Paola Brumatti, Jurgita Miliukaite, Valeria Parracino Immiserizing growth Paola Brumatti, Jurgita Miliukaite, Valeria Parracino

The history of immiserizing growth Economic growth is a concept referring to a worsening in the conditions of a country. The scholar Bhagwati (1958) coined this expression to indicate a growth that expands exports and worsens the terms of trade sufficiently that real income falls. Johnson (1955) had shown that a market distorted by a tariff could lose in terms of growth and had also, independently, worked out various conditions referring to Bhagwati's result.

The Standard Model of Trading Economy (short summary) 1. The terms of trade refers to the price of exports relative to the price of imports. 2. Export-biased growth reduces home country terms of trade, reducing its direct benefits of growth and increasing the welfare of foreign countries. 3. Import-biased growth increases home country’s terms of trade, increasing its welfare and decreasing the welfare of foreign countries.

Generally speaking, free international trade is considered to be positive for the welfare of a country. BUT: it might happen that the combination of international trade and economic growth decrease the country’s welfare. This phenomenon is know as “immisering growth”, from the famous homonym paper written in 1958 by Bhagwati.

In fact… In fact, free trade is the best economic policy for small countries: their supply and demande curves are slight in the world market, so the terms of trade is given and unchanged .

Let’s assume that there is no domestic industry which can supply this good.

Key concepts of the graph DD’ = domestic demand curve B: price  the price is given, since we assumed that the country is a small one. That’s the reason why they can import the quantity of the good that they demand at price B. A: equilibrium point in free trade DAB: level of welfare

Now let’s suppose that the country imposes an import fee

Key concepts of the graph DD’ = domestic demand curve E: new price with the import fee C: new equilibrium point DCE: new level of welfare. EC: is the new quantity imported The level of welfare is reduced , since the sum of the consumer’s surplus (DCE) and the revenue of the tariff (ECBF) is smaller than the previous level of welfare.

Since a change in a small country’s demand and supply doesn’t change the world terms of trade, the welfare of a small country increases by an increase in the domestic production. With free trade there is no possibility of immisering growth in a small country.

What happens in the case of a larger country? But if the country is large enough to influence the world terms of trade, the free trade is not the optimal condition for international trade.

Let’s assume that there is no domestic industry which can supply this good.

Key concepts of the graph DD’ : domestic demand curve FF’: supply curve of the foreign exporter A: world equilibrium price AB: domestic demand = AC supply from foreign exporter DBA: consumer’s surplus If the country imposes an import tariff, the new world price will be H , and the new country price will be C. The new domestic demand is CE which equals to the foreign supply, GH. The level of welfare is higher, since the sum of the consumers’ surplus DCE and the revenue of the fee CEIH is larger than the previous consumer’s surplus in free trade DBA.

That’s also the reason why the immiserising growth might happen only in the case of a big country and not in that of a small one. In fact, only a big country has the potential to influence the world terms of trade so much that the real benifit effect of the country is lower after the growth then it was before.

In fact we already know that an export-biased growth tends to worsen a growing country’s terms of trade.

The immiserizing growth occurs when a strongly export-biased growth is combined with very steep RS and RD curves. In this situation there is such a big change in the terms of trade since the initial positiv effects of the growth are offset. In other words, the immizering growth occurs when the negative variation of a good is larger than the positive variation of its production.

The immiserizing growth: geometrical demostration

Key concepts of the graph A: production point C: new production point B: consumption point D: new consumption point Slope AB: term of trade Slope CD: new term of trade Welfare is indicated by the consumption points. In the graph we can clearly see that the point D represents a lower level of welfare

Conclusion: a paradox The paradox of the immiserizing growth can occur, but in extreme conditions: strongly export biased growth must be combined with very steep RS and RD curves, so that the change in the terms of trade is large enough to offset the initial favourable effects of an increase in a country’s productive capacity. That’s why the immiserizing growth is mostly considered as a theoretical point and not a real-world issue.

Thank you for your attention

References: Immiserizing Growth < http://www.business.uwa.edu.au/__data/assets/pdf_fil e/0004/2283331/ZHANG-Xiaobo-Immiserizing- growth.pdf > 2015-03-12, 20:00. Development of International Trade Theory (Takashi Negishi) http://www.fses.uniba.sk/fileadmin/user_upload/editor s/Studium/AE/International_Econ/Lecture_4.pdf https://archive.org/stream/optimalpoliciesi00bhag/op timalpoliciesi00bhag_djvu.txt http://www.soc.duke.edu/sloan_2004/Papers/Memos/ Kaplinsky_immiserising%20growth_25June04.pdf