This presentation covers some aspects of topical issues in trade and economic development. Designed for A2 economics students - links to some Financial Times videos with special reference to the work of Hidalgo and Hausmann and their index of economic complexity

1. Some Topical Issues in Trade
and Development
A2 Macro Economics
March 2014

3. Coverage
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•
•
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•
Know the conventional wisdom but challenge it!
Revisiting Gains from Trade and the assumption
Improving Competitiveness
Primary Product Dependency
Escaping the Middle-Income Trap
Export Complexity and Development
Different views on the Foreign Aid Debate

4. A2 Unit 4 Macro: Challenging The
Conventional Wisdom

5. 1
2
3
4
5
6

6. Cesar Hidalgo
Esther Duflo
Dambisa Moyo
Paul Collier
James
Acemoglu
Amartya Sen

7. Some new thinking ........

8. Development Economics is Changing!
Networks & Social Learning
Capabilities and Capacities
Resilience / Adaptability
Randomised Control Trials

9. Development Economics is Changing!
Networks & Social Learning
Business networks - collaboration
Capabilities and Capacities
Social networks
Importance to developing economies of their
Resilience
diaspora (remittances) / Adaptability
New trade networks – e.g. Deepening intraregional trade in Sub-Saharan Africa Trials
Randomised Control

10. Development Economics is Changing!
Networks & Social Learning
Capabilities and Capacities
Diversifying the capabilities of economy
Resilience / Adaptability
Investment to achieve capital deepening
Randomised Control Trials

11. Development Economics is Changing!
Resilience to external shocks such as:
Networks & Social Learning
Financial instability
Effects of climate change
Capabilities and Capacities
Geo-political uncertainty
Resilience / Adaptability
Randomised Control Trials

12. Development Economics is Changing!
Banerjee and Duflo
Networks & Social Learning
The two authors have used randomized
control trials across five continents to test
the impactCapabilities and Capacities
of policies aimed at beating
poverty, from the provision of free antimalaria bed-nets to education subsidies
Resilience / Adaptability
Randomised Control Trials

13. Conventional Gains from Trade
Help to reduce scale
of extreme poverty
Increased market
contestability
Better access to
new technologies
Inflows of specialist
knowledge
Exploiting
economies of scale
Better use of our
scarce resources

14. Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade finance is
available
Barriers to
trade are small

15. Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade finance is
available
Barriers to
trade are small
Increasing returns?

16. Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade finance is
available
Barriers to
trade are small
Increasing returns?
Geographical and occupational
immobility of labour

17. Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade finance is
available
Barriers to
trade are small
Increasing returns?
Geographical and occupational
immobility of labour
External costs of production and
consumption

18. Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade finance is
available
Barriers to
trade are small
Increasing returns?
Geographical and occupational
immobility of labour
External costs of production and
consumption
Credit crunch / banking crisis has
affected finance for exporters

19. Evaluation: Awareness of Assumptions
Constant
returns to scale
Mobility of
factor inputs
Insignificant
externalities
Trade finance is
available
Barriers to
trade are small
Increasing returns?
Geographical and occupational
immobility of labour
External costs of production and
consumption
Credit crunch / banking crisis has
affected finance for exporters
Rise of regional trade blocs and
bi-lateral trade agreements

20. Drivers of Competitive Advantage
Unit labour costs
Exchange rate
Innovation
Economies of scale
Sustainability
Human capital

21. The Importance of Human Capital
Technology spill-overs
Precision Engineering
Universities
Science Parks
Capital Projects
Rise of Creative
Industries

22. Selected Competitiveness Rankings for 2013
Competitiveness Indicators
1. Institutions and
Infrastructure
2. Macroeconomic stability
3. Health/education systems
4. Financial markets (including
strength/stability of banks)
5. Technological readiness
6. Market size (linked to
population size and per
capita incomes)
7. Business sophistication
(quality of supply chains,
industrial clusters) and rate
of innovation

23. Selected Competitiveness Rankings for 2013
1:
Switzerland
4: Germany
2: Singapore
5: United
States
3: Finland
10: UK
Competitiveness Indicators
1. Institutions and
Infrastructure
2. Macroeconomic stability
3. Health/education systems
4. Financial markets (including
strength/stability of banks)
5. Technological readiness
6. Market size (linked to
population size and per
capita incomes)
7. Business sophistication
(quality of supply chains,
industrial clusters) and rate
of innovation

