High Theory: Prebisch-Singer

1. Comparative Advantage
and Development
2. Prebisch-Singer Theses
w & w/o Trade Balance
3. Empirical Evidence
Raúl Prebisch Hans W. Singer
4. Immiserizing Growth (1901-1986) (1910-2006)
1. Comparative Advantage and
Development
 Views About Divergence
• Solow convergence with identical fundamentals
• Baumol’s Convergence Clubs
• Barro’s Contingent Convergence
• But steady-state-and-growth version of comparative
advantage implies symmetry (convergence: gn = gs)
i.e., a one-world Solow economy integrated by trade
• This must underlie Sachs’ trade-based Convergence
• While Sachs, like Barro, opposes Endogenous (IRS)
Neoclassical Theory that is designed to explain
absolute divergence, how can/do Sachs-Warner
explain observed absolute divergence?
Trade-Based Absolute Convergence
• Sachs-Warner argue trade openness is sufficient for
bald convergence. Bald divergence is to be blamed
on state interventions (including trade restrictions)
• Trade as litmus test: effectively assume FPE
• They aim to show this empirically using the criteria:
Avg Tariff > 40% Avg Quota Coverage > 40%
Black Mkt ER Premia > 20%
State trading Socialism
• “Closed”  any 1 of 5 holds. “Open”  not all 5 hold
 Comparative Advantage
• If country A has comparative advantage in producing
commodity X, and country B in producing commodity Y,
it will be mutually beneficial for A to specialize in
producing X and for country B in producing Y
• Mutual gains are the hallmark of comparative
advantage doctrine (cf. Bliss reading)
• Comparative advantage doctrine is not inherently static
or dynamic. It is rather timeless.
• While CA fixes international specialization,
international specialization does not react back on CA
i.e., comparative advantage is EXOGENOUS
Two Doctrines of Comparative Advantage
• The source of advantage is inconsistent between the 2 theories!
• Ricardian advantage: Internally consistent w perfect competition?
• Hekscher-Ohlin adv.: Internally consistent w perfect competition?

Ricardian Comp Advantage Hekscher-Ohlin Rel Endowments

Single Factor >= 2 Factors
Non-Identical Technologies Identical Technologies
 Natural Resource Diff  Relative Endow. Diff
 *Skill Diff (~Con w PC)  Relative Intensity Diff
 *Know. Diff (~Con w PC)
Full Emp & Perfect Competition Full Emp. & Perfect Competition
All countries gain
Gains rise with Openness so FT Optimal even if others restrict
Exception: Monopoly Tariff
Interventions at Point of Distortion
*Persistent y-Differences FPE: equalized y
Deviations within Standard Theory
• Efficiency entails only point-of-distortion
interventions which infant-industry tariff isn’t
• Hence, need for 2nd best (e.g., fiscal) argument
• 2nd-Best Revenue Tariffs
• 2nd-Best Employment-Oriented Tariffs
• 2nd-Best Distributional Tariffs
• 2nd-Best Insurance Against Volatility
• 2nd-Best Learning Tariffs [cf. Bruton vs Balassa]
Trade with Fiscal Constraints
Employment-Oriented Trade Policy
Importable

P'

2ndtBest UFE

3rd Best

1st Best

P'
Exportable
 True & Non-Trivial?
• Comp-Adv: only econ. theory both true & non-trivial
The Effect of a Tariff

