|1. Inequality promotes growth|
Group living has some advantages in the early stage of development:
reduced risk, ability to hunt big games (wild animals, e.g., buffaloes)
Agriculture was invented around 10,000 BC in the fertile Crescent. Syrians grew cereals about 7000 BC. Hunters and gatherers became farmers. After settling down around river valleys and the population increased, the primitive people built cities and began to develop social life, which increased interpersonal tension. Various taboos were developed to regulate social behavior as the population grew . Code of Hammurabi enacted in 1754 BC include "an eye for an eye, a tooth for a tooth." As the society became more civilized, the notion of lex talionis (exacting payment in kind) was replaced by pecuniary compensations.
Roughly, half of ten commandments are designed to protect property rights, which were not well defined. 282 laws including lex talionis (an eye for an eye, a tooth for a tooth.)
The concept of private properties gradually developed during the Renaissance as international trade expanded. After the Black Death in 1348-50 in Europe, farm wage in England doubled between 1350 and 1450. Rents also declined substantially. (Gregory Clark, 2006)
(property rights) ⇒ give incentives to individuals to accumulate wealth. income inequality.
American Indians had no concept of land ownership ⇒ no economic growth.
In the early stage, a developed country (Greece, Rome) enjoys a higher living standard by military conquests and becomes a role model for other countries. (e.g., the title of Caesar is soon copied by others: Kaizer in Germany, Tsar in Russia.)
Trade soon follows. Even the conquered regions may benefit from trade. (England, France, Hong Kong, USA, etc.) Countries were conquered due to lack of organization. Roman provinces that gradually national identities snd developed much faster. Without such stimuli, it would have taken much more time for tribes to build a nation state (Russia, Arab countries became nation states much later.)
Trade promotes exchange of new ideas, technology, and information.
(The HO model is based on identical technologies)
As long as trade and learning are impeded, there will be developing countries. Before the invention of printing, it was difficult to transmit knowledge from one generation to the next.
The British people did not have an alphabet to record their history. No history before Caesar's invasion. A monk borrowed 24 letters from the Latin alphabet and added five characters in 1011, which later disappeared (thorn, wynn, etc.).
|LDCs copy DCs||
China's grid plan in the 15th century BC was copied by Japan (Kyoto).
|2. Developing Countries|
|Advanced Nations||It is a common practice to arrange all nations
according to GDP or income and draw a dividing line between the advanced
and the developing countries.
In the category of advanced nations are included the countries of North America and Western Europe, plus Australia, New Zealand and Japan.
LDCs (less developed countries)
|Developing countries are located mostly in Africa, Asia, Latin America and the Middle East. (South Korea, Taiwan, Singapore and China are industrial countries at present. The argument that China should be treated as a developing country is now tenuous.|
|World Trade in 2016||
Gross World Product = $72 trillion (2012)
EU = $16.5 trillion, US = $18 trillion, China = $11.4 trillion, Japan = India = $4.7 trillion
World Trade $15 trillion (about 20% of GWP = $78 trillion)
Imports of Developed countries = $8.6 trillion
Exports of Developed countries = $8 trillion (Developed economies have trade balance)
Europe's trade = $5.3 trillion (balanced)
North America (NAFTA)
Exports = $2.4 trillion
Imports = $1.7, Trade deficit = $0.7 trillion (mostly US trade deficit).
China exports = $1.6 trillion, imports = $1.4 trillion, trade surplus = $200 billion.
|Newly Industrializing Countries||
The terminology was popular in the 1980s, beginning with the Four Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan, but now most of them are classified as high income economies (over $30,000.)
Current NICs: South Africa, Brazil, Mexico + China,
India, Indonesia, Malaysia, Philippines, Thailand, + Turkey.
|Emerging markets (BRICS)||
Originally, they were called BRIC (Brazil, Russia, India and China), BRICS after 2010, including South Africa.
These are large and newly industrializing countries (NICs) accounts for 13% of world trade.
Population: 3 billion
GDP = $14.8 trillion as of 2013.
Its growth rate is 9%, compared to 2.6% in advanced nations.
Intra-emerging market trade accounts for about 30% of global consumption. Increasingly, emerging markets begin to denominate trade contracts in nondollar currencies.
Old guard currencies ($, euro, yen) are likely to depreciate as BRICS grow.
Brazil and China are active in Africa.
Brass plates from Benin City. British Museum.
Printing press (c. 1440) accelerated Economic growth
What was life like for the middle class in Europe
in the 1600s (before land ownership was established)? It was much worse
than that of a developing country in the world today. The printing press
had been just invented, but newspapers were not widely circulated yet.
Economic development did not take place before the printing press (invented c. 1440) became widespread in Europe (c. 1500). Printed newspapers became popular in the 16th century. Economic conditions of developing countries today are like those of European countries during the pre-industrial revolution period.
|3. Why Developing Countries Are Poor|
|1. Lack of Infrastructure||
Developing countries have not invested enough to build the infrastructure that enhances the productivity of both labor and capital inputs. Infrastructure installation is costly, and hence requires a large capital expenditure.
