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University of Southern California Dissertations and Theses
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External Trade And Economic Growth In Developing Countries With Special Reference To Iraq
(USC Thesis Other)
External Trade And Economic Growth In Developing Countries With Special Reference To Iraq
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This dissertation has been microfilmed exactly as received 69-13,047 AL-AMEEN, Abdul Wahab, 1938- EXTERNAL TRADE AND ECONOMIC GROWTH IN DEVELOPING COUNTRIES WITH SPECIAL REFERENCE TO IRAQ. University of Southern California, Ph.D., 1969 Economics, general University Microfilms, Inc., Ann Arbor, Michigan ® C o p y rig h t by ABDUL WAHAB AL-AMEEN 1969 EXTERNAL TRADE AND ECONOMIC G R O W TH IN DEVELOPING COUNTRIES WITH SPECIAL REFERENCE T O IRAQ by A bdul Wahab Al-Ameen A D i s s e r t a t i o n P re s e n te d to th e FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA I n P a r t i a l F u l f i ll m e n t o f th e R e q u ire m e n ts f o r th e D egree DOCTOR OF PHILOSOPHY (E co n o m ics) J a n u a ry 1969 UNIVERSITY O F SO UTHERN CALIFORNIA TH E GRADUATE SC H O O L U NIVERSITY PARK LOS A N G ELES. C A LIFO R N IA 9 0 0 0 7 This dissertation, written by A bdul Wahab Al-Am een under the direction of hi. S .... Dissertation C o m mittee, and a p p ro ve d by all its members, has been presented to and accepted by The G radu ate School, in partial fulfillment of require ments for the degree of D O C T O R O F P H I L O S O P H Y Date. DISSERTATION COMMITTEE ..................... A C K N O W LED G EM EN TS The w r i t e r w ould l i k e to e x p re s s h i s s i n c e r e th a n k s to P r o f e s s o r A la n Brown ( th e co m m ittee c h airm a n ) f o r h i s en co u rag em en t an d c o o p e r a tio n . S p e c ia l th a n k s a r e due to P r o f e s s o r Jo h n E . E l l i o t t f o r h i s p e r t i n e n t c r i t i c i s m and s u g g e s tio n s w hich th e w r i t e r h a s found v e ry h e lp f u l i n th e o r g a n i z a t i o n o f th e e n t i r e d i s s e r t a t i o n . F i n a l l y , th e w r i t e r w ould l i k e to e x te n d h i s th a n k s to th e M in is tr y o f E d u c a tio n o f I r a q ( D i r e c t o r a t e G e n e ra l o f S c h o la r s h ip s ) f o r th e s c h o la r s h ip e n a b lin g him to work f o r th e d e g r e e . i i TABLE OF CONTENTS C h a p te r I . I I . I I I . P age INTRODUCTION ............................................................... 1 P u rp o s e o f th e S tu d y H y p o th e s is Im p o rta n c e o f th e S tu d y S cope and B o u n d a rie s M ethodology S o u rc e s o f D a ta O r g a n iz a tio n o f th e R em ainder o f th e S tu d y THEORIES OF TRADE AND G RO W TH AND THEIR APPLICABILITY TO DEVELOPING COUNTRIES . . 11 P u rp o s e and O r g a n iz a tio n T rad e T heory G row th T heory In v e s tm e n t C r i t e r i a L in e a r Program m ing and Shadow P r i c e s Dynamic M acroeconom ic M odels Summary IMPORTANCE OF FOREIGN TRADE FOR ECONOMIC G ROW TH OF DEVELOPING COUNTRIES.............................................................. . 39 P u rp o s e and O r g a n iz a tio n Dynamic A p p ro ach es to th e T heory o f I n t e r n a t i o n a l T rad e E x p o rts a s a S e p a r a te Economy E x p o rts a s a L e a d in g S e c to r E x p o rts a s a L ag g in g S e c to r E x p o rts a s a B a la n c in g S e c to r E x p o rts and Econom ic G row th E x p o rt P ro c e e d s and Im p o rt C a p a c ity Summary iii C hapter IV . THE TERMS OF TRADE AND ECONOMIC GROWTH............................................................... P u rp o s e and O r g a n iz a tio n C o n cep t and S t a t i s t i c a l P ro b lem s o f th e Terms o f T rad e Long-R un Movement i n th e Terms o f T rad e o f D e v e lo p in g C o u n tr ie s S t a t i s t i c a l E v id e n c e and E v a lu a tio n The Im p a c t o f th e Terms o f T rad e on E conom ic Growth Summary V . PERFORMANCE AND PROBLEMS COUNTRIES IN W O RLD TRADE P u rp o s e and O r g a n iz a tio n O v e r-A ll T ren d s in T rad e L ag o f E x p o rts S upply-D e f i c i ency D emand-D e f 1c 1ency G row th o f Im p o rts The B a la n c e o f C u rre n t E x p o rt I n s t a b i l i t y and G row th Summary V I. NATIONAL POLICIES FOR IMPORT SUBSTITUTION AND EXPORT PROMOTION, AND APPLICATIONS TO DEVELOPING COUNTRIES....................................... 156 P u rp o s e and O r g a n iz a tio n Im p o rta n c e o f I m p o r t- S u b s t it u t io n and E x p o rt-P ro m o tio n P o l i c i e s A f f e c tin g Im p o rt S u b s t i t u t i o n Q u a n t it a t i v e Im p o rt R e s t r i c t i o n s M u ltip le Exchange R a te s T a r i f f s and S u b s id ie s S t r u c t u r a l R i g i d i t i e s E x te r n a l E conom ies iv OF DEVELOPING 108 P e rfo rm a n c e A cco u n ts Eoonomlc Page 71 C hapter Page V I I . V I I I . A s p e c ts o f T a r i f f P r o t e c t i o n P o l i c i e s A f f e c tin g E x p o rt P ro m o tio n Some P o s i t i v e E x p o rt P ro m o tio n M easu res R e d u c tio n o f Im p o rt D u tie s and E x p o rt S u b s id ie s R e s e a rc h and M a rk e tin g E x p o rt C r e d it D i v e r s i f i c a t i o n o f E x p o rts Summary THE ROLE OP M ONETARY A ND FISCAL POLICIES IN FOREIGN TRADE STRATEGY ................................... P u rp o s e an d O r g a n iz a tio n The Im p o rta n c e o f M onetary and F i s c a l S t r u c t u r e i n I n d u s t r i a l D evelopm ent The R o le o f M onetary P o lic y The R o le o f E x p o rt T axes As a Tax on F o r e ig n e r s E f f e c t s on E x p o rt Volume Econom io S t a b i l i z a t i o n C u rre n c y D e v a lu a tio n E q u ity and P r o s p e c t o f E x p o rt T axes C hanges i n M onetary I n s t i t u t i o n s and F i s c a l S t r u c t u r e Summary THE STRATEGY OF FOREIGN TRADE PLANNING ......................................................................... P u rp o s e an d O r g a n iz a tio n Eoonom lc P la n n in g and I n d u s t r i a l D evelopm ent The R o le o f F o re ig n T rad e i n Econom ic P la n n in g The Im p o rta n c e o f S h o rt-T e rm F o re ig n T rad e P la n n in g 206 2^3 v Chapter Page C h an n els o f C om m unications R e q u ire d f o r F o rm u la tio n o f a F o re ig n T rad e P la n Summary IX . THE STRUCTURE OF THE IRAQI ECONOM Y AND THE PATTERN OF FOREIGN TRADE.................... P u rp o s e and O r g a n iz a tio n The S t r u c t u r e o f th e I r a q i Economy G ro ss N a tio n a l P ro d u o t A g r i c u l t u r e I n d u s tr y The O il S e o to r E x p o rt T rade O il E x p o rts D e s t i n a t i o n o f O il E x p o rts N o n -O il E x p o rts D e s t i n a t i o n o f N o n -O il E x p o rts Im p o rt T rade Im p o rts by O il C om panies Im p o rts o f N on-O il S e c to r D e s t i n a t i o n o f Im p o rts The B a la n c e o f Paym ents The R e s t r i c t i v e S ystem Summary X. IRAQ’S FOREIGN TRADE, PUBLIC FINANCE, AND ECONOMIC DEVELOPMENT ............................. P u rp o s e and O r g a n iz a tio n H i s t o r i c a l B ackground The Terms o f T rade I r a q ’ s C a p a c ity to Im p o rt P u b lic F in a n c e and Econom ic D evelopm ent vi 263 288 C hapter Page B u d g e ta ry D evelopm ents Summary X I. SU M M A R Y AND CONCLUSIONS....................................... 308 Summary C o n c lu s io n s BIBLIOGRAPHY................................................................................... 332 STATISTICAL APPENDIX............................................................... 3^2 v l i T ab le 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9. 10. 11. 12. 13. LIST OP TABLES Page The N et B a r te r Terms o f T rad e o f th e U n ite d Kingdom: 1796-1913 .............................. 83 P e r i p h e r a l Terms o f T rad e : 1876-1947 • • 89 U n ite d S t a t e s and U n ite d Kingdom Im p o rt C o e f f i c i e n t s : 1925-1949 .................................. 90 The Terms o f T ra d e , P rim a ry P ro d u c ts and M a n u fa c tu re d P ro d u c ts : 1870-1950 . . . 92 E s tim a te s o f O cean F r e i g h t a s P e rc e n ta g e s f . o . b . V alu e o f Im p o rts and E x p o rts (P re c io u s M e tal E x c lu d e d ): 1 9 6 3 -1 9 5 4 . • 94 U n ite d Kingdom Terms o f T ra d e : 1950-1961 96 Terms o f T rad e by Econom ic C la s s : 1953- 1965 ................................................................................... 97 C om parison o f T rad e P e rfo rm a n c e In D ev elo p ed and D e v e lo p in g C o u n tr ie s : 1950-1960 I l l S h a re s I n W orld T rad e : 1955-1965 . . . . 112 W orld T rad e by M ajor A re a s : 1955-1965 . . 114 P e r c e n ta g e S h a re o f N o n - I n d u s tr ia l Coun t r i e s I n th e V alu e o f W orld T rad e : 1928-1957..... .................................................................... 115 E x p o rts o f D e v e lo p in g C o u n trie s to D eveloped E conom ies: 1960-1975 . . . . 117 D ev elo p ed C o u n tr ie s : G ro ss N a tio n a l P ro d u o t and Im p o rts from L ess D eveloped C o u n tr ie s : 1960-1975............................................ 11 9 -2 0 v i l i T able Page 1 4 . The Commodity C o m p o sitio n o f th e E x p o rts o f D e v e lo p in g C o u n trie s to D eveloped E conom ies: 1960-1975 ............................................ 121 1 5 . W orld Im p o rts and E x p o rts : 1948-1965 . . . 129 1 6 . C o m p o sitio n o f Im p o rts i n t o E ig h t S em i- In d u s t r i a l 1 zed C o u n trie s P re-W ar and 1945-1955 ......................................................................... 132 1 7 . T rad e B a la n c e s by M ajor A re a s : 1 953- 1965 134 1 8 . D e v e lo p in g C o u n tr ie s : C u rr e n t A ccount B a la n c e : 1960-1975 ................................................. 135 1 9 . C o m p o sitio n o f Tax R evenue o f S e le c te d C o u n tr ie s , 1 9 6 6 ................................................................143 2 0 . R a tio s o f E x p o rts to In v e s tm e n t and G overnm ent E x p e n d itu re : 1958-1959 A v e r a g e s .............................................................................. 145 2 1 . A nnual V a lu e s o f E x p o rts and R e se rv e s f o r S e le c te d C o u n tr ie s : 1951-1959 148 2 2 . M ain E x p o rts a s P e rc e n ta g e o f T o ta l E x p o rts f o r S e le c te d C o u n tr ie s : 1946-1958 . . . 150 2 3 . P o s te d P r i c e o f C rude O il o f M iddle E a s t and V e n e z u e la : 1954-1964 ........................................152 2 4 . E x p o rt T axes a s P e rc e n ta g e o f C e n tr a l G overnm ent T o ta l C u rre n t R evenue f o r S e le c te d C o u n tr ie s : 1951-1963 222 2 5 . G row th I n d i c e s o f G ross N a tio n a l P ro d u c t a t C u rre n t F a c to r P r i c e s by I n d u s t r i a l O r ig in : 1958-1963 .............................................. 343 2 6 . P e r C a p ita N a tio n a l Incom e: 1953-1963 . . 344 ix T able Page 2 7 . Summary o f I r a q ’ s F o re ig n T ra d e : 1 9 5 1 - 1966 ....................................................................................... 345 2 8 . I r a q ’ s C rude O il P r o d u c tio n , E x p o rts and R ev en u es: 1933-1966 .............................. . . . . 346 2 9 . D e s t i n a t i o n o f O il E x p o r ts : 1961-1965 . . . 347 3 0 . O il E x p o rts to th e P r i n c i p a l S even C o u n trie s . . . . . 348 3 1 . C o m p o sitio n o f E x p o rts : 1961-1965 .................... 349 3 2 . D e s t i n a t i o n o f E x p o r t s ................................................. 350 3 3 . E x p o rts (E x c lu d in g O il) to th e P r i n c i p a l S e v e n C o u n t r i e s ..............................................................351 34.. C o m p o sitio n o f I r a q 's Im p o rts c . i . f . , 1951-1965 (E x c lu d in g Im p o rts by O il C o m p a n ie s ) ............................................................................352 35* C o m p o sitio n o f I m p o rts : 1961-1965 .................... 353 3 6 . D e s t i n a t i o n o f I m p o r t s ..................................................... 354 37* Im p o rts from P r i n c i p a l S even C o u n trie s . . . 355 3 8 . I r a q i B a la n c e o f P ay m en ts: 1951-1966 . • . 356 39* I r a q 's Terms o f T ra d e : 1922-1958 357 4 0 . U n it V alu e I n d ic e s o f I r a q ’ s F o re ig n T ra d e : 1959-1964 ...................................................... 358 4 1 . N et Terms o f T rade o f B r i t a i n and I r a q : 1922-1958 ...................................... 359 4 2 . R evenue an d E x p e n d itu re s o f th e O rd in a ry B u d g et: 1951-1966 360 T able Page 4 3 . R evenues o f th e O rd in a ry B u d g e t: 1 9 6 2 - 1967 .............................................................................. 361 4 4 . E x p e n d itu re s o f th e O rd in a ry B u d g et: 1962-1967 362 4 5 . R evenues and E x p e n d itu re s o f D evelopm ent B o a rd , M in is tr y o f D ev elo p m en t, and Econom ic P la n s : 1952-1966 ......................... 363 4 6 . C e n tr a l G overnm ent D evelopm ent E x p e n d i t u r e s by P r i n c i p a l S e c t o r s ......................... 364 4 7 . Money S u p p ly an d F a c to r s A f f e c tin g Money S u p p ly : 1962-1965 ............................................ 365 4 8 . B a la n c e S h e e ts o f S p e c ia li z e d B anks: 1962-1965 366 x i D iagram I . LIST OF DIAGRAM S P age The P r o s p e r i t y C i r c l e ....................................... 66 i l l CHAPTER I INTRODUCTION P u rp o s e o f th e S tu d y The p u rp o se o f t h i s s tu d y i s to exam ine and e v a lu a t e th e h y p o th e s is t h a t f o r e i g n tr a d e p la y s a s i g n i f i c a n t r o l e i n th e eoonom lc g ro w th o f d e v e lo p in g c o u n t r i e s , a n d , i n th e l i g h t o f t h i s h y p o th e s is , to exam ine and e v a lu a te a l t e r n a t i v e p o l i c i e s and s t r a t e g i e s f o r th e en co u rag em en t and o o n tr o l o f th e f o r e ig n t r a d e s e c t o r i n and by d e v e lo p in g o o u n t r ie s , w ith s p e c i a l r e f e r e n c e to I r a q . The m e r c a n t i l i s t s and e v e ry e c o n o m ist o f n o te s in c e Adam S m ith hav e made th e r e l a t i o n s h i p b etw een i n t e r n a t i o n a l tr a d e and econom ic g ro w th a c e n t r a l p a r t o f t h e i r w r i t i n g s . B ut t h e o r e t i c a l e c o n o m ists hav e n o t a lw ay s e x am ined econom lo h i s t o r y from th e p o in t o f a b ir d h ig h i n th e a i r ; th e h i s t o r i a n * s b ro a d view and w ide p e rs p e c t i v e h a s l i t t l e a p p e a l f o r t h e o r i s t s . I n s te a d th e y hav e p r e f e r r e d to t e s t th e h y p o th e s is w hich s u g g e s ts t h a t t h e r e I s a o a u s a l r e l a t i o n s h i p b etw een e x p o r ts and eoonom lc g ro w th , and t h a t t h i s r e l a t i o n s h i p i s one o f in te rd e p e n d e n c e r a t h e r th a n o f u n i l a t e r a l c a u s a t io n . T h ere a r e g ro u n d s f o r b e li e v i n g , h o w ev er, t h a t e x p o rts a r e a k e y f a c t o r i n p ro m o tin g econom ic g ro w th and t h a t i t i s g e n e r a l l y a r i s e i n e x p o r ts t h a t s t i m u l a t e s a n in c r e a s e i n a g g re g a te econom ic g ro w th , r a t h e r th a n v ic e v e r s a . As f a r a s th e d e v e lo p in g o o u n tr ie s a r e c o n c e rn e d , t h e r e a r e s tr o n g l o g i c a l and e m p ir ic a l g ro u n d s f o r su p p o r t in g th e h y p o th e s is t h a t f o r m ost o f th e s e c o u n t r i e s , e x te r n a l t r a d e i s a n e c e s s a r y b u t by no m eans a s u f f i c i e n t c o n d itio n f o r r a p id g ro w th . H y p o th e s is The h y p o th e s is o f t h i s s tu d y s u g g e s ts t h a t h ig h e r r a t e s o f econom ic g ro w th te n d to be a s s o c i a t e d w ith h ig h e r r a t e s o f e x p o r t g ro w th . C o n v e rs e ly , m ost coun t r i e s w ith low r a t e s o f e x p o r t g ro w th a l s o te n d to h a v e , i n g e n e r a l , low r a t e s o f econom ic g ro w th . Im p o rta n c e o f th e S tu d y P e rh a p s th e m ain p ro b lem f a c in g th e l e s s d e v e lo p e d o o u n tr ie s i s n o t o n ly how to d e v e lo p , b u t a l s o how to a c h ie v e a h ig h e r r a t e o f econom ic g ro w th . The q u e s tio n , t h e r e f o r e , i s w hat i s th e m eohanlsm o f g ro w th and w hat a r e th e d e te r m in a n ts o f econom ic grow th? Q u ite r e c e n t l y t h i s p ro b lem h a s engaged th e a t t e n t i o n o f e c o n o m ists and econom ic h i s t o r i a n s and h a s s h i f t e d th e em p h asis from s h o r t - r u n e q u ilib r iu m and o y c l i c a l f l u c t u a t i o n s to lo n g -te rm p ro b lem s o f eoonom lc g ro w th . T h is i s f i l l i n g a v e ry im p o r ta n t g ap i n th e body o f eoonom io l i t e r a t u r e . I t i s i n su c h a p e r s p e c t iv e t h a t j t h e p r e s e n t s tu d y c o n s id e r s a p a r t i c u l a r a s p e c t o f th e economic: p ro b lem s o f d e v e lo p in g c o u n t r i e s , nam ely , th e r o l e o f f o r e ig n tr a d e i n eoonom lc g ro w th . C hanges i n th e eoonom lc s t r u c t u r e o f many d e v e lo p in g o o u n tr ie s h av e b ro u g h t a b o u t o hanges i n p r o d u c tio n , t r a d e , th e b a la n c e o f p a y m e n ts, and i n t e r n a t i o n a l eco nom ic r e l a t i o n s . T h ere h a s b een a n i n c r e a s in g p a r t i c i p a tio n o f th e governm ent i n eoonom io a c t i v i t y . The m ost im p o r ta n t f e a t u r e , how ever, c o n s i s t s i n th e con s c io u s e f f o r t to w a rd s eoonom io d e v e lo p m e n t th ro u g h " p la n s " f o r th e p u rp o se o f a t t a i n i n g a h ig h e r s ta n d a r d o f l i v i n g . I n o r d e r to f o s t e r th e s e " p l a n s ," t h e r e h av e b een c o n tr o l s o v e r t r a d e , ex change and in v e s tm e n ts . I n a n a tte m p t to a c o e l e r a t e th e r a t e o f t h e i r eoonom lc g ro w th , th e d e v e lo p in g o o u n tr ie s hav e to c r e a t e and s t i m u l a te new i n d u s t r i e s to a v o id , o r a t l e a s t to l e s s e n , th e d ep en d en cy upon th e e x p o rt o f a v e ry lim i te d ra n g e o f p rim a ry p ro d u c ts a s w e ll a s to a t t r a c t c a p i t a l in v e s tm e n t. F o re ig n t r a d e , t h e r e f o r e , i s v e ry im p o rta n t to th e s e o o u n tr ie s a s i t d e c i s i v e l y I n f lu e n c e s th e p h y s ic a l a s p e c t o f th e p r o c e s s o f c a p i t a l fo r m a tio n and In v e s tm e n t th ro u g h th e Im p o rt o f c a p i t a l goods an d o th e r d u r a b le goods r e q u ir e d f o r d e v e lo p m e n t. T h u s, i t i s im p o s s ib l e to s t a r t th e p ro c e s s o f econom ic g ro w th w ith o u t Im p o rts , and e s p e c i a l l y c a p i t a l g o o d s. I t seem s to be g e n e r a l l y a g re e d t h a t d e v e lo p in g c o u n tr i e s w i l l need to a o h ie v e a r a p id and s u b s t a n t i a l r i s e i n t h e i r e x p o r t p ro c e e d s to f in a n c e t h e i r g row ing im p o rts and to s e r v i c e t h e i r f o r e i g n b o rro w in g s . F a i l u r e to a t t a i n su ch an i n c r e a s e , o r to r e c e iv e e v e r l a r g e r f o r e ig n a i d , w ould Im pose a f o r e i g n ex change c o n s t r a i n t on t h e i r g ro w th , ev en th o u g h th e m a jo r tr a n s f o r m a tio n r e q u ir e d i s i n t h e i r i n t e r n a l econom ic and s o c i a l s t r u c t u r e and i n t h e i r c a p a c ity to sa v e and i n v e s t . I t s h o u ld a l s o b e n o te d t h a t a c o u n try t h a t t r i e s to prom ote g ro w th w h ile Ig n o rin g i t s e x p o rt p e rfo rm a n c e may su c c e e d i n th e s h o r t - r u n , e s p e c i a l l y i f i t c a n c o u n t on a n in flo w o f c a p i t a l o r d ra w in g down r e s e r v e s , b u t i t w i l l be h a r d - p r e s s e d to s u s t a i n g ro w th o v e r a lo n g p e rio d o f tim e . T h is m eans t h a t c o u n tr i e s e a g e r to a c c e l e r a t e t h e i r g ro w th r a t e s s h o u ld a d o p t th e ty p e o f p o l i c i e s t h a t w i l l s t i m u l a te e x p o r t s . I r a q i l l u s t r a t e s a m odel o f e x p o r t - l e d g ro w th i n th e s e n s e t h a t o i l e x p o r ts p ro v id e a lm o s t th e o n ly s tim u lu s f o r g ro w th a s r e f l e c t e d i n th e p h y s ic a l e x p a n s io n o f p r o d u c tio n i n o t h e r s e c t o r s o f th e econom y. I n o r d e r to a c h ie v e and m a in ta in a h ig h e r r a t e o f econom ic g ro w th and i n v iew o f th e l i m i t e d s h a r e o f p rim a ry p r o d u c ts i n w o rld t r a d e , m a n u fa c tu re d goods w i l l hav e to assum e i n c r e a s in g im p o rta n c e i n th e e x p o r ts o f th e d e v e lo p in g o o u n t r i e s . I t h a s b een s u g g e s te d t h a t th e e x p o r t e a rn in g s o f th e d e v e lo p in g c o u n tr i e s c o u ld in c r e a s e by $ 7 .5 to $9 b i l l i o n i f th e i n d u s t r i a l c o u n tr i e s w ere to make a d d i t i o n a l p u rc h a s e s from th e s e c o u n tr i e s e q u iv a le n t to one p e r c e n t o f th e in c r e a s e i n t h e i r g r o s s n a t i o n a l p ro d u c t b etw een i 960 and 1975* W hile a n e x p a n s io n o f t r a d e o f t h i s m ag n itu d e w ould c r e a t e few p ro b lem s i n th e manu f a c t u r i n g s e c t o r o f th e i n d u s t r i a l e co n o m ie s, i t would h e lp to d e a l w ith th e p r o j e c te d $ 1 1 .3 to $13*7 b i l l i o n d e f i c i t o f th e d e v e lo p in g o o u n tr ie s and w ould c o n tr i b u te im p o r ta n tly to t h e i r econom ic t r a n s f o r m a t i o n .1 1B . B a la s s a , T rad e P r o s p e c ts f o r D e v e lo p in g Coun t r i e s (Homewood, I l l i n o i s : B ic h a rd D . I r w in , I n c . , 196*0 1 p p 7 3 5 - 3 6 , 10k. 6 F i n a l l y , I t I s a l s o to be n o te d t h a t th e im p o r ta n c e o f t h i s s tu d y l i e s i n th e f a c t t h a t f r e e t r a d e among n a ti o n s s t i m u l a te s econom ic g ro w th and p r o v id e s a c u r r e n t a lo n g w hich p o l i t i c a l I d e a l s and i n s t i t u t i o n s c a n be t r a n s m i t t e d . I n t h i s s e n s e i t c a n s e r v e a s a s u b s t i t u t e f o r f o r e i g n a i d , and h a s th e a d d i t i o n a l a d v a n ta g e o f b e in g e f f i o i e n t i n g e n e r a tin g econom ic e x p a n s io n . I n th e c u r r e n t w o rld s i t u a t i o n , s m a ll c o u n tr i e s re c o g n iz e th e a d v a n ta g e o f t r a d e and w i l l c o u r t t h a t g r e a t pow er w hich o f f e r s them b e t t e r t r a d i n g a d v a n ta g e s . The e x p e r ie n c e o f some d e v e lo p in g c o u n tr i e s s e r v e s to i l l u s t r a t e t h a t tr a d e i s a n im p o r ta n t d e te rm in a n t o f p o l i t i c a l l e a n i n g s . Thus Im p o rt r e s t r i c t i o n s on th e p a r t o f g r e a t pow ers may s e r v e to a l i e n a t e th e a f f e c t i o n s o f s m a ll d e v e lo p in g o o u n t r i e s . S cope and B o u n d a rie s The s tu d y m a in ly in te n d s to e x p la in w hat s e r io u s e f f e c t s s t r u c t u r a l ch an g es i n demand and s u p p ly o f p r i m ary p ro d u c ts h av e had o n d e v e lo p in g c o u n tr i e s and w hat th e o o u n tr ie s th e m s e lv e s p la n to do to cope w ith t h i s p ro b le m . S p e c ia l a t t e n t i o n w i l l be fo c u s e d on I r a q and i n some d e t a i l o n th e r o l e o f p e tro le u m e x p o rts i n th e c o u n t r y 's eoonom lc p e rfo rm a n c e . The p e r io d u n d e r s tu d y w i l l be b a s i c a l l y 1951 to 1 9 6 5 . H ow ever, some s t a t i s t i c a l s e r i e s f o r lo n g e r p e rio d s w i l l be c o v e re d s t a r t i n g from 1933 ( th e y e a r p r i o r to th e b e g in n in g o f o i l e x p o r t s ) . Suoh h i s t o r i c a l d a t a a r e deem ed n e c e s s a r y to t r a c e th e d e v e lo p m e n t o f th e o i l s e c t o r and th e m ovem ents i n th e te rm s o f t r a d e w ith and w ith o u t th e o i l s e c t o r . The m ain r e a s o n f o r s e l e c t i n g th e s t a r t i n g y e a r , 1951. stem s from th e f a c t t h a t t h i s y e a r w itn e s s e d th e b e g in n in g o f im p o r ta n t e v e n ts i n th e o i l c o n c e s s io n s s t a r t e d i n t h a t y e a r and u l t i m a t e l y m a t e r i a li z e d i n th e 5 0 /5 0 p r o f i t - s h a r i n g a g re e m e n t i n i t i a t e d i n 1 9 5 2 . I t i s a l s o to be n o te d t h a t up to 1951. o i l e x p o rts had r e m ained a t a v e ry low l e v e l . M ethodology The m eth o d o lo g y u se d i n t h i s s tu d y i s n e i t h e r p u r e ly a q u a n t i t a t i v e n o r a d e s c r i p t i v e o n e . I t I s r a t h e r b ased on t h e o r e t i c a l econom ic a n a l y s i s i n g e n e r a l and on s t a t i s t i c a l re a s o n in g i n p a r t i c u l a r . P e rh a p s i t sh o u ld be made c l e a r t h a t th e c o n c e p t o f econom ic grow th w hich i s th e c e n t r a l them e o f t h i s s tu d y sim p ly means th e q u a n t i t a t i v e c h an g e s m easured i n te rm s o f r e a l o u tp u t p e r c a p i t a . T h is , o f c o u r s e , d i f f e r s from th e c o n c e p t o f econom ic d e v e lo p m e n t w hich In v o lv e s q u a l i t a t i v e ch an g es o r " r e v o lu tio n " i n th e s u p e r s t r u c t u r e o f th e economy and th e r e b y c r e a t i n g new c o n d itio n s f o r g ro w th . S o u rc e s o f D a ta I n c o m p ilin g th e d a ta f o r t h i s s tu d y , a g r e a t num ber o f v a lu a b le b o o k s, p r o f e s s i o n a l J o u r n a l a r t i c l e s , and p u b l i c a t i o n s o f th e U n ite d N a tio n s and I n t e r n a t i o n a l M onetary Fund hav e b e en c o n s u lte d . S t a t i s t i c a l d a ta on I r a q w ere ta k e n from v a r io u s g o v e rn m e n ta l s o u rc e s (some o f w hich have n o t y e t b e en p u b lis h e d ) , su c h a s th e a n n u a l r e p o r t s and th e q u a r t e r l y b u l l e t i n s o f th e C e n tr a l B ank, M in is tr y o f P la n n in g and M in is tr y o f O i l . Some books w r i t t e n i n A ra b ic h a v e a l s o b een found u s e f u l . O r g a n iz a tio n o f th e R em ainder o f th e S tu d y T h is s tu d y c o n s i s t s o f e le v e n c h a p t e r s . C h a p te r I I d e a l s w ith a n a n a l y s i s o f th e t h e o r i e s o f t r a d e and g ro w th and t h e i r a p p l i c a b i l i t y to d e v e lo p in g c o u n t r i e s , e s p e c i a l l y i n th e l i g h t o f in v e s tm e n t c r i t e r i a and su o h r e c e n t m eth o d o lo g y f o r d e v e lo p m e n ta l econom ics a s l i n e a r program m ing and dynam ic m acroeoonom io m o d e ls. The m ain a b j e c t i v e o f t h i s c h a p te r i s to e s t a b l i s h t h a t th e c l a s s i c a l th e o r y o f I n t e r n a t i o n a l t r a d e , on ce i t I s nod. i f le d by th e a s s u m p tio n s o f g ro w th th e o r y , c a n b e r e v i s e d to c o n s t i t u t e a new a p p ro a c h a p p r o p r i a te to th e p ro b le m s o f econom ic g ro w th o f d e v e lo p in g co u n t r i e s . C h a p te r I I I i s c o n c e rn e d w ith th e im p o rta n c e o f f o r e i g n t r a d e f o r econom ic g ro w th o f d e v e lo p in g co u n t r i e s . The m ain ta s k o f th e c h a p te r i s to a n a ly z e th e dynam ic a p p ro a c h e s to th e th e o r y o f i n t e r n a t i o n a l t r a d e by c o n c e n tr a ti n g o n th e r o l e o f e x p o r ts i n s t i m u l a ti n g eoonom io g ro w th . C h a p te r IV i s d e v o te d to a re v ie w and c r i t i c i s m o f th e l i t e r a t u r e on th e te rm s o f t r a d e and i t s im p a ct on econom ic g ro w th . C h a p te r V d e a l s w ith th e p e rfo rm a n c e and p ro b lem s o f d e v e lo p in g c o u n tr i e s i n w o rld t r a d e . The c h a p te r a n a ly z e s th e l a g o f e x p o r ts , g ro w th o f I m p o rts , and th e b a la n c e o f c u r r e n t a o o o u n ts o f d e v e lo p in g c o u n t r i e s . F i n a l l y , a s p e c i a l s e c t i o n i s d e v o te d to th e im p a ct o f e x p o rt i n s t a b i l i t y on t h e i r econom ic g ro w th . C h a p te r VI d is c u s s e s n a t i o n a l p o l i c i e s f o r im p o rt s u b s t i t u t i o n and e x p o rt p ro m o tio n , and g iv e s a p p l i c a t i o n s to d e v e lo p in g e co n o m ie s. C h a p te r V II exam ines th e r o l e o f m o n e ta ry and f i s c a l p o l i c i e s i n f o r e i g n t r a d e s t r a t e g y . The m ain o b j e c t i v e i s to em p h asize t h a t th e tem po o f econom ic 10 g ro w th may be a c c e l e r a t e d I f th e r i g h t m o n etary and f i s c a l p o l i c i e s a r e a d o p te d . C h a p te r V I I I d i s c u s s e s th e s t r a t e g y o f f o r e i g n t r a d e p la n n in g I n g e n e r a l and th e Im p o rta n c e o f s h o r t te rm f o r e i g n t r a d e p la n n in g I n p a r t i c u l a r . C h a p te r IX I s c o n c e rn e d w ith th e s t r u c t u r e o f th e I r a q i economy and th e p a t t e r n o f f o r e i g n t r a d e . The p u rp o s e o f t h i s c h a p te r I s to a n a ly z e th e r o l e o f th e m ain s e c t o r s I n I r a q 's g r o s s n a t i o n a l p ro d u c t and th e n to d is c u s s th e l e v e l , c o m p o s itio n , and d i r e c t i o n o f I r a q 's f o r e i g n t r a d e . S p e c ia l s e c t i o n s a r e d e v o te d to th e b a la n c e o f paym ents and th e r e s t r i c t i v e sy s te m . C h a p te r X d e a l s w ith I r a q 's f o r e i g n t r a d e and econom ic d e v e lo p m e n t. A f t e r g iv in g a b r i e f a c c o u n t o f I r a q 's h i s t o r i c a l t i e s w ith th e W est, th e c h a p te r b e g in s w ith a d i s c u s s i o n o n th e te rm s o f t r a d e and th e n a n a l y z e s I r a q 's c a p a c i ty to im p o r t. The m o n etary and f i s c a l m e a su re s t o g e t h e r w ith th e s t r a t e g y o f p la n n in g w i l l be i n t e g r a t e d i n a s e p a r a t e s e c t i o n o n p u b lic f in a n c e and econom ic d e v e lo p m e n t. F i n a l l y , C h a p te r XI sum m arizes th e m ain p o i n ts o f th e p r e v io u s c h a p te r s and p r o v id e s c o n c lu s io n s to th e s tu d y . CHAPTER I I THEORIES OP TRADE AND G RO W TH AND THEIR APPLICABILITY TO DEVELOPING COUNTRIES P u rp o s e and O r g a n iz a tio n The m ain p u rp o se o f t h i s c h a p te r i s to show t h a t a lth o u g h t r a d e th e o r y and g ro w th th e o r y a r e b ased on d i f f e r e n t a s s u m p tio n s , th e y c a n be r e c o n c ile d i n th e s e n s e t h a t b o th g iv e e s s e n t i a l l y th e same a n sw e r to th e same q u e s t io n . T ra d e th e o r y assum es u n c h a n g in g c o s t and demand c o n d it i o n s , w h ile g ro w th th e o r y assum es t h a t i n v e s tm e n t, inoom e, and o t h e r v a r i a b l e s a r e c o n s t a n t ly c h a n g in g . H ow ever, th e q u e s tio n ask ed by t r a d e th e o ry i s "w hat s h a l l we p ro d u c e f o r e x p o rt? " The g e n e r a l a n sw e r i s "p ro d u c e t h a t w hich w i l l be th e m ost p r o f i t a b l e ." The q u e s tio n a sk e d by g ro w th th e o r y i s "w hat s h a l l we t r y to p ro d u c e ? " The a n sw e r i s "p ro d u c e t h a t w hich w i l l r e q u i r e l e a s t c a p i t a l p e r u n i t o f o u t p u t ." The co n c lu s io n i s t h a t th e c l a s s i c a l th e o ry o f i n t e r n a t i o n a l t r a d e , once i t i s m o d ifie d by th e a s s u m p tio n s o f g ro w th 1 1 12 th e o r y , c an be r e v is e d to c o n s t i t u t e so m e th in g a p p ro p r i a t e to th e p ro b lem s o f econom ic g ro w th i n d e v e lo p in g c o u n t r i e s . The o h a p te r b e g in s w ith a n a n a l y s i s o f t h e o r i e s o f t r a d e an d g ro w th , th e n d e a ls w ith in v e s tm e n t c r i t e r i a t o g e t h e r w ith s o p h i s t i c a t e d r e c e n t m eth o d o lo g y f o r d e v e lo p m e n ta l eco n o m ics: l i n e a r program m ing and dynam ic m acroeoonom ic m o d e ls. T ra d e T h eo ry M ost o f th e l i t e r a t u r e on t r a d e th e o r y h a s b een r o o te d i n th e c l a s s i o a l th e o r y o f i n t e r n a t i o n a l t r a d e . T h is fam ous th e o r y b e g in s w ith S m ith and was l a t e r made p o p u la r by R ic a rd o . A o o o rd in g to t h i s th e o r y , u n d e r f r e e t r a d e e ac h c o u n try w i l l s p e c i a l i z e i n th e p ro d u c t i o n o f th o s e goods f o r w hich i t s r e l a t i v e c o s ts a r e low , and im p o rt goods f o r w hich i t s r e l a t i v e c o s t s a r e h ig h . The th e o r y assum es t h a t a l l f a c t o r s o f p r o d u c tio n ( la n d , l a b o r an d c a p i t a l ) w ere c o m p le te ly f r e e to be u se d in p r o d u c tio n , and oan be s h i f t e d from one p ro d u c t to a n o th e r w ith o u t r e s t r i c t i o n . R ic a r d o 's fam ous w ine an d d o t h exam ple i s a l u c i d i l l u s t r a t i o n o f t h i s th e o r y . I n E n g la n d , a g a ll o n o f w ine c o s t s 120 m an -h o u rs and a y a rd o f c lo t h 100 m an- h o u r s , w h ile i n P o r tu g a l th e c o s t o f w ine and c l o t h a r e 80 an d 90 m a n -h o u rs, r e s p e c t i v e l y . T h is I s c a l l e d an " a b s o lu te a d v a n ta g e " I n p r o d u c tio n , b u t I t d o es n o t mean t h a t P o r tu g a l s h o u ld o n ly e x p o r t o r E n g lan d o n ly Im p o rt. F o r th e h e a r t o f th e m a tte r l i e s I n " c o m p a ra tiv e ad v an ta g e " I n p r o d u c tio n . As we s h a l l s e e i n a moment, P o r tu g a l h a s a c o m p a ra tiv e a d v a n ta g e i n w ine p r o d u c tio n , and E n g la n d h a s a c o m p a ra tiv e a d v a n ta g e i n c l o t h p ro d u c t i o n . W ith o u t t r a d e , w ine c o s t s 1 -2 y a rd s o f c l o t h (1 0 0 /1 2 0 ) p e r g a ll o n i n E n g la n d , b u t o n ly .9 (8 0 /9 0 ) y a rd s o f c l o t h i n P o r t u g a l . O pening t r a d e (an d Ig n o rin g t r a n s p o r t c o s t s ) w ould p e rm it E n g lis h w ine b u y e rs to e x change l e s s th a n 1 -2 y a rd s o f c l o t h f o r a g a llo n o f w in e— sa y 1 .0 y a r d s . P o rtu g u e s e c l o t h b u y e rs , on th e o t h e r h a n d , o o u ld g e t m ore th a n .9 y a rd s o f c l o t h f o r a g a ll o n o f w in e— sa y 1 .0 y a r d s . B o th th e P o rtu g u e s e and th e E n g lis h w ould s ta n d to g a in by t r a d i n g a t a o n e -f o r - o n e exohange o f w ine an d c l o t h . I f E n g lan d now s p e c i a l i z e s i n th e p r o d u c tio n o f c l o t h , i t oan p ro d u ce 1 -2 u n i t s o f c l o t h f o r e a c h u n i t o f w ine i t c e a s e s to p ro d u c e . T hese u n i t s o f c l o t h w ould be exchanged f o r 1 -2 u n i t s o f im p o r te d w ine from P o r t u g a l — and a g a in ( o r p r o f i t ) o f 0 .2 u n i t s o f w ine w i l l be r e a p e d . C o n v e rs e ly , P o r tu g a l would g a in by s p e c i a l i z i n g i n th e p r o d u c tio n o f w in e , f o r i t oan p ro d u o e 1 .1 (8 0 /9 0 ) u n i t s o f w ine f o r e ac h u n i t o f o l o th i t c e a s e s to p ro d u o e . T h is w ine c o u ld be exchanged f o r 1^ 1 .1 u n i t s o f Im p o rte d o l o th from E n g la n d — and a p r o f i t o f 0 .1 u n i t s o f o l o th w i l l be g a in e d . The th e o r y , a s p r e s e n te d by R lo a rd o , I s v e ry s i m p l i f i e d : th e a s s u m p tio n s a r e o n ly two c o u n t r i e s , two c o m m o d itie s, s im p le b a r t e r ex ch a n g e, c o n s ta n t c o s t s , com p l e t e m o b ility o f f a c t o r s o f p r o d u c tio n w ith in a c o u n try , and c o m p le te im m o b ility o f f a o t o r s b etw een c o u n t r i e s . Much o f th e l a t e r l i t e r a t u r e on th e s u b j e c t was o o n c e m e d w ith s t a t i n g e x p l i c i t l y and th e n d ro p p in g th e s e s i m p li f y in g a s su m p tio n s to make th e th e o ry m ore r e a l i s t i c . B u t th e p re s u m p tio n i n f a v o r o f s p e c i a l i z a t i o n and t r a d e p e r s i s t s a l l th ro u g h t h i s l i t e r a t u r e . T h e re re m a in s th e p ro b lem o f how, when, an d w here th e p o l i c i e s o f s p e c i a l i z a t i o n an d t r a d e s h o u ld be a p p l i e d . M yrdal a rg u e s t h a t th e th e o r y a p p l i e s o n ly to th e c o u n tr i e s i n w hich i t was w r i t t e n — th e d e v e lo p e d coun t r i e s . 1 A c o o rd in g to M y rd a l's h y p o th e s is , e x p a n sio n i n one r e g io n a l s o h a s " sp re a d " e f f e c t s a s w e ll a s "b a c k wash" e f f e c t s , th e g ro w th o f i n d u s t r i a l c i t i e s , f o r exam ple s h o u ld c r e a t e a demand b o th f o r a g r i c u l t u r a l raw m a t e r i a l s and f o r c o n su m e rs' g o o d s. The " s p re a d " e f f e c t s 1G. M y rd a l. Econom ic T h eory and U n d erd ev elo p ed R e g io n s , (London: G e ra ld O uokw orth and C o ., I n o . , 1 9 5 7 ). 15 o o u ld o u tw e ig h th e 1 1 backw ash" e f f e c t s o n ly i f incom e and em ploym ent i n th e l e a d in g s e o t o r s grew r e l a t i v e to t h a t o f th e la g g in g s e c t o r . I n d e v e lo p in g c o u n t r i e s , how ever, th e h i s t o r i c a l p a t t e r n o f g ro w th h a s been su ch t h a t th e " s p re a d " e f f e c t s w ere w eak. The r u r a l s e c t o r , M yrdal a d d s , d id n o t p ro d u c e th e raw m a t e r i a l s f o r th e e x p an d in g i n d u s t r i a l s e c t o r , n o r d id th e e x p a n d in g i n d u s t r i a l s e c t o r r e l y h e a v i ly on th e r u r a l s e c t o r f o r f o o d s t u f f . Thus th e g ro w th o f th e i n d u s t r i a l s e c t o r d id n o t much expand th e m a rk e t f o r c a s h c ro p s o f th e r u r a l s e c t o r . The e s s e n c e o f M yrdal*s h y p o th e s is i s t h a t i t i s p o s s ib l e f o r i n t e r n a t i o n a l t r a d e to h av e s tr o n g " b a c k wash" e f f e c t s on th e d e v e lo p in g c o u n t r i e s . The p r e s e n t p a t t e r n o f p r o d u c tio n i n th e s e c o u n tr i e s r e f l e o t s th e s e backw ash e f f e o t s r a t h e r th a n t r u e c o m p a ra tiv e a d v a n ta g e . I n s t e a d o f i n c r e a s in g p r o d u c tio n o f p rim a ry goods f o r e x p o r t, th e t r u e a d v a n ta g e o f th e s e o o u n tr le s may l i e i n m a n u f a c tu r e s . B ro a d ly s p e a k in g , i t a p p e a rs t h a t c o u n tr i e s w ith l i m i t e d n a t u r a l r e s o u r c e s f i n d th e m s e lv e s fo r c e d to r e l y on c o m p a ra tiv e a d v a n ta g e b e c a u se th e y c a n n o t hope to p ro d u c e th e w hole ra n g e o f m a n u fa c tu re s and p rim a ry p r o d u c ts t h a t th e consum ing p u b lic d e s i r e s . S m all c o u n tr i e s h av e a n a d d i t i o n a l p roblem i n t h a t th e s i z e o f th e dom es t i c m a rk e t i s to o s m a ll f o r e f f i c i e n t - s i z e d f a o t o r i e s f o r 16 some p r o d u o t s - - l i k e a u to s , s t e e l , and m a c h in e ry . R e c e n t e x p e r ie n c e I n e x p o rt m a rk e ts and th e s t a t e o f a c o u n t r y 's f o r e i g n r e s e r v e s and b o rro w in g c a p a c ity a l s o b e a rs d i r e c t l y on a o o u n t r y 's a b i l i t y to com pete I n w o rld m a rk e ts . I n d i a , b e c a u se I t i s l a r g e and p re su m a b ly w e ll- e n dowed w ith n a t u r a l r e s o u r c e s , h a s l e s s p r e s s u r e to fo llo w th e c l a s s i c a l p o l i c i e s o f s p e c i a l i z a t i o n and t r a d e . The U n ite d S t a t e s , l a r g e and w ell-en d o w ed w ith n a t u r a l r e s o u r c e s a s i t i s , a l s o h a s few i n c e n ti v e s to fo llo w r ig o r o u s t r a d e p o l i c i e s . The H e e h s c h e r-O h lin v e r s i o n o f th e th e o r y o f com p a r a t i v e c o s t h a s b een w id e ly recom mended a s a b a s i s f o r d e v elo p m e n t b e c a u se i t d o e s n o t depend on th e e x is te n c e 2 o f p e r f e c t c o m p e titio n i n b o th d o m e s tic m a rk e ts . T h is th e o r y h a s th e a d d i t i o n a l a d v a n ta g e o f n o t r e q u i r i n g t h a t m a rk e ts be i n e q u ilib r iu m a t th e s t a r t . I t e x p la in s t h a t p r o d u c tio n o f co m m o d ities t h a t u s e more o f a co un t r y ' s r e l a t i v e l y a b u n d a n t f a c t o r s o f p r o d u c tio n w i l l make t r a d e p r o f i t a b l e # A c o u n try c a n e x p o rt th e s e co m m o d ities 2 B . O h lln . I n t e r r e g i o n a l and I n t e r n a t i o n a l T ra d e . (C am b rid g e, M a s s a c h u s e tts : H a rv a rd U n iv e r s ity P r e s s , 1 9 3 3 ). The o r i g i n a l a r t i c l e was by H e c h so h e r, E . P . , "The E f f e c t o f F o re ig n T ra d e on th e D i s t r i b u t i o n o f In co m e." E k r u m ls k T l d e s k r l f t , V o l. 2 1 , 1 9 19, p p . 4 9 7 -5 1 2 . and Im p o rt co m m o d ities u s in g I t s r e l a t i v e l y s c a r c e f a c t o r s , H e ch so h er and O h lln s u g g e s te d t h a t th e " i n c r e m e n ta l" c o m p a ra tiv e a d v a n ta g e o f o v e rp o p u la te d c o u n tr i e s l i e s i n in c r e a s e d e x p o r ts o f th e s im p le r k in d s o f manu f a c t u r e d consum er g o o d s. A r e p o r t o f f o u r le a d in g e x p e r ts s p o n s o re d by G .A .T .T . c o n firm s t h i s s u g g e s tio n and c o n s i d e r s i t a s " a n a t u r a l and econom ic d e v elo p m e n t t h a t r e l a t i v e l y p o o r c o u n t r i e s w ith h ig h p o p u la tio n l i k e I n d i a and Hong Kong s h o u ld e x p o r t c h ea p l a b o r - i n t e n s i v e manu f a c t u r e s i n o r d e r to im p o rt f o o d s t u f f s l i k e w h eat from d e v e lo p e d o o u n tr le s su c h a s A u s t r a l i a , C anada, and th e 3 U n ite d S t a t e s w hich a r e r i c h i n la n d and c a p i t a l . " - ' One d i f f i c u l t y w ith t h i s th e o r y i s t h a t i t assum es t h a t f a c t o r s o f p r o d u c tio n a r e c o m p a rab le th e w o rld o v e r , t h a t i s , t h a t th e q u a l i t i e s o f la n d , m in e r a l r e s o u r c e s , l a b o r s k i l l s , and o t h e r f a c t o r s a r e i d e n t i c a l e v e ry w h e re . A n o th e r w eakness o f th e H e o h s o h e r-O lln v e r s i o n o f t r a d e th e o r y i s t h a t i t assum es th e m ethods o f p r o d u c tio n to be th e same i n a l l c o u n t r i e s . B u t th e m ain w eakness o f b o th th e c l a s s i c a l and H e c h s c h e r-O h lin v e r s io n s o f t r a d e th e o ry i s t h e i r i n a b i l i t y to e x p la in how p r o d u c tio n e f f i c i e n c y , m a rk e t 3 •'T re n d s i n I n t e r n a t i o n a l T ra d e . G eneva, 1 9 58, p . 2 7 . 18 p r i c e s , and econom ic s t r u c t u r e ch an g e o v e r tim e . M odern g ro w th th e o r y I s o o n c ern ed w ith J u s t th o s e I s s u e s . G row th T h eory G row th th e o ry h a s b een fram ed I n term s o f th e t o o l s o f lnoom e a n a l y s i s made fam ous by K e y n es. The l e v e l o f a n a l y s i s f o r incom e th e o r y i s w h o lly d i f f e r e n t th a n f o r t r a d e th e o r y . The c o n c e p t o f n a t i o n a l incom e a s we s h a l l u s e i t h e re r e f e r s to th e t o t a l e a r n in g s o f a n a t i o n o r r e g io n from a l l s o u r c e s . Incom e a n a l y s i s i s a b i r d 's - e y e v iew o f th e econom y, w h ile th e a p p ro a c h o f t r a d e th e o r y m ig h t be c a l l e d th e w orm 's eye v ie w . T rad e th e o r y was fram ed i n te rm s o f p r i c e s , w hich e x p la in how a g iv e n o u tp u t i s d i s t r i b u t e d . Incom e th e o r y a t t a c k s th e p ro b lem o f c h a n g in g th e s i z e o f o u tp u t, and th u s may n e g le c t p r i c e s , p r o d u c tio n e f f i c i e n c y , and d i s t r i b u t i o n . Il K e y n e s' fam ous book i s th e a c c e p te d s t a r t i n g p o i n t f o r g ro w th a n a l y s i s , a lth o u g h o f c o u rs e a n te c e d e n ts to h i s id e a s c an be fo u n d i n books w r i t t e n c e n t u r i e s e a r l i e r . * ’ Incom e i s d e f in e d a s th e sum o f e a r n in g s o f th e f a c t o r s o f p r o d u c tio n . T h is lnoom e i s th e r e s u l t o f I I J . M. K ey n es, The G e n e ra l T h eory o f E m ploym ent. I n t e r e s t , and Money (New Yorks H a ro o u rt, B ra c e and Company, 1 9 3 6 ). **See C h a p te r 13 o f K e y n e s' G e n e ra l T h e o ry . 19 s p e n d e rs p u rc h a s in g th e s e r v i c e s o f p r o d u c tio n f a c t o r s . F o r ex am p le, a sh o e f a c t o r y w o rk e r e a rn s incom e b e c a u se th e f a c t o r y ow ner i s w i l l i n g to buy th e w o r k e r 's s e r v i c e s . B a is in g th e l e v e l o f incom e r e q u i r e s t h a t wage e a r n e r s be w i l l i n g to w ork and em p lo y ers a r e w i l l i n g to p u rc h a s e s e r v i c e s . K ey n es, w r i t in g d u r in g th e G re a t D e p re s s io n , saw t h a t t h e r e was ab u n d an ce o f unem ployed p e o p le re a d y to w ork, b u t few em p lo y ers w i l l i n g to p u rc h a s e s e r v i c e s . One p o s s ib l e s o l u t i o n w ould be to r a i s e c o n su m p tio n ( t h a t i s , g e t p e o p le to buy m ore sh o e s) and th u s c r e a t e a demand f o r w o rk e rs . The e m p lo y e rs, f in d in g th e y c o u ld s e l l m ore s h o e s , w ould th u s by happy to h i r e m ore w o rk e rs . T ak in g a n o th e r ta c k , th e sh o e m a n u fa c tu re r m ig h t be p e r su ad ed to b u ild up a l a r g e in v e n to r y o f s h o e s , and t h i s w ould i n c r e a s e em ploym ent. The a c t o f in v e n to r y accum u l a t i o n i s o a ll e d in v e s tm e n t. K eynes a l s o saw t h a t p e r s u a d in g th e go v ern m en t to buy sh o e s o r h i r e shoem akers w ould a c c o m p lis h th e g o a l o f i n c r e a s in g incom e i n d e p r e s s i o n — h id d e n eco n o m ie s. As a f o u r t h a l t e r n a t i v e , e x p o r t s c o u ld s t i m u l a te dem and, b u t a t K e y n es' moment i n h i s t o r y , t r a d e e x p a n s io n on an y b a s is was n e a r l y im pos s i b l e . The p ro b lem i n d e v e lo p in g c o u n tr i e s i s n o t o n ly i n a d e q u a te dem and, b u t a l s o In a d e q u a te s u p p ly . T h ese c o u n tr i e s a r e i n a " v ic io u s c i r c l e " o f p o v e r ty .^ I t ta k e s tim e t o b re a k t h i s v i c i o u s c i r c l e , and i t i s th e i n t e r a c t i o n s o v e r tim e among p r o d u c e r s , c o n su m ers, and I n v e s t o r s t h a t we m ust d is c u s s now. G row th th e o r y i s b a se d on a ssu m p tio n s t h a t d i f f e r w id e ly from th e s e u n d e rly in g th e th e o ry o f c o m p a ra tiv e c o s t ; ^ (1 ) c u r r e n t f a c t o r p r i c e s ( t h a t i s , wage r a t e s ) hav e no n e c e s s a r y r e l a t i o n s h i p to f u t u r e f a c t o r p r i c e s o r even to th e p r i c e s t h a t w ould be c h a rg e d i f new u s e s f o r f a c t o r s w ould be fo u n d im m e d ia te ly ; (2) th e q u a n ti t y and q u a l i t y o f f a c t o r s o f p r o d u c tio n may change su b s t a n t i a l l y o v e r tim e , p a r t l y a s a r e s u l t o f d e v elo p m e n t i t s e l f ; (3) some m a rk e ts a r e c u r r e n t l y to o s m a ll to p e r m it l a r g e , e f f i c i e n t p r o d u c tio n p r o c e s s e s to be u se d ; and (4) some p r o d u c ts a r e s a l a b l e o n ly i f c o m p lim e n ta ry goods a r e r e a d i l y a v a i l a b l e i n s u i t a b l e q u a n t i t i e s . E xam ples o f m u tu a lly c o m p lim e n ta ry p ro d u o ts a r e : g a s o lin e and a u to m o b ile s ; i r o n o r e , c o a l an d lim e s to n e ; and a lu m in a and e l e c t r i c po w er. T h ese a ssu m p tio n s r e q u i r e th e e r e c t i o n The term " v ic io u s c i r c l e " h a s b e en made fam ous by R . N u rk se , P ro b lem s o f C a p it a l F o u n d a tio n i n U n d erd ev elo p ed C o u n tr ie s . (O x fo rd : B a s i l B la c k w e ll, 1957)* and G. M y rd al, o n . c l t . 7 'H . B . C h e n ery , "C o m p arativ e A d v an tag e and D ev elo p m ent P o l i o y ," A m erican Eoonomlo R ev iew . M arch, 1961, p . 2 1. 21 o f new t h e o r e t i c a l e x p la n a tio n s and c a n le a d to c o n c lu s io n s e x a c tl y o p p o s ite th o s e d e r iv e d from th e th e o r y o f c o m p a ra tiv e c o s t . T h ere a r e two p r i n c i p a l s tre a m s o f th o u g h t t h a t h av e d e v e lo p e d o u t o f g ro w th th e o r y . One i s a s s o c i a t e d w ith th e nam es o f N urkse and R o s e n s te in -R o d a n , and i s 8 c a l l e d " b a la n c e d g ro w th ." The o t h e r c a l l e d " u n b a la n c e d " o r l o p - s i d e d g ro w th h a s b een fo rm u la te d by S c ito u s k y , q S t r e e t e n , and H irsch m an . B a la n c e d g ro w th i s b a sed on th e id e a o f s im u lta n e o u s e x p a n s io n on s e v e r a l f r o n t s . The N urkse v e r s i o n , w hich r e c e iv e d w ide a c c la im , e x p la in s t h a t a n u n d e rd e v e lo p e d o o u n try c a n n o t e x p e c t a sh o e f a c t o r y to be p r o f i t a b l e i f m ost o f th e p o t e n t i a l b u y e rs hav e no money to buy s h o e s . I t i s n e c e s s a r y to e s t a b l i s h s e v e r a l - - s a y 15 o r 20— co n su m er-g o o d s f a c t o r i e s a t th e same tim e , e ach to p ro d u ce one o f th e many ite m s t h a t consum ers w ant to b u y . The w o rk e rs i n e a c h o f th e s e i n d u s t r i e s , b e c a u se th e y have b a la n c e d n e e d s f o r s h o e s , O R . N u rk se , o p . c l t . , and R o s e n s te in -R o d a n , "P ro b lem s o f I n d u s t r i a l i z a t i o n o f E a s te r n and S o u th e a s te r n E u ro p e ," Econom ic J o u r n a l . V o l. 53» J u n e - S e p t ., 1 9^3. p p . 205- 216. o T . S c ito u s k y , "Two C o n c e p ts o f E x te r n a l E co n o m ies," J o u r n a l o f P o l i t i c a l Economy. V o l. 62, A p r i l , 195^# p p . 1 ^ 3 - 1 5 1 • P . S t r e e t e n , "U nbalanced G ro w th ," O xford Econom ic P a p e r s , V o l. 1 1 , J u n e , 1959* p p . 1 6 7 -1 9 1 ; T . S c ito u s k y , "G row th B a la n ce d o r U n b a la n c e d ," i n M. A b ra m c e v itz ' The A l l o c a t i o n o f Econom ic R e s o u rc e s . ( S ta n fo rd s S ta n f o r d U n i- v e r s l t y P r e s s , 1 9 5 9 ); and A. 0 . H irsc h m an , The S t r a te g y o f Econom ic D evelopm ent (New H aven: Y a le U n iv . P r e s s , 1 9 5 9 ). c l o t h i n g , fo o d s , hand t o o l s , h o u se f u r n i s h i n g s , and th e l i k e , w i l l be c u sto m e rs f o r th e o u t p u t. They w i l l s p e c i a l i z e i n th e p r o d u c tio n o f one good, and th e n buy a l l th e o t h e r th in g s th e y need from th e f a c t o r i e s i n w hich t h e i r n e ig h b o rs w o rk . T h u s, th e demand f o r w o rk e rs oan be d e r iv e d from th e demand f o r g o o d s, and th e demand f o r goods w i l l be e f f e c t i v e b e c a u se th e w o rk e rs h av e jo b s ; th e v ic io u s c i r c l e i s b ro k e n . The th e o r y o f b a l a n ce d g ro w th assum es t h a t th e s u p p ly o f e i t h e r c a p i t a l o r l a b o r i s l a r g e and a v a i l a b l e a t low c o s t ; some w r i t e r s ev en assum e th e s u p p ly to be u n l im i te d . T h is r a t h e r h e r o ic a s s u m p tio n p ro v id e s a b a se f o r show ing t h a t i n v e s tm e n t w i l l be m ore p r o f i t a b l e i f s p re a d o v e r s e v e r a l r e l a t e d s e c t o r s , r a t h e r th a n c o n c e n tr a te d i n one a r e a . R e f e r r in g back to th e w in e - c lo th i l l u s t r a t i o n , i t a p p e a rs t h a t s p e c i a l i z a t i o n i n n e i t h e r w ine n o r o l o th i s recom m ended. I n s te a d in v e s tm e n t i n a n i n t e r r e l a t e d g ro u p o f c o m p lim e n ta ry i n d u s t r i e s i s shown to be m ore p r o f i t a b l e . U n b alan ced g ro w th i s fo rm u la te d on th e a ssu m p tio n t h a t th e s u p p ly o f c a p i t a l and l a b o r i s f i x e d — t h a t i t i s p o s s ib l e to o b t a i n o n ly a l i m i te d am ount o f in v e s tm e n t fu n d s o r l a b o r s e r v i c e s (w ork) a t a g iv e n tim e . I n o r d e r to have f a c t o r i e s t h a t a r e b ig enough to be e f f i c i e n t , i t may be n e c e s s a r y to c o n c e n tr a te a l l o r m ost o f th e a v a i l a b l e r e s o u r c e s i n one o r two s e c t o r s , le a v in g th e 23 n e e d s f o r o t h e r goods u n r e q u ite d o r a t b e s t r e q u i t e d from im p o r ts . The o p t i o n a l p a t t e r n o f d e v elo p m e n t w ould th e n be a program m ed s e r i e s o f c o n c e n tr a ti o n on one i n d u s t r y a f t e r a n o th e r , w ith b a la n c e to oome o n ly i n th e dim f u t u r e . T hus, th e o l d , f a m i l i a r econom ies o f s c a l e i s one arg u m en t f o r u n b a la n c e d g ro w th . The seco n d i s S t r e e t e n 's t h e s i s t h a t t e c h n o lo g ic a l p r o g r e s s may be m ore r a p id i f in o r e a s e s i n p r o d u c tio n a r e c o n c e n tr a te d i n a few s e c t o r s . I n th e t h i r d , H irschm an a rg u e s t h a t im b a la n c e may be n e c e s s a r y b e c a u se o f s h o r ta g e s o f e n t r e p r e n e u r i c a l a b i l i t y . B ut n e i t h e r th e b a la n c e d n o r th e im b a la n c e d a p p ro a c h e s to econom ic d e v e lo p m e n t have b e en s u b je c te d to much e x a m in a tio n f o r h i s t o r i c a l re le v a n c e i n a r ig o r o u s m anner, p a r t l y b e c a u se th e y a r e n o t fo rm u la te d i n su ch a way a s to make t e s t i n g p o s s i b l e . B a la n ce d g ro w th h a s b e e n exam ined i n th e l i g h t o f h i s t o r i c a l e x p e r ie n c e by G e rsc h e n k ro n , R ostow , O h lin , and H ughes, 10 b u t i t h a s b een d i f f i c u l t to f i n d exam ples o f b a la n c e d g ro w th i n 10A. G e rsc h e n k ro n , "Econom ic B ackw ardness i n H is t o r i c a l P e r s p e c t i v e ," i n B . H o s e l i t z , e d ., The P r o g r e s s o f U n d e rd ev e lo p e d A r e a s . (C h ica g o : U n iv e r s ity o f C h icag o P r e s s 1 9 5 2 ); W. W. R ostow , "The T a k e -O ff i n t o S e lf - S u s ta in e d G ro w th ," E o o n o m lc Jo u rn a l. V o l. 66, M arch, 1 956, p p . 2 5 -4 8 ; P . G. O h lin , "B alan o ed Econom ic G row th i n H i s t o r y ," A m erican Econom ic R eview . V o l. 49t May, 1959. p p . 3 3 8 -3 5 3 ; and J . R . T . H ughes, " F o re ig n T rad e and B alan ced G row th, The H i s t o r i c a l F ram ew ork," A m erican Econom ic R eview . V o l. 4 9 , May, 1959. P P . 3 3 0 -3 3 7 . th e • h o r iz o n ta l" s e n s e o f e x p a n s io n o f many c o m p lim e n ta ry consum er goods i n d u s t r i e s a t one tim e . O h lin d id f in d some exam ples o f v e r t i c a l e x p a n s io n o f i n d u s t r i e s ( l i k e t e x t i l e s , i r o n , and s t e e l ) i n w hich s im u lta n e o u s d e v e lo p m ent o f raw m a t e r i a l s s o u r c e s , s e m i- f in is h e d g o o d s, and consum er goods o c c u r r e d , b u t t h i s c o u ld a s e a s i l y be c a l l e d a n exam ple o f u n b a la n c e d g ro w th s in c e o n ly one i n d u s t r y expanded a t a tim e . The h i s t o r i c a l s t u d i e s r e v e a le d t h a t m ost I n d u s t r i e s w ere d e p e n d e n t o n o t h e r I n d u s t r i e s a s s o u rc e s o f s u p p ly o r a s p o t e n t i a l c u s to m e rs . The n e t c o n t r i b u t i o n o f g ro w th th e o ry h a s b een to c a s t d o u b t upon th e c l a s s i c a l p re s u m p tio n t h a t p e r f e c t c o m p e titio n , ev en i f i t c o u ld be a c h ie v e d , w ould le a d to optim um d e v e lo p m e n t. C l a s s i c a l tr a d e th e o r y , b e c a u se i t assum es c o m p e titio n , i s th u s a l s o d o u b te d . T h e r e f o r e , b o th b a la n c e d g ro w th and u n b a la n c e d g ro w th a r e a rg u m e n ts f o r s t i m u l a t i o n o f p r o d u c tiv e a c t i v i t y , e i t h e r by many s m a ll p r o j e c t s s im u lta n e o u s ly o r e l s e by means o f a few l a r g e s t r a t e g i c o n e s . N e ith e r ty p e o f g ro w th th e o ry r e l i e s o n th e n a t u r a l f o r c e s o f s u p p ly and demand to g e n e r a te g ro w th . The p r o f i t m o tiv e r e p u te d ly i n th e h e a r t s o f b u sin e ssm e n i s a p p a r e n tly n o t s tr o n g enough to c a u se p r o d u c tiv e a c t i o n to be u n d e r ta k e n , a c c o rd in g to th e g ro w th t h e o r i s t s . I n t h i s way 25 g ro w th th e o r y h a s s e rv e d to o r i t i o l z e th e v e ry fo u n d a t i o n o f th e t r a d e th e o r y , t h a t i s , th e p o t e n t i a l p r o f i t s to be made from p ro d u c in g f o r e x p o rt sim p ly do n o t le a d to p r o d u c tiv e a c t i v i t y . To d e m o n s tra te t h e s e p o t e n t i a l tr a d i n g p r o f i t s , a s c l a s s i o a l t r a d e d o e s , i s n o t en o u g h . We need a dynam ic th e o r y o f i n t e r n a t i o n a l t r a d e . In v e s tm e n t C r i t e r i a Some e c o n o m is ts have become im p a tie n t w ith b o th t r a d e th e o r y and g ro w th th e o r y : th e y h av e made i n v e s t m ent d e c is io n s and p o l ic y reco m m en d atio n s w ith o u t th e b e n e f i t o f e i t h e r s tre a m s o f th o u g h t, u s in g " r u l e s o f thumb" I n s t e a d . S uch d e c i s i o n r u l e s have b een c a l l e d " in v e s tm e n t c r i t e r i a , " and a n e la b o r a t e t h e o r e t i c a l s t r u c t u r e h as b een b u i l t to j u s t i f y them on l o g i c a l g ro u n d s. The b e s t o f th e s e c r i t e r i a a r e b ased on th e dynam ic a s s u m p tio n s o f g ro w th th e o r y . The p u rp o se o f t h i s s e c t i o n i s to d e te rm in e w h e th e r th e s e c r i t e r i a oan be u se d a s a fram ew ork f o r d e v e lo p in g a dynam ic r e c o n s t i t u t e d a p p ro a c h to i n t e r n a t i o n a l t r a d e . The p r i n c i p a l q u e s tio n a sk e d by t r a d e th e o r y i s "w hat s h a l l we p ro d u c e f o r e x p o rt? " The g e n e r a l a n sw e r i s "p ro d u ce t h a t w hich w i l l be m o st p r o f i t a b l e . " C l a s s i c a l t r a d e th e o r y t o l d u s to s p e c i a l i z e i n th o s e goods i n w h ich we e n jo y e d c o m p a ra tiv e a d v a n ta g e i n p r o d u c tio n , b u t f o r d e v e lo p in g c o u n tr i e s we m ust d e f in e t h i s i n term s o f w hat th e e x p e c te d o r f u t u r e c o m p a ra tiv e a d v a n ta g e w i l l b e . The p r a c t i c a l q u e s tio n f o r d e v e lo p m e n t i s t h i s : "w hat s h a l l we t r y to p ro d u o e? " The s im p le s t a p p ro a c h i s to c o n c e n tr a te on th e s o a r c e s t r e s o u r o e , o a p i t a l , and th u s s tu d y in v e s tm e n t. B uchanan, one o f th e f i r s t o f th e " c r i t e r i a " w r i t e r s , to o k t h i s a p p ro a c h and came up w ith th e recom m endation to p ro d u ce th o s e goods w hich r e q u i r e l e a s t c a p i t a l p e r u n i t o f o u t p u t .* 1 He s u g g e s te d t h a t new in v e s tm e n t be made w here t h e am ount o f c a p i t a l p e r u n i t o f o u tp u t i s s m a l l e s t . The c r i t e r i a c a l l e d th e "minimum c a p i t a l - o u t p u t r a t i o . " B ut th e c r i t e r i o n i s to o s im p le ; th e q u a l i t y and th e q u a n ti t y o f n a t u r a l r e s o u r c e s and th e la b o r f o r c e m u st a l s o be c o n s id e r e d , and th e p ro b lem s o f m ea su rin g c o s ts and v a lu in g o u tp u t m ust be s p e c i f i e d . A c l o s e l y r e l a t e d c r i t e r i o n i s th e c a p i t a l - l a b o r r a t i o ; b u t t h i s , to o , i s in a d e q u a te b e c a u se i t assum es t h a t l a b o r and o a p i t a l a r e ev ery w h ere th e same ( o r a t l e a s t c o m p a ra b le ), and t h a t th e m ethods o f p r o d u c tio n a r e e q u iv a le n t . N e ith e r d o e s i t make a llo w a n c e f o r s p e c i a l a d v a n ta g e o f p a r t i c u l a r c o m b in a tio n s o f th e s e two f a c t o r s . ^ N . S . B uchanan. I n t e r n a t i o n a l In v e s tm e n t and D om estic W e lf a r e . (New Y ork, H. H o lt and Company, 1 9 ^ 5 )• 27 A much m ore o o m p reh en slv e a l l o c a t i o n c r i t e r i o n i s th e s o c i a l m a rg in p ro d u o t (SMP) o f a p a r t i c u l a r r e s o u r c e I n u s e . As p ro p o se d by K ahn, s o c i a l m a rg in a l p ro d u c t i s th e n e t c o n t r i b u t i o n o f a n a d d i t i o n a l (m a rg in a l) u n i t o f 12 in v e s tm e n t to th e n a t i o n a l p r o d u c t. H is d e c i s i o n r u l e i s to ra n k a l l in v e s tm e n t p r o j e c t s by t h e i r SM P and th e n spend th e i n v e s t a b l e fu n d s o n th e to p p r o j e o t s , g o in g down th e l i s t u n t i l a l l fu n d s a r e e x h a u s te d . An ev en s im p le r r u l e o f thum b would be to s t a t e t h a t a l l i n v e s t m ent p r o j e c t s w ith a n SMP g r e a t e r th a n th e c u r r e n t c r e s t o f c a p i t a l (s a y 6 p e r o e n t) c a n be a p p ro v e d ; many l a r g e b u s in e s s fir m s u s e t h i s c r i t e r i o n r e g u l a r l y . The v i r t u e o f th e SMP c r i t e r i o n i s i t s g r e a t g e n e r a l i t y . E v ery co n c e iv a b le k 4nd o f c o s t c a n be In c lu d e d i n th e c a l c u l a t i o n s o f SMP, a s w e ll a s a l l p o s s i b l e m o d if ic a tio n s o f v a lu e f o r o u t p u t. And th e c a l c u l a t i o n o an in c lu d e an y and a l l f u t u r e p e r i o d s . T h e re h a s b e en some d is a g re e m e n t a b o u t th e m ethods o f c a l c u l a t i o n , h o w ev er. G a len so n and L e i b e n s te i n have s u g g e s te d t h a t th e b e s t c r i t e r i o n was one w hich s e l e o t e d th o s e in v e s tm e n t p r o j e o t s w hich 12 A. E . K ahn. " In v e s tm e n t C r i t e r i a i n D evelopm ent P ro g ra m s," Q u a r te r ly J o u r n a l o f E conom ics. V o l. 6 5 , F e b ru a ry , 1951» p p . 3 8 -6 1 . 