Lectures-Wk6.docx

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Department
International Development Studies
Course
INTL DV 130
Professor
Lofchie
Semester
Fall

Description
9/11/2013 2:49:00 AM Study Questions  According to the development economists the profitability of capital invested in agriculture was less than that invested in industry. Why did they believe that? o Could be a question about agricultural pessimism.  In what way did the issue of elasticities figure into the thinking of development economics? o What are the key elasticities? What did they imply?  Low elasticity of consumer demand – can’t expand revenue by lowering the price.  Overvaluation. How did currency overvaluation figure into the ISI strategy?  What is the factor of indivisibilities and how did that figure the thinking of orthodox economists who criticized developed economics? Real Exchange Rate:  Upward line/slope is a devaluation and a downward line/slope is an overvaluation  Real exchange rate is a ratio. Consequences of ISI  Authoritarian Rule  Corruption  Exile of Intellectuals.  Expansion of Bureaucracy  Decline of Public Services.  Metaphor of the Chinese Plate factory: Industrialization based on protected markets is not likely to succeed. Overvaluation cheapened the cost of capital. o Chinese concluded that ISI model is a failed model. o In order for ISI to work you first need a large domestic market. o Wanted a labor-intensive model of industrialization instead of a capital-intensive model of industrialization.  ISI model brought early success, but not long-term success. Consequences of ISI: Political Realm.  Authoritarian Rule.  Corruption Exile of Intellectuals.  Expansion of Bureaucracy.  Decline of Public Services. Economic Consequences  Decline of agricultural sector  Failed industries  Shortages and scarcities  Decline of the banking sector.  Domestic and international indebtedness  Low or negative growth rates. Widening - not narrowing Explanations of ISI’s Failures  1. The “Left” Explanation – dependency  2. The “Central” Explanation – poor implementation. o Heterodox model - mixed model that combines some features of ISI with some of the features of a market-based approach combined with other ideal factors.  3. The “Orthodox” Explanation – the laws of economics. o Was the usual winner in this debate. o Keynesian and Orthodox economics shared certain features.  Most important shared supposition is governmental intervention.  Failure discredited the Keynesian school and government intervention in anything economic. Orthodox Critique:  No single person has been as influential as Anne Krueger.  1. Technical Factors (What Krueger believes is the most influential factor in the failure of ISI policies). o Indivisibilities – A factor of production that can’t be subdivided.  For many categories of production the imports that you have to buy are only available on a certain scale.  Metaphor of the Steel belted radial factory. o Factor Mix  2. Economic Factors o Deadweight Loss o Monopoly costs – capital intensiveness and moral hazard.  Moral Hazard –decentralized authority to spend resources from a  Small predominantly agricultural economy with a tiny consumer marketplace. There is going to be a price level that is going to be inefficient as compared to any other country. The capital to produce steel belted tires is not divisible.  Want to achieve cross-complimentarities.  Metaphor of the infant industry approach.  The great contradiction: a huge industrial base surrounded by many poor and unemployed.  When you artificially cheapen the price of a good, people will overuse it and it will be gone.  Stimulate industry by subsidizing the cost of capital, but it will encourage capital-intensive industrialization which is not something needed for developing countries.   3. Political Economy: Rent-Seeking o Guaranteed letter of credit – neither the borrower of the lenders have final responsibility for any losses that might arise. Banks are held accountable.  No nexus of responsibility. No holding those industrial managers accountable for their actions. Inefficient management resulting in overspending and producing few quality items. o What factors signal conversion from ISI to market-based approach?  Percentage of annual budget devoted to paying banks (20%). Outgrowth of guaranteed letters of credit. o Rent-Seeking – polite euphemism for a bribe and synonym for corruption.  Krueger: Rent-seeking. Diversion of a family’s investable resources away from productive enterprise to deadweight loss kinds of things.  Extent to which culture of investment change sin a centrally planned economy because the incentives to the individual and incentives to  It’s not really true that profitability of investment in industry is greater than that in agriculture. Investment in education that will get you a job is more profitable than either. o The Central Explanation  Implication of all those factors is structural adjustment an using market oriented and market based prices to replace central allocation.  Macroeconomics is showing a high rate of growth. Microeconomics data is showing that household incomes are either stagnant or declining.  Market-based approaches work because they give you a growth rate, but they aren’t going to solve the poverty and socio-economic problems.  The industries chosen for industrialization are chosen for some principal. Problem is that most every country followed one principal: low demand elasticity among consumers.  Tariffs provide an other limit on inefficiency. Final  Two questions  OH: 1-3pm  Trade Theory and Growth Theory and no spillover benefits o Original idea (Chenery) - expand output of export-oriented sector with no spillover benefits.  Can maximize trade form cocoa sector but there will no be no spillover benefits to agriculturalists in other sectors.  Merely exploding the production of one thing would have spillover benefits in other sectors or people working in those sectors.  Growth theory - trade needs to provide spillover benefits. Growth involves all sectors. Growth = development. o Ex. of Tanzania, Uganda (oil)  Overvaluation o Lowers the domestic prices of traded goods. o Agricultural sector dependent on imports (fertilizers, pesticides, irrigation equipment). Study Questions for Final 9/11/2013 2:49:00 AM 1. Hollis Chenery famously said “Factor prices don’t reflect opportunity costs with any accuracy” What did he mean and how did that fit into development economics? Why was it important?  A:
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