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International Development Studies

(M)-Examining Development Economics 9/10/2013 11:34:00 PM The 4 “pessimisms.”  1. Market pessimism - rejection of Smith. o Made development economics similar to Keynesian economics o Low-level trap is not self-correcting o Regulating business cycle  2. Trade Pessimism - rejection of David Ricardo and “comparative advantage.” o Orthodox economists accepted the benefits of trade at a basic level. o Developing countries dependent on export of cocoa, rubber. o Defining characteristic of a developing country was limited exports. Need to expand export sector. o Most developing countries have a kind of similar structural characteristic o Chenery: No spillover benefits or growth without development  “Enclave economy”  You can get increases in a sector without it having spillover benefits in terms of increased employment and wages in another sector. o 3 key points made by Chenery:  Market pessimism based on market prices  Difference between trade and growth theory. No spillover benefits.  Growth is only being experienced in a narrow field. o Robert Clower - studied Liberian economy and published “Growth without Development.” Can improve capital into improving efficiency of rubber trees and still no spillover benefits to other sectors and people.  No benefits in industrializing this economy. No trigger of demand in a way that is going to trigger industrialization. o Trade theory doesn’t mean that exports would be diversified. o Falling terms of trade (on world markets)  Saturated markets  Ease of entry (among producers) – capital entry threshold. Easier to install a cocoa factory than it is to start an automobile factory.  Ease of substitutability (among consumers)  Metaphor: running faster to stand still – real prices for those goods being exported (cocoa, coffee, tobacco) were not increasing as fast as the goods that you were purchasing on world markets.  Somehow increase the output of the agricultural economy just to be able to afford the same amount of vehicles and busses as before.  Essence as a developing country you depend on primary agricultural commodities.  Tendency toward crowding among producers of agricultural market.  Why would you have falling terms of trade?  Markets for agricultural commodities tend to become saturated very quickly because it is very easy to enter agricultural markets and world demand is satisfied at a certain level.  Pumping in more resources just lowers prices  Money falls because of substitutability. o Doctrine of “Unequal Exchange.”  Developing countries will always get the worse or trade relationships with developed countries.  Trade actually transfers wealth from the poor countries to the rich countries. If you are a producer of primary agricultural commodities the transfer of wealth is outward rather than inward  causes poverty instead of wealth.  3. Agricultural Pessimism - low level trap in peasant societies. o Agricultural sector could not be counted on to provide sustainable economic growth that would increase per capita incomes. o Falling terms of trade between agricultural an industrial countries. o Ease of entry among producer countries; low capital entry threshold. o Low marginal productivity of labor.  Resources invested in the agricultural sector would not be wisely invested.  Means holding other variables constant.  Increasing number of workers doesn’t necessarily increase output. o Last place where you would want to invest capital: agriculture and  4. Elasticity pessimism o Provided the core content of agricultural pessimism.  Low Demand Elasticity (among consumers)  Low Supply Elasticity (among producers). o Low Elasticity of Demand:  Exporters of primary commodities can’t do the same thing exporters of industrial commodities can do.  D/P  ^%/ ^%  If bottom number goes down than above goes up.  ^ are supposed to be squares.  Exporters of primary commodities can’t tap into the same elasticity mechanism as exporters of industrial commodities. Former are more limited. o Low elasticity of supply in response to producer price:  In the short-run was drawn from American labor economics.  If social wage goes up, the incentive to work goes up and the number of hours that people deliver into that economic environment goes up to a point until wages and incentive to work decrease. o The good of the industrial worker is hours worked and good of small-holder farmers is the food they produced. o Target Workers- once target is satisfied they don’t produce anymore.  Respond up to a point with added production  Backward Bending supply curve – supply of labor goes down as the prices goes up.  Taxes are the answer to being responsive only up to a certain point.  Tax farmers to reduce prices, which will then incentivize them to produce more.  Policy notion: lower prices by imposing taxing which wouldn’t have deleterious effect on society and could hire more workers. Import-Substituting Industrialization  The idea of creating industries for goods that have been imported has two stages: o Easy or First Stage: ISI to consist of industries for basic consumption goods: beverages, textiles, shoes, cigarettes, apparel, etc…” o “Second Stage” ISI: emphasis on production and transportation - bicycles, trailers, motors, pumps, etc…”  *Producing the machinery for production.  What you should try to do as a developing country is create an industrial sector by taxing agriculture and engaging in protectionism against foreign competition. o Early American infant industry approach.  Move from light consumer goods to production of industrial goods.  Low elasticity of demand among consumers.  Create a set of industries that will enable you to build an industrial economy. Government intervention in a big way through trade protectionism.  Advantages: o 1. Rapid industrialization o 2. Financial Savings on Imports. o 3. Acculturate a peasant population in rhythms of industrial society. o 4. Demand complimentarities across industries.  Don’t happen naturally.  Needed for industrial diversification to occur. o 5. Backwards stimulus to agriculture. (W)
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