CHAPTER 1: Concept and Measurement of Development

ECONOMIC GROWTH VS ECONOMIC DEVELOPMENT

Development has many meanings:

 increasing people’s freedom;

 reducing poverty; and
 public provision of education, health care and the maintenance of law and order

Economic Development – refers to economic growth accompanied by changes in output distribution

and economic structure.

Economic Structure – term that describes the changing balance of output, trade, incomes and
employment drawn from different economic sectors-ranging from primary to secondary to tertiary and
quaternary sectors.

Economic Growth – refers to increase in a country’s production and income per capita.

Production – usually measured by Gross National Product or Gross National Income (GNY) and
economy’s total output of goods and services.

Per Capita Income or Average Income – measures the average income earned per person in a
given area in a specified year. It is calculated by dividing the area’s total income by its total.

HUMAN DEVELOPMENT INDEX (HDI)

There are 3 basic goals of development that can be measured:

1. Long & Healthy Life

- Measured by life expectancy at birth on the assumption that people who live longer have
benefited from good health.
2. Improved Education
- Measured by the adult literacy rate combined with a measure of primary, secondary and
tertiary school enrolment.
3. Decent Standard of Living
- The ability to meet basic needs, measured by GDP per capita, converted at PPP $US.

What the numbers mean?

Three indicators of the HDI are combined to give an index value between 0 and 1.

Higher Value = Higher Level of Development

The UNDP classifies countries into three categories according to their HDI. Category HDI
Value High Human Development 0.800 and above Medium Human Development Low Human
Development Less than .055.
How can the HDI information be used?

- Prior to the establishment of the HDI in 1990, GDP per capita had been the yardstick for
measuring development, under the assumption that higher national income translated directly
into a higher level of development.

GENDER-RELATED DEVELOPMENT INDEX (GDI)

- This examines the same indicators as the HDI, but takes into account the inequalities of these
indicators for men and women. The GDI is essentially the HDI adjusted for inequality between
men and woman.

GENDER EMPOWERMENT MEASURE (GEM)

- Measures the extents to which woman are able to actively participate in economic and political
life.
- It examines their participation in the labor force and their share of national income.

HUMAN POVERTY INDEX (HPI)

- The HPI looks a proportion of people who are deprived of the opportunity to reach a basic level
in each area. It is also a composite index and looks at indicators that are comparable with the
indicators in the HDI.
- The HPI is useful for observing how evenly the benefits of development are spread with a
country.

LORENZ CURVE & GINI INDEX

- The most common form of representation of inequality. This takes data about household
income gathered in national surveys and presents them graphically.

GENUINE PROGRESS INDICATOR (GPI)

- One alternative measures of progress that has been established in more developed countries.
- This indicator attempts to measure whether a country’s growth has actually led to an
improvement in the welfare of the people.

Let us make a detailed study of these measurements for better understanding:

1. National Income as an Index of Development:

 Maintaining the growth of national income should be considered most suitable index of
economic development.

Argument in favor of National Income:

 A larger real national income is normally a pre-requisite for an increase in real per capita
income and hence, a rising national income can be taken as a token of economic
development.
Argument against National Income:

 It cannot definitely be said that economic welfare has increased if the national and even the
per capita income may be rising unless the distribution of income is equitable.
2. Per Capita Real Income:
 Economic development is defined as a process by which the real per capita income increases
over a long period of time.

Argument in favor of per Capita Real Income:

 If national income of a country goes up but the per capita income is not increasing, that will not
raise the living standard of the people. That way, per capita income is a better measure of
economic development than the national income.

