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

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

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

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.

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.

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)

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

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

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?

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

11. Trade Dependency Ratio

12. FDI

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

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