28 1 1 m axim ize th e am ount o f s a y in g s r e i n v e s t e d i n th e econom y. B u t th e g o a l o f t h e i r o r i t e r i o n was n o t to m axim ize i n - oome o v e r tim e o r even i n th e n e a r f u t u r e ; t h e i r m odel m axim izes incom e a t a p a r t i c u l a r tim e i n th e d i s t a n t f u t u r e . E c k s te in h a s d e v e lo p e d a fo rm u la t h a t r e c o n c i l e s I k th e SMP and th e m a rg in a l r e in v e s tm e n t c r i t e r i a . F i r s t , he assum es t h a t th e g o a l o f th e m odel i s to m axim ize th e p r e s e n t v a lu e o f th e f u t u r e c o n su m p tio n s tre a m , w ith some a p p r o p r i a te d is c o u n t r a t e (s a y 6 p e r c e n t) u se d to d i s c o u n t th e v a lu e s o f c o n su m p tio n i n e ac h f u t u r e p e r i o d . The l a r g e r th e d is c o u n t r a t e , th e m ore Im p o rta n t im m ed iate o r n e a r - f u t u r e c o n su m p tio n i s ; w ith a s m a ll d is c o u n t r a t e th e d i s t a n t f u t u r e c o n su m p tio n becom es m ore im p o r ta n t. S e c o n d , he in c lu d e s a term f o r th e a d d i t i o n a l c o n su m p tio n to be a c h ie v e d by r e i n v e s t i n g s a v in g s . T h is term b r in g s i n t o th e a n a l y s i s th e p o s s i b l e b e n e f i t s from h ig h r e in v e s tm e n t o f s a v in g s . B u t th e s u b s ta n c e o f th e m odel 13 W• G a len so n and H. L e i b e n s te i n . " In v e s tm e n t C r i t e r i a , P r o d u c t i v i t y , and Econom ic D ev elo p m en t," Q u a r te r ly J o u r n a l o f E co n o m ics. V o l. 69# A u g u st 1955# P P . 3 ^ 3 -3 7 0 . Ik 0 . E c k s te in , " In v e s tm e n t C r i t e r i a f o r Econom ic D evelopm ent and th e T h eo ry o f I n t e r n a t i o n a l W e lfa re E oonom ios," Q u a r te r ly J o u r n a l o f E co n o m ics. V o l. 71, F e b ru a ry 1957# P P . 5 6 -8 5 . 29 d e p en d s l a r g e l y o n th e d ls o o u n t r a t e anyhow , and th e t y p i c a l l y h ig h r a t e s fo u n d i n d e v e lo p in g c o u n tr i e s em p h a s iz e th e r e l a t i v e l y n e a r f u t u r e a s r e l e v a n t f o r p o l i c y . T h e re a r e many o t h e r i n d i r e c t dynam ic e f f e c t s o f g ro w th t h a t m ig h t be b ro u g h t i n t o th e fo rm u la e x p l i c i t l y , p a r t i c u l a r l y th e p s y c h o lo g ic a l and s o c i o l o g i c a l e f f e c t s on incom e and s a v in g s , and l a b o r s k i l l s d e s c r ib e d by H irsch m an , b u t th e y w ould c o m p lic a te th e m odel f a r beyond w hat i s c a l l e d a " r u l e o f th u m b ." Complex c o m p u ta tio n m ethods w i l l be r e q u ir e d f o r su c h d e c is io n -m a k in g . The c r i t e r i o n o f s o c ia l- m a r g in a l p r o d u c t i v i t y i s ( i n p r i n c i p a l ) a n e x te n s io n o f th e lo n g - te r m th e o r y o f c o m p a ra tiv e a d v a n ta g e b e c a u se b o th g iv e th e same an sw er to th e q u e s tio n "w h at s h a l l we p ro d u o e f o r e x p o rt? " "P ro d u ce t h a t w hich i s m ost p r o f i t a b l e , " i s th e a n sw e r, and th e c o n t r i b u t i o n o f th e SMP c r i t e r i o n i s to r e d e f i n e p r o f i t a b i l i t y to in c lu d e s o c i a l v a lu e s . Thus in v e s tm e n t c r i t e r i a , g ro w th th e o r y , and dynam ic ( lo n g - ru n ) t r a d e th e o r y a l l a n sw e r d e v elo p m e n t q u e s tio n s w ith s i m i l a r rec o m m e n d a tio n s. And a l l th o s e a p p ro a c h e s a r e f r a g m en tary and In c o m p le te . In v e s tm e n t c r i t e r i a seem to be e x c e l l e n t t r a d e and In v e s tm e n t p r i n c i p l e s f o r o o u n tr le s w here s t a t i s t i c a l 30 m e a su re s o f im p o r ta n t e le m e n ts o f th e economy a r e n o t a v a i l a b l e . B u t m ore c o m p lic a te d th e o r y i s r e q u ir e d i f a l a r g e num ber o f v a r i a b l e s a r e to be in c lu d e d i n th e a n a l y s i s . B e fo re c lo s in g t h i s c h a p t e r , p e rh a p s i t i s u s e f u l to d is c u s s b r i e f l y s o p h i s t i c a t e d r e c e n t m e th o d o lo g ie s f o r d e v e lo p m e n ta l eco n o m ics: l i n e a r program m ing and dynam ic m acroeconom ic m o d e ls. L in e a r Program m ing and Shadow P r i c e s L in e a r program m ing i s a l o g i c a l m ethod o f a c c o u n t in g f o r many v a r i a b l e s a s th e y ch an g e and a f f e c t e ach o t h e r . I t i s a m ethod o f c a l c u l a t i n g th e s o c i a l p ro d u c t o f l a r g e and s m a ll c h a n g e s, and i t i s c a p a b le o f e v a lu a t i n g a l l th e i n d i r e c t e f f e c t s t h a t o c c u r i n a dynam ic eoonom y. I t i s i n no s e n s e a new o r s e p a r a t e th e o r y o f 1 * 5 e o o n o m ics. J H ere th e g e n e r a l p ro b lem i s to m axim ize n a t i o n a l Incom e s u b j e c t to th e c o n s t r a i n t t h a t demand f o r e ac h good s h o u ld e q u a l s u p p ly . I t i s n e c e s s a r y to e s t i m ate th e q u a n ti t y o f a l l a v a i l a b l e r e s o u r c e s , l i s t a l l goods to be p ro d u c e d , and d e f i n e a l l te c h n iq u e s o f p r o d u c ti o n . The g e n e r a l p ro c e d u re f o r s o lv in g th e m odel *^R. D orfm an, " M a th e m a tic a l o r 'L i n e a r 1Program m ing: A N o n -m ath e m a tio a l E x p o s itio n ," A m erloan Eoonom lc R eview . V o l. X I I I , D ecem ber 1953» p p . 7 8 7 -8 3 5 . 31 I n v o lv e s t h r e e s t e p s : ( 1 ) f in d in g a s e t o f p r o d u c tio n p r o c e s s e s t h a t s a t i s f i e s th e su p p ly -d em an d re q u ir e m e n t; (2 ) c a l c u l a t i n g th e p r i o e s t h a t w ould e q u a te s u p p ly and demand ( th e s e t h e o r e t i c a l p r i c e s a r e c a l l e d "shadow p r i c e s " ) ; an d ( 3 ) u s in g th e shadow p r i c e s to d e te rm in e w h e th e r an y ch an g e s i n p r o d u c tio n a c t i v i t i e s w ould i n c r e a s e n a t i o n a l lnoom e. T h u s, th e q u e s tio n s o f w hat to p ro d u c e , w here to i n v e s t , and w hat to e x p o rt a r e an sw ered i n q u a n t i t a t i v e te rm s ; b o th q u a n t i t y and p r i c e outcom es a r e s p e c i f i e d . The d i f f i c u l t i e s a s s o c i a t e d w ith th e u s e o f l i n e a r program m ing a r e l a r g e l y th o s e o f o b ta in in g in f o r m a tio n . No c o u n try i n th e w o rld h a s enough d a ta to be c o m p le te ly d e s c r ib e d , and th e p ro b lem o f d e f i n i n g p r o d u c tio n te c h n iq u e s a s th e y ch an g e o v e r tim e h a s n o t y e t b een s o lv e d . M ost m odels i n u s e a r e o n ly a p p ro x im a tio n s . I n p u t - o u tp u t s t u d i e s (so m etim es c a l l e d i n t e r - i n d u s t r y s t u d i e s ) a r e a s p e o i a l , r e s t r i c t e d c a s e o f l i n e a r program m ing t h a t h a s b e e n u se d a s a co m p u tin g d e v ic e i n th e a n a l y s i s o f d e v e lo p m e n t p r o b le m s .1^ I n p u t- o u tp u t The a p p ro a c h i s l a r g e l y th e c r e a t i o n o f P r o f e s s o r W. W. L e o n t ie f i n h i s The S t r u c t u r e o f A m erican Economy. 1 9 1 1 -1 9 3 9 . (New Y ork: O x fo rd U n i v e r s i ty P r e s s , 1951 ) . a n a l y s i s I s b a se d on a o r o s s - s e c t i o n v iew o f th e economy a t a moment I n tim e . I t i s l i k e a c e n su s s u rv e y i n t h a t I t d e s c r ib e s a l a r g e p o p u la tio n o f d a ta in s t a n t a n e o u s l y , b u t d o e s n o t by i t s e l f t r a c e th e p a t t e r n o f change t h a t i s a l t e r i n g th e o b se rv e d d a t a . I t i s a ls o l i k e a c e n su s i n t h a t i t in v o lv e s much work o f c o m p ila tio n . A s e r i e s o f i n p u t- o u t p u t t a b l e s f o r a n economy w ould p ro b a b ly p r o v id e v e ry good i n s i g h t i n t o th e g ro w th p a t t e r n by r e c o rd in g th e ch an g e s i n th e s e c t o r s a s th e y o c c u r . C henery an d o t h e r s h av e shown how i n p u t- o u t p u t d a ta t a b l e s oan be u se d when d a ta f o r o n ly a few y e a r s a r e a v a i l a b l e , an d a dynam ic m odel o f ch an g es i n th e sy ste m v iew e x i s t s . 1^ An im p o rta n t p ro b lem a s s o c i a t e d w ith i n p u t- o u tp u t m ethods ( i n a d d i t i o n to o b t a i n i n g in f o r m a tio n ) i s t h a t o f t r a n s l a t i n g i t s c r o s s - s e c t i o n m e a su re s i n t o lo n g -te rm g ro w th p a ra m e te r s ; c r o s s - s e c t i o n p a ra m e te rs h av e f r e q u e n tly b een fo u n d to r e f l e c t s h o r t e r r e a c t i o n s w h ile tim e s e r i e s r e f l e c t much lo n g e r o n e s . Some p r o g r e s s h a s 17 'H . B. C h e n ery , " P a t te r n s o f I n d u s t r i a l G ro w th ," A m erican Econom ic R eview .' V o l. 1 , S e p tem b er I9 6 0 , p p . 62^-65A ; H. B. C henery," S . S h is h id o , and T . W atanabe, "The P a t t e r n o f J a p a n e s e G row th, 191^-195^*" E c o n o m e tric s . V o l. 3 0 , J a n u a ry 1962, p p . 9 8 -1 3 9 ; and R . D orfm an, P . S am u elso n , and R . Solow , L in e a r Program m ing and Econom ic A n a ly s is . (New Y ork: 195& ), C h a p te rs 1 0 -1 2 . 33 b een made i n d e f i n i n g th e d i r e c t i o n and p o s s ib le m ag n itu d e o f b ia s i n c r o s s - s e c t i o n d a t a , and we may e x p e c t much g r e a t e r u s e o f in p u t- o u tp u t te c h n iq u e s i n d ev elo p m en t 18 a n a l y s i s i n th e f u t u r e . Dynamic M acroeconom ic M odels Time s e r i e s o f in co m e, in v e s tm e n t, t r a d e , and o t h e r v a r ia b le s oan be s tu d ie d d i r e c t l y . The m ethod i s c a l l e d e c o n o m e tr ic s , w hioh i s d e f in e d a s th e a p p l i c a t i o n o f m a th e m a tic a l econ om ic th e o r y and s t a t i s t i c a l p r o c ed u r es 19 to eco n o m ics and t o v e r i f y econ om ic th e o r e m s. 7 The fram ework f o r s tu d y in g dynam ic (m acroeconom ic) m od els h a s b een d e v e lo p e d i n c o n s id e r a b le d e t a i l and some s t a t i s t i c s e x i s t f o r many d e v e lo p in g c o u n t r ie s . The l i t e r a t u r e g o e s back t o th e work o f T in b er g e n and h a s b een d e - 20 v e lo p e d by K le in and o t h e r s . Some more r e c e n t a p p l i - 18 Y. G ru n fe ld , "The I n t e r p r e t a t i o n o f C r o s s - S e c tio n E s tim a te s i n a Dynamic M odel," E o o n o m e trlc a . V o l. 29, J u l y 1 9 61, p p . 3 9 7 -^ 0 5 ; and E . K ub, "The V a l i d i t y o f C ro ss- S e c t i o n a l l y E s tim a te d B e h a v io r E q u a tio n s i n Time S e r i e s A p p l i c a ti o n s ," E o o n o m e trlc a . V o l. 2 7 , A p r il 1 9 59. ^ G . T i n t n e r . E o o n o m e trlo s. (New Y ork: Jo h n W iley and S o n s, I n c . , 1967)# PP. 3 - ^ . 20 J . T in b e rg e n . S t a t i s t i c a l T e s tin g o f B u s ln e s s - C y c le T h e o r ie s . V o l. 1 1 . B u s in e s s C y c le s i n th e U n ite d S t a t e s o f A m e ric a. 1 9 1 9 -1 9 3 2 . (G eneva: L eague o f N a tio n s 1 ^ 3 9 )1 and L . R. K le in and A. S . G o ld b e rg e r. An E cono m e tr ic M odel o f th e U n ite d S t a t e s . 1 9 2 9 -1 9 5 2 . (Am sterdam : 1 9 5 5 ). 3^ c a t io n s o f th e m ethod hav e b e en made by S u i t s , K le in , 21 C av es, C h e n ery , and B rem s. E c o n o m e tric m odels ta k e th e form o f s e r i e s o f e q u a tio n s d e f i n i n g r e l a t i o n s b etw een w hat th e m odel b u i l d e r c o n s id e r s to be im p o rta n t econom ic v a r i a b l e s f o r s tu d y . Some m odels a r e u se d sim p ly to d e s c r ib e a n economy; o t h e r s a r e u se d to f o r e c a s t econom ic e v e n ts . The r e a c t i o n s to p o l ic y c h an g e s ( r e g a r d in g tr a d e o r i n v e s tm e n t, sa y ) c an a ls o be s tu d ie d w ith dynam ic m odels and i n t e r n a t i o n a l c o m p a riso n s b etw een econom ies c a n be m ade. Dynam ic m odels hav e b e e n b u i l t a ro u n d incom e a n a l y s i s , and some o f them have n e g le c te d p r i c e s , a l l o c a t i o n s , and d i s t r i b u t i o n . B ut th e m odern, l a r g e - s i z e d m odels hav e p r i c e v a r i a b l e s and y i e l d e s tim a te s o f r e l a t i v e p r o d u c t i v i t y b etw een s e c t o r s . Even th e m ost c o m p li c a te d o f th e s e m o d e ls, how ever, h a s n o t u se d p r i c e e q u i lib r iu m b etw een demand and s u p p ly a s a n o r g a n iz in g p r i n c i p l e i n th e way t h a t l i n e a r program m ing d o e s . Incom e e q u ilib r iu m b etw een th e v a r io u s s e c t o r s h a s been u sed 21 D. B. S u i t s . " F o r e c a s tin g and A n a ly s is w ith a n E c o n o m etric M odel," A m erican Econom ic B evlew . V o l. I l l , M arch, 1 9 62, p p . 1 0 ^ -1 3 2 ; L . R . K le in , "A M odel o f J a p a n e s e Econom ic G row th, 1 8 7 8 -1 9 3 7 ," E o o n o m e trlc a . V o l. 29, J u l y 1961, p p . 2 7 7 -2 9 2 ; R . E . C aves and R . H. H o lto n , The C a n ad ian Economy. P r o s p e c ts and R e tr o s p e c t. (1 9 5 9 ), C h a p te rs 3 -4 ; end H. B. C henery and M. B ru n o , "D evelopm ent A l t e r n a t i v e s i n a n Open Economy: The C ase o f I s r a e l , " Econom ic J o u r n a l . V o l. X X II, M arch 1962, p p . 7 9 -1 0 3 . 35 i n s t e a d . T h is i s a b a s ic d i f f e r e n c e b etw een l i n e a r program m ing and dynam ic m aoroeconom io m od els w h ich u s e incom e e q u ilib r iu m a s an o r g a n iz in g c o n c e p t . L in e a r program m ing i s i n th e c l a s s i o a l t r a d i t i o n o f th e th e o r y o f co m p a ra tiv e c o s t s ; dynam ic m od els a r e more i n k e e p in g w ith th e new t r a d i t i o n o f incom e a n a l y s i s . Each a p p ro a ch , w ith some outw ard m o d if ic a t io n s , can be u se d t o s o lv e th e o t h e r ' s p ro b lem s, and b o th seem t o sh ed l i g h t on th e d ev elo p m en t p r o c e s s . U n fo r tu n a te ly , no s a t i s f a c t o r y 22 m a rria g e b etw een t h e two a p p ro a ch es h a s b een fo u n d . I n c o n c lu s io n , th e b r o a d ly -d e fin e d in v e stm e n t c r i t e r i o n " s o c i a l m a r g in a l p r o d u c t iv it y " (SMP) p r o v id e s a s a t i s f a c t o r y f i r s t s t e p to th e a p p l i c a t i o n o f a r e c o n s t i t u t e d tr a d e th e o r y to th e in v e stm e n t p rob lem s o f d e v e lo p in g c o u n t r ie s , b u t th e m ethods o f c o m p u ta tio n f o r t h i s c r i t e r i o n le a v e much t o be d e s ir e d . L in e a r p r o gramming and i t s c o r o l l a r y , in p u t-o u tp u t a n a l y s i s , a r e v e r y p r o m isin g t o o l s o f c a l c u l a t i o n , b u t th e y h ave n o t y e t b een u sed e x t e n s i v e l y f o r la c k o f r e l i a b l e d a ta and e l e c t r o n i c c o m p u ta tio n a l f a c i l i t i e s . Dynam ic m aoro- econ om ic m o d e ls, b e c a u se th e y a r e based on tim e s e r i e s 22H. Brems u se d th e term "m arriage" to d e s c r ib e a s i m i l a r r e l a t i o n s h i p b etw een s h o r t-r u n v a r ia b le s i n i n t e r n a t io n a l eco n o m ies; s e e h i s " D e v a lu a tio n , A M arriage o f th e E l a s t i c i t y and th e A b s o r p tio n A p p ro a ch es," Eoonom lc J o u r n a l, V o l. X V II, M arch, 1957* p p . 49-6*1-. a n a l y s i s and a r e b u i l t i n te rm s o f p o lic y v a r i a b l e s and f o r p r e d i c t i o n , p ro v id e a n a l t e r n a t i v e c a lc u lu s f o r a n a ly z i n g t r a d e and g ro w th . B ecau se th e d a t a f o r tim e s e r i e s a n a l y s i s i s much m ore g e n e r a l l y a v a i l a b l e th a n p r i c e d a t a , m acroeconom ic m odels a r e c a p a b le o f b e in g u se d i n m ore p la c e s th a n l i n e a r program m ing. A w ide v a r i e t y o f m acroeconom ic m odels have b een u se d r e c e n t l y 23 i n th e s tu d y o f econom ic d e v e lo p m e n t. ^ T h ese eco n o m e tr ic m odels hav e th e v i r t u e o f e x p re s s in g s e v e r a l sim p le g ro w th t h e o r i e s s im u lta n e o u s ly , m aking p o s s ib l e a s tu d y o f th e i n t e r r e l a t i o n s o f t h e o r i e s and i n t e r a c t i o n s o f v a r i a b l e s . I t i s i n e o o n o m e tric m ethod t h a t a tr a d e th e o r y , g ro w th th e o r y , and in v e s tm e n t c r i t e r i a c an be woven t o g e t h e r i n t o a m e a n in g fu l w h o le . Summary The m ain o b j e c t i v e o f t h i s c h a p te r h a s b e en to show t h a t c l a s s i c a l t r a d e th e o r y and g ro w th th e o r y , a l th o u g h b a se d on d i f f e r e n t a s s u m p tio n s , oan be r e c o n c ile d to p ro v id e a new a p p ro a c h w hioh c an be a p p li c a b l e to th e p ro b lem s o f econom ic g ro w th o f d e v e lo p in g c o u n t r i e s . 2^G. T ln t n e r , "Some T ho u g h ts A bout th e S t a t e o f E c o n o m e tric s ," i n S . R . K ru p p , e d ., The S t r u c t u r e o f Econom ic S c ie n c e : E ssa y s o n M eth o d o lo g y . (Englew ood C l i f f s , New J e r s e y : P r e n t i c e H a l l, I n c . , 1 9 6 6 ), p . 1 1 9 . 37 T rade th e o r y assu m es u n ch a n g in g c o s t and demand c o n d it io n s , w h ile grow th th e o r y assu m es t h a t in v e s tm e n t, Incom e, and o t h e r v a r i a b l e s a r e c o n s t a n t ly c h a n g in g . To be more u s e f u l i n a dynam lo econom y, tr a d e th e o r y m ust be r e c a s t in term s o f th e a ssu m p tio n s o f grow th t h e o r y . The ta s k o f b r id g in g th e gap b etw een th e o r y and p r a c t i c e r e m a in s. H ow ever, a number o f e c o n o m ists have become im p a tie n t w ith b o th tr a d e th e o r y and grow th th eo ry ? th e y h a v e made in v e stm e n t d e c i s i o n s and recom m en d a tio n s w ith o u t th e b e n e f it o f e i t h e r strea m s o f th o u g h t, u s in g ’’r u l e s o f thumb" i n s t e a d . T h ese d e c i s io n s h ave b een c a l l e d " in v e stm e n t c r it e r ia ? " and an e la b o r a t e t h e o r e t i o a l s t r u c t u r e h a s b een b u i l t to j u s t i f y them on l o g i c a l g r o u n d s. The b e s t o f t h e s e c r i t e r i a a r e b ased on th e dynam ic a ssu m p tio n s o f grow th t h e o r y . T hus, th e ta s k o f t h i s c h a p te r h as b een to d e te r m in e w h eth er t h e s e c r i t e r i a can be u sed a s a fram ework f o r d e v e lo p in g a dynam ic r e c o n s t it u t e d ap p ro a ch o f i n t e r n a t i o n a l t r a d e . The m ain q u e s t io n a sk ed by tr a d e th e o r y i s "what s h a l l we p rod u oe f o r exp ort?" The g e n e r a l an sw er i s " p roduce t h a t w h ich w i l l be th e m ost p r o f it a b l e ." C l a s s i c a l tr a d e th e o r y t e l l s u s to s p e c i a l i z e i n th o s e g o o d s i n w h ich we h ave a co m p a ra tiv e a d van tage? b u t f o r d e v e lo p in g c o u n t r ie s we m ust d e f in e t h i s i n term s o f what th e e x p e c te d o r f u tu r e co m p a ra tiv e a d v a n ta g e w i l l b e . The p r a c t i c a l q u e s tio n f o r d e v elo p m e n t I s t h i s : "What s h a l l we t r y to p ro d u ce ?" The s im p le s t a p p ro a c h I s to c o n c e n tr a te on th e s c a r c e s t r e s o u r c e , c a p i t a l , and th u s s tu d y I n v e s tm e n t. An a n sw e r, t h e r e f o r e , I s to p r o - duoe th o s e goods w hich r e q u i r e l e a s t c a p i t a l p e r u n i t o f o u t p u t. I n o t h e r w o rd s, new In v e s tm e n t m ust be made i n th o s e l i n e s o f p r o d u c tio n w here th e am ount o f c a p i t a l p e r u n i t o f o u tp u t I s s m a l l e s t . The c r i t e r i a c a l le d th e "minimum c a p i t a l - o u t p u t r a t i o . " T h e re a r e m ore c o m p lic a te d r e c e n t v e r s io n s i n th e s tu d y o f d e v e lo p m e n ta l econom ics su c h a s l i n e a r p ro g ram m ing and dynam ic m acroeconom ic m o d els, b u t th e y a l l e s s e n t i a l l y come to th e same c o n c lu s io n , "how to m axim ize g a in o r m in im ize o o s t w ith in th e l i m i t s o f c e r t a i n co n s t r a i n t s . " CHAPTER I I I IMPORTANCE OF FOREIGN TRADE FOR ECONOM IC G R O W T H OF DEVELOPING COUNTRIES P u rp o se and O r g a n iz a tio n The p u rp o se o f t h i s c h a p te r i s t o a n a ly z e th e a d v a n ta g e s o f f o r e ig n tr a d e a s an aven u e t o econ om ic g ro w th . The im p o rta n ce o f f o r e i g n tr a d e stem s from th e f a c t t h a t tra d e s t im u la t e s s p e c i a l i z a t i o n , in tr o d u c e s new g o o d s, c r e a t e s new dem ands, and e n c o u ra g e s new te c h n iq u e s o f p r o d u c tio n . T h ese a d v a n ta g e s a c c r u e e s p e c i a l l y to t h o s e c o u n t r ie s a b le to p rod u ce m a n u fa ctu red good s f o r e x p o r t . The o r g a n iz a t io n o f th e c h a p te r w i l l f o llo w th e them e o f th e r o l e o f e x p o r ts i n econ om ic g ro w th . T h is w i l l be d is c u s s e d u n d er th r e e m ain h e a d in g s: f i r s t , dynam ic a p p ro a ch es t o th e th e o r y o f in t e r n a t io n a l t r a d e , s e c o n d , e x p o r ts and econom ic g ro w th , and t h ir d , e x p o r t p r o c e e d s and im p o rt c a p a c it y . 39 Dynamic A pproaches to th e T h eo ry o f I n t e r n a t i o n a l T ra d e E x p o r t- i n d u s t r ia l is m a s a dynam ic th e o r y o f e c o nom ic g ro w th i s m ost a p p li c a b l e to d e v e lo p in g c o u n t r i e s . The p o i n t i s s t r e s s e d by L ew is, who c o n s id e r s t h i s th e o r y e s p e c i a l l y r e l e v a n t to " d e n s e ly s e t t l e d a r e a s w here l a b o r i s th e m ost a b u n d a n t f a c t o r f o r p r o d u c tio n n o t o n ly to c a p i t a l b u t a l s o to l a n d ." 1 I n r e l a t i o n to th e h ig h ly i n d u s t r i a l i z e d U n ite d Kingdom o f th e t w e n ti e t h c e n tu r y , Adam S m ith 's c ru d e tr a d e th e o r y m ore c l o s e l y a p p ro x im a te s r e a l i t y . S m ith d e v e lo p e d a r a t h e r c ru d e th e o r y t h a t e x te r n a l t r a d e c a n le a d to g ro w th . T h is th e o r y , o a lle d " v e n t f o r s u r p l u s ," assum es a s u r p lu s o f p r o d u c tiv e o a p a c ity (underem ploym ent) w ith tr a d e p r o v id in g new e f f e c t i v e dem and. A c c o rd in g to th e " p r o d u c t i v i t y d o o t r l n e ," a o o r o l l a r y o f th e th e o r y , t r a d e i s r e s p o n s ib le f o r i n c r e a s in g r e t u r n s and econom ic d e v e lo p m e n t. A n a ly z in g econom ic d e v elo p m e n t r a t h e r th a n p r i c e and d i s t r i b u t i o n , S m ith was n o t c o n c e rn e d w ith th e r e a l l o c a t i o n o f r e s o u r c e s from one f u l l em ploym ent e q u i lib r iu m to a n o th e r a s i s so o f t e n im p lie d i n m odern H i. A. L e w is, "Econom ic D evelopm ent w ith U n lim ite d S u p p ly o f L a b o r," The M a n c h e ste r S c h o o l o f Econom lo and S o o la l S t u d i e s . 195^# P» 1&6. k l d ev elo p m e n t t h e o r y . B eca u se th e " v en t f o r su r p lu s" th e o r y I m p lie s a n " I n e l a s t i c d o m e stic demand f o r e x p o r t a b le co m m o d ities and f o r a c o n s id e r a b le d e g r e e o f 2 I n t e r n a l im m o b ility and s p e c i f i o n e s s o f r e s o u r c e s ," I t may be a p p lic a b le to con tem p orary d e v e lo p in g c o u n t r ie s , many o f w h ich e x h i b i t t h e s e same phenom ena. S m ith 's v e n t f o r s u r p lu s th e o r y I s a d m it t e d ly a cru d e o n e; b u t i t h as s u g g e s te d more dynam ic a p p ro a ch es to th e th e o r y o f i n t e r n a t i o n a l t r a d e , w h ich we s h a l l now ex a m in e. The fr a g m e n ta r y p ie c e s o f dynam ic tr a d e th e o r y can be summed up u n d er fo u r g r o u p in g s: (1 ) e x p o r ts a s a s e p a r a te econom y— th e th e o r y o f d u a lism ; (2 ) e x p o r ts a s a le a d in g s e c t o r ; (3 ) e x p o r ts a s a la g g in g s e c t o r ; and ( k ) e x p o r ts a s a b a la n c in g s e c t o r .^ E x p o r ts a s a S e p a r a te Economy T h is s u b -th e o r y i s a s much an e x p la n a tio n o f how e x p o r t tr a d e oan be p r e v e n te d from a f f e c t i n g a d e v e lo p in g economy a s i t i s an e x p la n a tio n o f d e v e lo p m e n ta l e x p a n s- i o n . The t h e s i s d e v e lo p e d by Boeke i s a s f o llo w s : 2 H. M y ln t, "The C l a s s i c a l T heory o f I n t e r n a t io n a l Trade and th e U n d erd ev elo p ed C o u n tr ie s ," Econom ic J o u r n a l. 1958, p p . 3 1 7 -3 3 7 . -'C. P . K ln d le b e r g e r , Econom ic D evelop m en t (New York: M cG raw -H ill Book Company, 1 9 6 5 ). 4 J . P . B o ek e, E oonom lcs and Econom ic P o l i c y and D u al S o c i e t i e s . (H aarlem , N e th e r la n d s: H .D .T . W illin k , 1 9 5 3 ). E x p o r ts o f p rim ary p r o d u c ts su oh a s ir o n o r e , o i l , ru b b er, t i n , w h ea t, and o th e r a g r i c u l t u r a l p r o d u c ts a r e f r e q u e n t ly made p o s s i b l e by In v e stm e n ts o f f o r e i g n b u s in e s s fir m s •w hich a r e o on cern ed s o l e l y w ith th e e x t r a c t i o n o f r e s o u r c e s a t lo w c o s t . The e s ta b lis h m e n t o f m in e s, p la n t a t i o n s , and th e l i k e i s accom p an ied by some in v e stm e n t i n r o a d s , h a rb o r f a c i l i t i e s and e v e n t r a in in g o f s u i t a b l e w o r k e r s. T h ese In v e stm e n ts a r e th e im m ed iate o r s h o r t - ru n grow th e f f e c t s o f new e x t r a c t i v e i n d u s t r i e s . I n th e lo n g ru n , B oeke m a in ta in s t h a t e x t r a c t i v e in d u s t r ie s a r e d e l i b e r a t e l y in s u la t e d from th e rem a in in g p a r ts o f th e eoonomy b e c a u se o f th e d e s i r e to m a in ta in s t a b i l i t y and c o n t r o l w it h in th e i n d u s t r i a l com pounds; w ork ers w ith jo b s i n th e in d u s t r y a r e fe d and c lo t h e d and p a id , b u t o p p o r t u n it ie s to i n t e r a c t w ith th e r e s t o f th e s o c i e t y a r e s e v e r ly r e s t r i c t e d . The rem a in d er o f th e s o c i e t y may g e t J e a lo u s and r e v o l t — a s in d e e d th e y d id in I n d o n e s ia , B o e k e 's c a s e s tu d y — b u t e v e n t h a t i s no g u a r a n te e o f d e v e lo p m e n t. The d u a l i s t th e o r y o f d e v e lo p m ent may h ave f i t some c o u n t r ie s i n th e n in e te e n t h c e n tu r y and ev en c e r t a i n c o l o n i e s i n th e t w e n tie t h c e n t u r y . J a m a ic a , an im p o rta n t c a s e o f grow th v i a p rim ary p r o d u c t e x p o r t i n th e t w e n tie t h c e n tu r y , ca n be c i t e d a s a b e n e f ic ia r y o f th e s h o r t- r u n d e v e lo p m e n ta l e f f e c t s o f d u a l i s t i c g ro w th , b u t th e r e i s no r e a s o n to b e l i e v e t h a t ^3 th e lo n g -r u n i n s u l a r i t y d e s c r ib e d by B oeke w i l l e n s u e . I n o t h e r w ord s, h i s th e o r y d o e s n o t h e lp u s much. E x p o rts a s a L ea d in g S e c t o r The b a s ic h y p o th e s is o f t h i s s u b -th e o r y i s t h a t e x p o r ts a c t a s a " le a d in g s e c to r " o f a d e v e lo p in g eco n omy; th e y a r e w hat B o b e r tso n h a s c a l l e d an " e n g in e o f gro w th ." I n t h i s th e o r y , ex p a n d in g f o r e ig n tr a d e s tim u l a t e s grow th ; a r i s e i n e x p o r ts le a d s to a r i s e in n a t io n a l o u t p u t . T h is s im p le th e o r y seem s to d e s c r ib e n in e t e e n t h c e n tu r y econom ic p a t t e r n s , b u t d o e s n o t a g r e e w ith th e N urkse t h e s i s t h a t th e n in e t e e n t h c e n tu r y e x p e r ie n c e was u n iq u e . I t h appens i n th e t w e n tie t h c e n tu r y t o o . The C ase o f F u ll Em ploym ent. I n th e f i r s t p a t t e r n , c a p i t a l and o t h e r r e s o u r o e s a r e f u l l y em ployed w it h in th e econom y. H ere an I n c r e a s e in f o r e ig n demand may I n c r e a s e Incom e by r a i s i n g th e s e l l i n g p r ic e o r by In d u c in g c o s t - r e d u c in g in v e n t io n s and in n o v a t io n s . The r e s u l t , a s was th e c a s e i n th e U n ite d S t a t e s ( i n th e 1 8 ^ 0 's and 1 8 5 0 ' s ) , may le a d to in c r e a s e s i n s a v in g , I n v e stm e n t, and o u tp u t, and th u s to s t i l l h ig h e r incom e by e s c a p in g N u r k se 's v i c i o u s c i r c l e o f p o v e r ty . T h is th e o r y I s e s s e n t i a l l y s im i l a r to th e H e c h sc h e r - O h lin th e o r y w here th e c o n ce r n i s i n r e a l l o c a t i n g r e s o u r c e s . T h is co m p a ra tiv e c o s t a n a l y s i s assu m es " e it h e r p e r f e c t , o r , a t l e a s t a h ig h d e g r e e o f in t e r n a l m o b ilit y o f f a c t o r s a n d /o r a h ig h d e g r e e o f f l e x i b i l i t y o r e l a s t i c i t y b o th on th e s id e o f p r o d u c tio n and co n su m p tio n ." I n th e H e c h sc h e r -O h lin th e o r y , a c o u n tr y engaged in tr a d e i s a lr e a d y su p p osed t o p o s s e s s a h ig h ly d e v e lo p e d e c o nom ic sy ste m w h ich oan a d j u s t i t s m ethods o f p r o d u c tio n and f a o t o r co m b in a tio n s t o co p e w ith a w id e ra n g e o f p o s s i b l e v a r i a t io n s i n r e l a t i v e f a c t o r s u p p l i e s . O b v io u s l y , su oh c o n d it io n s a r e n o t l i k e l y to be found i n th e r a t h e r p r im it iv e eco n o m ies o f th e u n d e rd e v elo p e d c o u n t r ie s . The C ase o f U nderem ployed R e s o u r c e s . A seco n d and more i n t e r e s t i n g c a s e i s o n e w here la b o r o r c a p i t a l o r b o th a r e u n d erem p lo y ed . M ost d e v e lo p in g c o u n t r ie s f i t t h i s c a s e t o a g r e a t e r o r l e s s e r d e g r e e . H ere ex p a n d in g e x p o r ts p r o v id e em ploym ent and th u s g e n e r a te in co m e. T h is new incom e i s i n a d d it io n to th e g a in s from tr a d e t h a t a r i s e i n th e fu ll-e m p lo y m e n t o a s e . H irschm an h as o p t i m i s t i c a l l y p o in te d o u t t h a t in c r e a s e s i n e x p o r ts in t h i s c a s e may c a l l a t t e n t i o n to In v e stm e n t o p p o r t u n it ie s and th u s g u id e e n tr e p r e n e u r s and l n v e s t a b le c a p i t a l to p r o f i t a b l e v e n tu r e s t h a t may h a v e n e v e r o c c u r r e d o t h e r w is e . N u rk se, h o w ev er, i s much l e s s o p t im i s t i c a b o u t ^5 su c h an o c c u r r e n c e , and a r g u e s s t r o n g ly a g a in s t th e hope o f an in f lo w o f f o r e i g n c a p i t a l from su oh a n e v e n t . T h is seco n d c a s e c l o s e l y f i t s S m ith 's " v e n t f o r su r p lu s" th e o r y , f o r th e n a rro w n ess o f th e home m arket i s overoom e, th e d i v i s i o n o f la b o r i s im p roved , and th e g e n e r a l l e v e l o f p r o d u c tio n , and th u s in co m e, i s r a i s e d . The a ssu m p tio n s o f th e " v e n t f o r su r p lu s" th e o r y have been m en tio n ed a b o v e . The a d d it io n a l f a c t t h a t , w ith t h e i r m eager t e o h n ic a l and c a p i t a l r e s o u r c e s , th e d e v e lo p in g o o u n tr ie s o p e r a te u n d er c o n d it io n s n e a r to th o s e o f f i x e d - f a c t o r in p u ts and p ro d u c t m ix makes t h e i r a n a l y s i s more e a s i l y exam ined i n q u a n t i t a t i v e te r m s. The econ om ic c a s e o f a v a i l a b l e s u r p lu s e s o f c a p i t a l and la b o r e n a b le s v i r t u a l l y o o s t l e s s e x p a n sio n som ewhat l i k e t h a t p ic tu r e d by N u r k se 's d is g u is e d unem ploym ent o p p o r t u n it ie s . Suoh an e x p a n sio n c o u ld p r o v id e an im p e tu s to th e g e n e r a l econom y and th e f o r e ig n ex ch a n g e n e c e s s a r y f o r in c r e a s e d Im port d i v e r s i f i c a t i o n su c h a s H lrschm an s u g g e s t s . Unem ployed R e so u r c e s w ith P o t e n t i a l E conom ies o f S c a l e . A t h ir d c a s e i s th e on e w here a c o u n tr y w ith un em ployed r e s o u r c e s h a s i n d u s t r i e s o p e r a t in g a t a l e v e l to o sm a ll to b e e f f i c i e n t . An in o r e a s e i n f o r e ig n demand w i l l p e r m it t h e s e i n d u s t r i e s to expand to econ om ic s i z e 46 and th u s re d u c e th e u n i t c o s t o f p ro d u c tio n * C o s t r e d u c tio n s m ean i n c r e a s in g r e a l in co m e. O th e r A rg u m en ts. T h e re e x i s t s e v e r a l o t h e r a rg u m ents f o r e x p o rt p ro m o tio n a s a s tim u la n t to g ro w th : (1) E x p o rts p ro v id e f o r e i g n ex change w ith w hich to buy n e c e s s a r y im p o r ts . T h is i s a c t u a l l y th e " im p o rts a s a b a la n c in g s e c t o r " a rg u m e n t, a c a s e , w here e x p o rts do n o t p la y a dynam ic r o l e . (2 ) E x p o rts te n d to a t t r a c t f o r e i g n c a p i t a l . T h is a rg u m en t m ust be q u a l i f i e d , f o r t r a d i t i o n a l l y in v e s tm e n t h a s b e e n a lm o s t e x c l u s i v e l y a t t r a c t e d to th e p rim a ry e x t r a c t i v e i n d u s t r i e s , p r o v id in g a b a s i s f o r I n te n s e n a tio n a lis m an d o t h e r tr a d e d e f e a t i n g a t t i t u d e s . (3 ) Im p o rts in c r e a s e co m m ercial and o t h e r c o n ta c ts w ith f o r e i g n e r s and in c r e a s e th e p ro b a b i l i t y o f " c r o s s f e r t i l i z a t i o n o f i d e a s ." T h ese m ore com plex id e a s r e q u i r e p r o p o r t i o n a l l y com plex m odels i f , in d e e d , th e y oan be q u a n t i f i e d a t a l l , and th u s s h a l l n o t be in c lu d e d w ith t h e s e s im p le r m o d e ls. E ach o f th e s e t h r e e c a s e s e x p la in how g ro w th can o c c u r a s a r e s u l t o f i n c r e a s e s i n e x p o r ts , and th e assum p t i o n o f e a c h o f them a r e c o n s i s t e n t w ith g ro w th th e o r y : (1) p r i c e s may be d e te rm in e d i n any way— n o t n e c e s s a r i l y p e r f e c t c o m p e titio n ; (2 ) q u a n t i t y and q u a l i t y o f f a c t o r s o f p r o d u c tio n may c h an g e ; (3) th e a d v a n ta g e s o f l a r g e - s c a l e p r o d u c tio n can be in tr o d u c e d e x p l i c i t l y i n th e m o del; and (^ ) demand f o r e x p o rts and o t h e r goods c a n change f r e e l y , ev en w ith c h an g e s i n demand f o r c o m p li m e n ta ry p r o d u c ts . The d i f f i c u l t y w ith th e s e t h e o r i e s i s t h a t th e y a r e h a rd to t e s t . Econom ic h i s t o r i a n s h av e n o t b een d e t e r r e d by th e p ro b lem s o f p ro v in g c a u s a l r e l a t i o n s b etw een e x p o r ts and g ro w th , ho w ev er. R o b e rts o n and R ostow have found num erous exam ples o f g ro w th th ro u g h t r a d e . K in d le b e r g e r p a ra p h r a s e s D eane and H abakkuk a s h a v in g s a id ”. . . th e m ost s a t i s f y i n g i n t e r p r e t a t i o n o f B r i t i s h e x p e rie n c e i n th e I n d u s t r i a l R e v o lu tio n i s t h a t th e su d d en and im p o rta n t a c c e l e r a t i o n i n e x p o rts was r e s p o n s ib le f o r B r i t i s h g ro w th .” -’ N u rk se , w r i t in g a b o u t th e p r o s p e c ts o f t r a d e s e r v in g a s a n e n g in e o f g ro w th f o r p r e s e n t- d a y d e v e lo p in g c o u n t r i e s , was p e s s i m i s t i c a b o u t th e p r a c t i c a l v a lu e o f t h i s th e o ry a s a g u id e f o r p o l i c y . He s a i d t h a t " im p o rt r e s t r i c t i o n s by r i c h i n d u s t r i a l c o u n tr i e s c o u ld w ipe o u t p o t e n t i a l g a in s from e x p o rt by p o o re r o o u n t r ie s , and anyhow p o o re r c o u n tr i e s m ig h t n o t be a b le to com pete s u c c e s s f u ll y i n w o rld m a rk e ts f o r m a n u fa c tu re d g o o d s— th e s im p le s t ty p e s o f m a n u fa c tu re d goods a r e n o t I n s tr o n g demand and C . P . K in d le b e r g e r , " F o r e ig n T rad e and Econom ic Growth* L e sso n s from B r i t a i n and F ra n c e , 1850 to 1913»" Eoonom lc H is to r y R eview . V ol XIV, D ecem ber 1 9 61. 1 * 8 co m p lica te d , m a n u fa c tu re s a r e to o d i f f i c u l t f o r th e u n s k i l l e d l a b o r o r le s s - d e v e lo p e d l a n d s . N e v e r th e le s s , P u e r to B io o , J a p a n , Hong Kong and o t h e r d e v e lo p in g o o u n tr ie s hav e a c h ie v e d re m a rk a b le g ro w th by e x p o rt o f m a n u fa c tu re s , and Ja m a ic a , th e o i l p ro d u c in g o o u n t r ie s , and c e r t a i n o t h e r s h av e found g ro w th i n th e e x p o rt o f p rim a ry p r o d u c ts . The r e c e n t h i s t o r y o f some o f th e s e e x p o r tin g c o u n tr i e s i s a lr e a d y f a m i l i a r , and anyhow t h e i r e x p e r ie n c e s f i t b o th th e o l d e r th e o r y o f c o m p a ra tiv e a d v a n ta g e and th e new th e o ry o f e x p o rts a s a l e a d in g s e c t o r i n econom ic g ro w th .^ The m ost d i s t u r b i n g t h e o r e t i c a l c r i t i c i s m o f b o th th e th e o r y o f e x p o rts a s a le a d in g s e c t o r and a r e c o n s t i t u t e d (lo n g term ) th e o r y o f c o m p a ra tiv e a d v a n ta g e h a s b een made by H irsc h m an . He m a in ta in s t h a t t h e r e e x i s t s a n o n - q u a n t i t a t i v e in te rd e p e n d e n c e b etw een s e c t o r s , t h a t e x p a n sio n i n some s e c t o r s w i l l g iv e th e im a g in a tio n o f e n tr e p r e n e u r s and p o l i t i c i a n s and le a d them to f r u i t f u l e n d e a v o rs , i n o t h e r s e c t o r s . W hether ^R. N u rk se, P a t t e r n s o f T ra d e and D ev elo p m en t. (S to ck h o lm : W lc k s e ll L e c tu r e s , A lm q u ist and W lo k s e ll, 1 9 5 9 ), p . 2 6 . 7 'W. B a e r, " P u e r to R ico : An E v a lu a tio n o f a S u c c e s s f u l D evelopm ent P ro g ra m ," Q u a r te r ly J o u r n a l o f E conom ics V o l. 73, November 1959, p p . 6 ^ 5 -6 7 1 . 4 -9 th e s e p s y c h o lo g ic a l and s o c i o l o g i c a l f a c t o r s c a n be m easu red h a s n o t y e t b e e n d e te rm in e d , b u t many w r i t e r s f e e l t h a t th e y may be s i g n i f i c a n t . A n o th e r ty p e o f p s y c h o lo g ic a l b a r r i e r to d e v elo p m e n t th ro u g h e x p o r ts (an d th u s a q u a l i f i c a t i o n o f t r a d e th e o ry ) h as b een p o in te d o u t by W ile s , who s u g g e s ts t h a t a n a v e r s io n to r i s k - t a k i n g i n d e v e lo p in g c o u n tr i e s may l i m i t th e e x te n t o o f s p e c i a l i z a t i o n f o r e x p o rt t r a d e . E x p o rts a s a L a g g in g S e c to r The e s s e n c e o f t h i s h y p o th e s is w hich h a s been em p h asized by P r e b is c h s u g g e s ts t h a t f o r e ig n t r a d e i s doomed to l a g b e h in d d o m e s tic g ro w th b e c a u se o f th e d e - o d i n i n g w o rld demand f o r p rim a ry p r o d u o ts . W heat, t i n , n a t u r a l r u b b e r , c o f f e e , c o c o a , z in c , c o p p e r, l e a d , n a t u r a l n i t r a t e s , and m eat a r e no lo n g e r e a sy to s e l l to ad v an ced o o u n tr ie s f o r s e v e r a l im p o rta n t r e a s o n s : (1 ) Some o f th e s e goods a r e b e in g r e p la c e d w ith sy n t h e t i c s i (2 ) ad v an ced c o u n tr i e s a r e u s in g raw m a t e r i a ls Q P . D. J . W ile s , "G row th V e rsu s C h o ic e ,” Econom ic J o u r n a l . J u n e 1956, p p . 2*14-255• o ^ U n ited N a tio n s , Econom lo D evelopm ent o f L a t i n A m erica an d i t s P r i n c i p a l P ro b le m s . New Y ork, 1950; R . P r e b is c h , 'C om m ercial P o l i c y an d U n d e rd ev e lo p e d C o u n tr ie s ," A m erican Econom ic R eview (P a p e rs and P r o c e e d in g s ) , May 1959. p p . 2 5 1 -2 7 3 . m ore e f f i c i e n t l y ; (3) demand f o r f o o d s t u f f s i n p a r t i c u l a r d o es n o t I n c r e a s e p r o p o r t i o n a t e l y w ith incom e i n d e v e lo p e d c o u n tr i e s a s o t h e r consum er goods become m ore a t t r a c t i v e ; and (43 c o m p e titio n f o r th e s a l e o f raw m a t e r i a l s i s in c r e a s i n g , d r i v i n g th e w o rld p r i c e s down b u t n o t r e d u c in g th e c o s t o f p r o d u c tio n i n m ost d e v e lo p in g co u n t r i e s , C l e a r ly , p rim a ry -p ro d u c in g c o u n tr i e s t h a t c a n n o t lo w e r t h e i r own c o s ts o f p r o d u c tio n m u st lo o k e l s e w here f o r d e v e lo p m e n t. One r e s u l t h as b een th e e s t a b lis h m e n t o f i m p o r t - s u b s t i t u t i n g i n d u s t r i e s to make th e l o c a l economy m ore a u to n o m o u s. The a n a l y s i s c a n th u s be p h ra s e d p o s i t i v e l y : I f th e e x p o rt s e o t o r l a g s th e n some o t h e r s e c t o r m ust l e a d . German d e v elo p m e n t i n th e l a t e n i n e t e e n t h c e n tu r y was le d by e x p a n sio n i n th e d o m e stic s e c t o r , a s was t h a t o f A u s t r a l i a and S o u th A f r ic a m ore r e c e n t l y . I n d i a i s f o llo w in g a c o n s c io u s p o lic y o f d e v elo p m e n t th ro u g h e x p a n sio n o f th e d o m e s tic m a rk e t and d o m e s tic s o u ro e s o f s u p p ly . N e g le c t o f e x p o rts h a s le d to s t a g n a t i o n i n t h a t s e c t o r . P a k i s t a n , w hich a ls o h a s s e r i o u s d e v elo p m e n t p ro b le m s, h as a n e x p o rt s e c t o r w hich la g s b e h in d th e r e s t o f th e econom y.10 '10I • D. P a l , " P a k is ta n : A C ase o f an E x p o rt L ag g in g Econom y," Eoonom la I n t e r n a t i o n a l e . V o l. XIV, November 1961, p p . 6 9 7 -7 1 0 . I f p e ssim ism a b o u t th e g ro w th o f demand f o r p r i m ary p r o d u c t e x p o rts le a d s to em p h asis on th e d o m e stic s e c t o r f o r g ro w th , a l i s t o f c u r r e n t im p o rts p r o v id e s a re a d y g u id e to th e goods t h a t m ig h t be p ro d u ced a t hom e. An a n a l y s i s o f o o s t e s tim a te s sh o u ld i n d i c a t e w hich goods m ig h t be p ro d u c e d m ost p r o f i t a b l y , and im p o r t c o n t r o l s c an i n s u r e a re a d y m a rk e t f o r th e new i n d u s t r y . C o u n trie s w here th e l o o a l m a rk e t may be to o sm a ll f o r e f f i c i e n t - s i z e d p r o d u c tio n c a n n o t fo llo w t h i s p o lic y p r o f i t a b l y , o f c o u r s e . E x p o rts a s a B a la n c in g S e c to r T h is m odel i s s u b j e c t to g r e a t c o n tr o v e r s y . I t s a d v o c a te s a rg u e t h a t i t p ro v id e s a r a t i o n a l e f o r p r o m o tin g e x p o r ts i n o o u n tr ie s w here e x p o rts a r e n o t l i k e l y to become th e le a d in g o r d o m in an t s e o t o r o f th e econom y. I t i s u se d to d e s o r lb e econom ies w hioh m eet In c r e a s e d d o m e stic demand f o r fo o d by im p ro v in g a g r i c u l t u r a l e f f i c i e n c y o r e x p o rtin g m a n u fa c tu re s to pay f o r im p o rte d fo o d . B ut th e e s s e n c e o f th e n o tio n o f e x p o rts a s a b a la n c in g s e c t o r r e s t s on th e id e a t h a t th e f o r e ig n m a rk e t r e l i e v e s a d e v e lo p in g c o u n try from th e n e c e s s i t y to se e k b a la n c e i n an y s e o t o r o r b etw een s e c t o r s ; th e y o n ly p ro d u c e w hat can be s o ld , and buy w hat c an be b o u g h t. E x p o rts c an be prom oted to b a la n c e th e c o u n tr y ’s 52 economy to pay f o r th e m a rg in a l r e s o u r c e s t h a t th e l o o a l economy m u st im p o r t. L ew is c i t e s J a p a n a s th e c l a s s i c exam ple o f a c o u n try w hich u n d e rto o k e x p o rts o f m a n u fa c tu re s i n o r d e r to b a la n c e i t s o u t p u t, th o u g h L akdaw ala w ould p u t i t th e o t h e r way a ro u n d ; he s u g g e s ts t h a t th e e x p o r ts o f s i l k made i t p o s s i b l e f o r J a p a n to 11 i n d u s t r i a l i z e by p r o v id in g n e c e s s a r y f o r e i g n e x c h a n g e . M ost c o u n tr i e s a t one tim e o r a n o th e r a p p e a r to have b een u s in g f o r e i g n t r a d e to b a la n c e t h e i r e o o n o m ies. I n d i s c u s s i n g th e o b j e c t i v e s o f t r a d e o f C e n t r a l l y P la n ned E conom ies (C P E 's ), B row th s u g g e s ts i n a r e c e n t s tu d y t h a t , i n a d d i t i o n to r a p id g ro w th and I n d u s t r i a l i z a t i o n , f o r e i g n t r a d e h a s b een u se d i n C P E 's " a s a s a f e t y v a lv e i n a n a tte m p t e i t h e r to p r e v e n t s h o r t - r u n d is e q u il i b r iu m i n th e d o m e s tic s u p p ly sy ste m o r to m i t i g a t e t h e i r c o n - 12 s e q u e n c e s ." F i n a l l y , th e c l o s e s t th in g we h a v e to a dynam ic th e o ry o f t r a d e i s a c o l l e c t i o n o f s ta te m e n ts a b o u t th e r o l e o f e x p o r ts : E x p o rts a s a s e p a r a te econom y, a s a le a d in g s e c t o r , a s a la g g in g s e c t o r , and a s a b a la n c in g 11 D. T . L ak d a w ala , I n t e r n a t i o n a l A s p e o ts o f I n d ia n Econom ic D evelopm ent (London: O x fo rd U n iv e r s ity P r e s s , 1 9 5 1 ), p . 1 1 . 12 A. A. Brown, "Tow ards a T h eo ry o f C e n tr a ll y P la n ned F o re ig n T r a d e ," i n Brown and N e u b e rg e r ( e d s . ) , I n t e r n a t i o n a l T ra d e an d C e n tr a l P la n n in g (B e rk e le y : U n iv e r s ity o f C a l i f o r n i a , 1 9 6 8 ), p . 7 1 . 53 s e c t o r . T hese f o u r c l a s s i f i c a t i o n s s e rv e th e h ig h l i g h t Im p o rta n t b u t s e p a r a t e a s p e c ts o f w hat m ig h t be c a l l e d a r e c o n s t i t u t e d th e o ry o f i n t e r n a t i o n a l t r a d e , 13 a th e o r y b ased on lo n g - r u n c o m p a ra tiv e a d v a n ta g e . E x p o rts and Econom ic G row th T h ere a r e s tr o n g l o g i c a l and e m p ir ic a l g ro u n d s s u p p o r tin g th e h y p o th e s is t h a t e x p o rts a r e a key f a c t o r i n even g ro w th . The l o g i c a l g ro u n d s c a n be docum ented i n term s o f b o th th e d i r e c t and s e c o n d a ry e f f e c t s o f e x p o r ts on econom ic g ro w th . T h ere a r e many d i r e c t b e n e f i t s from a h ig h e x p o rt g ro w th r a t e t h a t h e lp in p ro m o tin g g e n e r a l econom ic g ro w th : (1) An i n c r e a s in g l e v e l o f e x p o rts g e n e r a l l y means t h a t th e c o u n try can expand i t s l e v e l o f im p o r ts . T hese im p o rts in c lu d e c a p i t a l goods w hich a r e e s p e c i a l l y im p o rta n t in co n t r i b u t i n g to econom ic g ro w th . The c o u n try i s e n a b le d to ta k e g r e a t e r a d v a n ta g e o f th e i n t e r n a t i o n a l d i v i s i o n o f l a b o r , p r o c u r in g d e s i r e d goods from a b ro a d a t co n s i d e r a b l e s a v in g s in term s o f in p u ts o r p r o d u c tiv e f a c t o r s . T h is h e lp s in c r e a s e th e e f f i c i e n c y o f i n d u s t r y , w hich i s a m a jo r f a c t o r in econom ic g ro w th . 13 A. 0 . H irsch m an , N a tio n a l Pow er and th e S t r u c t u r e o f F o re ig n T rade (B e rk e le y : U n iv e r s ity o f C a l i f o r n i a , W 5). (2 ) E x p o rt d e v elo p m en t a ls o te n d s to c o n c e n tr a te i n v e s tm e n t i n th e m ost e f f i c i e n t s e c t o r s o f th e c o u n tr y — th o s e i n w hich i t e n jo y s a c o m p a ra tiv e a d v a n ta g e . S p e c i a l i z a t i o n i n th e p ro d u c ts i n w hich a c o u n try h a s a c o m p a ra tiv e a d v a n ta g e i n c r e a s e s p r o d u c t i v i t y . (3) The c o u n try a l s o g a in s from econom ies o f s c a l e , s in c e th e i n t e r n a t i o n a l m a rk e t added to th e d o m e stic m a rk e t o b v io u s ly p e rm its l a r g e r s c a l e o p e r a tio n s th a n d o es th e d o m e stic m a rk e t a lo n e . (*0 The n e c e s s i t y o f re m a in in g c o m p e titiv e i n i n t e r n a t i o n a l m a rk e ts te n d s to m a in ta in p r e s s u r e on th e e x p o rt i n d u s t r i e s to k e e p c o s t s low and to c o n s t a n t ly s t r i v e f o r m ore e f f i c i e n t o p e r a t io n s . The c o m p e titiv e p r e s s u r e s a l s o te n d to le a d to Im provem ents i n th e q u a l i t y o f th e e x p o rt p r o d u c t, and i n g e n e r a l to i n h i b i t th e e s ta b lis h m e n t o f i n e f f i c i e n t e x p o rt in d u s t r i e s . I n a d d i t i o n t o d i r e c t b e n e f i t s o f p r o v i d i n g p a r t o f t h e n e c e s s a r y f i n a n c e f o r e c o n o m i c g r o w t h , a n d s t i m u l a t i n g m o r e e f f i c i e n t u s e o f r e s o u r c e s , a d y n a m i c e x p o r t s e c t o r a l s o p r o d u c e s s u b s t a n t i a l s e c o n d a r y b e n e f i t s . T h e s e i n c l u d e i n c r e a s e d i n v e s t m e n t , c o n s u m p t i o n a n d f l o w o f t e c h n o l o g y . E x p a n d i n g e x p o r t s a l s o e n c o u r a g e i n v e s t m e n t i n a n c i l l a r y i n d u s t r i e s s e t u p t o s u p p l y a n d s e r v i c e t h e o p e r a t i o n s o f m a i n e x p o r t i n d u s t r y . 55 T h is h y p o th e s is h a s b een s u p p o rte d by a s t a t i s t i c a l s tu d y o f th e s u b j e c t f o r m ore th a n a few c o u n tr i e s f o r th e y e a r s 1 9 5 0 -1 9 6 0 . T he s tu d y shows t h a t " e x p o r t- econom ies r e a c t im m e d ia te ly (u s in g a n n u a l d a ta ) to ch an g es i n e x p o r t s . Incom e a p p e a rs d i r e c t l y r e l a t e d to c h an g es i n e x p o r ts , a d d in g some e m p ir ic a l v e r i f i c a t i o n Ik to e x i s t i n g l i t e r a r y t h e o r i e s . " T h u s, h ig h e r r a t e s o f econom ic g ro w th te n d to be a s s o c i a t e d w ith h ig h e r r a t e s o f e x p o r t g ro w th . Con v e r s e l y , m ost c o u n tr i e s w ith th e low r a t e s o f e x p o rt g ro w th a l s o te n d to h a v e , i n g e n e r a l , low r a t e s o f e c o nom ic g ro w th . T h is c o n c lu s io n h a s a l s o b een s u b s t a n t i a te d by a n o th e r s t u d y . ^ I t h a s b een found t h a t th e E .E .C . c o u n tr ie s * f a s t e r g ro w th h a s b e en a s s o c i a t e d w ith r a p i d l y r i s i n g e x p o rts and w ith a f a v o r a b le tr e n d i n t r a d e b a la n c e s . The m ech an ics o f a n " e x p o r t le d " o r " e x p o r t- o r ie n te d " p a t t e r n o f g ro w th s u g g e s ts t h a t th e r a p id Ik J . E . H a rin g , "S im p le M odels o f T ra d e E x p a n s io n ," W e ste rn Econom ic J o u r n a l (S p rin g , 196*0, p . 173* 1< -\A. L a m fa llu s s y , The U n ite d Kingdom and th e S i x : An E ssa y on Econom ic G row th i n W e ste rn E urope (Homewood. I l l i n o i s : R ic h a rd D. I r w in , I n c . , 1 9 ^ 3 ). d e v elo p m e n t o f e x p o rts w i l l r a i s e b o th th e in v e s tm e n t and th e s a v in g r a t i o s , and th e l a t t e r m ore th a n th e fo rm e r. H en ce, c a p a c ity and p r o d u c t i v i t y w i l l grow f a s t e r w ith o u t c a u s in g i n f l a t i o n . On th e o t h e r h a n d , a c o u n try w ith s lo w ly g ro w in g e x p o rts w i l l end up w ith l e s s in v e s tm e n t and e v e n l e s s s a v in g , t h e r e f o r e , com b in in g s lo w e r g ro w th w ith I n f l a t i o n and a s te a d y p r e s s u r e o n th e b a la n c e o f p a y m e n ts. T h is e x p e rie n c e h a s b e en th e c a s e i n B r i t a i n , w h ile th e common m a rk e t coun t r i e s have e n jo y e d th e a d v a n ta g e s o f a n e x p o r t - o r i e n t e d g ro w th . I t s h o u ld a l s o be n o te d t h a t th e g a in s from tr a d e w i l l be g r e a t e r to th o s e c o u n tr i e s a b le to p ro d u c e manu f a c t u r e d goods f o r e x p o r t. P u e r to R ic o , J a p a n , and Hong Kong seem to h av e b e n e f ite d from t h i s s t r a t e g y . 1^ I n a d d i t i o n to g e n e r a l a d v a n ta g e s , m a n u fa c tu re f o r e x p o r t o f f e r s f o u r p a r t i c u l a r b e n e f i t s . F i r s t , e x p a n sio n th ro u g h e x p o rt m a n u fa c tu re d o e s n o t depend upon concom i t a n t g ro w th i n o t h e r s e c t o r s o f a d e v e lo p in g c o u n tr y . As m a n u fa c tu re s f o r th e home m a rk e t o f a n o v e rp o p u la te d d e v e lo p in g c o u n try i n c r e a s e , th e y w i l l be acco m p an ied by 16 J . E . H a rin g , " E x p o rt I n d u s t r i a l i s m and Econom ic G row th: A Dynamic M o d el," W este rn Econom ic J o u r n a l . V o l. I , A p r il 1963» p p . 1 1 ^ -1 2 6 . 57 i n c r e a s e s i n demand f o r a g r i c u l t u r a l p r o d u c ts . I f a g r i c u l t u r a l r e s o u r c e s a r e l i m i t e d , p r i c e s o f hom e-grow n f o o d s t u f f s w i l l r i s e , and i t w i l l be n e c e s s a r y to im p o rt g r e a t e r am ounts o f a g r i c u l t u r a l p r o d u c ts . W ith o n ly m a n u fa c tu re s f o r th e home m a rk e t, t h i s w i l l r e s u l t i n a n u n f a v o r a b le b a la n c e o f t r a d e . W ith e x p o rt m a n u fa c tu re s , how ever, i n c r e a s e s i n m a n u fa c tu rin g f o r th e home m a rk e t can be m et w ith e x p o rt i n c r e a s e s , and th u s th e n eed ed a g r i c u l t u r a l im p o rts c a n be p u rc h a s e d . The seco n d b e n e f i t o f m a n u fa c tu rin g f o r e x p o rt i s t h a t i t d o e s n o t g iv e r i s e to a c o m p a ra tiv e s t r u g g l e b etw een th e few s m a ll p ro d u c e rs i n th e d e v e lo p in g co u n t r y . Such c o m p e titio n i s o r d i n a r i l y r e s e n te d , and may be w a s te f u l o f th e c o u n tr y ’ s l i m i t e d r e s o u r c e s . T h ir d , f o r e i g n demand i s immense i n c o m p a riso n to th e o u tp u t o f th e i n d iv i d u a l p ro d u c e rs a t home, and i t d o e s n o t f o r c e p ro d u c e rs to depend upon th e s m a ll e f f e c t i v e demand w hich e x i s t s a t hom e. F i n a l l y , re v e n u e s from e x p o rt m a n u fa c tu re s c r e a t e new dem ands f o r a l l th e I n d u s t r i e s p ro d u c in g f o r th e home m a rk e t, and g iv e i n d i r e c t b e n e f i t s th ro u g h m u tu a l u s e o f t h e i r s o c i a l o v e rh e a d c a p i t a l and new p r o d u c tio n te c h n iq u e s . 58 E x p o rt P ro c e e d s and Im p o rt C a p a c ity A r i s e i n th e n a t i o n a l incom e o f an y c o u n try r a i s e s th e demand f o r th e goods t h a t a r e t r a d i t i o n a l l y Im p o rte d . I n d e v e lo p in g c o u n t r i e s , w hich have a l im i te d I n d u s t r i a l b a s e , t h i s e f f e c t i s bound to be p a r t i c u l a r l y s t r o n g . W ith th e r i s e i n incom e, th e w e ig h t o f in d u s tr y i n t o t a l o u tp u t I n c r e a s e s , an d a s th e im p o rt c o n te n t o f i n d u s t r i a l goods i s h i g h e r , o n a v e r a g e , th a n t h a t o f a g r i c u l t u r a l c o m m o d itie s, Im p o rts w i l l te n d to grow p r o p o r t io n a ll y f a s t e r th a n t o t a l o u t p u t. On th e c o n su m p tio n s i d e , th e demand f o r th e m ore m odem ty p e s o f consum er goods w hich a r e m o s tly im p o rte d a l s o te n d s to in c r e a s e p r o p o r tio n a t e l y more th a n incom e; and i f t h e r e i s a s h i f t i n to in v e s tm e n t, a lm o s t a l l th e m a c h in e ry and eq u ip m en t m ust be b o u g h t a b ro a d , b e c a u se th e c a p i t a l goods i n d u s t r i e s a r e n o t d e v e lo p e d i n i t i a l l y . F o r th e s e re a s o n s th e d e mand f o r im p o rts w i l l i n c r e a s e by m ore th a n th e o v e r a l l r a t i o o f im p o rts to incom e when d e v elo p m e n t g e ts g o in g . The c o r r e l a t i o n b etw een e x p o rt p ro c e e d s and im p o rt c a p a c ity c an be b e s t e s t a b l i s h e d by c o n s id e r in g some t h e o r e t i c a l a s p e c ts and f u n c t i o n a l r e l a t i o n s h i p s o f th e v a r io u s v a r i a b l e s In v o lv e d . To b e g in w ith , th e e q u i lib r iu m l e v e l o f incom e i n a n op en economy i s g iv e n by t h i s e q u a tio n : 59 Y = C + I + (X-M), w here X s ta n d s f o r e x p o r ts , M f o r im p o r ts , and h en ce (X-M) th e e x p o rt o r im p o rt s u r p l u s . As a r u l e , im p o rts a r e a r i s i n g f u n c t i o n o f incom e; and th e in c r e a s e i n im p o r t s a s s o c i a t e d w ith a u n i t r i s e i n incom e i s c a l l e d th e m a rg in a l p r o p e n s ity t o im p o r t. M a th e m a tic a lly , th e m a rg in a l p r o p e n s ity to im p o rt (q ) i s th e f i r s t d e r i v a t i v e o f th e Im p o rt f u n c tio n : dm q = dy The m a rg in a l p r o p e n s ity t o im p o rt i s n o t a c o n s ta n t f u n c t i o n o f Incom e, b u t f o r th e sa k e o f s i m p l i c i t y we s h a l l ta k e i t to be c o n s t a n t . C o u n tr ie s w hich a r e h e a v i ly d e p e n d e n t o n im p o r ts , a s th e c a s e o f d e v e lo p in g c o u n tr i e s and some I n d u s t r i a l c o u n tr i e s su c h a s th e U n ite d Kingdom and Sw eden, have a h ig h m a rg in a l p ro p e n s i t y to i m p o r t .1^ 17 'T h e m a rg in a l p r o p e n s ity to im p o rt w i l l d i f f e r f o r i n d i v i d u a l s e c t o r s o f th e econom y, a n d , t h e r e f o r e , th e v a lu e g iv e n by th e ab o v e e q u a tio n m ust be u n d e rs to o d a s a n a v e ra g e o f th e m a rg in a l p r o p e n s i t i e s to im p o rt o f th e v a r io u s s e c t o r s . I t sh o u ld be n o te d t h a t i t i s d i f f i c u l t to draw an y c o n c lu s io n s a b o u t th e s i z e o f th e m a rg in a l p r o p e n s ity to im p o rt from th e p u b lis h e d e s t i m ates o f th e a v e ra g e p r o p e n s ity to Im p o rt M/Y o f v a r io u s o o u n t r i e s . The a v e ra g e p r o p e n s ity to Im p o rt may be low (h ig h ) w h ile th e m a rg in a l p r o p e n s ity to im p o rt i s h ig h ( lo w ) . I f in v e s tm e n t and e x p o rts a r e au to n o m o u sly g iv e n , th e f o llo w in g e q u a tio n d e te rm in e s a u n iq u e e q u ilib r iu m incom e: Y = C (Y) + I + X - M(Y) T h is e q u a tio n may be e x p re s s e d i n a n o th e r way i f we u s e th e s a v in g s f u n c t i o n I n s te a d o f th e c o n su m p tio n fu n c t i o n . I t th e n becom es: S(Y) - I = X - M(Y) T h is e q u a tio n s t a t e s t h a t th e e q u ilib r iu m l e v e l o f i n come i s re a c h e d when th e d i f f e r e n c e b etw een v o lu n ta r y s a v in g s ( a t t h a t l e v e l o f incom e) and v o lu n ta r y n e t i n v e s tm e n t i s e q u a l to th e e x p o rt s u r p lu s ( a t th e l e v e l o f In c o m e ). I n a c lo s e d economy th e d i f f e r e n c e b etw een v o lu n ta r y s a v in g s and v o lu n ta r y n e t in v e s tm e n t m ust be z e r o . I n o r d e r to a n a ly z e how n a t i o n a l Incom e i s a f f e c t e d by a ch an g e i n e x p o r ts , l e t u s su p p o se th e c a s e o f a " tw o -c o u n try m o d e l." Eaoh I n c r e a s e i n th e e x p o rts o f o o u n try A i s i d e n t i c a l w ith a n in c r e a s e i n th e im p o rts o f c o u n try B. An e x p a n s io n a ry p r o c e s s ta k e s p la c e i n c o u n try A, due to th e I n c r e a s e i n e x p o r ts ; s im u lta n e o u s ly a c o n tr a c t i o n a r y p r o c e s s ta k e s p la c e i n c o u n try B due to a n l n o r e a s e I n im p o r ts . The c o n t r a c t i o n i n Incom e i n c o u n try B i n t u r n le a d s to a f a l l i n im p o rts a n d , h e n c e , p o s s i b l y to r e p e r c u s s io n s o n c o u n tr y A. So f a r we h av e n e g le c te d su c h r e p e r c u s s io n s w h ich a r e p e r m is s i b l e i f : (1) c o u n try A*s s h a r e i n w o rld t r a d e i s so s m a ll t h a t c h an g e s i n i t s e x p o r ts hav e no p e rc e p t i b l e c o n tr a c t i o n a r y e f f e c t s on th e r e s t o f th e w o rld , o r (2) th e c o u n tr i e s a f f e o t e d by th e c o n tr a c t i o n a r y p ro o e s s n e u t r a l i z e i t by I n t e r n a l f i s c a l o r m o n etary p o l i c y . I n a l l o t h e r c a s e s th e s e r e p e r c u s s io n s c a n n o t be n e g le c te d , and we hav e to a n a ly z e th e e f f e c t s o f a c o u n try * s c h an g e s i n e x p o r ts ( o r im p o r ts ) , ta k in g i n t o a c c o u n t some o f th e s e r e p e r c u s s i o n s . F o r t h i s p u rp o se we s h a l l o o n s ld e r o n ly two c o u n t r i e s , A and B . Even t h i s sim p le m odel w i l l i n d i c a t e th e c o m p le x ity o f th e p ro b le m . L e t u s su p p o se t h a t b o th c o u n tr i e s A and B have u n u se d r e s o u r c e s and t h e i r b a la n c e s o f paym ents a r e i n e q u ilib r iu m . T h e re i s a n autonom ous i n c r e a s e i n e x p o rts i n c o u n try A, t h a t i s , a n autonom ous r i s e (w hich i s n o t th e r e s u l t o f a change i n Incom e) i n Im p o rts i n c o u n try B . T h is w i l l le a d to th e fo llo w in g c h a in o f e f f e c t s : 62 C o u n try A C o u n try B autonom ous r i s e i n Im p o rts autonom ous r i s e i n e x p o r ts r i s e i n Incom e i i In d u c e d i n c r e a s e i n im p o rts in d u c e d d e c r e a s e i n im p o rts f a l l i n incom e r i s e i n Incom e r e d u c t io n i n Incom e i t In d u c e d d e c r e a s e i n im p o rts In d u ced in c r e a s e i n im p o rts The ab o v e i l l u s t r a t i o n c a n be summed up by th e f o l lo w in g two e q u a tio n s : *a = °a< V + *a + W ’ W - < W + + *b + W - «b<V S in c e th e im p o rts o f one c o u n try a r e I d e n t i c a l l y e q u a l to th e e x p o r ts o f th e o t h e r c o u n tr y we h av e: Xa (Yfe) a M b (Yb > Xb (Ya ) a M a (Ya ) I t c an be o b s e rv e d , t h e r e f o r e , t h a t th e b a la n c e o f pay- m ents s u r p lu s d e p en d s on th e incom e o f b o th c o u n t r i e s . The f i r s t e q u a tio n g iv e s th e incom e o f c o u n tr y A a s a f u n c t i o n o f th e incom e o f c o u n try B: Yft = f(Y b ) I f we d i f f e r e n t i a t e th e f i r s t e q u a tio n w ith r e s p e c t to Y^, we o b ta in : dYa qa d I b = s a + 9a i n w hich qfl, q^ s ta n d f o r th e m a rg in a l p r o p e n s i t i e s to im p o rt o f th e two o o u n tr ie s r e s p e c t i v e l y , and S s ta n d s cl f o r th e m a rg in a l p r o p e n s ity to sa v e o f c o u n tr y A . S in c e a l l th e c o n s t a n t s a r e p o s i t i v e , dY ^dY ^ i s a lw ay s p o s i t i v e , t h a t i s , Ya r i s e s w ith r i s i n g Y ^. S i m i l a r l y , th e seco n d e q u a tio n g iv e s th e incom e o f c o u n try B a s a fu n c t i o n o f th e incom e o f o o u n try A: Y^ = f(Y &) . D i f f e r e n t i a t i n g th e se co n d e q u a tio n w ith r e s p e c t to Y , we cl o b ta in : a Y b q a dIa “ s b + ib I f we assum e t h a t t h e r e i s an autonom ous change i n n e t in v e s tm e n t i n o o u n try B, t h i s m eans t h a t t h e r e i s a r i s e i n Incom e i n c o u n try B, w hioh i n t u r n in d u c e s in c r e a s e d im p o rts fro m c o u n try A, t h a t i s , in d u c e s a n i n c r e a s e i n e x p o r ts i n c o u n try A. I n p r a c t i c e i t i s n o t e a s y to d i s t i n g u i s h b etw een in d u c e d and autonom ous i n c r e a s e s i n e x p o r t s , t h a t i s , b etw een i n c r e a s e s i n e x p o r ts w hich a r e and a r e n o t b ro u g h t a b o u t by ch an g e s i n incom e. H ow ever, t h i s d i s t i n c t i o n i s o f g r e a t Im p o rta n c e in t h e o r e t i c a l a n a l y s i s . The d i r e c t e f f e c t o f a n autonom ous i n c r e a s e i n e x p o rts (b ro u g h t a b o u t, f o r exam ple, by th e rem o v al o f a t a r i f f on a d e s i r e d a r t i c l e ) i s d i f f e r e n t from t h a t o f a ch an g e i n e x p o r ts in d u c e d by a r i s e i n incom e i n th e f o r e i g n c o u n tr y . I f , a t th e e x i s t in g l e v e l o f incom e, c o u n try B p u rc h a s e s m ore e x p o rts from c o u n try A (b e c a u s e o f a r e d u c t io n i n t a r i f f s ) t h e r e i s a r e d u c t io n i n i n t e r n a l demand and h e n ce i n th e incom e o f c o u n try B . B u t i f c o u n try B i n c r e a s e s i t s im p o rts from c o u n try A b e c a u se o f a r i s e i n incom e r e s u l t i n g from a n in c r e a s e i n in v e s tm e n t, t h e r e i s no I n i t i a l f a l l i n i n t e r n a l demand i n c o u n try B . T h is d i f f e r e n c e h as a n im p o rta n t e f f e c t on th e f i n a l outcom e a s we have i n d i c a te d b e f o r e . R is in g e x p o rt p ro c e e d s c a n be s a i d to s t i m u l a te i n v e s tm e n t i n e x p o r t i n d u s t r i e s , i f we assum e t h a t c u r r e n t in v e s tm e n t p r o f i t s a r e r e l a t e d to e x p e c ta tio n s o f f u t u r e p r o f i t s . In v e s tm e n t, i n t u r n , p ro v id e s th e in c r e a s e d c a p a c ity f o r p ro d u c in g ev en m ore e x p o rt g o o d s, and so i t g o e s . One I n c r e a s e le a d s to a n o th e r and we a r e on a n upw ard s p i r a l o f g ro w th ; a k in d o f " p r o s p e r i t y c i r c l e ” 65 18 i s g e n e r a te d . D iagram 1 i l l u s t r a t e s th e p r o s p e r i t y o i r o l e d i a g r a m a t i c a l l y . T h e re we s e e t h a t e x te r n a l dem and, r e p r e s e n te d by f o r e i g n incom e (Yf ) , i s th e s t a r t e r o r i n i t i a l f o r c e i n th e c i r c l e , d r i v in g e x p o r ts (X) u p . E x p o rts i n t u r n in c r e a s e p r o f i t s ( P „ ) , and c p r o f i t s I n c r e a s e f ix e d in v e s tm e n t ( I f ) . The c i r c l e i s c o m p lete when f ix e d in v e s tm e n t r a i s e s e x p o r ts . Incom e (Y) i s in c r e a s e d a t e v e ry p o i n t o f th e c i r c l e a s th e a rro w s i n d i c a t e . I t oan be s e e n from th e ab o v e c h a r t t h a t p r o s p e r i t y c an be m a in ta in e d w ith o u t s u b s e q u e n t i n c r e a s e s i n f o r e i g n incom e; th e flo w o f c a u s a tio n c a n c o n tin u e from e x p o rts to p r o f i t s to in v e s tm e n t and back to e x p o rts w ith o u t i n t e r r u p t i o n o r a d d i t i o n a l s tim u lu s . B u t t h e r e i s a s tr o n g p re s u m p tio n i n th e m odel t h a t a c o n tin u o u s i n j e c t i o n o f demand from a b ro a d w i l l be n e c e s s a r y to m a in ta in g ro w th . The im p o rt n e e d s o f m ost e x p o rt econom ies p ro v id e th e b a la n c in g s t i m u l a t i o n to f o r e i g n incom e, a s s e e n i n th e d o tte d a rro w s from incom e to im p o rts (M ), and from im p o rts to f o r e i g n in co m e. T h u s, we have two p o t e n t i a l l y con tin u o u s flo w s o f p u rc h a s in g pow er (and c a u s a t io n ) — one 18 J . E . H a rin g , " E x p o rt I n d u s t r i a l i s m and Eoonomic G row th: A Dynamic M odel," W e ste rn Econom ic J o u r n a l . V o l. 1 , A p r il 1963. p . 