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Lectures 14 -15 Don De. Voretz Commercial Policies and International Trade and Finance: Best Lectures 14 -15 Don De. Voretz Commercial Policies and International Trade and Finance: Best Practices ? 1

Strategy I Devaluation • What are consequences of a 10% devaluation ? • • Strategy I Devaluation • What are consequences of a 10% devaluation ? • • 1. real wages fall by 5% 2. GDP falls by 1 to 4 % 3. Inflation 1 to 10% 4. Need 15 % rise in foreign aid to most countries to offset effects of devaluation ? 2

Overvalued Exchange Rates • Why have most LDC’s opted for Overvalued Exchange Rate ? Overvalued Exchange Rates • Why have most LDC’s opted for Overvalued Exchange Rate ? – Overvalued exchange rates reduce price of M’s • hope to get capital goods cheaper • However, luxury items also cheaper – Consequence DUAL EXCHANGE RATES • Argentina : two exchange rates: – overvalued for capital goods – undervalued for consumer goods • Eventual Devaluation 3

Corruption and Overvaluation 4 Corruption and Overvaluation 4

Foreign Aid: Facts • 1960 to present : • a. $1. 6 trillion in Foreign Aid: Facts • 1960 to present : • a. $1. 6 trillion in foreign Aid • b. 40 % of developing world gets about twice the aid as poorest. • 2. ODA from OECD has actually increased in early 1980's by. 5% per annum. • 3. 2% of aid went to primary health care and 1% to population growth. 5

Questions • 1. Has aid relieved poverty? • 2. Has aid helped countries who Questions • 1. Has aid relieved poverty? • 2. Has aid helped countries who have received it ? • 3. What constitutes foreign aid ? • 4. Who supplies foreign aid ? • 5. What is tied aid (1/2 of total) and what is added cost 6 (15%).

Strategy II: Debt Repayment • Buy -back debt: – Issue new Bonds to pay Strategy II: Debt Repayment • Buy -back debt: – Issue new Bonds to pay for old bonds which are at 40 % of ace value. – a. At what price? – Is it wise for LDC's to simply buy back debt ? 7

Strategy III Political Struggles • Lobby DC's to • a. lower effective rates of Strategy III Political Struggles • Lobby DC's to • a. lower effective rates of protection in DC’s • b. or supply special funds from IMF or Multi-lateral banks • c. Debt Forgiveness • Loans from IMF and Others on 8 concessionary terms

Strategy IV Restructuring ? • Inward Looking Commercial Policies ? • Ingredients: • Effective Strategy IV Restructuring ? • Inward Looking Commercial Policies ? • Ingredients: • Effective rate of protection vs. Nominal Rate – Nominal rate T= !(p’-p)/p! where p’ and p are unit prices with and without tariffs – Effective rate G=[(v’-v)/v](100) where v’ and v are value added with and without tariffs. – Effective rate can be + or - 9

Actual Effective rates : 1990’s • • • Country Average Effective Rate Pakistan 356 Actual Effective rates : 1990’s • • • Country Average Effective Rate Pakistan 356 % India 69% Thailand 27 % Singapore 22 % South Korea -1% 10

Perverse Effects Of Effective Tariffs by Type of Good • Developing Countries have: – Perverse Effects Of Effective Tariffs by Type of Good • Developing Countries have: – High effective rates on final goods – Low effective rates on intermediate and capital goods • Implications: – Backward Linkages can not develop – No development of a capital goods industries using labour intensive techniques 11

Arguments For Tariff Protection • • Tariff duties are major source of Revenue Import Arguments For Tariff Protection • • Tariff duties are major source of Revenue Import restrictions rebalance payments Reduces economic dependence Encourages foreign firms to come behind tariff wall. 12

Outward Looking Policies • • • Zero Effective Rates No quantity restrictions Convertible currencies Outward Looking Policies • • • Zero Effective Rates No quantity restrictions Convertible currencies Fluctuating exchange rates Membership in WTO: play by the rules ? 13

Trade Optimists • • • It produces competition Increased efficiency, technical change Attract foreign Trade Optimists • • • It produces competition Increased efficiency, technical change Attract foreign capital Generates foreign ex for food Ends rent seeking and corruption Equal access to resources 14

Trade Pessimists • • High efffective rates in Developed countries Mfg. Is olgopolistic Inelastic Trade Pessimists • • High efffective rates in Developed countries Mfg. Is olgopolistic Inelastic Demand for LDC’s exports Low income elasticity of demand for LDC products • LDC exports grow slowly • LDC terms of trade declining 15

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