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Explore consequences of devaluation, overvalued exchange rates, and foreign aid's impact. Discover debt repayment, political struggles, commercial policies, and trading viewpoints.
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Lectures 14-15Don DeVoretz Commercial Policies and International Trade and Finance:Best Practices ?
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 ?
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
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.
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 (15%).
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 ?
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 concessionary terms
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 -
Actual Effective rates : 1990’s • Country Average Effective Rate • Pakistan 356 % • India 69% • Thailand 27 % • Singapore 22 % • South Korea -1%
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
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.
Outward Looking Policies • Zero Effective Rates • No quantity restrictions • Convertible currencies • Fluctuating exchange rates • Membership in WTO: play by the rules ?
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
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