Infrastructure is public capital that can be used by all private sectors. Capital poor countries cannot afford to invest much in infrastructure. A minimal amount of infrastructure investment is necessary to maintain production in the modern world: the healthy working population, clean water, suitable housing, schools, and highways, etc. Lack of good highways raises transportation costs. Urban areas grow because investing infrastructure in urban areas is more profitable than that in the middle of nowhere.
Conquest of major infectious diseases was necessary for urban development. During the first century AD, life expectancy was a little more than 20-30, which did not change much through the Middle Ages. The average life expectancy rose to 47 years around 1900, and to 77 years in 2000.
|2. Lack of Skills and Technology||
Laborers in LDCs are generally employed in industries that require unskilled labor or self-employed as in agriculture. Skilled workers are employed generally in capital intensive industries. Capital intensive industries are located in areas with substantial infrastructure.
LDCs lack skilled workers and use unskilled workers intensively. Inward FDI should be welcome as it brings new technologies and stimulates learning.
|3. Religious and Cultural effects on economy||
Gunnar Myrdal thought that South and Southeast Asians are soft societies with low expectations. He said that they are lazy and do not demand much. As a result, they do not grow. However, the rise of Japan, the emergence of China as an industrial giant, and the Newly Industrializing Economies (South Korea, Singapore, Taiwain and Hong Kong now graduated from this list) as well as ASEAN proved his foresight was limited.
In Tibet during the 1920s, one third of the male population were monks. 25 percent of the mail population were monks in Tibet during the 1950s. In 1733 there were 319,270 monks in Central Tibet when its population was 2.5 million. About 26 percent of the males were monks. (Population and Society in Contemporary Tibet, Rong Ma, 2011)
In France, it is almost impossible to fire a worker, as exhibited by the outcry and sabotage of French workers to modify labor practices. It is an indication of monopoly or monopsony power in a segment of the society (e.g., labor union). Such a system is not conducive to developing a flexible modern economy. Long dinner hours in some European countries cut into their working hours.
|4. Insufficient trade with the West||
Developing countries do not fully exploit trade opportunities with the West. Trade raises the wage of export sectors in developing countries. Free trade with the west will eventually raise the wage of developing countries to that of the West. (Factor price equalization)
Trade accounted for 4% in the former Soviet Union (1985).
LDCs can accumulate trade surplus to build infrastructure and raise capital stock. Those who are successful in this transformation become newly industrializing countries (NICs).
Trade rather than Aid!
|5. Lack of Incentives||
In the early state of development, some inequality stimulates human desires to achieve a better life. Lack of private ownership did not contribute much to economic growth in the former Soviet Union. The rich or aristocrats provide a role model for the poor to reach higher income levels.
Welfare programs destroy incentives for the poor to work. In the former Soviet Union, people were reluctant to work because pay was not linked to work.
|4. Trade Characteristics of Developing Nations|
|Dependence on developed economies||
Developing nations are highly dependent on the advanced or developed nations.
Developing countries excluding Asia account for about 20% of world trade. If Asia is included, their export share of world trade is 40% in 2005. China will soon be exluded from this group.
Income dependence: Most of exports of developing nations go to the developed nations, e.g., Kopi Luwak (coffee)
dependence on Technology: Most of imports of developing nations originate in the developed countries (medicine, new machines). Trade among developing nations is minor.
Exports of developing nations are primary products (agricultural goods, raw materials, and fuels).
Some countries export drugs and low tech military goods to gain international currencies.
Shares of manufactured exports tend to be less than 10% among African countries.
|Labor intensive exports||
Exports of manufactured goods tend to be labor intensive (such as textiles). The absolute value of manufactured goods produced by the developing nations is low.
The rise in the shares of manufactured goods in developing nations is due to a handful of newly industrializing countries (NICs) such as Korea, Taiwan, and Singapore until 1980s. However, these countries have lost their export markets to China, which has emerged as an industrial giant in the 1990s. Exports of advanced economies tend to be capital- and technology-intensive.
|5. Trade Problems of Developing Nations Excluding BRICs|
|Unstable Export Markets||
One characteristic of many developing nations is that their exports are concentrated in a small number of primary products. Dependence on primary products, 1992
|Inelastic Demand and Supply|
Kopi Luwak, the most expensive coffee
|6. Revenue and price elasticity of demand (PED)|
|Revenue and PED||There is a straightforward relationship between TR and price elasticity of demand, PED. TR is defined by PQ, and is described by the rectangular area generated by a point on a given demand curve.|
Let Z be the product of two variables, X and Y,
Z = XY.
Let the new value of Z be denoted by Z'. Then
Z' = (X+ΔX)(Y+ΔY) = (1 + ^X)X(1 + ^Y)Y = (1 + ^X + ^Y + ^X^Y)XY
^Z = ^X + ^Y + ^X ^Y.
When the percentage changes are small,
Z = XY => ^Z = ^X + ^Y.
Z = 1/X => ^Z = - ^X. ( ^(1/X) + ^X = ^(1) = 0)
Z = X/Y => ^Z = ^X - ^Y.
^R = ^P + ^Q = ^P(1 + ^Q/^P) = ^P(1 - ε).
