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Topical Issues in Trade and Development

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This presentation covers some aspects of topical issues in trade and economic development. Designed for A2 economics students - links to some Financial Times videos with special reference to the work …

This presentation covers some aspects of topical issues in trade and economic development. Designed for A2 economics students - links to some Financial Times videos with special reference to the work of Hidalgo and Hausmann and their index of economic complexity

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  • 1. Some Topical Issues in Trade and Development A2 Macro Economics March 2014
  • 2. Coverage • • • • • • • Know the conventional wisdom but challenge it! Revisiting Gains from Trade and the assumption Improving Competitiveness Primary Product Dependency Escaping the Middle-Income Trap Export Complexity and Development Different views on the Foreign Aid Debate
  • 3. A2 Unit 4 Macro: Challenging The Conventional Wisdom
  • 4. 1 2 3 4 5 6
  • 5. Cesar Hidalgo Esther Duflo Dambisa Moyo Paul Collier James Acemoglu Amartya Sen
  • 6. Some new thinking ........
  • 7. Development Economics is Changing! Networks & Social Learning Capabilities and Capacities Resilience / Adaptability Randomised Control Trials
  • 8. Development Economics is Changing! Networks & Social Learning Business networks - collaboration Capabilities and Capacities Social networks Importance to developing economies of their Resilience diaspora (remittances) / Adaptability New trade networks – e.g. Deepening intraregional trade in Sub-Saharan Africa Trials Randomised Control
  • 9. Development Economics is Changing! Networks & Social Learning Capabilities and Capacities Diversifying the capabilities of economy Resilience / Adaptability Investment to achieve capital deepening Randomised Control Trials
  • 10. Development Economics is Changing! Resilience to external shocks such as: Networks & Social Learning Financial instability Effects of climate change Capabilities and Capacities Geo-political uncertainty Resilience / Adaptability Randomised Control Trials
  • 11. Development Economics is Changing! Banerjee and Duflo Networks & Social Learning The two authors have used randomized control trials across five continents to test the impactCapabilities and Capacities of policies aimed at beating poverty, from the provision of free antimalaria bed-nets to education subsidies Resilience / Adaptability Randomised Control Trials
  • 12. Conventional Gains from Trade Help to reduce scale of extreme poverty Increased market contestability Better access to new technologies Inflows of specialist knowledge Exploiting economies of scale Better use of our scarce resources
  • 13. Evaluation: Awareness of Assumptions Constant returns to scale Mobility of factor inputs Insignificant externalities Trade finance is available Barriers to trade are small
  • 14. Evaluation: Awareness of Assumptions Constant returns to scale Mobility of factor inputs Insignificant externalities Trade finance is available Barriers to trade are small Increasing returns?
  • 15. Evaluation: Awareness of Assumptions Constant returns to scale Mobility of factor inputs Insignificant externalities Trade finance is available Barriers to trade are small Increasing returns? Geographical and occupational immobility of labour
  • 16. Evaluation: Awareness of Assumptions Constant returns to scale Mobility of factor inputs Insignificant externalities Trade finance is available Barriers to trade are small Increasing returns? Geographical and occupational immobility of labour External costs of production and consumption
  • 17. Evaluation: Awareness of Assumptions Constant returns to scale Mobility of factor inputs Insignificant externalities Trade finance is available Barriers to trade are small Increasing returns? Geographical and occupational immobility of labour External costs of production and consumption Credit crunch / banking crisis has affected finance for exporters
  • 18. Evaluation: Awareness of Assumptions Constant returns to scale Mobility of factor inputs Insignificant externalities Trade finance is available Barriers to trade are small Increasing returns? Geographical and occupational immobility of labour External costs of production and consumption Credit crunch / banking crisis has affected finance for exporters Rise of regional trade blocs and bi-lateral trade agreements
  • 19. Drivers of Competitive Advantage Unit labour costs Exchange rate Innovation Economies of scale Sustainability Human capital