1 2 3 . 66 DIAGRAM I THE PROSPERITY CIRCLE* ♦ I b i d . , p . 12*f Filmed as receiv ed w ithout p a g e (s)___ UNIVERSITY MICROFILMS. 68 d o m e s tic and one f o r e i g n . The d o m e s tic c i r c l e i s e a s i e r to s tu d y and m ore am en ab le to m a n ip u la tio n b e c a u se o n ly one c e n t r a l a u t h o r i t y i s in v o lv e d . The i n t e r n a t i o n a l flo w s a r e bumpy and u n c e r t a i n , a s th e d o tte d a rro w s s u g g e s t. E xchange c o n t r o l s , t r a d e r e s t r i c t i o n s and th e l i k e a r e a lm o s t a lw ay s d e s ig n e d to c o n t r o l im p o rts , w h e rea s e x p o rts a r e u s u a l l y e n c o u ra g e d . Summary The im p a c t o f f o r e i g n t r a d e on econom ic g ro w th c an be summed up by a n a ly z in g th e r o l e o f e x p o r t s . E x p o rts may f u n c t i o n a s a " s e p a r a t e economy" ( o r th e th e o ry o f d u a lis m ) w here e x p o rts o f p rim a ry p r o d u c ts a r e f r e q u e n t ly made p o s s ib l e by f o r e i g n in v e s tm e n ts w hich a r e m a in ly c o n c e rn e d w ith th e e x t r a c t i o n o f r e s o u r c e s a t low c o s t and s h o r t - r u n g ro w th e f f e c t s . I n th e lo n g r u n , th e s e in v e s tm e n ts i n e x t r a c t i v e i n d u s t r i e s a r e bound to be i n s u l a t e d from th e re m a in in g s e c t o r s o f th e economy due to th e d e s i r e to m a in ta in s t a b i l i t y and c o n tr o l w ith in th e i n d u s t r i a l com pounds. I f e x p o rts a r e a " le a d in g s e c to r " o f th e economy ( t h a t i s to s a y , i f th e s tim u lu s to econom ic g ro w th comes from a b r o a d ) , th e n a n I n c r e a s e i n e x p o rts may c a l l a t t e n t i o n to in v e s tm e n t o p p o r t u n i t i e s , and t h i s g u id e s e n t r e p re n e u rs to p r o f i t a b l e v e n tu r e s t h a t may n e v e r have 69 o c c u rre d o th e r w is e . I f e x p o rts a r e a " la g g in g s e c to r " o f th e economy ( t h a t i s to s a y , i f e x p o rts l a g b e h in d d o m e s tic g ro w th due to a f a l l i n w o rld demand f o r p rim a ry p r o d u c t s ) , th e n th e s tim u lu s to econom ic g ro w th h a s to be w ith in th e d o m e s tic econom y. I n o t h e r w o rd s, th e d o m e s tic s e c t o r m ust le a d by a d o p tin g p ro g ram s f o r im p o rt-c o m p e tin g i n d u s t r i e s . I f e x p o rts a r e a " b a la n c in g s e c to r " o f th e economy ( t h a t i s to s a y , i f a d ju s tm e n t o f t r a d e k e e p s p a c e w ith d o m e s tic t r a n s f o r m a t i o n ) , th e n f o r e i g n t r a d e can f i l l th e gap b etw een c o n su m p tio n a n d - p r o d u c tio n . I n o t h e r w o rds, f o r e i g n t r a d e oan be u se d a s a " s a f e t y v a lv e " to p r e v e n t s h o r t - r u n d i s e q u il i b r iu m i n d o m e s tic s u p p ly . I t s h o u ld a l s o be n o te d t h a t when e x p o r ts a r e th e le a d in g s e o t o r o f th e econom y, th e g a in s from t r a d e w i l l le a d to te c h n o lo g ic a l c h an g e , c a p i t a l f o rm a tio n , and r e a l l o c a t i o n o f r e s o u r c e s . T h u s, th e g r e a t e r th e g a in s from t r a d e , th e h ig h e r th e r a t e o f eoonom ic g ro w th . I t fo llo w s from th e p r e v io u s a n a l y s i s t h a t a s m ost d e v e lo p in g c o u n tr i e s depend o n e x p o rt p ro c e e d s to e a r n t h e i r f o r e i g n e x c h a n g e , e x p o r ts a r e a m a jo r dynam ic f a c t o r i n d e te rm in in g n o t o n ly t h e i r im p o rt c a p a c ity b u t a l s o th e l e v e l o f g e n e r a l econom ic a c t i v i t y . A lth o u g h i n 70 th e l a r g e r c o u n tr i e s su c h a s I n d i a , and s e m i - i n d u s t r i a l - Iz e d c o u n tr i e s su c h a s M exico, d o m e s tic in v e s tm e n t i s a s im p o r ta n t a s e x p o r ts , i n many d e v e lo p in g c o u n t r i e s , su c h a s I r a q , e x p o rts a r e th e m o st Im p o rta n t a c t i v e f a c t o r i n g e n e r a tin g econom ic a c t i v i t y o r a c c e l e r a t i n g th e r a t e o f econom ic g ro w th . The slo w g ro w th o f t h e i r e x p o r ts , i f n o t accom panied by th e d e v elo p m e n t o f th e home s e c t o r , w ould mean a slo w g ro w th i n g e n e r a l . W h ile th e e x p o r ts o f I n d u s t r i a l c o u n tr i e s have in c r e a s e d f a s t e r th a n th o s e o f th e d e v e lo p in g c o u n tr i e s a s a w h o le , t h e i r p r o d u c tio n h a s g e n e r a l l y I n c r e a s e d even f a s t e r . T h e ir g ro w th r a t e s te n d to be h ig h e r th a n th o s e o f d e v e lo p in g c o u n t r i e s , due to th e im p o rta n c e o f e x p o rts a s a d e te rm in a n t o f g ro w th i n th e l a t t e r . I f t h i s d i s p a r i t y i n e x p o rt g ro w th co n t i n u e s , and i f d e v e lo p m e n t on th e home f r o n t i s n o t v ig o r o u s ly p u rsu e d i n th e d e v e lo p in g c o u n t r i e s , th e n th e gap i n Incom e l e v e l s b etw een d e v e lo p e d and d e v e lo p in g c o u n tr i e s w i l l te n d to be w id e n ed . CHAPTER IV THE TERMS OP TRADE AND ECONOMIC G RO W TH P u rp o s e and O r g a n iz a tio n The p u rp o s e o f t h i s c h a p te r i s to show t h a t th e lo n g - r u n d e t e r i o r a t i o n i n th e te rm s o f t r a d e o f p rim a ry p ro d u c in g c o u n tr i e s h a s re d u c e d th e im p o rt c a p a c ity o f t h e s e c o u n tr i e s and made t h e i r lo n g -te rm d ev elo p m en t p la n n in g a d i f f i c u l t t a s k , e s p e c i a l l y f o r th o s e t h a t have no s u f f i c i e n t r e s e r v e s . To a r r i v e a t t h i s c o n c lu s io n and to s u g g e s t some o f f s e t t i n g m e a s u re s , th e c h a p te r w i l l be o rg a n iz e d f i r s t to d e f i n e th e c o n c e p t o f , and s t a t i s t i c a l p ro b lem s r e l a t e d to th e te rm s o f t r a d e . The d e f i n i t i o n o f th e te rm s o f t r a d e , in t u r n , w i l l sh ed some l i g h t on th e Im p o rta n c e o f th e p r i c e r e l a t i o n s h i p b etw een e x p o r ts and Im p o rts . S e c o n d ly , th e q u e s tio n o f lo n g - r u n d e t e r i o r a t i o n in th e te rm s o f t r a d e o f t h e p e r ip h e r y in c o n t r a s t to t h e i n d u s t r i a l c e n t e r s w h ich h a s b e en r e f e r r e d to a s th e " P r e b is c h T h e s is " w i l l be exam ined and e v a lu a te d in th e 71 72 l i g h t o f s t a t i s t i c a l e v id e n c e . F i n a l l y , an a tte m p t w i l l be made to d i s c u s s th e im p a ct o f th e te rm s o f t r a d e on th e econom ic g ro w th o f d e v e lo p in g c o u n t r i e s . C oncept and S t a t i s t i c a l P ro b lem s o f th e Terms o f Oracle The c o n c e p t o f th e te rm s o f t r a d e p la y s an im p o r ta n t p a r t in d i s c u s s i o n s by e c o n o m is ts i n i n t e r n a t i o n a l t r a d e . In i t s s im p le s t m ean in g , th e te rm s o f t r a d e o f a g iv e n c o u n try r e f e r s to th e r e l a t i o n b etw een i t s im p o rt and e x p o rt p r i c e s . A c c o rd in g to t h i s d e f i n i t i o n a movement o f th e te rm s o f t r a d e in f a v o r o f a c o u n try m eans an in c r e a s e in th e volum e o f i t s e x p o r ts . The c o n c e p t so d e f in e d i s c a l le d "com m odity te rm s o f t r a d e . " But a lth o u g h s t r a ig h t f o r w a r d and c l e a r , t h i s d e f i n i t i o n h a s o f t e n b een m et w ith c r i t i c i s m from e c o n o m is ts , m a in ly b e c a u se i t ig n o r e s one o r a n o th e r o f t h e f a c t o r s w hich d e te rm in e th e i n f lu e n c e o f th e te rm s o f t r a d e on th e b a la n c e o f p a y m e n ts, th e g a in s from t r a d e , o r th e incom e o f a o o u n try . C o n se q u e n tly , s e v e r a l o t h e r m e a su re s o f th e te rm s o f t r a d e have b e en s u g g e s te d w hich ta k e a c c o u n t o f one o r m ore o f th e 73 f a c t o r s ig n o r e d .* "The F a o to r a l Term s o f T ra d e ," f o r ex am p le, c o r r e c t s th e "Commodity Term s o f T rad e " f o r ch an g es i n e f f i c i e n c y in p ro d u c in g goods f o r e x p o r t , from t h a t w h ich r e f l e c t a change in dem and. The f a c t o r a l te rm s o f t r a d e can h e m e a su re d , t h e r e f o r e , by d i v id i n g th e in d e x o f th e com m odity te rm s o f t r a d e by an in d e x o f th e p r o d u c t i v i t y f a c t o r s p ro d u c in g goods f o r e x p o r t. T h is m easu re r a i s e s many c o n c e p tu a l and p r a c t i c a l p ro b le m s , no n e o f w h ich can be s o lv e d s a t i s f a c t o r i l y a t p r e s e n t . A p a rt from th e d i f f i c u l t y o f d e f i n i n g w hat i s m eant by a " u n i t o f f a c t o r s o f p r o d u c tio n ," t h e r e i s a t p r e s e n t no way o f m e a su rin g c h an g e s i n th e p ro d u c t i v i t y o f f a c t o r s o t h e r th a n l a b o r . The m ain b a s i s f o r any g e n e r a l m easurem ent o f ch an g e s i n l a b o r p r o d u c t i v i t y m ust be a c o m p a riso n o f th e movement o f th e volum e o f p ro d u c tio n and em ploym ent. The f i g u r e s o b ta in e d m easu re th e f a c t o r a l te rm s o f t r a d e f o r m e rc h a n d ise t r a d e o n ly . M easures o f p r o d u c t i v i t y f o r i n v i s i b l e ite m s w ould be n eed ed to c a l c u l a t e th e f a c t o r a l te rm s o f t r a d e a s a *F or e x te n s iv e d i s c u s s i o n s o f th e d i f f e r e n t ty p e s o f th e te rm s o f t r a d e , se e J . V in e r, S tu d ie s i n th e T heory o f I n t e r n a t i o n a l T ra d e . New Y ork, H a rp e r and B r o th e r s , P u b l i s h e r s , 193?» p p . 5 5 5 -6 5 : C. P . K in d le b e r g e r , The Term s o f T ra d e : A E uropean C ase S tu d y . New Y ork, The te c h n o lo g y P r e s s of M .I .T ., Jo h n V lle y a rd S o n s, I n c . , 1956* E . D evons, E ssa y s i n E conom ics. L ondon, G eorge A lle n and Unw in, L t d . , 1 9 6 1 , p p . 13^-5^* G. A. H a b e r le r , S u rv ey o f I n t e r n a t i o n a l T rad e T h e o ry . P r in c e to n U n iv e r- s i t y , l $ 6 l , C h a p te r iV . 7^ w h o le, b u t t h e r e i s no b a s i s f o r a r r i v i n g a t s u c h m e a su re . A ll th e s e m ea su re s d i r e c t a t t e n t i o n to th e r e l a t i v e movement o f im p o rt and e x p o rt p r i c e s and pay no r e g a r d to th e e f f e c t s o f su c h p r i c e movement o r th e volum e o f im p o rts o r e x p o r t s . A f a v o r a b le movement i n th e term s o f t r a d e m easured i n t h i s way may be f a v o r a b le o n ly i n a t e c h n i c a l s e n s e . I f , f o r ex am p le, i n t e r n a l c o s t s and e x p o rt p r i c e s o f a c o u n try I n c r e a s e w h ile th e s e o f i t s c o m p e tito r s and s u p p l i e r s re m a in u n ch an g ed , th e volum e o f e x p o rts from t h a t c o u n try m ig h t f a l l s e v e r e ly and th e b a la n c e o f paym ents p ro b lem be s u b s ta n t i a l l y a g g ra v a te d ; y e t th e term s o f t r a d e would move in i t s f a v o r . I n i n t e r p r e t i n g th e s i g n i f i c a n c e o f a movement i n th e term s o f t r a d e one m ust pay a t t e n t i o n to th e e f f e c t o f p r i c e m ovem ents on th e volum e o f t r a d e . I t h a s b een s u g g e s te d t h a t a c o n v e n ie n t way o f d o in g t h i s s t a t i s t i c a l l y i s to m easu re ch an g es i n th e Im p o rt p u r c h a s in g pow er o f e x p o r ts and t h i s m easure i s c a l l e d " th e Incom e Terms o f T ra d e ." The incom e term s o f t r a d e , o r th e c a p a c ity to im p o rt, a r e c a l c u l a t e d sim p ly by d i v id i n g a n in d ex o f th e v a lu e o f e x p o rts by a n in d ex o f th e p r i c e o f im p o rts • T h is in d e x , t h e r e f o r e , ta k e s a c c o u n t o f th r e e f a c t o r s : th e q u a n t i t y o f goods e x p o rte d , ohanges i n th e a v e ra g e v a lu e o f e x p o r ts , 75 and ch an g es in th e a v e ra g e v a lu e o f im p o r ts . The f i n a l in d e x m e a su re s th e c h a n g in g volum e o f im p o rts t h a t c o u ld b e b o u g h t w ith th e incom e o b ta in e d from e x p o r ts . The in d e x r e f l e c t s n o t o n ly th e r e l a t i v e movement o f im p o rt and e x p o rt p r i c e s and th e e f f e c t o f su c h m ovem ents on th e volum e o f e x p o r ts , b u t a l l th e o t h e r f a c t o r s w h ich in f lu e n c e th e e x p o rt t r a d e o f th e c o u n try . I f t h e r e a r e no ite m s in f o r e ig n t r a n s a c t i o n s o t h e r th a n m e rc h a n d ise im p o rts and e x p o r ts , th e incom e te rm s o f t r a d e w i l l , o f c o u r s e , be th e same a s an in d e x o f th e volum e o f a c t u a l im p o rts . The incom e te rm s o f t r a d e can be c a l c u l a t e d e i t h e r f o r m e rc h a n d ise t r a d e a lo n e , o r w here th e i n f o r m a tio n i s a v a i l a b l e f o r i n v i s i b l e ite m s o f t r a d e a s w e ll. Thus t h i s in d e x p r o v id e s a u s e f u l su p p le m e n ta ry in d e x o f t h e c h a n g in g f o r e ig n t r a d e p o s i t i o n o f a c o u n tr y . A c c o rd in g ly , i t can be s a id t h a t w h a te v e r d e f i n i t i o n i s g iv e n to th e te rm s o f t r a d e , th e y a r e e x p re s s e d in in d e x num bers and p r e s e n t a l l th e p ro b le m s c o n n e c te d w ith th e c o n s t r u c t io n o f in d e x n u m b ers. The m easurem ent o f th e te rm s o f t r a d e w ould p r e s e n t no d i f f i c u l t y i f a c o u n try e x p o rte d o n ly one homo g en eo u s com m odity (s a y c o a l) and im p o rte d o n ly one homo- 76 g en eo u s com m odity ( s a y w h e a t). I t s te rm s o f t r a d e w ould be t h e am ount o f w h eat w hich i t g o t in exchange f o r a u n i t q u a n t i t y o f c o a l . I f i t now g e ts m ore u n i t s o f w h eat f o r th e same u n i t s o f c o a l th a n a t some p r e v io u s d a t e , i t s te rm s o f t r a d e can be s a i d to have im proved a s com pared w ith w hat th e y w ere a t t h a t d a t e , and th e im provem ent can be m easu red e x a c tl y . B ut b e s id e s o t h e r d i f f i c u l t i e s su c h a s ch an g es in consum ers t a s t e s d u r in g th e i n t e r v a l , m o st c o u n t r i e s , in f a c t im p o rt and e x p o rt a l a r g e num ber o f co m m o d ities ( t o sa y n o th in g f o r th e moment o f s a l e s o f s e r v i c e s and o t h e r i n t e r n a t i o n a l t r a n s a c t i o n s ) . Hence a change in th e te rm s o f t r a d e m ust b e m easu red w ith th e h e lp o f in d e x num bers o f e x p o r t and im p o rt p r i c e s . A p a rt from th e e x p e c te d d i f f e r e n c e s w hich r e s u l t from t h e u s e o f L a s p e y re s o r P a a sc h e * s in d e x , th e s i z e o f th e sam ple o f co m m o d ities u se d to com p u te im p o rt and e x p o r t p r i c e i n d ic e s a f f e c t s th e r e s u l t s o b ta in e d . A p r i c e s e r i e s b a se d on a l im i te d sam ple o f s i m i l a r co m m o d ities d u r in g a lo n g p e r io d o m its new co m m o d ities in tro d u c e d d u r in g th e p e r io d exam ined, and te n d s to have an upw ard o r downward 77 b i a s . ^ S t a t i s t i c a l in fo r m a tio n on th e te rm s o f t r a d e i s s c a n ty . B e s id e s t h i s d i f f i c u l t y and th e o t h e r a lr e a d y n o te d , d e t a i l e d s t a t i s t i c s r e l a t i n g to th e te rm s o f t r a d e a r e a v a i l a b l e m ore f o r th e d e v e lo p e d th a n th e d e v e lo p in g c o u n t r i e s . And even among th e d e v e lo p e d c o u n tr i e s s e r i e s lo n g enough to sh e d a l i g h t on th e lo n g - r u n movement have b een c o n s tr u c te d o n ly f o r B r i t a i n a n d , u n t i l r e c e n t l y , f o r th e U n ite d S t a t e s . H ow ever, m ost o f th e s t a t i s t i c s u se d in d i s c u s s i o n s a b o u t th e te rm s o f t r a d e b etw een p rim a ry p ro d u c in g and I n d u s t r i a l c o u n t r i e s r e l a t e to th e B r i t i s h te rm s o f t r a d e . A p a rt from th e p r a c t i c a l r e a s o n s , t h i s i s j u s t i f i e d on th e g ro u n d t h a t B r i t a i n a c c o u n te d f o r a s u b s t a n t i a l p r o p o r tio n o f t o t a l w o rld t r a d e in th e B oth i n d ic e s have been c r l t l o l z e d on th e ground t h a t L a s p e y r e s ' in d e x ( b a s e - y e a r q u a n t i t i e s ) can g e n e r a l l y b e e x p e c te d to o v e r e s tim a te o r to hav e an upw ard b i a s , w h ile P a a s c h e 's in d e x ( g iv e n - y e a r q u a n t i t i e s ) w i l l g e n e r a l l y do t h e e x a c t o p p o s i t e , t h a t i s , to hav e a downward b i a s . The c h o ic e b etw een them s h o u ld depend on w hich c h an g e s hav e to b e r e p r e s e n te d . I f ch an g e s i n th e te rm s o f t r a d e o f th e t r a d e p a t t e r n i n th e b a s e p e r io d have to be m e a su re d , th e In d e x e s s h o u ld b e o f th e b a s e w e ig h te d ty p e . A P a a sc h e w e ig h tin g p ro c e d u re s h o u ld be p r e f e r r e d , i f th e p r e s e n t c o m p o s itio n o f im p o rts and e x p o r ts have to b e ta k e n i n t o a c c o u n t. F o r f u r t h e r d e t a i l s se e U n ite d N a tio n s : UNCTAD, Term s o f T rad e an d th e C oncept o f Im p o rt P u rp h a s in g Pow er o f th e E x p o rts o f D e v elo p in g C o u n tr ie s , a p r e lim in a r y r e p o r t , M arch, i96&> P . 30. 78 n i n e t e e n t h c e n tu r y and I t I s s t i l l c o n s id e re d th e m ain Im p o rte r o f p rim a ry p r o d u c ts . The u t i l i z a t i o n o f s t a t i s t i c s r e l a t i n g to th e te rm s o f t r a d e , g e n e r a l l y , and p r i c e t r e n d s o f d i f f e r e n t c l a s s e s o f g o o d s, In p a r t i c u l a r , r a i s e s s p e c i f i c d i f f i c u l t i e s . M ost c o u n tr i e s v a lu e t h e i r e x p o r ts a t th e p o i n t o f e x p o r t ( f . o . b . ) , t h a t i s , th e e x p o rt p r i c e s o f manu f a c t u r e d goods from th e i n d u s t r i a l c o u n try e x c lu d e s h ip p in g c h a rg e s and c o s t o f t r a n s p o r t , In s u ra n c e and s i m i l a r c h a r g e s . Y et t h e l a t t e r a r e g e n e r a l l y an a d d i t i o n a l c h a rg e on th e r e s o u r c e s o f th e d e v e lo p in g c o u n tr y , s in c e s h ip p in g , f o r ex am p le, i s a lm o s t e n t i r e l y In th e h an d s o f th e d e v e lo p e d c o u n t r i e s . On th e o t h e r h a n d , many i n d u s t r i a l c o u n tr ie s v a lu e t h e i r Im p o rts o f p rim a ry m a t e r i a l s from d e v e lo p in g c o u n tr i e s ( c . l . f . ) , t h a t I s , i n c l u s i v e o f s h ip p in g c h a rg e s to th e p o i n t o f I m p o r ta tio n ; h en ce th e re c o rd e d p r i c e s In c lu d e paym ent n o t g e n e r a l l y made to th e d e v e lo p in g c o u n tr y , b u t to th e s h ip p in g l i n e s , In s u ra n c e com p a n i e s , e t c e t r a , o f th e same o r some o t h e r I n d u s t r i a l o o u n try . T h is l i m i t a t i o n a p p l i e s to th e U n ite d Kingdom p r a c t i c e o f v a lu in g Im p o rts , b u t n o t to t h a t o f th e U n ite d S t a t e s . T h u s, a change in B r i t i s h im p o rt p r i c e s n e ed n o t e n t i r e l y r e f l e c t a change in th e p r i c e s w hich f o r e i g n e r s 79 r e c e i v e d , s in c e s h ip p in g c o s t s on im p o rts w ere i n p a r t , a t l e a s t , p a id by B r i t i s h im p o r te r s to B r i t i s h s h ip p in g c o m p a n ie s. F u rth e rm o re , on th e e x p o rt s i d e t h e r e i s no p r o v i s i o n f o r th e i n c l u s i o n o f B r i t i s h s h ip p in g s e r v i c e s p u rc h a s e d by f o r e i g n e r s . A te rm s o f t r a d e in d e x w hich in c lu d e d b o th m e rc h a n d ise and s h ip p in g s e r v i c e s w ould g iv e a m ore a c c u r a te p i c t u r e o f B r i t a i n 's com m odity te rm s o f t r a d e . Prom t h i s p o i n t o f v ie w , i t i s p r e f e r a b l e to u s e th e t r a d e r e t u r n s o f th e d e v e lo p in g c o u n tr i e s them s e l v e s , s in c e t h e i r im p o rt v a lu e s g e n e r a l l y in c lu d e , and t h e i r e x p o rt v a lu e s e x c lu d e , s h ip p in g c h a r g e s . H ow ever, s in c e o u r a n a l y s i s i s b a se d on p r i c e r a t i o s and p r i c e in d ic e s r a t h e r th a n on a c t u a l p r i c e s , i t f o llo w s t h a t th e s t a t i s t i c s o f th e d e v e lo p e d c o u n tr i e s can be a c c e p te d a s an i n d i c a t o r o f th e ch an g e s in p r i c e s r e c e iv e d o r p a id by t h e i r l e s s d e v e lo p e d t r a d e p a r t n e r s , p r o v id e d th e c o s t s o f t r a n s p o r t , e t c e t e r a , have changed in th e same d i r e c t i o n and in th e p r o p o r tio n a s th e g e n e r a l l e v e l o f p r i c e s d u rin g th e p e r io d f o r w hioh th e c h an g e s in te rm s o f t r a d e a r e b e in g d e te rm in e d . T h ere a r e o t h e r m a jo r s t a t i s t i c a l p i t f a l l s i n a s tu d y o f c h an g e s in t h e te rm s o f t r a d e o v e r a lo n g p e r i o d . S t a t i s t i c a l d a t a o f t e n f a i l s to make due a llo w a n c e f o r c h an g es in q u a l i t y . M a n u fac tu re d goods a r e m ore s u b j e c t to ch an g es in q u a l i t y th a n food and p rim a ry m a t e r i a l s . In n o rm al tim e s , t h e r e I s a g e n e r a l te n d e n c y to w a rd s Im provem ent In th e q u a l i t y and e f f i c i e n c y o f m anufac tu r e d g o o d s, e s p e c i a l l y v e h ic le s and m a c h in e ry . H ence, in n o rm al tim e s , s t u d i e s o f ch an g es in te rm s o f t r a d e betw een d e v e lo p in g and i n d u s t r i a l c o u n tr i e s te n d to be a f f e c t e d by a s y s te m a tic b i a s to w a rd s m aking ch an g es a p p e a r m ore u n f a v o r a b le o r l e s s f a v o r a b le to th e d e v e lo p in g c o u n tr i e s th a n th e y r e a l l y a r e u n le s s th e m anufac tu r e d goods s e l e c t e d a r e o f a s ta n d a r d iz e d n a t u r e . Long-Run Movement i n th e Term s o f T rad e o f D e v elo p in g C o u n trie s To b e g in w ith , i t sh o u ld be em p h asized t h a t in a d e v e lo p in g c o u n try t o t a l im p o rts g e n e r a l l y c o v e r a much w id e r ra n g e o f p r o d u c ts th a n do e x p o r ts . C a p ita l goods may be a l a r g e p a r t o f t o t a l im p o r ts , b u t th e y do n o t form so p re d o m in a te a p a r t a s p rim a ry p r o d u c ts among e x p o r ts . The o v e r a l l te rm s o f t r a d e , t h e r e f o r e , depend upon p r i c e ch an g e s in a sm a ll num ber o f e x p o rt ite m s and upon th e d i s t r i b u t i o n o f p r i c e ch an g es among a f a i r l y w ide ra n g e o f im p o rte d p r o d u c ts . The c o m p o s itio n o f im p o r ts , a s w e ll a s o f e x p o r ts a f f e c t s th e t o t a l te rm s o f t r a d e . Among im p o r ts , th e p r o p o r tio n a c c o u n te d f o r by t e x t i l e m a n u fa c tu re r s i s one o f th e m ost Im p o rta n t f a c t o r s . B ut t h e i r im p o rta n c e d e c r e a s e s w ith th e d e g re e o f d e v e lo p m e n t, t h a t i s , t h e i r p r o p o r tio n i s h i g h e s t in 81 th e l e a s t d e v e lo p e d c o u n tr i e s and v i c e v e r s a . T h ere a r e c e r t a i n c a t e g o r i e s o f c a p i t a l g o o d s, m ore p a r t i c u l a r l y t e x t i l e m a c h in e ry , t r a c t o r s , c o p p e r m a n u f a c tu r e r s and a few o t h e r ite m s — - n o t a lw a y s th e same ite m s f o r a l l im p o rtin g c o u n t r i e s , o f c o u rs e --w h ic h i n c re a s e d i n p r i c e s in c e 1938 m ore th a n th e e x p o rt p r i c e s o b ta in e d b y many d e v e lo p in g c o u n t r i e s . F u rth e rm o re , in some d e v e lo p in g c o u n t r i e s e x p o rt p r i c e s r o s e so l i t t l e t h a t a som ewhat w id e r ra n g e o f c a p i t a l goods becam e ex p e n s iv e i n r e l a t i o n to e x p o rt p r i c e s r e c e i v e d . T h is , h o w ev er, r e f l e c t s r e l a t i v e l y low p r i c e s o f p a r t i c u l a r raw m a t e r i a l s r a t h e r th a n h ig h p r i c e s o f c a p i t a l g o o d s. A f u r t h e r a s p e c t h a s b e e n added to t h i s p ro b le m , b e c a u se a l l p ro g ram s o f econom ic d e v elo p m e n t r e q u i r e l a r g e am ounts o f c a p i t a l goods o b ta in a b le in d e v e lo p e d c o u n tr i e s and m u st b e ex ch an g ed — a s f a r a s no c a p i t a l im p o rts ta k e p l a c e — f o r e x p o r ts o f p rim a ry p r o d u c ts . The a b i l i t y o f d e v e lo p in g c o u n tr i e s t o a c q u ir e t h e s e goods d e p e n d s, t h e r e f o r e , on th e r e l a t i o n b etw een th e p r i c e s o f t h e i r e x p o r ts o f p rim a ry p r o d u c ts and th e p r i c e s o f t h e i r im p o rts o f c a p i t a l g o o d s. S t a t i s t i c a l E v id e n c e and E v a lu a tio n A lo n g s e r i e s o f th e B r i t i s h te rm s o f t r a d e was p r e p a r e d by Im la h . H ow ever, h i s s tu d y t a k e s a c c o u n t o n ly o f v i s i b l e t r a d e and d o e s n o t c o n s id e r th e i n v i s i b l e e l e 82 m en ts s u c h a s s h ip p in g and co m m ercial s e r v i c e s , c a p i t a l m ovem ents, incom e from f o r e i g n in v e s tm e n ts . H is in d e x i s c o n s tr u c te d by d i v id i n g t h e in d e x num bers o f an e x p o rt p r i c e s e r i e s by th e c o rre s p o n d in g num bers in a n im p o rt p r i c e s e r i e s . B is in g n u m b ers, t h e r e f o r e , l n d l o a t e f a v o r a b le movement f o r B r i t a i n ( s e e T a b le 1 ) . The im provem ent i n B r i t a i n 's te rm s o f t r a d e r a i s e s th e b r o a d e r q u e s tio n s o f w h e th e r t h e r e h a s b e en a lo n g - ru n d e t e r i o r a t i o n i n th e te rm s o f t r a d e o f p rim a ry p r o d u c in g c o u n t r i e s , and w h e th e r t h i s h a s b e en an im p o rta n t f a c t o r i n h i b i t i n g t h e i r d e v e lo p m e n t. Some w r i t e r s and s e v e r a l U n ite d N a tio n s r e p o r t s have m a in ta in e d t h a t t h e r e h a s b een a d e t e r i o r a t i o n , o v e r a lo n g p e r i o d , in th e te rm s o f t r a d e , o r th e r e l a t i o n b etw een p r i c e s o f raw m a t e r i a l s and th o s e o f m a n u fa c tu re d g o o d s, and t h i s h a s r e s u l t e d in a c o n s ta n t d e c r e a s e in p u r c h a s in g pow er and c a p a c ity f o r 3 d e v elo p m e n t i n th e c o u n tr i e s p ro d u c in g raw m a t e r i a l s . 3 •'U n ited N a tio n s : R e la tiv e P r i c e s o f E x p o rts and Im p o rts o f U n d e rd ev e lo p e d C o u n tr ie s . New Y o rk . 1949s U n ite d N a tio n s : (H aul P r e b l s o h ) « The Econom ic D evelopm ent o f L a t in A m erica and I t s P r i n c i p l e P ro b le m s . New & >rk. 195^» H. W. S in g e r , **tfhe D i s t r i b u t i o n of1 Grains b etw een I n v e s tin g and B orrow ing C o u n tr ie s ," A m erican Econom ic R eview , May 1950* PP« **73-85? M. K. A t t a l l a h . The L ong- Term Movement o f th e Term s o f T rad e B etw een A g r i c u l t u r a l and I n d u s t r i a l P r o d u c ts , (R o tte rd a m : N e th e rla n d s Econom ic I n s t i t u t e , 1 9 5 8 ). 83 Table (1 ) The N et B a r te r Term s o f T rad e o f th e U n ite d Kingdom (1880 slO O ) Y ear N .B .T . o f T. Y ear N .B .T . o f T. 1798 2 2 2 .3 1865 105.8 1800 2 05 .0 1870 1 0 2 .8 1805 2 1 8 .7 1875 1 1 2 .0 1819 1 7 3 .6 1880 1 0 0 .0 1815 1 5 5 .3 1885 1 0 0 .2 1820 1 6 0 .8 1890 1 0 9 .5 18 25 1 3 8 .4 1895 1 1 1 .7 1830 1 4 5 .6 1900 1 2 6 .1 1835 1 9 .6 1905 1 1 8 .4 1840 1 0 6 .1 1910 1 1 3 .2 1845 1 3 1 .1 1911 1 1 8 .2 1850 1 1 2 .3 1912 1 1 8 .1 18 55 9 7 .4 1913 1 2 2 .2 i 860 9 5 .6 S o u rc e : A. H. Im la h . Econom ic E lem en ts In th e PAX B r l t a n n l c a . S tu d ie s I n B r i t i s h F o re ig n " T ra d e In th e N in e te e n th C e n tu ry , ( C am bridgei H arv ard U n iv e r s ity P r e s s , l$ j> 8 ), p p . 9 4 -9 8 . In E uropean e x p e r ie n c e , th e te rm s o f t r a d e have tu rn e d a g a i n s t th e d e v e lo p in g c o u n tr i e s and i n f a v o r o f t h e i n d u s t r i a l o o u n t r le s . K in d ie b e rg e r h a s c a l c u l a t e d th e te rm s o f t r a d e f o r i n d u s t r i a l E u ro p e s e p a r a t e l y and f o r v a r io u s p a r t s o f th e w o rld , in c lu d in g in p a r t i c u l a r two g ro u p s o f c o u n t r i e s : o v e r s e a s , th e a r e a s o f r e c e n t s e ttle m e n t ( e x c lu d in g th e U n ite d S t a t e s ) and th e d e v e l o p in g c o u n tr i e s ( t h e r e s t o f t h e w o rld in h i s g ro u p in g ) . B oth th e new c o u n tr i e s and th e d e v e lo p in g c o u n tr i e s a r e e x p o r te r s o f p rim a ry p r o d u c ts and im p o r te r s o f m anufac tu r e d g o o d s. Prom 1913 to 1 9 5 2 , E u ro p e ’ s te rm s o f t r a d e w ith th e a r e a s o f r e c e n t s e t tl e m e n t showed a 20 p e r c e n t im p ro v em en t, w h ile in t r a d e w ith th e d e v e lo p in g coun t r i e s , E u ro p e ’ s te rm s o f t r a d e seem to have im proved by a s much a s 55 p e r c e n t. P e rh a p s one o f th e m a jo r a rg u m e n ts o f th e d e t e r i o r a t i o n in th e te rm s o f t r a d e o f p rim a ry p ro d u c in g c o u n tr i e s i s th e one w hich i s r e f e r r e d to a s th e " P re - b ls c h T h e s is ." T h is t h e s i s su g g e sts t h a t th e d e t e r i o r a t i o n in th e te rm s o f t r a d e o f th e s e o o u n tr le s can be p a r t l y e x p la in e d by th e f a i l u r e o f th e p r i c e s o f manu f a c t u r e d goods to f a l l n o n c o m m ita n tly w ith t e c h n i c a l C. P . K in d ie b e r g e r , The Term s o f T ra d e : A E uropean C ase S tu d y . (New York* *fhe te c h n o lo g y P r e s s o f M .I .lJ ., Jo h n W iley and S o n s, I n c . , 1 9 5 6 ), p . 2 3 ^ . 85 p r o g r e s s . B eca u se c o s t s ten d e d to d e o r e a s e a s a r e s u l t o f h ig h e r p r o d u c t iv i t y , th e incom e o f th e e n tr e p r e n e u r s and w ork ers in c r e a s e d , and when incom e in c r e a s e d , more th a n p r o d u c t iv i t y , p r i c e s r o s e . W hereas in p rim a ry p r o d u c in g c o u n t r ie s t h e g a in s in p r o d u c t iv i t y , a lth o u g h s m a lle r , h ave b een d i s t r i b u t e d in th e form o f p r i c e r e d u c t io n s o r in o n ly p ro p o rtio n ed . I n c r e a s e in money in com e. Had t h e r i s e in Incom e in th e I n d u s t r ia l c e n t e r s and t h e p e r ip h e r y b een p r o p o r t io n a t e t o t h e in c r e a s e in t h e i r p r o d u c t iv i t y , t h e p r i c e r e l a t i o n b etw een p rim a ry and m an u factu red p r o d u c ts w ould have b een t h e same a s i f p r i c e s had f a l l e n in s t r i c t p r o p o r tio n to p r o d u c t iv i t y . The p r io e r e l a t i o n w ould h ave moved in f a v o r o f th e p r i mary p r o d u c t s , b e c a u s e o f th e h ig h e r p r o d u c t iv i t y in in d u s t r y . P r e b is c h a t t r i b u t e s t h e c o n t r a s t in g b e h a v io r o f p r i c e s in I n d u s t r ia l and d e v e lo p in g c o u n t r ie s t o th e d i f f e r e n t m ovem ents in t h e p r i c e s o f p rim a ry and in d u s t r i a l p r o d u c ts o v e r s u c c e s s i v e b u s in e s s c y c l e s and t o t h e g r e a t e r number o f m onopoly e le m e n ts in i n d u s t r i a l m a r k e ts. He a s s e r t s t h a t in p r o s p e r o u s p e r io d s p r i c e s o f p rim ary p r o d u c ts h ave r i s e n r a p id ly , b u t h ave s u b s e q u e n tly l o s t t h i s g a in in th e dow nsw ing o f th e b u s in e s s c y c l e s . In c o n t r a s t , a lth o u g h m a n u fa ctu r in g p r i c e s h ave r i s e n l e s s in th e u p sw in g o f th e c y c l e , t h e s e p r i c e s 86 have n o t f a l l e n so f a r In d e p r e s s io n a s th e y h ave r i s e n in p r o s p e r it y , b e c a u se o f th e r i g i d i t y o f i n d u s t r i a l wage and p r i c e i n f l e x i b i l i t y in th e more m o n o p o lis tic i n d u s t r i a l m a r k e ts. I t i s t h e r e f o r e b e lie v e d t h a t o v e r s u c c e s s i v e c y c l e s th e gap b etw een t h e p r i c e s o f t h e two g ro u p s o f co m m o d ities h a s w id en ed , and th e p rim ary p r o d u c in g c o u n t r ie s have s u f f e r e d an u n fa v o r a b le movement in t h e i r term s o f t r a d e . P r e b ls c h a l s o s u g g e s t s t h a t th e c e n t e r ' s incom e e l a s t i c i t y o f demand f o r im p o r ts o f p rim ary p r o d u o ts i s l e s s th an u n i t y , w h ile th e p e r ip h e r y 's incom e e l a s t i c i t y o f demand f o r im p o r ts o f i n d u s t r i a l g o o d s i s g r e a t e r th an u n it y . In on e s ta te m e n t he p r o d u c es e v id e n c e show ing t h a t f o r e v e r y 1 p e r c e n t in c r e a s e in incom e in th e U n ite d S t a t e s , f o r ex a m p le , im p o rts o f p rim a ry g o o d s in c r e a s e o n ly ( .6 6 ) p e r c e n t , w h ile th e com p arab le f i g u r e f o r L a tin A m erica i s a b o u t (1 * 5 8 ) P « r c e n t .^ S o , a s f a r a s th e su p p ly s id e i s c o n c e r n e d , th e r e i s l i t t l e d o u b t t h a t t h e r e have b een g r e a t in c r e a s e s in p r o d u c t iv it y in th e c e n t e r ' s i n d u s t r i e s , b o th d o m e stic and e x p o r t. But in th e p e r ip h e r y t h e s e I n c r e a s e s have ^See h i s d ls o u s s lo n o f M y r d a l's p a p e r : "Toward a More C lo s e ly I n t e g r a t e d F ree-W orld Eoonom y,” in N a tio n a l P o l i c y f o r Econom ic W elfa re a t Home and A b road , e d it e d by H. Lekachm an, D ou b led ay and dompany, I n c . , Garden C it y , New Y ork, 1955* P» 2 ? 8 . 8? b een c o n fin e d l a r g e l y t o th e e x p o r t s e c t o r , and have h a r d ly a f f e c t e d t h e d o m e stic s e c t o r . I f we f o c u s o u r a t t e n t i o n on t h e in c r e a s in g p r o d u c t iv it y in th e p e r i p h e r y 's e x p o r t s e c t o r , we sh o u ld e x p e c t in c r e a s e d o u tp u t. But t h i s g r e a t e r o u t p u t , when i t f a c e s th e c e n t e r ' s lo w inoom e e l a s t i c i t y o f dem and, c a u s e s downward p r e s s u r e on th e p e r ip h e r y 's e x p o r t p r i c e s . On th e o t h e r hand, th e p e r ip h e r y 's own h ig h incom e e l a s t i c i t y o f demand f o r im p o rts w i l l te n d t o p r e s e r v e t h e p r i c e l e v e l o f in d u s t r i a l p r o d u c t s . I f t h e a ssu m p tio n o f c o m p e titio n w it h in t h e cen t e r w ere v a l i d , o n e c o u ld e x p e c t p r o d u c t iv it y I n c r e a s e s t o r e s u l t in a d e c l i n e in p r i c e s , w ith th e f a c t o r s o f p r o d u c tio n r e c e i v i n g th e same o r s l i g h t l y h ig h e r in c o m e s, b u t s t i l l l e s s th a n th e p r o d u c t iv it y in c r e a s e . I f t h e s e c o m p e tit iv e f o r c e s worked o n ly in th e p r o d u c t m a rk et, p r o d u c t iv it y I n c r e a s e s w ould b r in g a b o u t a r i s e in w ages and o r p aym en ts t o o t h e r f a c t o r s , w ith p r o d u c t p r i c e s l e f t u n ch a n g ed . P r e b ls c h a r g u e s t h a t m o n o p o lis t ic f o r c e s and s tr o n g la b o r u g io n s in th e c e n t e r a lw a y s s e e t o i t t h a t any p r o d u c t iv it y in c r e a s e s a r e m atched by I n c r e a se d f a c t o r p a y m en ts, and t h i s m akes p r i c e r e d u c t io n s im pos s i b l e . To su p p o r t h i s t h e s i s w h ich c e n t e r s around an a ll e g e d lo n g -r u n d e t e r i o r a t i o n in th e p e r ip h e r y 's term s 88 o f t r a d e f P r e b ls c h p r e s e n te d h i s s t a t i s t i c a l e v id e n c e in h i s 1950 s tu d y ( s e e T a b le 2 ) . The f i g u r e s i n t h i s t a b l e a r e in d e x num bers o f G re a t B r i t a i n 's com m odity ( n e t b a r t e r ) te rm s o f t r a d e , v eiw ed from th e p rim a ry p r o d u c e r s ' s t a n d p o in t . I t can be se e n t h a t th e a ll e g e d d e t e r i o r a t i o n d i d , i n f a c t , ta k e p l a c e . A n o th e r a s p e c t o f th e P r e b ls c h t h e s i s c o n c e rn s th e f a l l i n g im p o rt c o e f f i c i e n t in th e c e n t e r . T h is i s sim p ly th e r a t i o o f im p o rts to n a t i o n a l incom e. The s t a t i s t i c a l e v id e n c e i n d i c a t e s t h a t th e c o e f f i c i e n t f o r th e U n ite d S t a t e s h a s f a l l e n to h a l f i t s 1925 l e v e l , w h ile t h a t o f th e U n ite d Kingdom h a s d e c lin e d to tw o - t h i r d s ( s e e T a b le 3)« T hese phenom ena w i l l o b v io u s ly have some b e a r in g on th e p e r i p h e r y 's a b i l i t y to I n c r e a s e i t s e x p o rt volum e. H aving e s t a b l i s h e d th e e v id e n c e o f d i s p a r i t y in incom e e l a s t i c i t i e s o f demand f o r im p o rts w hich e x i s t s b etw een th e c e n t e r and th e p e r i p h e r y , P r e b ls c h s u g g e s ts t h a t th e o n ly way to o f f s e t t h i s d i s p a r i t y i s th ro u g h Im p o rt s u b s t i t u t i o n in th e p e r i p h e r y . I t s h o u ld be n o te d , h o w ev er, t h a t Im p o rt s u b s t i t u t i o n i s a c t u a l l y one f a c e t o f h i s m ore g e n e r a l p l e a f o r i n d u s t r i a l i z a t i o n . ^ ^ N a tio n a l p o l i c i e s f o r im p o rt s u b s t i t u t i o n and e x p o rt p ro m o tio n w i l l be d is c u s s e d in d e t a i l in C h a p te r V I. 89 T able (2 ) P e r i p h e r a l Term s o f T rad e ( 1876/80 ~ 100 ) P e r io d Amount o f f i n i s h e d p r o d u c ts o b t a in a b le f o r a g iv e n quan t i t y o f p rim a ry co m m o d ities 1876-1880 1 0 0 .0 1881-1885 1 0 2 .4 1886-1890 9 6 .3 1891-1895 9 0 .1 1896-1900 8 7 .1 1901-1905 8 4 .6 1906-1910 8 5 .8 1911-1913 8 5 .8 1921-1925 6 7 .3 1926-1930 7 3 .3 1931-1935 6 2 .0 1936-1938 6 4 .1 1946-1947 6 8 .7 S o u rc e: H aul P r e b ls c h , The Econom ic D evelop m en t o f L a tin A m erica and I t s P r i n c i p a l P ro b le m s; U n ite d N a tio n s , New Y ork, 195&* p . 9* T able (3 ) U n ite d S t a t e s and U n ite d Kingdom Im port C o e f f i c i e n t s (Im p o rts a s p e r c e n ta g e o f n a t io n a l Incom e) Y ear U .S . U .K . Y ear U .S . U .K . 1925 6 .0 3 3 3 .1 8 1940 3 .4 1 1 9 .2 7 1926 6 .0 3 3 1 .7 2 1941 3 .4 0 1 6 .5 0 1927 5.66 2 9 .3 9 1942 2 .1 2 1 3 .0 0 1928 5 .8 7 2 8.7 2 1943 2 .1 2 1 5 .8 0 1929 5 .5 3 29.22 1944 2 .2 7 1 5 .6 2 1930 4 .2 3 2 6 .3 8 1945 2 .3 9 1 3 .2 3 1931 3 .4 7 2 3 .4 9 1946 2 .9 1 1 5 .8 3 1932 2 .8 3 19.6 6 1947 2 .9 9 2 0 .3 7 1933 3 .2 4 1 8 .1 1 1948 3 .3 2 2 1 .2 7 1934 3.2 1 1 8 .8 5 1949 3 .1 4 ------ 1935 3 .6 4 1936 3 .7 1 1937 4 .4 4 1938 3 .1 5 1939 3 .3 7 S o u r c e : E x tr a c te d from U n ite d N a tio n s : Econom ic S u r re y on L a tin A m erica . New Y ork, 1949 and ECLA, 1951• p p . 2? and 30 . P r a c t i c a l l y s p e a k in g , P r e b l s c h 's h y p o th e s is may be c r i t i c i z e d on th e ground t h a t p r i c e d a t a on th e ex p o r t s and im p o rts o f p rim a ry p ro d u c in g c o u n tr i e s a re n o t d i r e c t l y a v a i l a b l e f o r a th o ro u g h e x a m in a tio n o f h i s h y p o th e s is . E q u a lly t r u e , B r i t a i n 's te rm s o f t r a d e can n o t sim p ly be u se d in r e v e r s e a s a m easu re o f th e te rm s o f t r a d e o f c o u n tr i e s e x p o r tin g to B r i t a i n , f o r th e s e c o u n tr i e s e x p o rte d to o th e r c o u n tr i e s b e s id e s B r i t a i n , 7 and th e y im p o rte d from o t h e r c o u n tr i e s to o . However, th e te rm s o f t r a d e b etw een p rim a ry m a n u fa c tu re d p r o d u c ts d id d e t e r i o r a t e b etw een th e 1 8 7 0 's and 1 9 3 0 's ; th e in d e x f e l l from 111 in 1870 to 75 in 1938 ( s e e T ab le 4 ) . I f i t i s re c o g n iz e d t h a t much o f th e d e c lin e in B r i t i s h im p o rt p r i c e s was c au se d by th e f a l l in t r a n s - O p o r t c o s t s a s some e c o n o m is ts t h i n k , and t h a t e x p o rt p r i c e s a c t u a l l y f e l l more b e c a u s e o f th e d e c r e a s e in th e c o s t s o f th e e x p o rte d s h ip p in g s e r v i c e s , th e n th e f i g u r e s in T ab le ^ o v e re m p h a siz e th e im provem ent in B r i t a i n 's te rm s o f t r a d e . ^ A cco rd in g to K in d le b e r g e r , a lth o u g h B r i t a i n 's te rm s o f t r a d e Im proved from 1872 to 1 9 00, th e te rm s o f t r a d e o f i n d u s t r i a l E urope w o rse n e d . See h i s The Terms o f T ra d e , o p . o l t . , p . 233. Q S t a t i s t i c a l e v id e n c e o f t h i s i s g iv e n in C. M. W rig h t, " C o n v e r t i b i l i t y and T r ia n g u la r T rade a s S a fe g u a rd s A g a in s t Econom ic D e p re s s io n ," Econom ic J o u r n a l , N o. 2 5 9 , S ep tem b er, 1955» p . 92 T able (4 ) Term s o f T ra d e , P rim a ry P r o d u c ts and M a n u fac tu re d P r o d u c ts , 1870-1950 (1913 * 100) Y ear (1 ) P r i c e In d e x o f P rim a ry P r o d u c ts (2 ) P r lo e In d e x o f M anufac tu r e d P ro d u c ts (3 ) In d e x o f Term s o f T r a d e ( l ) / ( 2 ) 1870 118 106 111 1880 102 102 100 1890 86 90 96 1900 86 88 98 1913 100 100 100 1921 131 186 70 1938 54 72 75 1950 124 122 102 S o u rc e : W . A. L e w is , "World P r o d u c tio n , P r ic e s and T ra d e , 1 8 7 0 -1 9 6 0 ," M a n c h e ste r S ch o o l o f E oono- m lc and S o c ia l S t u d i e s , May 1 9 5 2 , T a b le t l , p T T i S .--------------------------- In an a tte m p t t o exam ine t h e im p act o f s h ip p in g c h a r g e s on th e b a r t e r term s o f tr a d e o f A u s t r a lia and New Z ealand and t h e i r t r a d in g p a r t n e r s , C hisholm came to t h e c o n c lu s io n t h a t t h e c o n t r a s t b etw een t h e b e h a v io r o f f r e i g h t r a t e s in r e l a t i o n t o th e p r i o e s o f e x p o r ts from and im p o r ts in t o t h e s e tw o c o u n t r ie s i s b u t on e m a n ife s t a t i o n o f a w id e r p r o b le m , th e p r i c e i n s t a b i l i t y o f th e p rim a ry a s a g a in s t t h e s e o f t h e m an u factu red p r o d u c ts ( s e e T a b le 5)» One o f th e i n t e r e s t i n g t h in g s w o rth n o t in g in T a b le 5 i s t h e c o n s ta n c y o f t h e f r e i g h t burden on th e im p o r ts o f b o th c o u n t r ie s in c o n t r a s t t o t h e v e r y v a r ia b l e in c id e n c e upon e x p o r t s . T h is a r i s e s m a in ly from th e r a p i d i t y w ith w h ich th e p r i c e s r e c e iv e d f o r e x p o r t v a r y , w h erea s t h e im p ort p r i c e s g e n e r a lly ch an ge m ore s lo w ly . E x p o r ts co m p r ise fo o d , w ood, and o t h e r b a s i c c o m m o d itie s, w h ic h , d e s p i t e lo n g -te r m a g reem en ts c o v e r in g th e p u r c h a se o f many Item s f o r much o f th e p e r io d , have f l u c - u a te d g r e a t l y in p r i o e . The enorm ous in c r e a s e in th e p r i c e o f wood d u r in g th e K orean War i s a c a s e in p o i n t , and p a r t ly a c c o u n ts f o r th e lo w p e r c e n ta g e in c id e n c e o f f r e i g h t s on e x p o r ts in 1 9 5 1 -1 9 5 ^ • Im p orts m o s tly con s i s t o f m a n u fa ctu red g o o d s, w h ich a r e s u b j e c t to much l e s s v i o l e n t p r i c e f l u c t u a t i o n s , and a s a co n seq u en c e th e i n d i c e s o f Im port p r i c e s d is p la y a more r e g u la r 94 T a b le (5 ) ESTIMATES OF OCEAN FREIGHTS AS PERCENTAGES OF F .O .B . VALUE OF IMPORTS AND EXPORTS ( P r e c io u s M e tal E x clu d ed ) Y ear New Z ea la n d A u s t r a l i a T m ports E x p o rts Im p o rts E x p o rts 1936-40 1 4 .9 1 1 .2 1 4 .6 1 5 .0 1 9 4 1 -4 5 1 3 .6 1 2 .0 1 7 .0 2 6 .7 1946-50 1 2 .7 8 .8 1 3 .3 1 1 .5 1 9 5 1 -5 4 1 2 .7 6 .6 1 2 .0 6 .0 S o u rc e : M. C h ish o lm , " S h ip p in g C o sts and th e Term s o f T ra d e : A u s t r a l i a and New Z e a la n d ," A p p lie d S t a t i s t i c s . 1 9 5 9 . T a b le 1 , p . 1 9 7 . tr e n d th a n th o s e o f th e eaqoort p r i c e s . P r e b ls c h * s T h e s is h a s fo u n d s u p p o rt In a s tu d y by S i r R. H a l l.^ He p o in te d o u t t h a t In th e p a s t few y e a r s , a lth o u g h w o rld t r a d e in p rim a ry p r o d u c ts h a s in f a c t expanded enough to o f f s e t th e f a l l in p r i c e , th e I n c r e a s e h a s come m o s tly from c o u n tr i e s w h ic h , th o u g h th e m s e lv e s I n d u s t r i a l , a ls o p ro d u c e p rim a ry p r o d u c ts . H ow ever, he a d d s t h a t d e v e lo p in g c o u n tr i e s a s a group h ave b e en a c t u a l l y w o rse o f f ( s e e T a b le 6 ) . T h is un f a v o r a b le tr e n d in t h e te rm s o f t r a d e o f d e v e lo p in g c o u n tr i e s can be found in a m ore r e c e n t s e t o f f i g u r e s ( s e e T a b le 7 ) . I t seem s c l e a r from th e p r e v io u s a n a l y s i s and s t a t i s t i c a l e v id e n c e t h a t w h a te v e r th e e x p la n a tio n s , • i t i s a m a t t e r o f h i s t o r i c a l f a c t t h a t e v e r s in c e th e 1800*s th e t r e n d o f p r i c e s h a s been h e a v ily a g a i n s t s e l l e r s o f p rim a ry p r o d u c ts and in f a v o r o f th e s e l l e r s o f m a n u fa c tu re d g o o d s. M o reo v er, m ost d e v e lo p in g coun t r i e s have l i t t l e c o n tr o l o v e r th e tr e a tm e n t t h e i r ex p o r t s s h a l l r e c e i v e in f o r e i g n m a rk e ts o r o v e r th e te rm s on w h ich th e y can o b ta in t h e i r im p o rts . T h is i s due to th e f a c t t h a t th e p r i c e s o f th e e x p o rts and im p o rts o f th e s e c o u n t r i e s — and som etim es th e volum e o f e x p o rts ^See "Commodity P r i c e s and th e Term s o f T ra d e ," L lo y d s Bank R eview , No. 6 3 , J a n u a r y , 1 9 6 2 , p . 4 . 96 T able (6 ) U n ite d Kingdom Term s o f T rad e (195** * 100) Y ear Im p o rt P r i c e s E x p o rt P r i c e s Terms of* T rad e 1950 85 85 100 1951 113 100 88 1952 111 105 95 1953 101 101 100 195** 100 100 100 1955 103 102 99 1956 105 106 101 1957 107 111 io** 1958 99 110 111 1959 98 109 111 I9 6 0 99 111 112 1961 ( O c t.) 96 112 117 ♦ E x p o rt p r i c e s d iv id e d by Im p o rt p r i c e s . S o u rc e : S i r R o b e rt H a ll, "Commodity P r i c e s and th e Term s o f T r a d e ," L lo y d s Bank R eview , No. 63> J a n u a ry 1 9 6 2 , p . 3« 97 T a b le (7 ) TEEMS OP TRADE1 : (1958 * 100) B e g io n s Y ear Econom ic C la s s I Econom ic C la s s I I 2 c . d l . i l / E c .C l .I E c . d i . n L e ss F u e ls PR IM ./ MANUF. 1953 99 104 105 108 108 1954 97 109 112 113 113 1955 97 109 110 109 109 1956 98 106 108 105 105 1957 99 103 103 105 105 1958 100 100 100 100 100 1959 101 98 97 98 98 I 960 101 97 96 99 95 1961 102 95 93 96 93 1962 102 93 93 93 93 1963 1964 102 93 97 95 101 96 9^ 100 95 1965 102 95 93 99 92 S o u rc e : U n ite d N a tio n s S t a t i s t i c a l Y earbook, New Y ork, 1 9 67. Where one r e g io n I s m e n tio n e d : U n it v a lu e i n d e x o f e x p o r ts from th e r e g io n d iv id e d by u n i t v a lu e in d e x o f e x p o r ts to th e r e g i o n . W here two r e g io n s a r e m e n tio n e d : u n i t v a lu e in d e x o f e x p o r ts from th e f i r s t to t h e seco n d d iv id e d by u n i t v a lu e in d e x o f e x p o rts from th e seco n d to th e f i r s t . 98 a s w e ll— a r e d e te rm in e d by f o r c e s a lm o st e n t i r e l y o u t s id e t h e i r c o n t r o l . The p o l i c y c o n c lu s io n draw n from th e s e c u l a r te n d e n c y o f th e te rm s o f t r a d e to d e t e r i o r a t e f o r d e v e l o p in g c o u n t r i e s , i s t h a t th e s e c o u n tr i e s s h o u ld d i v e r s i f y t h e i r e x p o r ts and a d o p t p r o t e c t i o n i s t m e a s u re s . I t s h o u ld b e n o te d , h o w ev er, t h a t m ethods o f p r o d u c tio n , t r a n s p o r t a t i o n , w o rld t r a d e , w o rld p o p u la tio n and s t a n d a r d s o f l i v i n g have u n d e rg o n e trem en d o u s c h an g e s s in o e 18?0 and a r e s t i l l c h a n g in g . T h u s, i t i s d i f f i c u l t to f o r e c a s t f u t u r e m ovem ents o f th e te rm s o f t r a d e , d u e t o th e c o m p le x ity and u n p r e d i c t a b i l i t y o f lo n g - r u n te c h n o l o g ic a l and p o p u la tio n c h a n g e s. The Im pact o f th e Term s o f T rad e on Econom ic G row th The d e v e lo p in g c o u n tr i e s a r e and s h o u ld be much c o n c e rn e d w ith t h e i r i n t e r n a t i o n a l t r a d e p o s i t i o n in g e n e r a l and t h e i r te rm s o f t r a d e i n p a r t i c u l a r a s one o f th e f a c t o r s a f f e c t i n g th e s u p p ly o f b a d ly n eed ed im p o rts . The r e a l p o s i t i o n o f a c o u n try d o e s n o t n e c e s s a r i l y rem a in unchanged i f e x p o rt and im p o rt p r i c e s r i s e in e x a c tl y th e same d e g re e . T h is i s t r u e o n ly when th e t o t a l v a lu e s o f e x p o r ts and im p o rts a r e f a i r l y w e ll b a la n c e d : in su c h c a s e s i t i s o b v io u s t h a t a r i s e in e x p o rt and im p o rt p r i c e s in th e same d e g re e l e a v e s th e 99 p o s i t i o n u n ch an ged . T h is , h o w ev er, c e a s e s to b e tr u e when im p o rts a r e c o n s id e r a b ly la r g e r th a n e x p o r t s , o r v i c e - v e r s a . B ec a u se th e d e v e lo p in g c o u n t r ie s o f t e n have im p ort s u r p lu s e s , th e r i s e in im p ort p r i c e s i s a much m ore s e r io u s m a tte r and i s n o t s u f f i c i e n t l y com p en sated by an e q u a l r i s e in e x p o r t p r i c e s . T hus, th e b a la n c e o f paym en ts o f d e v e lo p in g c o u n t r ie s may d e t e r i o r a t e s e r i o u s l y , even th o u g h e x p o r t and Im port p r i c e s r i s e in e x a c t l y th e same d e g r e e . T here i s l i t t l e d ou b t t h a t in o r d e r to e v a lu a t e a w e lf a r e change i t i s n e c e s s a r y t o c o n s id e r volum e c h a n g es in a d d it io n to p r i c e c h a n g e s. T h is p o in t h a s b een w e ll made by H a b e rler who s u g g e s t s t h a t : . . .N e it h e r an in c r e a s e in th e in d e x o f th e g r o s s b a r t e r term s o f tr a d e n o r o f t h a t o f th e incom e term s o f tr a d e can b e reg a r d e d a s an i n d i c a t i o n t h a t a c o u n t r y 's p o s i t i o n h as im proved o r t h a t i t s g a in s from tr a d e h a s I n c r e a s e d . In f a c t , b o th o f t h e s e m ea su res a r e i n f e r i o r t o , and a l e s s r e l i a b l e g u id e th a n , th e s im p le com m odity term s o f t r a d e , b e c a u s e e a c h o f them t r e a t s a s e q u iv a le n t c a s e s t h a t h ave t o b e ju dged d i f f e r e n t l y , ev en i f o t h e r t h in g s h a v e rem ain ed un ch a n g ed . An I n c r e a s e in th e in d e x o f th e com m odity o r n e t b a r t e r term s o f tr a d e may b e c o n s id e r e d a s a fa v o r a b le tr e n d f o r a c o u n tr y b e c a u se a la r g e r volum e o f f o r e ig n g o o d s c o u ld be r e c e iv e d , c e t e r i s p a r ib u s , f o r a g iv e n P r in c e t T h eo ry , 100 volum e o f e x p o r t g o o d s: o r to p u t I t d i f f e r e n t l y , f o r a g iv e n volum e o f im p o r ts a s m a lle r volum e o f g o o d s n e e d s to b e e x p o r te d . H ow ever, th e in d e x d o e s n o t i n d i c a t e w h eth er th e r e i s an in c r e a s e , d e o r e a s e , o r no chan ge a t a l l in t h e m ore r e le v a n t in d e x o f t h e im p ort p u r c h a sin g pow er o f t o t a l e x p o r t s , b e c a u s e o n ly ch a n g es in th e p r i c e o f t h e e x p o r t s h a v e b een ta k e n in t o a c c o u n t, w h ile ch a n g es in t h e p h y s ic a l amount o f e x p o r t s , w h ich c o u ld r e s u l t from th e change in th e p r i c e o f e x p o r t s , h ave b een n e g le c t e d . In p r i n c i p l e t h i s n e g l e c t i o n i s o n ly p e r m is s ib le i f th e p r i c e e l a s t i c i t y o f t h e f o r e ig n demand f o r e x p o r ts i s z e r o . H a b er ler s u g g e s t s t h a t a d i s t i n c t i o n h a s t o be made b etw een ( a ) ch a n g e s in th e term s o f t r a d e o f a c o u n tr y w h ich r e s u l t from ch a n g es in f o r e ig n demand ( s h i f t , f o r any r e a s o n , in th e f o r e ig n r e c ip r o c a l demand o r o f f e r c u r v e s ) and (b ) ch a n g e s r e s u l t i n g from a s h i f t in th e c o u n tr y ’ s own r e c ip r o c a l demand o r o f f e r c u r v e s . Any im provem ent in t h e term s o f tr a d e w h ich r e s u l t s from a change in f o r e ig n demand i s f a v o r a b le , p r o v id e d f u l l em ploym ent and p r o d u c tio n can b e m a in ta in e d . S i m i l a r l y , a d e t e r i o r a t i o n o f th e term s o f tr a d e r e s u l t i n g from a c o n t r a c t io n o f f o r e ig n demand l e a v e s th e c o u n tr y w orse 11 o f f th an b e f o r e . 11 I b id . . p . 2 8 . 101 One way o f v ie w in g t h e g a in from im proved term s o f tr a d e i s t o c o n s id e r th e d i f f e r e n c e s b etw een t h e s t a t e o f t h e b a la n c e o f paym en ts a f t e r p r i c e s v a r y and w hat i t w ould have b een w ith o u t t h e p r i c e c h a n g e s , a ssu m in g th e q u a n t i t i e s tr a d e d a r e t h e same in b o th s i t u a t i o n s . One m ig h t d e te r m in e th e v a lu e o f th e q u a n t it y o f g o o d s t h a t w ould have b een J u s t enough t o o f f s e t th e e f f e c t o f p r i c e ch a n g es so t h a t th e b a la n c e o f p aym en ts rem ain ed unchanged. F or ex a m p le, i f th e term s o f tr a d e o f a c e r t a i n c o u n tr y had n o t im p roved , t h a t c o u n tr y w ould h ave had t o e x p o r t c e r t a i n p e r c e n ta g e more g o o d s th a n i t a c t u a l l y d id in o r d e r t o p ay f o r im p o r ts . The d i r e c t e f f e c t s o f th e term s o f tr a d e on th e f i n a n c i a l r e s o u r c e s a v a i l a b l e f o r econ om ic d ev elo p m en t a r e th e m ost im p o rta n t b u t b y no m eans t h e o n ly c o n s id e r a t i o n s . F a v o r a b le ch a n g es in th e term s o f tr a d e o f d e v e lo p in g c o u n t r ie s im prove t h e i r a b i l i t y t o m eet d e b t s e r v i c e s on f o r e ig n lo a n s and w ith d r a w a ls o f e a r n in g s o f f o r e ig n - f in a n c e d in v e s t m e n ts . T h e ir a b i l i t y t o a c c e l e r a t e d ev elo p m en t th ro u g h f o r e ig n f in a n c in g i s th u s im p r o v e d . The u n fa v o r a b le lo n g -r u n tr e n d i n th e p r i c e s o f p rim a ry m a t e r ia ls r e l a t i v e t o c a p i t a l g o o d s h a s , con v e r s e l y , l i m i t e d t h e i r c a p a c it y t o a b so r b f o r e ig n f in a n c in g f o r d ev elo p m e n t and th e r e b y ten d ed t o r e s t r i c t f o r e ig n in v e stm e n t t o t y p e s y i e l d i n g f o r e ig n ex ch a n g e 102 d i r e c t l y , su c h a s th e a c q u i s i t i o n o f s o u r c e s o f raw m a t e r ia ls o r fo o d s u p p l i e s . A f a v o r a b le ch an ge in term s o f t r a d e , by p r o v id in g o p p o r tu n ity o f o b t a in in g an in c r e a s e d quantum o f im p o r ts f o r a g iv e n quantum o f e x p o r t s , e n a b le s a d e v e lo p in g c o u n tr y t o o b t a in i t s p r e v io u s q u a n tit y o f im p o r ts f o r a red u ced q u a n t it y o f e x p o r ts and t o u t i l i s e th e d o m e stic r e s o u r c e s th u s s e t f r e e f o r p u r p o se s o f econ om ic d e v e lo p m ent o r , a l t e r n a t i v e l y , t o u t i l i z e th e e x t r a im p o r ts ob t a in e d f o r th e p r e v io u s quantum o f e x p o r ts f o r p u r p o se s o f d e v e lo p m e n t. In e i t h e r c a s e , t h e r e f o r e , econ om ic d e v elo p m e n t can b e prom oted by a fa v o r a b le ch an ge in term s o f t r a d e . The term s o f t r a d e , h o w ev er, a r e n o t , o f c o u r s e , th e o n ly f a c t o r in d e te r m in in g n a t io n a l incom e and fu n d s 12 a v a i l a b l e f o r eco n o m ic d e v e lo p m e n t. But i t i s o b v io u s t h a t ail in c r e a s e in e x p o r t p r o c e e d s , a r i s i n g from fa v o r a b le term s o f t r a d e , i s e q u iv a le n t to t h e r e c e i p t o f g r a n t s and lo a n s from th e o u t s id e w o rld ; a n d , in eo m p a ri- 12 I t sh o u ld b e n o te d t h a t o t h e r f a c t o r s n e c e s s a r i l y c o n tin u e t o b e im p o r ta n t a l s o , su c h a s f o r e ig n f in a n c in g , f o r e ig n lo a n s and in v e s tm e n ts w hloh may b e come a more Im p o rta n t r e s o u r c e f o r th e econ om ic d e v e lo p m ent o f d e v e lo p in g c o u n t r ie s th a n th e y a r e now, i f s t a b l e and f a v o r a b le p r i c e r e l a t i o n s a r e a s s u r e d . The l i m i t in g f a c t o r , h o w ev er, in t h e i r econ om ic d ev e lo p m e n t— from w h ich a l l o t h e r s m ust d e r iv e t h e i r e f f e c t i v e n e s s — l i e s in t h e d o m e stic s o u r c e s . 103 so n w ith th e l a t t e r , h a s th e f u r t h e r a d v a n ta g e o f n o t r e q u i r i n g f u t u r e r e s o u r c e s f o r th e s e r v i c i n g o f l o a n s . I t s h o u ld b e e m p h a siz e d , how ever, t h a t an in c r e a s e in e x p o rt p ro c e e d s in d u c e d by im proved te rm s o f t r a d e i s o n ly p o t e n t i a l l y , and by no m eans a u to m a t i c a ll y , a v a i l a b le a s a s o u rc e o f f in a n c e f o r econom ic d ev elo p m en t.* -^ I t h a s b e en s u g g e s te d t h a t even m in o r c h an g e s i n th e te rm s o f t r a d e o f p rim a ry p ro d u c in g c o u n tr i e s may h av e f i n a n c i a l c o n se q u e n c e s many tim e s l a r g e r th a n th e a v a i l a b i l i t y , even a f t e r any p o s s i b l e in c r e a s e o f f o r e ig n lq a n s and a i d . In a s tu d y by th e U n ite d N a tio n s , i t h a s b e e n e s tim a te d t h a t a 10 p e r c e n t change in th e te rm s o f t r a d e o f th e s e c o u n tr i e s w ould m o d ify t h e i r c a p a c ity to im p o rt by a s much a s 1 .5 b i l l i o n d o l l a r s a y e a r . In a n o th e r s tu d y , i t h a s b een e s tim a te d t h a t th e im prov e m ent i n th e te rm s o f t r a d e f o r L a t in A m erica from 19^6 to 1952 made a v a i l a b l e to t h a t c o n tin e n t m ore th a n 11 13 'T o r a s p e c i a l d i s c u s s i o n o f th e r e l a t i o n s h i p b etw een ch an g es i n th e te rm s o f t r a d e , c a p a c ity to im p o rt and th e r a t e o f g ro w th o f s e l e c t e d L a t in A m erican coun t r i e s , se e G. M aynard, Econom ic D evelopm ent and th e P r i c e L e v e l. (L ondon: Mac M illa n , 196 2 ) , C h a p te r IX , PP . 