Some Topical Issues in Trade
and Development

A2 Macro Economics
March 2014
Coverage
•
•
•
•
•
•
•

Know the conventional wisdom but challenge it!
Revisiting Gains from Trade and the assumption
Impr...
A2 Unit 4 Macro: Challenging The
Conventional Wisdom
1

2

3

4

5

6
Cesar Hidalgo

Esther Duflo

Dambisa Moyo

Paul Collier

James
Acemoglu

Amartya Sen
Some new thinking ........
Development Economics is Changing!

Networks & Social Learning
Capabilities and Capacities
Resilience / Adaptability

Rand...
Development Economics is Changing!

Networks & Social Learning
Business networks - collaboration
Capabilities and Capaciti...
Development Economics is Changing!

Networks & Social Learning
Capabilities and Capacities
Diversifying the capabilities o...
Development Economics is Changing!
Resilience to external shocks such as:
Networks & Social Learning
Financial instability...
Development Economics is Changing!
Banerjee and Duflo
Networks & Social Learning
The two authors have used randomized
cont...
Conventional Gains from Trade

Help to reduce scale
of extreme poverty

Increased market
contestability

Better access to
...
Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade...
Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade...
Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade...
Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade...
Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade...
Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade...
Drivers of Competitive Advantage
Unit labour costs

Exchange rate

Innovation

Economies of scale

Sustainability

Human c...
The Importance of Human Capital
Technology spill-overs

Precision Engineering

Universities

Science Parks

Capital Projec...
Selected Competitiveness Rankings for 2013
Competitiveness Indicators
1. Institutions and
Infrastructure
2. Macroeconomic ...
Selected Competitiveness Rankings for 2013

1:
Switzerland

4: Germany

2: Singapore

5: United
States

3: Finland

10: UK...
Primary Product Dependency
Prebisch-Singer Hypothesis
Suggests that over the long run the prices of primary goods such
as coal, coffee and cocoa decl...
Prebisch-Singer Hypothesis
Basic idea……………….

Long term decline in
real commodity
prices

Worsens terms of
trade for prima...
Prebisch-Singer Hypothesis
Basic idea……………….

Long term decline in
real commodity
prices

Worsens terms of
trade for prima...
Key A2 Concept: Terms of Trade
Key A2 Concept: Terms of Trade
• Sub Saharan Africa is
now getting 30% better
terms of trade than in
2004
• i.e. a bigger ...
Economic Complexity and Trade
UK
Zambia
Complexity matters for growth and
development
“Traditionally, economic development has been
measured through a host of agg...
Why Countries Grow
Who will grow next?
Building More Complexity
The wealth of nations is driven by
productive knowledge - Knowledge is
embedded in brains and hum...
Building More Complexity
The wealth of nations is driven by
productive knowledge - Knowledge is
embedded in brains and hum...
Building More Complexity
The wealth of nations is driven by
productive knowledge - Knowledge is
embedded in brains and hum...
A2 Macro Support
Get help from fellow
students, teachers and
tutor2u on Twitter:

#econ4
@tutor2u_econ
The Middle Income Trap
“The concept
defines the fastgrowing economies
that face a possible
dilemma of being
caught between...
The Middle Income Trap
According to the
OECD, only 17
countries have
joined ranks of rich
nations in the post
war period b...
Middle Income Trap
Danny Quah

The proposition that fast-growing
economies will slow eventually is
called “neoclassical co...
Causes of the Middle-Income Trap
Rising wages / unit labour costs
Productivity slowdown
Challenges of moving up the produc...
Strategies for Overcoming the Trap
Rising domestic consumption
Human capital investment
Investment in critical infrastruct...
Upgrading an economy
Policies to support diversification and productive upgrading can help a country
escape the middle-inc...
A2 Macro – October 2012

Aid and Development
Foreign Aid Debate
Foreign (overseas) development aid
Remittances from migrants
Foreign direct investment (FDI)
Portfolio ...
Different types of aid
• Bi-lateral aid: From one country to another
• Multi-lateral aid: Channelled through international...
Case For Aid
Helps to overcome the
savings gap + aid can play a
key role in stabilising postconflict environments and in
d...
Case Against Aid
Poor governance - aid can be
expropriated and leaves
recipient country - aid can
finance corruption / str...
Paul Collier on Aid
“There is mounting cynicism about aid—
some of it amply justified by past donor
practices. Yet few rea...
Moyo’s Tough Love Approach
“In five years, all aid to Africa
must stop. In its place,
African nations will need to
impleme...
Duflo and Banerjee – Poor Economics
• Duflo and Banerjee – Economists at
the Poverty Action Lab
• Have pioneered use of ra...
Angus Deaton on Aid
• When the conditions for
development are present,
aid is not required. When
they do not exist, aid is...
Breaking out of an aid cycle
Africans living
abroad send
more money
home to their
families than
official
development
assis...
A2 Macro Support
Get help from fellow
students, teachers and
tutor2u on Twitter:

#econ4
@tutor2u_econ
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 of Hidalgo and Hausmann and their index of economic complexity

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Topical Issues in Trade and Development

  1. 1. Some Topical Issues in Trade and Development A2 Macro Economics March 2014
  2. 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. 3. A2 Unit 4 Macro: Challenging The Conventional Wisdom
  4. 4. 1 2 3 4 5 6
  5. 5. Cesar Hidalgo Esther Duflo Dambisa Moyo Paul Collier James Acemoglu Amartya Sen
  6. 6. Some new thinking ........
  7. 7. Development Economics is Changing! Networks & Social Learning Capabilities and Capacities Resilience / Adaptability Randomised Control Trials
  8. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 19. Drivers of Competitive Advantage Unit labour costs Exchange rate Innovation Economies of scale Sustainability Human capital
  20. 20. The Importance of Human Capital Technology spill-overs Precision Engineering Universities Science Parks Capital Projects Rise of Creative Industries
  21. 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. 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. 23. Primary Product Dependency
  24. 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. 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. 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. 27. Key A2 Concept: Terms of Trade
  28. 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. 29. Economic Complexity and Trade
  30. 30. UK
  31. 31. Zambia
  32. 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. 33. Why Countries Grow
  34. 34. Who will grow next?
  35. 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. 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. 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. 38. A2 Macro Support Get help from fellow students, teachers and tutor2u on Twitter: #econ4 @tutor2u_econ
  39. 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. 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. 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. 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. 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. 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. 45. A2 Macro – October 2012 Aid and Development
  46. 46. Foreign Aid Debate Foreign (overseas) development aid Remittances from migrants Foreign direct investment (FDI) Portfolio capital investment Loans from international institutions
  47. 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. 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. 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. 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. 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. 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. 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. 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. 55. A2 Macro Support Get help from fellow students, teachers and tutor2u on Twitter: #econ4 @tutor2u_econ

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