailed government direction of the economy in Singapore to virtual laissezfaire in HK South Korea deliberately promoted the formation of very large industrial rms Taiwan s economy remains dominated by small family run companies 7 The actual impact on industrial structure may not have been large I There is little evidence that countries with explicit industrial policies have moved into the targeted industries any faster than those which have not 7 There have been some notable failures of industrial policy I For example from 1973 to 1979 South Korea followed a policy of promoting heavy and chemical industries chemicals steel automobiles and so on This policy proved to be very costly and was eventually judged to be premature and was abandoned I Beason and Weinstein REampS 1996 compare 13 different industries in Japan and ask whether the industries that bene ted from government support performed better or not The study shows that the support primarily went to slow growth industries and those industries that grew quickly typically did so with relatively little government help It makes sense to support industries with positive extemalities but in practice it is difficult to identify them and to implement effective policies This is by no means a settled debate I Other Factors in Growth 0 11 of K7 1 10 n 1 Two factors can explain the rapid growth in East Asia 7 High saving rates 7 Rapid improvement in public education The East Asian experience refutes that 7 Industrialization and development must be based on an inward looking strategy of import substitution 7 The world market is rigged against new entrants preventing poor countries from becoming rich FDI Multinationals and growth Do multinational corporations promote of hinder growth 7 Depends on how they are employed They help transferring marketing production and managerial knowhow that otherwise the country did not have access to But this is not an automatic process MNCs do not want to share their knowhow information if they do not have to If the receiving country does not actively seek the transfer of technology FDI is not necessarily growth promoting A I 39 390 Optional Gains from trade are much more likely when knowledge ows across borders Coe and Helpman 1995 test for the presence of such spillovers using data for the OECD countries Their hypothesis is that if international spillovers occur then the growth rates of countries should be correlated with both their own RampD expenditures and also the RampD expenditures of their trading partners They find that E Total Factor Productivity growth rates at the country level are indeed correlated with own and partnercounty RampD expenditures lending support to the idea that research and development carried out in one country spills over to its trading partners Funk 2001 finds that there is no significant relationship between TFP growth and import weighted RampD expenditures of partner countries However he does nd a sigpificant relationship between TFP and export weighted RampD Jquot of partner countries sunnortin the idea that exporters learn from their customers Keller 2002 has extended the results of Coe and Helpman using sectoral rather than aggregate country data He nds out that the spillovers are quite highly localized For the two closest countries in his sample Germany and the Netherlands one dollar of RampD expenditure in Germany has 31 of the impact on Dutch productivity as does one dollar RampD expenditure in the Netherlands The effects of foreign RampD are lower for all other countries for example the relative effect of American RampD on Canada is only 4 of the value of Canadian RampD on its own productivity So Keller s results provide evidence of RampD spillovers across borders that are precisely estimated but M Branstetter 2001 p 75 finds that spillovers are primarily infra national in scope There are some regressions where Japanese firms benefit from the weighted RampD activity of American companies but this effect does not remain significant when the domestic spillovers are included in the regression Conversely there is no evidence that American firms benefit from the RampD activities of the Japanese This raises the idea that in 39 Ag till v may be J 39 and presumably ow from the most technologically advanced country outwards In other work Branstetter 2000 has explored whether Japanese firms that have foreign affiliates in the Us act as a conduit for knowledge ows ie whether there is a greater spillover between these foreign affiliates and other American firms It appears that this is indeed the case so that foreign investment increases the ow of knowledge spillovers both to and from the investing Japanese firms Summary Trade policy in lessdeveloped countries is concerned with two objectives promoting industrialization and coping with the uneven development of the domestic economy Government policy to promote industrialization has often been justified by the infant industry argument Many lessdeveloped countries have pursued policies of importsubstituting industrialization These policies have fostered highcost inefficient production The HPAEs have industrialized not via import substitution but via exports of manufactured goods


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