2 3 9 -7 5 . ^ S e e U n ite d N a tio n s : R e la t iv e P r ic e s o f E x p o rts and Im p orts o f U n d erd ev elo p ed C o u n tr ie s . New Y ork, 193-9« P » 1 7 . 104 b i l l i o n d o l l a r s , t h a t i s , a b o u t 4 .3 p e r c e n t o f th e a g g re g a te p r o d u c t o f th e a r e a f o r th e w hole s e v e n - y e a r p e r i o d . A c c o rd in g to th e c a l c u l a t i o n s made by "The Econ o m is t, " th e f a l l o f 7 .5 p e r c e n t w hich o c c u rr e d in th e p r i c e s o f p rim a ry co m m o d ities d u r in g 1956-57 h a s r e s u l t ed in a l o s s o f 3*5 to 4 b i l l i o n d o l l a r s i n th e a n n u a l 16 e x p o rt e a r n in g s o f th e p rim a ry p ro d u c in g c o u n t r i e s . T. B alogh e s tim a te s t h i s f a l l a t 8 .5 p e r c e n t and su g g e s t s i t r e p r e s e n t s a f a l l in th e p u r c h a s in g pow er o f th e p rim a ry p ro d u c e rs o f w e ll o v e r 1 .5 b i l l i o n pounds p e r annum - m ore th a n th e w hole o f th e W estern Econom ic 17 A id to th e l e s s d e v e lo p e d c o u n t r i e s . F i n a l l y , i t s h o u ld be n o te d t h a t a s th e te rm s o f t r a d e a f f e c t t h e n a tu r e and e x te n t o f a c o u n try * s d e v e lo p m e n t, th e c o u rs e o f d e v e lo p m e n t, in t u r n , a f f e c t s th e te rm s o f t r a d e . In o t h e r w o rd s, a s d ev elo p m en t p r o c e e d s , t h e r e a r e l i k e l y to be ch an g es in co n su m p tio n p a t t e r n s , te c h n o lo g y , f a c t o r s u p p ly , f a c t o r p r i c e s and th e c o m p e titiv e and n o m o p o lis tic e le m e n ts i n m a rk e t ^ U n i t e d N a tio n s : Econom ic S u rv ey f o r L a tin A m e ric a. 1 9 5 1 -5 2 . New Y ork, l^f>3» p . 1 . *^The E c o n o m ist, November 1 6 th , 1957* p . 515* 17 r "The Wrong T a r g e t," The F in a n c ia l T im es. Novem b e r 1 8 th , 1957 . 1 0 5 s t r u c t u r e s . A ll t h e s e w i l l a f f e c t com m odity p r i c e s , and h en ce th e term s o f t r a d e . T h e o r e t i c a l l y , t h e im p a ct o f econ om ic d ev elo p m e n t on t h e term s o f tr a d e w i l l depend upon th e f l e x i b i l i t y and a d a p t a b i l i t y o f r e s o u r c e s on th e one hand, and th e e l a s t i c i t y o f demand f a c in g th e p a r t i c u l a r c o u n tr y on th e o t h e r . Summary T here a r e d i f f e r e n t m ea su res o f t h e term s o f t r a d e . The s im p le s t on e o f t h e s e i s th e " n e t term s o f tr a d e ," w h ich r e f e r to th e r a t i o o f e x p o r ts and im p o r ts p r i c e s . An in c r e a s e o f t h i s in d e x i n d i c a t e s t h a t im p o r t s have become c h e a p er r e l a t i v e t o e x p o r ts ; t h u s , more im p o r ts can b e o b ta in e d f o r a g iv e n amount o f e x p o r t s . The e x t e r n a l tr a d e o f m ost d e v e lo p in g c o u n t r ie s i s c h a r a c t e r iz e d by w id e f l u c t u a t i o n s in th e term s o f tr a d e t h a t te n d to d e t e r i o r a t e in th e lo n g -r u n . The r e a s o n f o r t h i s i s t h a t p r i c e s o f p rim a ry p r o d u c ts a r e g e n e r a lly sub j e c t to v i o l e n t ch a n g es from s e a so n t o s e a so n and from y e a r to y e a r , d ep en d in g on th e abundance o f th e p r o d u c t; in a d d it io n th e m a r k etin g o f a g r i c u l t u r a l p r o d u c ts i s 18 d i f f i c u l t to r e g u la t e . *®This i s due t o th e d i f f i c u l t i e s o f s t o r a g e f a c i l i t i e s a s when th e g o o d s a r e p e r is h a b le o r a l s o b e c a u se th e fa r m e r , due to h is bad econ om ic c o n d it io n s , ca n n o t w a it . 106 The i n s t a b i l i t y in th e p r i c e s o f a g r i c u l t u r a l p r o d u c t s in c o n t r a s t w ith p r i c e s o f I n d u s t r ia l p r o d u c ts w h ich a r e g e n e r a lly s t a b l e , a t l e a s t in th e s h o r t - r u n , i s t o a l a r g e e x t e n t , beyond th e c o n t r o l o f th e human w i l l ; a l s o th e m a r k etin g o f a g r i c u l t u r a l p r o d u c ts i s much more 19 d i f f i c u l t th a n m a n u fa ctu red g o o d s. In th e lo n g -r u n , h o w ev er, p r i c e s o f a g r i c u l t u r a l p r o d u c ts move downwards ( w it h t h e e x c e p t io n o f abnorm al p e r io d s ) b o th a s a r e s u l t o f t e c h n ic a l p r o g r e s s w h ich le a d s t o g r e a t e r p r o d u c t io n , and o f th e lo w e l a s t i c i t y o f demand ( u n lik e m an u fa ctu red g o o d s) f o r a g r i c u l t u r a l p r o d u c ts . T h u s, r e c e n t tr e n d s in m a rk ets f o r p rim a ry p r o d u c t s have l e n t su p p o r t to econ om ic t h e o r i e s w h ich a rg u e t h a t d e v e lo p in g c o u n t r ie s sh o u ld d i v e r s i f y t h e i r eco n o m ie s , r e d u c e t h e i r d ep en d en ce on o n e o r two co m m o d ities and em p h a size l o c a l i n d u s t r i a l i z a t i o n . T h is h y p o t h e s is , p o p u la r iz e d by th e L a tin A m erican e c o n o m ist Haul P r e b ls c h , s u g g e s t s t h a t th e i n d u s t r i a l c o u n t r ie s h ave managed t o ■^This i s s o , f i r s t , b e c a u s e i n d u s t r i a l p r o d u c ts a r e e a s y t o s t o r e , and s e c o n d , b e c a u se i t i s e a s y f o r th e p r o d u c e r s t o com bine in m o n o p o lis t ic g ro u p s t o o r g a n iz e m a r k e tin g . W hile in th e c a s e o f m ost a g r i c u l t u r a l p r o d u c t s i t i s e x tr e m ly d i f f i c u l t t o s u b j e c t them t o su c h form o f o r g a n iz a t io n ( f o r ex a m p le, a c a r t e l ) f o r s e v e r a l r e a s o n s , b u t p a r t i c u l a r l y b ed a u se o f th e l a r g e number o f u n i t s o f p r o d u c tio n w h ich i s a s s o c i a t e d w ith th e common sy stem o f s m a ll s c a l e p r o d u c tio n in a g r i c u l t u r e . 10? b e n e f i t m ore from t h e a d v a n ta g e s o f th e w o rld -w id e r i s e in p r o d u c t i v i t y and th a n th e d e v e lo p in g c o u n t r i e s w h ich c a n n o t im p o rt enough t o m eet th e re q u ire m e n ts f o r a h ig h e r r a t e o f g ro w th . In c o n c lu s io n , th e i n d u s t r i a l c o u n t r i e s , t h e r e f o r e , h av e an o b l i g a t i o n to s h a r e th e f r u i t s o f t e c h n i c a l p r o g r e s s w ith th e d e v e lo p in g c o u n t r i e s , n o t o n ly th ro u g h econom ic a id b u t m ore im p o r ta n tly in te rm s o f i n c r e a s in g t r a d e w ith th e s e c o u n tr i e s f o r th e m u tu a l a d v a n ta g e f o r a l l . CHAPTER V PERFORMANCE AND PROBLEMS OF DEVELOPING COUNTRIES IN W ORLD TRADE P u rp o s e and O r g a n iz a tio n The p u rp o s e o f t h i s c h a p te r i s to a n a ly z e th e o v e r a l l tr e n d s o f d e v e lo p in g c o u n tr i e s in w o rld t r a d e . One o f th e s t r i k i n g f e a t u r e s o f r e c e n t tr e n d s in th e i n t e r n a t i o n a l t r a d e o f th e d e v e lo p in g c o u n tr i e s ( w ith t h e e x c e p tio n o f th e o i l- p r o d u c in g c o u n tr i e s ) i s th e l a g o f e x p o r ts and g ro w th o f im p o r ts . T h is c h a p te r , t h e r e f o r e , f i r s t , a n a ly z e s th e s h a r e o f th e d e v e lo p in g c o u n tr i e s in w o rld t r a d e . S eco n d , i t ex am in es th e c a u s e s o f th e l a g o f e x p o r ts and g ro w th o f im p o r ts . T h ir d , i t ex am in es th e s i z e o f th e r e c e n t and p r o j e c t e d d e f i c i t in th e t r a d e b a la n c e in th e l i g h t o f th e r o l e o f th e i n d u s t r i a l c o u n tr i e s in n a rro w in g t h i s gap by p u rc h a s in g m ore from th e d e v e lo p in g c o u n tr i e s f o r th e m u tu a l b e n e f i t o f a l l . F i n a l l y , a s e p a r a t e s e c t i o n w i l l b e d e v o te d to a d i s c u s s i o n o f th e im p act o f e x p o rt 108 109 i n s t a b i l i t y on econom ic g ro w th o f d e v e lo p in g c o u n tr i e s in g e n e r a l , w ith s p e c i a l r e f e r e n c e t o th e o il- p r o d u c in g c o u n t r i e s . O v e r - a ll T re n d s in T rad e P e rfo rm a n c e A c c o rd in g to U n ite d N a tio n s s t a t i s t i c s , d u r in g 1 9 5 9 -1 9 6 1 th e l e v e l o f e x p o rt v a lu e o f th e d e v e lo p in g c o u n tr i e s in w o rld t r a d e was f o u r and o n e - h a lf tim e s th e p r e w ar (1 9 3 8 ) l e v e l , w h ile t h a t o f th e d e v e lo p e d coun t r i e s was f i v e and o n e - h a lf t i m e s . * The l e v e l o f e x p o rt v a lu e o f th e n o n -p e tro le u m e x p o rtin g c o u n tr i e s i s su b - 2 s t a n t i a l l y lo w e r th a n th e a v e r a g e . Thus th e s o u th and s o u th e a s t A sia n c o u n t r i e s , w hich l a r g e l y e x p o rt f o o d s t u f f s and a g r i c u l t u r a l raw m a t e r i a l s , a r e d o in g p a r t i c u l a r l y b a d ly ; in 1959-19611, th e t o t a l e x p o rt v a lu e o f t h i s a r e a 3 was l e s s th a n t h r e e tim e s th e p re w a r l e v e l . D u rin g th e p e r io d 1 9 5 0 -1 9 6 0 , th e e x p o rt t r a d e o f th e d e v e lo p in g c o u n tr i e s d id n o t p e rfo rm w e ll in co m p ari son w ith w o rld t r a d e in g e n e r a l and th e t r a d e o f th e d e v e lo p e d c o u n tr i e s in p a r t i c u l a r , w ith r e s p e c t to e x p o rt v o lu m e, p r i c e s , and t o t a l v a lu e . (S ee T ab le 8) ^ U n ite d N a tio n s , Econom ic Com m ission f o r A s ia and th e F a r E a s t . New Y ork, (196& ), p p . i 8 - i £ . 2G .A .T .T . T ren d s in I n t e r n a t i o n a l T ra d e : A R e p o rt by a P a n e l o f E x p e rts ( H a b e r le r , C hairm an: G eneva, 1 9 5 8 ), P . 2 3 . 3ECAFE S u rv ey (1 9 6 2 ), p p . 1 8 -1 9 . 110 The r e c e n t t r e n d s I n th e i n t e r n a t i o n a l t r a d e o f th e d e v e lo p in g c o u n tr i e s i n d i c a t e t h a t t h e i r p e rfo rm a n c e h a s n o t b een g e n e r a l l y e n c o u ra g in g . E x p o rts from th e d e v e lo p in g c o u n tr i e s in w o rld t r a d e d e c lin e d from 2 5 .3 p e r c e n t in 1955 to 2 1 .3 p e r c e n t in I9 6 0 and f u r t h e r to 1 9 .5 p e r c e n t in 1965 . W hereas e x p o rts o f th e d e v e lo p e d c o u n tr i e s in c r e a s e d from 6 4 .8 p e r c e n j in 1955 to 6 8 .9 p e r c e n t in 1965* (S ee T a b le 9) The w o rld t r a d e in 1965 was a s f o llo w s : E x p o rts o f : D eveloped c o u n tr i e s to e a c h o t h e r 60 p e r c e n t D eveloped to D e v e lo p in g c o u n tr i e s 18 p e r c e n t D e v e lo p in g to D eveloped c o u n tr i e s 16 p e r c e n t D e v e lo p in g c o u n tr i e s to e ac h o t h e r 6 p e r c e n t T o ta l E x p o rts 100 p e r c e n t L e t u s c l a s s i f y , f o r th e p u rp o se o f a n a l y s i s , th e d e v e lo p e d c o u n tr i e s a s Group A and th e d e v e lo p in g coun t r i e s a s Group B. The v a lu e o f th e i n t r a - t r a d e o f th e U n ite d S t a t e s , C anada, and W estern E urope in Group A a lo n e was $87 b i l l i o n (a b o u t 47 p e r c e n t) o u t o f $186 b i l l i o n o f th e t o t a l v a lu e o f w o rld t r a d e i n 1965 . T h u s, i t can be o b se rv e d from th e c l a s s i f i c a t i o n ( p . 2) t h a t c o u n tr i e s o f Group A a r e e a c h o th e rs * b e s t c u s to m e rs . ^ E x clu d in g USSR, E a ste r n E u rop e, C hina (m a in la n d ) N o rth K o rea , N orth V ietn am . The p e r c e n ta g e f ig u r e s ( c a l c u la te d by t h e w r it e r ) m ust be r eg a rd ed a s e s t im a t e s . S ee U n ite d N a t io n s . S t a t i s t i c a l Y earbook. 19 6 7 . T ab le 1 4 9 . p . 398. / 111 TABLE 8 COMPARISON OF TRADE PERFORMANCE IN DEVELOPED AND DEVELOPING COUNTRIES, 1950-1960 D eveloped D e v e lo p in g C o u n trie s C o u n tr ie s R a te o f G row th o f T ra d e Volume (% p e r annum) E x p o rts 6 .9 3 .6 Im p o rts 6 .9 4 .6 P e r c e n ta g e d e c r e a s e In U n it V alu e I9 6 0 o v e r 1950 E x p o rts 1 7 .5 1 .0 Im p o rts 1 1 .3 1 0 .2 S h a re s In W orld E x p o rt V alu e 1950 59.8 3 0 .0 I 960 6 6 .0 2 0 .4 S o u rc e : U n ite d N a tio n s , W orld Econom ic S u rv e y , 1 9 6 2 , New Y ork, p a r t 1 , p p . 1-3* 112 TABLE 9 SHABES IN W O RLD TRADE ( P e r c e n t by V alu e) R eg io n s 1955 I 960 1965 Econom ic C la s s I^ E x p o rts from 6 4 .8 67 .0 6 8 .9 E x p o rts to 6 5 .7 6 5 .3 6 8 .3 Econom ic C la s s II** E x p o rts from 2 5 .3 2 1 .3 1 9 .5 E x p o rts to 2 4 .8 2 2 .9 2 0 .3 Econom ic C la s s I I I ### E x p o rts from 9 .9 1 1 .7 1 1 .6 E x p o rts to 9 .5 1 1 .8 1 1 .4 S o u rc e : U n ite d N a tio n s : S t a t i s t i c a l Y earbook, 1 9 6 7 , p . 4 1 1 . ♦Econom ic C la s s I : N o rth A m erica* W estern E u ro p e, A u s t r a l i a , New Z e a la n d , S o u th A f r ic a and J a p a n . ♦♦Econom ic C la s s I I : W orld l e s s b o th Econom ic C la s s I and I I I . ♦♦♦Econom ic C la s s I I I : USSR, A lb a n ia , B u lg a r ia , Czecho s l o v a k ia , E a s te r n Germany, P o la n d , H ungary, C hina (M a in la n d ), N o rth K o re a , N o rth V ietnam and M o n g o lia. The l n t r a - t r a d e o f A was a b o u t tw e lv e tim e s t h a t o f B. More th a n a h u n d red c o u n tr i e s In Group B (am o u n tin g to t w o - t h ir d s o f th e t o t a l p o p u la tio n o f th e A and B g ro u p s com bined) hav e v e ry l i t t l e t r a d e w ith e a c h o t h e r . B 's e x p o r ts t o A a r e t h r e e and o n e - h a lf tim e s a s g r e a t a s t h e i r e x p o r ts to e a c h o t h e r . (S e e T a b le 10) Lag o f E x p o rts The v a lu e o f e x p o r ts o f d e v e lo p in g c o u n tr i e s shows a d e c l i n i n g te n d e n c y In w o rld t r a d e w h ile th e o p p o s ite I s t r u e a s f a r a s th e v a lu e o f Im p o rts I s c o n c e rn e d . T h is u n f a v o r a b le p o s i t i o n In t h e i r b a la n c e o f t r a d e h as s e r i o u s e f f e c t s on t h e i r e c o n o m ie s, p a r t l y b e c a u se o f th e Im p o rta n t r o l e w hich e x t e r n a l t r a d e p la y s In t h e i r eco nom ic l i f e . The t r a d e t r e n d s o f th e s e c o u n tr i e s c l a r i f y t h i s c r i t i c a l p o s i t i o n e s p e c i a l l y I f th e o i l - e x p o r t i n g c o u n tr i e s a r e e x c lu d e d . The p e r c e n ta g e v a lu e o f Im p o rts o f d e v e lo p in g c o u n tr i e s in w o rld t r a d e in c r e a s e d from 28 in 1928 t o 33 in 1957* th e p e r c e n ta g e v a lu e o f e x p o r ts f e l l from 33*8 to J1.3 d u r in g th e same p e r i o d . The f a l l in th e e x p o rt s h a re o f th e s e c o u n tr i e s i s m ore s e r i o u s i f th e o i l- p r o d u c in g c o u n tr i e s a r e l e f t o u t o f a c c o u n t. W ith o u t th e o il- p r o d u c in g c o u n t r i e s , e x p o r ts f e l l from 3 2 .3 p e r c e n t in 1928 to 2k,k p e r c e n t In 1 9 5 7 . (S ee T a b le 11) In i 9 6 0 , th e f . o . b . v a lu e o f goods e x p o rte d by TABLE 10 W O BLD TBADE BY MAJOR AREAS ( F . o . b . v a lu e s In m i l l i o n U .S . d o l l a r s ) E x p o rts Y ear E x p o rts to E x p o rts to Econom ic C la s s From W orld I I I I I I W orld 1955 I9 6 0 1965 9 3 ,5 2 0 1 2 7 ,7 7 0 1 8 6 ,1 1 0 6 0 ,9 1 0 8 2 ,9 2 0 1 2 6 ,4 5 0 23,020 2 9 ,0 9 0 3 7 ,4 8 0 8 ,7 9 0 15,010 2 1 ,0 9 0 Econom ic C la s s I 19 55 i 960 1965 6 0 ,4 6 0 8 5 ,4 2 0 1 2 7 ,9 6 0 4 2 ,0 9 0 6 0 ,3 3 0 9 5 ,5 4 0 1 6 ,6 6 0 2 1 ,8 1 0 2 7 ,0 0 0 1 ,3 2 0 2 ,9 7 0 4 ,9 9 0 Econom ic C la s s I I 1955 i 960 1965 2 3 ,6 9 0 2 7 ,3 1 0 3 6 ,4 5 0 1 7 ,1 1 0 1 9 ,7 8 0 2 6 ,2 4 0 5 ,7 5 0 6 ,0 3 0 7 ,5 60 570 1 ,2 2 0 2 ,3 4 0 Econom ic C la s s I I I 19 55 i 960 1965 9 ,3 7 0 1 5 ,0 3 0 2 1 ,7 1 0 1 ,7 1 0 2 ,8 0 0 4 ,8 7 0 620 1 ,2 5 0 2 ,9 3 0 6 ,9 0 0 1 0 ,8 2 0 1 3 ,7 7 0 S o u rces C om piled from U n ite d N a tio n s , S t a t i s t i c a l Y ear b o o k . 1 9 6 5 . 1 9 6 7 , p . 398. 115 TABLE 11 PEBCENTAGE SHARE ON NON-INDUSTRIAL COUNTRIES IN THE VALUE OP W O RK ED TRADE*®* ( f . o . b . ) In c lu d in g O i l - e x p o r t in g C o u n trie s E x c lu d in g O il- im p o r tin g C o u n trie s 1928 1 2 2 1928 1957 E x p o rts 3 3 .8 3 1 .3 3 2 .2 2 4 .4 Im p o rts 2 8 .0 3 5 .0 2 6 .9 3 0 .4 S ource* G .A .T .T . T ren d s In I n t e r n a t i o n a l T ra d e . 1 9 5 8 , T a b le 1 8 , p . 4 5 ; R. N u rsk e , P a t t e r n s o f T rad e and D evelopm ent (S to c k h o lm , 1 9 ^ 9 ), p . i l l . ( a )E x c lu d in g a l l S o v ie t a r e a Im p o rts and e x p o r ts . 116 d e v e lo p in g c o u n tr i e s to d e v e lo p e d c o u n tr i e s was $19*7 b i l l i o n (T a b le 1 0 ) . Of t h i s t o t a l , p e tro le u m and p e t r o l eum p r o d u c ts , th e s i n g l e l a r g e s t com m odity g ro u p , a c c o u n te d f o r o n e - f o u r th # 5 .1 b i l l i o n . N ext to i t , th e e x p o r ts o f n o n -c o m p e tin g t r o p i c a l p r o d u c ts , a g r i c u l t u r a l raw m a t e r i a l s , and n o n - f u e l m in e r a ls and m e ta ls am ounted to $3 b i l l i o n e a c h , w h e re a s e x p o rt e a r n in g s d e r iv e d from th e s a l e o f te m p e ra te zone fo o d s and c o m p etin g t r o p i c a l fo o d s w ere # 2 .2 b i l l i o n . F i n a l l y , d e v e lo p e d c o u n tr i e s p u rc h a s e d one m i l l i o n d o l la r s * w o rth o f m a n u fa c tu re d goods from d e v e lo p in g c o u n t r i e s . A c co rd in g to B a la s s a * s c a l c u l a t i o n s , th e e x p o rts o f d e v e lo p in g c o u n tr i e s to d e v e lo p e d c o u n t r i e s , m easu red in i 960 p r i c e s , w ould r i s e from #1 9 .5 b i l l i o n in i 960 to #2 9 .1 b i l l i o n in 1970 and #3 6 .0 b i l l i o n in 1975 . In te rm s o f c u r r e n t p r i c e s , th e e x p o rts o f th e d e v e lo p in g c o u n tr i e s to d e v e lo p e d c o u n t r i e s have b een e s tim a te d to r e a c h #26.7 b i l l i o n in 1970 and #3 3 .1 b i l l i o n in 1975 . E x p o rts w ould th u s r i s e a t an a v e ra g e a n n u a l r a t e o f 3.6 p e r c e n t , re a c h in g 170 p e r c e n t o f th e i 960 l e v e l in 1 975. (S ee T a b le 12) The p r o s p e c tiv e d e v e lo p m e n ts in th e m ain m a rk e ts f o r th e e x p o r ts o f d e v e lo p in g c o u n tr i e s seem to i n d i c a t e ^B. B a la s s a , T rad e P r o s p e c ts f o r D e v elo p in g Coun- t r i e s (Homewood, I l l i n o i s : E ic lia rd D. I r w in , I n c . , 1 ^ 7 , P . 4 3 . 117 TABLE 12 EXPORTS OF DEVELOPING COUNTRIES TO DEVELOPED ECONOMIES I 960 1970 1975 E x p o rts to d e v e lo p e d c o u n t r i e s i n i 960 p r i c e s ^ m illio n in d e x 1 9 ,4 9 6 100 2 9 ,0 9 7 1 4 9 .2 36,010 1 8 4 .7 E x p o rts to d e v e lo p e d c o u n t r i e s i n c u r r e n t p r i c e s $ m illio n in d e x 1 9 ,4 9 6 100 2 6 ,7 3 4 1 3 7 .1 3 3 ,0 5 4 1 6 9 .5 I m p l i c i t im p o rt p r i c e in d e x 100 9 1 .9 9 1 .7 G ro ss n a t i o n a l p r o d u c t in d e v e lo p e d c o u n tr ie s , in 1955 p r i c e s » I b i l l i o n in d e x 9 6 4 .0 100 1 ,4 3 9 .3 1 4 9 .3 1 ,7 3 9 .3 1 8 0 .4 S o u rces B. B a la s s a , T rad e P r o s p e c ts f o r D ev elo p in g C o u n tr ie s , (Homewood, I l l i n o i s : R ic h a rd D. I r w in , I n c . , 1 9 6 * 0 , p . 4 4 . 118 t h a t e x p o r ts t o Ja p a n a r e e x p e c te d to show th e h ig h e s t r a t e o f e x p a n sio n d u r in g th e p e r io d 1960-1975* J a p a n e s e Im p o rts from d e v e lo p in g c o u n t r i e s , e x p re s s e d In c u r r e n t p r i c e s , have b een p r o j e c te d to in c r e a s e one and o n e - h a lf tim e s b etw een i 960 and 1975* In th e same p e r i o d , im p o rts I n to O c e a n ia and S o u th A f r i c a w ould r i s e by 80 p e r c e n t , w h ile th e p r o j e c te d i n c r e a s e s a r e 75 and 43 p e r c e n t f o r W estern E urope and N o rth A m e ric a, r e s p e c t i v e l y . (S ee T a b le 13) O ut o f th e t o t a l i n c r e a s e s o f $13*6 b i l l i o n in th e v a lu e o f e x p o r ts o f d e v e lo p in g c o u n tr i e s d u r in g th e p e r io d 1960-1975* i t i s p r o j e c t e d t h a t e x p o r ts o f f u e l s and n o n - f u e l m in e r a ls and m e ta ls w ould a c c o u n t f o r #9*0 b i l l i o n , a s a g a i n s t an I n c r e a s e o f $3*2 b i l l i o n in th e c a s e o f a g r i c u l t u r a l c o m m o d itie s, and $ 1 .4 b i l l i o n f o r m a n u fa c tu re d g o o d s. (S e e T a b le 14) Many r e a s o n s have b e en g iv e n to e x p la in th e l a g g in g b e h in d o f e s p o r ts o f d e v e lo p in g c o u n tr i e s in th e im p o rt s t r u c t u r e o f th e i n d u s t r i a l c o u n t r i e s . A num ber o f lo n g - te rm f a c t o r s , su c h a s in c r e a s e d c o m p e titio n from s y n t h e t i c s u b s t i t u t e s , g r e a t econom ies in th e u s e o f raw m a t e r i a l s , th e r e l a t i v e l y low incom e e l a s t i c i t y o f demand f o r fo o d in d e v e lo p e d c o u n t r i e s , s h i f t s in th e s t r u c t u r e o f p r o d u c tio n to w a rd s i n d u s t r i e s w ith lo w e r in p u ts o f raw m a t e r i a l s and p o l i c i e s to p r o t e c t d o m e s tic p r o d u c tio n 119 T A B L E 13 DEVELOPED COUNTRIES t GROSS NATIONAL PRODUCT AND IMPORTS FROM LESS DEVELOPED COUNTRIES (C u r r e n t P r i c e s ) I 960 1970 1975 N o rth A m erica Im p o rts from L .D .C . ♦ m illio n 6 ,5 9 7 7 .9 3 1 9 .4 0 7 in d e x 100 1 2 0 .2 1 4 2 .6 G ro ss N a t io n a l P ro d u o t In d e x 100 1 5 0 .0 1 8 1 .0 W estern Europe Im p orts from L .D .C . ♦ m illio n 1 0 ,8 3 1 1 5 .1 8 5 1 8 ,9 0 1 In d ex 100 1 4 0 .2 1 7 4 .5 G ro ss N a tio n a l P ro d u ct in d e x 100 1 4 6 .1 1 7 5 .0 Japan Im p orts from L .D .C . ♦ m illio n 1 ,4 0 4 2 ,6 9 4 3,557 in d e x 100 1 9 1 .9 2 5 3.3 G ross N a tio n a l P ro d u o t in d e x 100 I 69 . I 215.7 O ce a n ia and S o u th A f r ic a Im port from L .D .C . ♦ m illio n 664 925 1 .1 8 9 in d e x 100 1 3 9 .3 1 7 9 .1 G ro ss N a tio n a l P r o d u ct in d e x 100 1 4 5 .4 1 7 5 .4 120 TABLE 13 DEVELOPED COUNTRIES: GROSS NATIONAL PRODUCT A N D IMPORTS PRO M LESS DEVELOPED COUNTRIES (C u rr e n t P r i c e s ) ( C o n tin u e d ) _ _ D ev elo p ed C o u n tr ie s , t o t a l Im p o rts from L«DiC« ♦ m illio n 1 9 .4 9 6 2 6 ,7 3 4 3 3 .0 5 4 in d e x 100 1 3 7 .1 1 6 9 .5 G ross N a t io n a l P r o d u ct in d e x 100 1 4 9 .3 1 8 0 .4 S o u rc e : E x tr a c te d from B a la s s a , 0£ . c l t . , T a b le 3 .1 .2 . p . 4 6 . 121 TABLE 14 THE COMMODITY COMPOSITION OP THE EXPORTS OP DEVELOPING COUNTRIES TO DEVELOPED ECONOMIES (C u rre n t P r i c e s ) I9 6 0 1970 1975 T em p erate Zone fo o d s ^ m illio n in d e x 1 ,9 9 3 100 2,330 116.9 2 ,7 1 3 1 3 6 .1 C om peting t r o p i c a l fo o d s ^ m illio n in d e x 2,127 100 2,113 9 9 .3 2 ,2 8 4 1 0 7 .4 N on-com peting t r o p i c a l f«Sods ^ m illio n in d e x 3,095 100 3 ,9 9 5 1 2 7 .8 4 ,4 6 9 1 4 4 .4 A g r i c u l t u r a l raw m a t e r i a l s ^ m illio n 3 .1 4 6 in d e x 100 3 ,6 0 8 1 1 4 .7 4 ,1 0 6 1 3 0 .5 F u e ls $ m illio n in d e x 5,095 100 8,260 1 6 2 .4 1 1 ,0 3 0 2 1 6 .9 M an u fac tu re d goods ^ m illio n in d e x 1 ,0 7 5 100 1 ,8 1 2 1 6 8 .6 2 ,3 7 9 2 2 1 .3 T o ta l e x p o r ts ^ m illio n in d e x 19,496 100 2 6 ,7 3 4 1 3 7 .1 3 3 ,0 5 4 1 6 9 .5 S o u rces E x tra cted from B a la s s a , o p . o l t . . T a b le 3 .1 .3 , p . 4 8 . 122 o f p rim a ry com m odities.** A c c e p tin g th e " e x p o r t la g " a s - a f a c t , w hat have b e e n th e c a u s a l I n f lu e n c e s a t work? V a rio u s a n sw e rs to t h i s q u e s tio n have b een g iv e n , and th e s e can c o n v e n ie n tly b e g ro u p ed a c c o rd in g to w h e th e r th e y p la c e em p h asis on a d e f i c ie n c y in th e s u p p ly o f th e s e e x p o r ts to th e w o rld m a rk e t, o r on a d e f i c ie n c y in w o rld demand f o r th e e x p o r ts o f th e d e v e lo p in g c o u n t r i e s . S u p p ly -D e fic ie n c y T h is arg u m en t i s m a in ly c o n c e rn e d w ith th e id e a t h a t th e f a i l u r e o f p rim a ry p ro d u c in g c o u n tr i e s to ex pan d t h e i r e x p o rts r a p i d l y i s due to th e i n d u s t r i a l i z a t i o n p ro g ram s p r a c t i c e d by th e s e c o u n t r i e s . The advo c a t e s o f t h i s arg u m en t s u g g e s t t h a t i n d u s t r i a l g ro w th in d e v e lo p in g c o u n tr i e s w i l l in v o lv e th e co n su m p tio n o f g r e a t e r q u a n t i t i e s o f t h e i r own a g r i c u l t u r a l p ro d u c e , t h u s , r e s t r i c t i n g s u p p l i e s f o r th e e x p o rt m a rk e t. A m ore d e t a i l e d i n v e s t i g a t i o n i n to th e econom ic d e v e lo p m ent o f in d iv i d u a l c o u n t r i e s , w o u ld , no d o u b t, r e v e a l t h a t f o r some c o u n t r i e s , and f o r some p e r i o d s , i n d u s t r i a l i z e incom e e l a s t i c i t y o f demand f o r fo o d in th e d e v e lo p in g c o u n t r i e s i s c o n s id e r a b ly h ig h e r th a n in h lg h - lncom e n a t i o n s , p r o b a b ly on th e o r d e r o f ( . 6 ) o r h ig h e r in lo w -in co m e c o u n tr i e s v e r s e s ( .2 0 r .3 ) in th e h ig h - incom e c o u n t r i e s . See B. F . J o h n s to n and J . W . M e llo n , "The B o le o f A g r i c u l t u r e on Econom ic D ev elo p m en t," A m erican Econom ic B evlew . (S e p te m b e r, 1 9 6 1 ), p . 572. 123 i z a t i o n h a s had a r e t a r d i n g e f f e c t on th e s u p p ly o f p r i m ary co m m o d ities f o r e x p o r t. A rg e n tin e m aize and I n d ia n c o tt o n , a r e p ro b a b ly good exam ples o f t h i s . B ut th e w e ig h t o f e v id e n c e i s in f a v o r o f th e v iew t h a t in d u s t r i a l i z a t i o n o f a p rim a ry p ro d u c in g c o u n try c a n n o t in i t s e l f be assum ed to have a d v e rs e e f f e c t on i t s c a p a c ity to e x p o rt and th u s i n d i r e c t l y to p la c e l i m i t s on i t s do m e s tic r a t e o f econom ic g ro w th . M o reo v er, t h i s l i n e o f th o u g h t ig n o r e s th e e f f e c t o f p r i c e i n c r e a s e s in th e w o rld m a rk e t in s t i m u l a ti n g th e o u tp u t o f p rim a ry p r o d u c ts . A m ore s o p h i s t i c a t e d arg u m en t in g e n e r a l s u p p o rt o f th e s u p p ly - d e f ic ie n c y t h e s i s h a s b een s u g g e s te d by C a im - c r o s s , a n d , m ore r e c e n t l y , by B a la s s a , who p o i n t o u t t h a t th e f a i l u r e o f i n d u s t r i a l c o u n tr i e s to expand t h e i r im p o r t s o f p rim a ry p r o d u c ts in p r o p o r tio n to t h e i r econom ic g ro w th , o r t h e i r co n su m p tio n o f m a n u fa c tu re s , m ust have 7 b een d u e , in p a r t a t l e a s t , to th e s u p p ly p r i c e f a c t o r . ' D em an d -D eficien cy P e rh a p s th e m ost p o w e rfu l a d v o c a te o f th e dem and- d e f i c ie n c y t h e s i s was N u rsk e . In h i s l a s t d i s c u s s i o n on Q th e p ro b le m , he a rg u e d t h a t th e l a g in e x p o r ts o f th e 7 fA. K. C a ir n c r o s s , “ I n t e r n a t i o n a l T rad e and Econom i c D ev elo p m en t", K y k lo s . V o l. X I I I ( I 9 6 0 ) , p . 550. B a la s s a , 0£ . c l t . . p p . 6 -7 . 0 R. N u rsk e, P a t t e r n s o f Trade and D evelop m en t (S to ck h o lm : W ic k s e ll L e c t u r e s , A im q u ist and W ik seiJ.,1 9 5 9 ) p . 26. 12k l e s s d e v e lo p e d c o u n tr i e s was m a in ly a r e f l e c t i o n o f r e l a t i v e s lu g g is h n e s s in e x te r n a l demand e m a n a tin g from th e g r e a t i n d u s t r i a l co n su m ers. The c a u se o f t h i s s l u g g is h g ro w th i n th e demand f o r im p o rts o f p rim a ry p r o d u c ts on th e p a r t o f th e i n d u s t r i a l c o u n t r i e s , a p p e a r to have b e e n : (1 ) a s h i f t in th e p a t t e r n o f o u tp u t in th e i n d u s t r i a l c o u n t r i e s , i n f a v o r o f e n g in e e r in g , c h e m ic a l and o t h e r i n d u s t r i e s and s e r v i c e s , w h ich h av e a low im p o rt c o n te n t, r e l a t i v e l y to t e x t i l e s and o t h e r i n d u s t r i e s w hich have a h ig h im p o rt c o n te n t; (2 ) a s e c u l a r tr e n d to w a rd s re d u c e d u sa g e o f p rim a ry m a t e r i a l s p e r u n i t o f o u tp u t m a n u fa c tu re s ; (3 ) a s u b s t a n t i a l s u b s t i t u t i o n o f s y n t h e t i c s f o r im p o rte d n a t u r a l m a t e r i a l s ; and (4 ) a g r i c u l t u r a l p r o te c tio n is m u se d by some o f th e i n d u s t r i a l c o u n t r i e s , w hich r e s t r i c t s t h e i r im p o rts o f p rim a ry p r o d u c t s . I t i s d i f f i c u l t , o f c o u r s e , to docum ent w hich one o f th e f o u r m en tio n ed c a u s e s i s th e l i m i t i n g f a c t o r f o r th e la g o f e x p o r ts o f p rim a ry e x p o r t e r s . I t seem s, how e v e r , t h a t p ro b a b ly t h e l a s t two c a u s e s a r e m ore r e s p o n s i b l e th a n th e o t h e r s . As f a r a s th e s u b s t i t u t i o n o f sy n t h e t i c s f o r im p o rted n a t u r a l m a t e r i a l s i s c o n c e rn e d , i t can be s a id t h a t a s lo n g a s m ore th a n 70 p e r c e n t o f a l l ru b b e r u se d in th e U n ite d S t a t e s i s s y n t h e t i c , t h e r e f o r e , n a t u r a l - r u b b e r p ro d u c e rs i n A s ia f a c e a lo n g -te rm compe- 125 t i t i o n from s y n t h e t i c s . S o u th e a s t A s ia , i f C eylon i s in c lu d e d , p ro d u c e s m ore th a n 90 p e r c e n t o f th e w o r l d 's n a t u r a l r u b b e r . R ubber s a l e s b r in g i n m ore th a n 60 p e r c e n t o f a l l M a la y a 's e x p o rt e a r n in g s and n e a r l y ^5 p e r c e n t o f I n d o n e s i a 's . I f th e p r i c e o f ru b b e r f a l l s , 10 p e r c e n t , e i t h e r o f t h e s e c o u n tr i e s s ta n d s to l o s e $150 m i l l i o n a y e a r . R ubber p r i c e f l u c t u a t i o n s c u t M a la y a 's f a v o r a b le t r a d e b a la n c e by h a l f b etw een i 960 and 1961 . As f a r a s a g r i c u l t u r a l p r o te c tio n is m i s c o n c e rn e d , p e rh a p s t h e r e a r e two i n c o n t r o v e r t i b l e f a c t s w h ich a r e o f g r e a t im p o rta n c e in t h i s r e g a r d . F i r s t , a g r i c u l t u r e d p r o te c tio n is m e x i s t s a t a h ig h l e v e l in m ost d e v e lo p e d c o u n tr i e s ; and se c o n d , th e d e v elo p m e n t o f th e p r o d u c tio n and co n su m p tio n o f a g r i c u l t u r a l p r o d u c ts i n su c h c o u n tr i e s h a s b een su c h a s to make t h e i r n e t a g r i c u l t u r a l im p o rts m ore and m ore m arg in ed in r e l a t i o n to t h e i r t o t a l dom es t i c p r o d u c tio n and co n su m p tio n o f su c h p r o d u c ts . T hese two f a c t o r s t o g e t h e r s u g g e s t t h a t a g r i c u l t u r a l p r o t e c t i o n ism in d e v e lo p e d c o u n tr i e s i s one o f th e m ain f a c t o r s r e s t r i c t i n g th e w o rld t r a d e in p rim a ry p r o d u c ts w h ich a r e th e m a jo r e x p o r ts o f th e d e v e lo p in g c o u n t r i e s . P e rh a p s th e U n ite d S t a t e s T rad e E x p an sio n A c t, 1 9 6 2 , p r o v id e s e v id e n c e in t h i s r e g a r d . D e s p ite i t s llb e r a d ls m (w h ile in a c t u a l f a c t c o n c e rn s m a in ly th e d e v e lo p e d c o u n tr i e s ) th e A ct s t i l l p la c e s r e s t r i c t i o n s on 126 im p o rts o f a g r i c u l t u r a l p r o d u o ts . “ I n c r e a s e d im p o rts s h a l l b e c o n s id e re d to c a u s e , o r t h r e a t e n to c a u s e , th e same tim e , e x p o rt s u b s id y o p e r a t io n s w ere b ro a d e n e d c u lm in a tin g in th e v a s t p rogram o f "dum ping" e x p o rt s u r p l u s e s w hich i s now b e in g p u rs u e d a s p a r t o f U n ite d S t a t e s f o r e ig n a id o p e r a t io n s . C o tto n e x p o r ts w ere s u b s id iz e d d e s p i t e th e o o n o e m o f B r a z i l , P e r u , I n d i a , E g y p t, and S udan. The a g r i c u l t u r a l p o l i c y o f th e E uropean Eoonomic Community (B e lg iu m , G ra n o e, W est Germ any, I t a l y , Luxem b o u rg , and th e N e th e r la n d s ) can be c i t e d a s a n o th e r ex am ple in t h i s c o n n e c tio n . I t i s b e lie v e d t h a t ( a p a r t from th e i n t e r e s t s o f th e Common M arket c o u n tr i e s in th e lo n g - r u n , w hich a f t e r a l l d epend on w o rld -w id e a g re em e n t to l i b e r a l i z e t r a d e and t a r i f f s ) a s a p r o t e c t i v e eoonom ic o r g a n i z a t i o n , th e E uropean Econom ic Community d o e s have some significant e f f e c t s on th e w o rld t r a d e and on the i n t e r e s t s o f th e d e v e lo p in g o o u n tr ie s in p a r t i c u l a r . T h ere a r e some t r o p i c a l p r o d u c ts t h a t a r e p e n a liz e d h e a v i ly , b u t n o t n e c e s s a r i l y f o r p r o t e c t i v e r e a s o n s . The d u t i e s on c o f f e e in W est Germ any, P ra n c e and I t a l y a r e a l l in e x c e s s o f ?0 p e r c e n t (an d t h e i r r a t e s a r e n o t th e Q s e r i o u s i n j u r y to th e d e m e s tic in d u s tr y c o n c e rn e d .1,7 At a n s lo n A ot O c to b e r, 1962. W ashington 127 h i g h e s t) and on t e a t h e l e v i e s in Germany r e a c h n e a r l y 100 p e r c e n t . The Common M arket c o u n tr i e s w i l l le v y in due c o u rs e a common t a r i f f on s u g a r o f 80 p e r c e n t . B ro a d ly s p e a k in g , th e d e v e lo p e d c o u n tr i e s a r e g u i l t y o f th e im p o s itio n o f t a r i f f s , q u o ta r e s t r i c t i o n s , l e v i e s , o r o t h e r m e a su re s w hich re d u c e th e s i z e o f th e m a rk e ts a v a i l a b l e to e x p o r ts from d e v e lo p in g c o u n t r i e s . T hese r e s t r i c t i o n s a r e o b j e c ti o n a b le m a in ly b e c a u se th e y p la c e o b s t a c l e s in th e way o f i n t e r n a t i o n a l s p e c i a l i z a t i o n and a tte m p ts by d e v e lo p in g c o u n tr i e s to I n c r e a s e t h e i r e a r n in g s o f f o r e i g n ex ch an g e by s e l l i n g goods to th e d e v e lo p e d c o u n t r i e s . T h is p o i n t h a s b een w e ll made by C a ir n c r o s s : . . . i n a s e n s e t a r i f f s a r e th e l e a s t o f th e p ro b le m . F a r m ore r e s t r i c t i v e a r e th e q u o ta s by w hich a c e i l i n g can b e p la c e d on im p o rts and a l l pow er to r a i s e t r a d e to a h ig h e r l e v e l d e s tr o y e d . T h is i s o f p a r t i c u l a r im p o r ta n c e in th e c a s e o f m a n u fa c tu re s . I f W estern E u r o p e 's im p o rts o f m a n u fa c tu re s from th e u n d e rd e v e lo p e d c o u n tr i e s a r e a lm o st n e g l i g i b l e t h i s i s n o t b e c a u se th e s e coun t r i e s a r e u n a b le to com pete b u t b e c a u se th e y a r e o n ly to o a b le to c o m p e te .1 -0 F i n a l l y , i t i s e v id e n t from th e p r e v io u s a n a l y s i s t h a t a g r i c u l t u r a l f o o d s t u f f s and raw m a t e r i a l s a r e h ig h ly p r o t e c te d in W estern E urope and i n N o rth A m erica. Ac c o r d in g ly , one may c o n c lu d e t h a t a r e d u c tio n in p r o t e c t i o n w ould h e lp in p ro m o tin g th e econom ies o f d e v e lo p in g * ° A .K .C a irn c ro s s , F a c to r s In Econom ic D evelopm ent (L ondon: G eorge A lle n and U n w in ,L td .,1 9 6 2 ), p . 2 9 . 128 c o u n t r ie s . T h is i s b e c a u se t h e c o n tin u e d a p p l i c a t i o n o f q u a n t i t a t i v e r e s t r i c t i o n s a g a in s t im p o rts from d e v e lo p in g c o u n t r ie s i s p o s i t i v e l y in j u r io u s to t h e s e c o u n t r ie s by r e d u c in g t h e i r p u r c h a sin g pow er and th e r e b y l i m i t i n g t h e i r Im port c a p a c it y from t h e d e v e lo p e d c o u n t r ie s . Growth o f Im p orts A lth o u g h th e e x p o r ts from d e v e lo p in g c o u n t r ie s h ave in c r e a s e d l e s s q u ic k ly th a n w o rld tr a d e g e n e r a lly ) im p o r ts in t o t h e s e c o u n t r ie s h ave r i s e n f a s t e r th a n w orld t r a d e . E x p o r ts from d e v e lo p in g c o u n t r ie s I n c r e a s e d from $21,000 m i l l i o n in 1953 t o $27,300 m il l i o n in i 960 and to *36 ,5 0 0 m i l l i o n in 1965 . T h e ir im p o r ts in c r e a s e d from $ 2 1 ,4 0 0 m i l l i o n to $30,100 m i l l i o n , and t o $37,600 m il l i o n in 1953» I 9 6 0 , and 1965 r e s p e c t i v e l y (S e e T a b le 1 5 )• I t sh o u ld b e n o t e d , h o w ev er, t h a t d e s p i t e th e in c r e a s e in t h e a b s o lu t e v a lu e o f e x p o r t s and im p o rts o f th e d e v e lo p in g c o u n t r ie s in w o rld t r a d e , t h e i r p e r c e n ta g e sh a r e in w o rld tr a d e h a s d e c l i n e d , more so in th e c a s e o f e x p o r ts th a n im p o rts (S e e T a b le 9 ) . In o r d e r t o a n a ly z e th e grow th o f im p o r ts , we have t o d i s c u s s th e tr a d e s t r u c t u r e o f t h e s e c o u n t r ie s . Im p orts o f d e v e lo p in g and d e v e lo p e d c o u n t r ie s a r e o f a d i f f e r e n t n a tu r e in t h a t t h o s e o f th e form er a r e l e s s i n t im a t e ly r e l a t e d to th e c u r r e n t p r o c e s s o f p r o - 129 TABLE 15 W O R L D IMPORTS AND EXPORTS (V a lu e in m il l i o n U.S. d o l l a r s ) R eg io n s Im ports c . 1 . f • 1 $ ^ " 1 9 5 5 ' 1960 1965 W orld(a ) 6 3 ,6 0 0 8 4 ,2 0 0 1 3 5 ,3 0 0 1 9 6 ,8 0 0 Econom ic (b ) C la s s I 4 1 ,2 0 0 5 5 ,0 0 0 8 9 ,1 0 0 1 3 6 ,7 0 0 Econom ic ( c ) C la s s I I 1 8 ,6 0 0 2 1 ,4 0 0 30,100 3 7 ,6 0 0 Econom ic (d ) C la s s I I I 3 ,8 0 0 7 ,8 0 0 16,100 2 2 ,5 0 0 E x p o rts F .o .b . World 5 7 ,5 0 0 8 2 ,6 0 0 1 2 8 ,0 0 0 1 8 6 ,3 0 0 Econom ic C la s s I 3 7 ,7 0 0 5 3 ,7 0 0 8 5 ,7 0 0 1 2 8 ,1 0 0 Econom ic C la s s I I 1 7 ,7 0 0 2 1 ,0 0 0 2 7 ,3 0 0 36,500 Econom ic C la s s I I I 3 ,7 0 0 7 ,9 0 0 15,000 2 1 ,7 0 0 S o u rc e : U n ited N a tio n s : I n t e r n a t io n a l Trade S t a t i s t i c s . 1 9 6 5 -1 9 6 ? . ( a ) E x c lu d in g tr a d e o f C hina (m a in la n d ) M o n g o lia , N o rth K orea, N orth V iet-N am w ith one a n o th e r . (b ) U n ite d S t a t e s , Canada, W estern E u rop e, J a p a n , A u s t r a lia , New Z ealan d and S o u th A f r ic a . ( c ) T o ta l r e g io n s o t h e r th an Econom ic C la s s I , I I I . (d) USSR, E a ste r n E u rop e, C hina (m a in la n d ), Mon g o l i a , N o rth K orea and N o rth V ietn am . 130 d u c tio n and co n su m p tio n th a n a r e im p o rts o f d e v e lo p e d c o u n t r i e s . A c o n s id e r a b le p o r t i o n o f th e im p o rts o f d e v e lo p in g c o u n t r i e s c o n s i s t s o f c a p i t a l g o o d s, w hich a r e r e l a t e d t o th e r a t e o f econom ic g ro w th r a t h e r th a n to th e c u r r e n t l e v e l o f a c t i v i t y . W ith an In c r e a s e d r a t e o f econom ic g ro w th th e s h a r e o f c a p i t a l goods in t o t a l im p o r t s h a s i n c r e a s e d . (S e e T a b le 16) I t can b e se e n from t h i s t a b l e t h a t th e im p o rts o f d e v e lo p in g c o u n tr i e s c o n s is te d ( b e f o r e th e w ar) o f f o u r c a t e g o r i e s o f a b o u t e q u a l im p o rta n c e . In 195^-1955 th e consum er goods c a te g o ry had b e en re d u c e d to a b o u t o n e - h a l f o f i t s p re - w a r s h a r e , w h ile t h a t o f c a p i t a l goods had I n c r e a s e d to a b o u t 40 p e r c e n t o f i t s p re -w a r s h a r e . M o reo v er, th e v a lu e o f c a p i t a l goods in c r e a s e d to a b o u t f i v e tim e s t h a t o f i t s p re -w a r s h a r e , w h ile t h a t o f con sum er goods had in c r e a s e d to l e s s th a n tw ic e t h a t o f i t s p re -w a r s h a r e . T h u s, th e c o m p o s itio n o f im p o rts o f d e v e lo p in g c o u n tr i e s ch an g es w ith t h e i r econom ic g ro w th , t h a t i s , i t i s e x p e c te d t h a t th e r e l a t i v e im p o rta n c e o f c a p i t a l goods w i l l be in c r e a s e d a t th e e x p en se o f a g e n e r a l r e l a t i v e d e c l in e in t h e i r Im p o rts o f co n su m p tio n g o o d s. T h is tr e n d h a s b e en e s t a b l i s h e d in a s tu d y by th e U n ite d 131 N a tio n s on th e ECAPE r e g i o n . ^ In t h i s r e g io n a s a w h o le , th e v a lu e o f im p o rts o f c o n su m p tio n goods (fo o d and o t h e r ^ f e l l from 44 p e r c e n t in 1952 to 31 p e r c e n t in 1957 and to a b o u t 27 p e r c e n t in 1 9 6 1 . W hile th e v a lu e o f im p o r t s o f c a p i t a l goods in c r e a s e d from 17 p e r c e n t to 23 p e r c e n t and to 25 p e r c e n t in 1 9 5 2 , 1957> and 1961 r e s p e c t i v e l y . T h is te n d e n c y i s v e ry c l e a r in I n d i a , f o r i n s t a n c e , w here th e v a lu e o f h e r im p o rts o f co nsum ption go ods f e l l from 40 p e r c e n t in 1952 to 21 p e r c e n t in 1 9 6 1 . In c o n t r a s t , th e v a lu e o f h e r im p o rts o f c a p i t a l goods in c r e a s e d from 27 p e r c e n t to 43 p e r c e n t and to 48 p e r c e n t i n 1 9 5 2 , 1957» and 1961 r e s p e c t i v e l y . A p a rt from p ro d u c in g an i n c r e a s in g p a r t o f h e r c a p i t a l goods a t home, I n d ia can f u r t h e r r a i s e h e r s h a re o f c a p i t a l goods im p o rts to a b o u t 60 p e r c e n t o f h e r t o t a l im p o rts by 1975* T h is can be a c h ie v e d by s t r i c t im p o rt c o n t r o l s . The B a la n ce o f C u rre n t A c co u n ts The g ro w th in th e e x p o rt p ro c e e d s o f d e v e lo p in g c o u n tr i e s o v e r th e p e r io d 1953-1965 la g g e d b e h in d th e r i s e in t h e i r im p o rt e x p e n d itu r e , w ith th e e x c e p tio n o f th e e a r l i e r p a r t o f th e p e r io d w hich c o in c id e d w ith th e K orean W ar. The d e v e lo p in g c o u n tr i e s s u c c e e d e d , u n d e r 11-U n lte d N a tio n s , Econom ic S u rv ey o f A s ia and th e F a r E a s t, 1 9 6 l (B angkok, 1 9 6 2 ), T ab le 1 9 , p p . 1 8 9 -1 ^ 1 . 132 TABLE 16 COMPOSITION OP IMPOSTS INTO EIGHT SEMI-INDUSTRIALIZED COUNTRIES PRE-WAR AND 1 954-1955 (V alu e in m i l l i o n d o l l a r s c . i . f . and p e r c e n t) Im p o rts P re .•War 1 9 5 4-55 V alue P e r C ent V alu e P e r C ent Raw m a t e r i a l s 815 2 9 .0 2 ,9 6 3 3 2 .7 S e m i-m a n u fa c tu re d goods 744 2 6 .4 2 ,3 6 3 2 6 .1 C a p ita l Goods 553 1 9 .7 2 ,5 2 1 2 7 .8 Consum er goods 702 2 4 .9 1 ,2 1 1 1 3 .4 T o ta l im p o rts 2 ,8 1 4 1 0 0 .0 9 ,0 5 8 1 0 0 .0 S o u rc e : G .A .T .T . T ren d s In I n t e r n a t i o n a l T ra d e . 1 9 5 8 , T a b le 1 9 , p . 4 6 . 133 th e Im p etu s o f f a v o r a b le e x p o rt p r i c e s , in I n c r e a s in g t h e i r e x p o rt in co m es. I t sh o u ld be n o te d , how ever, t h a t t h i s was m ore in th e n a tu r e o f a w in d f a ll and th e p e ak l e v e l o f 195^ was n e v e r re a c h e d a g a in . (S ee T a b le 17) The s tr o n g p r e s s u r e s g e n e r a te d by d em o g rap h ic g ro w th , a s w e ll a s th e e x p a n d in g volum e o f Im p o rts r e q u ir e d f o r d e v e lo p in g th e p r o d u c tiv e f a c i l i t i e s in t h e s e c o u n t r i e s , w ere l a r g e l y r e s p o n s i b l e f o r t h i s t r e n d . The d e f i c i t i n th e t r a d e b a la n c e o f d e v e lo p in g c o u n tr i e s f o r th e p e r io d 1956-1965 am ounted to $ 1 6 ,7 0 0 m i l l i o n ( s e e T a b le 1 7 ) . M o reo v er, i f n e t p ay m en ts on a c c o u n t o f p r o f i t s and i n t e r e s t e a rn e d by f o r e ig n c a p i t a l d u r in g th e p e r io d was a ls o ta k e n i n to c o n s i d e r a ti o n , th e in a d e q u a c y o f e x p o r t e a r n in g s i s a l l th e m ore e v id e n t. B a la s s a e s tim a te s a t r a d e d e f i c i t o f $ ^ .3 b i l l i o n f o r 1970 and $ 6 .1 b i l l i o n f o r 1 9 7 5 . The c u r r e n t a c c o u n t d e f i c i t s o f th e d e v e lo p in g c o u n t r i e s , ta k e n t o g e t h e r , w ould r i s e from # ^ .6 b i l l i o n in i 960 to $ 9 .^ b i l l i o n in 1970 and $ 1 1 .3 b i l l i o n in 1 9 75. (S ee T a b le 18) M ost c o u n tr i e s n o rm a lly Im p o rt c e r t a i n goods a s p a r t o f t h e i r accu sto m ed co n su m p tio n p a t t e r n and in o r d e r to c a r r y on p r o d u c tio n a t th e e x i s t i n g l e v e l . They a ls o e x p o rt c e r t a i n goods in o r d e r to m atch t h e i r im p o r ts . L e t u s assu m e, f o r th e sa k e o f s i m p l i c i t y , t h a t th e s e im p o rts and e x p o r ts J u s t b a la n c e . I f now a c o u n try em barks upon Y ear 1953 195^ 19 55 1956 1957 1958 1959 I960 1961 1962 1963 1964 1965 134 TABLE 17 TRADE BALANCES BY MAJOR AREAS ( M illio n U .S . d o l l a r s , f . o . b . ) 1 R eg io n s Econom ic Eoonomic Econom ic C la s s I C la s s I I C la s s I I I - 1 ,3 5 0 1 ,0 1 0 340 - 1 ,1 9 0 1 ,0 6 0 130 - 840 410 440 430 - 950 520 3 ,2 9 0 -3 ,2 5 0 240 2,650 -2 ,8 1 0 170 990 - 1 ,0 9 0 110 2 ,1 9 0 -2 ,0 6 0 -1 4 0 2,690 -2 ,7 7 0 90 1 ,2 8 0 -1 ,5 5 0 270 4?0 -1 ,0 6 0 590 900 -1 ,1 0 0 200 1 ,0 7 0 -1 ,3 4 0 280 S o u rces U n ite d N a tio n s , S t a t i s t i c a l Y ear Book, 1 9 67 , p . 4 1 1 . lw E x p o rt from " l e s s " e x p o r t t o " . TABLE 18 DEVELOPING COUNTRIES: CURRENT ACCOUNT BALANCE ( I b i l l i o n , c u r r e n t p r i c e s ) I9 6 0 1970 1975 T rad e S e r v ic e s C u rre n t T rad e A cco u n t S e r v ic e s C u rre n t T rad e A ccount S e r v ic e s C u rre n t A ccount L a tin A m erica + 0 .2 8 - 1 .7 8 - 1 .5 0 - 0 . 4 - 2 .2 - 2 .6 - 0 . 4 - 2 . 4 - 2 .8 A f r ic a - 1 .2 3 + 0 .2 1 - 1 .0 2 - 1 .1 - 0 .6 - 1 .7 - 0 .6 - 0 .9 - 0 .7 M iddle E a s t + 1 .1 2 - 1 .2 1 - 0.09 + 1 .2 - 1 .6 - 0 . 4 + 1 .2 - 1 .9 - 0 .7 A s ia - 1 .5 1 - 0 .5 3 - 2 .0 4 - 4 .0 - 0 .7 - 4 .7 - 5 . 4 - 0 .9 - 6 .3 TOTAL - 1 .3 ^ - 3 .3 1 - 4 .6 5 - 4 .3 - 5 .1 - 9 . 4 - 5 .2 — 6 .1 - 1 1 .3 S o u rc e : E x tr a c te d from B a la s s a , T rad e P r o s p e c ts f o r D e v e lo p in g C o u n tr ie s . (Home wood, 1 1 1 .: R ic h a rd D. I r w in , I n c . , 1 9 6 4 ), T a b le 5 * 2 .1 ., p . 1 0 ^ . i 136 an a d d it io n a l program o f in v e s tm e n t, i t i s more l i k e l y to r e q u ir e c e r t a in a d d it io n a l im p o r ts (raw m a t e r i a l s , ma c h in e r y , ev en fo o d im p o r ts n eed ed f o r f e e d in g t h e n ew ly em ployed w o r k e r s ). Im p orts a r e a l s o l i k e l y to in c r e a s e a s a r e s u l t o f t h e demand f o r consum er g o o d s from abroad a r i s i n g from th e n ew ly c r e a te d incom e from a d d it io n a l in v e s tm e n t. A t th e same t im e , a d d it io n a l g o o d s f o r e x p o r t a r e n o t l i k e l y t o b e a v a i l a b l e u n t i l , a t l e a s t , th e new in v e stm e n t p r o j e c t s a r e co m p le ted and s t a r t e d tu r n in g o u t f i n i s h e d p r o d u c t s . P r e s s u r e i s , t h e r e f o r e , l i k e l y t o d e v e lo p d u r in g t h i s p e r io d on th e c o u n t r y 's b a la n c e o f p ay m e n ts, w h ich i t may p a r t l y overcom e by r e s t r i c t i n g i t s norm al con su m p tio n o f c e r t a in im p o rted g o o d s , by s u b s t i t u t i n g , to a c e r t a in e x t e n t , d o m e stic g o o d s f o r im p orted o n e s , and by p u sh in g up i t s s a l e s abroad o u t o f i t s cu r r e n t o u tp u t. F i n a l l y , i t f o ll o w s from th e ab ove a n a l y s i s o f t h e tr a d e s t r u c t u r e o f d e v e lo p in g c o u n t r ie s t h a t th e r e sure s e v e r a l s tr o n g argu m en ts f o r g r a n tin g t h e s e c o u n t r ie s more tr a d e c o n c e s s io n s th a n t h o s e r e c e iv e d from them by th e d e v e lo p e d c o u n t r ie s . F i r s t , th e r e e x i s t s a fu n d a m en ta l asy m m etries^ tr a d e r e l a t i o n b etw een t h e s e two g ro u p s o f c o u n t r ie s . The d e v e lo p e d c o u n t r ie s buy much m ore sunong th e m s e lv e s th a n from th e d e v e lo p in g c o u n t r ie s , and th e l a t t e r c o u n t r ie s do J u st th e r e v e r s e . T h is m eans 137 t h a t a c e r t a i n am ount o f e x p o r ts from th e d e v e lo p in g c o u n t r i e s h a s much g r e a t e r im p o rta n c e f o r t h e i r econom ies th a n i t h a s , i n th e form o f im p o r ts , f o r th e econom ies o f t h e i r d e v e lo p e d t r a d e p a r t n e r s . Hence th e o p e n in g up o f m a rk e ts f o r d e v e lo p in g c o u n t r i e s , even to a s m a ll e x t e n t , w ould s i g n i f i c a n t l y I n c r e a s e th e e x t e r n a l p u r c h a s in g pow er o f th e d e v e lo p in g c o u n t r i e s . S e c o n d ly , th e d e v e lo p in g c o u n tr i e s w i l l c o n tin u e t o p ro v id e e x p an d in g m a rk e ts f o r im p o rts from d e v e lo p e d c o u n t r i e s , e s p e c i a l l y f o r t h e i r c a p i t a l g o o d s. The im p o r t p o l i c i e s o f th e d e v e lo p in g c o u n tr i e s have a d i s t i n c t b i a s in f a v o r o f c a p i t a l goods t h a t a r e th e m ain e x p o r ts o f th e d e v e lo p e d c o u n t r i e s . T h ir d ly , th e p o t e n t i a l im p o rt demand o f th e d e v e lo p in g c o u n tr i e s i s much m ore th a n t h e i r a c t u a l im p o r ts . The gap i s n o t so much a r e s u l t o f p r o te c tio n is m a s o f th e g e n e r a l s h o r ta g e o f f o r e i g n ex change r e s o u r c e s . T hus, any d e g re e o f e x p o rt e x p a n sio n p e r m itte d w ould le a d a l m ost to th e same d e g re e o f im p o rt i n c r e a s e s . T h is in c r e a s e w ould u n d o u b te d ly be in th e i n t e r e s t o f t h e i r t r a d e p a r t n e r s and o f w o rld t r a d e e x p a n s io n . E x p o rt I n s t a b i l i t y and Econom ic G row th The d ep en d en ce o f d e v e lo p in g c o u n tr i e s on a few e x p o rt co m m o d ities a s a s o u rc e o f a l a r g e s h a r e o f t h e i r incom e i s one o f th e m a jo r c a u s e s o f t h e i r weak eco n o m ie s, 138 b e c a u s e i t B ak es them s e n s i t i v e to p r i c e f l u c t u a t i o n s and l e a d s t o s e r i o u s c o n se q u e n c e s. I t I s m ore s o , s in c e p r l o e s o f p rim a ry p r o d u c ts a r e s u b j e c t t o w ide f l u c t u a t i o n s w h ile , a lth o u g h In th e u p sw in g s b r in g u n u s u a l p r o s p e r i t y , can In th e dow nsw ings c a u se c a t a s tr o p h e . I t I s g e n e r a l l y a c o e p te d t h a t d e v e lo p in g c o u n t r i e s , d e p e n d in g m a in ly on p rim a ry p r o d u c ts o r m in e r a l s , w ould s u f f e r a s e v e r e s e tb a c k I f t h e r e was a m arked f a l l in t h e i r e x p o r t p r o o e e d s . Some l e a d in g ex am p les o f th e s e o o u n t r le s a r e : Cuba ( s u g a r ) ; G hana and N ig e r ia ( o o c o a ); P a k i s t a n ( j u t e ) ; Burma ( r i c e ) ; B r a z i l and C olom bia ( c o f f e e ) ; M alaya and In d o n e s ia ( r u b b e r ) ; Sudan ( o o t to n ) ; C h ile ( c o p p e r ) ; and th e o i l- p r o d u c in g c o u n t r i e s . The Im p act o f a f a l l In e x p o rt p ro o e e d s on th e r e s t o f th e economy In th e s e o o u n tr le s h a s b e en w e ll made by W a lllc h In h i s s tu d y on Cuban e x p e rie n c e s In Cuba th e outcom e o f a l l e n t e r p r i s e s d e p en d s u l t i m a t e l y upon s u g a r and w h e th e r s u g a r d o e s w i l l o r p o o r ly d e p e n d s upon th e c o n d itio n s a b ro a d . The I n d i v i d u a l 's econom ic f a t e I s t h e r e f o r e d e te rm in e d to a h ig h e r d e g re e th a n e ls e w h e re by f o r c e s beyond h i s and h i s n a t i o n 's c o n t r o l . The v io le n c e o f s u g a r f l u c t u a t i o n s I s su c h t h a t a m o d e ra te r i s e In th e p r i c e oan do m ore f o r m ost Cubans th a n oan a g r e a t d e a l o f h a rd w ork, s a v in g and In v e s t i n g . 12 As p re d o m in a n tly a g r i c u l t u r a l o o u n t r l e s , th e y 12H. C. W a lllc h , M o n etary P ro b le m s o f an E x p o rt Boonomyt The Cuban E x p e r ie n c e , i 9 1 4 -^ 7 . (C am b rid g e. M a s s a c h u s e tts , H arv ard U n iv e r s ity P r e s s , 1 9 5 0 ), p . 1 1 . 139 depend on f o r e ig n s o u rc e s f o r th e s u p p ly o f t h e i r c a p i t a l goods and from c e r t a i n c o u n tr i e s d u e to t h e i r l i n k s w ith th o s e c o u n tr i e s w h e th e r in g ro u p s o r a s i n d i v i d u a l s . T h is k in d o f d e p en d en cy m akes t h e i r econom ic s t r u c t u r e i n f l e x i b l e a s w e ll a s u n s t a b l e . T h is c h a r a c t e r i s t i c w hich h a s d o m in a ted m ost o f th e d e v e lo p in g econom ies can be shown from t h e i r f o r e ig n t r a d e s t a t i s t i c s . Many o f th e s e c o u n tr i e s have a b o u t h a l f o f t h e i r t r a d e t i e d to one i n d u s t r i a l c o u n try o r a g ro u p o f d e v e lo p e d c o u n t r i e s . F o r ex am p le, C h ile e x p o r ts o v e r 70 p e r c e n t o f i t s c o p p e r to th e U n ite d S t a t e s and c o p p e r a c c o u n ts f o r m ore th a n t w o - t h ir d s o f C h ile a n e x p o rt e a r n in g s . V ene- z u e a l s e l l s a b o u t 40 p e r c e n t o f i t s p e tro le u m to th e U n ite d S t a t e s m a rk e t and p e tro le u m r e p r e s e n ts m ore th a n 90 p e r c e n t o f i t s e x p o rt r e v e n u e . ^ T rad e r e l a t i o n s b etw een th e A f r ic a n economy and th e r e s t o f th e w o rld m ig h t a ls o sh ed some l i g h t on t h i s q u e s t io n . A bout t h r e e - q u a r t e r s o f A f r ic a n e x p o rts con s i s t o f p rim a ry p r o d u c ts , p r i n c i p a l l y o f a g r i c u l t u r a l o r i g i n . The ra n g e o f e x p o r ts i s n a rro w , e le v e n p r i n c i p a l ite m s a c c o u n tin g f o r a b o u t 60 p e r c e n t o f th e t o t a l e x p o rt v a lu e in 195^« The d ep en d en ce upon one o r a few e x p o rt ite m s becom es even m ore m arked i f i n d iv i d u a l c o u n tr i e s ■^See G .A .T .T . T ren d s in I n t e r n a t i o n a l T ra d e . o p . c l t . , p . 1 1 2 . 140 a r e c o n s id e re d s e p a r a t e l y . In f i f t e e n A f r ic a n c o u n tr i e s from 70 p e r c e n t to 90 p e r c e n t o f e x p o rt e a r n in g s w ere 14 a c c o u n te d f o r b y two o r t h r e e c o m m o d ities. By f a r th e g r e a t e r p a r t o f th e A f r ic a n eoonomy i s l a r g e l y com plem entary to t h a t o f W estern E u ro p e , p a r t i c u l a r l y P ra n c e an d th e U n ite d Kingdom w h ich b o th , u n t i l r e c e n t l y , e n jo y e d th e l i o n ’ s s h a re in A fric a n f o r e ig n t r a d e . T h is s o r t o f t r a d e r e l a t i o n s , how ever, may a ls o hav e b een th e s o u rc e o f d ev elo p m en t f o r some d e v e lo p in g c o u n t r i e s . B ut i t i s m ost l i k e l y t h a t i t can b e unde s i r a b l e i f i t l e a d s to t h e i r econom ies becom ing i n f l e x i b l e a s w e ll a s u n s t a b l e . On th e o t h e r h a n d , many o f th e p rim a ry p ro d u c in g c o u n tr i e s have r e l i e d l a r g e l y on a g r i c u l t u r a l e x p o r ts , n o t o n ly f o r e a r n in g f o r e ig n e x c h a n g e , to f in a n c e t h e i r im p o rts , b u t a ls o f o r a l a r g e p a r t o f t h e i r governm ent re v e n u e . T hese a r e r a i s e d e i t h e r from e x p o rt t a x e s , a s f o r t e a in C e y lo n , and r u b b e r in M alay a, j u t e in P a k is t a n , o r from th e p r o f i t s o f governm ent o r p r o d u c e r s ’ m ar k e ti n g a g e n c ie s a s f o r r i c e in Burma and co co a in G hana. Some d e v e lo p in g c o u n tr i e s r e l y h e a v ily on custom d u t i e s a s a s o u rc e o f re v e n u e . T h is m eans t h a t g o v e rn - 14 ■ t S ee: The D evelopm ent o f A f r i c a . R e p o rt o f th e Group o f E x p e rts p r e s e n te d to th e C o n s u lta tiv e A ssem bly o f th e C o u n c il o f E u ro p e , S tr a s b o u r g , S e p te m b e r, 1957» p . 36 . 141 m ent re v e n u e w i l l f l u c t u a t e w ith f l u c t u a t i o n s in demand o f o v e rs e a s e x p o rt m a rk e ts . In C e y lo n , M alay a, P a k is ta n and B o l iv i a , f o r ex am p le, a h ig h p e rc e n ta g e o f th e t o t a l ta x re v e n u e i s d e r iv e d from cu sto m s d u t i e s in b o th im p o rts and e x p o r ts . B ut b r o a d ly s p e a k in g , im p o rt d u t i e s p ro v id e m ore re v e n u e th a n do e x p o rt t a x e s . (S ee T a b le 19) Column (1 ) in th e t a b l e c o m p rise s ta x e s w hich a r e o f t e n r e f e r r e d to a s d i r e c t t a x e s , w h e rea s colum ns (3 ) and (4 ) c o v e r ta x e s w h ich a r e f r e q u e n t ly la b e le d a s i n d i r e c t t a x e s . The m ain p o i n t w hich c o n c e rn s u s i n th e t a b l e i s t h a t d i r e c t ta x e s o ccupy a m in o r p o s i t i o n in th e ta x re v e n u e o f m ost d e v e lo p in g c o u n t r i e s . The fu n d a m e n ta l re a s o n f o r th e m a jo r r o l e w h ich i n d i r e c t ta x e s p l a y in t h e s e c o u n t r i e s , i s t h a t th e y a r e m ore d i f f i c u l t to a v o id th a n d i r e c t t a x e s . The d ep en d e n ce on a few e x p o rt co m m o d ities i s c l e a r l y i l l u s t r a t e d by S o u th and C e n tr a l A m erican e x p e r ie n c e . In p re -w a r p e r i o d , i t was e s tim a te d t h a t th e p e r c e n ta g e o f n a t i o n a l Incom e c o n tr ib u te d by e x p o rts was 30 f o r C h ile , 25 f o r U rag u ay , 15 f o r A rg e n tin a , and 20 p e r c e n t f o r th e L a tin A m erican R e p u b lic s a s a g ro u p . The c o rre s p o n d in g f i g u r e f o r th e U n ite d S t a t e s was 6 p e r Ik2 c e n t . ^ In a l l c o u n tr i e s b u t one (M exico) t h r e e commod i t i e s a c c o u n te d f o r a t l e a s t h a l f o f th e t o t a l e x p o rt t r a d e . D u rin g th e econom ic d e p r e s s io n o f 1 9 2 9 -3 2 , t h e i r e x p o r ts f e l l o f f b y a p p ro x im a te ly 62 p e r c e n t . F o r C h ile , th e w o r s t - a f f e c t e d o f th e g ro u p , th e p e r c e n ta g e d e c l in e q o 16 was 8 8 . E x p o rt p r o c e e d s a s th e m ain s o u rc e o f th e o i l p ro d u c in g c o u n t r i e s . Some o f th e s e c o u n tr i e s a r e c o m p le te ly d o m in a te d by th e o i l s e c t o r a s i n K uw ait and S a u d i A r a b ia , f o r e x am p le, w here consum er and c a p i t a l go o d s a r e a lm o s t a l l im p o rte d and fin a n c e d by o i l re v e n u e s . I t i s su g g e s te d t h a t d e v e lo p in g c o u n tr i e s a r e e x p o sed to c o n s id e r a b l e s h o r t- te r m i n s t a b i l i t y from e x t e r n a l s o u rc e s so lo n g a s a l a r g e p a r t o f g r o s s n a t i o n a l p r o d u c t— and p a r t i c u l a r l y f o r e i g n ex ch an g e r e c e i p t s — a r e d e r iv e d from one o r a few p r o d u c ts o f e x p o r t. I t s h o u ld be n o te d t h a t th e h ig h e r p e r c e n ta g e o f n a t i o n a l incom e c o n tr ib u te d by e x p o r ts d o e s n o t mean t h a t t h e economy i s u n s t a b le and v i c e v e r s a , b e c a u s e i t d e p en d s on th e v a r i e t y o f e x p o r ts in th e f i r s t p l a c e . The U n ite d Kingdom’ s e x p o r t s , f o r ex am p le, a r e m a in ly m a n u fa c tu re d goods whose p r i c e s do n o t f l u c t u a t e in th e w o rld m a rk e t a s p rim a ry p r o d u c ts d o . B e s id e s , i n v i s i b l e e a r n in g s a r e v e ry im p o rta n t i n h e r c u r r e n t acooufct. As f o r th e c a s e o f New Z e a la n d , h e r a g r i c u l t u r a l s e c t o r i s h ig h ly d e v e lo p e d , con s e q u e n tly th e a g r i c u l t u r a l p o p u la tio n i s r e l a t i v e l y s m a ll, a b o u t 20 p e r c e n t o f th e t o t a l p o p u la tio n . ■^See S.A .M osk, I n d u s t r i a l R e v o lu tio n in M exico (B e rk e le y : U n iv e r s ity o f C a l i f o r n i a P r e s s , 1 9 ^ 0 ), p p . 5 -7 . TABLE 19 143 COMPOSITION OP TAX BEVENUE OP SELECTED COUNTRIES, 1966 ( I n p e r c e n t to t o t a l ta x r e v e n u e ) ^ (1 ) (2 ) (3 ) (4 ) T axes on O th er Incom e E xp ort Im port O u tla y o f W ealth T axes T axes T axes T o ta l D eveloped C o u n trie s Sweden 50 22 5 13 100 U n ite d Kingdom ( t ) 59 35 6 100 U n ite d S t a t e s 70 10 2 18 100 D e v elo p in g C o u n trie s B o liv ia (1 9 6 4 ) 14 22 37 27 100 C eylon 20 19 37 24 100 E cu a d o r ( 1 9 6 5 ) 16 12 46 26 100 Ghana 20 8 38 34 100 I n d ia (b ) 12 24 64 100 I r a q (c ) 21 — 44 35 100 N a la y a ( 1 9 6 5 ) 26 14 34 26 100 N ig e r ia (1 9 6 5 ) 13 10 51 26 100 P a k is ta n 20 25 33 22 100 Sudan 9 13 47 31 100 V en ez u ea l ( c ) 45 3 22 30 100 S o u rces U n ite d N a tio n s , S t a t i s t i c a l Y ear Book, 1967. (a ) T hese f i g u r e s ( c a l c u l a t e d by th e w r i t e r ) m ust b e re g a rd e d a s e s t im a t e s . (b ) F ig u re s p la c e d midway b etw een two colum ns s i g n i f y t h a t th e s t a t e d p e r c e n ta g e s c o v e r re v e n u e s from b o th s o u r c e s . (c ) E x c lu d in g o i l re v e n u e s . 14-4 In g e n e r a l th e r a t i o o f f o r e i g n t r a d e to n a t i o n a l incom e i s h ig h e r f o r d e v e lo p in g c o u n t r i e s th a n f o r d e v e l oped c o u n t r i e s . In co n seq u en ce o f t h i s , f l u c t u a t i o n s in th e v a lu e o f i n t e r n a t i o n a l t r a d e te n d to b e m ore im por t a n t in r e l a t i o n to n a t i o n a l incom e in a d e v e lo p in g coun t r y th a n in a d e v e lo p e d c o u n tr y . T h is m eans t h a t , a s S in g e r r i g h t l y s t a t e d , " f l u c t u a t i o n s in f o r e i g n t r a d e te n d to be im m ensely m ore im p o rta n t f o r u n d e rd e v e lo p e d coun t r i e s in r e l a t i o n to t h a t s m a ll m arg in o f incom e o v e r s u b s is te n c e n e e d s w hich form s th e s o u rc e o f c a p i t a l f o r m a tio n . I t s h o u ld a ls o be n o te d t h a t th e r a t i o o f e x p o rts to n a t i o n a l Incom e i s h ig h e r th a n f o r e i t h e r in v e s tm e n t o r governm ent e x p e n d itu r e to incom e. (S ee T a b le 20) S in c e th e l a t t e r two f a c t o r s a r e g e n e r a l l y re g a rd e d a s m ore am enable to n a t i o n a l c o n t r o l , th e g r e a t e r im p o rta n c e o f e x p o rts i s su p p o sed to ex p o se th e econom ies o f d e v e lo p in g c o u n tr i e s to f l u c t u a t i o n s in i n t e r n a t i o n a l com m odity m a rk e ts . In a s t a t i s t i c a l s tu d y on t h i s s u b j e c t , Macbean s u g g e s ts t h a t th e im p o rta n c e o f e x p o r ts r e l a t i v e to in v e s t- •^H . S in g e r , "The D i s t r i b u t i o n o f G ain s b etw een I n v e s tin g and B orrow ing C o u n tr ie s ," A m erican Econom ic R eview (1 9 5 0 ), p . 