(1+t)Pw (1+t)Pw

A A
T T
B D Pw B D
Pw
 The Shifting Grounds of the
Neoclassical Case for Free Trade
• Gains from trade: Trivial even if True?
• “Rentseeking” costs: Large but False?
• Knowledge spillovers: neither necess. nor suff.
• Enhanced choice: consumer utility, not growth
• Discipline: Is monopoly statically inefficient?
Is it dynamically inefficient (Schumpeter)?
Why must discipline be external, not internal?
Must producers be disciplined by consumers?
 Trade as Engine of Growth
• No Neo-C argument linking trade & growth
• Dubious empirical evidence (cf Harrison)
• Potentially large DoL gains vs tiny “Δ” losses
– Why, then, no convergence in 2 centuries?
– Why, then, North-South divergence?
• Similar (large gains) vs dissimilar economies
(small gains): assumes what requires proof!
• Trade ratios correlated with pc Income: cause
or effect?
2. The Prebisch-Singer Theses
with & without Trade Balance
 North-South Relations
and Divergence
• Why do international growth rates differ despite
trade and financial integration? Under what
conditions do divergent growth paths emerge (with
or without deteriorating terms of trade)?
• Why have some S-countries succeeded in catching up
with the North but others systematically failed?
Under what conditions does one part of the South
overcome forces causing relative income stagnatio
 Prebisch-Singer Challenge to the Classical View
• UN data on terms of trade of United Kingdom from
1876-80 to 1946-47 showed a steady improvement
• Factors that contributed to the deteriorating trend:
(1) lower income elasticity of primary commodity
exports compared to manufactured exports;
(2) capital-intensive tech. progress in manufacturing
industry that economized on the use of raw
materials, and thus reduced the demand for them;
(3) technological gap between advanced and
developing countries;
(4) asymmetric market structures in the export
industries of industrialized and developing countries.
 Differences with Classical Theory
• History Matters: historical, not axiomatic theory.
Countries have historical Identities: the creation
of a unified world economy starting from the
European conquests of 15th c., and the Industrial
Revolution of 18th c. generated an international
division of labor between an advanced ‘center’,
that determined the pace of accumulation &
innovation for the whole system, and a backward
‘periphery’ which reacted more or less passively
to the center i.e. within the constraints and
parameters set by the center.
 Differences (contd).
• Static model may be the same or not but time
is of the essence, so distinct dynamic model
• Dynamic divergence is endogenous due to
– Asymmetry of Export Elasticities
– Asymmetry of Product Market Structures
– Asymmetry of Factor Market Structures
– Asymmetry of Technologies
• To which may be added cumulative process
(or spiral) of political economy
 Prebisch-Singer Doctrine
• Gains from trade are unevenly distributed over
time. Mutual gains do not hold dynamically.
• Joint hypotheses on (gn , gs) and g(ToT):
– IF if gn = gs, THEN, ToT deteriorate
– IF ToT are constant, THEN, gn=gs (divergence)
• That is, North is on up escalator while South is
on a treadmill
Note: Empirical literature has grossly failed to
recognize joint nature of the fundamental
hypothesis.
 Simple Example
• Two region-two commodity model:
– Centre – Periphery
– Income elasticities
(ec = 1.4) (ep = 0.7)

• What is the effect of economic growth upon

trade balances?

March 23rd, 2009 Economic Theory Workshop

 If both regions grow at the same rate:

– gc = gp = 4.0 percent
• Exports of the periphery will grow much
slower than its imports:
– xp = gc x ep = 4.0 x 0.7 = 2.8 %
– mp= gp x ec = 4.0 x 1.4 = 5.6 %
• Opposite case for the centre:
– xc = gp x ec = 4.0 x 1.4 = 5.6 %,
– mc = gc x ep = 4.0 x 0.7 = 2.8 %
Hence, ToT must adjust – downward for the Periphery

March 23rd, 2009 Economic Theory Workshop

 Unsustainable situation for the
periphery…
• …unless it can finance an ever-growing trade deficit
through rising capital inflows …
• … due to the relative abundance of primary
products, periphery’s terms of trade will deteriorate.
• This deterioration would only be avoided if the
primary good exporting region (the periphery) grows
at a slower rate then the manufacturing region (the
centre).

March 23rd, 2009 Economic Theory Workshop

 If ToT do not adjust
• mp = xp
gp x ec = gc x ep
gp x 1.4 = gc x .0.7
so gp / gc = 0.7/1.4 = 0.5 (growth divergence)
(also known as Thirlwall’s Law (1979)

March 23rd, 2009 Economic Theory Workshop

 If ToT are constant and
trade is balanced in the long run

• E (YN, 1/p) = p M (YS, p)

eN g S  eS g N
pˆ 
S   N  1

• Higher income-elasticity of Northern exports implies:

– If g S  g,N the terms of trade would turn against the South
(Northern terms of trade would improve, i.e. pˆ  0 )
– If pˆ  0 , there would be growth divergence, i.e. g S  g N

March 23rd, 2009 Economic Theory Workshop

 Modifications under trade balance
• The P-S Joint Hypothesis holds with balanced trade.
• With a Southern trade deficit, ToT deterioration is
blunted and/or divergence will be reduced.
• If capital inflows from the North lead to capital
accumulation in the South, the North-South K/L gap
will also be reduced.
• But so long as these effects leave trade patterns
unchanged (with Engel elasticity of Southern exports
less than that of Northern exports), the P-S Joint
Hypothesis will remain in place.
If the terms of trade change and
trade balance does not hold (1):
• TB = E (YN, 1/p) - p M (YS, p)
eN g S  eS g N TB 1 E
pˆ  
S  N 1 t  S   N  1

• As long as the change in trade balance adjusted for exports is

positive or zero, eN > eS implies :
– If g S  g,N , the terms of trade would turn against the
South ( pˆ  0)
– If pˆ  0 , there would be growth divergence: g S  g N

March 23rd, 2009 Economic Theory Workshop

If the terms of trade change and
trade balance does not hold (2):
• If the change in trade balance adjusted for exports is
negative, eN > eS implies :
– The relative scarcity of Southern imports might
improve its terms of trade if the ‘trade balance
effect’ dominates the ‘income-elasticity gap
effect’ in the steady-state.

