Chapter 14 Trade Policies for DevelopingCountries

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Fig. 14.1 page 318.

Growth Ratesof GDP &

GDP/capita

W. Arthur Lewis, 1915-1990

Born St. Lucia (Caribbean)Educated at LSETaught at U. of Manchester, under Hayek,and at Princeton

Adviser to the UN, gov’t of Ghana,Nobel Prize, 1979

“Economic Development with Unlimited Supplies of Labor” 1954

Trade Policy Alternatives for Developing Countries (p. 319)

• Focus on exporting primary products• Attempt to raise the world prices of

primary products that are exported• Protect and encourage new industries

that produce products sold into the local market

• Encourage new industries that produce products that are exported

Raúl Prebisch, 1901 - 1985

Born in a province of Argentina. Parents were German immigrants. Studied at University ofBuenos Aires, where he later taught. During the 1930she moved from classical orthodoxy to a form ofKeynesianism. In 1948 he was the first director of ECLA, [CEPAL] and in 1950 promulgated what became known as the Prebisch-Singer hypothesis, which argued against freetrade because of an alleged trend toward falling termsof trade for raw materials. Although he is said tohave favored ISI, he was often critical of its excesses.

From 1964-1969 he led UNCTAD, a UN body thatworked for Third World countries.

Why Declining Terms of Trade?

1) Engel’s Law – that as incomes grow, people spend less on food2) Increased supply with growth of what were called LDCs3) Technological change, generated in developed countries, to their own advantage: New products that require less raw materials4) There was a significant amount of hostility to MNCs and to the industrial countries, who were accused of biasing trade to their favor. [mt: not real logical, but that’s what people thought]5) Protectionist policies in the industrial countries, which would typically reduce demand for LDC exports. very evident in the 1930s.

Why not Declining Terms of Trade? pp. 324-25

Fixed amount of raw materials – especially hydrocarbons

Slow productivity growth in raw material sector

Many developed countries export raw materials

High technological change in manufactured products from D.C.’s

Eventually, many third world countries successfully broke into exporting manufactured goods. Prebisch and co. didn’t foresee that

Figure 14.2 page 325Relative price of primary products

Import Substituting Industries (pp. 333-)

Potential strengths• Infant industries can grow up• Developing government can get much-needed revenue• The country’s international terms of trade can improve• Information on demand is acquired cheaplyActual experience• Deadweight losses from resource misallocation• Developing countries practicing or adopting freer-trade

policies grow more quickly

mt believes that Pugel exaggerates the failure of ISI, in Latin America and elsewhere, but it is undeniable that ISI is now out of favor.

Figure 14.3 page 329. Cartel as profit maximizing monopoly

EYE ON THE PAST

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P. 369Bade/Parkin

Oil Price Cycles in the U.S. and Global Economies

Erosion of Cartel Power (p. 330)

• Declining demand as buyers respond by switching to substitutes

• Increasing responsiveness of competing supply from non-cartel producers

• Declining share of the cartel’s production in the world market

• Cheating by the cartel members

U.S. Petroleum Production, Consumption, Imports

Source: U.S. DoE

Figure 14.4 page 337Changing mix of exports from LDCs

Figure 13.5 page 331

Trade reform inTransition economies

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