4 ? 3 . 145 TABLE 20 RATIOS OP EXPORTS TO INVESTMENT AND GOVERNM ENT EXPENDITURES (1 958-1959 A v e rag e s) C o u n try X I X G X I + G A rg e n tia n 59 88 35 B r a z il 48 64 27 Burma 97 120 54 C eylon 268 212 118 C h ile 129 144 68 C olom bia 111 313 82 Cuba 189 33 129 M alaya 529 359 213 N ig e r ia 124 291 87 P a k is ta n 59 66 31 P u e rto R ico 230 348 138 V e n ez u ela 122 18? 74 S o u rces E x tr a c te d from M acbean, E x p o rt I n s t a b i l i t y and Econom ic D ev elo p m en t, o p . c i t . t fla b le 3: 1» p p . 6 0 -6 1 . ( s e l e c t e d c o u n tr ie s ) 146 m ent and governm ent e x p e n d itu r e i s s i g n i f i c a n t l y c o r r e l a te d w ith th e s i z e o f n a t i o n s b u t n o t p a r t i c u l a r l y to w h e th e r th e y a r e d e v e lo p e d o r u n d e rd e v e lo p e d . H is d a t a seem to i n d i c a t e t h a t f o r c o u n tr i e s w ith l e s s th a n 10 m il l i o n i n h a b i t a n t s th e c o r r e l a t i o n i s s t a t i s t i c a l l y s i g n i f i c a n t . The d a t a f o r s m a ll c o u n tr i e s ( l e s s th a n 10 m il l i o n p o p u la tio n a s th e d i v id i n g l i n e ) on e x p o r ts a s a p e r c e n ta g e o f in v e s tm e n t and go v ern m en t e x p e n d itu r e s r e s p e c t i v e l y and t o g e t h e r a r e th e mean r a t i o s : 185 f o r ( x/ l ) , 251 f o r ( % ) , and 1 0 5 .5 f o r ( x/x +G )> th e m edian f o r th e l a s t r a t i o i s 1 0 7 . As f o r th e c o u n tr i e s w ith o v e r 10 m il l io n p o p u l a t i o n , th e r a t i o s o f th e mean and 18 th e m edian o f ( X /I+ G ) a r e 4 9 .1 and 33*5 r e s p e c t i v e l y . Due to I n s t a b i l i t y o f t h e i r e x p o r t s , d e v e lo p in g c o u n tr i e s h o ld r a t h e r h ig h e r r e s e r v e s o f f o r e ig n exchang e th a n d e v e lo p e d c o u n t r i e s . I t h a s b een fo u n d , f o r ex am p le, t h a t th e mean r a t i o o f r e s e r v e s to im p o rts i s 70 p e r c e n t f o r f o u r te e n d e v e lo p in g c o u n t r i e s and 42 p e r c e n t f o r e ig h te e n d e v e lo p e d c o u n tr i e s d u r in g th e p e r io d 1950- 19 1957* C hanges in b o th d i r e c t i o n and m ag n itu d e o f f o r e ig n -e x c h a n g e r e s e r v e s seem to b e h ig h ly c o r r e l a t e d o v e r T 8 A .I . M acbean, E x p o rt I n s t a b i l i t y and Econom ic D evelopm ent ( C am bridge, M a s s a c h u s e tts : Harvard. U n iv e r s ity P r e s s , 1 9 6 6 ) , p p . 6 0 - 6 l . 19 M. M ic h a e ly , C o n c e n tr a tio n In I n t e r n a t i o n a l T rad e (A m sterdam : N o rth H o llan d P u b lis h in g C o ., 1 9 6 2 ), tfa b le 2 C L 14? tim e w ith e x p o r ts o f i n d iv i d u a l c o u n tr i e s ( s e e T a b le 2 1 ) . E x p o rt i n s t a b i l i t y , t h e r e f o r e , w i l l te n d to p ro d u c e tem p o r a r y b o t tl e n e c k s in th e flo w o f f o r e i g n e x c h a n g e . T h is i s e s p e c i a l l y th e c a s e f o r many d e v e lo p in g c o u n tr i e s w hich a r e s h o r t o f r e s e r v e s o f g o ld o r c o n v e r t ib l e c u r r e n c i e s and c a n n o t u s e them a s an e f f e c t i v e c u s h io n a g a i n s t f l u c t u a t i o n s in e x p o r t p r o c e e d s . To stun u p , th e im p a ct o f e x p o rt i n s t a b i l i t y on th e eco n o m ies o f d e v e lo p in g c o u n tr i e s h a s b een w e ll made by N u rsk e , who s u g g e s ts t h a t " th e i n s t a b i l i t y o f e x p o r t m ar k e t s f o r p rim a ry co m m o d ities m akes any s te a d y d e v elo p m e n t p o l ic y d i f f i c u l t ; d is c o u r a g e s in v e s tm e n t in p rim a ry p r o d u c tio n i t s e l f ; g e n e r a l l y l i m i t s th e ’ econom ic h o r iz o n ’ , and d e s t r o y s th e c o n t i n u i t y so n e c e s s a r y in p r i v a t e a s 20 w e ll a s p u b l ic p la n n in g ." I t s h o u ld be n o te d , h o w ev er, t h a t th e im p a c t o f e x p o rt i n s t a b i l i t y on econom ic g ro w th o f I n d iv id u a l coun t r i e s v a r i e s , d e p e n d in g on th e c o m p o s itio n , v o lu m e, and tim in g o f t h e i r e x p o r ts . Some c o u n tr i e s have b e n e f i te d from r i s i n g p r i c e s o f e x p o r ts in c e r t a i n y e a r s and th e re b y in c r e a s e d t h e i r e x p o r t e a r n in g s in t h e s e y e a r s . O th e r c o u n t r i e s , d e s p i t e th e r i s e in u n i t v a lu e , h o w ev er, have s u f f e r e d a d e c l in e in t h e i r e x p o rt e a r n in g s due to a sub ?o H. N u rsk e , "The Q u e st f o r a S t a b i l i z a t i o n P o lic y in P rim a ry P ro d u c in g C o u n tr ie s ," K y k lo s, V o l. XI ( F a s c .2 . 1 9 5 8 ), p . 1 4 3 . T A B L E 21 ANNUAL VALUES OF EXPORTS AND RESERVES FOR SELECTED COUNTRIES ( I n m i l l i o n d o l l a r s ) C o u n try 1951 1952 1953 1954 1955 1956 1957 1958 1959 Ghana E x p o rts 234 216 225 293 243 222 229 263 286 R e se rv e s 374 379 404 514 532 484 434 450 427 I r a n E x p o rts 590 100 100 160 372 512 650 738 760 R e se rv e s 196 177 185 186 205 230 246 254 214 I r a q E x p o rts 183 278 392 488 519 478 360 567 606 R e se rv e s 114 129 181 233 294 354 261 288 296 M alaya E x p o rts 1 ,1 0 4 697 424 522 1 1 1 774 739 712 616 809 R e se rv e s 400 379 473 514 494 502 650 P a k is ta n E x p o rts 763 532 439 359 401 340 358 302 321 R e se rv e s 638 356 376 360 397 415 359 312 400 Sudan E x p o rts 227 133 128 116 145 192 148 125 192 R e se rv e s 240 185 178 170 152 192 121 88 158 L a t in A m erica E x p o rts 7 ,8 0 6 7*056 7 ,6 2 0 7 ,8 8 6 7 ,9 7 6 8 ,6 4 3 8 ,6 6 2 8 ,1 9 9 8 ,3 2 0 R e s e rv e s 2 ,9 8 0 3 ,0 0 5 3 ,2 9 5 3 ,1 3 0 3 ,1 7 5 3 ,6 7 5 3 ,8 1 5 3 ,1 0 5 3 ,0 0 0 M S o u rc e s E x tr a c te d from M acbean, oj>. o l t . . T a b le 3 * 1 1 , p . 8 3 . £ 149 s t a n t l a l d ro p in o u t p u t. W ith in th e d e v e lo p in g c o u n tr i e s t h e r e i s c o n s id e r a b le v a r i a t i o n , from th e h ig h ly co n cen t r a t e d e x p o r ts o f I r a q to th e r e l a t i v e l y d i v e r s i f i e d p a t t e r n f o r K o rea and A r g e n tin a . (S e e T a b le 22) When th e I n d i v id u a l e x p e rie n c e o f e ao h c o u n try m en tio n e d in t h i s t a b l e i s exam ined i t seem s c l e a r t h a t b o th g e n e r a l and s p e c i f i c f a c t o r s w ere r e s p o n s i b l e f o r th e i n s t a b i l i t y o f e x p o r ts . In th e c a s e o f th e two o il- p r o d u c in g c o u n t r i e s , I r a n and I r a q , i t i s t r u e t h a t th e demand f o r p e tro le u m in w o rld m a rk e ts h a s b een m ore o r l e s s th e m ost s t a b l e com m o d ity in w o rld t r a d e , b u t t h i s i s e s p e c i a l l y th e c a s e up to 1 9 5 8 . O il e x p o rts o f b o th c o u n tr i e s ( a s o f o t h e r o i l - p ro d u c in g c o u n tr i e s ) I n c r e a s e d s t e a d i l y d u rin g th e p e r i o d , w ith th e e x c e p tio n a l y e a r s — 1952-1953 in I r a n d u e to th e u n s u c c e s s f u l n a t i o n a l i z a t i o n o f th e o i l i n d u s t r y and th e p o l i t i c a l s t r u g g l e in th e c o u n tr y . In I r a q , o i l e x p o rts f e l l s h a r p ly in 1956 and 1957 due to th e Suez C r i s i s . (S ee T a b le 21) When th e Suez C anal was re o p e n e d in 1957* o i l p r i c e s in th e M iddle E a s t w ent up u n ifo rm ly by 13 c e n ts p e r b a r r e l , w h ile V e n e z u e la c ru d e p o s tin g in c r e a s e d from $ 2 .8 0 p e r b a r r e l to $3 .0 5 o r a lm o s t d o u b le th e I n c r e a s e o f M id d le E a s t c ru d e o i l . In 1959» th e i n t e r n a t i o n a l o i l com panies re d u c e d M iddle E a s t c ru d e p o s te d p r i c e s by 18 TABLE 22 MAIN EXPORTS AS PERCENTAGE OP TOTAL EXPORTS FOR SELECTED COUNTRIES (1 9 * 6 -1 9 5 8 ) C o u n try 1 s t P e r C ent 2nd P e r C ent P e r C ent A rgen t i n a m eat 26 w heat 16 w ool 13 B o liv ia t i n 60 le a d 9 tu n g s te n 7 Ghana co co a 62 wool 12 diam onds 11 H a i ti In d o n e s i a c o ff e e ru b b e r 61 36 s i s o l p e tro le u m 18 30 s u g a r t i n 9 6 I r a n p e tro le u m ( p r o d u c ts ) 36 p e tro le u m ( c r u d e ) 29 c o tto n 7 I r a q p e tro le u m 88 d a te s 3 b a r le y 2 K orea (1 9 5 0 - 58) tu n g s te n 1* t a l c 12 f i s h 6 M alaya ru b b e r *9 t i n 11 p e tro le u m p r o d u c ts 10 P a k is ta n (1 9 * 8 - 58) j u t e *9 c o tto n 21 wool 6 Sudan c o tto n *7 c o tto n se e d 11 gum 10 V ie t Nam (1 9 * 8 - 58) ru b b e r 60 r i c e 25 c o a l 3 S o u rces M acbean, 0£ . o l t . , T a b le 2 :6 , p . 52. 151 c e n ts o r 5 c e n ts belo w th e l e v e l m a in ta in e d b e f o r e th e Suez c r i s i s . V en ezu elan c ru d e p o s t i n g s w ere b ro u g h t b ack to th e l e v e l p r e v a i l i n g p r i o r to th e Suez c r i s i s . (S e e T a b le 16) In a n a tte m p t to s e c u r e an a g re em e n t f o r th e re g u l a t i o n o f th e s u p p ly o f o i l so a s to e n s u re s t a b l e p r i c e s and o r d e r l y m a rk e tin g and th e r e b y s e c u r in g s te a d y incom e t o th e p ro d u c in g c o u n t r i e s , I r a q to o k th e i n i t i a t i v e in I9 6 0 and e x te n d e d i n v i t a t i o n s to th e m a jo r o i l p ro d u c in g c o u n t r i e s t o m eet in Baghdad to d e a l w ith th e p ro b lem c o l l e c t i v e l y . R e p r e s e n ta tiv e s o f V e n e z u e la , I r a n , S a u d i A r a b ia , K u w ait, and Q a ta r h e ld t h e i r f i r s t m e e tin g in Baghdad on A ugust 1 0 , i 9 6 0 . Thus th e O r g a n iz a tio n o f P e tro le u m E x p o rtin g C o u n tr ie s (OPEC) was o f f i c i a l l y fo rm - 21 ed in S e p te m b e r, i 9 6 0 . P e rh a p s one o f th e s t r i k i n g outcom es o f th e fo rm a tio n o f OPEC, a s a b a r g a in in g pow er r e p r e s e n t i n g th e o i l e x p o r tin g c o u n tr i e s in t h e i r d i s p u t e s w ith th e o i l c o m p a n ie s, i s th e f a c t t h a t o i l p r i c e s have rem ain ed th e same s in c e i 9 6 0 . (S e e T a b le 23) 21 Q a ta r was an o b s e r v e r in th e f i r s t m e e tin g and becam e a f u l l member i n O c to b e r, i 9 6 0 . In d o n e s ia and L ib y a J o in e d th e O r g a n iz a tio n in 1 9 62. TABLE 23 POSTED PRICE OP CRUDE OIL OP MIDDLE EAST AND VENEZUELA 1954-1964* ( i n d o l l a r s p e r b a r r e l ) 1954 1955 1956 1957 1958 1959 I9 6 0 1961 1962 1963 1964 I r a n ( 3 4 ° - 3 4 .9 ° f . o . b . A badan) 1 .8 6 1 .8 6 1 .8 6 1 .9 9 1 .9 9 1 .8 1 1 .7 3 1 .7 3 1 .7 3 1 .7 3 1 .7 3 I r a q ( 3 6 ° - 3 9 .9 ° f . o . b . T r i p o l i ) 2 .3 9 2 .3 9 2 .4 6 2 .6 9 2 .4 9 2 .3 1 2 ,2 1 2 .2 1 2 .2 1 2 .2 1 2 .2 1 K uw ait ( 3 1 ° - 3 1 .9 ° f .o .b . A l-A hm adi) 1 .7 2 1 .7 2 1 .7 2 1 .8 5 1 .8 5 1 .6 7 1 .5 9 1 .5 9 1 .5 9 1 .5 9 1 .5 9 Q a ta r ( 4 0 ° - 4 0 .9 ° f . o . b . Un S a id ) 2 .0 8 2 .0 8 2 .0 8 2 .2 1 2 .2 1 2 .0 3 1 .9 3 1 .9 3 1 .9 3 1 .9 3 1 .9 3 S a u d i A ra b ia ( 3 4 ° - 3 4 .9 ° f . o . b . Ras T an u ra) 1 .9 7 1 .9 7 1 .9 3 2 .0 8 2 .0 8 1 .9 0 1 .8 0 1 .8 0 1 .8 0 1 .8 0 1 .8 0 V e n e z u e la (O fe en a 3 5 ° -3 5 .9 ° f . o . b . P o r t La C roz) 2 .8 8 2 .8 8 2 .8 0 3 .0 5 3 .0 5 2 .8 0 2 .8 0 2 .8 0 2 .8 0 2 .8 0 2 .8 0 S o u rc e : M in is tr y o f O i l , D ep artm en t o f S t a t i s t i c s and R e s e a rc h , B aghdad, I r a q 153 Summary R ecen t tr e n d s in t h e in t e r n a t io n a l tr a d e o f th e d e v e lo p in g c o u n t r ie s in d i c a t e t h a t t h e i r p erfo rm a n ce h a s n o t b een g e n e r a lly e n c o u r a g in g . E x p o r ts from t h e s e c o u n t r ie s in w o rld tr a d e d e c lin e d from a b o u t 25 p e r c e n t in 1955 to a b o u t 21 p e r c e n t in i 960 and to 1 9 .5 p e r c e n t in 1 9 6 5 » w h erea s e x p o r ts o f th e d e v e lo p e d c o u n t r ie s i n c r e a s e d from a b o u t 65 p e r c e n t in 1955 t o a b o u t 69 p e r c e n t in 1 9 6 5 . I t sh o u ld a l s o b e n o te d t h a t th e d e v e lo p e d coun t r i e s a r e ea ch o t h e r ’ s b e s t c u s to m e r s, w h ereas th e d e v e lo p in g c o u n t r ie s have v e r y l i t t l e tr a d e w ith ea ch o t h e r (6 p e r c e n t o f w orld tr a d e in 1 9 6 5 ) . E x p o r ts from d e v e l o p in g c o u n t r ie s t o d e v e lo p e d c o u n t r ie s w ere th r e e and o n e - h a l f tim e s a s g r e a t a s t h e i r e x p o r ts t o ea c h o t h e r in 1 9 65. The d e c l i n i n g te n d e n c y o f d e v e lo p in g c o u n tr ie s * e x p o r ts in w o rld tr a d e ( e x c lu d in g o il- p r o d u c in g c o u n t r ie s ) i s due to a number o f lo n g -te r m f a c t o r s , su ch a s in c r e a s e d c o m p e titio n from s y s t h e t i c s u b s t i t u t i o n , g r e a t eco n o m ies in th e u se o f raw m a t e r i a l s , th e r e l a t i v e l y lo w incom e e l a s t i c i t y o f demand f o r f o o d s t u f f s in w orld mar k e t , and th e p r o t e c t i o n i s t p o l i c i e s e x e r c is e d in d e v e l oped c o u n t r ie s . Some e c o n o m is ts a rg u e t h a t th e l a g o f e x p o r ts o f d e v e lo p in g c o u n tr i e s may b e a t t r i b u t e d e i t h e r to s u p p ly - d e f i c le n c y o r d e m a n d -d e fic ie n c y o r some c o m b in a tio n o f b o th . A d v o c ate s o f s u p p ly - d e f ic ie n c y s u g g e s t t h a t i n d u s t r i a l i z a t i o n p ro g ra m s e x e r c is e d by d e v e lo p in g c o u n tr i e s in v o lv e th e c o n su m p tio n o f g r e a t e r q u a n t i t i e s o f t h e i r own p rim a ry p r o d u c ts , th u s r e s t r i c t i n g s u p p lie s f o r th e e x p o rt m a rk e t. P e rh a p s a more c o n v in c in g e x p la n a tio n i s th e d e m a n d -d e fic ie n c y a rg u m e n t, w hich e m p h a size s t h a t th e m ain re a s o n f o r th e l a g o f e x p o rts o f p rim a ry p ro d u c in g c o u n tr i e s i s th e low demand in w o rld m a rk e t. A lth o u g h th e e x p o r ts from d e v e lo p in g c o u n tr ie s have in c r e a s e d l e s s q u ic k ly th a n w o rld t r a d e g e n e r a l l y , im p o rts i n to th e s e c o u n tr i e s have r i s e n f a s t e r th a n w o rld t r a d e . T h e ir im p o rts I n c r e a s e d from $21 b i l l i o n in 1953 to $ 3 7 .6 b i l l i o n in 1 9 6 5 . A c o n s id e r a b le p o r t i o n o f t h e i r im p o rts c o n s i s t s o f c a p i t a l goods r e q u ir e d f o r d e v e lo p m e n t. The d e f i c i t in th e b a la n c e o f t r a d e f o r th e p e r io d 1 9 5 6 -6 5 am ounted to $ 1 6 .7 b i l l i o n . The d e f i c i t in t h e i r c u r r e n t a c c o u n t i s e s tim a te d to be more th a n $11 b i l l i o n in 1 9 75. T h u s, due to th e f a c t t h a t d e v e lo p in g c o u n tr i e s w i l l c o n tin u e to p r o v id e ex p an d in g m a rk e ts f o r Im p o rts from d e v e lo p e d c o u n t r i e s , t h e r e i s a v a l i d c a s e f o r th e arg u m en t t h a t th e l a t t e r o o u n tr le s m ust g r a n t m ore t r a d e 155 c o n c e s s io n s to th e fo rm e r c o u n t r i e s and buy more goods from them f o r th e m u tu a l b e n e f i t o f a l l c o u n tr i e s in w o rld com m unity. F i n a l l y , i t s h o u ld a l s o be added t h a t th e i n c r e a s in g d ep en d en cy o f d e v e lo p in g c o u n tr i e s on a few p rim a ry p r o d u c ts to e a rn t h e i r f o r e ig n exchange m akes t h e i r econ om ies i n f l e x i b l e a s w e ll a s u n s t a b l e . In a d d i t i o n , th e h ig h e r r a t i o o f e x p o r ts to n a t i o n a l incom e in m ost d e v e l o p in g c o u n tr i e s i n d i c a t e s t h a t i n s t a b i l i t y in t h e i r ex p o r t m a rk e ts m akes lo n g -te rm d e v elo p m e n t p la n n in g a v e ry d i f f i c u l t t a s k , e s p e c i a l l y i f a c o u n try h a s no s u f f i c i e n t r e s e r v e s . CHAPTER VI NATIONAL POLICIES FOR IMPORT SUBSTITUTION AND EXPORT PROMOTION, AND APPLICATIONS T O DEVELOPING COUNTRIES P u rp o se and O r g a n iz a tio n The p u rp o se o f t h i s c h a p te r i s to exam ine and e v a lu a te c e r t a i n a s p e c t s o f tr a d e p o l i c i e s o f d e v e lo p in g c o u n t r ie s v i s - a - v i s t h e i r im p o r t-c o m p e tin g i n d u s t r i e s and e x p o r t-p r o m o tio n p rogram s. The q u e s t io n i s n o t how to J u s t i f y p r o t e c t io n and i n d u s t r i a l i z a t i o n , b u t, r a t h e r w h eth er th e m ea su res g e n e r a lly s u g g e s te d make any c o l l e c t i v e s e n s e from th e s ta n d p o in t o f d ev elo p m e n t s t r a t e g y . The c h a p te r b e g in s w ith a d i s c u s s i o n o f th e im p o rt a n c e o f Im port s u b s t i t u t i o n and e x p o r t-p r o m o tio n , w ith r e f e r e n c e to th e " P r e b isc h T h e s is ." S e c o n d ly , p o l i c i e s a f f e c t i n g im p o r t - s u b s t it u t io n su ch a s q u a n t it a t iv e r e s t r i c t i o n s , m u lt ip le ex ch a n g e r a t e s , and t a r i f f s and s u b s i d i e s w i l l be d ls o u s s e d in d e t a i l . T h ir d ly , a s e p a r a t e s e c t i o n w i l l be d e v o te d to p o l i c i e s a f f e c t i n g 156 157 e x p o r t-p r o m o tio n su ch a s e x p o r t s u b s i d i e s , r e s e a r c h , and e x p o r t c r e d i t . F i n a l l y , th e im p o rta n ce o f th e d i v e r s i f i c a t i o n o f e x p o r ts w i l l be ex a m in ed . Im p o rta n ce o f I m p o r t -S u b s tit u tio n and E x p o rt-P ro m o tio n I m p o r t - s u b s t it u t io n can be d e f in e d a s th e i n c r e a s e d sh a r e o f d o m e stic p r o d u c tio n i n t o t a l s u p p ly . k d ev elo p m en t program u s u a l l y p ro d u ces a s h i f t in th e im p o rt s o h e d u le , s in c e th e im p o rt c o n t e n t o f i n v e s t m ent i s l i k e l y to be g r e a t e r th an t h a t o f co n su m p tio n . I m p o r t - s u b s t it u t io n , t h e r e f o r e , i s on e o f th e m ajor f a c t o r s r e s p o n s ib le f o r th e ch a n g in g p a t t e r n o f in d u s t r i a l d e v e lo p m e n t. I t sh o u ld a l s o b e added t h a t w here grow th le a d s and im p o r t - s u b s t it u t io n f o llo w s a s a co n seq u e n c e o f demand e l a s t i c i t i e s , l o c a t i o n a l a d v a n ta g e s , c h a n g in g f a c t o r p r o p o r t io n s , and im proved te c h n o lo g y , th e d e c l i n e i n im p o r ts r e l a t i v e to n a t io n a l Incom e i s norm al and a p p r o p r ia te . To s t a r t w ith im p o r t - s u b s t it u t i o n , h o w ev er, m ig h t b e a b e g in n in g a t th e wrong en d . The im p o rta n ce o f e x p o r t p ro m o tio n stem s from th e f a c t t h a t d ev elo p m e n t o f t r a d i t i o n a l e x p o r ts and im provem ent o f th e e a r n in g s d e r iv e d from t h a t tr a d e a r e th e m ajor p rob lem s f a c in g th e d e v e lo p in g c o u n t r ie s in t h e i r e f f o r t to i n d u s t r i a l i z e . The o n ly p r a c t i c a l and 158 p ro m is in g a l t e r n a t i v e to c o v e r a t l e a s t p a r t o f th e e x p e c te d h ig h t r a d e d e f i c i t l i e s i n th e d e v elo p m e n t o f new e x p o r t s . Im p o rt s u b s t i t u t i o n i s a c t u a l l y o n e f a c e t o f P r e b is o h 's p le a f o r i n d u s t r i a l i z a t i o n to o f f s e t th e d i s p a r i t y i n incom e e l a s t i c i t i e s o f demand f o r im p o r ts w hioh e x i s t s b etw een th e c e n t e r and th e p e r ip h e r y . T h is p o l i c y im p lic a t io n can be i l l u s t r a t e d by a n u m e r ic a l ex a m p le. Assume o n ly one c e n t e r and i t s p e r ip h e r y , w ith e q u a l r a t e s o f p o p u la tio n g ro w th . Assume a l s o t h a t th e c e n te r * s r a t e o f incom e g ro w th i s 3 p e r c e n t p e r y e a r , an d i t s incom e e l a s t i c i t y o f demand f o r Im p o rts o f p rim a ry goods i s 0 .8 . I f t h e r e i s no Im p o rt s u b s t i t u t i o n , i t s r a t e o f g ro w th o f im p o rts w i l l be 2A p e r c e n t i (3 p e r c e n t a 0 .8 ) p e r y e a r . S u p p o se t h a t th e p e r i p h e r y 's lnoom e e l a s t i c i t y o f demand f o r Im p o rts o f i n d u s t r i a l goods i s 1 .3 * I f th e r a t e o f g ro w th o f th e s e Im p o rts i s n o t to exceed t h a t o f p e r i p h e r a l e x p o r ts , th e p e r i p h e r y 's incom e c a n n o t i n c r e a s e f a s t e r th a n 1.8*f p e r c e n t (2*4 1*3) p e r y e a r . T h is i s th e r a t e w hioh, com bined w ith th e s t a t e d e l a s t i c i t y c o e f f i c i e n t , g iv e s th e l i m i t o f im p o rt g ro w th , 159 t h a t I s , a r a t e o f 2 A p e r c e n t ( d is r e g a r d p o s s ib l e c a p i t a l I n f l o w ) . S h o u ld th e p e r i p h e r y ’ s Incom e grow a t a r a t e o f , s a y , 3 p e r c e n t , I t s demand f o r Im p o rts o f I n d u s t r i a l goods w ould grow a t th e r a t e o f 3*9 p e r c e n t (3 p e r c e n t tim e s 1 .3 )» w h ile e x p o rts w ould in c r e a s e o n ly 2 A p e r c e n t . To b r id g e t h i s g a p , e i t h e r th e r a t e o f I n c r e a s e o f demand f o r im p o rts w ould h a v e to f a l l by m eans o f im p o rt s u b s t i t u t i o n , o r i n d u s t r i a l e x p o rts w ould hav e to be ad d ed to th e p rim a ry o n e s , o r a c o m b in a tio n o f th e tw o . I f we a d m it a h ig h e r r a t e o f p o p u la tio n g ro w th i n th e p e r ip h e r y , i t s I n d u s t r i a l i z a t i o n w i l l hav e to be i n t e n s i f i e d even m ore. I t sh o u ld be n o te d , how ever, t h a t P r e b ls c h d o es n o t a d v o c a te a o n e -s id e d i n d u s t r i a l i z a t i o n p ro g ram . He ta k e s th e s ta n d t h a t i n d u s t r y an d t e c h n i c a l a d v an ce i n p rim a ry p r o d u c tio n a r e c o m p lim e n ta ry , b u t i n d u s t r y p la y s th e m ore dynam ic r o l e , and t h a t i t c an g iv e o f f d e s i r a b l e e f f e c t s to backw ard s e c t o r s . G iven a g ro w in g i n d u s t r i a l b a s e , l a b o r d is p la c e d from p rim a ry p r o d u c tio n c a n move i n t o d o m e s tic - s e c to r em ploym ent w ith o u t d r i v in g w ages down. P r e b ls c h s u g g e s ts t h a t h ig h e r i n d u s t r i a l c o s t s i n d e v e lo p in g c o u n tr i e s do n o t m ean t h a t a n I n d u s tr y i s n o t eco n o m ic. 160 The p ro b lem h a s to be c o n s id e re d from a n o th e r a n g le . I t I s n o t r e a l l y a q u e s tio n o f oom parlng I n d u s t r i a l o o s ts w ith Im p o rt p r i c e s , b u t o f co m p arin g th e In c re m e n t o f Incom e o b ta in e d I n th e e x p a n s io n o f In d u s t r y w ith t h a t w hich c o u ld h av e b e en o b ta in e d I n th e e x p o r t a c t i v i t i e s h ad th e same pro d u c tiv e r e s o u r c e s b e e n em ployed t h e r e . 1 The p o l ic y I m p lic a tio n h e r e i s t h a t d e v e lo p in g c o u n tr i e s sh o u ld e x e r c i s e p r o te c tio n is m to e s t a b l i s h new I n d u s t r i e s . T h is , i t i s c la im e d , w i l l n o t ham per th e r a t e o f g ro w th i n w o rld t r a d e . I f th e d e v e lo p e d c o u n tr i e s r e s o r t to p r o t e c t i v e m e a s u re s , o n th e o t h e r h a n d , t h i s w i l l te n d to d e p r e s s th e d e v e lo p m e n t o f d e v e lo p in g eco n o m ies and to d e c r e a s e t o t a l w o rld t r a d e . F u rth e rm o re , P r e b ls c h s u g g e s ts t h a t th e t r a d i t i o n a l form o f r e c i p r o c i t y , u n d e r w hich p e r i p h e r a l co u n t r i e s a r e a sk e d to g r a n t d u ty c o n c e s s io n s s i m i l a r to th o s e I n tro d u c e d by th e c e n t e r , d o e s n o t a llo w f o r a n i m p l i c i t e le m e n t o f r e c i p r o c i t y a lr e a d y e x te n d e d . The ln o r e a s e d e x p o rts from th e p e r ip h e r y w i l l soon be fo llo w e d by a c o rre s p o n d in g I n c r e a s e i n i t s im p o rts o f I n d u s t r i a l g o o d s. T h is i s due to th e p e r i p h e r y 's h ig h incom e e l a s t i c i t y o f dem and, and t h e r e i s no n eed f o r a r e d u c tio n o r e li m in a ti o n o f th e p e r i p h e r y 's d u t i e s . ^■*R. P r e b ls c h , "C om m ercial P o l i c y i n th e U nder d e v e lo p e d C o u n tr ie s ," A m erican Econom ic R eview , p a p e rs and p r o c e e d in g s , May 1 9 59. p . 2 5 5 -2 7 1 . 161 The n o t io n h e r e i s t h a t p r o t e c t io n is m i n th e p e r ip h e r y w i l l m e r e ly a l t e r th e c o m p o sitio n o f im p o r ts , w h ereas i n th e c e n t e r i t w ould d e c r e a s e im p o r ts . S in g e r 2 and M yrdal h ave b o th s t r e s s e d t h i s same p o i n t . P o l i c i e s A f f e c t i n g Im p ort S u b s t it u t io n M ost d e v e lo p in g c o u n t r ie s to d a y a r e c o n fr o n te d w ith th e d u a l c h a lle n g e o f how to grow f a s t e r and how to overcom e t h e i r b a la n c e o f paym ents d i f f i c u l t i e s . An in o r e a s e i n th e f lo w o f e x t e r n a l c a p i t a l w i l l be o f g r e a t h e lp . B ut i t c a n n o t be th e f i n a l a n sw er, f o r e x t e r n a l lo a n s m ust e v e n t u a lly be s e r v io e d and a m o r tiz e d . A more b a s ic s o l u t i o n l i e s t h e r e f o r e i n t r a d e . S u c c e s s f u l im p o rt s u b s t i t u t i o n and e x p o r t d i v e r s i f i c a t i o n c o n t r ib u t e s u b s t a n t i a l l y to th e a c h ie v e m e n t o f m o b ile and s e lf - g e n e r a t e d g ro w th . Through them , a d e v e lo p in g c o u n tr y n o t o n ly s a v e s and e a r n s more f o r e ig n e x c h a n g e , b u t a l s o b road en s i t s p r o d u c tio n p a t t e r n , c r e a t e s more em ploym ent, a c q u ir e s new s k i l l s , e t c e t e r a . The c o n c o m ita n t d ev elo p m en t o f r e s o u r c e s te n d s to change th e r e l a t i v e su p p ly and p r i c e s o f f a c t o r s o f p r o d u c tio n ^ 1 . W. S in g e r , "The D i s t r i b u t i o n o f G ains b etw een I n v e s t in g and B o rro w in g C o u n tr ie s ," A m erloan Eoonomlo R eview . May 1950; G. M y rd al, An I n t e r n a t i o n a l Econom y. (New ¥ o rk : H a rp e r and B r o th e r s , 1956F, p p . 2B3-*G?. 162 a n d , c o n s e q u e n tly , a l t e r s th e c o m p a ra tiv e a d v a n ta g e p o s i t i o n . I t I s d i f f l o u l t to w eigh th e r e l a t i v e im p o rta n c e o f im p o rt s u b s t i t u t i o n and e x p o r t e x p a n s io n i n th e d e v e lo p m e n t p ro c e s s o f an y p a r t i c u l a r c o u n tr y . H i s t o r i c a l l y , t h e r e a r e exam ples o f g ro w th th ro u g h e x p o r t, a s i n th e U n ite d Kingdom and J a p a n , b u t t h e r e a r e a l s o exam ples o f p r o t e c te d i n d u s t r i a l i z a t i o n i n W est Germany and th e U n ite d S t a t e s . From h i s s t a t i s t i c a l f i n d in g s o f i n d u s t r i a l g ro w th o f a b o u t f i f t y c o u n t r i e s , C henery c o n c lu d e s t h a t im p o rt s u b s t i t u t i o n i s a n im p o rta n t c a u se o f i n d u s t r i a l i z a t i o n . He fo u n d t h a t im p o rt s u b s t i t u t i o n a c c o u n ts f o r 50 p e r c e n t o f i n d u s t r i a l i z a t i o n and i s more im p o rta n t th a n th e p u re in c r e a s e o f dem and. The in c r e a s e i n im p o rt s u b s t i t u t i o n , a c o o rd in g to C h en ery , i s th e r e s u l t o f ch an g es i n c o m p a ra tiv e a d v a n ta g e . I f a c o u n try h a s a n in c r e a s e i n i n come w ith no ch an g e i n c o m p a ra tiv e a d v a n ta g e , th e a n a l y s i s s u g g e s ts t h a t o n ly a t h i r d o f th e n o rm al am ount o f in d u s t r i a l i z a t i o n w i l l ta k e p la o e . C hanges in s u p p ly c o n d it i o n s , r e s u l t i n g from a change i n r e l a t i v e f a c t o r c o s t s a s incom e r i s e s , c a u se a s u b s t i t u t i o n o f d o m e s tic p r o d u c tio n f o r i m p o r ts .3 ■^H . B . C h en ery , " P a t te r n s o f I n d u s t r i a l G ro w th ," A m erican Eoonomlo R eview . S ep tem b er I9 6 0 , p . 6*H. 163 I t s h o u ld be n o te d , h o w ev er, t h a t a s la te c o m e rs I n i n d u s t r i a l i z a t i o n and econom ic d e v e lo p m e n t, d e v e lo p in g c o u n tr i e s a r e fa c e d w ith p ro b lem s su ch a s s m a ll s i z e o f th e m a rk e t, la c k o f b a s ic econom io f a c i l i t i e s , la c k o f m odern b u s in e s s o r g a n i z a t i o n and m a rk e tin g te c h n iq u e s , e t c e t e r a . One c an h a r d ly e x p e c t them to com pete o u t r i g h t w ith th e o l d e r i n d u s t r i a l i z e d c o u n t r i e s . The s t a t e m u st p ro v id e some s u p p o rt f o r new, I n f a n t i n d u s t r i e s . I f i n t e r n a t i o n a l paym ents w ere b a la n c e d , o r i f t h e r e w ere s tr o n g w o rld demand f o r some o f t h e i r e x p o r ts , th e p ro b lem o f f in a n c in g and f o s t e r i n g im p o rt s u b s t i t u t i o n and e x p o rt d i v e r s i f i c a t i o n w ould be r e l a t i v e l y s im p le . F o r some y e a r s , how ever, e x p o r ts o f d e v e lo p in g c o u n tr i e s h a v e b e e n s lu g g is h and t h e i r b a la n c e s o f paym ents w eak. As a r e s u l t , by th e m id -1 9 5 0 's , many o f them h ad a d o p te d t r a d e and ex ch an g e r e s t r i c t i o n s to s a f e g u a rd th e b a la n c e o f p a y m e n ts. S uch p o l i o i e s do n o t n e c e s s a r i l y c o n f l i c t w ith th o s e f o r e f f e c t i v e im p o rt s u b s t i t u t i o n and e x p o rt p r o m o tio n . In d e e d , th e y o f t e n move i n th e same d i r e c t i o n . I n some c a s e s , how ever, p o l i c i e s d e s ig n e d m a in ly to s a f e g u a rd th e b a la n c e o f paym ents may n o t be r i g h t f o r p r o m o tin g e x p o rts o r f o r p r o t e c t i o n i n th e lo n g r u n . I t i s from t h i s v ie w p o in t t h a t th e v a r io u s n a t i o n a l p o lic y 16k m easu res m ust be ex a m in ed . The q u e s t io n I s n o t how to J u s t i f y p r o t e c t io n and c o n t r o l s , b u t, r a t h e r , w h eth er th e m easu res b e in g a d o p te d make any c o l l e c t i v e s e n s e . The an sw er c a n n o t be s im p le , f o r many c o u n t r ie s h ave a d o p te d tw o, t h r e e , o r e v e n more k in d s o f c o n t r o l s — t a r i f f s , su b s i d i e s , Im port s u r c h a r g e s , m u lt ip le ex ch a n g e r a t e s , quan t i t a t i v e r e s t r i c t i o n s , ta x and c r e d i t I n c e n t i v e s , e t c e t e r a . Some a s p e c t s o f t h e s e m easu res r e l a t e p r im a r ily to im p o rt s u b s t i t u t i o n , o t h e r s to e x p o r t p r o m o tio n . Q u a n t it a t iv e Im p ort R e s t r i c t i o n s One o f th e m ost common ty p e s o f tr a d e and exch an ge sy ste m s i n d e v e lo p in g c o u n t r ie s h as b een a c o m b in a tio n o f an o v e r v a lu e d c u r r e n c y w ith q u a n t i t a t i v e Im port r e s t r i c t i o n s Im posed p r im a r ily f o r th e p u rp o se o f s a f e g u a rd in g th e b a la n c e o f p a y m en ts. S in c e many d e v e lo p in g c o u n t r ie s to d a y a r e e x p e r ie n c in g s lo w grow th o f t h e i r t r a d i t i o n a l e x p o r t s , th e y ca n n o t do away w ith su ch r e s t r i c t i o n s . What a r e th e im p lic a t io n s o f q u a n t i t a t i v e r e s t r i c t io n s f o r im p o rt s u b s t i t u t i o n s ? Once q u a n t i t a t i v e r e s t r i c t io n s a r e im posed on im p o r ts , p r ic e s o f im p o rted commod i t i e s i n d o m e stlo m ark ets ten d to r i s e im m e d ia te ly . P r ic e (and q u a l i t y ) c o m p e titio n i s s h u t o f f . P r ic e s and p r o d u c tio n o f d o m e stlo s u b s t i t u t e s ten d to in c r e a s e , t o o . 165 The in c r e a s e d d o m e s tic p r o d u c tio n f i l l s th e e x i s t i n g s u p p ly gap a s w e ll a s th e g ro w in g gap c a u se d by r i s i n g in co m e. S uch a sy ste m o f e n c o u ra g in g im p o rt s u b s t i t u t i o n i s n o t a lw a y s a b l e s s i n g s t r a t e g y . F i r s t , th e p a t t e r n o f r e s t r i c t i o n s i s d e t e r m ined p re d o m in a n tly by b a la n c e o f paym ents and c o s t o f l i v i n g c o n s i d e r a t i o n s . T hus, l e s s e s s e n t i a l consum er goods an d l u x u r i e s a r e u s u a l ly m ore s e v e r e ly r e s t r i c t e d th a n o t h e r c o m m o d itie s. D o m estic p ro d u c tio n o f suoh c o m m o d itie s, th e n , r e c e i v e s c o rr e s p o n d in g ly h ig h e r p r o t e c t i o n and m ore r e s o u r c e s a r e a t t r a c t e d to t h e i r p r o d u c ti o n . F o r ex am p le, d u r in g 1955-62 o u tp u t o f d o m e s tic r e f r i g e r a t o r s and room a i r - c o n d i t l o n e r s i n I n d i a and th e P h i l i p p i n e s in c r e a s e d muoh f a s t e r th a n o u tp u t o f p ro d u c e r g o o d s, su c h a s c a u s t i c so d a an d cem en t, i n th e P h i l i p - li p in e s , and s u lp h u r ic a c id an d s t e e l , i n I n d i a . T hese d e v e lo p m e n ts h a v e n o t c o rre s p o n d e d to c o m p a ra tiv e a d v a n ta g e , and many d e v e lo p in g c o u n tr i e s hav e t r i e d to c o r r e c t th e d i s t o r t i o n i n r e s o u r c e a l l o c a t i o n by im p o sin g e x c is e ta x e s on th e d o m e s tic p r o d u c tio n o f s o c i a l l y l e s s d e s i r a b le g o o d s. L U n ite d N a tio n s : Econom ic S u rv e y o f A s ia and th e F a r E a s t . (New Y ork: 1 9 6 3 ). p p . ^ 1 - ^ 3 . 166 S eco n d , im p o rts o f c a p i t a l g ood s a r e u s u a lly g iv e n fa v o r e d tr e a tm e n t. T h is en co u r a g es th e u s e o f im p orted in p u ts and d isc o u r a g e s im p o rt s u b s t i t u t i o n o f raw m a t e r ia ls , s e m i- f in is h e d p r o d u o ts , o r c a p i t a l g o o d s , -im p orted c a p i t a l g ood s a r e p u rch ased a t th e o v e r v a lu e d o f f i c i a l r a t e and a r e , t h e r e f o r e , ch eap i n term s o f l o c a l c u r r e n c y to th e u s e r s who ca n o b t a in im p o rt l i c e n s e s . The fe w e r d o m e stic in p u ts u s e d , th e more p r o f i t im p o r t- r e p la c in g i n d u s t r i e s ca n m ake. T h is i s why th e p a ck a g in g and l a b e l l i n g — th e " f in is h - t o u c h " — i n d u s t r i e s , a r e f lo u r i s h i n g i n many d e v e lo p in g c o u n t r ie s u n d er th e quan t i t a t i v e r e s t r i c t i o n s sy ste m . I n d u s t r i a l i z a t i o n i n t h i s form becom es r a th e r s u p e r f i c i a l and la c k s d e p th . A ls o , s in c e im p orted c a p i t a l g ood s a r e ch ea p , a d o p tio n o f c a p i t a l - i n t e n s i v e p r o d u c t io n te c h n iq u e s i s en cou raged ev en th ou gh la b o r i s th e abundant f a c t o r i n th e econom y. M ean w h ile, a s im p o rts o f c a p i t a l good s a r e s t im u la t e d , th e p r e s s u r e s on f o r e ig n exch an ge m ount. The more r e s t r i c t i o n s a r e n eed ed on im p o r ts o f n o n - e s s e n t i a l g o o d s; t h i s f u r t h e r a c c e n t u a te s th e d i s t o r t i o n on r e s o u r c e a l l o c a t i o n . T h ir d , a s th e im p o r t - s u b s t it u t in g in d u s t r i e s grow f a s t and th e t o t a l a v a i l a b i l i t y o f f o r e ig n exch an ge i s l i m i t e d , e v en th e demand f o r th e p r e fe r r e d im p o rts o f 167 c a p i t a l goods c a n n o t be f u l l y s a t i s f i e d . M oreover, cum bersom e p ro c u d u re s i n a d m in is te r in g Im p o rt l i c e n s e s in tr o d u c e d e la y , w h ile f a v o r i t is m and c o r r u p tio n p r e v e n t im p o rts from flo w in g d i r e c t l y to th e end u s e r s . The r e s u l t a n t s h o r ta g e o f im p o rte d m a t e r i a l s and s p a r e p a r t s t e n i s to c a u s e many p l a n t s o f th e new i n d u s t r i e s to o p e r a te f a r below c a p a c i ty . A s u b s t a n t i a l p a r t o f c a p i t a l e q u ip m en t in v e s te d becom es i d l e and w a ste d , th e a v e ra g e c o s t i s h ig h e r , and th e o u tp u t s m a lle r . F o u r th , th e a p p l i c a t i o n o f q u a n t i t a t i v e r e s t r i c t i o n s te n d s to r e s u l t i n w in d f a ll p r o f i t s to th e fa v o re d im p o r te r s . T h ere i s h a r d ly an y i n c e n ti v e f o r im p ro v in g e f f i c i e n c y o f p r o d u c tio n u n d e r q u a n t i t a t i v e p r o t e c t i o n , f o r c o m p e titio n from a b ro a d i s l i m i t e d by a d m i n i s t r a t iv e d e c i s i o n . P r i c e and q u a l i t y a r e g e n e r a l l y n o t d e te rm in a n t s i n s e t t i n g im p o rt q u o ta s . No m a tte r how h ig h th e d o m e s tic m a rk e t p r i c e , how p o o r th e q u a l i t y o f d o m e s tic p r o d u c ts , no m ore Im p o rts th a n th e q u o ta s a r e p e r m itte d . H ig h e r p r i c e s m ean, o f c o u rs e , w e lf a r e s a c r i f i c e s o n th e p a r t o f th e co n su m er. I f t h i s s a c r i f i c e c a n be compen s a te d by f u t u r e p r i c e r e d u c tio n s and i n c r e a s e s i n em ploy m ent and r e a l incom e, i t may be j u s t i f i e d a s a n e c e s s a r y t r a n s i t i o n a l s t a g e . B u t, i t a p p e a rs u n c e r t a i n t h a t t h i s o o u rs e w i l l f o llo w u n d e r th e c o n t r o l s y s te m . 168 F i f t h , c lo s e l y r e la te d , to th e g e n e r a l I n e f f i c i e n c y o f th e I m p o r t - s u b s t i t u t i n g I n d u s t r i e s i s th e p e n a lty to th e e x p o rt s e c t o r . The f a s t- g r o w in g , Im p o rt- s u b s t i t u t i n g i n d u s t r i e s te n d to draw m a t e r i a l , f i n a n c i a l , and l a b o r r e s o u r c e s away fro m t h i s s e o t o r . W here e x p o r t i n d u s t r i e s u s e p ro d u c ts o f some i m p o r t - s u b s t i t u t i n g i n d u s t r i e s a s t h e i r I n p u ts , th e h ig h p r i c e s o f su c h p r o d u c ts a l s o p u sh up th e c o s t o f p ro d u c in g th e e x p o r ts . Suoh upw ard p r e s s u r e on th e c o s t s t r u c t u r e c a n do much damage to th e c o u n try * s a b i l i t y to e a r n f o r e i g n e x ch a n g e, e s p e c i a l l y i f accom panied by i n f l a t i o n . The q u e s tio n i s n o t w h e th e r o r n o t to a b o li s h q u a n t i t a t i v e r e s t r i c t i o n s e n t i r e l y and r e t u r n to f r e e t r a d e . R a th e r , i t i s w h e th e r some o t h e r c o m b in a tio n o f exchange and t r a d e p o l l o l e s o an do th e jo b b e t t e r . F o r i n s t a n c e , a downward a d ju s tm e n t o f th e exchange r a t e w ould re d u c e th e need f o r q u a n t i t a t i v e r e s t r i c t i o n s and m eanw hile r e s t o r e th e e x p o rt s e c t o r to th e p o s i t i o n i t d e s e r v e s . Im p o rt d u t i e s c a n be a d ju s te d to s u i t more s p e c i f i c a l l y th e p u rp o se o f p r o t e c t i o n and a llo w a r e a s o n a b le am ount o f f o r e i g n c o m p e titio n . E ven w ith a l l th e s e c h a n g e s , b a la n c e i n i n t e r n a t i o n a l paym ents may s t i l l be u n o b ta in a b le and q u a n t i t a t i v e r e s t r i c t i o n s may s t i l l be n e e d e d — b u t to a much l e s s e r e x t e n t . They may s t i l l h av e to be u se d to c u rb im p o rts o f lu x u ry oonsum p- 169 t i o n goods ( I n c o m b in a tio n w ith c o rre s p o n d in g e x o is e ta x e s to d is c o u r a g e d o m e s tic p r o d u c tio n o f s i m i l a r g o o d s) o r a s a p r o t e c t i v e d e v ic e to p r e v e n t m a rk e t d i s r u p t i o n o r c o u n te r v a i l dum ping. B u t th e y s h o u ld be u sed o n ly on a l i m i t e d , s e l e c t e d b a s i s . M u ltip le E xchange R a te s A o o u n try may n o t w ant to d e v a lu e i t s c u rre n c y f o r a v a r i e t y o f r e a s o n s , in c lu d in g f e a r o f i n f l a t i o n and l o s s o f c o n fid e n c e i n th e c u rr e n c y . M u ltip le e x ch an g e r a t e s , u n d e r w hich h ig h e r r a t e s a r e g e n e r a l l y a p p lie d to l e s s e s s e n t i a l Im p o rts th a n to b a s ic fo o d and c a p i t a l g o o d s, a r e a welcom e com prom ise. T h is r e d u c e s g r e a t l y th e p r e s s u r e o n demand f o r im p o rts com p a re d to a sy ste m o f q u a n t i t a t i v e r e s t r i c t i o n s and s ip h o n s o f f a t l e a s t p a r t o f th e w in d f a ll Im p o rt p r o f i t s . Many c o u n tr i e s a l s o u s e some q u a n t i t a t i v e r e s t r i c t i o n s i n c o m b in a tio n w ith m u lt i p le exohange r a t e s , b u t th e s e v e r i t y o f su o h r e s t r i c t i o n s i s much l e s s . Low exchange r a t e s a r e u s u a l l y a p p lie d to t r a d i t i o n a l e x p o r ts , b e c a u s e i t i s o f t e n found t h a t su c h co m m o d ities c an s t i l l be e x p o rte d ev en u n d e r p e n a lty exchange r a t e s , and t h e i r s u p p ly a p p e a rs to b e r a t h e r p r i c e I n e l a s t i c i t y . O th e r m in o r, and p a r t i c u l a r l y new, e x p o r ts a r e u s u a l ly e n - o o u rag ed by a h ig h e r exohange r a t e . 170 T hus, a p a r t i a l d e v a l u a t i o n becom es a s u b s t i t u t e f o r a c r o s s - th e - b o a r d d e v a lu a tio n and s t r a ig h t f o r w a r d q u a n t i t a t i v e r e s t r i c t i o n s . I t s i g n i f i c a n t l y s h i f t s th e b u rd e n o f d e fe n d in g th e b a la n c e o f paym ents an d p r o t e c t in g d o m e s tic p r o d u c ts from a d m i n i s t r a t i v e c o n tr o l s to th e p r i c e m echanism . F u rth e rm o re , by u s in g s t r a t i f i e d exohange r a t e s , th e g o v ern m en t i s g e n e r a l l y a b le to c i r cum vent th e d i f f i c u l t i e s t h a t t a r i f f a d ju s tm e n t may r a i s e w ith r e g a r d to i n t e r n a l l e g i s l a t i o n and e x te r n a l com m it m ents u n d e r th e G e n e ra l A greem ent on T a r i f f s and T rad e (GATT). I n s o f a r a s th e im p o rts c o rre s p o n d in g to th e d i f f e r e n t ex change r a t e s a r e c l a s s i f i e d on th e p r i n c i p l e o f e s s e n t i a l i t y , th e m u ltlp le - e x c h a n g e - r a te sy ste m , l i k e q u a n t i t a t i v e r e s t r i c t i o n s , d i s t o r t s th e p a t t e r n o f i n v e s t m ent and e n c o u ra g e s d o m e s tic p r o d u c tio n o f th e l e s s e s s e n t i a l goods p r o t e c te d by th e h ig h e r exchange r a t e s ( u n le s s c o rre s p o n d in g e x c is e ta x e s c a n be im p o s e d ). T h is i s n o t n e c e s s a r i l y i n a c c o rd a n c e w ith p r o s p e c tiv e com para t i v e a d v a n ta g e i n th e s e n s e t h a t , g iv e n a re a s o n a b le p e rio d o f tim e , th e i n d u s t r i e s w ould become e f f i c i e n t . A more r a t i o n a l sy ste m o f p r o t e c t i o n m ig h t r e q u i r e a l a r g e num ber o f r a t e s , e a c h a p p l i c a b l e to a few in d u s t r i e s . B u t t h i s may become Im p o s s ib le to a d m i n i s t e r . 171 B u t t h i s may become Im p o s s ib le to a d m i n i s t e r . E ach I n t e r e s t e d g ro u p w i l l p r e s s f o r a m ore f a v o r a b le exchange r a t e , o r u rg e f o r a r e c l a s s i f i c a t i o n o f th e com m odity c o n c e rn e d to a m ore f a v o r a b le c a te g o r y . I f ex ch an g e r a t e s a r e m u l t i p l i e d to s u i t I n d i v id u a l I n d u s t r i e s , th e n p r o t e c t i v e t a r i f f s w ould be a b e t t e r c h o ic e . I n s p i t e o f th e s e d e f i c i e n c i e s , th e m u l t i p l e - e x c h a n g e - r a te sy ste m h a s a d v a n ta g e s o v e r th e sy ste m o f q u a n t i t a t i v e r e s t r i c t i o n s . F i r s t o f a l l , i t r e l i e s more on th e p r i c e m echanism th ro u g h d is g u is e d ta x e s and su b s i d i e s . A lth o u g h th e com m odity g ro u p in g s t i l l r e q u i r e s some a d m i n i s t r a t i v e d e c i s i o n , th e r e l i a n c e o n a r b i t r a r y im p o rt q u o ta s i s g r e a t l y re d u c e d . I t c h a lle n g e s th e a d eq u a cy o f th e o f f i c i a l exchange r a t e and a c t u a l l y moves th e " a v e ra g e " r a t e to a m ore r e a l l s t i o l e v e l . I n c a s e th e a v e ra g e e f f e c t i v e im p o rt r a t e i s h ig h e r th a n th e a v e ra g e e f f e c t i v e e x p o r t r a t e , th e d i f f e r e n c e , r e p r e s e n tin g a s o r t o f t a x a t i o n on i n t e r n a t i o n a l t r a n s a c t i o n s , y i e l d s re v e n u e to th e g o v ern m en t o r exohange p r o f i t s to th e m o n etary a u t h o r i t y — w hich i s a d i s i n f l a t i o n a r y f a c t o r . I n many c a s e s , a f l o a t i n g exohange r a t e i s a llo w e d to e x i s t t o g e t h e r w ith o t h e r r a t e s , w hich h e lp s to some e x te n t th e a d ju s tm e n ts o f demand and s u p p ly i n th e v a r io u s b a la n c e o f paym ents ite m s . I t a l s o h e lp s i n f i n d in g a 172 r e a l i s t i c l e v e l o f th e ex ch an g e r a t e . T hus, a m u l t i p l e - e x c h a n g e - r a te sy s te m , I f n o t c o m p lic a te d i n s t r u c t u r e and d i f f i c u l t to a d m in is te r , c an be a n e x p e d ie n t t r a n s i t i o n a l d e v ic e tow ard e v e n tu a l d e v a lu a tio n and u n i f i c a t i o n o f ex ch an g e r a t e s . I t s h o u ld , how ever, n o t be a p e rm a n e n t s y s te m . E xohange and Im p o rt s u rc h a rg e s a r e - a k i n to m u ltip le r a t e s . E xchange s u rc h a r g e s a r e u s u a l l y a p p lie d to f o r e i g n exohange s o ld by th e c e n t r a l bank f o r v a r io u s k in d s o f e x t e r n a l p a y m e n ts. Im p o rt s u r c h a r g e s u s u a l ly ta k e th e form o f d i f f e r e n t r a t e s o f ad v a lo re m d u t i e s im posed o v e r and above th e r e g u l a r im p o rt d u t i e s on b ro ad c a t e g o r i e s o f g o o d s. The sy ste m i s e q u iv a le n t to m u ltip le exohange r a t e s a p p lie d o n ly to th e m e rc h a n d ise im p o rt s i d e , n o t o n e x p o r ts and I n v i s i b l e s . I t s e f f e c t s on im p o rts and d o m e s tic in v e s tm e n t and p r o d u c tio n , and i t s a d m in is tr a t i v e p ro b le m s, a r e s i m i l a r to th o s e o f a m u lt i p le - e x - c h a n g e - r a te sy s te m . T a r i f f s an d S u b s id ie s A g ro w in g num ber o f d e v e lo p in g c o u n tr i e s a r e m oving away from q u a n t i t a t i v e r e s t r i c t i o n s tow ard m u ltip le ex ch an g e r a t e s and from m u ltip le exohange r a t e s tow ard a d e v a lu e d u n i f i e d ex ch an g e r a t e . They h a v e , t h e r e f o r e , f e l t th e n eed f o r r e l y i n g m ore and m ore on t a r i f f s f o r t r a d e and d e v elo p m e n t p u rp o s e s and h a v e begun to r e v i s e t h e i r t a r i f f s y s te m s . B u t one c a n n o t d i s c u s s a n a d e q u a te l e v e l o f t a r i f f p r o t e c t i o n w ith o u t lo o k in g a l s o I n to o t h e r r e l a t e d m e a s u re s . I f th e c u rr e n c y i s o v e rv a lu e d , f o r ex am p le, th e t a r i f f w ould l o s e p a r t o f i t s pow er o f p r o t e c t i o n . On th e o t h e r h a n d ,’ i f q u a n t i t a t i v e r e s t r i c t i o n s a r e u s e d , th e n eed f o r t a r i f f p r o t e c t i o n w ould be l e s s . T h u s, i f th e c u rre n o y i s o v e rv a lu e d by 20 p e r c e n t , a 35 p e r c e n t ad v a lo re m t a r i f f w i l l o n ly le a v e 15 p e r c e n t n e t p r o t e c t i o n . B u t i f , a t th e same tim e , q u a n t i t a t i v e im p o rt r e s t r i c t i o n s a r e a l s o a p p li e d , and th e d o m e s tic m a rk e t p r i c e o f th e im p o rte d com m odity i n q u e s tio n i s 25 p e r c e n t h ig h e r th a n w ith o u t th e r e s t r i c t i o n , th e n e t p r o t e c t i o n w ould be 50 p e r c e n t . E x c is e ta x e s , i f t h e r e a r e a n y , s h o u ld be c o n s id e re d a s n e g a tiv e f a o t i o n s . T hus, th e l e v e l o f p r o t e c t i o n i s g e n e r a l l y d e te rm in e d by th e a p p a r e n t t a r i f f r a t e , p lu s o r m inus e f f e c t i v e c u rre n c y u n d e r o r o v e r v a lu a tio n , p lu s th e e x te n t o f a d o m e s tic p r i c e r i s e due to q u a n t i t a t i v e r e s t r i c t i o n s , and m inus th e e x c is e ta x r a t e . The a rg u m e n ts f o r t a r i f f p r o t e c t i o n hav e a lo n g h i s t o r y an d h av e r e o e n t ly b e e n a d v an c ed f u r t h e r a lo n g w ith th e ad v an cem en t o f d e v elo p m e n t e o o n o m ics. I t i s n o t In te n d e d h e r e to re v ie w th e l i t e r a t u r e on t a r i f f p r o t e c t i o n .^ B ut i t w ould be u s e f u l to m e n tio n b r i e f l y some o f th e b a s ic re a s o n s s u p p o r tin g th e p o lic y o f t a r i f f p r o t e c t i o n , f o r th e s e re a s o n s h a v e a b e a r in g o n th e c h o ic e o f p o l ic y m e a su re s: S t r u c t u r a l R i g i d i t i e s T ru e lo n g - r u n c o m p a ra tiv e a d v a n ta g e h a s n o t b een r e a l i z e d i n th e d e v e lo p in g o o u n t r i e s , a c c o rd in g to one s c h o o l o f th o u g h t, b e c a u se o f s t r u c t u r a l r i g i d i t i e s m an i f e s t e d i n f a c t o r im m o b ility . T hus, i t h a s b e en a rg u e d by o rth o d o x e c o n o m ists t h a t , s in c e th e t r o u b le s a r e d e e p - r o o te d , th e rem edy l o g i c a l l y l i e s w ith im provem ent o f f a c t o r a l m o b il i ty , su c h a s la n d re fo rm , e d u c a tio n , t r a i n i n g o f l a b o r , th e d e v e lo p m e n t o f c a p i t a l m a rk e ts , e t c e t e r a , r a t h e r th a n i n t e r f e r e n c e w ith f o r e i g n t r a d e . A d v o c a te s o f p r o t e c t i o n ism th in k su c h a rem edy, w h ile n e e d e d , would ta k e to o lo n g to y i e l d r e s u l t s . The r e a l i s s u e , how ever, i s th e c h o ic e o f p o lic y m e a su re s: t a r i f f s v e r s u s s u b s id i e s f o r ^ F o r suoh a re v ie w , s e e th e fo llo w in g two a r t i c l e s : H. M y ln t, " I n f a n t I n d u s t r i e s A rgum ents f o r A s s is ta n c e to I n d u s t r i e s i n th e S e t t i n g o f Dynam ic T rad e T h e o ry ," I n t e r n a t i o n a l T rad e T h eo ry i n a D e v e lo p in g W o rld . R. H a rro d , ( E d .) , 19^3? and M. G. d e V r ie s , "T ra d e an d Ex change P o l i c y and Econom ic D ev elo p m en t," O xford Econom ic P a p e r s . M arch, 1 9 6 6 . 175 th e p u rp o s e o f p ro m o tin g Im p o rt s u b s t i t u t i o n . O rth o d o x e c o n o m ists p r e f e r s u b s id i e s b e c a u se th e y k e e p p r i c e s a t c o m p e titiv e l e v e l s and do n o t d i s t o r t p r i c e r e l a t i o n s and o o n su m p tio n and in v e s tm e n t d e c i s i o n s . I n p r a c t i c e , ho w ev er, few d e v e lo p in g c o u n tr i e s f in d i t p o s s i b l e to o r g a n iz e s u b s id i e s i n any s u b s t a n t i a l way to f a c i l i t a t e im p o rt s u b s t i t u t i o n . An e f f e c t i v e p ro g ram o f s u b s id i z in g im p o rt su b s t i t u t i o n w ould r e q u i r e a l a r g e am ount o f p u b lic f i n a n c e . W here w ould th e fu n d s come from ? I n t e r n a l t a x a t i o n i s e x a c tl y one o f th e f i e l d s w here d e v e lo p in g c o u n tr i e s f in d i t d i f f i c u l t to move a h e a d . I n c o n t r a s t , i t i s com para t i v e l y e a sy to ta x Im p o rts . As a m a tte r o f f a c t , w h ile i n d e v e lo p e d c o u n tr i e s custom s re v e n u e i s g e n e r a l l y a s m a ll p a r t o f t o t a l go v ern m en t re v e n u e , i n d e v e lo p in g c o u n t r i e s i t c o n s t i t u t e s a l a r g e p r o p o r t io n . E ven i n th e U n ite d S t a t e s i n 1 8 5 0 , im p o rt d u t i e s p ro d u ce d 90-95 p e r c e n t o f th e f e d e r a l re v e n u e ; th e f i g u r e h a s now d ro p p e d to below 2 p e r c e n t .^ I t i s n a t u r a l t h a t th e d e v e lo p in g c o u n tr i e s to d a y h av e to r e l y s u b s t a n t i a l l y on im p o rt d u t i e s f o r b o th p r o t e c t i o n and re v e n u e . Im p o rt . P . K in d le b e r g e r , F o re ig n T rad e and th e N a tio n a l Economy. (New Haven: Y a le U n iv e r s ity P r e s s , 1 9 6 2 ), p . 137. 176 d u t i e s may h av e th e s i d e e f f e c t s o f some p r i o e d i s t o r t i o n and m is a l l o o a t i o n o f r e s o u r o e s , b u t so f a r a s p r o t e c t i v e t a r i f f s c a n be re d u c e d a n d , e v e n t u a l l y , rem oved a s i n d u s t r i e s m a tu re , su c h e f f e c t s would o n ly be t r a n s i t i o n a l i n c h a r a c t e r . They a r e n o t th e optim um s o l u t i o n ; b u t th e y a r e th e se co n d b e s t and m ost f e a s i b l e p o lic y m easu re to a d o p t. P e tro le u m e x p o rtin g c o u n tr i e s (s u c h a s I r a q ) , w here am ple f i n a n c i a l r e s o u r o e s a r e a v a i l a b l e and f o r e i g n exohange i s n o t s c a r o e , may p r e s e n t a s p e c i a l c a s e . H ere i t may be d e s i r a b l e and f e a s i b l e to u s e s u b s id i e s to en c o u ra g e th e d e v e lo p m e n t o f i m p o r t - s u b s t i t u t i o n I n d u s t r i e s . E x te r n a l E conom ies A n o th e r s c h o o l o f th o u g h t em p h a size s t h a t c u r r e n t c o s t s and p r i c e s a r e u n s a t i s f a c t o r y i n d i c a t o r s o f lo n g - ru n c o m p a ra tiv e a d v a n ta g e b e c a u s e , i f e x t e r n a l econom ies c an be r e a l i z e d i n th e f u t u r e , th e c o s t - p r i o e s t r u c t u r e w i l l change and so w i l l f u t u r e c o m p a ra tiv e a d v a n ta g e . P o s s i b l e e x te r n a l econom ies in c lu d e in c r e a s e d a v a i l a b i l i t y o f econom ic o v e rh e a d f a c i l i t i e s o r econom ic i n f r a s t r u c t u r e ; b e n e f i t s o f th e l e a r n in g p ro c e s s r e q u ir e d f o r man a g em en t, l a b o r , m a rk e tin g , m ethods o f p r o d u c tio n , e t c e t e r a ; and th e a d v a n ta g e s o f b a la n c e d g ro w th and th e i n t e r i n d u s t r y r e l a t i o n . I n o r d e r to b r in g o u t suoh ex t e r n a l e co n o m ie s, p r o t e c t i o n i s needed d u r in g th e t r a n s i t i o n a l p e r i o d . 177 T h is l i n e o f th in k in g r a i s e s f u r t h e r p o lic y q u e s tio n s w ith r e s p e c t to p r o t e c t i o n . I t i s a rg u e d t h a t e x t e r n a l econom ies c a n be r e a l i z e d e a s i l y i f a con s t e l l a t i o n o f i n d u s t r i e s d e v e lo p s s im u lta n e o u s ly . T h is w ould e n a b le th e tr a n s m is s io n o f e x te r n a l econom ies b o th h o r i z o n t a l l y and v e r t i c a l l y th ro u g h o u t th e w hole in d u s t r i a l s t r u c t u r e . H ence, th e i n f a n t m a n u fa c tu rin g s e c t o r a s a w hole m u st be p r o te c te d I n s te a d o f j u s t i s o l a t e d i n f a n t i n d u s t r i e s . T h is arg u m e n t i s r e in f o r c e d by th e e x is te n c e o f f a c t i o n a l im m o b ility , f o r a g e n e r a l p r o t e c t i o n o f th e m a n u fa c tu rin g s e c t o r te n d s to a t t r a c t more underem ployed l a b o r from a g r i c u l t u r e th a n i s o l a t e d p r o t e c t i o n . To make th e p r o t e c t i o n o f th e w hole m a n u fa c tu rin g s e c t o r e f f e c t i v e , i t h a s b een s u g g e s te d t h a t a u n ifo rm ad v a lo re m t a r i f f be im posed on a l l m a n u fa c tu re d Im p o rts , le a v in g th e s e l e c t i o n o f i n d iv i d u a l i n d u s t r i e s to m a rk e t 7 f o r c e s , ' o r t h a t a sy ste m o f d u a l exchange r a t e s be i n - Q tr o d u c e d . T h is w ould e lim in a te th e need f o r go v ern m en t to d e c id e w hat i n d u s t r i e s a r e e l i g i b l e f o r p r o t e c t i o n . 7 G. M. M e ie r, L e a d in g I s s u e s i n D evelopm ent E co n o m ic s. (Londons O x ford U n iv e r s ity P r e s s , 1 9 6 4 ), p . 3 0 3 . Q N. K a ld o r, "D ual E xchange B a te s and Eoonomic D e v e lo p m e n t,” Econom ic B u l l e t i n f o r L a t i n A m e ric a . V o l. IX , No. 2 , November 196*1- (U n ite d N a tio n s P u b l i c a t i o n , S a le s N o.: 6 5 .1 1 .G .3 ) . I f a u n ifo rm ad v a lo re m t a r i f f on a l l m a n u fa c tu re d im p o rts i s su p e rim p o sed on th e e x i s t i n g t a r i f f s y s te m , i t m ould mean a n Im p o rt s u rc h a rg e on m a n u f a c tu r e r s . T h is m easu re w ould h av e th e e f f e c t o f r e d u c in g im p o rt ex p en d i t u r e s . I t w ould te n d to g iv e h ig h e r p r o t e c t i o n to th o s e i n d u s t r i e s whose c o m p etin g im p o rts a r e p r io e e l a s t i c i n demand th a n to th o s e whose c o m p etin g Im p o rts a r e p r i c e i n e l a s t i c . T h is may n o t be i n c o n fo rm ity w ith c o m p a ra tiv e a d v a n ta g e . H ow ever, a d e v e lo p in g economy t h a t r e l i e s h e a v i ly on a few p rim a ry e x p o r ts and i s i n th e i n i t i a l s ta g e o f d e v e lo p m e n t h a s no way o f i d e n t i f y in g th o s e m a n u fa c tu re s t h a t h av e a p o t e n t i a l c o m p a ra tiv e a d v a n ta g e . A d o p tio n o f u n ifo rm p r o t e c t i o n may be h e l p f u l i n in d u c in g i n i t i a l d i v e r s i f i c a t i o n , w ith th e c h o ic e o f I n d u s t r i e s s u i t a b l e f o r i n d iv i d u a l p r o t e c t i o n l e f t to a l a t e r s t a g e . B u t f o r th o s e c o u n tr i e s w here im p o rt o r exohange s u rc h a rg e s o r m u lt i p le exchange r a t e s , o r q u an t i t a t i v e r e s t r i c t i o n s a r e a lr e a d y i n f o r c e , and some i n d u s t r i e s have b een e s t a b l i s h e d , t h e r e s h o u ld be some c lu e s a s to th e s u i t a b l e p a t t e r n o f i n d u s t r i a l d e v e lo p m en t. I n su c h c a s e s , s p e c i f i c p r o t e c t i o n may be c o n s id e r e d . A s p e c ts o f T a r i f f P r o t e c t i o n We have j u s t d is c u s s e d th e q u e s tio n o f g e n e r a l v e r s u s s e l e c t i v e p r o t e c t i o n o f m a n u fa c tu rin g . O th e r 179 im p o r ta n t q u e s tio n s a r e how to d e f i n e th e d e g re e o f t a r i f f p r o t e c t i o n , w hat s h o u ld be i t s a p p r o p r i a te l e v e l , an d how lo n g i t s h o u ld l a s t . I t i s v e ry im p o r ta n t to d i s t i n g u i s h th e a p p a r e n t r a t e o f p r o t e c t i o n from th e e f f e c t i v e r a t e o f p r o t e o t i o n . The a p p a r e n t r a t e o f p r o t e c t i o n i s th e a d v a lo re m t a r i f f r a t e on th e p r i c e o f th e p ro d u o t o f th e i n d u s t r y , w h ile th e e f f e c t i v e r a t e o f p r o t e c t i o n i s th e ad v a lo re m t a r i f f on th e " v a lu e - a d d e d ” p e r u n i t o f o u tp u t o f th e i n d u s t r y . S ln o e th e i n d u s t r y 's d i r e c t c o n t r i b u t i o n to th e economy i s r e p r e s e n te d by i t s " v a lu e -a d d e d ," th e e f f e c t i v e t a r i f f r a t e r e p r e s e n t s th e r e a l p r o t e o t i o n . F o r ex am p le, i f th e a p p a r e n t t a r i f f r a t e on c o tt o n c l o t h i s 30 p e r c e n t , and th e c o t t o n w eaving I n d u s tr y ad d ed 40 p e r c e n t to th e end p r o d u c ts , th e e f f e c t i v e t a r i f f p r o t e c t i o n o f th e i n d u s t r y i s 75 p e r c e n t ( o .3 d iv id e d by 0 . 4 ) . T h u s, w ith th e same r a t e o f a p p a r e n t t a r i f f , th e e f f e c t i v e r a t e o f p r o t e c t i o n c an d i f f e r among i n d u s t r i e s , d e p e n d in g on th e d i f f e r e n c e s i n th e p r o p o r tio n o f v a lu e a d d e d . I f t h e r e a r e no t a r i f f s on Im p o rte d I n p u t s , th e lo w e r th e p e rc e n ta g e o f v a lu e a d d e d , th e h ig h e r w i l l be th e e f f e c t i v e p r o t e c t i o n o f th e i n d u s t r y . I f im p o rte d i n p u ts a r e a l s o ta x e d and i f i n d u s t r y c a n n o t change f u r t h e r i t s p r o p o r tio n o f v a lu e ad d ed o r r a i s e th e p r i c e o f i t s o u t p u t, th e n th e e f f e c t i v e r a t e o f p r o t e o t i o n i s 180 re d u c e d , an d f o r th e eoonomy a s a w hole p r o t e o t io n becom es m ore w id e ly an d e v e n ly d i s t r i b u t e d . I f th e o o u n t r y 's r e s o u r o e endowment I s su o h t h a t c e r t a i n raw m a t e r i a l s o r s e m i- f in is h e d p ro d u c ts c a n n o t be p ro d u c e d a t a l l , z e ro t a r i f f s o n su c h I n p u ts w ould n o t ham per d o m e s tic p r o d u c tio n o f t h e i r s u b s t i t u t e s . B ut i f t h e r e a r e am ple p o s s i b i l i t i e s o f p ro d u c in g su c h i n t e r m e d ia te p ro d u c ts a t hom e, an d i f th e e n d -p ro d u c t in d u s t r i e s h av e p ro g r e s s e d to th e p o i n t w here th e y c a n s u r v iv e low e f f e o t i v e p r o t e o t i o n , a n im p o s itio n o f t a r i f f s on th e s e i n p u ts te n d s to e x te n d th e p r o c e s s o f im p o rt su b s t i t u t i o n to s e m i- f in is h e d g o o d s, raw m a t e r i a l s , o r even to c a p i t a l g o o d s. S o o n e r o r l a t e r , a s ta g e may be re a c h e d w here t a r i f f s on su o h in te r m e d ia te goods a s th e c o u n try m ig h t e v e n tu a lly p ro d u c e e c o n o m ic a lly w i l l h av e to be i n c r e a s e d . I n f a c t , I n d i a h a s a lr e a d y r a i s e d h e r t a r i f f s on m a c h in e ry i n o r d e r to e n o o u ra g e th e d e v elo p m e n t o f h e r e n g in e e r in g o i n d u s t r y , w h ile t a r i f f s on l i g h t m a n u fa c tu re d goods a lr e a d y c lo s e to eoonom ioal p r o d u c tio n may h av e to be g r a d u a lly re d u c e d . The l a t t e r i s p a r t i c u l a r l y im p o r ta n t, o ^ U n ite d N a tio n s : Eoonomlo S u rv e y o f A s ia an d th e F a r E a s t . New Y ork, 1963* p . 7 ^ . 