Development Economics, HU zu Berlin

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Trade Growth

• Development Economics, HU zu Berlin
• Daniel Werner Alejandro Lara
• Egor Nikitin Clemence Charveriat

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Content

• Growth Strategy
• Economic principles for trade
• Washington consensus
• Import Substitution
• Outward-oriented policies
• Big Push
• Spillover effects of industrialization
• Openness and Growth
• Measuring Growth
• Empiric evidence

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GROWTH STRATEGY Dani Rodrik 2003
Def Growth strategy Economic policies and
institution arrangements aimed at achieving
economic convergence with the living standards
prevailing in advanced countries.
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Diverse growth in the last 40 years.
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• Fisrt order economic principles for trade
• Protection of property rights.
• Market based competition.
• Appropriate market based incentives.
• Sound money.
• 
  do not correspond to unique policies!!!!
• Many different institution forms can succeed in
  applying these principles.

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Ex. of the Washington consensus (J. Williamson
1990) 1 Fiscal discipline 2 Reorientation of
public expenditure 3 Tax reform 4 Interet rate
liberalization 5 Unified and competitive exchange
rates 6 Trade liberalization 7 Openness to DFI 8
Privatization 9 Deregulation 10 Secure property
rights
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How can one ignite economic growth? Quite easy
all countries have experienced it. What ?
install the first order economic principles. How
? many different ways than the Washington
consensus! Authors view 1rst solution Remove
the government imposed barriers on trade
Government failures . 2nd solution The first
solution Subsidize the market so as to trigger
investment and entrepreneurship. Ex currency
devaluation.
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How can one SUSTAIN economic growth? Institutio
n building strategy Why To construct a stable
and resistant environment for growth. How
Copying western way is not always the
solution. Ex Poland, Japan
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Content

• Growth Strategy
• Economic principles for trade
• Washington consensus
• Import Substitution
• Outward-oriented policies
• Big Push
• Spillover effects of industrialization
• Openness and Growth
• Measuring Growth
• Empiric evidence

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Import SubstitutionR. E. Baldwin.

• After the end of World War II developing
  countries adopted import-substitution policies
• Reasons countries from whom they obtained
  independence had much higher per capita income
  levels and were much more industrialized, because
  former rulers had imposed economic policies that
  discouraged industrialization.
• Import substitution restrict imports of
  manufactured goods for which there already was a
  domestic demand in order both to shift this
  demand toward domestic producers and permit the
  use of the countrys primary-product export
  earnings to import the capital goods needed for
  industrialization

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• The infant industry argument maintains that
  during the temporary period when domestic costs
  in an industry are above the products import
  price, a tariff is a socially desirable method of
  financing the investment in human resources
  needed to compete successfully with foreign
  producers. And in 1950s it was applied to the
  entire manufacturing sector.
• Worked quite well initially. Increases in output
  of simple manufactured goods and imports of key
  intermediate inputs and capital goods. Production
  utilized the abundant unskilled labor.
• Mistakes uncritical acceptance of the industry
  argument and failure to take macro effects when
  applied to all manufacturing

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• However, overvalued currencies (tight exchange
  controls) reduce earnings from primary-product
  exports and kept import prices relatively low of
  needed capital goods.
• Secondary effects. Hardships imposed on export
  sector began to have adverse growth effects.
• Lack of higher skill and technology requirements
  worsened profit of domestic producers
• Expansionary activities by governments caused
  inflationary pressures and large government
  budget deficits and balance of payments deficits
  this caused tighter exchange rate and import
  controls. Net outcome was a slowing in growth
  rate.

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Content

• Growth Strategy
• Economic principles for trade
• Washington consensus
• Import Substitution
• Outward-oriented policies
• Big Push
• Spillover effects of industrialization
• Openness and Growth
• Measuring Growth
• Empiric evidence

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• SHIFT TO OUTWARD-ORIENTED POLICIES
• First group of developing countris were far
  eastern countries Taiwan, Singapore, South Korea
  and Hong Kong.
• Many attempts to liberalize trade and payment
  regimes of other developing countries until the
  debt crisis of 1982 which convinced them.
• They had borrowed heavily in the international
  markets to cope with trade-deficit problems
  caused by IS and growth rates were not as
  expected.
• Countries such like Mexico, Argentina, Chile,
  Turkey, Ghana and Uganda began to adopt the
  outward looking policies.
• Inability to borrow funds to mantain the IS was
  main reason to switch.

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• Studies started considereing not only changes in
  levels ofiimport protection and export
  subsidization but the array of macroeconomic
  policies monetary, fiscal, exchange rate to
  promote import substitution
• Many countries that switched to the
  outward-looking polices often foreced to abandon
  them temporarily because of external events or
  domestic political pressures
• Inward and outward policies involve as well FDI,
  exchange rates, money supply under control,
  constraint budget deficits and corruption and
  control monopolistic behavior.
• Countries who stuck with an inward-looking
  approach over the years were Pakistan, Burma and
  Zimbabwe have had relatively lower growth rates

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• OPENNESS AND THE NEW GROWTH THEORY
• Traditional comparative-statics frameword changes
  in trade policy lead only to one-time changes in
  levels of production. In real world one might
  expect to observe the shift to new equilibria
  over a number of periods.
• In latter 80s and early 90s improvement in
  endogenous growth theroy buy Romer Lucas and
  Grossmand Helpman
• RD process increases the stock of knowledge wich
  substitutes the human capital in the production
  of new intermediate inputs. The outcome is a
  constant rate of growth of factor productivity
  and output in the sectors producing the final
  goods
• Effects of tariff on imported good. If the
  country is importing the good that uses human
  capital and exporting the good intensively using
  unskilled labor, the import duty will raise the
  relative domestic price of human capital
  intensive good and therefore the wages of skilled
  labor. This increase in the price of human
  capital will lower the RD and lower equilibrium
  growth