24. Primary Product Dependency

25. Prebisch-Singer Hypothesis
Suggests that over the long run the prices of primary goods such
as coal, coffee and cocoa decline in proportion to the prices of
manufactured goods such as cars and washing machines
Raul Prebisch
Hans Singer

26. Prebisch-Singer Hypothesis
Basic idea……………….
Long term decline in
real commodity
prices
Worsens terms of
trade for primary
exporters
Better off focusing
on import
substitution policies

27. Prebisch-Singer Hypothesis
Basic idea……………….
Long term decline in
real commodity
prices
Worsens terms of
trade for primary
exporters
Better off focusing
on import
substitution policies
Labour intensive manufactured goods are now
cheaper because of globalisation
Modern reality
Strong rise in global commodity prices
Many commodity exporters have seen their
terms of trade rise .. A big opportunity

28. Key A2 Concept: Terms of Trade

29. Key A2 Concept: Terms of Trade
• Sub Saharan Africa is
now getting 30% better
terms of trade than in
2004
• i.e. a bigger “return” for
each unit of export sold
to the world
• But it could still be
higher in the long run!
• If they can increase the
value added from their
export sectors

30. Economic Complexity and Trade

31. UK

32. Zambia

33. Complexity matters for growth and
development
“Traditionally, economic development has been
measured through a host of aggregated variables,
mainly GDP, adjusted for PPP.
As the human body develops, cells differentiate into
neurons, muscles, bones and other cell types.
Similarly, as nations develop, different industries and
products are born. Assessing the health of a nation
solely based on its wealth is like assessing the health of
a child solely based on its weight.” Ricardo Hausmann

34. Why Countries Grow

35. Who will grow next?

36. Building More Complexity
The wealth of nations is driven by
productive knowledge - Knowledge is
embedded in brains and human networks
Chunks of knowledge can be aggregated
by connecting people through
organizations and markets
Development is driven by networks –
standard development theory finds it
hard to model this

37. Building More Complexity
The wealth of nations is driven by
productive knowledge - Knowledge is
embedded in brains and human networks
Chunks of knowledge can be aggregated
by connecting people through
organizations and markets
Development is driven by networks –
standard development theory finds it
hard to model this

38. Building More Complexity
The wealth of nations is driven by
productive knowledge - Knowledge is
embedded in brains and human networks
Chunks of knowledge can be aggregated
by connecting people through
organizations and markets
Development is driven by networks –
standard development theory finds it
hard to model this

39. A2 Macro Support
Get help from fellow
students, teachers and
tutor2u on Twitter:
#econ4
@tutor2u_econ

40. The Middle Income Trap
“The concept
defines the fastgrowing economies
that face a possible
dilemma of being
caught between
poverty and
prosperity”
Source: World Bank
Development Blog

41. The Middle Income Trap
According to the
OECD, only 17
countries have
joined ranks of rich
nations in the post
war period by
breaking out of the
middle income trap
- this includes
Greece and
Portugal!

42. Middle Income Trap
Danny Quah
The proposition that fast-growing
economies will slow eventually is
called “neoclassical convergence” —
when capital-deepening has run its
course and any further advance in
prosperity can come only from
technological progress, whether
through indigenous innovation or
through importing techniques from
any economies still running on
ahead. But neoclassical convergence
is an old idea.

43. Causes of the Middle-Income Trap
Rising wages / unit labour costs
Productivity slowdown
Challenges of moving up the product
value chain
Institutional Weaknesses
Challenge of maintaining macroeconomic stability

44. Strategies for Overcoming the Trap
Rising domestic consumption
Human capital investment
Investment in critical infrastructure
Regional Trade Integration and New Trade Routes
Diversification of industrial base and export industries
Encouraging private sector development
Measures to support inclusive growth

45. Upgrading an economy
Policies to support diversification and productive upgrading can help a country
escape the middle-income trap. For example, South Korea has grown it’s
capacity to benefit from trade-led growth in high connectivity and higher valueadded sectors
8:37:01 PM