181 b e c a u se many I n d u s t r i e s a f t e r s u c c e e d in g i n Im p o rt su b s t i t u t i o n w i l l be re a d y to e x p o r t p a r t o f t h e i r p ro d u c t i o n , T h e ir e f f i c i e n c y m u st be f u r t h e r im proved i n o r d e r to com pete i n f o r e i g n m a r k e ts . I n t h i s dynam ic a p p ro a c h to a t a r i f f p o l i c y , i t i s im p o rta n t to exam ine th e i n d i v id u a l i n d u s t r i e s c a r e f u l l y i n d e c id in g th e t a r i f f l e v e l and th e tim e schem e f o r g r a d u a l r e d u o t i o n . A s p re a d o f h ig h t a r i f f s among a l l i n d u s t r i e s te n d s to p u sh up a l l c o s t s o f p r o d u c tio n . The s u c c e s s o f t h i s p o lic y d epends g r e a t l y on th e i n t e l l i g e n t s e l e o t i o n o f th e h ig h e r i n d u s t r i e s a t th e r i g h t tim e . As f a r a s th e g e n e r a l l e v e l o f t a r i f f i s c o n c e rn e d , t h e r e h a s b e en much t h e o r e t i c a l d i s c u s s i o n o f th e " o p t i mum t a r i f f " w hich w i l l im prove th e te rm s o f t r a d e b u t n o t re d u c e th e volum e o f t r a d e . H ow ever, a s th e m a rg in a l u t i l i t y o f r e a l incom e d i f f e r s b etw een i n d u s t r i a l and d e v e lo p in g c o u n t r i e s , th e optim um t a r i f f f o r th e l a t t e r may be h ig h e r th a n t h a t f o r th e fo rm e r.^ -0 The c o n c e p t o f th e "optim um t a r i f f " n e v e r t h e l e s s i s h a r d l y u s e f u l i n c o n n e c tio n w ith th e d i s o u s s io n o f th e l e v e l o f p r o t e c t i o n . M. F le m in g , "The Optimum T a r i f f from a n I n t e r n a t i o n a l S ta n d p o in t," R eview o f E conom ics an d S t a t i s t i c s . F e b ru a ry , 1 9 5 6 . 182 I t i s t r u e t h a t t a r i f f s im prove th e te rm s o f t r a d e , b u t t h i s i s seldom t h e i r p u rp o s e . A t a r i f f f o r p r o t e o t i o n f a i l s i f th e f o r e i g n e r p a y s th e w hole d u ty . The same q u a n ti t y Im p o rte d le a v e s th e d o m e s tic p r i c e unohanged and b e n e f i t s no d o m e s tic p r o d u c e r .I I T h ere i s o b v io u s ly no a p r i o r i way to d e te rm in e th e a b s o l u te s u i t a b l e l e v e l o f t a r i f f p r o t e c t i o n . I n g e n e r a l , a t a r i f f w a ll s h o u ld n o t be so h ig h a s to p u sh th e c o s t s t r u o t u r e o f th e economy up so a s to damage i t s a b i l i t y to e x p o rt and to l e s s e n i t s p r o s p e c ts o f e v e n tu a l l y lo w e rin g th e t a r i f f w a l l. I t may be a rg u e d t h a t b ro a d p r o t e c t i o n w ould p e rm it a c l u s t e r o f i n d u s t r i e s to become e s t a b l i s h e d , fo rm in g e ach o t h e r 's m a rk e t. B u t t h i s n e g le c t s th e " c o s t- p u s h e f f e c t " on th e s u p p ly s i d e . I f e x te n s iv e t a r i f f p r o t e c t i o n i s g iv e n , i t i s l i k e l y to r a i s e c o s t s th ro u g h th e i n p u t and o u tp u t lin k a g e s i n th e e n t i r e econom y. A h ig h t a r i f f on c h e m lo a l f e r t i l i z e r s , th o u g h p r o t e c t i n g th e d o m e s tic o h em io al f e r t i l i z e r in d u s t r y , w i l l , f o r ex am p le, in o r e a s e th e o o s t o f a g r i c u l t u r a l p r o d u c tio n . C o n s e q u e n tly , e x p o rts o f a g r i c u l t u r a l p r o d u c ts may be ham p ered . I n a d d i t i o n to w o rk in g th ro u g h i n p u t- o u t p u t l i n k s , c o s t- p u s h e f f e c t a l s o o p e r a te s a t th e f a c t o r l e v e l . I f 11 C . P . K in d le b e r g e r , F o r e ig n T rad e and th e N a tio n a l Economy. (New H aven: Y ale U n iv e r s ity P r e s s , 1 9 6 2 ), p . l 4 2 . p r o t e o t i o n i s p ro v id e d to a w ide ra n g e o f i n d u s t r i e s , c a p i t a l and l a b o r w i l l be a b so rb e d by th e s e s h e l t e r e d i n d u s t r i e s and w ith h e ld from a l t e r n a t i v e f i e l d s o f p r o d u c ti o n . The e x p o r t m a n u fa c tu rin g i n d u s t r i e s w i l l be th e f i r s t to be a d v e r s e ly a f f e c t e d , f o r th e y u s e k in d s o f l a b o r an d f i n a n c i a l s o u rc e s s i m i l a r to th o s e u se d by l m p o r t - s u b s t i t u t i o n I n d u s t r i e s . I n th e i n i t i a l s ta g e o f im p o rt s u b s t i t u t i o n , th e " r e s o u r c e - s h i f t " and " c o s t - p u sh" e f f e c t s may n o t be f e l t . B u t a f t e r some p r o g r e s s i n i n d u s t r i a l i z a t i o n , when d o m e s tic m a rk e ts a r e g r a d u a lly f i l l e d and i n d u s t r i e s s t a r t to beg f o r o v e rs e a s m a rk e ts , th e h ig h c o s t s t r u o t u r e w i l l d e a r l y become a n o b s t a c l e . The p r e s s u r e o f h ig h c o s t s te n d s to be p a r t i c u l a r l y h eav y i f i n f l a t i o n p r e v a i l s . The p e r io d o f p r o t e c t i o n i s c l o s e l y r e l a t e d to th e d e g re e o f p r o t e c t i o n . I t i s j u s t i f i a b l e to draw r e s o u r o e s from o t h e r s e c t o r s o f th e economy to a id I n f a n t i n d u s t r i e s o n ly i f th e p r o t e c t i o n i s t r a n s i t i o n a l ; i t i s n o t J u s t i f i a b l e i f p ro lo n g e d i n d e f i n i t e l y . P e r s i s t e n t p r o t e c t i o n te n d s to p e r p e tu a te th e u s e o f m ore d o m e stlo r e s o u r c e s p e r u n i t o f d o l l a r f o r s a v in g f o r e i g n exchange th a n t h a t f o r e a r n in g f o r e i g n e x o h an g e, t h i s i s more l i k e l y to be c o n s id e re d a s w a s te f u l r e s o u r c e a l l o c a t i o n . B e fo re p r o t e c t i o n i s g r a n te d , t h e r e f o r e , i t i s a d v is a b le t h a t a th o ro u g h s tu d y be made o f p r e s e n t and p r o s p e c tiv e 184 008t s , p r i c e s , q u a l i t y o f p r o d u o ts , m a r k e ts , and m anage m ent o f th e p a r t i c u l a r i n d u s t r y , i t s r e l a t i o n w ith o t h e r i n d u s t r i e s , a s w e ll a s s i m i l a r I n f o r m a tio n o n co m p e tin g i n d u s t r i e s a b ro a d . Suoh i n v e s t i g a t i o n i s n e c e s s a r y to d e te rm in e th e h e i g h t and th e d u r a t i o n o f th e t a r i f f . A tim e s c h e d u le f o r re d u o in g th e t a r i f f by s ta g e s sh o u ld a l s o be a g re e d upon w ith th e I n d u s t r y , so a s to fo r o e i t to im prove i t s e f f i o i e n o y g r a d u a l ly . I t s h o u ld a l s o be n o te d t h a t t h e r e a r e s e v e r a l d e v e lo p in g c o u n t r i e s and th e p o l i o l e s o f an y one o f them c a n n o t be deem ed r a t i o n a l i f th e y f a l l to ta k e a o o o u n t o f th e i n t e r e s t s o f o t h e r c o u n tr i e s s i m i l a r l y s t r u g g l i n g w ith t h e i r own b a la n c e o f paym ents w e a k n e ss. F o r exam ple I r a q i d a te s o r Burm ese h i g h - q u a l i t y tim b e r would be l u x u r i e s f o r m ost I n d ia n consum ers an d t h e r e f o r e good t a r g e t s f o r im p o rt r e s t r i c t i o n s i n I n d i a . I f s i m i l a r r e s t r i c t i o n s e x is te d i n I r a q and Burma on e x p o rts o f l u x u r i e s su c h a s o a r p e ts o r f i n e c l o t h o r cashew n u ts from I n d i a , a s i n g l e an d l o g i o a l way o u t o f th e dilem m a w ould be a m u tu al l i b e r a l i z a t i o n o f r e s t r i c t i o n s . B u t i n p r a c t l o e suoh a c o u rs e may n o t p ro v e so s im p le . F o r o n e th in g , th e m u tu a l l i b e r a l i z a t i o n o f im p o rts may h a v e to be on a b i l a t e r a l o r d i s c r im i n a t o r y b a s i s i f th e baby i s n o t to be throw n o u t w ith th e b a th w a te r . Wine i s p ro d u ce d b o th i n F ra n o e and T u n is ia ; and i f l i b e r a l Im p o rts o f w ine a r e to 185 be p e r m itte d from T u n is ia , t h e r e i s no p o i n t i n g iv in g up r e s t r i c t i o n s o n th e im p o rt o f w ine a l t o g e t h e r . I f th e o u r r e n t i n t e r n a t i o n a l dogma o f n o n - d is c r im in a tio n w ere s t r i c t l y a d h e re d t o , th e o n ly a l t e r n a t i v e b e fo r e m o st d e v e lo p in g c o u n tr i e s w ould be to m a in ta in r e s t r i c t i o n s a g a i n s t e a c h o th e r * s im p o rts to th e d e tr im e n t o f a l l o f th em . A t th e same tim e , i f th e p r i n c i p l e o f some m a rg in a l d i s c r i m i n a t i o n , w h e th e r th ro u g h b i l a t e r a l and b a r t e r d e a l s o r o th e r w is e , i s a c c e p te d , i t w ould be ex tre m e ly d i f f i c u l t to a p p ly su o h a p r i n c i p l e r a t i o n a l l y o r e q u i t a b l y . The m a rk e ts t h a t d i f f e r e n t d e v e lo p in g c o u n tr i e s c a n p ro v id e to th e p ro d u c ts o f o t h e r d e v e lo p in g c o u n tr i e s w ould v a ry so much i n s i z e and sco p e t h a t i t w ould be d i f f i c u l t to e s t a b l i s h ev en a n a p p ro x im a te d e g re e o f r e c i p r o c i t y ; and i t may w e ll be t h a t th e d i s c r i m i n a t i o n i m p l i c i t i n an y b i l a t e r a l a rra n g e m e n t i s a g a i n s t some o t h e r d e v e lo p in g c o u n tr y r a t h e r th a n a g a i n s t th o s e who c a n w e ll ta k e i t i n t h e i r s t r i d e . The dilem m a t h a t i s p o se d i n th e s e o o n f l i o t i n g c o n s i d e r a ti o n s i s d i f f i c u l t to r e s o l v e , an d i n a c t u a l p r a c t l o e i t i s l i k e l y to be r e s o lv e d m ore by p r e s s u r e s and c o u n te r - p r e s s u r e s th a n by th e a p p l i c a t i o n o f a n y n a t i o n a l p r i n c i p l e . P e rh a p s one way o f r e s o l v in g th e dilem m a w hioh h a s become a p r a c t i c a l r e a l i t y i n some a r e a s i s t h a t o f form in g su o h u n i t s o f r e g i o n a l o o o p e r a tlo n . B u t a p a r t from 186 th e d i f f i c u l t y o f fo rm in g su c h r e g io n a l c o o p e r a tio n u n i t s i n some a r e a s , t h e r e w ould s t i l l re m a in th e q u e s t io n o f r e l a t i o n s b etw een d i f f e r e n t r e g io n a l g ro u p s among th e d e v e lo p in g c o u n t r i e s . The l o g i o a l th in g to d o , i f one f o llo w s t h i s l i n e o f th o u g h t, w ould be f o r a l l d e v e lo p in g o o u n tr ie s to a d o p t a l i b e r a l im p o rt p o lic y to w a rd s e a c h o t h e r e x o e p t I n s o f a r a s c o n s i d e r a ti o n s o f " i n f a n t in d u s t r i e s " a rg u m en t a p p ly . The e x c e p tio n j u s t n o te d i s c l e a r l y im p o r ta n t i n v iew o f th e f a c t t h a t d i f f e r e n t d e v e lo p in g o o u n tr ie s a r e n o t a t th e same s ta g e o f d e v e lo p m e n t. E ven s o , a c o n s id e r a b le p a r t o f th e tr a d e among d e v e lo p in g o o u n tr ie s c o u ld s t i l l be b ro u g h t w ith in th e sc o p e o f l i b e r a l im p o rt p o l ic y to th e m u tu a l b e n e f i t s o f a l l o f them . F o l i o i e s A f f e c tin g E x p o rt P ro m o tio n T h ere c an be no d o u b t t h a t d e s p i t e a l l th e em phasis on p o t e n t i a l im p o rt s a v in g , th e t o t a l im p o rt b i l l o f th e d e v e lo p in g o o u n tr ie s w i l l o o n tln u e to grow i f d e v elo p m e n t i t s e l f i s to be a c o n tin u in g p r o c e s s . S o o n e r o r l a t e r , t h e r e f o r e , th e d e v e lo p in g c o u n tr i e s m u st ln o r e a s e t h e i r e x p o r ts s u b s t a n t i a l l y . B a s i c a l l y , o f c o u r s e , th e f i r s t and fo re m o s t r e q u ire m e n t f o r a n a t i o n a l e x p o r t p o lic y w ould be s u f f i c i e n t 187 a t t e n t i o n to th e d e v elo p m e n t o f e x p o r t i n d u s t r i e s i n th e a l l o o a t i o n o f in v e s tm e n t and o t h e r s o a r c e r e s o u r c e s . Judgm ent a s to th e k in d o f i n d u s t r i e s and a o t i v i t i e s w hich a r e more l i k e l y to em erge a s s i g n i f i c a n t e x p o r t i n d u s t r i e s o r a c t i v i t i e s w ould v a ry from c a s e to o a s e . A bout th e o n ly g e n e r a l i z a t i o n one c an make i s t h a t th e p ro b lem i s s u f f i c i e n t l y l a r g e to w a r r a n t th e f u l l e s t e x p l o i t a t i o n o f a l l th e a v e n u e s f o r e x p o r t— w h e th e r o ld o r new, w h e th e r th o s e r e l a t i n g to p rim a ry p r o d u c ts o r im p o rt-c o m p e tin g I n d u s t r i e s o r i n v i s i b l e inoom e. I t i s e q u a lly t r u e t h a t th e p o lio y o f a d e q u a te in v e s tm e n t i n e x p o r t i n d u s t r i e s m u st b e accom panied by a p o lio y o f r e s t r a i n t i n d o m e s tic c o n su m p tio n o f e x p o r ta b le ite m s , by r ig o r o u s m a rk e t p ro m o tio n and by a th o ro u g h c o n s i d e r a ti o n f o r e f f i c i e n c y and s t a n d a r d s . T h ere s h o u ld a l s o be a d e te rm in e d e f f o r t to a v o id i n f l a t i o n w hich c a n n o t b u t h u r t th e e x p o rt d r i v e ; and when a g e n e r a l p r i c e r i s e beoomes u n a v o id a b le , t h e r e s h o u ld be a prom pt a d j u s t m ent i n th e ex change r a t e . I t sh o u ld be rem em bered, o f c o u rs e , t h a t r ig o r o u s and e f f i c i e n t e x p o r t I n d u s t r i e s c a n n o t be c r e a te d o v e r n i g h t . A t th e same tim e , e x p o rt m a rk e ts m u st b e g in to be ta p p e d and c u l t i v a t e d a s so o n a s p o s s ib l e i f th e y a r e to be f u l l y e x p lo ite d i n due c o u r s e . A d e l i b e r a t e p o lio y 188 o f g iv in g i n c e n ti v e s to th e e x p o r t i n d u s t r i e s i n th e i n i t i a l s t a g e s i s , t h e r e f o r e , im p e r a tiv e . The c a s e f o r e x p o r t i n c e n t i v e s i s e s s e n t i a l l y th e same a s t h a t f o r " i n f a n t i n d u s t r i e s " p r o t e c t i o n o r f o r im p o rt r e s t r i c t i o n s , w ith a v iew to re d u c in g th e b a la n c e o f paym ents b o t t l e n e c k . The d e v e lo p in g c o u n tr i e s c a n n o t com pete w ith th e i n d u s t r i a l c o u n tr i e s a s r e g a r d s e x p o r t i n c e n ti v e s i n th e form o f c h ea p o r e d i t s and th e l i k e . The g e n e r a l p r a c t i c e among th e d e v e lo p in g c o u n tr i e s i s to o f f e r a v a r i e t y o f I n c e n tiv e s su c h a s ta x e x e m p tio n , s u b s id iz e d t r a n s p o r t o r pow er f a c i l i t i e s , o r c h e a p e r s u p p ly o f raw m a t e r i a l s , o r e a s i e r a o o e s s to im p o rt l i c e n s e s f o r re p la c e m e n t o f im p o rte d co m p o n en ts. Some o f th e s e i n c e n t i v e s , su c h a s e x e m p tio n from cu sto m s and e x c is e d u t i e s and l i c e n s e s f o r th e Im p o rt o f m ac h in e ry and s p a r e p a r t s , a r e n o t r e a l l y " in c e n tiv e s " i n th e s t r i c t s e n s e o f th e te rm . I n some c a s e s , a sy stem o f r e t e n t i o n q u o ta s , w hereby e x p o r t e r s c a n r e t a i n a p a r t o f t h e i r e a r n in g s and im p o rt th o s e goods w hioh a r e i n s c a r c e s u p p ly , h as b een i n f o r c e . The p r o f i t s made on e x p o rts s u b s id i z e th e Im p o rts . From th e p o i n t o f v iew o f e q u ity a s w e ll a s e f f i c i e n c y , i n d i r e c t form s o f e x p o r t s u b s i d i z a t i o n le a v e muoh to be d e s i r e d . I t w ould be f a r s im p le r and r a t i o n a l to g iv e a s t r a i g h t fo rw a rd s u b s id y to e x p o r ts ; an d th e m ain re a s o n why t h i s 189 i s n o t done a s o f t e n a s i t m ig h t be i s th e la c k o f i n t e r n a t i o n a l a p p r e c i a t i o n o f th e l e g i t i m a t e c a s e f o r e x p o r t i n c e n t i v e s i n a d e v e lo p in g economy a s p a r t l y r e f l e c t e d "b y th e r e s t r i c t i v e im p o rt p o l i o i e s o f th e i n d u s t r i a l 12 c o u n t r i e s ." I t i s som ewhat u n f o r tu n a te t h a t th e d is a p p o in tin g e x p o rt p e rfo rm a n c e i n c e r t a i n d e v e lo p in g c o u n tr i e s seem s to h av e le d p la n n e r s to em p h asize f o r e i g n a i d r a t h e r th a n e x p o r t s . T h is p o i n t h a s b e en w e ll made by Cohen i n h i s o a se s tu d y o f I n d i a n e x p o r ts : "The I n d i a n G overnm ent may n o t have c o n s id e re d a n i n c r e a s e i n e x p o rt e a r n in g s a s c l e a r l y b e n e f i o i a l . . .G overnm ent p la n n e r s may h av e f e l t t h a t a d ra m a tic d e c l in e i n I n d ia * s f o r e i g n exchange r e s e r v e s was a p r e r e q u i s i t e f o r o b ta in in g th e H s. 12 b i l l i o n i n f o r e i g n a s s i s t a n c e c a l l e d f o r i n th e S econd F iv e -Y e a r F l a n . The p la n n e d l e v e l o f e x p o r ts was s e t s l i g h t l y below th e l e v e l a c t u a l l y a t t a i n e d d u r in g th e F i r s t P la n p e r io d , and a lm o s t no e x p o r t p ro m o tio n p o l i o i e s w ere s u g g e s te d i n th e S econd F iv e -Y e a r P l a n . " *3 Some P o s i t i v e E x p o rt P ro m o tio n M easu res A lm o st e v e ry d e v e lo p in g c o u n try h as a d o p te d some s o r t o f i n d u s t r i a l p o lio y to e n c o u ra g e i n d u s t r i a l i z a t i o n . 12 G. M y rd a l, A s la n Drama: An I n q u i r y I n t o th e P o v e r t y o f N a tio n s . (New Y ork: Random H ouse, 1 9 ^ 8 ), V o l. 1 , P . 5 8 3 . ^ B . I . C ohen, "The S ta g n a tio n o f I n d ia n E x p o r ts , 1951*1 1 Q u a r te r ly J o u r n a l o f E oonom lcs. November 196**, p p . 611- 612. 190 A p a rt from th e m e a su re s r e l a t i n g to p r o t e c t i o n and p r i o r i t i e s f o r o b t a i n i n g Im p o rt o r ex ch an g e l i c e n s e s f o r p u ro h a s e s o f c a p i t a l goods from a b ro a d w hich we h a v e d i s c u s s e d a b o v e . I t ln o lu d e s ta x c o n c e s s io n s , low I n t e r e s t l o a n s , p r i o r i t i e s I n a l l o c a t i n g c a p i t a l g o o d s, e s t a b l i s h m ent o f I n d u s t r i a l e s t a t e s , e t o e t e r a . T hese g e n e r a l m ea su re s a r e n o rm a lly a p p lie d to a l l i n d u s t r i e s w h e th e r p ro d u c in g f o r d o m e s tic m a rk e ts o r f o r e x p o r t s . W hat we a r e i n t e r e s t e d I n h e r e a r e , how ever, th o s e m ea su re s d i r e c t l y o o n o e m e d w ith e x p o rt p ro m o tio n . R e d u c tio n o f Im p o rt D u tie s an d E x p o rt S u b s id ie s D u tie s on im p o rte d m a t e r i a l s te n d to in c r e a s e th e c o s t o f p r o d u c tio n o f e x p o rt g o o d s. A r e d u c tio n o f th e s e d u t i e s w i l l e a s e th e b u rd e n o f e x p o r t I n d u s t r i e s and i n c r e a s e t h e i r c o m p e titiv e n e s s a b ro a d . Many d e v e lo p in g c o u n tr i e s a r e now u s in g t h i s d e v ic e . H ow ever, a r e d u c t i o n o f d u t i e s on im p o rte d m a t e r i a l s may d is c o u ra g e th e p r o d u c tio n o f d o m e s tic m a t e r i a l s i f su c h p o t e n t i a l i t y e x i s t s i n th e econom y. T hus, th e a d v a n ta g e o f p ro m o tin g a n e x p o rt i n d u s t r y h a s to be w eighed a g a i n s t th e ad v an ta g e o f im p o rt s u b s t i t u t i o n by o t h e r i n d u s t r i e s . 191 Im p o rt s u b s t i t u t i o n w i l l o f t e n le a d to new e x - i k p o r t s . A f t e r e x p an d in g to s u p p ly th e d o m e s tic m a rk e t, f u r t h e r e x p a n s io n i n t o th e e x p o rt m a rk e t may e n a b le p ro d u c e rs o f Im p o rt s u b s t i t u t e s to o p e r a te o n a m ore eco n o m ic al s o a le a t re d u c e d a v e ra g e c o s t . M eanw hile, a s u c c e s s f u l p e r io d o f l e a r n i n g c an a l s o r e s u l t I n a n I n c r e a s e I n e f f i c i e n c y . When s u c h a s t a g e o f m a tu r ity I s re a c h e d , a s h i f t from p r o t e c t i o n a g a i n s t Im p o rt to s u b s i d i z a t i o n f o r e x p o r t may be I n o r d e r . S e s e a ro h an d M a rk e tin g E x p o rt p ro m o tio n e f f o r t s w i l l be b e t t e r d i r e c t e d o r m ore p o in te d I f e x t e r n a l m a rk e t p o s s i b i l i t i e s an d I n t e r n a l p r o d u c tio n p o s s i b i l i t i e s c a n be I d e n t i f i e d . B e- s e a ro h I s e x tre m e ly u s e f u l and w i l l p r o b a b ly h av e to be u n d e rta k e n by th e G overnm ent I n d e v e lo p in g o o u n t r l e s . The c o n t r i b u t i o n o f r e s e a r c h to d e v elo p m e n t I n g e n e r a l an d e x p o rt p ro m o tio n I n p a r t i c u l a r may b e I l l u s t r a t e d by th e v e r t i c a l i n t e g r a t i o n o f s u g a r an d I t s F o r i n s t a n c e , i n C h in a (T a iw a n ), I n d i a , S o u th K o re a , P a k i s t a n an d T h a ila n d w here th e I n d u s t r i e s w ere e s t a b l i s h e d i n i t i a l l y f o r Im p o rt s u b s t i t u t i o n , th e y have i n many o a s e s e x p o rte d t h e i r p r o d u c ts i n f a i r l y l a r g e q u a n t i t i e s . S e e , U n ite d N a tio n s : Econom ic S u rv e y o f A s ia and th e F a r E a s t . New Y ork, 1963* p . V6. 192 r e l a t e d I n d u s t r i e s I n C h in a ( t a i w a n ) . S u g a r i s a m a jo r e x p o rt com m odity i n t h i s o o u n tr y ; i t s e x p o rts a r e o rg a n iz e d by th e T aiw an S u g a r Company, th e s t a t e t r a d i n g a g e n c y . The company a l s o u n d e rta k e s s u c c e s s f u l r e s e a r c h to in o r e a s e th e y i e l d o f s u g a r oane and to s h o r te n th e c ro p -g ro w in g p e r i o d . I t r e q u i r e s o r e n c o u ra g e s s u g a r can e fa rm e rs to r a i s e p i g s , m aking u s e o f th e w a ste o f s u g a r oane f o r fe e d an d th e m anure o f p ig s f o r f e r t i l i z e r s . I t h a s s e t a b o u t Im p ro v in g th e b re e d o f p i g s , an d h a s e s t a b l i s h e d a n im a l f e e d p l a n t s a s w e ll a s w orkshops to p ro c e s s th e ham an d o t h e r p r o d u c ts f o r e x p o r t. Y e a s t, a lc o h o l an d monsodium g lu ta m a te a r e made from s u g a r m o la s s e s w h ile b a g a s s e b a r r e l s and p a r t i c l e b o a rd s f o r c o n s t r u c t io n and f u r n i t u r e a r e p ro d u c e d from s u g a r c a n e f i b e r , b o th f o r Im p o rt s u b s t i t u t i o n an d f o r e x p o r t. The T aiw an S u g a r Company a l s o m a n u fa c tu re s i n s e c t i c i d e s an d a g r i c u l t u r a l p e s t i c i d e s . An i n g r e d i e n t i n a n im a l f e e d , a v re o m y o in , i s b e in g p ro d u c e d from m o la s s e s . B e se a rc h on by p r o d u c ts su c h a s oane wax i s a l s o o o n d u o ted by th e T aiw an S u g a r E x p e rim e n ta tio n S t a t i o n . 5 T h is exam ple s u g g e s ts t h a t p o s s i b i l i t i e s o f e x p o r t d i v e r s i f i c a t i o n e x i s t n o t o n ly i n m a n u fa c tu rin g I n d u s t r y , b u t a l s o i n a g r i c u l t u r e . Once a t t e n t i o n i s d i r e c t e d t o w ards e x p o rt m a rk e ts , t h e r e a p p e a r to be am ple o p p o r tu n i t i e s f o r e x p l o i t a t i o n . As f a r a s m a rk e tin g i s c o n c e rn e d , Ig n o ra n c e a b o u t f o r e i g n m a rk e ts , t a s t e s an d p r e f e r e n c e s o f f o r e i g n ^ ^ U n ite d N a tio n s : Eoonom lc S u rv e y o f A s ia an d th e F a r E a s t . New Y o rk , 1963. p . 2 5 . 193 c o n su m ers, m a rk e tin g te c h n iq u e s , e t c e t e r a , a r e p r a c t i c a l h a n d ic a p s to s u c c e s s f u l e x p o r t p ro m o tio n by d e v e lo p in g c o u n t r i e s . S m a ll volum e o f s a l e s , la c k o f fu n d s , and u n c e r t a i n t y and d i f f u s i o n i n th e b e n e f i t s o f a d v e r t i s i n g a r e th e m ain re a s o n s f o r th e la c k o f a g g r e s s iv e m a rk e tin g by p r i v a t e b u s in e s s e s i n d e v e lo p in g c o u n t r i e s . I n th e s e m a tte r s a l s o , th e G overnm ent c a n o f t e n p la y a n im p o r ta n t r o l e i n a s s i s t i n g th e p r i v a t e s e c t o r by p r o v id in g i n f o r m a tio n a b o u t f o r e i g n m a rk e ts , by u n d e r ta k in g f o r e i g n m a rk e t r e s e a r c h , by p r o v id in g t r a i n i n g f a c i l i t i e s , e t c e t e r a . The G overnm ent may a l s o ta k e th e le a d i n o rg a n i z i n g p r i v a t e b u s in e s s e s f o r j o i n t a c t i o n i n m a rk e tin g a b r o a d . I n t h i s c o n n e c tio n , th e r o l e o f th e I n d u s t r i a l Bank i n I r a q i I n d u s tr y c o u ld be c i t e d a s a n e x a m p le .^ I t s h o u ld a l s o be n o te d t h a t s t a n d a r d i z a t i o n and q u a l i t y c o n tr o l a r e n e c e s s a r y s t e p s i n e x p o r t p ro m o tio n , w ith o u t w hich f o r e i g n m a rk e ts c a n be e a s i l y s p o ile d by p ro d u o ts o f u n e v e n q u a l i t y f a i l i n g to m eet b u y e rs ' s p e c i f i c a t i o n s . I n a d d i t i o n to s t r i c t c o n t r o l s and i n s p e c t io n , th e G overnm ent s h o u ld e n c o u ra g e p r i v a t e b u s in e s s e s to o r g a n iz e th e m se lv e s and e x e r c i s e v o lu n ta r y o o n t r o l s . 16K . M. L a n g le y , The I n d u s t r i a l i z a t i o n o f I r a o . (C am b rid g e, M a s s a c h u s e tts : H a rv a rd U n iv e r s ity P r e s s , I 9 6 0 ) , p p . 1 3 7 -1 3 8 . 19^ E x p o rt C r e d it I n th e d e v e lo p in g c o u n t r i e s , th e f in a n c in g o f e x p o rts o f p rim a ry p ro d u c ts g e n e r a l l y r e q u i r e s o n ly s h o r t- te r m c r e d i t o f l e s s th a n s i x m o n th s. Such c r e d i t h a s t r a d i t i o n a l l y b een p ro v id e d by th e com m ercial b a n k s. F o r th o s e d e v e lo p in g c o u n tr i e s w hich a r e b e g in n in g to e x p o rt m a n u fa c tu re s and e s p e c i a l l y m ac h in e ry and d u r a b le g o o d s, su c h o r e d i t f a c i l i t i e s a r e a p p a r e n tly in a d e q u a te , b e c a u se th e f in a n c in g o f m a n u fa c tu re d e x p o rts g e n e r a l l y r e q u i r e s lo n g e r term and m ore s o p h i s t i c a t e d a rra n g e m e n ts . C o m p e titio n i n e x p o rts o f m a n u fa c tu re s , e s p e c i a l l y e n g in e e r in g p r o d u c ts , o n th e w o rld m a rk e t i s p a r t i c u l a r l y s e v e r e , and i n t h i s c o m p e titio n th e p r o v is io n o f e x p o rt c r e d i t i s a n Im p o rta n t e le m e n t i n a d d i t i o n to p r i c e and q u a l i t y o f th e p r o d u c ts . The d e v e lo p in g c o u n tr i e s a r e c l e a r l y i n a d is a d v a n ta g e o u s p o s i t i o n i n th e r a c e , f o r th e y a r e newcom ers i n th e f i e l d and s u f f e r from s h o r ta g e o f c a p i t a l , h ig h I n t e r e s t r a t e s and la c k o f a d e q u a te f i n a n c i a l i n s t i t u t i o n s . I n o r d e r to e n c o u ra g e e x i s t i n g i n s t i t u t i o n s , i n c lu d in g co m m ercial b a n k s, and to f in a n c e m a n u fa c tu re d e x p o r t s , r e f i n a n c i n g f a c i l i t i e s a t r e a s o n a b le term s sh o u ld be p ro v id e d e i t h e r by th e c e n t r a l bank, by a n e x i s t i n g a g en c y o r by a new n a t i o n a l a g e n c y . T h is h as 195 b e en done i n s e v e r a l d e v e lo p in g c o u n t r i e s . F o r i n s t a n c e , th e C e n tr a l Bank o f A rg e n tin a in tro d u c e d i n 1962 a s p e c i a l a rra n g e m e n t f o r f in a n o in g n o n - t r a d i t i o n a l e x p o rts by b u y in g b i l l s o f ex ch an g e d e riv e d from th e s e e x p o rts on term s o f l e s s th a n f i v e y e a r s . M exico i n 1963 o r e a te d a new a g e n c y , th e M exican M a n u fac tu re d P r o d u c ts E x p o rt D evelopm ent F und, to p r o v id e r e d is c o u n t f a c i l i t i e s f o r b i l l s ra n g in g from s i x m onths to f i v e y e a r s . I n d ia ex te n d e d th e sc o p e o f o p e r a t io n o f th e e x i s t i n g c r e d i t s , e s p e c i a l l y f o r e n g in e e r in g g o o d s . ^ I n g e n e r a l , when th e volum e o f m a n u fa c tu re d e x p o rts becom es l a r g e and te n d s to in c r e a s e c o n tin u o u s ly , th e n e e d s o f e x p o r t c r e d i t w i l l a l s o become v o lu m in o u s, v a r i e d , and c o n tin u o u s . T h is may be th e tim e f o r c r e a t i n g a s p e c i a l i z e d e x p o rt c r e d i t i n s t i t u t i o n to c o o r d in a te e x i s t i n g a c t i v i t i e s , to m o b iliz e f i n a n c i a l r e s o u r o e s f o r e x p o r t f in a n c e and to d e v e lo p new in s tr u m e n ts and m ethods o f f in a n c in g . A n o th e r o b s t a c l e to e x p o r t a ti o n i s th e r i s k o f n o n -paym ent by f o r e i g n o u s to m e rs . B isk I n s u r a n c e , w hich h a s become a lm o s t a n i n t e g r a l p a r t o f e x p o rt c r e d i t , s tr o n g ly I n f lu e n c e s th e a v a i l a b i l i t y and c o s t o f e x p o rt c r e d i t . T h is i s p a r t i c u l a r l y Im p o rta n t f o r m a n u fa c tu re d 17 U n ite d N a tio n s : W orld Econom ic S u rv e y . New Y ork, 1963. PP. 265-271. e x p o rts from th e d e v e lo p in g c o u n t r i e s , f o r th e c r e d i t in v o lv e d i n medium o r lo n g -te rm and th e m a rk e t c a te r e d to i s u s u a l l y new and u n f a m i l i a r . C om m ercial r i s k s may ta k e th e form o f p r o te c te d d e f a u l t on paym ents o r in s o lv e n c y on th e p a r t o f th e b u y e rs . T hese r i s k s may n o t be h eav y f o r t r a d i t i o n a l e x p o rts w ith e s t a b l i s h e d m a rk e t and c r e d i t c h a n n e ls , b u t c an be l a r g e f o r new e x p o r t s . As com m ercial r i s k s r e l a t e o n ly to i n d i v i d u a l t r a n s a c t i o n s , a n in s u ra n c e schem e on a n a o t u a r i a l b a s i s may n o t be to o d i f f i c u l t to e s t a b l i s h . H ow ever, a s t h i s i s a new f i e l d i n th e d e v e lo p in g c o u n t r i e s , i t may r e q u i r e th e G overnm ent o r G overnm ent- p r i v a t e J o i n t a c t i o n to i n i t i a t e su c h in s u r a n c e a g e n c ie s . E x p o rt o r e d l t i s p a r t i c u l a r l y s u s c e p t i b l e to t r a n s f e r r i s k s . A d e la y o r p r e v e n tio n o f t r a n s f e r o f paym ents by th e b u y e rs may a r i s e from exchange o r im p o rt r e s t r i c t i o n s i n a n im p o rtin g c o u n tr y . T h is a f f e c t s a l l th e e x p o r t e r s . S i m i l a r l y , p o l i t i o a l r i s k r e s u l t i n g from w ar, r e v o l u t i o n s , s t r i k e s , e t o e t e r a , i n a g iv e n im p o rtin g o o u n try a l s o a f f e c t a l l e x p o r ts . Some p o l i t i o a l r i s k s may, ho w ev er, a f f e c t o n ly i n d iv i d u a l o o n t r a o t s , su c h a s d e f a u l t o f paym ents o f a r b i t r a r y c a n c e l l a t i o n o f o r d e r s by f o r e i g n g o v ern m en ts o r f o r e i g n p u b lic c o r p o r a t io n s . H isk s due to n a t u r a l c a l a m i ti e s su c h a s f l o o d s , e a r t h q u a k es o r ty p h o o n s may be more d i v e r s i f i e d th a n p u re p o l i t i c a l and t r a n s f e r r i s k s . N e v e r th e le s s , a l l th e s e 197 r i s k s a r e d i f f i c u l t to I n s u r e on a n a c t u a r i a l b a s i s , and h a r d ly an y p r i v a t e a g en c y w ould v e n tu r e i n t o t h i s k in d o f in s u ra n o e b u s in e s s . I n one way o r a n o th e r i t h a s to be a go v ern m en t o r a n i n t e r n a t i o n a l u n d e r ta k in g . D i v e r s i f i c a t i o n o f E x p o rts W hile th e p ro b lem f a c in g some i n d u s t r i a l c o u n tr i e s i s one o f d e v e lo p in g e x p o r ts , th e p ro b lem i n th e d e v e lo p in g c o u n tr i e s i s to expand i n d u s t r i a l p r o d u c tio n and d i v e r s i f y t h e i r e c o n o m ie s. To hav e a d i v e r s i f i e d economy m eans to some o f them , l i k e I n d i a f o r exam ple, t h a t th e p r e s s u r e o f p o p u la tio n o n la n d c a n be re d u c e d , p ro v id e d t h a t a g r i c u l t u r a l p r o d u c t i v i t y c o u ld be in o r e a s e d . A d i v e r s i f i e d economy i s one i n w hich th e r e i s a l a r g e num ber o f i n d u s t r i e s ( in c lu d in g a g r i c u l t u r e and tr a d e ) p ro d u c in g a v a r i e t y o f co m m o d ities and s e r v i c e s . An un d i v e r s i f i e d eoonomy i s one w hich d e p en d s o n th e f o r tu n e s o f a s m a ll num ber o f I n d u s t r i e s and c o m m o d itie s. D i v e r s i f i c a t i o n o f p r o d u c tio n may be m easured by th e c o n tr i b u t i o n o f d i f f e r e n t I n d u s t r i e s to th e n a t i o n a l incom e o r by th e d i s t r i b u t i o n o f th e o c c u p ie d p o p u la tio n b etw een d i f f e r e n t i n d u s t r i e s . T hese c r i t e r i a a p p ly to o u tp u t o r em ploym ent a s a w h o le . T h ere i s a n o th e r p a r t i a l c r i t e r io n , nam ely th e d e g re e o f d i v e r s i f i c a t i o n o f e x p o r t s . T h is c r i t e r i o n i s Im p o rta n t i n th e a n a l y s i s o f f o r e i g n t r a d e . D i v e r s i f i c a t i o n h a s a b e a r in g o n s t a b i l i t y o f in co m e. A w e ll d i v e r s i f i e d economy c a n w ith s ta n d th e sh o ck o f f l u c t u a t i o n s i n p r l o e s o r o u tp u t i n an y one com m odity b e t t e r th a n a l e s s d i v e r s i f i e d econom y. N a t u r a l ly th e r e a r e many q u a l i f i c a t i o n s , and much w i l l depend o n th e k in d o f co m m o d ities i n q u e s t io n . T hus, a n economy l a r g e l y b a se d on a com m odity t h a t i s i n r e l a t i v e l y s t a b l e dem and, an d th e p r o d u c tio n o f w hich i s n o t s u b je o t to s h a rp f l u c t u a t i o n s , may a c t u a l l y e n jo y a s t e a d i e r i n - oome th a n a m ore h ig h ly d i v e r s i f i e d econom y. T h e re i s a l s o a r e l a t i o n s h i p b etw een th e d e g re e o f d i v e r s i f i c a t i o n and th e l e v e l o f in co m e. I t i s a u n i v e r s a l r u l e t h a t a g r i o u l t u r e i s th e p re d o m in a n t f i e l d o f em ploym ent i n d e v e lo p in g c o u n t r i e s . I t i s t r u e t h a t a g r i c u l t u r a l o u tp u t may in c lu d e a v a r i e t y o f c o m m o d itie s, b u t th e sc o p e f o r d i v e r s i f i c a t i o n i s r a t h e r s m a lle r i n a g r i c u l t u r e th a n i n i n d u s t r y and s e r v i c e s , a n d , i n an y c a s e , w here th e p r o d u c t i v i t y o f th e economy and r e a l i n come p e r head a r e v e r y lo w , a h ig h p r o p o r tio n b o th o f th e p r o d u c tiv e e f f o r t and o f t o t a l e x p e n d itu r e g o es i n t o th e p r o v is io n o f a few e s s e n t i a l f o o d s t u f f s . C o n v e rs e ly , more h ig h ly d e v e lo p e d o o u n tr ie s w i l l g e n e r a lly show a h ig h e r d e g re e o f d i v e r s i f i c a t i o n . 199 I n g e n e r a l we w ould e x p e c t t h a t a s d e v elo p m e n t p r o c e e d s , a g r i c u l t u r e w i l l become l e s s p re d o m in a n t a s a f i e l d o f em ploym ent. W hether o r n o t t h i s lo n g - r u n t e n d en cy w i l l be a s s o c i a t e d w ith a c o rre s p o n d in g f a l l I n th e s h a r e o f a g r i c u l t u r e i n n a t i o n a l incom e, i s a n o th e r m a tte r w hloh w i l l d epend o n r e l a t i v e ch an g es I n p ro d u c t i v i t y and i n th e te rm s o f tr a d e b etw een p rim a ry p ro d u c ts and i n d u s t r i a l g o o d s. T h ere a r e many a d v a n ta g e s i n s p r e a d in g th e e x p o rts o v e r a l a r g e ra n g e o f c o m m o d itie s. The f i r s t a d v a n ta g e I s n a t u r a l l y to ev en o u t r i s k s . W ith th e v i o l e n t f l u c t u a t i o n s o f th e p r i c e s o f th e e x p o r t goods o f d e v e lo p in g c o u n t r i e s , a n o th e r a d v a n ta g e i s to s tr e n g th e n t h e i r b a r g a in in g p o w er. A c o u n try m ig h t a c c e p t a num ber o f co n c e s s io n s r e g a r d in g i t s im p o r ts , w hich i t would n o t a c c e p t i f i t had a f r e e r p o s i t i o n s in c e th e y ru n c o u n te r to i t s b o u n d a rie s to th e im p o rt o f a num ber o f c o n su m p tio n goods w h ile th e r e i s i d l e c a p a c ity a t home to p ro d u ce them . The l a s t a d v a n ta g e , b u t n o t th e l e a s t , i s to re d u c e r i g i d i t y w hich i s th e b a s ic w eakness o f m ost d e v e lo p in g co u n t r i e s i n i n t e r n a t i o n a l t r a d e and to a c q u ir e f l e x i b i l i t y i n t h e i r econom ies w hich i s a p r e c o n d itio n f o r g r e a t e r s u c c e s s i n e x p l o i t i n g th e new o p p o r t u n i t i e s and r e l e a s i n g th e m se lv e s from th e l e s s re m u n e ra tiv e l i n e s o f e x p o r t. The o n ly way o f d o in g so i s c o n t i n u a l l y to se e k o u t new 200 p r o d u c ts f o r s a l e and so b u ild up g r a d u a lly a g r e a t e r num ber o f e x p o rt o u t l e t s . A m arked d e g re e o f v a r i a b i l i t y I n e x p o rt v a lu e s I s g e n e r a l l y th e r e s u l t o f la c k o f d i v e r s i f i c a t i o n and o f com plex c irc u m s ta n c e s r e l a t i n g to p r o d u c tio n and m a rk e tin g o f th e co m m o d ities in v o lv e d . When t h e r e i s a l a r g e num ber o f d i v e r s i f i e d e x p o r ts , th e norm al ch an g es i n p r i c e s a b ro a d o r i n p r o d u c tio n tr e n d s a t home o f t e n te n d to o f f s e t eaoh o t h e r ; v a r i a t i o n s i n th e g e n e r a l p r i c e a n d /o r quantum in d e x o f e x p o rts te n d to be l e s s pro n o u n ced th a n th e v a r i a t i o n s i n s i n g l e p r i c e o r volum e i n d i c e s . I t h a s b een s u g g e s te d t h a t m a n u fa c tu re d co m m o d ities o f f e r th e m ain p r o s p e c t f o r d i v e r s i f i c a t i o n . B u t w ith th e e x c e p tio n o f a few p r o d u c ts , no d e v e lo p in g c o u n try h a s b e en a b le to make m a jo r in r o a d s i n t o th e m a rk e ts f o r m a n u fa c tu re d p r o d u c ts i n th e i n d u s t r i a l c o u n t r i e s , i n h i s r e c e n t book, M yrdal s u g g e s ts t h a t : Any s u b s t a n t i a l s h i f t i n e x p o rt com posi t i o n from t r a d i t i o n a l p rim a ry m a t e r i a l s to m a n u fa c tu re d co m m o d ities w ould r e q u i r e a h ig h e r l e v e l o f econom lo d ev elo p m e n t th a n h as y e t b e en a c h i e v e d .18 18 G. M y rd al, A s la n D ram a, o p . c l t . . V ol 1 , 1968, p . 6 5 1 . 201 T h u st a s we hav e d is c u s s e d b e f o r e , th e c a s e f o r d i v e r s i f i c a t i o n and " b a la n c e d g ro w th " need n o t a lw ay s im p ly a r e j e c t i o n o f th e p r i n c i p l e o f c o m p a ra tiv e ad v an ta g e a s th e b a s i s o f w o rld s p e c i a l i z a t i o n . The c o n f l i c t b etw een "G row th T heory" and "T rad e T heory" d o e s n o t seem 19 to be a s I r r e c o n c i l a b l e a s i s o f t e n su p p o s e d . 7 F i n a l l y , a c e r t a i n b a la n c e b etw een d i f f e r e n t s e c t o r s : a g r i c u l t u r e , t r a n s p o r t , i n d u s t r y , and d i s t r i b u t i o n , i s n e c e s s a r y , b u t th e e z a o t o o n te n t o f t h i s b a la n c e c a n n o t be d e te rm in e d e x c e p t a f t e r ta k in g i n t o c o n s i d e r a ti o n th e d e t a i l s o f any g iv e n econom ic s i t u a t i o n . N e e d le ss to sa y t h a t no d e v elo p m e n t program o an r e a l l y be c o n s id e re d w e ll- b a la n c e d u n le s s i t p ay s a d e q u a te a t t e n t i o n to s o c i a l s e r v i c e s su c h a s h e a l t h and e d u c a tio n . Summary An i n d iv i d u a l c o u n try h a s , a s a r u l e , l i t t l e con t r o l o v e r th e p r i c e s o f i t s e x p o r ts i n th e e x te r n a l m ar k e t s o r o v e r th e term s on w hich i t oan o b t a i n i t s Im p o rts . W hat i t h a s s i g n i f i c a n t c o n tr o l o f , how ever, i s th e e x te n t to w hich im p o rts s h a l l be h in d e re d from e n te r in g by i t s 19 7H. B. C h en ery , "C o m p arativ e A d v an tag e and D e v e l opm ent P o l i c y ," A m erican Econom ic R eview . V o l. I I , M arch, 19 6 1 , p p . 1 8 -4 8 . 202 own a r t i f i c i a l b a r r i e r s . A ll c o u n tr i e s w h ich , i n th e p a s t , have em barked upon l i n e s o f p r o d u c tio n a lr e a d y w e ll e s t a b l i s h e d e ls e w h e re hav e found th e m se lv e s i n a s i m i l a r p o s i t i o n . I f th e i n t e r n a t i o n a l d i v i s i o n o f l a b o r , b ased on o u r r e n t o r p r e d i c t a b l e c o m p a ra tiv e c o s t s , had b een re g a rd e d a s " g iv e n ," th e i n d u s t r i a l i z a t i o n o f Germany, J a p a n , and th e S o v ie t U nion w ould n o t have b een p o s s ib le i n th e way and sp e ed and a t th e tim e i n w hich i t o c c u r r e d . S p e c i f i c a l l y , a c o m b in a tio n o f im p o rt d u t i e s , ex p o r t ta x e s , an d s u b s id i e s a r e f r e q u e n tly a d v o c a te d to (1 ) im prove th e te rm s o f t r a d e , (2 ) a l t e r th e d o m e s tic d i s t r i b u t i o n o f incom e, and (3 ) s t i m u l a te th e movement o f r e s o u r c e s i n t o s e c o n d a ry p r o d u c tio n . T rad e p o lic y im plem ented by Im p o rt t a x a t i o n te n d s to I n f lu e n c e th e te rm s o f t r a d e , i n th e f i r s t i n s t a n c e , by re d u c in g th e demand f o r im p o rts , th e re b y re d u c in g th e p r i o e r e c e iv e d by th e f o r e i g n p r o d u c e r. A f t e r th e im p o s i t i o n o f t a r i f f s th e d o m e s tic consum er p ay s m ore f o r im p o rts w h ile th e f o r e i g n p ro d u c e r te n d s to r e c e iv e l e s s , th e d i f f e r e n c e b etw een th e s e p r i o e s r e p r e s e n ts th e re v e n u e d i r e c t e d to th e t a r i f f - i m p o s i n g g o v e rn m e n t. Im p o rt and e x p o rt d u t i e s may a l s o s e r v e a s c o u n te r c y c l i c a l m e a s u re s . U n lik e th e ad v an c e d e p o s i ts te c h n iq u e , b o th o f th e s e d u t i e s y i e l d governm ent re v e n u e s w hich m ig h t be u se d to f in a n c e (u n in te n d e d ) d e s t a b l l z i n g g o v e rn - 203 m ent e x p e n d itu r e s . Im p o rt d u t i e s , how ever, a r e a k in to th e im p o s itio n o f a d v an ce d e p o s i ts i n t h a t th e y o p e r a te on d o m e s tic money incom e o n ly a f t e r th e in c r e a s e i n e x p o r t e a r n in g s h a s a c c ru e d to th e p r i v a t e s e c t o r , and a s su c h c a n o n ly p r e v e n t th e " se c o n d a ry " r i s e i n money i n com e. E x p o rt d u t i e s , o n th e o t h e r h a n d , c an be d e v is e d to p r e v e n t a l l o r p a r t o f th e i n i t i a l in c r e a s e i n e x p o r t p ro c e e d s from b e in g t r a n s m i t te d to th e p r i v a t e s e c t o r . To t h i s e x te n t th e u s e o f e x p o rt ta x e s i s a s t r o n g e r m easu re th a n e i t h e r im p o rt d u t i e s o r th e ad v an ce d e p o s i t te c h n iq u e . P r o t e c t i v e t a r i f f s have to be u se d s e l e c t i v e l y on c e r t a i n p r o d u c ts to e n o o u ra g e th o s e i n d u s t r i e s m o st l i k e l y to su c o e e d , and th e y s h o u ld be u se d i n c o n ju n c tio n w ith o t h e r m ea su re s w hich c an s t i m u l a te in v e s tm e n t. T a r i f f s m u st be aocom panled b y th e m o b iliz a tio n o f o a p l t a l f o r econom ic d e v elo p m e n t and th e e x p a n sio n o f th e d o m e s tic m a rk e t. E xchange c o n t r o l s a r e a ls o n e c e s s a r y to p r e v e n t l i q u i d c a p i t a l from l e a v in g th e o o u n try to e sc a p e ta x e s o r to se e k h ig h e r p r o f i t s a b ro a d . I t sh o u ld be em phasized, how ever, t h a t exohange c o n t r o l s m ust n o t o n ly be u se d to p r e v e n t su c h d r a i n s o f w e a lth b u t a l s o to e n c o u ra g e i t s In v e s tm e n t i n th e d o m e s tic m a rk e t. 204 I f eoonom lo d e v elo p m e n t p la n s a r e s u c c e s s f u l, Im p o rt r e s t r i c t i o n s w ould n o t In v o lv e a d e c l in e I n t o t a l I m p o r ts , b u t r a t h e r a change I n t h e i r c o m p o s itio n . By c o n t r a s t , t r a d e r e s t r i c t i o n s Im posed by th e I n d u s t r i a l c o u n tr i e s a r e l i k e l y to re d u c e th e volum e o f I n t e r n a t i o n a l t r a d e , f o r th e y a r e much m ore s e l f - s u f f i c i e n t th a n a r e th e le s s - d e v e lo p e d tr a d e p a r t n e r s . T hus, th e a d o p tio n o f a f r e e t r a d e p o lic y by th e I n d u s t r i a l c o u n tr i e s s h o u ld n o t be c o n tin g e n t upon th e d e v e lo p in g c o u n tr i e s d o in g th e sam e. T hese c o u n tr i e s a r e n o t p re p a re d to l e t m a rk e t f o r c e s d e c id e w h e th e r to b u ild r a c e t r a c k s o r h y d ro e l e c t r i c p l a n t s , w h e th e r to Im p o rt lu x u ry a u to m o b ile s o r t r a c t o r s . I t s h o u ld a l s o be em p h asized t h a t th e o n ly p r a c t i c a l and p ro m is in g a l t e r n a t i v e to c o v e r a t l e a s t p a r t o f th e e x p e c te d h ig h t r a d e d e f i c i t l i e s I n th e d e v e lo p m ent o f new e x p o r ts by d e v e lo p in g c o u n tr i e s and I n th e a c c e p ta n c e o f su c h e x p o rts by th e I n d u s t r i a l c o u n t r i e s . T h is p ro b le m , t h e r e f o r e , h a s become a w o rld -w id e I s s u e , e s p e c i a l l y s in c e th e f i r s t U n ite d N a tio n s C o n fe re n c e on T rad e and D evelopm ent h e ld I n G eneva I n 1 9 6 4 . I n c o n c lu s io n , I n d u s t r i a l i z a t i o n an d th e c o n se q u e n t I n c r e a s e I n th e l e v e l o f Incom e o f d e v e lo p in g c o u n tr i e s may be c o n d u o lv e to m ore t r a d e r a t h e r th a n a c t a s I t s d e t e r r e n t . The Id e a t h a t th e I n d u s t r i a l i z a t i o n o f th e s e 205 c o u n tr i e s w i l l a f f e c t th e p r o s p e r i t y o f th e i n d u s t r i a l c o u n t r i e s a d v e r s e ly seem s to be u n r e a l i s t i c i n th e co n t e x t o f p r e s e n t e x p e r ie n c e o f d e v e lo p in g c o u n t r i e s . CHAPTER V II THE ROLE OP M ONETARY AND FISCAL POLICIES IN FOREIGN TRADE STRATEGY P u rp o s e and O r g a n iz a tio n The p u rp o se o f t h i s c h a p te r i s to exam ine and e v a lu a te th e r o l e o f s p e o i f i c m o n e ta ry and f i s c a l m e a su re s i n s t i m u l a t i n g an d m a in ta in in g i n d u s t r i a l d e v e lo p m e n t. I n o r d e r to a c h ie v e t h i s o b j e c t i v e , i t i s deem ed n e c e s s a r y to d is c u s s f i r s t th e Im p o rta n c e o f m o n etary and f i s c a l s t r u c t u r e i n i n d u s t r i a l d e v e lo p m e n t. S e c o n d ly , th e r o l e o f m o n etary p o l ic y w i l l be a n a ly z e d . T h ir d ly , th e r o l e o f f i s c a l p o lio y w i l l be d is c u s s e d v i s - a - v i s th e r o l e o f e x p o rt t a x e s . F i n a l l y , ch an g es .in m o n e ta ry i n s t i t u t i o n s and f i s c a l s t r u c t u r e f a v o r a b le f o r i n d u s t r i a l d e v e lo p m e n t w i l l be d is c u s s e d . 206 207 The Im p o rta n c e o f M onetary an d F i s c a l S t r u c t u r e I n I n d u s t r i a l D evelopm ent I t i s g e n e r a l l y h e ld t h a t i n d e v e lo p in g c o u n tr i e s th e n e t bank c r e d i t c r e a t i o n and th e v a lu e o f e x p o r ts a r e p o s i t i v e l y c o r r e l a t e d . As th e v a lu e o f e x p o rts r i s e s , due to r i s e i n t h e i r p r i c e s an d a n i n c r e a s e i n t h e i r volum e, i t m u st be e x p e c te d t h a t t h e r e w i l l be a n ex p an s io n o f c r e d i t to f in a n c e them . T h is ty p e o f c r e d i t ex p a n s io n i s one o f th e l e a s t h a rm fu l to a n economy b e c a u s e i t i s s h o r t- te r m c r e d i t to f in a n c e th e co m m ercial movement o f g o o d s. I f th e v a lu e o f e x p o r ts c o n t r a c t s , c r e d i t w i l l a l s o c o n t r a c t . Thus th e new money w i l l d is a p p e a r i f and when th e tim e com es, j u s t a s n a t u r a l l y a s i t f i r s t a p p e a re d . The volum e o f c r e d i t , t h e r e f o r e , te n d s to f o llo w th e " n e e d s o f t r a d e ." A h ig h p r o p o r t io n o f bank a s s e t s i n th e form o f c a s h a t hand and w ith b anks a b ro a d i s a common p r a c t i c e i n d e v e lo p in g c o u n t r i e s . A c o r o l l a r y o f t h i s h ig h l i q u i d i t y o f b an k s i s th e v e ry low l e v e l o f lo a n s and a d v a n c e s , and even th e s e lo a n s a r e u s u a l l y s e a s o n a l and c o n fin e d to th e im p o rt and e x p o rt t r a d e . T hus, th e r e s p o n s iv e n e s s o f b an k s to ch an g es i n t h e i r e x t e r n a l a s s e t s h a s v a r ie d from one c o u n try to a n o th e r . B ro a d ly s p e a k in g , how ever, c r e d i t c r e a t i o n by th e b an k s f o r th e 208 p r i v a t e s e c t o r h a s te n d e d to b e I n f lu e n c e d m a in ly by th e c h a n g in g v a lu e o f e x p o r ts . The r a t i o o f t o t a l e x p o r ts to g r o s s n a t i o n a l p r o d u c t i s u s u a l l y u s e d a s a n i n d i c a t o r o f th e im p o rta n c e o f th e e x p o r t s e c t o r . B u t th e p ro b le m s a r e m ore oom plex, e x p e c ia ll y b e c a u s e many d e v e lo p in g c o u n tr i e s ( i n v a r y in g d e g re e s ) la c k a d e q u a te f i n a n c i a l i n s t i t u t i o n s . I n th e s e c o u n tr i e s th e volum e o f d o m e s tlc a lly - f in a n c e d In v e s tm e n t i s so s m a ll r e l a t i v e l y to n a t i o n a l incom e t h a t c h an g e s i n i t w ould n o t o f f s e t l a r g e ch an g es i n e x p o rt e a r n i n g s . M o reo v er, th e r e l a t i v e l y l i m i t e d volum e o f d o m e s tic a lly - f in a n c e d in v e s tm e n t d o e s n o t d epend o n i n s t i t u t i o n a l f i n a n c e , and a s su c h i s beyond th e c o n tr o l o f a c e n t r a l bank whose te c h n iq u e s a r e aim ed d i r e c t l y a t th e co m m ercial b anks and th e c a p i t a l m a rk e t. T h ere a r e a num ber o f c o u n tr i e s w hich h av e a c h ie v e d a r e l a t i v e l y sound f i s c a l p o s i t i o n b e c a u se th e y h av e b een a b le to e x p o rt raw m a t e r i a l s f o r w hich t h e r e i s a h ig h l e v e l o f demand i n th e w o rld m a rk e t and th e p ro d u c e rs o f w hich ( f r e q u e n t l y f o r e i g n e n tr e p r e n e u r s ) a r e th e c h i e f c o n t r i b u t o r s to g o v ern m en t re v e n u e s . I n th e s e c a s e s th e f i s c a l p ro b lem may b e q u i t e e a s y , a lth o u g h th e p h y s ic a l p ro b lem o f d e v e lo p m e n t may b e f a r from b e in g s o lv e d . 209 Such c a s e s a p p ly , f o r I n s t a n c e , to o i l , t i n , c o p p e r, and n i t r a t e - p r o d u c i n g c o u n tr i e s a s w e ll a s to econom ies w hich a r e b ig e x p o r te r s o f r i c e c o f f e e , w ool, s u g a r , r u b b e r , e t o e t e r a . C o u n trie s w hich a r e p ro d u c e rs o f one o r a few raw m a t e r i a l s y i e l d i n g r e l a t i v e l y l a r g e e x p o rt p ro c e e d s u s u a l ly h av e a ta x s t r u c t u r e g e a re d to ta p p r i m a r il y t h i s s o u rc e o f r e v e n u e . S uch a ta x s t r u c t u r e i s e i t h e r b ased on e x p o r t ta x e s (b e c a u s e th e s e p r o d u c ts a r e u s u a l ly e x p o rte d ) o r on r o y a l t i e s o r f r a n c h i s e f e e s . T hus, a s new e n t e r p r i s e s a r e e s t a b l i s h e d u n d e r th e d i v e r s i f i c a t i o n p ro g ram , th e o ld ta x s t r u c t u r e f a l l s to r e a c h th e new i n d u s t r i e s . Econom ic d e v elo p m e n t m a n ife s te d th ro u g h i n d u s t r i a l d i v e r s i f i c a t i o n , t h e r e f o r e , r e q u i r e s im m ed iate ta x re fo rm s w hich ta k e i n t o a c c o u n t su c h new i n d u s t r i a l d e v e lo p m e n ts . T h is i s a n exam ple o f how i t i s p o s s ib l e and i n f a c t n e c e s s a r y to b u ild a f i s c a l s t r u c t u r e w hich a lr e a d y ta k e s i n t o a c c o u n t th e n e x t s ta g e o f i n d u s t r i a l d e v e lo p m e n t. In d e e d , i t i s h a r d e r and ta k e s lo n g e r to d e v e lo p I n d u s t r i a l l y th a n to s e t up th e m a c h in e ry f o r su c h a m easu re a s a c o r p o r a te incom e ta x w hich i s a p p l i c a b le to a v a r i e t y o f i n d u s t r i e s . I t i s n e o e s s a r y t h a t th e f i s o a l re fo rm s b o th i n th e l e g i s l a t i v e and i n th e a d m i n i s t r a t i v e a s p e c t s do n o t l a g b e h in d th e i n d u s t r i a l d e v e lo p m e n t b u t t h a t th e y a n t i c i p a t e 210 i t , so t h a t no re v e n u e i s l o s t to th e s t a t e b e c a u se o f la c k o f a d a p t a t i o n o f i n s t i t u t i o n s and p o l i o i e s to new c o n d i t i o n s . T h is a p p l i e s w ith ev en g r e a t e r f o r c e to th o s e c o u n tr i e s w hich do n o t hav e a sound • ’f i n a n c i a l " s i t u a t i o n . A sound " f i n a n c i a l " s i t u a t i o n , a s r e f l e c t e d i n a b a la n c e o f paym ents s u r p lu s o r , ev en m ore s o , a s r e f l e c t e d i n a d o m e s tic f i n a n c i a l s u r p l u s , d o e s n o t n e c e s s a r i l y i n d i c a t e a g e n e r a l e c o n o m ic a lly sound s i t u a t i o n . The l a t t e r i s r a t h e r shown by th e e x t e n t o f th e ro a d n e tw o rk , th e p u b lic u t i l i t i e s , t r a n s p o r t a t i o n f a c i l i t i e s , l e v e l o f l i t e r a c y , m ethods o f a g r i c u l t u r e , and I n d u s t r i a l d e v elo p m e n t i n g e n e r a l . The f i s c a l p ro b lem o f c o u n tr i e s w hich do n o t hav e an y im p o r ta n t raw m a t e r i a l s a t t h e i r d i s p o s a l i s m ore d i f f i c u l t . A c o u n tr y w hich d o e s hav e su c h r e s o u r c e s c a n a t l e a s t a c c u m u la te f o r e i g n c u rre n c y r e s e r v e s f o r a lo n g - r u n d e v elo p m e n t p ro g ra m , ev en i f i t i s n o t e a g e r o r i f f o r p o l io y re a s o n s i t may n o t b e a d v is a b le to expand su c h a pro g ram a t a n e x c e e d in g ly r a p i d p a c e . I t h a s been s u g g e s te d t h a t th e f i r s t and f o r e m ost ta s k i s to p la n a n e x p e n d itu r e program a s to volum e, c h a r a c t e r , and tim in g . T h is i s im p o rta n t f o r b o th raw - m a t e r i a l e x p o r tin g and n o n - r a w - m a te r la l e x p o rtin g coun t r i e s , b e c a u se th e fo rm e r may have to u t i l i z e a l l a v a i l a b le r e s o u r c e s f o r th e p r o d u c tio n o f th e m a t e r i a l s d u r in g 211 a p e r io d o f boom and to u s e th e a v a i l a b l e c a s h b a la n c e f o r t h e i r I n t e r n a l d e v e lo p m e n t I n a p e rio d o f d e c l i n i n g p r i c e s . 1 I t fo llo w s from th e above a n a l y s i s t h a t a d e v e lo p in g c o u n tr y c a n n o t a f f o r d to l e t th e f i s c a l s t r u c t u r e l a g b e h in d th e I n d u s t r i a l and econom ic d e v e lo p m e n t, e s p e c i a l l y s in c e th e I n c r e a s e I n th e d e v e lo p m e n t pro g ram b r in g s a b o u t a n a u to m a tic in c r e a s e o f p u b lic f in a n c e s (e v e n i n c o u n tr i e s w here p r i v a t e e n t e r p r i s e p la y s a n Im p o rta n t r o l e ) b e c a u se I t I n v o lv e s r o a d - b u i l d in g , p o r t - b u l l d i n g , and th e c r e a t i o n o r e x p a n s io n o f p u b lic s e r v i c e s o f v a r io u s t y p e s . The R o le o f M o n etary P o l i c y I n a d e v e lo p in g economy e f f o r t s s h o u ld be d i r e c t e d m a in ly to w a rd s i n c r e a s in g In v e s tm e n t. B u t to w hat e x te n t l a r g e - s o a l e in v e s tm e n t c a n be u n d e rta k e n i s v e ry l im i te d by c e r t a i n c h a r a c t e r i s t i c s . B ecause o f th o s e l i m i t a t i o n s , su c h a n economy i s u n l i k e l y to re s p o n d to m e a su re s w hich s u i t th e ad v an ced econom y. U n o rth o d o x m e a s u re s , t h e r e f o r e , become n e c e s s a r y i f r a p id econom ic d e v e lo p m e n t i s i H. S . B lo c k , "Econom ic D evelopm ent and P u b lic F in a n c e ," The P r o g r e s s o f U n d e rd ev e lo p e d A re a s . B . F . H a s e l i t z ( E d .) , (C h ica g o : U n iv e r s ity o f C hicago P r e s s , 1 9 5 2 ), p . 2 5 1 . 212 to be a c h ie v e d . Two p o l i c i e s may be s u g g e s te d — i n f l a t i o n and p r o t e c t i o n . D e l ib e r a t e i n f l a t i o n , sa y th ro u g h c r e d i t , may w e ll i n c r e a s e th e l e v e l o f money demand a s th e s u p p ly o f money i n c r e a s e s , and n o t a l l i s a b s o rb e d i n i d l e c a s h b a la n c e s . I t i s a l s o l i k e l y to s t i m u l a te in v e s tm e n t by r a i s i n g p r o f i t e x p e c ta tio n s and may be a means o f e x t r a c t i n g o f f o rc e d s a v in g s to m atch th e in v e s tm e n t made w ith bank c r e d i t . B ut th e in c r e a s e i n money dem and, i s , o f c o u rs e , n o t a s o l u t i o n to th e p ro b lem o f th e demand s i d e o f th e " v ic io u s c i r c l e . " W hat i s needed i s a n i n c r e a s e i n r e a l dem and. R e a l incom e, n o t money incom e, m u st r i s e b e fo r e home demand w i l l o f f e r s u f f i c i e n t in d u c e m ent to home I n v e s tm e n t. M onetary e x p a n sio n may be th e r e s u l t e i t h e r o f d i r e c t go v ern m en t d e f i c i t f i n a n c in g o r e v e r-e x p a n s io n o f b a n k in g c r e d i t to p r i v a t e e n tr e p r e n e u r s a*vi l e s s f r e q u e n tly o f p e r s i s t e n t s u r p lu s e s i n th e b a la n c e o f p a y m e n ts . I n th e l a t t e r c a s e th e s u r p lu s o f f o r e ig n c u r re n c y i s b e in g a c c u m u la te d by th e m o n e tiz a tio n o f t h i s s u r p lu s i n th e form o f l o c a l c u rre n c y w hich i t c r e a t e s and e x e r t s a n i n f l a t i o n a r y p r e s s u r e . T h is l a t t e r form o f i n f l a t i o n i s r a t h e r o f r a r e o c c u rr e n c e i n d e v e lo p in g c o u n t r i e s , e s p e c i a l l y so a s w ith th e c o n tin u o u s d e c lin e 213 I n th e p r i o e s o f p rim a ry p ro d u c ts and l i m i t e d Im p o rt o f c a p i t a l . T hose c o u n tr i e s u s u a l l y e n c o u n te r b a la n c e o f paym ents d i f f i c u l t i e s and th u s i n f l a t i o n g e n e ra te d by a s u r p lu s i n th e b a la n c e o f paym ents i s a v e ry r a r e e x c e p t i o n . C o n c e rn in g th e e x t r a c t i o n o f f o r c e d s a v in g s and in v e s tm e n t th ro u g h i n f l a t i o n , t h e r e i s a c o n s id e r a b le 2 l i t e r a t u r e i n d i c a t i n g th e d is a d v a n ta g e s o f t h i s p o l i c y . Some o f th e s e a r e : (1 ) th e m is d i r e c t i o n o f s a v in g s i n to f o r e i g n a s s e t s , r e a l e s t a t e , an d i n v e n t o r i e s in s t e a d o f to I n d u s tr y and a g r i c u l t u r e ; (2) th e p r e s s u r e s on th e b a la n c e o f paym ents and th e p o s s i b i l i t y o f c o n tin u o u s c u rre n c y d e p r e c i a t i o n ; an d (3 ) th e e v e r - i n c r e a s i n g d i v e r g e n c ie s b etw een p r i v a t e m a rg in a l p ro d u c t and s o c i a l m a rg in a l p r o d u c t. The i m p l i c a ti o n o f th e ab o v e a n a l y s i s i s t h a t d u r in g p e r io d s when p r i c e s a r e e x p e c te d to r i s e , s a v e r s c an be e x p e c te d to s h i f t th e d i s p o s i t i o n o f t h e i r a s s e t s 2 U n ite d N a tio n s : M easu res f o r Econom ic D evelopm ent o f U n d e rd ev e lo p e d C o u n tr ie s . (New Y ork, 1951)» E . M. ” B e r n s te in and I . G. P a t e l , " I n f l a t i o n i n R e la tio n to Econom ic D e v e lo p m e n t," I .M .F .. Novem ber, 1952, p p . 3 6 3 -9 8 ; A. S . S h a a la n , "The Im p a c t o f I n f l a t i o n on th e C o m p o sitio n o f P r i v a t e D o m estic I n v e s tm e n t," I .M .F .. S t a f f P a p e rs , J u l y , 1962, p p . 2 ^ 3 -6 1 . 214 away from f i n a n c i a l a s s e t s and to w a rd s p h y s ic a l a s s e t s . I n so d o in g i n f l a t i o n may w e ll I n f lu e n c e th e a v a i l a b i l i t y o f s a v in g s so t h a t th e s u p p ly o f s a v in g f o r in v e s tm e n t i s d i s t o r t e d away from th e m ore e f f e c t i v e in v e s tm e n t o p p o r t u n i t i e s . T h is b ia s to w a rd s p h y s ic a l a s s e t s , and away from f i n a n c i a l a s s e t s , e n g en d e re d by i n f l a t i o n e n c o u ra g e s econom ic u n i t s to make in v e s tm e n ts d i r e c t l y r a t h e r th a n th ro u g h th e c a p i t a l m a rk e t. A c c o rd in g ly , one o f th e e f f e c t s o f i n f l a t i o n i s l i k e l y to be to c o n v e rt econom ic u n i t s from w is h in g to be n e t s a v e r s to n e t i n v e s t o r s . T h is te n d e n c y may i n t u r n be one o f th e f a c t o r s a f f e c t i n g a p r e f e r e n c e f o r c e r t a i n form s o f in v e s tm e n t. T h is t e n d en cy f o r th e b u s in e s s c l a s s i n d e v e lo p in g c o u n tr i e s to i n v e s t i n i n v e n t o r i e s h a s b e e n w e ll made by H ig g in s : \ "M ost o f th e s e ( th e d e v e lo p in g c o u n tr i e s ) s u f f e r from a te n d e n c y f o r in v e s tm e n t to be d i r e c t e d to w ard s p e c u l a ti v e h o ld in g o f in v e n t o r i e s , r a t h e r th a n to th e e s ta b lis h m e n t o r e x p a n s io n o f p r o d u c tiv e e n t e r p r i s e s . A co n s t a n t l y r i s i n g p r i c e l e v e l te n d s to a g g ra v a te t h i s te n d e n c y by m aking s p e c u l a ti o n s a l l th e m ore p r o f i t a b l e . Who w i l l p r e f e r a p o s s ib l e s m a ll g a in o v e r a lo n g p e r io d , i f a s s u r e d o f a l a r g e g a in i n a s h o r t p e r io d .''^ 3 -'B. H ig g in s , Econom ic D ev elo p m en t. P r i n c i p l e s . P ro b le m s , and P o l i c i e s ^ (New Y ork: N o rto n , 1959)» p . 4 6 4 . 