  • 20. The Importance of Human Capital Technology spill-overs Precision Engineering Universities Science Parks Capital Projects Rise of Creative Industries
  • 21. Selected Competitiveness Rankings for 2013 Competitiveness Indicators 1. Institutions and Infrastructure 2. Macroeconomic stability 3. Health/education systems 4. Financial markets (including strength/stability of banks) 5. Technological readiness 6. Market size (linked to population size and per capita incomes) 7. Business sophistication (quality of supply chains, industrial clusters) and rate of innovation
  • 22. Selected Competitiveness Rankings for 2013 1: Switzerland 4: Germany 2: Singapore 5: United States 3: Finland 10: UK Competitiveness Indicators 1. Institutions and Infrastructure 2. Macroeconomic stability 3. Health/education systems 4. Financial markets (including strength/stability of banks) 5. Technological readiness 6. Market size (linked to population size and per capita incomes) 7. Business sophistication (quality of supply chains, industrial clusters) and rate of innovation
  • 23. Primary Product Dependency
  • 24. Prebisch-Singer Hypothesis Suggests that over the long run the prices of primary goods such as coal, coffee and cocoa decline in proportion to the prices of manufactured goods such as cars and washing machines Raul Prebisch Hans Singer
  • 25. Prebisch-Singer Hypothesis Basic idea………………. Long term decline in real commodity prices Worsens terms of trade for primary exporters Better off focusing on import substitution policies
  • 26. Prebisch-Singer Hypothesis Basic idea………………. Long term decline in real commodity prices Worsens terms of trade for primary exporters Better off focusing on import substitution policies Labour intensive manufactured goods are now cheaper because of globalisation Modern reality Strong rise in global commodity prices Many commodity exporters have seen their terms of trade rise .. A big opportunity
  • 27. Key A2 Concept: Terms of Trade
  • 28. Key A2 Concept: Terms of Trade • Sub Saharan Africa is now getting 30% better terms of trade than in 2004 • i.e. a bigger “return” for each unit of export sold to the world • But it could still be higher in the long run! • If they can increase the value added from their export sectors
  • 29. Economic Complexity and Trade
  • 30. UK
  • 31. Zambia
  • 32. Complexity matters for growth and development “Traditionally, economic development has been measured through a host of aggregated variables, mainly GDP, adjusted for PPP. As the human body develops, cells differentiate into neurons, muscles, bones and other cell types. Similarly, as nations develop, different industries and products are born. Assessing the health of a nation solely based on its wealth is like assessing the health of a child solely based on its weight.” Ricardo Hausmann
  • 33. Why Countries Grow
  • 34. Who will grow next?
  • 35. Building More Complexity The wealth of nations is driven by productive knowledge - Knowledge is embedded in brains and human networks Chunks of knowledge can be aggregated by connecting people through organizations and markets Development is driven by networks – standard development theory finds it hard to model this
  • 36. Building More Complexity The wealth of nations is driven by productive knowledge - Knowledge is embedded in brains and human networks Chunks of knowledge can be aggregated by connecting people through organizations and markets Development is driven by networks – standard development theory finds it hard to model this
  • 37. Building More Complexity The wealth of nations is driven by productive knowledge - Knowledge is embedded in brains and human networks Chunks of knowledge can be aggregated by connecting people through organizations and markets Development is driven by networks – standard development theory finds it hard to model this
  • 38. A2 Macro Support Get help from fellow students, teachers and tutor2u on Twitter: #econ4 @tutor2u_econ
  • 39. The Middle Income Trap “The concept defines the fastgrowing economies that face a possible dilemma of being caught between poverty and prosperity” Source: World Bank Development Blog
  • 40. The Middle Income Trap According to the OECD, only 17 countries have joined ranks of rich nations in the post war period by breaking out of the middle income trap - this includes Greece and Portugal!
  • 41. Middle Income Trap Danny Quah The proposition that fast-growing economies will slow eventually is called “neoclassical convergence” — when capital-deepening has run its course and any further advance in prosperity can come only from technological progress, whether through indigenous innovation or through importing techniques from any economies still running on ahead. But neoclassical convergence is an old idea.