46. A2 Macro – October 2012
Aid and Development

47. Foreign Aid Debate
Foreign (overseas) development aid
Remittances from migrants
Foreign direct investment (FDI)
Portfolio capital investment
Loans from international institutions

48. Different types of aid
• Bi-lateral aid: From one country to another
• Multi-lateral aid: Channelled through international
bodies
• Project aid: Direct financing of projects for a donor
country
• Technical assistance: Funding of expertise of various
types
• Humanitarian aid: Emergency disaster relief, food
aid, refugee relief and disaster preparedness
• Soft loans: A loan made to a country on a
concessionary basis
• Tied aid: i.e. projects tied to suppliers in donor
country
• Debt relief – e.g.
cancellation, rescheduling, refinancing of a country’s
external debts
UK Bi-Lateral Aid
Review 2011
1. Aid stopped to
China and Russia
2. No new financial
grant aid to India
3. UK will end direct
financial support to
South Africa by
2015
4. Part of the bilateral
aid to Rwanda,
Uganda and Malawi
has been
suspended.

49. Case For Aid
Helps to overcome the
savings gap + aid can play a
key role in stabilising postconflict environments and in
disaster recovery
Project aid can fast forward
investment in critical
infrastructure projects –
capital deepening effects
+higher productivity
Building a Case
for Overseas Aid
Long term aid for health and
education projects - builds
human capital and stronger
social institutions. Aid
projects for enterprise
Well targeted aid might add
around 0.5% to growth rate
of poorest countries - this
benefits donor countries too
as trade grows

50. Case Against Aid
Poor governance - aid can be
expropriated and leaves
recipient country - aid can
finance corruption / strengths /
locks-in ruling elites
Lack of transparency –
hundreds of $m spent on aid
consultants and developed
country NGOs
Some arguments
against overseas
aid
Dependency culture – one aid
paradox is that aid tends to be
most effective where it is
needed least – it may stunt
entrepreneurial culture
Aid may lead to a distortion of
market forces and a loss of
economic efficiency and risks of
inflation

51. Paul Collier on Aid
“There is mounting cynicism about aid—
some of it amply justified by past donor
practices. Yet few realise just how smart
and highly geared modern British aid can
be. Perhaps the most sensational recent
economic development in Africa has been
the explosive growth of “branchless”
telephone banking in Kenya. DfID thought
up the idea, spent money successfully
piloting it, and demonstrated to the private
sector that there was a market
opportunity. British aid was smart, and
thereby catalytic.”
Source: Prospect Magazine, 2010

52. Moyo’s Tough Love Approach
“In five years, all aid to Africa
must stop. In its place,
African nations will need to
implement new policies
including micro-loans,
improved remittances and
formalised domestic savings
schemes, as well as,
internationally, improving
foreign direct investment,
borrowing responsibly and
securing more equitable
trading arrangements with
the west.”
Source: Dambisa Moyo, Dead
Aid

53. Duflo and Banerjee – Poor Economics
• Duflo and Banerjee – Economists at
the Poverty Action Lab
• Have pioneered use of randomised
controlled trials to find out what
works in development
• Test efficacy of projects /
interventions within a population –
2 or more groups (inc control)
• “Top-down” aid projects afflicted by
– Ideology (prejudices, beliefs)
– Ignorance (info gaps about local
conditions)
– Inertia (failure to change when
project does not work)
“Precisely because
[the poor] have so
little, we often find
them putting much
careful thought into
their choices: They
have to be
sophisticated
economists just to
survive.”

54. Angus Deaton on Aid
• When the conditions for
development are present,
aid is not required. When
they do not exist, aid is
not useful and probably
damaging
• Foreign aid is
antidemocratic because it
frees local leaders from
having to obtain the
consent of the governed

55. Breaking out of an aid cycle
Africans living
abroad send
more money
home to their
families than
official
development
assistance by
western aid
donors. In 2010
the African
diaspora
remitted
$51.8bn; in the
same year ODA
to Africa was
$43bn.
Source: FT, Oct
2013
Sovereign
Wealth
Funds
Formalised
domestic
savings
Remittances
from
Diaspora
MicroFinance
More
equitable
trade flows

56. A2 Macro Support
Get help from fellow
students, teachers and
tutor2u on Twitter:
#econ4
@tutor2u_econ