Argument against Per Capita Real Income:

 According to Meier and Baldwin, “If an increase in per capita income were taken as the
measure of development, we would be in the awkward position of having to say that a country
had not developed if its real national income had risen, but population has also risen at the
same time.”
3. Economic Welfare as an Index of Economic Development:
 When there is equal distribution of national income among all the sections of the society. It
raises economic welfare.
 When the purchasing power of money goes up, even then there is an increase in the level of
economic welfare. The purchasing power of money can go up when with the increase in
national income there is also increase in the prices of goods. That means economic welfare
can increase if price stability is ensured.
4. Comparative Concepts:
 The comparison can be made by two methods over time period:
 (a) Comparison within the country.
 (b) Comparison with other countries.
5. Measurement through Occupational Pattern:
 (1) Primary Sector
 (2) Secondary Sector
 (3) Tertiary Sector
6. Standard of Living Criterion:
 Standard of living and not rise in per capita income or national income should be considered
an indicator of economic development. The very objective of development is to provide better
life to its people through improvement or upliftment of the standard of living.

Which is the Best Measurement of Economic Development?

 Answer depends on the objective of measuring economic development. However, after

considering from different point of view it may be concluded that GNP or per capita income is
the best method of measuring economic development.
CHAPTER 2: Theories of Economic Development
Classical Theories with four main clusters:

 Linear stages of growth models

 Structural change models
 International dependence models
 Neoclassical counter-revolution models

Goals of Development

1. Growth;
2. Improvement of quality of life;
3. Sustainable development; and
4. The Millennium Development Goals.

Goals of Economic Development

1. Growth of Gross National Product

 Goal is to create the wealth of a nation.
 Economic performance is measured by an annual increase in Gross National Product (GNP),
an alternative measure in Gross Domestic Product (GDP),
 GNP is expressed in a common currency, usually US dollars, and reported in per capita terms
to take into account the size of a nation’s population.
2. Quality of Life
 Many developing countries have experienced high growth rates of per-capita income but little
change in the living conditions of a large part of the population.
 In the 1990s, economists increasingly recognized that it was the quality of life that determines
whether people are from developing countries or not.

Amartya Sen (1985) - the ultimate goal of development is to enhance human capabilities, which is
defined as “the freedom that a person has in terms of the choice of functioning, given his personal
features and his command over commodities.

3. Sustainable Development
 It is defined by the Brundtland Commission, formally the World Commission on Environment
and Development, as “progress that meets the needs of the present without compromising the
ability of future generations to meet their own needs.
 Aims to improve the quality of life in a comprehensive manner, including economic prosperity,
social equity and environmental protection.
4. The Millennium Development Goals
 In September 2000, the MDGs were developed to address the most pressing problems in
developing countries, including:
 1. poverty and hunger;
 2. primary universal education;
 3. gender equality;
 4. child health;
  5. maternal health;
 6. HIV/AIDS;
 7. environmental sustainability; and
 8. Global partnership.

The Evolution of Economic Development Thoughts

Early Views about the Nature of Economic Society and Prosperity

 Capitalism: Free trade, Private property and Competition (Adam Smith, 1776)
 Communism: Social or Public ownership of property, and independence of foreign capital and
goods (Karl Marx, 1993).

Classical Theories of Economic Development

The Linear stages of growth models

 Walt Whitman Rostow (1960), an American Economist, Savings and Investment

 Sir Henry Roy Forbes Harrod (1948) was an English Economist and Evsey David Domar
(1947) was a Russian American economist, model emphasized that the prime mover of
the economy is Investments.

Classical Theories

Structural Change Models

 In Arthur Lewis in 1954, two-sector model or theory of surplus labor, labor increasingly moves
away from the agricultural sector to the industrial sector.
 According to Lewis model considered savings and investments to be the driving forces of
economic development but in the context of the less developed countries.

International Dependence Models

This theory was popular in the 1970s and early 1980s.

 The unequal exchange, in terms of trade against poor countries, made free trade a convenient
vehicle of ‘exploitation” for the developed countries.
 Developed countries can exploit national resources of developing countries through getting
cheap supply of food and raw materials.

Neoclassical Counter-Revolution Models:

• Liberalization

• Stabilization

• Privatization

Robert Solow, neoclassical growth model stresses the importance of three factors of output of
growth.
 • (1) Increases in labor quantity and quality through population growth and education);
• (2) Increases in capital (through savings and investments); and
• (3) Improvements in technology.