215 The im p l i c a ti o n o f th e ab o v e a n a l y s i s i s t h a t i n f l a t i o n s im u lta n e o u s ly e n c o u ra g e s e x c e s s iv e in v e s tm e n t i n i n v e n t o r i e s , w hich i s a form o f s h o r t- te r m in v e s tm e n t, an d d is c o u r a g e s lo n g -te rm In v e s tm e n t i n f ix e d a s s e t s . D a ta o n g r o s s d o m e s tic In v e s tm e n ts f o r b o th d e v e lo p e d an d l e s s d e v e lo p e d c o u n tr i e s o v e r th e p e r io d 1 9 5 3 -5 9 h av e b e e n c l a s s i f i e d i n t o f ix e d and in v e n to r y in v e s tm e n t. The r e s u l t s s u g g e s t t h a t th e l e s s d e v e lo p e d c o u n tr i e s a s a g ro u p show a m arked b i a s i n f a v o r o f i n v e n to r y in v e s tm e n t. W h ereas, o n th e a v e ra g e , th e l e s s d e v e lo p e d c o u n tr i e s c h a n n e le d a p p ro x im a te ly 10 p e r c e n t o f g r o s s d o m e s tic in v e s tm e n t i n t o i n v e n t o r i e s d u r in g th e s e y e a r s , th e c o rre s p o n d in g f i g u r e s f o r a random s e l e c t i o n o f th e d e v e lo p e d c o u n tr i e s a v e ra g e d l e s s th a n i x , 5 p e r c e n t . H ow ever, a d i s t i n c t i o n s h o u ld be made b etw een i n f l a t i o n and i n f l a t i o n a r y p r e s s u r e . I n f l a t i o n d e v e lo p s th e f o llo w in g p a t t e r n : f i r s t d e f i c i t f in a n c in g by g o v ern ' m ent and a r i s e i n w ages e x c e e d in g i n c r e a s e s i n p ro d u c t i v i t y ; s e c o n d ly , c r e d i t e x p a n s io n and I n c r e a s e i n th e h, _ F o r f u r t h e r d i s c u s s i o n r e g a r d in g th e r e l a t i o n s h ip b etw een th e s ta g e o f d e v e lo p m e n t o f l e s s d e v e lo p e d c o u n tr i e s an d t h e i r te n d e n c y to d i r e c t a l a r g e r s h a re o f r e s o u r c e s to t h i s form o f In v e s tm e n t, s e e S h a a la n , o n . o l t . 216 s u p p ly o f money; t h i r d l y , r i s e i n p r i c e s and d e f i c i t i n th e b a la n o e o f p a y m e n ts. I n f l a t i o n a r y p r e s s u r e , on th e one h a n d , i s a n i n e v i t a b l e r e s u l t o f th e a c c e l e r a te d i n v e s tm e n ts r e q u ir e d by d e v elo p m e n t p ro g ram s i n s o f a r a s th e y a r e n o t fin a n c e d from a b ro a d . I n f l a t i o n a r y p r e s s u r e d e v e lo p s i n t o I n f l a t i o n o n ly when i t i s n o t o f f s e t by f l s o a l m e a su re s; d i r e c t c o n tr o l s o r im p o rt s u r p l u s e s . T h is p o i n t h a s been w e ll s t a t e d i n a s tu d y made by th e U n ite d N a tio n s ; " The . . .g o v ern m en t o f a n u n d e rd e v e lo p e d economy i s n o t l i k e l y to f in d i t p o s s ib l e to a v o id i n f l a t i o n a r y p r e s s u r e s in c e t h i s i n many c a s e s would mean th e abandonm ent o f d e v e lo p m ent i t s e l f , i . e . , i t i s p ro b a b ly n o t p o s s ib l e to hav e r a p id econom ic d e v elo p m e n t w ith o u t some i n f l a t i o n . "5 T h is d o e s n o t m ean, o f c o u rs e , t h a t i n f l a t i o n i s p r e f e r a b l e , b e c a u se th e e l a s t i c i t y o f s u p p ly i s l e s s r e s p o n s iv e to in c r e a s e s i n p u rc h a s in g po w er. T hus, w hat i s c a l l e d " h y p e r i n f l a t i o n " h a s to be c h ec k ed ; w hat i s a c c e p ta b le i s "m ild i n f l a t i o n . " The fo rm e r k in d o f i n f l a t i o n d is c o u r a g e s d o m e s tic s a v in g s a s w e ll a s f o r e ig n in v e s tm e n t, d i s r u p t s f o r e i g n tr a d e r e l a t i o n s , and lo w e rs th e g e n e r a l e f f i c i e n c y o f p r o d u c t i v i t y . The l a t t e r , ^ U n ite d N a tio n s , M ethods o f F in a n c in g Econom ic D evelopm ent i n U n d erd ev elo p ed C o u n tr ie s . New Y ork. 19^9. p . 19- 21? h ow ever, s t im u la t e s p r iv a t e In v e stm e n ts In th e I n i t i a l s t a g e s o f d e v e lo p m e n t. Such econom ic p o l i c y may a c h ie v e a b a la n ce d and s te a d y grow th i n a l l s e c t o r s o f th e e c o n omy. I n f l a t i o n ca n be c o n t r o lle d by th e m onetary a u t h o r i t i e s in th e d e v e lo p in g c o u n t r ie s by th e f o llo w in g w ays: f i r s t , by Im port s u r p lu s e s e s p e c i a l l y c a p i t a l good s f o r th e p u rp o se o f in c r e a s in g d o m e stic p r o d u c tio n . S eco n d , t a x a t io n may be an a d e q u a te way o f o f f s e t t i n g i n f l a t i o n a r y p r e s s u r e g e n e r a te d by econ om ic d e v e lo p m e n t. T h is i s c a l l e d " fo r c e d s a v in g s ." B ut t h i s p o l i c y m ig h t c a u se p r iv a t e in v e s tm e n ts to be d iv e r t e d to o t h e r c h a n n e ls o f in v e s tm e n ts w hich may n o t s e r v e th e n a t io n a l econom y. M oreover, p o l i t i c a l and s o c i a l f a c t o r s i n th e d e v e lo p in g c o u n t r ie s w ould m i l i t a t e a g a in s t a p o l i c y o f fo r c e d s a v in g s w ith a v ie w to d i v e r s i o n o f r e s o u r c e s from c o n su m p tio n to in v e s tm e n t, a s lo n g a s con su m p tio n l e v e l s a r e a lr e a d y v e r y lo w . O th er m ethods can be u se d more e f f e c t i v e l y th a n t a x a t io n su ch a s p r ic e c o n t r o l and r a t io n in g s y ste m , b u t t h e s e a r e h a r d e r to a d m in is te r th a n t a x e s . F i n a l l y , a more e f f e c t i v e way in c h e c k in g i n f l a t i o n i s by th e c o o r d in a tio n o f b o th m on etary and f i s c a l p o l i c i e s . 218 I t h a s b een s u g g e s te d t h a t th e c o n tr o l o f Im p o rts d u r in g a n e x p o r t boom I s n o t s o u g h t f o r i t s own s a k e , b u t b e c a u se I t c a n be u se d by th e c e n t r a l bank to i n f l u en ce th e l i q u i d i t y o f th e economy and th e l e v e l o f money in co m e. T h is c an be i l l u s t r a t e d by c o n s id e r in g one te c h n iq u e w hich c a n s e r v e t h i s p u r p o s e . The te c h n iq u e i n q u e s t io n i s th e im p o s itio n and r e g u l a t i o n o f ad v an ce d e p o s i ts on im p o r ts .^ U nder a sy ste m o f ad v an ce d e p o s i t s , a n Im p o rte r i s n o t g iv e n am im p o rt l i c e n s e u n t i l he h a s made a d e p o s i t ( i n n a t i o n a l c u rre n c y o r i n an y o t h e r ap p ro v ed form ) w ith th e c e n t r a l b a n k . T hese d e p o s i ts a r e f r o z e n f o r s t i p u l a t e d p e r i o d s . The am ount o f th e d e p o s i t and th e tim e d u r in g w hich i t i s f r o z e n n eed n o t be th e same f o r a l l c o m m o d ities a c c o rd in g to o r i t e r i a d e c id e d by th e a u t h o r i t i e s . F o r ex am p le, a h ig h r a t e o f d e p o s i t may be r e q u i r e s on " lu x u ry " o r " n o n - e s s e n ti a l" Im p o rts , w h ile e s s e n t i a l im p o rts a r e e i t h e r exem pt from d e p o s i t r e q u i r e m ent o r a t t r a c t v e ry low d e p o s i t s . ^ J . M a r s h a ll, "A dvance D e p o s its o n I m p o rts ," I .M .F .. S t a f f P a p e r s , V o l. V I, 1 9 58, p p . 2 3 9 -5 7 ; E . A . B irnbaum and M. A . Q u re s h i, "A dvance D e p o s it R e q u ire m e n ts f o r I m p o r ts ," I .M .F . . S t a f f P a p e r s , V o l. V I I I , I9 6 0 . 219 The re q u ire m e n t o f advanoe d e p o s i ts may be im posed a s a m easu re f o r a c h ie v in g two a p p a r e n tly c o n f l i c t i n g aim s o f p o lic y d u r in g a n e x p o rt boom— th e m a in te n a n c e o f a h ig h e r l e v e l o f f o r e i g n r e s e r v e s and th e p r e v e n tio n o f d o m e s tic i n f l a t i o n th ro u g h a se c o n d a ry v i s e i n money in co m e. On th e one h an d , i t may be u se d to syphon o f f from th e p r i v a t e s e c t o r a p a r t o f th e in c r e a s e i n money incom e a r i s i n g from th e e x p o rt boom, th e r e b y p r e v e n tin g a r i s e i n d o m e s tic s p e n d in g . On th e o t h e r h an d , i t i s a te c h n iq u e w hich i n c r e a s e s th e c o s t o f im p o rts , and t h e r e by re d u c e s th e volum e o f im p o rts w hich c a n be f in a n c e d 9 o u t o f a g iv e n volum e o f money in c o m e .' B ut s in c e th e s u p p ly o f d o m e s tic a lly -p ro d u c e d goods i n d e p e n d e n t econom ies i s r e l a t i v e l y i n e l a s t i c , t h e r e may be a l i m i t to th e e x te n t to w hich th e s u p p ly o f im p o rts can be r e s t r i c t e d w ith o u t ru n n in g th e r i s k o f d o m e s tic i n f l a t i o n a r y r e s u l t s . T h is l i m i t , ho w ev er, d ep en d s o n th e c o n p o s ltlo n o f im p o r ts . When u se d s e l e c t i v e l y and e f f e c t i v e l y , a d v an ce d e p o s i ts on im p o rts may c u r t a i l im p o rts a p p r e c ia b ly w ith o u t any s i g n i f i c a n t 7 fJ . 0 . W. O lak am p ie, "M onetary M anagem ent i n D ep en d en t E co n o m ie s," E oonom loa. November 1961, p . *K>3. 220 Q a f f e c t on th e d o m e s tic p r i c e l e v e l . M o reo v er, even i f d o m e s tic p r l o e s s h o u ld r i s e , t h i s w ould n o t be a s i g n i f i c a n t r e a s o n to condemn th e u s e o f t h i s te c h n iq u e . So f a r we h av e b een d i s c u s s i n g th e u s e o f a d v an ce d e p o s i t te c h n iq u e s i n a n e x p o r t boom. We now tu r n to t h e i r u s e i n a n e x p o r t r e c e s s i o n . The p ro b lem w i l l now be e x a o tly r e v e r s e d . I n s t e a d o f th e i n t e r n a l economy b e in g th r e a te n e d by i n f l a t i o n and e x c e s s iv e im p o r ts , th e t h r e a t w ould be f a l l i n g e x p o r t p r o c e e d s . T h is would a p p e a r to be a n a p p r o p r i a te tim e to u n f r e e z e th e d e p o s i ts made w ith th e c e n t r a l bank d u r in g th e boom, and i n a d d i t i o n im pose no a d v an c e d e p o s i ts a s lo n g a s th e r e c e s s i o n c o n ti n u e s . The H ole o f E x p o rt T axes P e rh a p s a d m i n i s t r a t i v e c o n v e n ie n c e i s th e m ain j u s t i f i c a t i o n o f e x p o rt d u t i e s i n many d e v e lo p in g co un t r i e s . N e v e r th e le s s , th e g ra d u a l s u b s t i t u t i o n o f o t h e r ta x e s seem s d e s i r a b l e i n v iew o f th e l im i te d p o s s i b i l i t i e s o f s h i f t i n g th e b u rd e n o f e x p o rt ta x e s to f o r e i g n b u y e rs . O I . G. P a t e l , " S e l e c ti v e C r e d it C o n tro l i n U n d erd ev elo p ed C o u n tr ie s ," I .M .F . S t a f f P a p e r s , 1 9 5 4 -5 5 . p p . 7 3 -8 4 . 221 and th e need to rem ove o b s t a c l e s to th e e x p o r ts o f p r i m ary p r o d u c ts . Tem porary e x p o rt ta x e s c a n be u s e f u l a s a c o u n t e r - c y c l i c a l d e v ic e o r to a b s o rb w in d f a ll p r o f i t s a s s o c i a t e d w ith a c u rre n o y d e v a l u a t i o n . E x p o rt d u t i e s and m a rk e tin g b o a rd s* s u r p lu s e s a r e l i k e l y to re m a in Im p o rta n t a s r e g u l a r re v e n u e s o u rc e s In some d e v e lo p in g o o u n t r i e s . F o r exam ple, e x p o rt ta x e s a c c o u n t f o r 10 p e r c e n t o r m ore o f c e n t r a l governm ent re v e n u e I n U ganda, M alaya, S udan, C e y lo n , N ig e r ia , T h a ila n d , C olom bia, and E l S a lv a d o r . T h e ir y i e l d h as f l u c t u a t e d w id e ly , a s a r e s u l t o f v a r i a t i o n s I n th e volum e and v a lu e o f e x p o rts and ch an g es I n ta x r a t e s and c o v e ra g e , ( s e e T a b le 2 ^ ) . I n g e n e r a l , re v e n u e r o s e r a p i d l y I n 1950 and 1951* th e n d e c lin e d a lm o s t a s s h a r p ly d u r in g th e p o s t-K o re a n War r e c e s s i o n ; th e y g e n e r a lly re c o v e re d I n 1955* b u t l a t e r re c e d e d a g a in I n a lm o s t a l l c o u n t r i e s . Ghana and Uganda hav e e x p e rie n c e d th e l a r g e s t f l u c t u a t i o n s i n th e r e l a t i v e Im p o rta n c e o f e x p o rt ta x r e v e n u e s . As a Tax o n F o r e ig n e r s The l e g a l I n c id e n c e o f e x p o rt ta x e s I s g e n e r a lly on th e M e x p o r t e r s , from whom th e g o v ern m en t c o l l e c t s th e t a x . B ut i n r e a l i t y , how ever, th e ta x may be s h i f t e d fo rw a rd to b u y e rs — t h a t i s , p a id by f o r e i g n oonsum ers; TABLE 24 EXPOBT TAXES AS PER CENT OP CENTRAL GOVERNMENT TOTAL CURRENT REVENUE 1951-63 C ountry 1951 1952 1953 1954 1955 1956 1957 1958 1959 I 960 1961 1962 1963 C ey lo n 34 26 22 27 35 28 28 28 27 26 22 19 19 Equador 3 5 4 6 5 6 6 6 6 7 7 8 7 E l S a lv a d o r 29 26 25 28 30 26 29 21 16 15 14 12 13 Ghana • • 39 42 44 64 44 32 43 42 42 34 18 15 I n d o n e s ia 13 12 10 7 7 3 1 1 1 3 M alaya 41 30 25 25 29 30 24 21 29 30 22 40 32 N ig e r ia • • 27 29 27 21 17 16 19 17 12 10 9 • • T h a ila n d 15 17 14 13 18 25 24 20 19 18 18 15 13 Uganda 51 48 23 33 31 24 30 24 25 19 12 8 11 S o u rce: D e r iv e d from I n t e r n a t io n a l M onetary Fund. S t a f f P a p e r s . November 1 966, p . 4 6 2 . IO to to 223 i t may be b orn e by d o m e stic p r o d u c e r s; o r i t may f a l l on la n d o w n ers o r w o r k e r s. The d i s t r i b u t i o n o f th e e x p o r t ta x burden among eoon om ic grou p s i s f r e q u e n t ly u n c le a r * th ough i t te n d s t o f a l l on th o s e i n th e w e a k e st b a r g a in in g p o s i t i o n . W h ile t h i s u n c e r t a in t y som etim es r e d u c e s p o l i t i c a l o p p o s it io n to e x p o r t t a x a t i o n , i t h a s d is a d v a n ta g e s f o r o t h e r a s p e o t s o f p u b lic p o l i c y , su c h a s i n come d i s t r i b u t i o n and p r o d u c tio n i n c e n t i v e s . E l a s t i c su p p ly and i n e l a s t i c demand a r e c o n d u c iv e to s h i f t i n g a ta x fo rw a r d , w h ereas th e ta x te n d s to r e s t on p r o d u c e r s u n d er c o n d it io n s o f i n e l a s t i o su p p ly and e l a s t i c dem and. I f th e ta x in g c o u n tr y a c c o u n ts f o r o n ly a s m a ll p a r t o f w orld p r o d u c tio n , a s i s g e n e r a lly t r u e , th e r e i s l i t t l e o p p o r tu n ity f o r s h i f t i n g th e t a x . I t s e x p o r ts c a n n o t be s o ld a t more th a n th e w orld p r i c e , and any r e d u c t io n i n t h e i r volum e ca n b e made up by o t h e r c o u n t r ie s . R e g a r d le s s o f th e e l a s t i c i t y o f w orld demand f o r th e com m odity, th e e l a s t i c i t y o f demand f o r sh ip m en ts f o r on e c o u n tr y w ith a s m a ll o u tp u t w i l l be h ig h a t p r i c e s ab o v e o r b elo w th e w o rld p r i c e . When th e t a x in g c o u n tr y s u p p lie s a la r g e p a r t o f t o t a l w orld e x p o r t s , o r when s i m i l a r t a x e s a r e l e v i e d by s e v e r a l o o u n t r le s , th e ta x i s more l i k e l y to r e s u l t i n h ig h e r p r i c e s i n e x t e r n a l m a r k e ts. B u t su ch s h i f t i n g o f th e ta x h a s i t s l i m i t a t i o n s : a p r ic e r i s e 224 may, i n tim e , s t im u la t e a p r o d u c tio n e ls e w h e r e o r en co u ra g e s u b s t i t u t i o n o f o t h e r p r o d u o ts — s y n t h e t i c ru b b er f o r n a t u r a l, o r v e g e t a b le o i l f o r a n o th e r , alum inum f o r o o p p er, e t c e t e r a . P erh ap s w ith r a r e e x c e p t io n s , cou n t r i e s t h a t a r e c o n s id e r in g e x p o r t d u t i e s sh o u ld reg a rd them p r im a r ily a s t a x e s on t h e i r own p ro d u c e rs and tr a d e r s r a th e r th a n a s a means o f t a x in g f o r e i g n e r s . E f f e c t s on E x p o r t Volume The p r o b a b le a d v e r s e e f f e c t s on e x p o r ts m ust be oou n ted a s a d is a d v a n ta g e o f e x p o r t t a x a t io n a s a r e g u la r so u r c e o f r e v e n u e . Some e c o n o m ists h ave argu ed t h a t m od erate t a x a t io n w ould h a v e l i t t l e in f lu e n c e on e x p o r t volum e b e c a u s e , o v e r a r a t h e r w id e r a n g e , p r o d u c er s i n d e v e lo p in g c o u n t r ie s w ere i n s e n s i t i v e to ch a n g es i n n e t p r i c e s . M oreover, i t h a s a l s o b een a rgu ed t h a t a ta x m ig h t s t im u la t e o u tp u t b e c a u se fa rm ers w ould h ave to work h a rd er to s a t i s f y t h e i r Incom e a s p i r a t i o n s . T h e o r e t i c a l l y s p e a k in g , th e s e p o s s i b i l i t i e s a r e v a l i d , b u t e m p ir ic a l s t u d i e s seem to I n d ic a t e o t h e r - o w is e . I f a c o u n try im poses a p e rm a n en t e x p o r t ta x o r 9 7B . Good, G. E . L e n t, and P . D . O jh a , "H ole o f E x p o rt T axes i n D e v e lo p in g C o u n tr ie s ," I .M .F . S t a f f P a p e rs , V o l.X I I I , No. 3 t November 1 9 66, p . 4 6 6 . 225 o p e r a t e s a m a r k e tin g board so a s to k e e p p r i c e s r e c e iv e d by p r o d u c e r s b elo w w orld p r io e s on a g iv e n com m odity, i t sh o u ld o r d i n a r i l y e x p e c t p r o d u c tio n — a n d , h en o e e x p o r t s — t o be r e d u c e d , o r i t s grow th r e ta r d e d , e i t h e r Im m ed ia tely o r a s so o n a s th e c r o p 's grow th c y c l e p e r m its . The s t r o n g e s t c a s e f o r a p r o lo n g e d u s e o f e x p o r t t a x e s i s i n s u p p o r t o f a n i n t e r n a t i o n a l com m odity a g reem en t t h a t i n v o lv e s th e d e l i b e r a t e l i m i t a t i o n o f e x p o r t s . I t d o e s n o t f o llo w , ho w ev er, t h a t th e e f f e c t on e x p o rt volum e i s a d e c i s i v e o b j e c t i o n to e x p o rt t a x e s , S e v e r a l o t h e r c o n s i d e r a ti o n s a r e r e l e v a n t . F i r s t , s h o r t - ru n p r i c e e l a s t i c i t y o f s u p p ly o f a n n u a l c ro p s and lo n g - ru n p r i c e e l a s t i c i t y o f t r e e c ro p s seem s to be below u n i t y , som etim es b elo w 0 .5 * T h is s u g g e s ts t h a t th e p e r c e n ta g e r e d u o tio n i n e x p o rts o f th e ta x e d a g r i c u l t u r a l oom m odlty w i l l be s m a lle r th a n th e e f f e c t i v e ta x r a t e . I n o t h e r w o rd s, th e g a in i n governm ent rev en u e w i l l e x c e e d th e l o s s o f e x p o r t e a r n in g s o f th e oom m odlty t a x e d . I n fo r m a tio n on th e lo n g -r u n e l a s t i c i t y o f m in e r a l e x p o r ts i s e v en l e s s a d e q u a te th a n t h a t o f a g r i c u l t u r a l e x p o r t s , and i t i s hard to s a y how th e re v e n u e g a in from ta x on m in e r a ls w i l l com pare w ith th e e x p o r t l o s s . S ec o n d , a r e d u c t io n i n p r o d u c tio n and e x p o r t o f th e ta x e d com m odity u s u a l l y d o e s n o t e n t a i l an e q u a l r e d u c t io n i n t o t a l p r o d u c tio n . Some r e s o u r c e s w i l l be 226 t r a n s f e r r e d to o t h e r I n d u s t r i e s . The l o s s w i l l n o t be th e g r o s s am ount o f t h e i r p r o d u c t, b u t, r a t h e r jth e d i f f e r e n c e b etw een t h e i r ( s o o l a l ) p r o d u c t iv it y i n th e t a x e s e x p o r t in d u s t r y and I n th e in d u s t r y to w h ich th e y a r e t r a n s f e r r e d . T h ir d , o t h e r k in d s o f t a x e s may a l s o h in d e r p r o - d u o tlo n and e x p o r t s . S in c e r e v e n u e s m ust be o b t a in e d , th e r e a l q u e s t io n i s how t h i s oan b e done w ith th e l e a s t harm w h ile o b s e r v in g th e r e q u ir e m e n ts o f e q u ity and a d m in is t r a t iv e e f f i c i e n c y . Econom ic S t a b i l i z a t i o n C o n s id e r a b le a t t e n t i o n h a s b e en g iv e n to th e u s e o f e x p o r t t a x e s a s a o o u n t e r - c y c l l o a l d e v ic e to s t a b i l i z e th e econom y. V a r ia t io n s i n e x p o r t t a x e s — -a c h ie v e d th ro u g h t y in g ta x r a t e s t o e x p o r t p r i c e s . C hanges i n th e ta x la w , on a p p l i c a t i o n o f s l i d i n g s o a le r a t e s — ca n ca p tu r e p a r t o f th e g a in s a r i s i n g from h ig h e r w orld p r ic e s o r m it ig a t e th e e f f e o t o f a p r i c e d e c l i n e on p ro ced u re In c o m es. The govern m en t ca n b u ild up r e s e r v e s i n p e r io d s o f p r o s p e r it y and expend them i n p e r io d s o f r e c e s s i o n , th u s r e d u c in g f l u c t u a t i o n s i n money incom e and e x p e n d i t u r e s and i n im p o r ts . The p o l i c y , i t sh o u ld be n o te d , r e q u ir e s t h a t th e a c c u m u la tio n and u s e o f f i s c a l r e s e r v e s be accom p an ied by l i k e m ovem ents i n f o r e ig n exoh an ge r e s e r v e s . 22? Econom ic s t a b i l i z a t i o n was th e m a jo r j u s t i f i c a t i o n f o r th e w id e -s p re a d in o r e a s e i n e x p o rt ta x r a t e s and th e a d a p tio n o f s l i d i n g s c a l e r a t e s d u r in g th e K o rean War boom. T hese p o l i c i e s , h o w ev er, w ere o n ly m o d e ra te ly s u c c e s s f u l i n a b s o rb in g in c r e m e n ta l e x p o rt e a r n in g s . C o n tin u a tio n o f h ig h r a t e s o f d u ty i n t o a p e rio d o f f a l l i n g p r i c e s i s l i k e l y to be burdensom e and to damage e x p o rt e a r n i n g s . W hile t h i s d a n g e r c an be a v o id e d by a d o p tio n o f a s l i d i n g s c a l e , su c h a sy ste m n e e d s to be c a r e f u l l y d e s ig n e d and a d m in is te r e d i n o r d e r to p r e v e n t m a n ip u la tio n o f th e m a rk e t. C u rre n c y D e v a lu a tio n T em porary ta x e s c a n be le v i e d on e x p o r ts w ith low s h o r t - r u n e l a s t i c i t y o f s u p p ly i n c o n n e c tio n w ith a c u rr e n c y d e v a l u a t i o n . The g o v ern m en t c a n th u s o b t a i n re v e n u e w hich w i l l h e lp to c o n tr o l p r i v a t e e x p e n d itu r e s and k e ep im p o rts dow n. By s h a r in g i n th e w in d f a ll g a in s o f e x p o r t e r s , th e g o v ern m en t may a l s o make a d e v a lu a tio n p o l i t i c a l l y more a c c e p t a b l e . I t sh o u ld be n o te d , how ever, t h a t any te m p o ra ry e x p o rt ta x e s be re d u c e d — o r e lim in a te d — i n l i n e w ith th e p r o d u c tio n c y c le and th e r a p i d i t y w ith w hich th e volum e o f e x p o rts w i l l re s p o n d to o h an g es i n p r i c e s . L o c a l c u rre n c y c o s t s u s u a l l y te n d to I n c r e a s e a f t e r a d e v a lu a t i o n , and a n in o r e a s e i n th e n e t l o c a l c u rre n c y p r i c e 228 r e c e iv e d by e x p o r te r s w i l l o r d i n a r i l y be r e q u ir e d even to m a in ta in th e volum e o f e x p o rts o v e r tim e . A f u r t h e r I n c r e a s e i s l i k e l y to be n eed ed to s t i m u l a te e x p o r ts . E q u ity and P r o s p e c t o f E x p o rt T axes E x p o rt ta x e s a r e by n a tu r e d i s c r im i n a t o r y , i n t h a t th e y do n o t a p p ly to p r o d u c tio n f o r th e home m a rk e t and u s u a l l y do n o t a p p ly to a l l e x p o r t s . Among p r o d u c e r s o f th e e x p o rt co m m o d ities s u b j e c t to t a x a t i o n , h i g h - c o s t p ro d u c e rs may s u f f e r b e c a u se th e y pay a t th e same r a t e a s m ore e f f i c i e n t o r b e t t e r l o c a te d p r o c e d u r e s . W here e x p o rt d u t i e s a r e Im p o r ta n t, how ever, th e more r e f i n e d ta x e s on incom e, p r o f i t s , o r la n d v a lu e s a r e u s u a l l y n o t r e a l i s t i c a l t e r n a t i v e s , e s p e c i a l l y i n th e a g r i c u l t u r a l s e c t o r . H o st c o u n tr i e s f in d i t n e c e s s a r y to u s e a v a r i e t y o f e x c i s e s , stam p ta x e s , and o t h e r im p e r s o n a l ta x e s t h a t do n o t conform to th e h i g h e s t s ta n d a r d s o f e q u i t y . E x p o rt ta x e s may w e ll be l e s s a r b i t r a r y th a n some o f th e t r a d i t i o n a l i n d i r e c t t a x e s . 10 I n th e lo n g - r u n , e x p o rt ta x e s w i l l p ro b a b ly d im in is h i n f i s c a l im p o rta n c e i n d e v e lo p in g c o u n t r i e s , a s th e y d id e a r l i e r i n E u ro p e . Econom ic d e v elo p m e n t and 10G. E . L e n t, "Tax I n c e n t iv e s f o r In v e s tm e n t i n D e v e lo p in g C o u n tr ie s ," I .M .F . S t a f f P a p e r s , V o l. XIV, N o. 2 , J u l y 1967, p . 2 7 9 . 229 a d m i n i s t r a t i v e and p o l i t i c a l f a c t o r s c a n be e x p e c te d to work i n t h i s d i r e c t i o n . F o r ta x p o l i c y , a n im p o r ta n t q u e s tio n i s w h e th e r o r n o t th e n o rm al re p la c e m e n t o f e x p o r t ta x e s by o t h e r m e a su re s s h o u ld be a c c e l e r a t e d . I f view ed p r a g m a tic a lly , re p la c e m e n t o f e x p o rt ta x e s w i l l be a s s ig n e d a lo w e r p r i o r i t y th a n i f view ed i d e a l i s t i c a l l y . N e v e r th e le s s , th e g ra d u a l s u b s t i t u t i o n o f o t h e r ta x e s f o r e x p o r t ta x e s seem s a d e s i r a b l e g o a l i n v iew o f th e d i s c r im i n a t o r y c h a r a c t e r o f s p e c i a l e x p o r t ta x e s and th e Im p o rta n c e o f rem oving o b s t a c l e s to th e e x p o r ts o f th e p rim a ry p ro d u c in g c o u n t r i e s . I n many o f th e s e c o u n t r i e s , th e m ost im m ed iate c o n c e rn w i l l be th e a d a p t a t i o n o f e x p o rt ta x e s to c h a n g in g c o n d itio n s and t h e i r im provem ent r a t h e r th a n t h e i r re p la c e m e n t. I n t h i s c o n n e c tio n , i t i s p a r t i c u l a r l y im p o r ta n t f o r g o v e rn m ents to p ay c lo s e a t t e n t i o n to tr e n d s i n p r i c e s and c o s t s and to be p re p a re d to re d u o e e x p o rt ta x e s when u n f a v o r a b le c o s t - p r i c e r e l a t i o n s s e r i o u s l y t h r e a t e n th e volum e o f e x p o r t s . C hanges i n M o n etary I n s t i t u t i o n s and F i s c a l S t r u c t u r e T h ere i s no r e a l money m a rk e t i n d e v e lo p in g coun t r i e s . The o rg a n iz e d money m a rk e ts a r e l e s s f u l l y i n t e g r a te d th a n th e money m a rk e ts i n d e v e lo p e d c o u n t r i e s . The 230 s i z e o f a n o rg a n iz e d money m a rk e t I n an y c o u n try may be I n d ic a te d by e i t h e r o r b o th o f th e f o llo w in g r a t i o s , a lth o u g h n e i t h e r m easurem ent I s p e r f e c t : th e r a t i o o f d e p o s i t money to money s u p p ly and th e r a t i o o f th e b a n k in g sy ste m * s c la im s (m o s tly lo a n s , a d v a n c e s , and b i l l s d is c o u n te d ) o n th e p r i v a t e s e c t o r to n a t i o n a l In co m e. The f i r s t r a t i o may be s a id to r e p r e s e n t “ th e l i q u i d i t y p r e f e r e n c e '1 a p p ro a c h , and th e se co n d r a t i o " t h e lo a n a b le fu n d s " a p p ro a c h . The r a t i o o f d e p o s i t money to money s u p p ly a c t u a l l y m e a su re s b a n k in g d ev elo p m e n t r a t h e r th a n th e d e v e lo p m e n t o f th e money m a rk e t. H ow ever, to th e e x te n t t h a t th e d e v e lo p m e n t o f co m m ercial b a n k in g i s synonym ous w ith th e d e v e lo p m e n t o f th e money m a rk e t, t h i s r a t i o may be u se d a s a n i n d i c a t o r o f th e g ro w th o f a money m a rk e t. I n m ost d e v e lo p in g c o u n t r i e s , th e r e a r e h a r d ly an y l e a d in g a g e n c ie s o f im p o rta n c e o t h e r th a n co m m ercial b a n k s. T h ere a r e no d is o o u n t h o u se s o r a c c e p ta n c e h o u s e s , and s a v in g s I n s t i t u t i o n s ( in c lu d in g l i f e ln s u r a n o e co m panies) a r e i n th e e a r l y s ta g e s o f d e v e lo p m e n t. B o th r a t i o s m ig h t be e x p e o te d to be low i n a d e v e lo p in g c o u n try and h ig h i n a n ad v an ced c o u n tr y . The r a t i o o f d e p o s i t money to money s u p p ly sh o u ld be h ig h e r i n a m ore d e v e lo p e d c o u n try b e c a u s e , w ith econom ic d e v e lo p m en t, t h e r e i s a l s o d e v elo p m e n t o f th e b a n k in g sy s te m . 231 The g r e a t e r u s e o f banks f o r s e t tl e m e n t o f d e b t s , th e u s e o f c h e c k in g a c c o u n ts in s te a d o f c u rre n c y a s a medium o f e x ch a n g e, and th e e x te n s io n o f b o rro w in g from th e b a n k in g sy ste m te n d to In o r e a s e and th e im p o rta n c e o f d e p o s i t m oney. The u n o rg a n iz e d money m a rk e ts a r e ev en more im p e r f e c t and in d e e d i t i s q u e s tio n a b le w h e th e r th e e x i s t i n g a rra n g e m e n ts sh o u ld be r e f e r r e d to a s " m a rk e ts ." They a r e much l e s s hom ogeneous th a n th e o rg a n iz e d m a rk e ts and a r e l o c a te d m a in ly i n r u r a l a r e a s a n d , t h e r e f o r e , th e demand f o r and s u p p ly o f lo a n a b le fu n d s o r i g i n a t e s m a in ly from th e a g r i c u l t u r a l s e c t o r . The s u p p ly o f c r e d i t i n th e u n o rg a n iz e d money m a rk e ts comes from n o n - i n s t i t u - t i o n a l s o u r c e s , t h a t i s , from I n d i v id u a ls who a r e e i t h e r p r o f e s s i o n a l m o n ey len d ers o r l a n d l o r d s , r e l a t i v e s , e t c e t e r a , a s w e ll a s from f i n a n c i a l i n s t i t u t i o n s , su c h a s c o o p e r a tiv e s and p r i v a t e and g o v e rn m e n t-sp o n so re d a g r i c u l t u r a l b a n k s . The n o n - i n s t i t u t i o n a l s o u r c e s , h o w ev er, a r e much m ore im p o r ta n t th a n i n s t i t u t i o n a l s o u rc e s i n th e s u p p ly o f a g r i c u l t u r a l o r r u r a l c r e d i t i n many d e v e lo p in g c o u n t r i e s . I t h a s b e en e s tim a te d , f o r ex am p le, t h a t o v e r 80 p e r c e n t o f a g r i c u l t u r a l c r e d i t i s s u p p lie d from n o n - i n s t i t u t i o n a l s o u rc e s i n P a k i s t a n and T h a ila n d , and o v e r 90 p e r c e n t i n I n d i a . I n J a p a n o n ly a b o u t h a l f th e t o t a l s u p p ly comes from n o n - i n s t i t u t i o n a l s o u r c e s , s in c e 232 th e f i n a n c i a l s t r u c t u r e i s w e l l - d e v e l o p e d .^ T h ere a r e many r e a s o n s why n o n - i n s t i t u t i o n a l s o u r c e s s h o u ld p ro v id e m ore c r e d i t th a n i n s t i t u t i o n a l s o u r c e s . The m ost Im p o rta n t i s t h a t e x i s t i n g f i n a n c i a l i n s t i t u t i o n s te n d to r e s t r i c t t h e i r le n d in g a c t i v i t i e s m a in ly to u rb a n a r e a s and do n o t g e n e r a l l y w ish to en g ag e i n th e m ore r i s k y f i e l d o f le n d in g to th e a g r i c u l t u r a l s e c t o r . A ls o , th o s e i n th e r u r a l s e c t o r who w ish to b o rro w money p r e f e r to u s e n o n - i n s t i t u t i o n a l s o u rc e s o f c r e d i t d e s p i t e th e f a c t t h a t th e I n t e r e s t r a t e s a r e much h ig h e r th a n r a t e s on lo a n s from f i n a n c i a l i n s t i t u t i o n s . The p r e f e r e n c e i s d u e to a num ber o f f a c t o r s . The i n s t i t u t i o n s a r e u s u a l l y a t a c o n s id e r a b le d i s t a n c e from th e b o rro w e rs , w h ile m o n ey len d e rs a r e a v a i l a b l e i n e v e ry v i l l a g e . B o rro w ers o b t a i n t h e i r lo a n s more p ro m p tly from n o n - i n s t i t u t i o n a l s o u r c e s . M o reo v er, th e n o n - i n s t i t u t i o n a l s o u rc e s do n o t I n s i s t on p u n c tu a l r e p a y m ent a s banks o r c o o p e r a tiv e s o c i e t i e s d o . The te n d e n c y o f th e co m m ercial banks to k e e p a h ig h p e rc e n ta g e o f t h e i r d e p o s i t s i n l i q u i d fo rm , i s 11U. Tun W ai, " I n t e r e s t B a te s O u ts id e th e O rg a n iz e d Money M a rk e ts o f U n d erd ev elo p ed C o u n tr ie s ," I .M .F . S t a f f P a p e r s , 1 9 5 7 -5 8 , p . 8 7 . 233 c o n s id e r e d a s on e o f th e m ain o b s t a o le s i n c a r r y in g o u t an e f f e c t i v e m on etary p o l i c y . T h is p o in t h a s b een w e ll s t a t e d i n a U n ite d N a tio n s* stu d y : ’•In th e u n d e rd ev elo p ed c o u n t r ie s , commer c i a l banks n o r m a lly c o n fin e d t h e i r o p e r a t io n s to s h o r t-te r m lo a n s , i f th e y w ere to a s s i s t i n d u s t r i a l d e v e lo p m e n t, i t w ould be n e c e s s a r y to e x te n d t h e i r o p e r a t io n s to medium and lo n g term lo a n s a s w e l l . I t w a s, o f c o u r s e , u n d er s to o d t h a t i n d u s t r i a l f ln a n o ln g was n o t c o n f in e d t o th e p ro m o tio n o f new i n d u s t r i e s . E x i s t i n g in d u s t r i e s a l s o r e q u ir e d f i n a n c i a l a s s i s t a n c e f o r t h e i r c u r r e n t and d e v e lo p m en ta l n e e d s . ”12 The r o l e o f f i n a n c i a l i n s t i t u t i o n s i n econom ic d ev elo p m e n t c a n be d ls o u s s e d i n th e f o llo w in g w a y s. In th e f i r s t p la c e t h e i r p u rp o se i s to p r o v id e money s u p p ly . S e c o n d ly , to d i v e r t s a v in g s in t o c h a n n e ls p r o f i t a b l e to th e econom y. T h ir d ly , due to th e h ig h d e g r e e o f r i s k in h e r e n t i n in v e s tm e n t i n a d e v e lo p in g econom y, m ost p r iv a t e e n t e r p r is e r s a r e r e lu c t a n t to I n v e s t in th e i n d u s t r i a l s e c t o r . H ow ever, i f p r iv a t e banks a r e to be a s s ig n e d a s i g n i f i c a n t r o l e in th e econom y, i t becom es n e c e s s a r y to in f lu e n c e t h e i r d e c i s i o n s . The t r a d i t i o n a l f e a r s o f com m ercial banks c o n c e r n in g m edium -term o r lo n g -te r m lo a n s o f a p r o d u c tiv e c h a r a c t e r may be m i t i g a te d by a p p r o p r ia te govern m en t g u a r a n te e s o r r e d is c o u n t 12 U n ite d N a tio n s: D o m estic F in a n c in g o f Econom ic D evelop m ent. New York, 1951, p. 60. f a c i l i t i e s . F i n a l l y , i t i s o f t e n c o n te n d e d t h a t th e r e i s a n i n s t i t u t i o n a l b ia s i n d e v e lo p in g c o u n tr i e s i n f a v o r o f in v e s tm e n t i n c o n s t r u c t i o n and t r a d e to th e d e tr im e n t o f m ore p r o d u c tiv e a l t e r n a t i v e s a v a i l a b l e i n i n d u s t r y and a g r i c u l t u r e . T h is m eans t h a t th e c r e d i t n e ed s o f th s e s c o u n tr i e s a r e n o t m et a d e q u a te ly by e x i s t in g i n s t i t u t i o n s . The g o v e rn m e n t, t h e r e f o r e , h a s to s e t up new o r s p e c i a l i z e d c r e d i t I n s t i t u t i o n s . As a m a tte r o f f a c t n e a r l y a l l th e s e c o u n tr i e s in r e c e n t y e a r s hav e s e t up su c h i n s t i t u t i o n s to m eet th e s p e c i a l n e ed s o f a g r i c u l t u r e o r o f new I n d u s t r i e s . W hatever th e d e f e c t s i n th e a c t u a l o p e r a t io n o f th e s e i n s t i t u t i o n s , th e b a s ic id e a i n s e t t i n g them u p i s u n d o u b te d ly so u n d . M o reo v er, th e y c a n p ro v id e p r i v a t e I n v e s to r s w ith a d v ic e , g u id a n c e , and o t h e r th in g s th e y may need i n m aking t h e i r d e c i s i o n s . The s e c u r i t y m a rk e t c a n n o t become b ro ad and a c t i v e u n le s s th e c o u n try h a s re a c h e d a c e r t a i n s ta g e o f in d u s t r i a l d e v e lo p m e n t w ith th e p red o m in an ce o f th e c o r p o r a te form o f b u s in e s s o r g a n i z a t i o n . T h ere i s a l s o a c lo s e c o n n e c tio n b etw een th e money m a rk e t and o t h e r r e l a t e d m a rk e ts , su c h a s th e com m odity m a rk e ts , th e f o r e ig n exchange m a rk e t, e t c e t e r a . T hese m a rk e ts p ro v id e o p p o r t u n i t i e s f o r th e in v e s tm e n t o f fu n d s l e n t i n th e s h o r t- te r m money m a rk e t. The s t a t e o f t h i s money m a rk e t and th e p a t t e r n o f s h o r t- te r m r a t e s p r e v a i l i n g t h e r e i n s e r v e a s a good, b a ro m e te r f o r p u rp o s e s o f c e n t r a l b a n k in g o p e r a t i o n s . A c c o rd in g ly , th e f u n c tio n s o f a c e n t r a l bank a r e s e v e r e ly r e s t r i c t e d when th e money m a rk e ts a r e n o t w e ll d e v e lo p e d . The a b se n c e o f th e s o - c a l l e d " c a l l - lo a n m a rk e t” and a " b i l l m a rk e t” makes i t d i f f i c u l t f o r th e c e n t r a l bank to s e c u re c o n tr o l o v e r th e a c t i v i t i e s o f th e co m m ercial b a n k s. Even m ore s i g n i f i c a n t l y , open m a rk e t o p e r a tio n s may n o t be p o s s ib l e i n th e s e money m a rk e ts . And, s in c e th e banks do n o t g e n e r a l l y m a in ta in f ix e d r a t i o s b etw een t h e i r c a s h r e s e r v e s and d e p o s i t s , b u t in s t e a d a r e accu sto m ed to a llo w in g c o n s id e r a b le f l u c t u a t i o n s i n t h e i r c a sh r a t i o s , th e banks a r e n o t l i k e l y to r e a c t to th e s m a ll ch an g es i n t h e i r c a s h b a la n c e s w hich a r e b ro u g h t a b o u t by w h a te v e r o p en m a rk e t o p e ra t io n s a r e p o s s ib l e i n th e s e n a rro w s e c u r i t y m a rk e ts . T hus, t h e r e a r e s p e c i a l d i f f i c u l t i e s c o n n e c te d w ith i n t r o d u c in g th e in s tr u m e n ts o f m o n etary c o n tr o l i n t o th e s e 13 c o u n t r i e s . ^ A c e n t r a l b a n k 's p rim a ry f u n c tio n i s to h e lp c o n t r o l and s t a b i l i z e th e m o n etary and b a n k in g sy ste m , n o t ^ R . S . S a y e rs , M odern B a n k in g . 4 th E d it i o n , O x fo rd , C le re n d o n P r e s s , I9 6 0 , e s p e c i a l l y C h a p te r 11, p p . 2 7 9 -9 8 . 236 to f in a n c e d e v e lo p m e n t. B u t I n th e l e s s d e v e lo p e d co u n t r i e s , and in d e e d i n th e i n d u s t r i a l i z e d c o u n tr i e s a s w e ll, th e f u n c tio n s o f th e c e n t r a l b anks h a v e n o t ended w ith th e a c h ie v e m e n t o f c o n tr o l o v e r th e com m ercial banks and th e r e g u l a t i o n o f th e money m a rk e t. They h a v e , i n r e c e n t tim e s , b e en o b lig e d to assum e some r e s p o n s i b i l i t y f o r e n c o u ra g in g , and ev en u n d e r ta k in g , th e f i n a n c in g o f th e d e v e lo p m e n t o f th e r e s o u r c e s o f th e c o u n tr y . They hav e e x te n d e d t h e i r a c t i v i t i e s i n t o o t h e r s e c t o r s o f th e money m a rk e t, b e s id e s th e co m m ercial b a n k s, s e c t o r s w hich a r e in a d e q u a te ly d e v e lo p e d on a c c o u n t o f th e d e f e c t i v e f i n a n c i a l o r g a n i z a t i o n s . P ro b a b ly th e m ain r e a s o n f o r t h i s change i n th e r o l e o f th e c e n t r a l bank from a n a g en cy o f r e g u l a t i o n t o o l , a t l e a s t p a r t i a l l y , o f d e v e lo p m e n t, i s th e s h i f t i n o p in io n w hich now f a v o r s p la n n in g and r e c o n s t r u c t i o n . Some e c o n o m is ts w ent ev en so f a r a s to s u g g e s t d i r e c t Ik f in a n c in g o f i n d u s t r i a l d e v elo p m e n t by th e c e n t r a l b an k . I t w ould, i n t h e i r o p in io n , rem edy th e p ro b lem o f th e e x is te n c e o f In a d e q u a te c a p i t a l f o r m a tio n th ro u g h th e c r e a t i o n o f f o rc e d s a v in g s i n th e com m unity. l i t H. C. W a llic h , M onetary P ro b lem s o f a n E x p o rt Economy— The Cuban E x p e rie n c e . 1 9 1 4 -4 7 . (C am bridge. M assa- c h u s e t t s : H a rv ard U n iv e r s ity P r e s s , 1 9 5 0 )t p . 295* 237 As f a r a s f i s c a l p o lic y I s c o n c e rn e d . I t I s n o rm a lly a c h a r a c t e r i s t i c o f a d e v e lo p in g econom y's f i s c a l sy ste m t h a t a h ig h p r o p o r tio n o f re v e n u e s i s d e r iv e d from I n d i r e c t ta x e s and custom d u t i e s w hich a r e r e g r e s s i v e . T axes o n Incom e from la n d a r e low and p r o v id e o n ly a s m a ll p r o p o r tio n o f a l l governm ent Incom e. P r o g r e s s iv e Income ta x e s a r e low I n y i e l d s . N ot o n ly a r e th e ta x sy ste m s g e n e r a l l y a r b i t r a r y and r e g r e s s i v e I n c h a r a c t e r , b u t I n a d d i t i o n th e r e a r e p ro b lem s o f con s i d e r a b l e ta x e v a s io n and I n e f f i c i e n t ta x c o l l e c t i o n . T h is , o f c o u r s e , im pedes e f f e c t i v e f i s c a l p o l i c y . I n suoh a n econom y, how ever, e x te n s iv e and e f f i c i e n t u s e o f f i s c a l p o lic y i s I n d is p e n s a b le to a c c e l e r a t e eoonom lo d e v e lo p m e n t. P o l i c i e s c o n n e c te d w ith governm ent re v e n u e s and e x p e n d itu r e s c a n h a v e f o u r s i g n i f i c a n t e f f e c t s upon th e r a t e o f d e v e lo p m e n t. They c a n (1 ) a f f e c t th e a l l o c a t i o n o f r e s o u r c e s , (2 ) a l t e r th e d i s t r i b u t i o n o f i n come, (3) prom ote c a p i t a l a c c u m u la tio n , and (4) r e s t r a i n i n f l a t i o n . Governm ent e x p e n d itu r e s In a p a r t ic u la r s e o t o r o f th e econom y ten d to a t t r a c t r e s o u r c e s to t h a t s e c t o r , w h ereas t a x a t io n o f a p a r t ic u l a r s e c t o r te n d s to r e p e l r e s o u r o e s from t h a t s e c t o r . T hus, by a f f e c t i n g f a c t o r m o b ilit y among i n d u s t r i e s and o c c u p a t io n s , th e p a t te r n o f r e v e n u e s and e x p e n d itu r e s w i l l a f f e c t th e a l l o c a t i o n 238 o f r e s o u r o e s . More p a r t i c u l a r l y from th e s ta n d p o in t o f d e v e lo p m e n t, la n d and p r o p e r ty t a x e s ca n a f f e c t th e sy stem o f la n d te n u r e , ta x ex em p tio n and ta x d is c r im in a t i o n , ca n I n f lu e n c e th e d i r e c t i o n o f In v e stm e n t to p a r t ic u l a r s e c t o r s , t a x e s ca n l i m i t I n d u s t r ie s w ith s o o l a l c o s t s , and s u b s id ie s can en co u ra g e I n d u s t r ie s w ith s o c i a l b e n e f i t s . As th e f i s c a l o b j e c t i v e s become la r g e r , e x p e n d i tu r e p la n n in g becom es more s i g n i f i c a n t . T h is r e q u ir e s th e c r e a t io n o f b u d g eta r y m a ch in er y . I t n e c e s s i t a t e s an a p p r o v a l to b u d g e tin g w h ich ta k e s I n to a c c o u n t lo n g -r u n econom ic d ev elo p m e n t p la n s . The a n n u a l b u d g et o f t e n b e com es th e t a c t i c a l Im p le m en ta tio n o f a d ev elo p m en t s t r a t e g y w h ich i s e x p r e s se d i n a n n u a l p la n s , f i n a n c i a l r e p o r t in g becom es th e n a n e c e s s i t y , and w ith I t s p e r f e c t io n a new ty p e o f f i n a n c i a l c o n t r o l i s c r e a t e d . S p e c ia l f in a n o l a l m a ch in ery I s n e o e s s a r y f o r g o v ern m en ta l p ro d u c t io n , tr a d in g , and f i n a n o l a l o p e r a t io n s , and th e f l e x i b i l i t y r e q u ir e d f o r su ch o p e r a t io n s c a l l s f o r new form s o f f in a n o l a l o r g a n iz a t io n and m anagem ent. T a x a tio n i s u s u a l l y th e m ajor m ethod o f m o b iliz in g d o m e stic s a v in g s In c o u n t r ie s w ith a lo w l e v e l o f n a t io n a l Incom e. T hat i s p a r t i c u l a r l y th e d i f f i c u l t y I n c o u n t r ie s w hich h ave no m ajor raw m a t e r ia ls to e x p o r t . N orm ally t a x a t io n i s th e o n ly r e a l l y a n t i - i n f l a t i o n a r y In stru m en t 239 o f f in a n c in g a t th e d i s p o s a l o f g o v e rn m e n ts. I n coun t r i e s w here a l a r g e num ber o f p e o p le a r e o u ts id e th e money economy and w here o t h e r s a r e c lo s e to th e su b s i s t e n c e l e v e l , m ass t a x a t i o n i s e i t h e r im p o s s ib le o r I n h i b i t s d e v e lo p m e n t. T h is c r e a t e s th e need f o r a n a p p ro a c h to t a x a t i o n w hich i n some in s t a n c e s r e q u i r e s new f i s c a l te c h n iq u e s . The d e v e lo p m e n t o f th e f i s c a l s t r u c t u r e i s ( h o w ev er, n o t m e re ly l i m i te d to s t r u c t u r a l o r m a n a g e ria l a s p e o ts o f th e g o v e rn m e n ta l o r g a n i z a t i o n b u t o f t e n c u ts r a t h e r d e e p ly i n t o th e s o c i a l s t r u c t u r e . I f a ta x r e form i s u n d e rta k e n w hich ch an g es th e r e l a t i o n s h i p b e tw een la n d lo r d s and t e n a n t s , i t h a s s i g n i f i c a n t r e d i s t r i b u tiv e e f f e c t s and i s a lr e a d y th e b e g in n in g o f a n o v e r a l l la n d re fo rm . A d i s t i n c t i o n m u st be made h e re betw een th e s e ty p e s o f f i s c a l re fo rm s w hioh a f f e c t e le m e n ts o f th e s o c i a l s t r u c t u r e a s su c h and th o s e w hich e f f e c t o n ly f i n a n o l a l I n s t i t u t i o n s , ev en i f th e s e f i n a n c i a l i n s t i t u t io n s a r e v e ry im p o r ta n t. The t a x a t i o n o f la n d i s a lw ay s c l o s e l y lin k e d to th e a g r a r i a n s t r u c t u r e a s a w h o le . C hanges on th e ta x s i d e a lo n e a r e n o t d e c i s i v e a s lo n g a s th e r e i s a l a n d - t e n u r e sy ste m w hich i s u n s u ite d to p ro p e r econom io d e v e lo p m e n t. Y et ta x ch an g es and te n u r e c h an g es m u st be i n t e r r e l a t e d i n o r d e r to p ro d u ce th e 2k 0 k in d o f ch an g e I n a g r a r i a n p o lic y w hich I s n e c e s s i t a t e d hy g ro w in g d e v elo p m e n t p ro b le m s. T ec h n iq u e s I n la n d t a x a t i o n a r e h a r d e r to t r a n s f e r from one c o u n try to a n o th e r th a n te c h n iq u e s In ta x in g c o r p o r a t i o n s , b e c a u se t a x a t i o n a s I t a f f e c t s a g r i c u l t u r e I s a p a r t o f th e g o v e rn m e n ta l p ro c e s s and I n tim a te ly t i e d up w ith th e e n t i r e p o l i t i c a l , s o c i a l and econom ic fram ew o rk . The t a x a t i o n o f c o r p o r a t io n s , how ever, a f f e c t s th e same ty p e o f f i n a n c i a l I n s t i t u t i o n s i n d e v e lo p e d and d e v e lo p in g o o u n t r l e s . W hat h a s happened i n p r a c t i c e to many d e v e lo p in g o o u n tr le s i s t h a t o f h a v in g had t h e i r f i s c a l s t r u c t u r e im p la n te d from a b ro a d , w here b i t s and p ie c e s o f v a r io u s sy ste m s h a v e b e e n t r a n s f e r r e d , a n d , a s th e y have b e e n t r a n s f e r r e d th e y have v e ry o f t e n b een tr a n s fo r m e d . F i n a l l y , th e m ain d i f f i c u l t y i n t r a n s f e r r i n g te c h n iq u e s from one c o u n try to th e o t h e r c o n s i s t s i n th e o o n tin u e d e v o lu tio n o f th e t r a n s f e r r e d te c h n iq u e s i n th e "m o th e r c o u n tr y ," w h ile th e same e v o lu tio n o f t e n d o e s n o t ta k e p la c e I n th e d e v e lo p in g c o u n tr i e s to w hich th e te c h n iq u e s h a v e te e n e x p o rte d . 241 Summary I n m o st d e v e lo p in g c o u n t r i e s , f l s o a l and m o n etary m ea su re s h a v e b een a d o p te d f o r In d u c in g I n d u s t r i a l d e v e lo p m e n t. The m o st common a r e ta x I n c e n tiv e s and e a sy c r e d i t . U s u a lly e x em p tio n s from Im p o rt d u t i e s on m ao h ln ery and raw m a t e r i a l s u se d by th e I n d u s t r i e s , from a b u s in e s s ta x , o r from th e c o r p o r a te Incom e t a x , e t c e t e r a , a r e g iv e n f o r s p e c i f i c p e r i o d s . L ib e r a l d e p r e c i a t i o n a llo w a n c e s , c a r r y in g o v e r I n to s u b s e q u e n t y e a r s I n c a s e o f l o s s e s I n th e c u r r e n t y e a r , a r e a l s o g e n e r a l l y o f f e r e d . When th e r e I s c r e d i t o o n tr o l i n d e v e lo p in g o o u n t r le s , u s u a l l y th e m o n etary a u t h o r i t i e s p e r m it, o r ev en s u p p o r t, a m ore l i b e r a l e x te n s io n o f c r e d i t by oom m erolal banks to Im p o rt c o m p etin g and e x p o rt i n d u s t r i e s . Som etim es r e d is c o u n t an d r e f i n a n c e f a c i l i t i e s a t a low i n t e r e s t r a t e a r e o f f e r e d . The e f f e c t s o f th e s e m ea su re s h av e to be w eighed a g a i n s t th e e f f e c t s o f t r a d e and ex change m e a s u re s . F o r I n s t a n c e , th e p o s i t i v e e f f e c t s d e r iv e d from ta x and o t h e r i n c e n ti v e s may be l a r g e l y o f f s e t by th e n e g a tiv e e f f e c t s o f a n o v e rv a lu e d exchange r a t e . T hus, I t i s th e " t o t a l e f f e c t " o f a l l th e s e p r o t e c t i v e and i n c e n ti v e m e a su re s i n th e f i e l d s o f t r a d e , e x c h a n g e , c r e d i t , ta x a t i o n , e t c e t e r a , w hich m a tte r s i n c o n s id e r in g th e t o t a l l e v e l o f p r o t e c t i o n . C hanges i n m o n etary i n s t i t u t i o n s and f i s c a l s t r u c t u r e f a v o r a b le f o r i n d u s t r i a l d ev elo p m en t a r e r e q u i r e d . F o r i n s t a n c e , th e te n d e n c y o f th e com m ercial banks to k e ep a h ig h p e rc e n ta g e o f t h e i r d e p o s i ts i n l i q u i d form i s c o n s id e re d to be one o f th e m ain o b s t a c l e s i n c a r r y in g o u t a n e f f e o t i v e m o n e ta ry p o l io y . I f co m m ercial banks a r e to be a s s ig n e d a s i g n i f i c a n t r o l e i n th e econom y, i t becom es n e o e s s a ry to I n f lu e n c e t h e i r d e c i s i o n s . T hus, t h i s to o o a u tio u s p o l ic y o f th e co m m ercial banks i n d e v e lo p in g c o u n tr i e s s h o u ld be m itig a te d by a n i n i t i a t i v e o f th e c e n t r a l b anks i n th e s e c o u n tr i e s to g u a ra n te e th e com m ercial b anks a g a i n s t r i s k s e m a n a tin g from t h e i r le n d in g p o l i c y . I t i s to be n o te d t h a t t h i s p o lic y was a d v o c a te d by th e C e n tr a l Bank o f I r a q a f t e r 1958, w hich l e d to th e e x p a n sio n i n b a n k in g c r e d i t f o r i n d u s t r i a l d e v e lo p m e n t. F i n a l l y , i t s h o u ld be n o te d t h a t e x te n s iv e and e f f i c i e n t u s e o f f i s c a l p o lic y i s in d is p e n s a b le to a c c e l e r a t e econom ic d e v e lo p m e n t. F i s c a l p o lic y c a n (1) a f f e c t th e a l l o c a t i o n o f r e s o u r c e s , (2 ) a l t e r th e d i s t r i b u t i o n o f Incom e, (3) prom ote c a p i t a l a c c u m u la tio n , and (4) r e s t r a i n I n f l a t i o n . CHAPTER V I I I THE STRATEGY OP FOREIGN TRADE PLANNING P u rp o s e and O r g a n iz a tio n The p u rp o se o f t h i s c h a p te r i s to show th e Im p o rt a n c e o f f o r e i g n t r a d e i n th e d r a f t i n g o f a s t r a t e g y f o r econom ic p la n n in g . T h is c a n be o b se rv e d from th e f a c t t h a t i n o r d e r to m axim ize th e a g g r e g a te r a t e o f econom ic g ro w th , s t r a t e g i e s f o r econom lo d e v elo p m e n t have to be d e s ig n e d to re d u c e th e c o n s t r a i n t im posed o n th e c a p a c ity to Im p o rt by th e s c a r c i t y o f f o r e i g n e x c h a n g e . T h is c an be a c h ie v e d by a d o p tin g p ro g ram s w hich g iv e h ig h p r i o r i t y to th e d e v e lo p m e n t o f i m p o r t - s u b s t i t u t i n g and e x p o rt i n d u s t r i e s . The c h a p te r b e g in s w ith a d i s c u s s i o n o f econom ic p la n n in g and I n d u s t r i a l d e v e lo p m e n t. S e o o n d ly , th e r o l e o f f o r e i g n t r a d e i n econom ic p la n n in g w i l l be a n a ly z e d . T h ir d ly , th e im p o rta n c e o f s h o r t- te r m f o r e i g n t r a d e p la n n in g w i l l be d i s c u s s e d . F i n a l l y , c h a n n e ls o f co m m u n icatio n r e q u ir e d f o r f o r m u la tio n o f a f o r e i g n t r a d e p la n w i l l be d is c u s s e d . 244 Economics P la n n in g and I n d u s t r i a l D evelop m en t S in c e World War I I , p la n n in g h as b een i n c r e a s in g ly a c c e p te d and c a r r ie d o u t in a l a r g e number o f c o u n t r ie s w ith d i f f e r e n t s o c i a l and econom ic sy ste m s and a t v a r y in g s t a g e s o f d e v e lo p m e n t. I n some ( f o r ex a m p le, th e U .S .8 .R . arxL o t h e r c e n t r a l l y p la n n ed e c o n o m ie s ), i t o r ig in a t e d a s an i n t e g r a l p a r t o f a s o c i a l and p o l i t i c a l id e o lo g y ; i n th e m a jo r ity o f o t h e r c o u n t r ie s , p la n n in g was a d o p te d f o r th e p u rp o se o f r a p id econ om ic d e v e lo p m e n t. T h is i s e s p e c i a l l y th e c a s e i n m ost d e v e lo p in g c o u n t r ie s to d a y . P la n n in g h as th u s em erged a s an in str u m e n t f o r t h e e f f e c t i v e m o b iliz a t io n and o p tim a l u t i l i z a t i o n o f a v a i l a b l e r e s o u r c e s f o r a t t a i n i n g th e d e s ir e d g o a ls o f n a t io n a l p o l l o y . I t sh o u ld be n o te d , h o w ev er, t h a t p la n n in g i n th e m odern s e n s e was i n i t i a t e d i n th e S o v ie t U n ion i n th e n in e t e e n t w e n t ie s , and i n a few o th e r c o u n t r ie s , th ou gh o n ly o n a m od est s o a l e , i n th e n in e t e e n t h i r t i e s . D u rin g t h i s p r e-w a r p e r io d and i n th e f i r s t p o st-w a r y e a r s , p la n n in g i n th e m ixed econ om ies was c o n fin e d m a in ly to th e ad van ced c o u n t r ie s , a s a means o f p r e v e n tin g m ajor d i s e q u ilib r iu m from a r i s i n g and f o r p r e p a r in g th e t r a n s i t i o n 245 from a w ar to a p e a c e econom y. I t was o n ly I n th e 1 9 5 0 ’ s t h a t th e em p h asis I n th e s c ie n c e o f p la n n in g was s h i f t e d to p la n n in g f o r th e d e v elo p m e n t o f th e l e s s d e v e lo p e d c o u n tr i e s w ith m ixed e c o n o m ie s. A lth o u g h th e s c ie n c e o f d ev elo p m e n t p la n n in g f o r m ixed econom ies I s th u s r e l a t i v e l y new, c o n s id e r a b le p r o g r e s s h a s b een made I n d e v is in g m ethods and d i s c i p l i n e s f o r th e f o r m u la tio n o f d e v e lo p m ent p l a n s . 1 P la n n in g , o r r a t h e r " n o rm a tiv e " p la n n in g , i s oo n - o e rn e d w ith b o th d e te r m in in g p la n n in g g o a ls and th e m eans 2 by w hich th e s e g o a ls may be a o h ie v e d . I n d e v e lo p in g o o u n tr le s one may p o i n t o u t t h a t th e id e a p re c e d e s i t s r e a l i z a t i o n . As eoonom lo d e v elo p m e n t may be e x p e c te d to come by I t s e l f , p la n n in g becom es a p r e - c o n d i ti o n f o r d e v e lo p m e n t, n o t a s I n th e W e ste rn c o u n t r i e s , a l a t e r co n se q u e n c e o f d e v elo p m e n t and a l l th e o t h e r ch an g es w hich accom panied i t . I t h a s b e e n s u g g e s te d t h a t i t i s p a r t o f th e p o l i t i c a l dynam ics i n a l l th e d e v e lo p in g c o u n tr i e s t h a t U n ite d N a tio n s : " O r g a n iz a tio n a l A s p e c ts o f P la n n in g ," I n d u s t r i a l i z a t i o n and P r o d u c t i v i t y . B u l l e t i n 9, New Y o rk , 19&5. 2 0 . L an g e , E ssa y s o n Eoonomlo P la n n in g . A s ia P u b lis h in g H ouse, 19&3» p . 2 1 . 246 t h e Id e a o f p la n n in g I s s p r e a d in g , and t h a t I t ( d i f f e r i n g from b o th th e I d e o lo g ie s and th e f a o t o f p la n n in g I n W e ste rn o o u n tr le s ) Im p lie s a p ro g ram m atic and com pre- 3 h e n s iv e s t a t e d i r e c t i o n o f th e econom ic d e v elo p m e n t A d e v elo p m e n t o f th e I n d u s t r i a l s e c t o r o f t h e i r econom ies I s a common d e s i r e o f m ost d e v e lo p in g coun t r i e s . F o r many o f them t h e r e I s no o t h e r s e c t o r a l d e v elo p m e n t t h a t g iv e s b e t t e r p ro m ise o f d e c r e a s in g th e d ep en d en cy o f a c o u n try o n p r i c e , i n t e r n a t i o n a l and c l i m a t i c f l u c t u a t i o n s a f f e c t i n g th e s i n g l e m a jo r e x p o rt e a r n e r , w h ile I n c r e a s in g th e Jo b s a v a i l a b l e t h a t a b s o rb p a r t o f th e g ro w in g l a b o r f o r c e I n c o u n tr i e s w ith e v e r - i n c r e a s in g p o p u la tio n g ro w th r a t e . T h ere i s no m agic ■ s fo rm u la , o f c o u rs e , t h a t c an be a p p lie d to p ro v id e th e d e s i r e d i n d u s t r i a l g ro w th . H ow ever, a p la n b a se d on r e a l i s t i c o b j e c t i v e s and a v a i l a b l e c a p i t a l f o r i n v e s t m en t, c a n e n a b le th e f o r m u la tio n o f a n i n d u s t r i a l d e v e lo p m ent program d e s ig n e d to m eet th e g ro w th t a r g e t s o f a n eoonom lc p la n . F r e q u e n tly , i n i t i a l i n d u s t r i a l d ev elo p m e n t p ro gram s o f new ly d e v e lo p in g o o u n tr le s c o n s i s t o f a s e r i e s G. M y rd a l, Beyond th e W e lfa re S t a t e : Eoonomlc P la n n in g and I t s I n t e r n a t i o n a l I m p l i c a t i o n s . (New Haven: Y a le U n iv e r s ity P r e s s , I 9 6 0 ) , p . 1 2 3 . 