  • 42. Causes of the Middle-Income Trap Rising wages / unit labour costs Productivity slowdown Challenges of moving up the product value chain Institutional Weaknesses Challenge of maintaining macroeconomic stability
  • 43. Strategies for Overcoming the Trap Rising domestic consumption Human capital investment Investment in critical infrastructure Regional Trade Integration and New Trade Routes Diversification of industrial base and export industries Encouraging private sector development Measures to support inclusive growth
  • 44. Upgrading an economy Policies to support diversification and productive upgrading can help a country escape the middle-income trap. For example, South Korea has grown it’s capacity to benefit from trade-led growth in high connectivity and higher valueadded sectors 8:37:01 PM
  • 45. A2 Macro – October 2012 Aid and Development
  • 46. Foreign Aid Debate Foreign (overseas) development aid Remittances from migrants Foreign direct investment (FDI) Portfolio capital investment Loans from international institutions
  • 47. Different types of aid • Bi-lateral aid: From one country to another • Multi-lateral aid: Channelled through international bodies • Project aid: Direct financing of projects for a donor country • Technical assistance: Funding of expertise of various types • Humanitarian aid: Emergency disaster relief, food aid, refugee relief and disaster preparedness • Soft loans: A loan made to a country on a concessionary basis • Tied aid: i.e. projects tied to suppliers in donor country • Debt relief – e.g. cancellation, rescheduling, refinancing of a country’s external debts UK Bi-Lateral Aid Review 2011 1. Aid stopped to China and Russia 2. No new financial grant aid to India 3. UK will end direct financial support to South Africa by 2015 4. Part of the bilateral aid to Rwanda, Uganda and Malawi has been suspended.
  • 48. Case For Aid Helps to overcome the savings gap + aid can play a key role in stabilising postconflict environments and in disaster recovery Project aid can fast forward investment in critical infrastructure projects – capital deepening effects +higher productivity Building a Case for Overseas Aid Long term aid for health and education projects - builds human capital and stronger social institutions. Aid projects for enterprise Well targeted aid might add around 0.5% to growth rate of poorest countries - this benefits donor countries too as trade grows
  • 49. Case Against Aid Poor governance - aid can be expropriated and leaves recipient country - aid can finance corruption / strengths / locks-in ruling elites Lack of transparency – hundreds of $m spent on aid consultants and developed country NGOs Some arguments against overseas aid Dependency culture – one aid paradox is that aid tends to be most effective where it is needed least – it may stunt entrepreneurial culture Aid may lead to a distortion of market forces and a loss of economic efficiency and risks of inflation
  • 50. Paul Collier on Aid “There is mounting cynicism about aid— some of it amply justified by past donor practices. Yet few realise just how smart and highly geared modern British aid can be. Perhaps the most sensational recent economic development in Africa has been the explosive growth of “branchless” telephone banking in Kenya. DfID thought up the idea, spent money successfully piloting it, and demonstrated to the private sector that there was a market opportunity. British aid was smart, and thereby catalytic.” Source: Prospect Magazine, 2010
  • 51. Moyo’s Tough Love Approach “In five years, all aid to Africa must stop. In its place, African nations will need to implement new policies including micro-loans, improved remittances and formalised domestic savings schemes, as well as, internationally, improving foreign direct investment, borrowing responsibly and securing more equitable trading arrangements with the west.” Source: Dambisa Moyo, Dead Aid
  • 52. Duflo and Banerjee – Poor Economics • Duflo and Banerjee – Economists at the Poverty Action Lab • Have pioneered use of randomised controlled trials to find out what works in development • Test efficacy of projects / interventions within a population – 2 or more groups (inc control) • “Top-down” aid projects afflicted by – Ideology (prejudices, beliefs) – Ignorance (info gaps about local conditions) – Inertia (failure to change when project does not work) “Precisely because [the poor] have so little, we often find them putting much careful thought into their choices: They have to be sophisticated economists just to survive.”
  • 53. Angus Deaton on Aid • When the conditions for development are present, aid is not required. When they do not exist, aid is not useful and probably damaging • Foreign aid is antidemocratic because it frees local leaders from having to obtain the consent of the governed
  • 54. Breaking out of an aid cycle Africans living abroad send more money home to their families than official development assistance by western aid donors. In 2010 the African diaspora remitted $51.8bn; in the same year ODA to Africa was $43bn. Source: FT, Oct 2013 Sovereign Wealth Funds Formalised domestic savings Remittances from Diaspora MicroFinance More equitable trade flows
  • 55. A2 Macro Support Get help from fellow students, teachers and tutor2u on Twitter: #econ4 @tutor2u_econ