ε = price elasticity of demand = -^Q/^P.
ε < 1. Thus, ^P and ^R move in the same direction.
ex: ε = 0.5. If ^P = -10%, then ^R = - 10%(1 - 0.5) = - 5%.
In this situation, farmers are worse off when they harvest a good crop, because ^Q and ^R move in the opposite directions.
Implication: A good harvest means low prices and low revenue for farmers.
ε > 1. Thus, ^P and ^R move in the opposite direction.
ex: ε = 2. ^P = - 10%. ^R = - 10%(1 - 2) = 10%.
|Unitary Elastic Demand||ε = 1, and hence ^R = 0.|
|7. Stabilizing Commodity Prices|
|In an attempt to stabilize export earnings, developing countries have pressed for international commodity agreements. ICAs are typically agreements between leading producing and consuming nations about stabilizing commodity prices, assuring adequate supplies to consumers, and promoting economic development of producers.|
|Who wants price stability?||Farmers want stable prices.|
|Gains from price instability||
Do Consumers want price stabilization? No.
Consumer gains from a price fall: the apparent red trapezoid (BCC"B")
Consumer losses from a price increase: the apparent green trapezoid (BCC'B').
Expected gains from price instability = (1/2)(BCC"B" -BCC'B') > 0.
Using positively sloped supply curve, one can also demonstrate that producer surplus is greater when prices are unstable. Thus, producers should also prefer random prices.
However, producers are more easily organized than consumers to persuade the government to stabilize farm prices and that the stabilized prices should be higher than the mean prices. They do not mind high prices, but asks the government to gaurantee minimum prices.
|International Commodity Agreement||
Commodity agreements are usually made between producing and consuming nations that want to introduce stability in the otherwise unstable commodity markets. Agreements among producers within a single country are usually outlawed by Antitrust laws, but such laws do not have jurisdiction over the national territory. Thus, it is possible to have agreements on price stabilization schemes with other producing nations.
|8. Producion and Export Control|
|How to face a global recession||
Producer revenue can be riased with production control.
Specifically, the blue rectangle can be larger than the red rectange, which represents revenue with production control. The area of the blue rectangle is greater than that of the red when demand is price inelastic.
OPEC raised the price of oil from $20 per barrel to about $50 in 1973 and to over $100 in 1979. However, unity within OPEC did not last long.
US oil consumption $20 million barrels per day. production: $10 million barrels per day.
US dependence on imported oil is shrinking. Fuel efficiency is increasing, domestic supply is increasing.
|9. Grow Together vs Grow Apart|
|Special Message to the Congress, Jan 25, 1962||
Trade Expansion Act of 1962.
(i) asked for authority to reduce tariffs by 50% in reciprocal negotiations.
(ii) introduced trade adjustment assistance.
|"The two great Atlantic markets [EEC and the US] will either grow together or they will grow apart. The meaning and range of free economic choice will either be widened for the benefit of free men everywhere--or confused and constricted by new barriers and delays. "|
|Outcome||Kennedy Round reduced tariffs by 30%.|
|Grow alone policy vs grow together policy|
|10. Effect of Price Stabilization in Developed Countries|
Producers' associations have adopted export quotas. Export quotas must also be accompanied by production control.
|Buffer Stock||A stabilization agency needs to maintain Buffer Stock.
Maximum price is a price ceiling which government imposes to protect consumers by releasing surplus grains. Price will not rise above the maximum price.
Minimum price is a price floor that government imposes to protect producers by purchasing grains at the minimum price. The price does not fall below the minimum price.
In principle, the government can make money when it buys grains at low price and sell at high prices.
It can be a price support program
Governments in LDCs don't have money to support prices.
e.g., India's protest against the elimination of a fuel subsidy.
|11. Buffer stock program|
The US government set up the Commodity Credit Corporation in 1933 to stabilize farm prices.
Farmers lobby for price stabilization, which in fact becomes a price subsidy program.
With a buffer stock program, the government establishes a minimum price and buys surplus grains, and sells the surplus when price is higher.
(i) The government must set aside a large amount to enable itself to purchase the surplus grains.
(ii) The government must also use resources to manage the buffer stock, including storage facilities.
(iii) storage cost is high.
(iv) one-year old grains are not highly valued.
|11. Deficiency Payment program|
The government let the market price fall to the equilibrium price, and pays farmers the difference d = pmin - p*. The cost of deficiency payments program is
C = Q(pmin - p*)
Demand for grains are generally price inelastic.
Accordingly, revenue from consumers (blue rectangle) is smaller under the deficient payment program than under the buffer stock scheme.
This means that deficiency payment program costs more than the buffer stock scheme for given price ceiling.
However, there is no storage cost associated with the deficiency payments program.
For this reason, the US government uses the deficiency payments program, and let farmers manage the storage problem.
Supply of grains are also price inelastic.
|Developing countries||Surplus grains are dumped in developing countries, which now demand removal of export subsidies in EU.|
|Life in Renaissance Europe (1450 - 1600)|
Return from the Inn, Pieter Bruegel the Younger (circa 1620) illustrates the farm life in a developing country.
|Helgoland, Germany (1800s)||