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International Trade, Foreign Capital Flow and Aid in Development

International Trade, Foreign Capital Flow and Aid in Development. CSEAS, Koichi Fujita Kyoto University Japan. Basic Theory of International Trade. Why and how international trade takes place? Benefit from international trade Comparative advantage vs. Absolute advantage

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International Trade, Foreign Capital Flow and Aid in Development

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  1. International Trade, Foreign Capital Flow and Aid in Development CSEAS, Koichi Fujita Kyoto University Japan www.Assignmentpoint.com

  2. Basic Theory of International Trade • Why and how international trade takes place? • Benefit from international trade Comparative advantage vs. Absolute advantage Trade takes place according to the comparative advantage “Theory of Comparative Advantage” by D. Ricardo (UK) Every country gets benefit from international trade, so that free trade is necessary. • An example www.Assignmentpoint.com

  3. An Example If price is determined as 1 cotton=1 shirt in international trade, www.Assignmentpoint.com

  4. Free Trade vs. Industry Protection • Logic of “infant industry protection” F. List (Germany) vs. D. Ricardo (UK) • Why infant industry should be protected? Industrial sector can be developed by ‘learning by doing’. Industrial sector has the ‘economies of scale’. Agricultural sector will face limitation of demand. Developed countries are protecting agricultural market, which severely limits the export of agricultural products by developing countries. • Logic of IMF/ World Bank Based on the ‘Washington Consensus’ with a simple and highly optimistic reliance on free trade and/or market mechanism. www.Assignmentpoint.com

  5. Industrialization Policy: Import Substitution vs. Export Promotion • Import Substitution Strategy Historically, there emerged an ‘international division of labor’ in which developed countries export manufactured goods and import agricultural products and developing countries export agricultural products and import manufactured goods. Manufactured goods Developed countries Developing countries Agricultural products In order to promote industrialization, developing country adopts policies which restrict import of manufactured goods, thereby promote domestic manufacturing sector and substitute import with domestic production. www.Assignmentpoint.com

  6. Next Step: Export Promotion • Limitation of import substitution industrialization strategy Constraints of narrow domestic market: Case of ‘small country’ such as Korea, Taiwan, Hong Kong, and Singapore (NIEs). Constraints of foreign exchange in the case of ‘large country’ such as India. • Change to export promotion strategy The Government gives advantages to export industries in terms of, 1) Taxation 2) Institutional finance for export industries 3) Trade policy, which reduce tariff for raw materials and intermediate goods 4) Construction of export processing zones (EPZ in Bangladesh) www.Assignmentpoint.com

  7. FDI (Foreign Direct Investment) • FDI and Foreign Indirect Investment Indirect investment: investment in bank deposit, bond, stock, and other financial commodities FDI: transfer of the ‘management resources’; technologies, know-how of management, marketing skills and powers, skills and powers of financial procurement, information gathering capacity, etc. • Effects of FDI Promotion of more dynamic economic development Creation of employment opportunity • Necessary conditions to attract FDI Low wage Infrastructure, taxation, administrative procedures, governance www.Assignmentpoint.com

  8. The East Asian Miracle • Dynamism of industrialization in ‘East Asia’ NIEs (Newly Industrialized Economies): South Korea, Taiwan, Singapore and Hong Kong Starting from light industries (such as food processing and textile) to heavy industries, and then high-tech industries Japan----- NIEs------ ASEAN------ China and Vietnam • The ‘Plaza Consensus’ Japanese yen was suddenly appreciated vis-à-vis other currencies after 1985. Acceleration of capital flow (FDI) from Japan and NIEs to ASEAN (especially Malaysia, Thailand and Indonesia), then to China and Vietnam Large-scale international re-location of manufacturing factories www.Assignmentpoint.com

  9. Case of Indian Sub-continent • The wave of dynamism of industrialization in ‘East Asia’ has not yet reached to Indian Sub-continent • Different type of industrialization India: IT industries • Bangladesh is the exception? www.Assignmentpoint.com

  10. Foreign Aid • Official Development Assistance (ODA) Definition: ‘Grant Element’ is 25% or more Grant element: ratio which is calculated considering interest rate, lending period and grace period. If it is a pure commercial lending, the grant element is 0%, if it is a pure grant, the grant element is 100%. • Financial assistance and Technical assistance Case of Japan Financial assistance: Japanese Yen Loan Technical assistance: JICA expert and JOCV www.Assignmentpoint.com

  11. Trade Dependency Ratio www.Assignmentpoint.com

  12. FDI www.Assignmentpoint.com

  13. ODA (net) by DAC member countries DAC:Development Assistance Committee under OECD (Organization for Economic Cooperation and Development) www.Assignmentpoint.com

  14. END www.Assignmentpoint.com

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