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1

What are the typical reforms that falls under the world bank structural adjustment program?

1. Reducing/eliminating producer and consumer subsidies
2. Lowering trade barriers
3. Streamlining of the public sector
4. Stimulating private sector through less government intervention and greater use of markets
5. Tax reform

2

When/Why were the World Bank Structural Adjustment Programs created?

Begun in the early 1980's, as developing countries experienced problems in paying back loans incurred in 1970's

3

What was the purpose of the World Bank Structural Adjustment Program?

- Aimed at stimulating long-term economic growth and transformation of low-income countries

4

What is structural adjustment loans?

Structural adjustment loans provide financial support to governments and sectors undergoing adjustment, conditional on economic and policy reforms in those sectors ('conditionality')

5

Post-WWII Thinking on Economic Development
“Stages of Growth”

- Traditional agriculture-based society
- "take off" - education, capital mobilization, technology development, incipient manufacturing
- Drive to maturity - industrialization, economic diversification, lower imports

6

Sectors which stimulate growth

1. Agriculture and natural resources
2. Manufacturing
3. Services
4. Knowledge-driven, technology and innovation based sectors

7

What are the two strategies for trade and economic development?

1. Import-substitution industrialization
2. Export-oriented growth

8

Import-substitution Industrialization:

Support growth of
domestic import-competing industries – esp. manufacturing – in order to replace imports with domestic production,
restrain outflow of foreign exchange, and avoid negative terms-of-trade effects.

9

Aspects of ISI strategy:

- Common in 1950s - 1970s
- Protect "infant industries"; high level of subsidies
- Imposition of high tariffs and non-tariff barriers keep out imports and protect domestic industry; often tariff escalation
- Overvalued exchange rate
- Substitution of domestic production for imports

10

Experience with ISI strategy:

1. Trade barriers become permanent; economic rents created
2. Guaranteed domestic market limits competition and reduces incentives for domestic producers to become efficient; keeps prices high.
3. Small markets: inability to take advantage of economies of scale, inefficiency, excess capacity problems
4. Incentive to use capital-intensive production regardless of country's factor endowments: lack of labor absorption
5. Focus on manufacturing neglected agriculture and other primary sectors in which country has genuine comparative advantages

11

Prevalence of ISI strategy in 1950’s–1970’s in developing
countries; led to: (6)

1. Inefficient capital-intensive industrial production
2. High trade protection
3. Low rates of economic growth
4. Dependence on public sector for employment
5. Food imports
6. High and unsustainable subsidies

12

Export-oriented growth:

Strategy of achieving economic growth through promotion of export industries in which
country has existing/potential comparative advantage.

13

Export-oriented growth aspects of strategy (5)

1. Open markets and low trade barriers to maintain prices at international levels
2. Maintain market-oriented (or under-valued) exchange rate to keep exports price-competitive
3. Take advantage of economies of scale through seeking foreign markets
4. Achieve production efficiency through exposure to international competition
5. Special incentives and benefits for exporters, including tax breaks, preferential access to transportation and port services

14

Experience with export-oriented growth

1. Overall association (correlation) of "outward-oriented" trade policies, which promote exports, with national rates of economic growth
2. Great successes in some countries
3. Some countries overly dependent on 1, or few, exported products
4. Exposure to international price trends, especially for primary commodities
5. Potential terms of trade problems
6. Has stimulated economic restructuring and trade liberalization initiatives in many developing countries

15

Factors contributing to rising income inequality?

1. Technological change
2. Financial globalization and foreign direct investment
3. International Trade

16

What are other factors contributing to rising income inequality in the US since 1970s?

1. Restructuring of U.S. industrial sector
2. Labor market factors
3. Tax policy
4. Increased immigration
5. Globalization and the "winner take all' society

17

What are the international monetary fund main goals? (4)

1. Promote cooperation on issues related to international monetary system
2. Facilitate international trade and a multilateral system of international payments
3. Promote stability of exchange rates
4. Make short-term financial resources available to member nations to correct payments disequilbria

18

What does the IMF economic stabilization program do for countries experiencing high inflation, overvalued currency, chronic budget deficits, and/or current account deficits?

1. Reduction of budget deficit through higher taxes or lower expenditures
2. Controlled growth of money supply to limit inflation
3. Controlled growth of money supply to limit inflation
4. Devalue currency to stimulate exports, reduce imports, and restore equilibrium in current account
5. Remove price controls
6. Reduce wage growth

19

What are some world bank structural adjustment programs?

1. Lower (zero) subsidies for farmers
2. Eliminate (reduce) generalized consumer food subsidies
3. Increase subsidized interest rates to market level

20

Facts about the World Bank (International bank for Reconstruction and Development)

- Established to provide long-term loans for Europe's reconstruction following WW2
- Since 1950s, has focused on providing long-term loans for projects and programs in developing countries
- Funded through capital stock