VII. B Trade and Development and
VII.C . Primary Commodity Trade
ECON 3508 November 30 and December 2
(Source: See Text, Chapter 12, pp. 564-593)
Outline
I. Introduction
Central Questions
Changing and clashing conventional
wisdoms
II. Theories of Trade and Development:
Does trade promote development? How?
III. Problems of Primary Commodity Trade
I. Introduction
Differing historical experiences with trade:
• Contrast Canada with Asia. L. Am, Caribbean
and Africa
Central Questions
• Does trade promote development? How?
• What types of policies are necessary for trade to
promote equitable development?
Changing and clashing conventional wisdoms
1930s; 1940s; 1950s;
1960s and 1970s;
1980s and 1990s;
2000s and 2010s ??
I. Introduction, cont’d
Some Specific Questions
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•
•
•
•
•
•
Does international economic integration via trade simply
intensify the exploitation of people in developing
countries?
Are Multinational enterprises the principal beneficiaries?
Are workers in the high income countries and the
countries themselves the losers when their industries
relocate in developing countries?
What are the environmental consequences of gung-ho
international economic expansion?
Is “globalization” making those left behind worse off?
Is an integrated international economic system more
vulnerable to crisis and collapse?
Is China playing by the rules of the game?
II. Theories of Trade and Development:
How does trade promote development?
1. Most Basically: Exports
•
•
•
•
•
•
earn foreign exchange,
permit imports,
permit technological transfer,
generate jobs and incomes,
Generates tax revenues, & finances social programs
support infrastructure development
2. Exports enable technological transformation:
– from exports into imported capital equipment that could
not be produced domestically
– (a “magical transformation”)
II. Theories of Trade and Development:
How does trade promote development?
3. “Vent for Surplus” idea, Adam Smith
4. Comparative Advantage (D. Ricardo)
5. “Productivity Theory”: (Dynamic)
Trade permits
•
•
•
•
increased specialization,
technical change & innovation;
development of economies of scale; and
increased productivity
6. Product Cycle approach:
• DMEs do the R&D, become the first producers,
• Other countreies learn the technology, become lower cost
producers and capture the market.
• Example: China woith almost all products, now computers
and aircraft.
4. Comparative Advantage
Basic idea:
• Countries have different “factor endowments” (range and
qualities of natural, human and capital resources)
• The production of different types of product require different
types of land, labour and capital.
• Countries should focus their resource allocation on those
products for which they have a comparative advantage.
• Unfettered or “free” trade will lead to countries producing those
products for which they have a comparative advantage
• All trading partners will gain if countries focus on, and export
those products for which they have a comparative advantage.
NOTE: Omit the graphical analysis of p. 616, Figure 12.1
Problems with the Comparative Advantage Theory
1. All the problems of primary commodity trade (examined
below)
2. Agglomeration economies and increasing returns to scale
can lead to concentrations of production in certain locales.
3. Monopoly and oligopoly market control can limit spread of
technologies and production processes to other countries.
4. Multinational corporations can shape the international
division of labour and patterns of production worldwide
5. Who receives the gains from trade? Local citizens, foreign
enterprises, foreign workers, foreign land-holders?
6. The enclave character of some foreign-owned export
activities may lead to the expatriation of profits with
minimal linkages to the nation where they are located.
“Trade Pessimists:”
Arguments against trade as an engine of growth and development
There are Numerous Problems re trade:
– Over-dependence on single export products and
vulnerability to international business cycle
– Price volatility for many export products
– Declining Terms of Trade ??
– Low income elasticities of demand for some
products, e.g. coffee, tea, cocoa,
• Synthetic substitutes
– “Enclave character” of some export activities
– Protectionism in high income countries: tariff & nontariff barriers;
Still relevant? Only partly
Some Indicators for Economic and Social Progress for
Some African Countries
Mauritius
S. Africa
Ghana
Exports of G&S per capita,
$US, 2005
1,100.
1,456.
179.
109.
16.20
GDP per capita PPP,
2005, $US
12,215.
11,456.
2,480.
1,240.
1,066.
0.804
#65
0. 674
#121
0.553
#135
0.521
#148
0.406
#169
#27
#55
#65
#60
#105
Human Development Index,
Rank among Countries
Multidimensional Human
Poverty Index, Rank
among LDCs (103 total)
Kenya Ethiopia
Implications? Exports provide an essential fuel for
economic and social development.
