ECO DEV

• Autarkic economy


  An economy that can consume only as much as it can produce and only what it can consume, and cannot exploit any economies of scale
• Gains from trade


  • Consumption gains: Reaching higher indifference curves through gains realized by consumers
  • Production gains: Specialization in production of commodities at relatively lower cost due to absolute or comparative advantage, expanded production through economies of scale, and technology transfers
• Absolute advantage


  A country can produce a commodity more efficiently
• Comparative advantage


  A country can produce a commodity relatively more efficiently
• The gains from trade can be broken down into gains from exchange and gains from specialization
• Ricardian theory of trade


  Differences in technology determine comparative advantage, based on units of labor or labor hours required to produce a commodity
• The Ricardian model explains trade patterns by technological or labor productivity differences between countries, and trade is a positive-sum game with no losers
• Heckscher-Ohlin theorem


  Countries will specialize and trade in goods which are relatively abundant, so labor-rich countries will specialize in labor-intensive products while capital-abundant countries will specialize in capital-intensive products
• Poorer countries are expected to export labor-intensive products while richer countries export capital- or skill-intensive products
• Limitations of Ricardian and HOS models

  • Assume perfect competition, factor immobility, identical preferences and production functions, no taxes/transport costs/trade barriers
  • Do not explain significant trade between countries with similar factor endowments or intra-industry trade
• Imperfect competition theory


  Explains intra-industry trade based on differences in relative factor endowments, production differentiation, and relative market size
• International trade volume has grown faster than income in the past 30 years, with East and Southeast Asia's share of world exports now over 20% compared to 12% in 1990
• The role of primary products in trade has declined due to low and falling income elasticity of demand and deteriorating terms of trade, while trade in manufactured goods has risen dramatically
• Trade is often greatest between countries with the greatest differences in economic structures, and factor prices tend to equalize as trade takes place
• Import-substitution trade regime


  A country tries to stimulate domestic production by levying taxes, licensing, quotas or bans on imports to reduce their competitiveness
• Outward-oriented trade regime


  Promotion of exports, starting with labor-intensive products with strong backward linkages and then moving to more skill and capital-intensive industries
• Flying Geese development paradigm


  Describes how less developed countries can catch up by adopting the industries of developed countries, with a life cycle of 5 stages
• Effective rate of protection

  The percentage by which the value-added of a product at a particular stage of processing in a domestic industry can exceed what it would have been without protection
• Exports help economies adopt international best-practice technologies, and the cumulative productivity growth is unlikely to be from domestic efforts alone
• Fallacy of composition


  If all developing countries adopt an export-growth strategy, it could lead to a flood of products into developed country markets and protectionist pressures
• Despite protectionist trade regimes, the Asian "miracle" economies were the most open to foreign technology through duty drawbacks and exemptions
• FDI inflows to Asia have increased significantly over the past two decades, with China, Hong Kong and Singapore accounting for 70% of the region's FDI in 2001
• Education and timing were key factors in how technology was adopted in different parts of Asia, with East Asia having a more educated labor force and higher savings rates
• Technology adoption in different parts of Asia

  • East Asia had an already highly educated labor force, and thus was able to adopt overseas technology either by licensing or purchasing directly
  • East Asia had high saving rates or they borrowed heavily from overseas technology to augment their saving
  • East Asia had very small amounts of foreign direct investment, with the exception of Japanese investments in Korea
• Technology adoption in Southeast Asia

  • Southeast Asia started to industrialize later
  • Southeast Asia had a less well-trained labor force and thus relied on primary exports for foreign exchange revenue to a greater extent than the NIEs
  • Southeast Asia had a rapid buildup in saving when the growth period began, but also relied on foreign funding to a larger extent than did Japan or Taiwan
  • The Plaza Accord brought a strong inflow of FDI from the neighboring countries which were ready to move offshore with some of their more elementary technology and force industry alliances
• Equilibrium exchange rate


  The rate determined by the market for foreign exchange if it is free, used to determine whether a currency is overvalued or undervalued
• International capital markets in the 1970s vs 1980s/1990s

  • 1970s: Most international capital movements were in the form of loans from Western banks, primarily from the US, into Latin America. There was not much equity investment and the private sector was not involved to a great extent.
  • 1980s and 1990s: Markets in Asia opened up, with a significant increase in portfolio investment and short-term bank lending to the private sector
• Many developing countries would have given their right arm to be in the same situation as the NIEs and the economies of Southeast Asia during this period, but these economies also went off the rails following the Thai baht devaluation in mid-1996
• Implications of the rapid buildup of foreign inflows

  • Current-account deficit
  • Absorptive capacity
  • Price stability and competitiveness
• Reasons for the increase in the share of intra-Asian trade in total Asian trade


  • Growth in income and geographic proximity within the region have stimulated trade
  • Rapid growth in different kinds of regional cooperation arrangements that have facilitated trade
  • Fluctuating exchange rates, technological developments in telecommunications and lower transportation costs have helped to stimulate trade within the region
  • As incomes have grown and developing Asia has begun to produce more manufactured goods, their trading pattern has begun to resemble that of the OECD countries, with more trade in industrial products where there is a higher degree of product differentiation
• Other things being equal, we would expect to see more rapid growth in trade between countries that are growing rapidly than between countries which are growing slowly
• The shorter the distance, the more trade will take place, due to lower transportation costs and better knowledge about and familiarity with the nearby countries
• Factors that have facilitated intra-Asian trade

  • Bilateral trade agreements
  • APEC
  • ASEAN
  • WTO
  • NAFTA
  • EU
  • SAARC
• Other factors that have facilitated intra-Asian trade

  • Exchange rate adjustments
  • Reduction in transport costs
  • Improved telecommunications
  • Liberalization of regulations on foreign direct investment
  • Intellectual property rights
• Saving


  Plays a key role in determining growth, and it is important to know how saving behaviour is conditioned in order to explore the implications for macroeconomic policy and the impact of changing government policies
• Total saving


  The sum of government, business, and private saving
• Keynesian and income constrained models of saving


  • Consumption may depend upon current income
  • Saving forms the residual
  • This model was overtaken by more plausible theories in the 1960s and 1970s that allow for consumption and income smoothing over time
• Reasons why income smoothing may not occur

  • Income smoothing is not possible because of borrowing constraints and imperfect capital markets
  • Income smoothing is not applicable since many generations live together, weakening the need for individuals to save
  • Future incomes are uncertain so it is difficult to plan over a lifetime, particularly for the self-employed or those dependent on agriculture
• Permanent income hypothesis (PIH)

  Consumption is based on permanent income, and all transitory income is saved
• Life cycle hypothesis (LCH)


  There is a time profile of saving and consumption that leaves the individual either with no saving at death, or a predetermined bequest at death, characterized by a hump in the saving function during the maximum earning years