Contemporary Theories of Economic Development

New Growth Theory

• Knowledge; and
• Innovation.
• Linked the technological change to the production of knowledge. The new growth theory
emphasizes that economic growth results from increasing returns to the use of knowledge
rather labor and capital.
• The theory argues that the higher rate of returns as expected in the Solow model is greatly
eroded by lower levels of complementary investments in human capital (education),
infrastructure, or research and development (R&D).

CHAPTER 3: Growth, Poverty and Inequality

Functional inequality
• Sometimes important to know not only the size of income a person has, but its factor share
distribution (functional inequality).

POVERTY – measurement
• The inequality measures give idea about relative poverty (how much income people in a
country have relative to each other).

Poverty Line - minimum amount of income (PPP adjusted) that can be used to compare poverty
internationally; typically $1 a day or $2 a day.
Headcount - the nr of people below the PL.
Headcount index (ratio) - the proportion of people below PL from the whole population.
Total poverty gap (TPG) - measures the total amount of income necessary to lift everyone below the
PL to that line.
Human poverty index (introduced by UNDP)
• Want to broaden the usual “income poverty” definition (e.g. the $1 a day PL by the World
Bank); analogous to the human development index.

POVERTY, INEQUALITY AND WELFARE

• Most people agree that absolute poverty is bad and should be eradicated (e.g. in all religions,
all government policies).
1. Economic efficiency: income inequality can lead to inefficiencies.
2. Political and social stability.
3. Moral and ‘fairness’ objections to inequality.

EMPIRICAL EVIDENCE

Growth and inequality – evidence

• Long-term growth and income inequality 1965-1996; no clear pattern to be seen; East-Asia
grew a lot, inequality stayed constant; LA grew little, inequality increased a little; SSA didn’t
grow, inequality increased slightly.
Growth and poverty – evidence
• Dollar and Kraay (2002) share of income accruing to bottom 20% is not correlated with
average income
• Claim: average incomes of the poorest 20% of society rise proportionately with average
incomes (note this does not mean the poor gain the same absolute amount of income as the
rich!)
Who are the poor?
1. Rural – poor are disproportionately located in rural areas people below PL are in rural areas,
seems focus on rural areas and agriculture in particular is necessary.
2. Women - women and children experience harshest deprivation, more likely to be under
nourished, less likely to receive medical services, clean water, sanitation, etc.; less access to
education, formal sector employment, social security.
3. Ethnic minorities - over-represented among the poor.
4. People in the poor countries - seems obvious but important implication is that growth can
help.

CHAPTER 4: Human Capital and Investment

Capital - usable, productive resources, all forms of assets and capabilities that can be harnessed for
human development.
Human Development - increasing human welfare, well-being and human capital (possibly increasing
human freedom and creativity)

Individuality - a product of human mental development, of social organizations, institutions and of a

cultural sphere, imparting knowledge, skills and values, is making available to each member the
cumulative advances of the collective, and providing freedom and opportunity for unique individual
characteristics to develop.

Measuring Human Capital

• While financial capital, land, even labor and natural capital are measured or are attempted to
be expressed through money, human and social capitals seem to be above and beyond
expressing in money. One of the major tasks ahead is to measure human and social capitals,
qualitatively and possibly quantitatively

Market

• More than democracy since no tyranny of the majority (or minority), but
• Irrationality of the crowd,
• real vs. virtual, could be real ‹‹ virtual

Markets failures:

• Ecological footprint and climate change (destroying natural capital)

• Huge unemployment (destroying human and social capital)

Contagion - mistrust (destroying human and social capital)

Moral Crisis

• ”Every gun made, every warship launched, every rocket signifies in the final sense a theft from
the hungry. The world in arms is not only spending money. It is spending the sweat of its
laborers, the genius of its scientists.”
• To ensure the development of humankind, it is necessary to banish war, any military and non-
military violence from our culture. Violence and its ideology are remnants of the past., social
pathologies incompatible with the new era.”