Some Indicators for Economic and Social Progress for
Some Latin American Countries
Haiti
Guatemala
Brazil
Mexico
Chile
Exports of G&S per capita,
$US, 2007
$54.40
$520.80
$838.00 $2,583.00 $4,114.00
GNI per capita PPP, 2010,
$US
$949
$4,694
$10,601
$13,971
$13,562
Human Development
Index, Rank among
Countries (2010)
145
116
73
56
45
Human Poverty Index,
2010
.306
.102
.039
.015
n.a.
Implications? Exports provide an essential fuel for economic and social development
But Note re Impacts of Trade on
Development:
1. Different Types of Export Activity have different
Development Implications
The “Enclave” Phenomenon
(See next chart, explained in class)
2. “Resource Economy Syndrome” or “Petroleum
Economy Syndrome” or the “Curse of Resource
Wealth”
(Explained later below)
Enclave Character of Large Scale “CapitalIntensive” Resource Projects :
limited linkages to domestic economies
Explain:
– “Backward Linkages” (ability to provide the inputs
needed for
mining or oil)
– “Forward Linkages” (ability to undertake further
processing of the ores or petroleum)
– “Consumption Linkages” Payments to people
promoting increases in final demand)
Depends on employment and income patterns and volumes
The Varying Development Implications of Some Types of Export Activity
Small Scale "Peasant"
Agricultural Exports
(e.g. coffee, cocoa, tea)
K-Intensive; high tech., limited job Simple technology; labour
creation,
intensive
Strong links (machinery and
Limited but harness-able
equipment) often from MNCs in
because tech is simple,
DMEs, not captured by LDCs
Large-Scale Mining or
Petroleum
Technology
Production Linkages:
Backward" (input
provision)
"Forward" (output
processing)
Final Demand
Linkages
Externalities
Processing (beyond smelting)
usually "market-oriented“, not
captured by most LDCs
K-Intensity => high profits for
owners; profit repatriation;
limited jobs => limited income
for locals in LDCs
Some transport benefits maybe;
environmental costs often;
Some training transferable
elsewhere
Strong in many cases
"Fiscal Linkages"
(tax revenues for
support of Gov't
programs
Strong sometimes (petroleum)
Foreign Exchange
variable sometimes
Earnings
Policies f or Increasing Harness linkages where possible;
diversify on a resource base
Net Benefits
Limited due to marketoriented processing in
many cases
Strong due to labour
intensity and broad
ownership
Limited training; but good
for entrepreneurship;
beneficial impacts on
infrastructure
OK, but often not that
strong
OK to variable
High Tech or Low-Tech
Manufacturing;
Plantations; Tourism;…
III. Problems of Primary Commodity Trade
1. Export Concentration in a Few Products
Diversifying Export Patterns
2. Price Instability => Foreign Exchange
Volatility
Stabilizing Foreign Exchange Earnings
3. Declining Raw Material Prices?
4. The “Resource Wealth Curse”
5. Protectionism in Potential Markets
Problems of Primary Commodity Trade cont’d
1. Export Concentration in a Few Products
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–
–
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The historical pattern
Recent Trends
The evidence
The problems:
Price instability; price trend; market dependence,
– Economic Diversification: urgent but difficult;
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–
–
diversify into other primary commodities: agri, food,
mineral
Diversify into manufactures for export to neighbours
and DMEs.
Easy to say; hard to do; synonymous with the whole
task of development
Export Concentration, Selected Countries. 2005
(Percentage of Total Exports)
Country
Botswana
Chad
Ghana
Kenya
Nigeria
S. Africa
Tanzania
Zambia
Sub-Saharan Africa
Main Export
Diamonds 88.2%
Oil 99.9%
Cocoa 46
Tea 16.8
Oil 92.2
Platinum. 12.5
Gold 10.9
Copper 55.8
Oil 49.2
Other Exports
Nickel 8.1
Manganese 7.2
Flowers 14.2
Coal 8; Gold 7.9
Fish 9.7; Copper 8.6
Cobalt 7
Diamonds 12.6; Nickel 7.8
Problems of Primary Commodity Trade, cont’d
2. Price Instability => Foreign Exchange Volatility
– Evidence
– Causes:
Supply and Demand Explanation:
Graphical explanation in class
• Price in-elasticities of both supply and demand
in the short run
• Supply side disruption, especially for agricultural
commodities;
• Demand side disruption, especially for mineral
products
2. Price Instability => Foreign Exchange Volatility
– Causes:
Supply and Demand Explanation:
Graphical explanation in class
• Price in-elasticities of both supply and demand
in the short run
• Supply side disruption, especially for agricultural
commodities;
• Demand side disruption, especially for mineral
products
2. Price Instability Causes: Supply and Demand Explanation:
Graphical explanation, IN CLASS
An Empirical “Short term” Supply Curve for Copper
Source: World Mine Cost Data Exchange
An Empirical “Short term” Supply Curve for Petroleum
• Consequences for Developing Countries:
Price instability => Foreign exchange instability
=> national macroeconomic instability =>
unstable tax revenues for government =>
public sector management problems and
general problems of “boom and bust”
• Policy Options:
– Compensatory Financing” by IMF Facility:
Already in operation; partial amelioration of
instability of F.Xch.