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Content

• Growth Strategy
• Economic principles for trade
• Washington consensus
• Import Substitution
• Outward-oriented policies
• Big Push
• Spillover effects of industrialization
• Openness and Growth
• Measuring Growth
• Empiric evidence

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Big Push Rosenstein-Rodan(Murphy, Kevin and
Shleifer)

• Rosenstein-Rodan was initially concerned with
  the post war development of Eastern and South
  Eastern Europe
• He argued that industrialisation was the only
  way to alleviate the 25 unemployment rate due to
  excess agrarian workers
• However, he believed that such investment would
  not occur without coordination

Paul Rosenstein-Rodan 1902 - 1985
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Idea of Big Push

• small domestic markets (no free trade), costly
  trade ? firms may not generate enough sales to
  make adoption of an increasing returns technology
  profitable (industrialization trap )
• simultaneous industrialization of many sectors
  can be self-sustaining and welfare improving
• Why Growth in domestic demand ? growth of
  domestic output (Chenery, Robinson and Syrquin,
  1986)

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Spillover effects of industrialization (Chenery,
Robinson and Syrquin, 1986)

• where p(n) Profit of the firm
• a markup,
• F investment to industrialize
• L labour.

Positive correlation between y and p
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Spillover effects (contd.)

• 1st Nash equilibrium all firms industrialize
• 2nd Nash equilibrium none industrializes (LltF)

Industrialization
Output ?
Profit ?
Income ?
consumption
growth
Single industrialization
Output ?
Profit ?
No spillover
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Content

• Growth Strategy
• Economic principles for trade
• Washington consensus
• Import Substitution
• Outward-oriented policies
• Big Push
• Spillover effects of industrialization
• Openness and Growth
• Measuring Growth
• Empiric evidence

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Increased growth across regions(World Bank
Global Economic Prospects Report)
Real GDP growth, 2001-2005
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Trade Facilitation circle
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Trade Facilitation Theory(Berg Krueger, 2003)

• Simplification of procedures through
• Reduced transport costs
• Improved ports facilities
• Efficient and transparent customs procedures
• Transparent and harmonized regulations (tarrifs
  and NTBs)
• Improved communication/information technologies
• ? static allocation of resources

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Effects of efficient static allocation of
resources

• an increased efficiency of investment
• expansion of constant returns through access to
  larger markets
• a higher real return to capital in unskilled
  labour abundant countries
• higher rate of domestic saving and/or foreign
  capital inflow
• rapid short-term growth in response to trade
  opening
• further pro-growth economic policy reforms
  because of open trade regime
• reduction in rent seeking activities inspired by
  trade restrictions
• spur to innovation and entrepreneurial activity
  resulting from competition and access to larger
  markets
• openness to ideas and innovations generated by
  openness to trade

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Openness or changes in openness?

• Increasing returns to scale or sufficient
  externalities can generate a situation of growth
  traps (Easterly, 2001)
• NAFTA Mexico vs. U.S. textile market

• Openness or changes in openness
• China closed market vs. high growth
• Closed market higher growth
• Japan semiconductor world market

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How to measure openness?

• How to calculate a meaningful overall measure?
• Commodity A ? higher tariff vs. lower welfare
  costs
• Commodity B ? lower tariff vs. higher welfare
  costs
• Same tariff ? different effects in different
  countries
• no necessary relationship between official and
  collected tariffs (Pritchet and Sethi (1994)
  almost no relationship for three developing
  countries)
• NTBs are hard to quantify (Anderson and Neary,
  1996)
• average tariffs are not meaningful (Berg, 1997)
• switching from one form of protectionism to
  another vs. decreasing/increasing protection
  (Dean, 1994)

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Sachs and Warner index (1995)

• Five tests of openness
• an average tariff rate below 40
• NTB covering less that 40 of trade
• black market exchange rate premium below 20 on
  average during 70s 80s
• absence of socialist economic system
• absence of extractive state monopoly on major
  exports

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Critics on Sachs Warner index

• black market premium reflects chaotic
  macroeconomic policy
• Various measures of trade policy are not
  correlated
• productivity in traded-goods sector leads to a
  rise in relative prices of nontraded services
  (Alcala and Ciecone, 2001 real openness
  imports exports as a share of GDP in
  purchasing-power-parity dollars)

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Content

• Growth Strategy
• Economic principles for trade
• Washington consensus
• Import Substitution
• Outward-oriented policies
• Big Push
• Spillover effects of industrialization
• Openness and Growth
• Measuring Growth
• Empiric evidence

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Empirical Evidence (Edwards and Sebastian)

• Methods
• Multi-country studies
• Cross-country growth regressions

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A more detailed view on growth regressions

• Econometrical background
• Trade influences growth through
• positive externalities on nonexports sectors (Fx)
  
• a productivity differential in favour of exports
  (d)
• ? equation (Feder, 1983)

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A more detailed view on growth regressions
(contd.)

• Results
• Almost all studies find a positive relation
  between export performance and growth
• but very general in nature, no insights in the
  mechanism

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A more detailed view on growth regressions
(contd.)

• Arising questions
• Is a minimum level of development required in
  order to reap the benefits of trade?
• Evidence is mixed, but indications that the state
  of development matters.
• Do the world market conditions have an influence?
• Strong indications that world market conditions
  matter on an individual country basis.
• Does trade policy influence growth?
• Outward oriented countries generally grow faster.
• What about causality?
• Often it is not clear, whether rising exports
  induce growth, or whether an improved growth
  performance lead to higher exports.