– If the terms of trade remain constant, the South

might grow faster (or slower) than the North since
eN g S  eS g N  0 , which means g S g N  eS e N

March 23rd, 2009 Economic Theory Workshop

Trade with Prebisch Effects
 A Two-Equation N-S Model (1)

pˆ  ag S  bg N  c

Where a 
eN
 0, b  
eS
0, TB 1 , c > 0,
S   N  1 S   N  1 
t E

a eN
 1
b eS

March 23rd, 2009 Economic Theory Workshop

 A Two-Equation N-S Model (2)

• Following the literature on North-South models* that

emphasize the dependent growth path for the South,

gS     g N
• Inserting (4.3) into (4.1) ‘Prebisch equation’ becomes:

pˆ  a    g N   bg N  c
 a  a  b g N  c

• * (see, for example, Dutt, 1990; Taylor, 1983; Findlay, 1981; Darity,
1990)

March 23rd, 2009 Economic Theory Workshop

 Technical Change
• P-S explained why gains from tech. progress are
unequally distributed between centre & periphery
• For exports from North, the benefits of productivity
increases go to workers and employers through
productivity bargaining and price markups. But for
Southern exports, they are reflected in lower prices.
• So the Center retains the gains while the periphery is
compelled to ‘export’ the gains through worsened
factorial ToT (relative price adjusted for productivity)
• This is due to both goods market and labor market
features.
 Industrialization as a means
to avoid ToT deterioration
• Industrial policy and protected import substitution
in the South will lead to a transitory rise in its ToT.
• This requires North to refrain from retaliation.
• Indeed, if the South as a whole can pursue an optimally
protected diversification program, then, it can avoid an
ToT losses altogether.
• Under favorable conditions, the progressive decline in
trade asymmetry will progressively reduce unequal
exchange effects until convergence is achieved.
• Sub-regions favored by the North would industrialize
e.g., US favoring Japan, Taiwan, South Korea, etc.
Trade with Learning Economies
3. Empirical Evidence
 Shift in Focus from Primaries to Manufactures

• The rising share of manufactured exports in the South’s total exports,

• Yet, continuing high share of South-North exports in South’s total exports.

80
80

60
60

Percent
Percent

40
40

20
20

1960 1970 1980 1990 2000 2010 1985 1990 1995 2000 2005
year year

Major Exporters of Manufactures South Asia East Asia and the Pacific Low and Middle Income Countries
Source: WDI Database and author's calculations Source: WDI Database
ToT Indices: Major Exporters of Manufacturers and
Remaining Countries
140
120
100
80
60

1960 1970 1980 1990 2000 2010

Year

Major Exporters of Manufactures Remaining Countries

Source: UNCTAD Handbook of Statistics
 Implications of the trend analysis (1)

• The null hypothesis of a unit root is rejected at

least at 10% level
• The estimated coefficients of the trend
variable are negative and statistically
significant at 5 percent level (b < 0).
• ToT series has a long-run tendency to revert to
a negative trend following any short-term
disturbances.
 Implications of the trend analysis (2)
• Long-run growth rate of • For all non-oil exporting
ToT is negative for all developing countries,
groups, ranging between the ToT has fallen at
-0.65 (for `other’ group) annual rate of above 1%
and -2.19 (HICs). from 1960 to 2003.
• For developing countries Developing Countries Terms of Trade (excluding oil-exporters)

120
excluding oil-exporters:

110
Net Barter Terms of Trade

– Trend rate: -1.48 %

p.a. 100
90

– Cumulative decline:
80

47%
70

1960 1970 1980 1990 2000

Year
Source: UNCTAD Handbook of Statistics
 Implications of the trend analysis (4)

• Negative trend in the South’s ToT coupled with

widely confirmed S-N growth divergence
validates the Prebisch-Singer Joint Hypothesis.

• Hence, whatever be the static gains from

trade, North-South trade dynamically
considered is unequal exchange.
 Further Interpretation
• Growth stagnation in the North after 1980s
put downward pressure on ToT of the South,
as the Northern demand for Southern exports
decreased.
• After 1980, a greater degree of openness is
associated with a lower terms-of-trade after
1980s.
• The debt crisis of 1980s forced developing
countries to reduce their trade deficits.
‘Export desperation’ increased the downward
pressure on ToT.
4. Immiserizing Growth
 Bhagwati’s Immiserizing Growth
• A country that experiences TP and/or factor
accumulation might increase the relative supply of
its exports. This may lead to a deterioration in its ToT
unless the rest of the world grows at least as fast
• If the ToT losses in real income exceed the rise due to
the growth itself, the country will actually be made
worse off –immiserized– by growth.
• The concept of “immiserizing growth” refers to a
situation in which the growth of an economy results
in a significant worsening in its terms of trade which
leaves the economy with a net loss of real income in
post-growth period.
Immiserizing Growth
 Monopoly Power
• Countries with no monopoly power cannot, by
definition, experience immiserizing growth.
Therefore, the optimal trade policy for them is to get
rid of all protective measures and pursue free trade
• For countries with monopoly power in international
markets, Bhagwati recommended an optimal trade
policy that would counteract the deterioration in the
terms of trade. This could involve imposing an import
tariff or export tax
• The advent of Uruguay Round WTO signals a reduced
tolerance from the North to protective policies in the
South.