CHAPTER 5: Migration and Urbanization

1. Definitions

Migration: Geographic movement of people across a specified boundary for the purpose of
establishing a new permanent or semi-permanent residence (refugees are not considered as
migrants!)

Circular Migration: Regular pattern of short term migration.

Migrant: A person who comes from one place to another, especially in order to find work or better
living conditions.

2. International Migration: Moves between countries

Types of Migration

• International Migration: Moves between countries

• Immigration: move into a new country
• Immigrant: An international migrant who enters the area from a place outside the countryŠ* A
person who comes to live permanently in a foreign country.
• Emigration: move out of home country Š
• Emigrant: An international migrant departing to another country by crossing the international
boundary.
3. Internal migration: Moves within a country
• In-Migration: movement into a new politically/geographically/administratively defined area
within the same country
• In-Migrant : A person who moves into a new area within the same country
• Out-Migration: movement out of a politically/geographically/administratively defined area
within the same country. Š
• Out-Migrant: a person who moves out of a area within the same country

Types of Migration

1. International
• Crossing a boundary; easier to control; regulated; difference in income; 2-3 million per year.
2. National
• Between states or provinces; little control; employment opportunities; education; retirement.
 3. Local
• Within a city/region; change of income or lifestyle.
4. Voluntary
• The outcome of a choice.
5. Involuntary
• The outcome of a constraint.

Selective Migration

1. Context
• Many migrations are selective.
• Do not represent a cross section of the source population.
2. Age-specific migrations
• One age group is dominant in a particular migration.
• International migration tends to involve younger people.
• The dominant group is between 25 and 45.
3. Sex-specific migrations
• Males - Often dominant international migrations.
• Females - Often dominate rural to urban migrations.
• Mail-order bride - Come from places in which jobs and educational opportunities for women
are scarce and wages are low.
4. Education-specific migrations
• May characterize some migrations (having or lacking of).
• High level of education attained by most contemporary Asian immigrants to the USA and
Canada.
5. Immigration and jobs
• Related to the economic sector.
• High Level - Filling high skilled position in science, technology and education.
• Low Level - Filling low paid jobs (minimum wage) that most people do not want (agriculture
and low level services).

Brain Drain

1. Definition
• Relates to educationally specific selective migrations.
• Can be both a benefit for the receiving country and a problem to the country of origin.
2. Receiving country
• Getting highly qualified labor contributing to the economy right away.
• Promotes economic growth in strategic sectors: science and technology.
3. Country of origin
• Education and health costs not paid back.
• Long term impact on economic growth.
• Possibility of remittances.
Migration Theory

1. Push - Pull Theory

Context

Negative or push factors in his current area of residence:

• High unemployment and little opportunity.

• Great poverty.
• High crime.
• Repression or a recent disaster.

Positive or pull factors in the potential destination:

• High job availability and higher wages.

• More exciting lifestyle.
• Political freedom, greater safety and security, etc.

Intervening obstacles

• Migration costs / transportation.

• Immigration laws and policies of the destination country.

The problem of perception

Assumes rational behavior on the part of the migrant:

• Not necessarily true since a migrant cannot be truly informed.

• The key word is perception of the pull factors.
• Information is never complete.

2. Economic Approaches

Labor mobility

• The primary issue behind migration.

• Notably the case at the national level.

Remittances

• Capital sent by workers working abroad to their family / relatives at home.

3. Behavioral Explanations of Migration

Life-cycle factors

• Migration linked to events in one’s life.

• People in their 30s are the most mobile.
• Later in life, flexibility decreases and inertia increases.
Migrants as risk-takers

• Migrants tend to be greater risk-takers, more motivated, more innovative and more adaptable.

Summary

• No one theory of migration can adequately explain this huge worldwide phenomenon.
• Each brings a contribution to the understanding of why people move.

Refugee/s - is a person who has been forced to leave their country in order to escape war;
persecution or natural disaster.

