EconDev Module2

• Inadequate fund management system

  -unable to efficiently handle and

  disburse the massive inflows of foreign funds
• Ineffective sterilization of capital inflows

  -sterilization mechanism that

  could have been used to choke off some of the excess demand generated by the influx of capital was constrained by thin markets for government securities and a fixed rate.
• Restrictions on foreign

  -does not encourage the entry of foreign firms providing financial services. Financial sectors were less “internationalized” in

  terms of competition from financial providers based in other countries.
• Nonperforming loans

  -banks made many risky loans. Supervision and regulation of the financial systems in these countries were inadequate.
• High cost of financial service

  -the combination of devaluation and stock market collapse that exposed the financial sector to severe balance sheet

  problems.
• Balance sheet

  -the extent of balance sheet troubles is difficult to measure

  without careful country-to-country analysis.
• Rapid growth in current-account deficit

  –As the boom of the early 1990s progressed, account deficits also grew as offshore borrowing

  increased. While exports were growing rapidly, these current-account deficits were viewed as a positive sign that growth-enhancing and capacity-expanding investments were taking place.
• Overvalued exchange-rate

  -the exchange rates for

  most Asian currencies were loosely tied to the US dollar. The Philippine peso moved more but not beyond a band of 25-27 pesos per US dollar.
• Collapse in export

  -1996, export growth performance fell substantially, particularly from 1995 when exports had been performing spectacularly. Devaluation, rising wages, the decline of activity in the computer-chip market and computer-peripheral markets in the industrial industries are the possible causes
• The Jamaican economist and Nobel Prize winner, Arthur Lewis developed the first two-sector model which attempted to capture interaction between a

  traditional agricultural sector and a modern industrial sector for a developing economy.
• John Fei and Gustav Ranis built upon the work of Arthur Lewis a decade later
• The model Gustav Ranis and John Fei developed is often called the Lewis-Fei-Ranis model
• Lewis-Fei-Ranis Model

  there may be traditional characteristics in the informal sector of the urban economy.
• Lewis-Fei-Ranis Model

  there may be modern agricultural processing industries in the countryside.
• Lewis-Fei-Ranis model

  -The essence of the model is to contrast traditional agricultural methods and rural social organization, which revolves around family enterprises, with the modern industrial sector where workers earn wages and industrial goods are produced
• The interaction between the industrial and rural sectors can be studied using the concept of backward and forward linkages
• If direct backward linkages are

  strong, when an industry grows its suppliers also grow.
• Indirect backward linkages are the secondary effects which growth in an industry has its own suppliers.
• Industries that have strong backward linkages have low value-added and a large input from local suppliers.
• General industries with strong backward linkages include leather, clothing, textiles, food and beverages and paper
• The lowest backward linkages are in agriculture, public

  utilities, mining and services.
• Labor-intensive manufacturing industries have the highest linkages, while primary industries have the lowest.
• Forward linkages tell us how a product is related as an input into the production of a product at the next stage-textiles into apparel, for example, or petroleum into plastics.
• Forward linkages are a good indication of the extent to which an economy can upgrade its industrial base by using its existing expertise and resource base.
• As part of the process of industrialization, there will be a change in the production process as relative prices of factors change.
• In the early stages of

  industrialization, countries have limited capital and plentiful labor.
• Labor-intensive technologies may be appropriate in a poor

  country with plenty of low-skilled and cheap labor
• Economies of scale come into play when a country is exporting, or when production is taking place on a large scale for the domestic market.
• Economies of scale

  -This enables companies to operate at the low point on their cost curves.
• it may be difficult to reach a competitive plant size if production is intended for the domestic market alone.
• The standard for measuring the efficiency of an industry is to use the price of imports.
• Sometimes a tariff is imposed to keep out cheaper foreign products through infant industry protection.
• Exports are critical in explaining productivity gains in the Asian economies.
• large countries with low industrial concentration ratios, efficiency rates are low.
• Firms financed by foreign direct investment (FDI) are, other

  things being equal, more efficient than their domestic counterparts.
• To be more efficient, firms should be competitive internationally
• When technical progress is labor-intensive, it will help employment
• When technical progress is capital-intensive, it will retard the growth in employment.
• Innovation requires a creative

  process of abandoning old ways of doing things and the adoption of new methods and processes.
• Innovation

  -To do this effectively and dynamically requires the

  ability of the economic system to facilitate the exit of inefficient companies and the entry of new and more productive ones.