AEB 4283: International Development Policy Section III: International Problems and Policies Week 10: Trade and Globalization Today: Discuss make-up exams Discuss Class Project paper Discuss case study on Taiwan in class from Chapter 12 Start Chapter 13, “Balance of Payments and Debts” Next Week: Complete Chapter 13 and Start Chapter 14 Start topic: “Foreign Finance, Investment and Aid” Assignment for Monday: Read Chapter 13

REVIEW: Trade and Globalization Globalization → increase in the openness of economies to international trade and financial flows (FDI, Portfolio Investment; Foreign Aid) Trade is a key element of the globalization trend Two key trade theories: The principle of Comparative Advantage → countries should focus on producing the products that they are the best at producing Factor Endowment Trade Theory → proposes that countries should specialize in the production of goods which use their most abundant factor (factor endowment) most intensively The concepts of Comparative Advantage and Factor Endowment Trade Theory form the basis of Neoclassical Trade Theory Unrealistic assumptions limit the applicability of the Neoclassical Trade Theory for the realities the LDCs face today

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 will stimulate economic growth Unrealistic assumptions from Neoclassical Trade Theory that are not very realistic for LDCs freely available technology perfectly competitive markets no government interference in trade There are many factors that determine whether trade is good or bad for a country and in reality some aspects of all approaches, Export Promotion, Import Substitution Industrialization (ISI), Economic Integration may be necessary for LDCs Some government help maybe required ( tariffs and theory of protection)

The Critique of Traditional Free-Trade Theory in the Context of Developing-Country Experience Some Conclusions on Trade Theory and Economic Development Strategy Trade can lead to rapid economic growth under some circumstances Trade seems to reinforce existing income inequalities Trade can benefit developing countries if they can extract trade concessions from developed countries Developing countries generally must trade Regional cooperation may help developing countries

What the U.S can do to help global trade? Oct. 22, 2002 What the U.S can do to help global trade? “The World’s poorest developing nations have a special place in the Obama trade agenda.” US Trade Representative Ron Kirk, Georgetown University, 29 April 2009 The economic crisis is hitting the world’s poorest countries through falling trade and commodity prices. Many of the trade policy steps that countries should take, or avoid, in coping with the crisis Avoiding additional protectionist measures is at the top of the list! The eighth of the MDGs adopted at a UN summit in 2000 calls on the rich countries to provide duty-free-quota-free market access for the LDCs. Providing full market access will not reverse the decline in trade flows, but it would open opportunities for some of the poorest countries in the world. 5

Case Study: Taiwan

Per Capita GDP* in Two Eastern Asian Tigers Source: Penn World Table * At purchasing-power-parity in 2005 USD

A Development Success Story: Taiwan Positive experience of the four Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan – also more recently, Brazil, Mexico and China) → Expanding manufactured good exports One of the four “East Asian Tiger” economies. A “development” miracle. Average annual economic growth rate of 7% during 1960-2000. Universal elementary & middle school education (9 yrs mandate). Life expectancy: 75 years; infant mortality rate: 5/1000 live births Absolute poverty virtually eliminated. Low unemployment. Low inequality

A Development Success Story: Taiwan Reasons for success: Emphasis on education (including girls). Extensive infrastructure development. Early and thorough land reform. Very high rates of saving and investment (not overtly dependent on FDI) Diffusion of commercial ideas from China, Japan & USA (e.g., China External Trade Development Council). Effective government industrial policies (e.g., successful import substitution policies). Market incentives / entrepreneurial culture.

A Development Success Story: Taiwan Reasons for success: Emphasis on education (including girls). Tax breaks on donations Incentives between education & business stressed Extensive infrastructure development. Early head start due to established networks in place Government incentive to encourage infrastructure development Transparent proceedings kept corruption in check Early and thorough land reform Rapid ag productivity → land-to-the-tiller government program in the 50s

A Development Success Story: Taiwan Successful capital formation efforts → very high rates of saving and investment (not overtly dependent on Foreign Direct Investment (FDI)) Govt. policies that promote savings → high interest rate on savings, tax-free Diffusion of commercial ideas from DCs Investing the savings in productive sectors is key. Govt. role in agencies like China External Trade Development Council to promote industrialization (adopt technologies), market development Effective government industrial policies (e.g., successful import substitution policies). Govt. role to license exports, control FDI, export cartels, fiscal incentives for priority sectors in the infancy stages Market incentives / entrepreneurial culture solid property rights, work ethic, export-led growth from the 60s

A Development Success Story: Taiwan Challenges: Relationship with mainland China. Affects its exports to the country Environmental problems. Chronic air pollution problems Land use patterns Land is limiting factor Source: http://taiwantoday.tw/