1. Environmental and economic refugees

• People who can no longer gain a secure livelihood in their homelands because of what are
primarily environmental or economic factors of unusual scope.
2. Origins
• The first recorded refugees were the Protestant Huguenots who left France to avoid religious
persecution.
3. Pre-WW II and during WW II
• Primarily political elites: Fleeing repression from the new government, which overthrew them.
• War-driven refugees: Usually could be expected to repatriate after the war ended.
4. Post WW II
• Change in the patterns of refugee flows.
• De-colonization in Asia, Africa, and the Caribbean.
• The Cold War also increased political instability in a number of countries.
• Political instability in Latin America increased due to the vast social inequalities existing in that
region.
• New kind of refugee flow.
5. Current issues
• Refugees are a controversial issue: Increasingly, refugees are no longer accepted. Economic
refugees resorting to asylum as the only way to get a legal status.
• 1996 amendment to US immigration law: Enforcing detention for all refugees entering the
United States.

Urbanization - The agglomeration of population in cities.

• Demographic process: Urban population growth (natural increase or migration).

• Infrastructure process: Expansion of urban infrastructures and land use.
• Economic process: Creation of secondary, tertiary and quaternary sectors.
• Creates a society where values and lifestyles are urban.

Context and Issues

1. Causes of urbanization
• Historical: Defense and Trade routes.
• Social: Increased social interactions.
• Economic: Linked with agricultural surpluses and increased of economic opportunities.
 2. The urban explosion
• Urban population growth is the most important change in population geography.
3. Developed countries
• Developed countries are already urbanized.
4. Developing countries
• Going through a major phase of urbanization.

Why People Move to Urban Areas?

1. Context
• Major changes in the developing world.
2. Push-Pull considerations
• Both are affecting rural-urban migrations.
• “Pull” of the cities may determine the destination.
3. Urbanization and economic survival
• Decision to move to an urban area: Largest labor market maximizing the chances of
employment and survival.
• Cities are the largest labor markets.
• Favelas (squatter settlements) of Rio de Janeiro: Characterized by large landholdings owned
by a limited elite.

Megacities and Urban Regions

1. Concentration
• An increasing share of the global population lives in megacities.
• 1900: 233 million urbanites (14% of the global population); 20 megacities.
• 1950: 83 megacities and 34 cities in developing countries.
• 2000: All new millionaire cities are in developing countries.

Shantytowns

1. Context
• Many of the new urban dwellers, particularly women and their children are among the poorest
people in the world.
2. Definition
• Dwellings are built by the current or original occupant: Do not follow norms in terms of housing
and sanitation.
• Inhabitants have no legal title to the land: Exploiting a legal vacuum of land ownership.
• Lack of urban services.
3. Setting
• Shantytowns are constructed over the least desirable land.
• Put the population at risk.
4. Habitat
• Informal settlements: Perhaps the most visible sign of widespread poverty.
• Emerged in all Third World cities: Following the demographic explosion.
• Incapacity of private and public instances: Provide low price housing for the majority of the
population.
 • Housing crisis that could not be solved.
5. Growth process
• People expelled from gentrification in downtown areas.
• Inflow of people expelled from poverty in rural areas.

CHAPTER 6: Agricultural Sector

DEFINITION:

• Agriculture sectors comprise establishments primarily engaged in growing crops, raising

animals, and harvesting fish and other animals from a farm, ranch, or their natural habitats. 

Agricultural Systems

• Useful to view agriculture in a systems framework: inputs, outputs and linkages

• Inputs- labor, fertilizer, seeds, land preparation, land quality and tenure.
• Outputs- production in form of mature crops and income earned and allocated
• Linkages- labor intensity > type of crop (rice, rubber, etc); land size>income earned and
traditional system
A. Physical - Ecosystem- especially climate (precipitation), soil and vegetation.
B. Behavioral - how ecosystem is perceived-physical and behavioral may be in conflict.
C. Operational - culture, values, class structures, institutions and tradition, political system,
technology level-farm management, land tenure-all influence and govern machinery of
production, consumption and exchange.

