1. Lecture 14 Don DeVoretz
Commercial Policies and International Trade and Finance:Best Practices ?

2. 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 ?

3. 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

4. Corruption and Overvaluation

5. 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.

6. 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%).

7. 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 ?

8. 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

9. Strategy IV Restructuring ?
Inward Looking Commercial Policies ?
Ingredients:
Low effective rate of protection
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 positive or negative ?

10. Actual Effective rates
Country Average Effective Rate
Pakistan 356 %
India 69%
Thailand 27 %
Singapore 22 %
South Korea -1%

11. 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 low rates of effective protection
Implications:
Backward Linkages can not develop
No development of a capital goods industries using labour intensive techniques

12. 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.
How have these arguments panned out in history ?

13. Outward Looking Policies
Zero Effective Rates
No quantity restrictions
Convertible currencies
Fluctuating exchange rates
Membership in WTO: play by the rules ?

14. 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

15. Trade Pessimists High efffective rates in Developed countries
Mfg. Is ologopolistic
Attract foreign capital
Low income elasticity of demand for LDC products
LDC exports grow slowly
LDC terms of trade declining

16. End of Show