– International Commodity Agreements?
Mainly unviable
– National macroeconomic management?
Difficult but possible
– Diversification around primary exports?
Again difficult but possible for some countries
Problems of Primary Commodity Trade for LDCs, cont’d:
3. Long term Declining Raw Material Prices?
(the “Prebisch Singer Hypothesis”)
The “Terms of Trade”
Explanation and example in class
The Record
• 1950-2000 steady decline in many primary
commodity prices;
• Why? supply and demand side factors
Explanation
Problems of Primary Commodity Trade for LDCs, cont’d
2000-2008: Major increases:
Why? supply and demand side factors at work;
Explain
2009: world recession
=> major price reduction;
Explain
2010-2013: price recovery;
Explain
2014-2015, renewed reductions
Explain
Problems of Primary Commodity Trade, cont’d
Consequences of Terms of Trade Decline
Solutions?
4. The Paradox of Plenty aka “Resource Curse”
The “curse”
Resource wealth generates great revenues for governments
but also may tend to lead to relative economic stagnation
and political problems – waste, corruption, political
patronage systems, civil conflict & war
i.e. Perhaps: an inverse relationship between resource
wealth and genuine development
Why?
Economic factors: exchange rate, prices, econ. management
Political factors via
windfall revenues to Governments without need for accountability to
tax-payers, and also
windfall revenues “up for grabs” among competing elites.
4. The Paradox of Plenty aka “Resource Curse”
Variations:
From “Dutch Disease”
with impacts via exchange rate and perhaps prices
Netherlands and North Sea Gas;
Alberta and Canada with oil and gas ?
To “Oil Economy Syndrome” with extreme economic
impacts
(Saudi Arabia and other oil producers)
To “Resource Wealth Curse”
with economic impacts plus political impacts
(Chad, Venezuela?)
Oil in the Niger Delta, Nigeria:
 +/- 89% of Gov’t revenue
 +/- 25% of GDP
 about 95% of export earnings;
 13% of oil revenues to oil-producing states
 Impoverishment and environmental problems for local peoples (the
Ogoni and other groups)
 Major Conflict in the Delta
Explanation A: “Dutch Disease” or “Oil Economy
Syndrome”
The Phenomenon in Brief:
Export “boom” caused by a sudden increase in oil
export prices or in resource export volumes,
leads to an appreciation of the exchange rate with
negative consequences, such as
• a major reduction of traditional (pre-boom)
exports;
• unemployment of the factors of production in
the traditional export sector;
• an increased concentration on the resource
export and reduced diversity of export
structures;
• damage to import-competing exports;
Examples:
• Spain during its glory days with silver and gold inflows
from pillage and later the rich mines of Mexico and South
America from perhaps 1530 to 1700
• Countries undergoing a resource boom (e.g. Norway, 19902013; Canada in the 1950s,)
• Major oil exporting countries such as Saudi Arabia, UAE,
Nigeria (with 92% of its exports as petroleum in 2004);
Chad (99%) etc.
• The Netherlands after its North Sea natural gas boom and
before the “Euro”
• Alberta and Canada, in 2006-2008 and 2014-2015 with
tar sands and oil prices
Explanation B: Other Economic Factors
• Volatility of Foreign Exchange Earnings and Tax
Revenues
– affects economic management and performance
• Economic Policy Failures:
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–
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Waste the funds extravagantly when available;
Expand consumption
Reduce other non-mineral taxes
Undertake costly but unwise strategic investments
5. Protectionism in International Markets
• Note protectionism in High Income Countries:
• Minimal or no protectionism against fuels and
minerals
• affects other DMEs and some LDC agricultural
exporters the most;
• Affects African producers of Cotton in particular
• Protectionism for manufactured products exists and
is damaging but has been reduced over the years
• Protectionism among developing countries
Generally, the severity of this problem has diminished
with general trade liberalization