Agrarian Structure

• Refers to ways in which agricultural system is developed on the land and includes land
ownership, cropping system, and institutions.

Land tenure - Who owns or controls the land.

Communal tenure - Land held by village where villagers enjoy usufruct.

Estates – Large estates where wage laborers are employed by private sector firms (agri-business),
or plantations held by public sector.

Freehold - Outright ownership with land being transferred and divided equally among (usually
males).

Tenancy - Farmers pay owners for use of land either in cash or kind (production).

Forms of Agriculture

1. Wet rice (sawah or padi) cultivation - rice grown in an embanked field relying on natural
rainfall or irrigation.
2. Plantation or Estate Agriculture - foreign capital or public sector capital.
3. Sedentary dry farming - mostly smallholders growing cereal grains usually millets and
sorghums.
 4. Shifting cultivation - sometimes referred to as ‘swidden’ and means occupancy of the land
interrupted by lengthy rest periods, clearing field and burning vegetation, sowing food crops.
5. Highland Market Gardens - Largely labor intensive vegetable or tea production for urban
markets

Constraints on Rural Southeast Asian Agriculture

• Small size of farms limit productivity of labor

• Reduction in size of land parcels under inheritance tends to increase tenancy

Contrasting Peasant Agriculture: Asia

• In Latin America and Africa - Too much land under control of too few people.
• In Asia - Too many people crowded onto too little land.

Three forces have molded the traditional pattern of land ownership into its present condition.

1. European rule - Private property, rise of landlord and creation of individual land titles.
2. Rise in power of the moneylender - With land titles land became a negotiable asset.
3. Rapid growth of Asian populations - impact has been severe fragmentation; as holdings
shrink production falls below poverty level; peasants forced to borrow at usurious rates; large
debts; forced to pay high rents with scarce land; labor abundant so wages are low.

Southeast Asia’s Green Revolution

• Basically a worldwide attempt to revolutionize production of wheat and rice in many Third
World countries.
• Most important development is the application of new seeds or hybrid referred to as HYVs
(high yielding varieties).

Hybrid Rice

• Especially responsive to fertilizers in conditions of adequate water supply and effective

management.
• Spectacular yields - More than double normal which allows nations to achieve rice self
sufficiency and eliminates need to import.
• HYVs are locationally selective - Best results where cheap irrigation is available.

Impact of Green Revolution

• Commercial and environmental risks are raised with increased dependence on success in the
market
• Forced boom in irrigation and water control schemes
• Rise in fertilizer and pesticide consumption
• Increased dangers from new plant diseases
• Bottlenecks in labor supply- harvest time
Toward a New Strategy for Rural Development

1. Land Reform - farm structures and tenure patterns must fit need to:
• a. increase food production
• b. promote wider distribution of benefits of agrarian progress
2. Supportive Policies - Need state policies that provide incentives and opportunities.
• a. assure access to needed inputs
• b. corresponding changes in rural institutions that control production
• c. expand supporting government services
3. Integrated Development Objectives
• a. need simultaneous changes in income, employment, education, health and housing
• b. lessening of rural-urban imbalances
• c. capacity of rural sector to sustain these improvements over time

CHAPTER 7: International Trade and Development

Development - requires skilled labor, appropriate technology, proper machines, sufficient funds and
materials.

Expanding Trade - can lead to fuller employment and more efficient allocation of resources.

Economic development - is a progressive process of improving human conditions.

Economic Growth - is the product of economic development.

National income - is the total income of the factors of production in a given year or the total factor
payments received by citizens in one year.

Gross national product (GNP) - This is the total market value of all final goods and services product
by citizens in one year.

Gross Domestic product (GDP) - is the total market value of all final goods and services produced
within the territories of a country in one year.

Per capita income (PCI) - It means income per head.

Per capita GNP - is derived by dividing the GNP by population of country.

Less Developed countries (LDC) - These may also refer to the least development countries which
are the poorest countries of the world.

Developed Countries - are the rich, advanced or industrial countries.

South - refers to developing countries which are located in the southern hemisphere.

North - refers to developed countries which are located in the northern hemisphere.

Characteristics of the less developed countries (LDC)

• Subsistence agricultural economy

• Low per capita income
 • High birth rate
• Malnutrition
• Inefficient public administration
• Unfavorable attitude, value and institutions

BALANCE OF PAYMENTS
- An annual accounting statement of all financial transactions of a country with the rest of the
world.

Balance trade - a situation where the value of exports of a country is equal to the value of its imports.

Invisible Items - pertain to service in the balance of payments.

Surplus balance of payments - a situation where the incomes of a country are greater than its
expense in its financial transactions with the rest of the world

Deficit balance of payments - a situation where the expenses of a country are greater that its
incomes in the financial transactions with the rest of the world.

Credits - are the incomes of individuals, organizations or government earned from other countries.

Debits - are payments of individuals, organizations or government of a country to other countries.

Capital account - it is record of all financial transaction relating to private investments, grants and
loans with other countries.

Officials’ monetary reserves/cash account - these are the assets of the central bank of the
Philippines in the form of gold reserves.

Causes of balance of payments deficits

Structural causes - the traditional exports of the less developed countries are mainly primary
products.

Monetary causes - Incorrect monetary policies can create balance of payments problems for a
country.

Demand pull inflation - money means more demand for goods and services.

EXCHANGE RATE POLICIES

- A foreign exchange rate is the price of foreign money expressed in the terms of local money.

CHAPTER 7: International Trade Theory and Development Strategy

Globalization: An Introduction

• Globalization - many interpretations

• Concerns with globalization center around the unevenness of the process
Demand Elasticity and Export Earning Instability

• Low income elasticity of demand for primary products

• Low price elasticity of demand and supply
• Export earnings instability

The Traditional Theory of International Trade

• Main conclusion of the neoclassical model is that all countries gain from trade
• World output increases with trade

• Trade theory and Development: The Traditional Arguments

- Trade stimulates economic growth

- Trade promotes international and domestic equality
- Trade promotes and rewards sectors of comparative advantage

Trade Strategies for Development: Export Promotion versus Import Substitution

a. Export promotion: looking outward and seeing trade barriers

- Low income elasticity
- Low population growth rates in developing economies
- Decline in prices implies low revenue
b. Expanding Exports of manufactured goods: Some successes
c. Import substitution: looking inward but still paying outward
- Tariffs, infant industries, and the theory of protection
d. The IS industrialization strategy and results
- Protected industries get inefficient and costly
- Foreign firms benefit more
e. Tariff Structure and Effective Protection
- Nominal rate of protection
- Effective rate of protection
f. Standard argument for tariff protection
- Sources of revenue
- Response to chronic BOP problems
g. Must be applied selectively and wisely
h. Foreign-exchange rates, exchange controls, and the devaluation decision
- Currencies of developing countries are overvalued
i. Chronic payments deficits can be ameliorated by a currency devaluation
- Difference between depreciation and devaluation
- Higher import prices result in an inflationary wage-price spiral

Trade Optimists and Trade Pessimists: Summarizing the Traditional Debate

1. Trade pessimist arguments

• Limited growth of world demand for primary exports
• Secular deterioration in terms of trade
• Rise of “new protectionism”
 2. Trade optimist arguments
• Trade Liberalization promotes competition and efficiency
• Generates pressure for product improvement
3. The industrialization strategy approach to export policy
• Focus on government interventions to encourage exports
• WTO rules and industrial policies

South-South Trade and Economic Integration: Looking Outward and Inward

1. Economic Integration: Theory and Practice

• The growth of trade among developing countries.
• Integration encourages rational division of labor among a group of countries and increases
market size
2. Regional trading blocs (economic unions) and the globalization of trade
• NAFTA
• MERCOSUR
• SADC
• ASEAN

Trade Policies of Developed Countries: the Need for Reform

• Rich-nation economic and commercial policies matter for LDCs

• 1995 Uruguay Round and WTO
• Despite 8 liberalization rounds over 50 years trade barriers remain in place in agriculture and
textiles
• Doha Development Round 2001 has tilted the focus on the needs of the developing world

CHAPTER 7: INTERNATIONAL TRADE and DEVELOPMENT

International Trade is exchange of goods and services that is conducted beyond the political
boundaries of a country.

Benefits of International Trade

1. Increases consumers’ satisfaction. The best goods and services are winners in the world
markets.
2. Improves standard of living. People are given the chance to purchase all the goods and
services that money can purchase.
3. Promotes product specialization. To survive market competition, the best option is to
specialize in the production of goods and services based on natural comparative advantages.
4. Accelerates economic development. These benefits apply for the less developed countries.
5. Generates foreign exchange earnings. To a less developed countries like our country
Philippines, the availability of sufficient foreign exchange is significant for the attainment of
economic stability and growth.
6. Stimulates production. A profitable and large market is the best incentive for production.
People do not produce on a commercial scale if there are buyers for their products.
Bases of International Trade

1. Technological differences. All other things being equal, a country with a better technology
has definitely an advantage in production.
2. Price differences. Countries with lower prices attract importers while countries with higher
prices attract exporters.
3. Distribution of natural resources. Because of geographic differences, countries do not have
the same natural resources. Our own country is very rich in natural resources which are
suitable for agricultural production.

THEORY OF COMPARATIVE ADVANTAGE

Comparative Advantage refers to the ability of a party to produce a particular good or service

at a lower marginal and opportunity cost over another. Even if one country is more efficient in the
production of all goods (absolute advantage in all goods) than the other, both countries will still gain
by trading with each other, as long as they have different relative efficiencies.
Forms of Trade Protection

Protection refers to an advantage given to domestic producers in competing against foreign

goods in the domestic market.

1. Quotas. It refers to a quantitative restriction in limiting imports of a particular product to a specified

number of units, or to a certain value in a given period of time.

2. Tariffs. It refers to a tax imposed on imports as they enter a country. It is commonly levied as a
specified as valorem percentage of the value of imports.

3. State trading. Governments, especially those with socialist and communist economies, sometime
grant monopoly importing rights to state enterprises. Thus, private companies cannot import goods.

4. Exchange controls. The Bangko Sentral ng Pilipinas restricts the sale of foreign exchange like for
example US dollars to importers. Only those with permission from the BSP to buy foreign exchange
have the ability to import.

5. Government regulations. These constitute a sort of protection for the domestic protection for the
domestic products. Safety and health standards for imported goods are an example of government
regulation.

PHILIPPINE EXPORT-IMPORT POLICY GUIDELINES

Classification of Imports
a. Freely Importable.  These are commodities, which importation is neither regulated nor prohibited.
The importation may be effected without prior approval of or clearance from any government agency.

b. Regulated Commodities. These are commodities which importation requires clearances/permits

from appropriate government agencies including the Bangko Sentral ng Pilipinas (BSP).
 
c. Prohibited or Banned.  These are commodities which importation is not allowed under the
existing laws.
Letter of Credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount.

Letter of Credit, simply defined, is a written instrument issued by a bank at the request of its
customer, the Importer (Buyer), whereby the bank promises to pay the Exporter (Beneficiary) for
goods or services, provided that the Exporter presents all documents called for, exactly as stipulated
in the Letter of Credit, and meet all other terms and conditions set out in the Letter of Credit.

No Dollar Import is a special privilege given by the government to returning residents and other
qualified individuals to bring motor vehicles into the country for personal use under certain conditions.

Foreign exchange also refers to the global market where currencies are traded virtually around-the-
clock.

The Bangko Sentral ng Pilipinas (BSP) maintains a floating exchange rate system. Exchange rates
are determined on the basis of supply and demand in the foreign exchange market.

Balance of payments (BoP) accounts are an accounting record of all monetary transactions

between a country and the rest of the world.