247 o f p r o j e c t s s e l e c t e d by a g ro u p o f "p la n n e rs* ' I n a c c o r d a n c e w ith th e a p p a r e n t n e e d s o f th e c o u n try and fu n d s a v a i l a b l e f o r in v e s tm e n t. V ery o f t e n p o l i t i c a l c o n s id e r a t i o n s p la y a m a jo r p a r t I n t h e fo r m u la tio n o f s u c h I n d u s t r i a l p ro g ra m s. P e rh a p s t h e r e I s l i t t l e d a n g e r w ith t h i s I n i t i a l m ethod o f i n d u s t r i a l program m ing f o r coun t r i e s t h a t do n o t p o s s e s s a back g ro u n d o f s t a t i s t i c s o r r e s o u r c e s o r p r o j e c t i o n s o f m a rk e t dem ands f o r oonsum er and in v e s tm e n t g o o d s. The I n d u s t r i a l pro g ram fo rm u la te d by th e " p la n n e rs " beoomes a n e c e s s i t y and o f r e a l v a lu e I n th e i n i t i a l g ro w th o f th e c o u n tr y . H ow ever, u n le s s su c h a team o f p la n n e r s h a s b e en e x c e p ti o n a l l y r e a l i s t i o , d i f f i c u l t i e s i n th e im p le m e n ta tio n o r from th e r e s u l t s o f p r o j e c t by p ro d u c t p ro g ram s w i l l be a lm o s t i n e v i t a b l e . I n s p i t e o f th e a v a i l a b i l i t y o f fu n d s f o r in v e s tm e n t t h e r e may be d e la y s i n c o n s t r u c t i o n , i n s t a l l a t i o n o f eq u ip m en t o r i n o p e r a t io n o f c o m p lete d p l a n t s due to la c k o f a d e q u a te te c h n i c a l p e rs o n n e l and b a s ic m a t e r i a ls f o r p r o d u c tio n . To some e x te n t t h i s h a s b e en th e e x p e rie n c e i n I r a q . T h ere hav e b e en c a s e s w here th e r a t e o f in v e s tm e n t h as b e e n g r e a t e r th a n th e a b s o r p tiv e o a p a c lty o f th e in d u s t r i a l economy to im plem ent p r o j e o t s a s so h e d u le d by th e d e v elo p m e n t p l a n . U n le ss t h e r e i s y e a r - b y - y e a r r e v i s i o n 248 su ch p r o j e o t program m ing ca n r e s u l t i n s e r io u s u n b a la n ce i n th e econom y o f a c o u n tr y . The R o le o f F o r e ig n T rade in Eoonomlo P la n n in g T h e o r e t io a l s t u d i e s and e m p ir io a l e v id e n c e b o th seem to i n d i c a t e th e c r i t i c a l im p o rta n ce o f f o r e ig n tr a d e i n th e d r a f t in g o f a s t r a t e g y f o r a c c e le r a t e d econom ic g r o w th . The com m odity p a t t e r n o f p r o d u c tio n i n a d e v e lo p in g economy i s r e l a t i v e l y u n d i f f e r e n t ia t e d , w h ile th e p a t t e r n o f demand i s much more v a r ie d . Under t h e s e c ir c u m s ta n c e s th e a d ju stm e n t o f th e su p p ly t o th e demand m ust in v o lv e o p e r a t io n s o f f o r e ig n t r a d e , th ro u g h w h ich s u r p lu s e s o f a few co m m o d ities a r e , a s a r u l e , exchanged a g a in s t a more s o p h i s t i c a t e d l i s t o f g o o d s i n s h o r t su p p ly i n a c o u n tr y . M ost d e v e lo p in g c o u n t r ie s , h o w ev er, f a l l in t o th e o a te g o r y o f " im p o r t - s e n s it iv e eo o n o m ies," w here th e i n s u f f i c i e n t c a p a c it y t o im p o rt a c t s a s a b o t t le n e c k , p u t t in g a c e l l i n g t o th e r a t e o f grow th o f th e n a t io n a l econom y. T h is i s a c i r c u l a r p r o c e s s : i n t e r n a l Im b alan ces a r e t r a n s la t e d in t o a d d it io n a l demand f o r f o r e ig n g o o d s, b u t a fe e d b a c k d e v e lo p s b etw een f o r e i g n tr a d e and th e r e s t o f th e economy: i n s u f f i c i e n t im p o rts o f c a p i t a l g ood s s lo w down th e r a t e o f in v e s tm e n ts and k eep i t b elo w 249 th e l e v e l o f p o t e n t i a l s a v in g s , w h ile I n s u f f i c i e n t Im p orts o f n e c e s s i t i e s a r e l i k e l y to f o r c e th e c o u n tr y to o h o o se w hat seem s a t th e moment to be th e l e s s e r e v i l — a s lo w e r r a t e o f grow th w ith o u t I n f l a t i o n o r a h ig h e r r a t e o f g ro w th w ith I n f l a t i o n . E it h e r c h o ic e , i s , h o w ev er, h ig h ly u n s a t i s f a c t o r y . P la n n in g o f f o r e i g n tr a d e in v o lv e s two d i s t i n c t b u t in te r c o n n e c te d o p e r a t io n s : th e a l l o c a t i o n o f e x p o r t - p ro m o tin g and im p o r t - s u b s t it u t in g in v e s tm e n ts (a lr e a d y d is c u s s e d I n C h ap ter V I ) ; and th e a l l o c a t i o n o f th e c a p a c it y t o im p o r t. The aim I s f i r s t to m axim ize th e c o u n tr y ’ s c a p a c it y to im p o rt th ro u g h e x p o r t p ro m o tio n o r to red u ce i t s d ep en d en ce on im p o r ts, w h ic h e v e r w i l l p ro v e more e f f i c i e n t by m aking th e b e s t from th e g iv e n in v e s tm e n t, ta k in g i n t o c o n s id e r a t io n th e manpower w h ich ca n be em ployed a t th e assum ed r e a l w ages; th e n to m axi m ize th e r a t e o f grow th o f th e econom y w ith a g iv e n Im port c a p a c it y by m aking th e b e s t u s e o f i t . The f i r s t a s p e c t p e r t a in s t o th e realm o f m acroeconom ic p la n n in g , th e seco n d to t h a t o f o p e r a t in g f o r e ig n t r a d e . The problem o f p la n n in g th e e x t e r n a l s e c t o r i s one o f th e c r i t i c a l t a s k s f a c in g th e d ev elo p m en t p la n n e r s . Too o f t e n h a s th e b a la n c e o f paym ents im posed a s e v e r e c o n s t r a in t on econ om ic g r o w th . I n fo r m u la tin g t h e i r 250 program s o f d ev e lo p m e n t, th e p la n n e r s h ave n o t o n ly to ta k e f u l l a c c o u n t o f t h i s c o n s t r a i n t , b u t, th rou gh r ig o r o u s p o l i c i e s , have a l s o to do t h e i r u tm o st to l e s s e n i t . The r o l e o f th e e x t e r n a l s e c t o r i n th e econom ic grow th o f d e v e lo p in g c o u n t r ie s i s d om in ated by two f a c t s . One i s th e te n d e n c y f o r th e e x p o r t e a r n in g s o f many o f t h e s e c o u n t r ie s t o in c r e a s e o v e r th e y e a r s a t o n ly a v e r y m od est p a c e . The o t h e r i s t h e e v id e n t need o f d e v e lo p in g c o u n t r ie s f o r an ex p a n d in g volum e o f im p orted g o o d s and s e r v i o e s w ith w h ich to tr a n sfo r m and m o d ern ize t h e i r e c o n o m ie s. Taken t o g e t h e r , t h e s e f a c t s h ave c a s t t h e e x t e r n a l s e c t o r i n th e r o l e o f a p i v o t a l c o n s t r a in t on th e econom ic grow th o f d e v e lo p in g c o u n t r ie s . E f f o r t s t o move a d e v e lo p in g economy a lo n g th e p a th o f m o d e r n iz a tio n a r e bound to c r e a t e n e e d s f o r a w h o le ra n g e o f g o o d s and s e r v i c e s em bodying m odem t e c h n o lo g y . B ut d o m e stic p r o d u c tio n , b e in g l a r g e l y t r a d i t i o n a l i n s t r u c t u r e and t e c h n iq u e s , i s u n a b le to p r o v id e a l l th e means f o r i t s own t r a n s fo r m a tio n . Im b a la n ces th u s a r i s e i n th e p r o c e s s o f grow th b etw een th e co m p o si t i o n o f d o m e stic demand and th e s t r u o t u r e o f d o m e stic p r o d u c tio n ; an d , i f an a d eq u a te p a ce o f grow th i s to be s u s t a in e d , t h e s e t e n s io n s have to be r e l i e v e d th rou gh an 251 ex p a n d in g volum e o f im p orted s u p p l i e s . I t i s f o r t h i s r e a s o n t h a t th e la c k o f dynamism i n th e f o r e ig n exch an ge e a r n in g s n eed ed to f in a n c e in c r e a s in g r e q u ir e m e n ts o f Im p orts i s s e e n t o p o se a m ajor t h r e a t t o d o m e stic eoonom lc d e v e lo p m e n t. The asym m etry b etw een th e grow th o f im p o rt r e q u ir em e n ts and o f f o r e ig n exch an ge e a r n in g s seem s to i n d i c a t e t h a t th e " fo r e ig n ex ch a n g e gap" r a t h e r th a n th e " d o m estic s a v in g gap" i s f r e q u e n t ly th e more s t r a t e g i c c o n s t r a in t on econom io g r o w th . E f f o r t s t o r a i s e th e l e v e l s o f d o m e stic s a v in g and In v e stm e n t may be f r u s t r a t e d i f th e r i g h t c o m p o s itio n o f s u p p lie s n eed ed to s u s t a in h ig h e r l e v e l s o f in v e stm e n t and o u tp u t ca n n o t be s e c u r e d . I t i s q u i t e c o n c e iv a b le t h a t d e v e lo p in g c o u n t r ie s c o u ld , th rou gh a p p r o p r ia te i n s t i t u t i o n a l and o t h e r p o l i c y mea s u r e s , g e n e r a lly manage to a c h ie v e some I n c r e a s e i n th e l e v e l o f d o m e stic s a v in g i f th e a c c e l e r a t i o n o f econom ic grow th w ere, i n f a o t , an o b j e o t iv e to w h ich h ig h s o c i a l p r i o r i t y had b e en g iv e n . But i t i s u n l i k e l y t h a t th e f o r e ig n ex ch a n g e c o n s t r a in t c o u ld be a s r e a d i l y overcom e, s in c e th e r o o t s o f t h a t c o n s t r a in t stem from e x t e r n a l demand c o n d it io n s f o r p rim ary p r o d u c ts and a ls o from th e s t r u c t u r a l im b a la n c e s c h a r a c t e r i s t i c o f th e d o m e stic eco n o m ies o f d e v e lo p in g c o u n t r ie s . The s t r a t e g y o f f o r e ig n tr a d e p la n n in g , i n th e Im m ediate f u t u r e , sh o u ld b e g ea red t o th e m a x im iz a tio n o f th e a g g r e g a te r a t e o f econom io grow th w it h in th e l i m i t s o f th e c a p a c it y to im p ort by th e a v a i l a b l e su p p ly o f f o r e ig n e x o h a n g e . But o v e r th e lo n g e r ru n , s t r a t e g i e s f o r econom ic d ev elo p m e n t h ave to be d e s ig n e d to r e d u c e , a s much a s p o s s i b l e , th e c o n s t r a in t Im posed by th e s c a r c i t y o f f o r e i g n e x c h a n g e . I n o t h e r w o rd s, h ig h p r i o r i t y h a s t o be g iv e n to th e d ev elo p m en t o f im p o r t- s u b s t i t u t i n g i n d u s t r i e s , e x p o r t-p r o m o tin g i n d u s t r i e s o r b o th . I t i s e v id e n t , t h e r e f o r e , t h a t a s t r a t e g y o f f o r e ig n tr a d e p la n n in g c o u ld n o t b e d e v is e d i n i s o l a t i o n ; su ch a s t r a t e g y h a s by i t s n a tu r e t o be an i n t e g r a l p a r t o f th e o v e r a l l s t r a t e g y o f d ev elo p m en t p la n n in g . As t h e b a la n c e o f paym ents i s a c r i t i c a l f a c t o r l i m i t i n g econ om io grow th i n m ost d e v e lo p in g c o u n t r ie s , f u l l a t t e n t i o n sh o u ld be p a id to th e p roblem o f a l l o c a t in g i n th e b e s t p o s s i b l e manner th e s c a r c e su p p ly o f f o r e ig n e x c h a n g e . A m ajor a s p e c t o f th e fo r m u la tio n o f a d ev elo p m e n t p la n th u s c o n s i s t s i n th e s y s t e m a t ic e s t i m a tio n o f f o r e i g n ex ch a n g e r e c e i p t s and r e q u ir e m e n ts to c o v e r a l l d ev elo p m en t p r o j e c t s . The ta s k o f m aking p r o j e c t io n s o r e s t a b l i s h i n g t a r g e t s f o r th e e x t e r n a l s e c t o r c a n n o t, h o w ev er, b e 253 view ed, i n i s o l a t i o n from th e d ev elo p m e n t p a th f o r th e r e s t o f th e econom y. The e x t e r n a l s e c t o r may be s e e n a s a c h a n n e l th ro u g h w h ich th e im b a la n c e s t h a t f r e q u e n t ly em erge i n t h e d o m e stic s e o t o r s o f t h e eoonomy ca n be r e l i e v e d . T h is o n ly em p h a sizes t h a t th e t a r g e t s f o r e x p o r t e a r n in g s , f o r o t h e r com ponents o f f o r e ig n exoh an ge r e c e i p t s and f o r f o r e ig n ex ch a n g e r e q u ir e m e n ts h a v e t o be h arm on ized w ith th e o v e r a l l d ev elo p m e n t g o a ls and th e s t r a t e g y o f p la n n in g o f th e c o u n tr y c o n c e r n e d . The e s t im a t io n o f f o r e ig n ex ch a n g e r e c e i p t s and r e q u ir e m e n ts , l i k e th e c a l c u l a t i o n o f In v e stm e n t n e e d s , sh o u ld b e c a r r ie d o u t on th e b a s i s o f a d e t a i l e d s e c t o r a l a n a l y s i s . The e s t im a t e s o f e x p o r t e a r n in g s sh o u ld be made a t th e l e v e l o f in d iv id u a l c o m m o d itie s. Such a p r o ced u re w ould n o t be an in s u p e r a b le d i f f i c u l t y , f o r t y p i c a l l y two o r th r e e co m m o d ities p r o v id e d th e b u lk o f e x p o r t e a r n in g s i n m ost d e v e lo p in g c o u n t r ie s . C a r e fu l a s s e s s m e n t sh o u ld be made o f th e tr e n d s i n e x t e r n a l demand f o r I n d iv id u a l co m m o d ities; a s f a r a s p o s s i b l e , t h e demand p r o s p e c ts i n m ajor e x t e r n a l m ark ets sh o u ld be s tu d ie d s e p a r a t e l y . The demand a n a l y s i s sh o u ld b e m atched by a c r i t i c a l e x a m in a tio n o f th e tr e n d s i n su p p ly o f e x p o r t c o m m o d itie s. F u rth erm o re, p r o p e r a c c o u n t sh o u ld b e ta k e n 254 o f th e l i k e l y im p a ct o f new p o l i c y m easu res on b o th demand f o r , and su p p ly o f , in d iv id u a l e x p o r t it e m s . The r e l a t i v e l y u n d i v e r s i f i e d c h a r a c te r o f th e e x p o r t tr a d e o f d e v e lo p in g c o u n t r ie s w ould make i t p o s s i b l e t o c a r r y o u t a com m od ity-b y-com m od lty e x a m in a tio n o f l i k e l y t r e n d s . Su ch a d is a g g r e g a t iv e a n a l y s i s i s n o t g e n e r a lly p o s s i b l e w ith r e s p e c t t o Im p o r ts, w h ich u s u a l l y c o n s i s t o f a w id e ra n g e o f p r o d u c ts . N e v e r t h e le s s , a tte m p ts sh o u ld be made t o e s t im a t e im p o rt r e q u ir e m e n ts th ro u g h a r e a s o n a b ly d e t a i l e d s e c t o r a l a n a l y s i s . Im p ort r e q u ir e m e n ts o f su c h c a t e g o r ie s a s o a p i t a l g o o d s, co n sum er good s and raw m a t e r ia ls sh o u ld be a n a ly z e d s e p a r a t e l y s in c e e a ch o f t h e s e c a t e g o r ie s h a s to be r e l a t e d t o a d i f f e r e n t v a r ia b le o r s e t o f v a r i a b l e s . F or ex a m p le, th e volum e o f im p o r ts o f o a p i t a l g o o d s w ould depend upon t h e p la n n ed l e v e l o f in v e s tm e n t, and th e volum e o f im p o rts o f consum er g ood s w ould b e d eter m in e d by th e p la n n ed l e v e l o f co n su m p tio n , a f t e r ta k in g i n t o a c c o u n t i n ea ch c a s e th e p la n n ed e x t e n t o f s u b s t i t u t i o n o f im p o rts th ro u g h e x p a n sio n i n d o m e stic p r o d u c tio n . S p e c ia l a t t e n t i o n sh o u ld be p a id t o m a in ta in in g a d e q u a te s to o k s o f com ponents o r p a r t s o f m a ch in ery a s w e ll a s o f e s s e n t i a l raw m a t e r i a l s . O fte n I n d u s t r ie s i n d e v e lo p in g c o u n t r ie s h ave t o work f a r b elo w c a p a c it y due 255 t o th e la c k o f an e s s e n t i a l com ponent and i t i s f o r th e p la n n e r s t o in s u r e t h a t su ch fo r e g o n e o p p o r t u n it ie s a r e m in im iz e d . The problem o f tim e l a g s — th e tim e la p s e b e tw een th e p la c in g o f an o r d e r and th e d e l i v e r y o f th e p r o d u c t, f o r ex a m p le, sh o u ld a l s o be b orn e in m in d . As i n th e c a s e o f m erch a n d ise t r a d e , e s t im a t e s f o r th e i n v i s i b l e ite m s on th e b a la n c e o f paym ents sh o u ld a l s o be made o n th e b a s i s o f a c l o s e s c r u t in y o f r e l e v a n t f a o t o r s . F or ex a m p le, t r a n s p o r t a t io n and in s u r a n c e paym ents and r e c e i p t s o o u ld be e s tim a te d by ta k in g in t o a c c o u n t t h e p r o j e c te d l e v e l o f m erch a n d ise t r a d e , th e p r o s p e c t iv e tr e n d s i n o c e a n f r e i g h t and in s u r a n c e r a t e s , and th e d ev elo p m en t o f n a t io n a l s h ip p in g and in su r a n c e c o n c e r n s . E s tim a te s o f d e b t s e r v i c e sh o u ld r e f l e c t th e c h a r g e s n o t o n ly on th e e x i s t i n g o b l i g a t i o n s , b u t a l s o on th e new e x t e r n a l d e b ts to be in c u r r e d d u r in g th e tim e sp an o f th e d ev elo p m e n t p la n . The e s t im a t e s o f f o r e ig n exoh an ge r e c e i p t s and r e q u ir e m e n ts th u s a r r iv e d a t h a v e th e n to be ren d ered c o n s i s t e n t w ith th e e s tim a te d e x c e s s o f in v e stm e n t o v e r d o m e stic s a v in g , w ith due a t t e n t i o n to th e f e a s i b i l i t y o f o b t a in in g e x t e r n a l f in a n c e t o c o v e r su ch a g a p . T h at w ould e n t a i l a p r o c e s s o f s u c c e s s iv e a p p r o x im a tio n i n o r d e r to a r r i v e a t a s e t o f a g g r e g a t iv e and s e c t o r a l t a r g e t s w h ich a r e m u tu a lly c o n s i s t e n t . I f a n i n i t i a l 256 round o f c a l c u l a t i o n s in d ic a t e d t h a t th e v a r io u s t a r g e t s w ere o u t o f harmony* th e e x e r o is e sh o u ld b e r e p e a t e d - - a number o f t im e s , i f n e c e s s a r y — w ith a p p r o p r ia te m odi f i c a t i o n s i n p la n n ed g o a ls a s w e ll a s i n th e w h ole ra n g e o f p o l i o y v a r i a b l e s u n t i l f u l l c o n s is t e n c y was r e a c h e d . The Im p o rta n ce o f S h ort-T erm F o r e ig n T rade P la n n in g The f u n c t io n s o f a dynam ic f o r e i g n tr a d e s t r a t e g y i s t o h e lp r e a l i z e Im m ediate and s h o r t- r u n n a t io n a l o b j e c t i v e s . F o r e ig n tr a d e p o l i c y i s a c o m p o site s t r u c t u r e , r e f l e c t i n g d iv e r s e p u b lic p o l i c y o b j e c t i v e s . P o l i c y g o a ls w h ich in f lu e n c e tr a d e p o l i c y i n c lu d e , among o t h e r s , i n d u s t r i a l i z a t i o n p rogram s, f i s o a l and m onetary p o l i c i e s , p o l i t i c a l autonom y, e t c e t e r a . C o n tin u o u s p la n n in g r e q u ir e s th e fo r m u la tio n o f an I n t e g r a t e d s e t o f lo n g -te r m , m edium -term and s h o r t term p la n s . A lo n g -te r m p la n p r o v id e s a broad p e r s p e c t i v e o f th e d ev elo p m en t p a th s e l e c t e d by a c o u n tr y , w h ile th e u n d e r ly in g o b j e c t i v e s and th e p o lio y in str u m e n ts th ro u g h w hloh t h e s e o b j e c t i v e s a r e t o be a c h ie v e d a r e in d ic a t e d i n g r e a t e r d e t a i l i n a m edium -term p la n . H ow ever, th e tim e p e r io d o f ev en a m edium -term p la n , commonly f i v e y e a r s , i s to o lo n g from th e s ta n d p o in t o f e f f e o t i v e im p le m e n ta tio n . F or p la n n in g to be o p e r a t io n a lly m e a n in g fu l, s h o r t-te r m p la n s o r program s a r e n eed ed w h ich 257 w ould l a y down c o n c r e t e ly and w ith p r e c i s io n th e ex p en d i t u r e s t h a t w ould be In c u r r ed and th e m easu res t h a t w ould be em ployed to g e t h e r r e s o u r c e s . T h ere I s l i t t l e d o u b t t h a t th e e x a c t n a tu r e o f a s h o r t-te r m p la n w ould depend upon su ch f a c t o r s a s th e s t r u c t u r e o f th e c o u n t r y 's econom y, th e s t a t e o f p la n n in g m a ch in ery and o t h e r i n s t i t u t i o n a l a rra n g em en ts w it h in th e g o v ern m en t. I t sh o u ld be p o in te d o u t t h a t th e r e i s a g ro w in g te n d e n c y t o draw up a n n u a l p la n s o r program s w h ich , i n tu r n , s e r v e a s a b a s is f o r f i n a n c i a l b u d g e ts . A nnual p la n s a r e h e l p f u l f o r th e p r o c e s s o f econ om ic d ev elo p m en t in a v a r i e t y o f w a y s. They i n d i c a t e d e t a i l s o f th e p r o j e c t s s e l e c t e d by a p p ly in g a p p r o p r ia te c r i t e r i a , t h a t a r e to b e u n d erta k e n i n a g iv e n o p e r a t io n a l p e r io d . F or p u b lic e n t e r p r i s e s , th e p la n s p r o v id e e x p l i c i t d i r e c t i v e s f o r a c h ie v in g th e t a r g e t s l a i d down f o r them , and c o n c u r r e n tly th e y p ave th e ground f o r f i n a n c i a l a u t h o r iz a t io n s r e q u ir e d f o r t h a t p u r p o s e . The im p o rta n ce o f f o r e ig n tr a d e s t r a t e g y stem s from t h e f a c t t h a t no m edium -term p la n c o u ld f o r s e e a l l e le m e n ts o f i n s t a b i l i t y o r random f o r c e s ; t h a t ta s k c o u ld be p erform ed o n ly th ro u g h p la n s c o v e r in g a s h o r t e r tim e p e r io d , su c h a s a n n u a l p la n s . I f , f o r exa m p le, sud d en f l u c t u a t i o n s to o k p la c e I n a g r i c u l t u r a l o u tp u t o r In e x p o r t e a r n in g s — b o th o f w h ich w ere o f p rofou n d Im por ta n c e f o r th e d e v e lo p in g c o u n t r ie s — a n n u a l p la n s c o u ld b e so a rra n g ed a s t o p r o v id e o f f s e t s f o r sudden s h o r t f a l l s . L ik e w is e , I f c e r t a i n b o t t le - n e c k s em erged o r i f new o p p o r t u n it ie s a r o s e w h ich c o u ld n o t be f o r e s e e n i n a m edium -term p la n , a n n u a l p la n s c o u ld s e r v e a s a co n v e n ie n t m echanism t o ta k e c a r e o f them . E r r o r s In p r o j e c t i o n s and s h o r t f a l l s i n im p le m e n ta tio n a r e e x p e c te d t o o c c u r i n th e p r o c e s s o f p la n n in g ; f o r ex a m p le. In v e stm e n t I n a p a r t ic u l a r y e a r m ig h t tu r n o u t t o be s m a lle r th a n th e o r i g i n a l t a r g e t . S u ch e r r o r s and la g s c o u ld be d u ly c o r r e c t e d th ro u g h a n n u a l p la n s . C h a n n els o f C om m unications S e o u lr e d f o r F o r m u la tio n o f a F o r e ig n Trade P la n The p r e p a r a tio n o f a d e t a i l e d f o r e ig n tr a d e p la n i n v o l v e s , In e f f e c t , p r o j e c t io n s o f a l l im p o r ta n t e c o nom ic v a r ia b le s I n a f a i r d e g r e e o f d e t a i l . O b se r v in g th e p r o g r e s s u n d er th e p la n , and p e r io d ic r e v i s i o n o f th e p la n , r e q u ir e r e a s s e s s m e n t o f p a s t p r o g r e s s and m edium -term p r o s p e c ts o f th e e n t i r e econom y. The a u t h o r i t i e s en gaged i n th e p r e p a r a tio n and u p -d a tin g o f t h e m edium -term f o r e ig n tr a d e p la n h a v e th u s n o t o n ly t o r e l y on f o r e ig n tr a d e and b a la n c e o f paym ents d a t a , b u t a l s o t o s e c u r e a s te a d y f lo w o f in fo r m a tio n from 259 o t h e r a u t h o r i t i e s co n cern ed w ith p r o d u c tio n and i n v e s t m ent p la n s . The f i r s t s t e p i s t o com pare a c t u a l p erfo rm a n ce, w it h r e g a r d t o im p o r ts and e x p o r t s , w ith th e f o r e c a s t made e a r l i e r . F o r t h i s p u r p o se , f o r e ig n tr a d e com m odity s t a t i s t i c s and paym ents and r e c e i p t s d a ta m a in ta in e d by t h e c e n t r a l bank w ould h a v e to be u t i l i z e d . When th e r e i s im p o rt l i c e n s i n g and ex ch a n g e c o n t r o l , s t a t i s t i c s r e g a r d in g t h e i s s u i n g o f im p o rt l i c e n s e s and r e l e a s e o f f o r e ig n ex ch a n g e w i l l , when com pared w ith d a ta on a c t u a l paym ents and im p o r ts , p r o v id e th e b a s is f o r s h o r t-te r m f o r e c a s t i n g . S t a t i s t i c s o f a g r i c u l t u r a l and i n d u s t r i a l p r o d u c tio n , a s r e p o r te d by t h e s t a t i s t i c a l a u t h o r i t i e s c o l l e c t i n g su ch d a t a , ca n be u se d t o ch eck th e e x t e n t t o w h ich p r o d u c tio n a ssu m p tio n s h ave b een f u l f u l l e d . A d ju stm en t f o r im p o r ts and e x p o r ts w i l l i n d i c a t e th e v a r i a t i o n s o f a c t u a l co n su m p tio n from a n t ic ip a t e d l e v e l s . P r ic e d a ta w h ich may be c o l l e c t e d b o th f o r c o n s t r u c t io n o f p r i c e i n d i c e s and a s a n a d m in is t r a t iv e b y -p r o d u c t o f th e work o f th e a g r i c u l t u r a l , i n d u s t r i a l and o t h e r d e p a r t m en ts m ust f lo w i n t o th e o f f i c e co n ce r n ed w ith f o r e c a s t in g , so t h a t th e im p a ct on p r i c e s o f any d iv e r g e n c e s b etw een a n t ic i p a t e d and a c t u a l su p p ly l e v e l s can be n o t e d . 260 R e v is io n o f fo rw a rd e s t im a t e s i n th e l i g h t o f p a s t e z p e r ie n o e c a l l s f o r u p -d a tin g e s t im a t e s f o r f u tu r e y e a r s o f demand and p r o d u c tio n , v a r y in g th e p r i c e assum p t i o n s i f n e c e s s a r y . The a u t h o r i t i e s c o n cern ed w ith p r o d u c tio n i n d i f f e r e n t s e c t o r s w ould h ave t o p r o v id e a c o n t in u in g f lo w o f in fo r m a tio n w ith re g a r d t o th e r e v i s i o n o f forw ard e s t im a t e s o f o u tp u ts o v e r th e p e r io d o f t h e m edium -term p la n . The b a s is o f r e v i s i o n s — f o r exam p le, d e la y i n p r e p a r a tio n o r p r o j e c t r e p o r t s , d e la y i n n e g o t ia t i n g e x t e r n a l a s s i s t a n c e f o r f in a n c in g p r o j e c t im p o r ts , e t c e t e r a — m ust be s p e c i f i e d , t o f a c i l i t a t e c h e c k in g . Su ch e s t im a t e s w ould h ave t o s p e c if y th e e x t e n t t o w h ich t h e in p u ts u se d w i l l be In d ig e n o u s and im p o rted r e s p e c t i v e l y , and th e su p p ly o f in d ig e n e o u s in p u ts a llo w e d f o r w i l l h a v e to b e ch eok ed a g a in s t in d e p e n d e n t e s t im a t e s o f th e p r o d u c tio n o f t h e s e it e m s . Demand e s t im a t e s b a sed on incom e g ro w th , l e v e l s o f I n v e stm e n t, e t c e t e r a , can be r e v ie w e d by th e f o r e c a s t i n g a g e n c y i t s e l f , on th e b a s i s o f t h e r e v is e d p r o j e c t io n s b a sed on r e c e n t p a s t e x p e r ie n c e . The agen oy w i l l be a b le to o f f e r s u g g e s t io n s a s to th e d i r e c t i o n and p o s s i b l e m a g n itu d e o f th e a d ju stm e n t n eed ed i n th e m acroeconom io v a r i a b l e s , su ch a s th e l e v e l o f p u b lic i n v e s tm e n t, d is p o s a b le p r iv a t e Incom e and d i r e c t p u b lic 261 s e c t o r o u t la y s on im p o r ts w h ich a p p ea r to be n e c e s s a r y from th e p o in t o f v ie w o f a b a la n c e d f o r e ig n tr a d e p la n . Summary P la n n in g o f f o r e i g n tr a d e in v o lv e s two d i s t i n c t b u t in te r c o n n e c te d o p e r a t io n s : th e a l l o c a t i o n o f e x p o r t- p ro m o tin g and im p o r t - s u b s t it u t in g in v e s tm e n ts , and th e a l l o c a t i o n o f th e c a p a c it y to im p o r t. The aim i s f i r s t to m axim ize th e c o u n tr y 1s c a p a c it y to im p ort th ro u g h e x p o r t p ro m o tio n o r to r e d u c e i t s d ep en d en ce on im p o r ts , w h ic h e v e r w i l l p r o v e more e f f i c i e n t by m aking th e b e s t from th e g iv e n in v e s t m e n t. The f i r s t a s p e c t p e r t a in s to m acroeconom ic p la n n in g , th e seco n d to t h a t o f o p e r a t in g f o r e ig n t r a d e . The r o l e o f th e e x t e r n a l s e c t o r in th e econ om ic g row th o f d e v e lo p in g c o u n t r ie s i s dom inated by two f a c t s : o n e i s th e te n d en c y f o r th e e x p o r t e a r n in g s o f t h e s e c o u n t r ie s ( e x c lu d in g o il- p r o d u c in g c o u n t r ie s ) to in c r e a s e a t a v e r y lo w r a t e . The o t h e r i s th e e v id e n t n eed o f t h e s e c o u n t r ie s f o r an ex p a n d in g volum e o f c a p i t a l good s and s e r v i c e s r e q u ir e d f o r d e v e lo p m e n t. T hus, th e e x t e r n a l s e c t o r may be s e e n a s a ch a n n e l th ro u g h w h ich th e im b a la n c e s t h a t f r e q u e n t ly em erge i n th e d o m e stio s e c t o r s o f th e econom y can be r e l i e v e d . I t sh o u ld a l s o be n o te d t h a t th e f u n c t io n s o f a dynam ic f o r e i g n tr a d e s t r a t e g y i s to h e lp t o r e a l i z e im m ed iate and s h o r t- r u n n a t io n a l o b j e c t i v e s . The im p o r t a n ce o f f o r e i g n tr a d e s t r a t e g y stem s from th e f a c t t h a t no m edium -term p la n c o u ld f o r e s e e a l l e le m e n ts o f i n s t a b i l i t y o r random f o r c e s , t h a t ta s k o o u ld b e b e t t e r perform ed o n ly th ro u g h p la n s c o v e r in g a s h o r t e r tim e p e r io d , su ch a s a n n u a l p l a n s . T h is s t r a t e g y h a s b een r e c e n t l y a d v o c a te d i n I r a q . CHAPTER IX THE STRUCTURE OP IRAQI EC O N O M Y AND THE PATTERN OF FOREIGN TRADE P u rp o se and O r g a n iz a tio n The p u rp o se o f t h i s c h a p te r i s t o a n a ly z e th e sh a r e o f b o th th e a g r i c u l t u r a l and th e i n d u s t r i a l s e c t o r s in th e g r o s s n a t io n a l p r o d u c t. Due to i t s im p o r ta n c e, a s p e c ia l s e c t i o n w i l l be d e v o te d to th e r o l e o f th e o i l s e c t o r in th e I r a q i econom y. Then th e p a t t e r n and d i r e c t i o n o f f o r e ig n tr a d e w i l l b e exam ined t o show th a t th e tr e n d o f I r a q ’ s im p o r ts i s d e term in ed a lm o st e x c lu s i v e l y by o i l r e v e n u e s . The s e c t i o n on th e b a la n c e o f paym ents w i l l e s t a b l i s h th e f a c t o f th e in c r e a s in g dep en d en cy o f th e n a t io n a l economy upon th e o i l s e c t o r . F i n a l l y , th e r e s t r i c t i v e sy ste m w i l l be d is c u s s e d . The S tr u c tu r e o f th e I r a q i Economy G ross N a tio n a l P r o d u ct The grow th in I r a q 's economy h as b een f a i r l y r a p id in th e p a s t d e c a d e . G ross n a t io n a l p r o d u c t i s e s tim a te d 263 26k to have increased in real terms at a compound annual rate of about 6.4 per cent in the period 1953/63. The increase in real national income and real per capita income have been at annual rates of 5*5 per cent and 3.0 per cent, respectively, during the same period. The rates at which different sectors of the economy have contributed to the growth in output have varied substantially over the years (see Statistical Appendix, Tables 25 and 26). The agricultural sector, which has been subject to sharp year-to-year fluctuations, has been relatively stag nant, and hence its contribution to total output declined over the decade ended in 1963. The share of construction in gross national product has also declined reflecting the effects of the considerable slowdown in public sector investments in highly capital intensive irrigation pro jects and stagnation in private activity associated with political and economic uncertainties. On the other hand, a high growth rate characterized all other sectors of the economy, notably water and electricity, manufacturing and mining (including oil), and public services, whose contri bution to the growth in output has grown steadily over the same period. Gross national product estimates for the years after 1963 are not yet available. However, based on pro duction in major sectors of the economy, provisional esti mates for 1964 indicate a rise of about 7 per cent in 265 g r o s s n a t io n a l p r o d u c t r e s u l t i n g m a in ly from th e s u b s ta n t i a l in c r e a s e s in a g r i c u l t u r a l p r o d u c tio n , f o llo w in g th e p o o r crop o f 1963* o i l o u tp u t and governm ent p u r c h a se s o f g o o d s and s e r v i c e s . A n oth er bumper crop s e r v e d to in c r e a s e a g r i c u l t u r a l p r o d u c tio n in 1 9 6 5 and governm ent p u r c h a se s o f g o o d s and s e r v i c e s c o n tin u e d t h e i r sharp in c r e a s e w h ile th e r a t e o f grow th in o i l p r o d u c tio n d e c lin e d . T hese f a c t o r s a r e e s tim a te d to h ave c o n tr ib u te d to an in c r e a s e o f ab o u t 8 to 10 p e r c e n t in g r o s s n a t io n a l p r o d u c t in 1965. A g r ic u lt u r e A g r ic u lt u r e p r o v id e s em ploym ent f o r t h r e e - f o u r t h s o f th e t o t a l w ork in g p o p u la tio n and a c c o u n ts f o r o n ly ab o u t o n e - fo u r t h o f g r o s s n a t io n a l p r o d u c t. Ir a q h a s an abundance o f a g r i c u l t u r a l la n d in r e l a t i o n to i t s p o p u la t i o n . A lth o u g h due to c lim a t e and to p o g ra p h y o n ly 17 p e r c e n t o f th e t o t a l a r e a i s c u l t i v a b l e , i t i s e s tim a te d t h a t 10 m il l i o n h e c t a r e s (o n e h e c t a r e e q u a ls 2 .^ 7 a c r e s ) c o u ld be b ro u g h t un d er c u l t i v a t i o n by e x t e n s io n o f i r r i g a t io n and d r a in a g e f a c i l i t i e s in a d d it io n to th e 8 m i l l i o n h e c t a r e s c u l t i v a t e d a t p r e s e n t . A p p ro x im a tely 4 m i l l i o n h e c t a r e s have i r r i g a t i o n f a c i l i t i e s a v a i l a b l e ; ab ou t h a l f i s crop p ed ea ch y e a r and th e rem ain d er l e f t f a ll o w . In r e c e n t y e a r s a g r i c u l t u r a l p r o d u c tio n h as f lu c t u a t e d , m a in ly d ep en d en t on c lim a t ic c o n d it io n s . In a d eq u a te r a in 266 f a l l a f f e c t e d a g r i c u l t u r a l p r o d u c tio n in 1963* c a u s in g a d e c l i n e o f a b ou t 30 p e r c e n t b elo w th e 1 9 6 2 p r o d u c tio n l e v e l . T here was a r e c o v e r y in 1 9 6 4 , and p r o d u c tio n was e s tim a te d t o be some 1 5 p e r c e n t h ig h e r th a n in 1 9 6 3 . The y e a r 1 9 6 5 was a v e r y good a g r i c u l t u r a l y e a r w ith t o t a l p r o d u c tio n r i s i n g by some 20-25 p e r c e n t r e l a t i v e to 1 9 6 4 . A deq u ate r a i n f a l l , b o th in th e r a in f e d and i r r i g a t e d a r e a s , p e r m itte d some in c r e a s e in t h e a r e a un d er c u l t i v a t i o n and r e s u lt e d in a sh arp r i s e in y i e l d s . In p a r t ic u l a r th e p r o d u c tio n o f th e m ain c r o p s , w heat and b a r le y , showed l a r g e in c r e a s e s o v e r 1 9 6 4 . The r i s e in c o t to n and r i c e c r o p s was a l s o s u b s t a n t i a l . The 1965 w heat h a r v e s t was s u f f i c i e n t l y la r g e to m eet t o t a l d o m e stic r e q u ir e m e n ts f o r con su m p tion a s w e ll a s r e s t o c k in g and s e e d in g . The h ig h e r p r o d u c tio n o f b ar l e y and c o t to n p e r m itte d an in c r e a s e in b a r le y e x p o r ts and some e x p o r t o f c o t t o n . A lso th e p r o d u c tio n o f r i c e in c r e a s e d s u f f i c i e n t l y t o m eet d o m e stic demand. P u b lic in v e stm e n t in a g r ic u lt u r e d e c lin e d from ID 1 4 .2 m i l l i o n in 1 9 5 7 /5 8 t o ID 4 .5 m i l l i o n in 1 9 6 3 /6 4 , th a t i s , to l e s s th a n 10 p e r c e n t o f t o t a l p u b lic i n v e s t ment in th e l a t t e r y e a r . The d e c lin e was due p r im a r ily to a s h i f t o f em p h asis in fa v o r o f s o c i a l and w e lf a r e s e r v i c e s . H igh er p r i o r i t y h a s been g iv e n t o p u b lic in v e stm e n t in 1 9 6 4 /6 5 and 1965/66 and th e f i v e - y e a r p la n (1 9 6 5 /6 6 1 9 6 9 /7 0 ) h as a l l o t e d ab ou t ID 1 4 2 .0 m il l i o n 26? (27 p e r c e n t o f t o t a l in v e stm e n t u n d er t h e p la n ) th e im provem ent and e x p a n sio n o f d r a in a g e s y s te m s , i r r i g a t i o n , s to r a g e p r o j e c t s , a g r i c u l t u r a l m a c h in e r y , c o o p e r a t iv e s and c r e a t io n o f a g r a r ia n and c o o p e r a t iv e b a n k s. Im p lem en ta tio n o f th e A g r ic u lt u r a l Reform Law o f Septem ber 1958 l i m i t i n g o w n ersh ip to a maximum o f 1 ,0 0 0 dunums o f I r r ig a t e d la n d o r 2 ,0 0 0 dunums o f r a in fe d la n d h as p r o g r e s s e d s lo w ly . S in c e Septem ber 1 9 5 8 , 7 .8 m i l l i o n dunums (o n e dunum e q u a ls 0 .6 2 a c r e o r 0.25 h e c t a r e ) have b een e x p r o p r ia te d by th e governm ent o f w h ich o n ly 2 .2 m i l l i o n dunums h ave so f a r b een r e d is t r ib u t e d ; th e rem ain d e r h as b een le a s e d by th e govern m en t to t e n a n t s . The f iv e - y e a r p la n aim s a t d i s t r i b u t i n g a b o u t b m il l i o n dunums o r ab o u t t h r e e - f i f t h s o f la n d u n d er c o n t r o l o f an a g r a r ia n reform c o m m ittee . A rrangem ents to r e p la c e th e v a r io u s s e r v i c e s fo r m e r ly ren d ered by la n d lo r d s , f o r exam p le, c r e d i t f a c i l i t i e s , a g r i c u l t u r a l m a ch in ery and m a rk etin g a rra n g em en ts h ave a ls o la g g e d . In a d d it io n , s a l i n i t y o f th e s o i l in c r e a s e d b e c a u se o f in a d e q u a te c a r e . In o r d e r t o r a i s e o u tp u t, e f f o r t s a r e b e in g made to im prove a g r i c u l t u r a l know-how and t e c h n o lo g y . G overnm ent farm s h ave b een c r e a te d f o r b e t t e r q u a l i t y se e d p r o d u c tio n , t r a in in g and th e in t r o d u c tio n o f new c r o p s by o p e r a tin g p i l o t p r o j e c t s . On a li m i t e d s c a l e , c e r t a in governm ent a g e n c ie s have been p ro v id in g f in a n c in g , s e e d and f e r t i l i z e r a s w e ll a s m a rk etin g 268 f a c i l i t i e s ; t h e s e a r e th e C otton Company, V e g e ta b le O il Company, th e J u te Company and th e Corn Company. F in an c i a l a s s i s t a n c e i s a l s o g iv e n t o C o o p e r a tiv e s by t h e A g r ic u lt u r a l Bank and t h e C o o p e r a tiv e Bank. The A g r i c u l t u r a l Bank d o e s n o t p r o v id e s e a s o n a l f in a n c in g b u t o n ly lo a n s f o r th r e e y e a r s ( a t 5 p e r c e n t p e r annum) a g a in s t s e c u r i t y o f la n d . H ow ever, th e n eed f o r a d eq u a te s e a s o n a l f in a n c in g h a s b een r e c o g n iz e d and in 1965 a m od est s t a r t was made in t h i s a r e a . The number o f coop e r a t i v e s h as r i s e n from 64 in 1963 to 205 in 1964. The f i v e - y e a r d ev elo p m e n t p la n f o r e s e e s c r e a t io n o f an a d d i t i o n a l 1 ,0 0 0 a g r i c u l t u r a l c o o p e r a t iv e s . I n d u s tr y M a n u fa ctu rin g ( e x c lu d in g th e o i l s e c t o r ) h a s p la y e d an in c r e a s in g r o l e in 1963 c o n t r ib u t in g a b o u t 12 p e r c e n t t o Ir a q * s g r o s s n a t io n a l p r o d u c t; v a lu e added in In d u s tr y am ounted to ID 6 8 .9 m i l l i o n in 1963 w h ich was more th a n th r e e tim e s i t s l e v e l a d eca d e e a r l i e r . D e t a ile d d a ta on i n d u s t r i a l p r o d u c tio n f o r 1964 and 1965 a r e n o t a v a i l a b le . In fo r m a tio n from la r g e r i n d u s t r i a l u n i t s i n d i c a t e , h o w ever, t h a t th e gro w th r a t e o f i n d u s t r i a l p r o d u c tio n was p r o b a b ly in t h e n eig h b o rh o o d o f 10 p e r c e n t in ea ch o f th e y e a r s 1964 and 1965* w h ile i n d u s t r i a l o u tp u t ex panded by a b o u t 12 p e r c e n t a y e a r d u r in g th e d ec a d e ended in 1963. A la r g e p a r t o f m a n u fa ctu rin g fir m s i s made up 269 o f s m a ll f a c t o r i e s em p loyin g l e s s th a n f i v e p e o p le . Firm s em p lo y in g more th a n 20 a c c o u n t f o r o n ly a b o u t on e p e r c e n t o f th e t o t a l number o f fir m s b u t em ploy a b o u t 50 p e r c e n t o f a l l n o n - o i l i n d u s t r i a l w o r k e r s. U n t il th e m i d - f i f t i e s , th e m a n u fa ctu rin g in d u s tr y c o n s is t e d m a in ly o f fo o d p r o c e s s in g and p a c k a g in g , b u ild in g m a t e r ia ls and l i g h t consum er g o o d s i n d u s t r i e s . S in c e th e n , some d iv e r s i f i c a t i o n h as ta k e n p l a c e , m a in ly th ro u g h e s ta b lis h m e n t and e x p a n sio n o f a number o f r e l a t i v e l y l a r g e - s c a l e , govern m en t-ow n ed e n t e r p r is e s f o r o i l r e f i n i n g , cem en t, a s p h a l t , t e x t i l e s and fo o tw e a r . A number o f gov ern m en t- owned f a c t o r i e s su ch a s th e e l e c t r i c a l equipm ent p la n t a t B aghdad, th e k n i t t i n g and h o s ie r y f a c t o r y a t K u t, an a g r i c u l t u r a l m a ch in ery p la n t a t I sk a n d a r ly a and a d a t e syru p f a c t o r y a t K erh a la a r e b e in g e s t a b l i s h e d . The s t r u c t u r e o f o w n ersh ip in t h e m a n u fa ctu rin g s e c t o r h a s changed c o n s id e r a b ly f o llo w in g n a t i o n a l i z a t i o n in 1 9 6 ^ .^ The s h a r e o f th e p u b lic s e c t o r in th e p a id -u p c a p i t a l o f m a n u fa ctu rin g i n d i s t r i e s w ent up from 53 p e r In J u ly 1 9 6 4 , Ira q n a t io n a l i z e d a l l b a n k s, in su r a n c e co m p a n ies, and t h i r t y o f t h e l a r g e s t i n d u s t r i a l and com m ercial f ir m s . The n a t u r a li z a t i o n m ea su res s p e c i f i e d th o s e in d u s t r i e s e x c l u s i v e l y s e t a s id e f o r p u b lic o w n ersh ip ( f o r ex a m p le, cem en t, a s b e s t o s , and c i g a r e t t e s ) , w h ile p r o v id in g f o r j o i n t o w n ersh ip w ith p r iv a t e e n t e r p r i s e o f c e r t a in o t h e r s , th e r em a in d e r, m a in ly medium and sm a ll s c a l e e n t e r p r is e s b e in g r e s e r v e d f o r p r iv a t e o w n e r sh ip . The s h a r e o f p r iv a t e o w n ersh ip in m a n u fa ctu r in g f e l l from a b o u t ^7 p e r c e n t o f p a id -u p c a p i t a l to l e s s th a n o n e - fo u r t h a s a r e s u l t o f n a t i o n a l i z a t i o n . 270 c e n t in 1963 to 76 p e r c e n t in 1 9 6 4 . P r iv a t e i n d u s t r i a l in v e stm e n t began t o d e c l i n e in 1959 b u t a number o f f i s c a l m ea su res a d o p ted in 1961 in a cc o r d a n c e w ith th e I n d u s t r ia l P rom otion Law had a tem p orary f a v o r a b le e f f e c t in 1962 b e fo r e u n s e t t l e d p o l i t i c a l c o n d it io n s in 1963 and th e n a t i o n a l i z a t i o n m ea su res in 1 9 6 4 , red u ced c o n f id e n c e . To p rom ote p r iv a t e in v e stm e n t i n d u s t r i a l c r e d i t f a c i l i t i e s w ere im proved in r e c e n t y e a r s and in November 1964 a r e v is e d I n d u s t r ia l P rom otion Law was p ro m u lg a ted r e p la c in g t h e Law o f 1 9 6 1 . The new Law s p e c i f i e s incom e t a x ex em p tio n on p r o f i t s earn ed from in v e s tm e n ts in in d u s t r i e s , p r o v id e d t h a t m ach in ery and in str u m e n ts a r e o f a v a lu e n o t l e s s th a n ID 3>000 ( e x c lu d in g pow er g e n e r a tin g e q u ip m e n t), t h a t em p lo y ees and w o rk ers (e x c e p t e x p e r t s ) a r e c i t i z e n s o f Arab C o u n tr ie s and t h a t 60 p e r c e n t o f th e p a id -u p c a p i t a l h as b een s u b s c r ib e d by su ch c i t i z e n s . R e in v e s te d e a r n in g s , n o t e x c e e d in g 25 p e r c e n t o f an n u al p r o f i t s , a r e exem pt from incom e t a x . Im p orts o f m a ch in er y , eq u ip m en t, c o n s t r u c t io n _ m a t e r ia ls , raw and p a c k in g m ater i a l s a r e exem pt from cu stom s d u t i e s . In a d d it io n , p ro p e r t y u t i l i z e d f o r p r o d u c tio n o r s to r a g e i s exem pt from e s t a t e ta x f o r t e n y e a r s . W ith some e x c e p t io n s a l l n a t io n a liz e d e n t e r p r is e s a r e exem pt from cu stom s d u t i e s on im p orted raw m a t e r ia ls , m a ch in ery eind t o o l s . 271 The O il S e c to r On an a v e r a g e a n n u a l b a s i s o i l p r o d u c tio n s in c e 1953 h a s grown a t a h ig h e r r a t e th a n th e n a t io n a l p r o d u c t. In 1 9 5 3 t h e o i l s e c t o r p r o v id e d r o u g h ly s i x t y p e r c e n t o f I r a q ’ s f o r e ig n exch an ge e a r n in g s com pared w ith 80 p e r c e n t in 1 9 6 3 and a c c o u n te d f o r ab o u t o n e - f i f t h o f th e g r o s s n a t io n a l p r o d u c t a g a in s t J O p e r c e n t in 1963. The s h a r e o f governm ent r e c e i p t s from th e o i l s e c t o r in t o t a l governm ent rev en u e h a s rem ain ed f a i r l y s t a b le a t 60 p e r c e n t a s o t h e r s o u r c e s o f rev en u e e s p e c i a l l y c u s tom s and e x c i s e t a x e s r e f l e c t i n g t h e in c r e a s e in im p o r ts , r o s e s h a r p ly d u r in g t h i s p e r io d . The fo r e ig n -o w n e d Ir a q P e tro leu m Company (IPC ) and i t s a f f i l i a t e s p ay t o th e G overnm ent JO p e r c e n t o f t h e i r p r o f i t s a c c r u in g from o p e r a t io n s in I r a q . In 196*1- I r a q ’ s p ro v en o i l r e s e r v e s w ere e s tim a te d a t ab ou t 3*3 b i l l i o n to n s o r 7 .5 p e r c e n t o f w orld r e s e r v e s . The p r e s e n t r a t e o f p r o d u c tio n i s ab o u t 66 m i l l i o n lo n g t o n s p e r y e a r , w h ich i s ab ou t k m i l l i o n t o n s s h o r t o f t h e p r e s e n t c a p a c it y o f th e p ip e l i n e s and te r m in a l f a c i l i t i e s ( s e e T a b le 2 8 ) . O il p r o d u c tio n f a i l e d t o expand in 1961 and 1962 r e f l e c t i n g p ro b lem s a s s o c ia t e d w ith p r o t r a c te d n e g o t ia t i o n s f o r a la r g e r governm ent sh a r e in o i l p r o f i t s , w ith d r a w a ls o f IPC’ s c o n c e s s io n r i g h t s on 9 9 • 5 p e r c e n t o f th e c o n c e s s io n a r e a in Decem ber 1961 and I m p o s itio n o f c e r 2?2 t a i n ca rg o d u e s . In 1963 an agreem en t was rea ch ed r e g a r d in g ca rg o d u es and s in c e th e n p r o d u c tio n h as in c r e a s e d s t e a d i l y . A n o th er agreem en t was i n i t i a l l e d in 1 9 6 5 by th e I r a q i G overnm ent and t h e c o n c e s s io n a r y o i l com p an ies b u t h a s n o t b een r a t i f i e d y e t by t h e I r a q i G overnm ent. The d r a f t agreem en t p r o v id e s f o r s e t t le m e n t o f a number o f i s s u e s in c lu d in g co m p u ta tio n o f p r o f i t s s u b j e c t to I r a q i incom e t a x e s . In v e stm e n ts in p e tr o le u m and p e tr o c h e m ic a l p r o j e c t s in th e f iv e - y e a r d ev elo p m en t p la n a r e s u b s t a n t i a l am ounting t o some ID 7 4 m i l l i o n (1 3 p e r c e n t o f t o t a l in v e stm e n t u n d er th e p l a n ) . P r o j e c t s a lr e a d y in e x e c u t i o n o r un d er stu d y in c lu d e th e K irkuk su lp h u r r e c o v e r y p la n t (ID 8 m i l l i o n ) , t h e K irkuk-B aghdad g a s p i p e l i n e s and T o j l g a s p r o c e s s in g p la n t (ID 16 m i l l i o n ) , th e B a sra r e f i n i n g p la n t (ID 5 m i l l i o n ) , a l u b e o i l p la n t in D aura (ID 4 .3 m il l i o n ) and o t h e r s m a ll p r o j e c t s . E x p o r t T r a d e I r a q 's t o t a l e x p o r ts am ounted to ID 335 m i l l i o n in 1966 com pared w ith ID 315 m i l l i o n in 1965 and ID 300 m i l l i o n in 196^ ( s e e T a b le 2 7 ) . O il E x p o rts O il s t i l l o c c u p ie s th e fo r e m o st p o s i t i o n in th e e x p o r t t r a d e . The p r o p o r tio n o f o i l e x p o r ts to th e t o t a l 273 e x p o r ts r a n g e s b etw een 9 0 -9 5 p e r c e n t , d ep en d in g on th e p erfo rm a n ce o f n o n - o i l e x p o r ts and on th e r a t e o f in c r e a s e in th e demand f o r o i l in w o rld m a rk et. A lth o u g h o i l e x p o r ts s t a r t e d in 1 9 3 4 , th e y w ere n o t s i g n i f i c a n t u n t i l th e e a r ly 1 9 5 0 's and s p e c i f i c a l l y in 1952 when e x p o r ts jumped to 17.7 m i l l i o n to n s compared w ith 7 .9 m i l l i o n to n s in 1951* O il p r o d u c tio n and ex p o r t s in c r e a s e d by a p p r o x im a te ly 10-16 p e r c e n t p e r y e a r f o r th e p e r io d 1 9 5 3 -5 9 w ith th e e x c e p t io n o f t h e y e a r s 1 9 5 6 -5 7 due to th e Suez C r i s i s . For th e p e r io d 1 9 6 0 -6 6 , t h e r a t e o f grow th o f o i l p r o d u c tio n and e x p o r ts in c r e a s e d by 4 -6 p e r c e n t p e r y e a r ( s e e T a b le 2 8 ) . The v a lu e o f o i l e x p o r ts am ounted to ID 293*5 m il l i o n in 1965 com pared w ith ID 2 8 1 .7 m i l l i o n in 1 9 6 4 and ID 2 5 8 .9 m i l l i o n in 1963» t h a t i s , th e r a t e o f th e in c r e a s e was 4 .2 p e r c e n t o v e r 1 9 6 4 and 1 3 .4 p e r c e n t o v e r 1963 ( s e e T a b le 2 9 ) . The p e r c e n ta g e sh a r e o f o i l e x p o r ts in th e v a lu e o f t o t a l e x p o r ts f e l l from 9 4 .9 p e r c e n t in 1 9 6 4 t o 9 4 .2 p e r c e n t in 1 9 6 5 com pared w ith 93*9 p e r c e n t in 1 9 6 3 . D e s tin a tio n o f O il E x p o rts The European Common M arket C o u n tr ie s a r e th e m ain im p o r te r s o f I r a q i o i l . The v a lu e o f o i l e x p o r ts to t h e s e c o u n t r ie s am ounted t o ID 1 4 1 .9 m il l i o n in 1 9 6 5 o r 4 8 .3 p e r c e n t o f t o t a l o i l e x p o r ts com pared w ith ID 1 3 3 .9 m il l i o n o r 4 ? .5 p e r c e n t in 1 9 6 4 . In th e seco n d p la c e 274 th e S t e r l i n g A rea C o u n tr ie s w here o i l e x p o r ts am ounted to ID 6 6 .2 m i l l i o n o r 2 2 .6 p e r c e n t o f t o t a l o i l e x p o r ts in 1965 com pared w ith ID 77*6 m il l i o n o r 27.6 p e r c e n t in 1 9 6 4 ( s e e T a b le 2 9 ) . I f o i l e x p o r ts a r e v iew ed by in d iv id u a l c o u n t r ie s , th e n t h e o r d e r o f m a g n itu d e o f th e se v e n fo r e m o st coun t r i e s im p o r tin g o i l was a s f o llo w s : th e U n ite d Kingdom, (ID 49 m i l l i o n ) , P rance (ID 4 8 .6 m i l l i o n ) , I t a l y (ID 40 m i l l i o n ) , H o lla n d (ID 2 4 .5 m i l l i o n ) , West Germany (ID 2 2 .9 m i l l i o n ) , Japan (ID 2 1 .9 m i l l i o n ) , and B r a z il (ID 7 .8 m i l l i o n ) . The t o t a l v a lu e o f o i l e x p o r ts to t h e s e se v e n c o u n t r ie s am ounted t o ID 2 1 4 .8 m il l i o n o r 7 3 .2 p e r c e n t o f th e t o t a l v a lu e o f o i l e x p o r ts in 1965 ( s e e T ab le 3 0 ) . N o n -O il E x p o rts The v a lu e o f n o n - o i l e x p o r ts in c r e a s e d from ID 1 5 .3 m i l l i o n in 1 9 6 4 t o ID 1 8 .1 m il l i o n in 1965 a s com p a red w ith ID 16.7 m i l l i o n in 1963 and ID 193 m i l l i o n in 19 6 2 and ID 7 .9 m i l l i o n in 1961 ( s e e T a b le 31)« The in c r e a s e in th e v a lu e o f t h e s e e x p o r ts in 1965 was 1 8 .5 p e r c e n t o v e r 1 9 6 4 and 8 .3 p e r c e n t o v e r 1963. D a te s s t i l l o ccu p y th e fo re m o st p o s i t i o n in dom es t i c e x p o r t s . The v a lu e o f d a t e s e x p o r ts am ounts t o more th a n o n e - t h ir d o f t h e t o t a l v a lu e o f d o m e stic e x p o r ts d u r in g th e p e r io d 1961-65 w ith 53*9 p e r c e n t in 1963 275 ( s e e T a b le 3 1 )• I t sh o u ld b e n o te d t h a t th e fo r em o st r e l a t i v e p o s i t i o n o f d a t e s in t o t a l e x p o r ts was due to v a r io u s r e a s o n s , th e m ost im p o rta n t b e in g th e s u b s t a n t i a l im provem ent in t h e i r e x p o r t p r i c e s a s a r e s u l t o f th e o p e n in g o f new o u t l e t s f o r t h e i r m a r k e tin g , and e s p e c i a l l y a s a r e s u l t o f th e b i l a t e r a l tr a d e a g reem en ts con c lu d e d w ith some c o u n t r ie s e s p e c i a l l y th e S o v ie t U n io n , C h in a, Japan and I n d ia . E x p o r ts o f b a r le y and raw w ool come in th e seco n d p la c e o f t h e v a lu e o f d o m e stic e x p o r t s . The im p o rta n ce o f cem ent e x p o r ts i s in c r e a s in g s t a r t i n g e s p e c i a l l y in 1 9 6 4 when th e v a lu e o f i t s e x p o r ts am ounted to ID 1 .9 m i l l i o n o r 1 2 .4 p e r c e n t o f th e v a lu e o f t o t a l d o m e stic e x p o r ts compared w ith 8 .4 p e r c e n t in 1963* D e s t in a t io n o f N o n -O il E x p o rts The p e r c e n ta g e sh a r e o f th e Arab L eague C o u n tr ie s in I r a q ’ s e x p o r ts h as b een in c r e a s in g s in c e i 9 6 0. The v a lu e o f e x p o r ts to Arab C o u n tr ie s am ounted to ID 8 .2 m il l i o n o r 4 5 .1 p e r c e n t o f t o t a l e x p o r ts in 1965 com p a red w ith ID 6 .1 m i l l i o n o r 39 .9 p e r c e n t in 1964 and ID 5 .3 m il l i o n o r 32 p e r c e n t in 1963 . The seco n d m ajor a r e a f o r I r a q ’ s e x p o r ts h a s b een th e S t e r l in g A rea C o u n tr ie s . The v a lu e o f e x p o r ts t o t h e s e c o u n t r ie s am ounted to ID 3*9 m il l i o n o r 21 .6 p e r c e n t o f t o t a l e x p o r ts in 1965 compared w ith ID 4 .1 m il l i o n o r 27 p e r c e n t in 1964. E x p o rts to th e S o c i a l i s t c o u n t r ie s had 276 b een n e g l i g i b l e in th e p a s t u n t i l a f t e r 1958 R e v o lu tio n . S in c e 1959 t h e s e c o u n t r ie s have m a in ta in e d t h ir d p la c e in th e o r d e r o f m agn itu d e f o r I r a q ’ s e x p o r t s . E x p o r ts to t h e s e c o u n t r ie s am ounted t o ID 3 .3 m i l l i o n o r 1 8 .4 p e r c e n t o f t o t a l e x p o r t in 1 9 6 5 com pared w ith ID 3 m i l l i o n o r 1 9 .8 p e r c e n t in 1 9 6 4 ( s e e T a b le 3 2 ) . The o r d e r o f m agn itu d e o f th e s e v e n fo r e m o st coun t r i e s im p o r tin g I r a q i g o o d s in 1965 was a s f o llo w s : Lebanon (ID 2 .5 m i l l i o n ) , th e U .A .R . (ID 1 .9 m i l l i o n ) , P e o p le ’ s C hina (ID 1 .8 m i l l i o n ) , K uw ait (ID 1 .6 m i l l i o n ) , I n d ia (ID 1 .3 m i l l i o n ) , t h e S o v ie t U nion (ID 1 m i l l i o n ) , and S au d i A ra b ia (ID 1 m i l l i o n ) . T o ta l e x p o r ts t o a l l t h e s e c o u n t r ie s am ounted t o ID 1 1 .3 m i l l i o n o r 6 2 .4 p e r c e n t o f t o t a l e x p o r ts ( s e e T a b le 3 3 ) . Im port Trade I r a q ’ s t o t a l im p o rts am ounted to ID 176 M illio n in 1966 com pared w ith ID 1 6 2 .6 m i l l i o n in 1965 and ID 1 4 7 .4 m i l l i o n in 1 9 6 4 ( s e e T a b le 2 7 ) . Im p o rts by O il Companies Im p orts o f o i l com p an ies am ounted to ID 1 m i l l i o n in 1966 compared w ith ID 0 .9 m i l l i o n in 1965 and ID 0 .7 m i l l i o n in 1 9 6 4 . I t sh o u ld be n o te d t h a t im p o rts o f o i l com p an ies s t a r t e d to f a l l s in c e 1 9 5 9 . They f e l l from ID 17 m i l l i o n in 1959 to ID 1 4 .6 m i l l i o n in i 960 , ID 1 2 .1 277 m i l l i o n in 1 9 6 1 , to ID 1 .8 m il l i o n in 1 9 6 2 , and t o ID 1 .5 m i l l i o n in 1963. The m ain r e a s o n o f t h i s sh arp f a l l in im p o r ts o f th e o i l com p an ies com pares to t h e l e v e l p r i o r t o 1962 w as due to t h e f a c t t h a t th e o i l com p an ies sto p p e d t h e i r e x p lo r a t io n o p e r a t io n s a f t e r t h e G overnm ent to o k o v e r 9 9 •5 p e r c e n t o f th e a r e a s u t i l i z e d by th e o i l c o m p a n ies. I t sh o u ld b e r e a l i z e d , t h e r e f o r e , t h a t a s m ost im p o r ts o f th e o i l com p an ies a r e c a p i t a l g o o d s n e c e s s a r y f o r p r o d u c tio n o p e r a t io n s , th e n th e f a l l o r r a t h e r a lm o s t t h e c e s s a t i o n o f t h e s e im p o rts p a r t ly ex p l a i n s th e r e l a t i v e l y s lo w r a t e o f grow th in o i l p ro d u c t i o n . Im p o rts o f N on-O il S e c to r Im p orts o f C a p ita l G oods. The v a lu e o f t h e s e im p o r t s amounted t o ID 87 m i l l i o n in 1965 compared w ith ID 67 m il l i o n in 1 9 6 4 and ID 52 m il l i o n in 1963. T hus, t h e in c r e a s e in t h e s e im p o rts in 1965 was ab o u t 30 p e r c e n t o v e r 1 9 6 4 and a b o u t 50 p e r c e n t o v e r 1963. The im p o r ts o f c a p i t a l g o o d s am ounted to 50 p e r c e n t o f th e t o t a l v a lu e o f im p o rts in 1965 compared w ith 4 0 .6 p e r c e n t in 1 9 6 4 , ( s e e T a b le 3 4 ) . The in c r e a s e in th e p e r c e n ta g e sh a r e o f c a p i t a l g o o d s in t o t a l im p o rts i s m a in ly a t t r ib u t e d to th e i n d u s t r i a l i z a t i o n program s b e in g im p lem e n ted in th e c o u n tr y f o r t h e l a s t d e c a d e . The in c r e a s e in im p o rts in 1 9 6 5 a s com pared w ith 278 1 9 6 4 was m a in ly r e f l e c t e d in th e Im p orts o f ir o n s t e e l (from 6 .7 p e r c e n t in 1964 t o 8 .1 p e r c e n t In 1965)* b o i l e r s and m a ch in ery (from 8 .1 p e r c e n t t o 9 .8 p e r c e n t ) , e l e c t r i c m a ch in ery (from 8 .5 p e r c e n t to 1 0 .4 p e r c e n t ) , c h e m ic a ls (from 3 .4 p e r c e n t t o 3*6 p e r c e n t ) , and tim b er (from 2 .2 p e r c e n t to 2 .7 p e r c e n t ) . The t o t a l im p o r ts o f t h o s e ite m s a lo n e c o n tr ib u te d to 34.7 p e r c e n t o f th e t o t a l v a lu e o f im p o rts in 1965 com pared w ith 2 8 .6 p e r c e n t in 1964 ( s e e T a b le 3 5 ). Im p o rts o f C onsum ption G oods. The im p o rts o f t h e s e g o o d s d e c r e a s e d from ID 7 9 .7 m i l l i o n in 1964 to ID 7 4 .3 m i l l i o n in 1965 o r by 6 .8 p e r c e n t . The f a l l in t h e s e im p o rts was m a in ly a t t r ib u t e d to th e l a r g e f a l l in im p o r ts o f f o o d s t u f f s d u e to th e e x c e p t io n a lly good h a r v e s t in 1965. For ex a m p le, im p o rts o f c e r e a l s f e l l from ID 9 .7 m i l l i o n ( o r 6 .6 p e r c e n t o f t o t a l im p o r ts) in 1964 to ID 2 .3 m i l l i o n (o r 1 .4 p e r c e n t o f t o t a l im p o r t s ) in 1965 ( s e e T a b le 3 5 ). H ow ever, im p o r ts o f o t h e r m ajor ite m s in c r e a s e d in 1965 o v e r th e p r e c e d in g y e a r a s in th e c a s e o f su g a r w h ich in c r e a s e d from ID 1 0 .8 m i l l i o n (o r 7 .3 p e r c e n t o f t o t a l im p o r ts) in 1964 to ID 1 4 .4 m i l l i o n ( o r 9 p e r c e n t o f t o t a l im p o r ts) in 1965» and v e g e t a b le o i l s w h ich in c r e a s e d from ID 2 .5 m i l l i o n (o r 1 .7 p e r c e n t ) in 1964 to ID 5.7 m il l i o n (o r 3 .5 p e r c e n t ) in 1965. 279 D e s t in a t io n o f Im p orts The S t e r l in g A rea c o n n t r ie s c o n tr ib u te d to more th a n o n e - t h ir d o f I r a q ’ s im p o rts f o r th e p e r io d 1961- 63 , to more th a n o n e - fo u r t h in 1 9 6 4 , and to more th a n o n e - f i f t h in 1965. The European Common M arket c o u n t r ie s c o n tr ib u te d to ab o u t o n e - f i f t h o f t o t a l im p o rts f o r th e p e r io d 1961- 65. The S o c i a l i s t c o u n t r ie s c o n tr ib u te d b etw een 1 4 -2 0 p e r c e n t o f t o t e d im p o rts f o r th e p e r io d 1961- 64 . I t sh o u ld b e n o t e d , h o w ev er, t h a t th e in c r e a s in g sh a r e o f th e S o c i a l i s t c o u n t r ie s in I r a q ’ s im p o rts s in c e 1959 h as b een a t th e ex p e n se o f th e d e c lin in g sh a r e o f th e S t e r l in g A rea . Im p orts from th e S o c i a l i s t c o u n t r ie s am ounted to ID 4 1 .1 m il l i o n (o r 2 5 .7 p e r c e n t o f t o t a l im p o r ts) in 1965 com pared w ith ID 2 5 .2 m i l l i o n (o r 1 7 .2 p e r c e n t o f t o t a l im p o r ts) in 1 9 6 4 . Im p orts from th e S t e r l in g A rea c o u n t r ie s am ounted t o ID 3 3 .7 m i l l i o n (o r 2 1 .1 p e r c e n t ) com pared w ith ID 3 3 .7 m il l i o n ( o r 2 1 .1 p e r c e n t ) com p a red w ith id 4 0 .9 m il l i o n (o r 2 7 .9 p e r c e n t in 1 9 6 4 ) . Im p orts from th e European Common M arket c o u n t r ie s am ounted to ID 3 2 .5 m i l l i o n ( o r 2 0 .3 p e r c e n t ) in 1965 compared to ID 2 8 .2 m i l l i o n ( o r 1 9 .2 p e r c e n t) in 1964 ( s e e T a b le 3 6 ) . The o r d e r o f m a gn itu d e o f th e se v e n fo r e m o st c o u n t r ie s e x p o r tin g t o Ir a q in 1965 was a s f o llo w s : th e U n ite d S t a t e s (ID 1 8 .9 m i l l i o n ) , th e U n ited Kingdoms 380 (ID 1 6 .7 m i l l i o n ) , W est Germany (ID 1 5 .3 m i l l i o n ) , th e S o v ie t U nion (ID 1 1 .8 m i l l i o n ) , Japan (ID 9 .1 m i l l i o n ) , C z e c h o s lo v a k ia (ID 8 .8 m i l l i o n ) , and P o la n d (ID 7 .^ m i l l i o n ) . T o ta l im p o rts from a l l t h e s e se v e n c o u n t r ie s am ounted t o ID 8 7 .9 m il l i o n o r 5 ^ .9 p e r c e n t o f th e t o t a l im p o r ts in 1965 ( s e e T a b le 3 7 ) . The B a la n ce o f Paym ents The e x p o r t s e c t o r p la y s a v e r y s i g n i f i c a n t r o l e in I r a q ’ s econom y. In r e c e n t y e a r s , th e c o n t r ib u t io n o f e x p o r ts to th e g r o s s n a t io n a l p r o d u c t h a s b een an a v e r a g e ^7 p e r c e n t p e r y e a r . The p r in c ip a l s o u r c e o f f o r e ig n ex ch a n g e incom e i s o i l ; o t h e r e x p o r t s , c o n s is t in g p r i m a r ily o f a g r i c u l t u r a l p r o d u c t s , p r o v id e l e s s th an o n e - f i f t h o f f o r e ig n exch an ge r e c e i p t s . A f te r a p e r io d o f r e l a t i v e s t a g n a t io n , o i l p r o d u c tio n w ent up in 1963 and r e c e i p t s from t h i s s o u r c e in c r e a s e d by 12 p e r c e n t o v e r th e p r e v io u s y e a r . A lth o u g h o t h e r e x p o r ts d e c r e a s e d s l i g h t l y b e c a u se o f th e p o o r h a r v e s t , th e b a la n c e o f tr a d e im porved a s th e f a v o r a b le d ev elo p m en t in o i l e x p o r ts was accom panied by a f a l l in im p o rts due to a g e n e r a lly lo w l e v e l o f econ om ic a c t i v i t y in t h a t y e a r . M ain ly a s a r e s u l t o f t h e s e m ovem ents, n e t f o r e ig n a s s e t s in c r e a s e d by ID 3 7 .6 m i l l i o n ( s e e T a b le 3 8 ) . In s p i t e o f a f u r th e r I n c r e a s e in o i l r e c e i p t s in 281 1 9 6 4 t h e b a la n c e o f paym en ts show ed a d e f i c i t o f ID 20 m i l l i o n , m a in ly b e c a u se o f a sh a rp r i s e (ID 36.6 m i l l i o n ) in im p o r ts and a d e c l i n e (ID 29 m illio n ) in d ra w in g s on f o r e ig n lo a n s . The sharp r i s e in im p o rts (3 2 p e r c e n t ) r e f l e c t e d th e p ic k -u p in p r i v a t e s e c t o r a c t i v i t y in th e f i r s t h a l f o f 1 9 6 4 . The d e c l i n e in d ra w in g s on f o r e ig n lo a n s was due t o r e c e i p t o f a lo a n o f ID m i l l i o n from K uw ait in 1963. The r i s e in n e t i n v i s i b l e paym ents in 1 9 6 4 r e f l e c t e d p r im a r ily govern m en t paym ents to Arab L eague o r g a n iz a t io n s . The la r g e paym en ts d e f i c i t was e lim in a te d in 1965* r e p r e s e n t in g an im provem ent in th e paym ents p o s i t i o n o f a b o u t ID 20 m i l l i o n . The im provem ent was due to th e i n c r e a s e in n e t r e c e i p t s from th e o i l s e c t o r and th e re d u c t io n in th e n o n - o i l c u r r e n t a c c o u n t d e f i c i t . E xport r e c e i p t s in c r e a s e d in 1965 a s a r e s u l t o f th e e x c e p t io n a l l y good cr o p s w h ich made p o s s i b l e to in c r e a s e e x p o r ts o f b a r le y , d a t e s and s k i n s . Cement e x p o r ts a ls o in c r e a s e d a s a r e fe u lt o f th e e x p a n sio n in p r o d u c tio n c a p a c it y . I t i s n o t in te n d e d h e r e t o a n a ly z e a l l th e ite m s o f th e b a la n c e o f p aym en ts b u t r a th e r to p b in t o u t th e r e le v a n t i s s u e a t hand, t h a t i s , th e o i l s e c t o r . One o f th e m ost s t r i k i n g f e a t u r e s o f th e b a la n c e o f paym ents i s th e in c r e a s in g d ep en d en cy o f th e n a t io n a l economy upon th e o i l s e c t o r to f in a n c e th e d e f i c i t in th e b a la n c e o f 282 t r a d e . H i s t o r i c a l l y , th e a n n u a l a v e r a g e d e f i c i t in th e tr a d e b a la n c e in c r e a s e d from a b o u t ID 1 8 .5 m i l l i o n d u r in g th e p e r io d 1 9 4 7 -4 9 to a b o u t ID 79 m i l l i o n f o r th e p e r io d 1 9 5 3 -5 7 * T h is d e f i c i t was fin a n c e d a lm o st e n t i r e l y by o i l r e c e i p t s w h ich in c r e a s e d from ID 8 .7 m il l i o n p e r y e a r d u r in g th e p e r io d 1 9 4 7 -4 9 t o ID 83*3 m i l l i o n p e r y e a r d u r in g t h e p e r io d 1 9 5 3 -5 7 * F i n a l l y , i t sh o u ld a ls o be n o te d t h a t th e in c r e a s in g d ep en d en cy upon th e o i l s e c t o r was accom panied by a d e t e r i o r a t i o n in th e term s o f tr a d e d u r in g th e p e r io d 1 9 4 6 - 5 1 /1 9 5 2 - 5 8 .2 The R e s t r i c t i v e System The a l l o c a t i o n o f ex ch a n g e f o r im p ort program w h ic h , w it h in an o v e r - a l l c e i l i n g , e s t a b l i s h e s in d iv id u a l a l l o c a t i o n s f o r im p o r te r s a s w e ll a s f o r s p e c i f i e d com m o d ity g r o u p s. Non d is c r im in a t o r y r e s t r i c t i o n s a r e in e f f e c t f o r c u r r e n t i n v i s i b l e s , b u t a c e r t a in amount o f d is c r im in a t io n r e s u l t s from b i l a t e r a l a rra n g em en ts. The im p ort p o l i c y i s b a sed on an exch an ge b u d g e t, ta k in g in t o a c c o u n t ex ch a n g e r e c e i p t s from e x p o r ts o f g o o d s and s e r v i c e s , a r i d b o rro w in g from a b ro a d , a s w e ll 2M. S . H asan, Econom ic D evelop m en t o f I r a q : F o r e ig n Trade and Econom ic D ev elo p m en t, 1 8 6 4 -1 9 5 5 ( In A r a b ic ) , ( B e ir u t , Lebanon: A l-M aktabah A l- A s r iy a , 1965) , p p . 426-29* a s th e p o s s i b i l i t y o f d raw in g on f o r e ig n ex ch a n g e h o ld in g s . On th e paym en ts s i d e , a l l o c a t i o n s a r e made f o r im p o r ts , s u b d iv id e d in t o c a p i t a l g o o d s , d u r a b le consum er g o o d s, and o t h e r ( in c lu d in g a c o n tin g e n c y ite m ) — s e r v i c e s and c a p i t a l p a y m en ts. The b u d g e t p re p a r ed in th e l a t e 1965 f o r 1966 in d ic a t e d t h a t a l l o c a t i o n s f o r im p o rts n o t fin a n c e d by lo a n s o r u n d er b i l a t e r a l paym en ts a r r a n g e m e n ts, w ere f ix e d a t th e same l e v e l a s f o r 1965* The r e l a t i v e sh a r e o f th e p r iv a t e s e c t o r ' s a l l o c a t i o n in 1965 was a b o u t on e t h ir d o f t o t a l im p o r ts a s a g a in s t t w o - t h ir d s p r i o r to th e n a t i o n a l i z a t i o n m e a su r e s. The demand o f th e p u b lic s e c t o r f o r im p o rts h a s g e n e r a lly b een f u l l y m et and a t th e p r e s e n t l e v e l o f a l l o c a t i o n s , th e demand by th e p r iv a t e s e c t o r was s t a t e d , on th e w h o le , a s b e in g s a t i s f i e d , e x c e p t f o r lu x u r y g o o d s . In 1965 and a g a in in 1966 some im p o rts t h a t in 1 9 6 4 w ere r e s e r v e d f o r im p o r ta tio n by th e p u b lic h ave b een r e t r a n s f e r r e d in f u l l o r in p a r t to th e p r iv a t e s e c t o r . In 1965 t h e governm ent m onopoly o v e r th e im p ort o f d r u g s , p h a r m a c e u tle a d s, i n s e c t i c i d e s , chem i c a l s , f e r t i l i z e r s , m otor v e h i c l e s , t i r e s , s p a r e p a r t s , t e a , su g a r and baby m ilk was l i f t e d . For 1966 th e p r iv a t e s e c t o r was a llo w e d to im p ort J O p e r c e n t o f a u to sp a r e p a r t s , 25 p e r c e n t o f t i r e im p o r ts , and 50 p e r c e n t o f im p o rts o f baby m ilk and c h e m ic a l f e r t i l i z e r s . The Im port o f m e d ic a l in str u m e n ts i s t o b e d e a l t w ith on a 284 f ir s t - c o m e , f i r s t - s e r v e d b a s i s b etw een th e two s e c t o r s . F i n a l l y , th e r e i s a l i s t o f 70 tr a d e ite m s th e im p ort o f w h ich i s p r o h ib it e d f o r p r o t e c t i v e p u r p o s e s . Summary The r e a l n a t io n a l incom e and r e a l p e r c a p it a in come o f Ir a q h ave in c r e a s e d a t a n n u a l r a t e s o f 5 .5 p e r c e n t and 3 p e r c e n t , r e s p e c t i v e l y , d u r in g th e p e r io d 1 9 5 3 -6 3 . A g r ic u lt u r e p r o v id e s em ploym ent f o r more th a n 70 p e r c e n t o f th e t o t a l w ork in g p o p u la tio n and a c c o u n ts f o r o n ly a b ou t 25 p e r c e n t o f th e g r o s s n a t io n a l p r o d u c t. M a n u fa ctu rin g ( e x c lu d in g th e o i l s e c t o r ) a c c o u n ts f o r a b o u t 12 p e r c e n t o f th e g r o s s n a t io n a l p r o d u c t. In d u s t r i a l o u tp u t expanded by ab o u t 12 p e r c e n t a y e a r d u r in g th e p e r io d 1 9 5 3 -6 3 . U n t il th e m i d - f i f t i e s , th e m anufac t u r in g In d u str y c o n s is t e d o f a v e r y li m i t e d ra n g e o f i n d u s t r i e s . S in c e t h e n , some d i v e r s i f i c a t i o n h a s ta k en p l a c e , m a in ly th ro u g h e s ta b lis h m e n t and e x p a n sio n o f a number o f r e l a t i v e l y l a r g e - s c a l e governm ent-ow ned e n t e r p r i s e s . I t sh o u ld a ls o be n o te d t h a t th e s t r u c t u r e o f o w n ersh ip in th e m a n u fa c tu r in g s e c t o r h as changed con s id e r a b ly f o llo w in g th e n a t io n a l i z a t i o n m ea su res in J u ly , 1 9 6 4 . The sh a r e o f th e p u b lic s e c t o r in th e p a id up c a p i t a l o f m a n u fa ctu rin g i n d u s t r i e s r o s e from 53 p e r c e n t 285 in 1963 to 76 p e r c e n t in 1 9 6 4 . On an a v e r a g e a n n u a l b a s i s , o i l p r o d u c tio n h as grown a t a h ig h e r r a t e th an th e n a t io n a l p r o d u c t s in c e 1953* The o i l s e c t o r p r o v id e d a b o u t 60 p e r c e n t o f I r a q 's f o r e ig n ex ch a n g e e a r n in g s in 1953 a s compared w ith 80 p e r c e n t in 1963 and a c c o u n te d f o r a b o u t 20 p e r c e n t o f t h e g r o s s n a t io n a l p r o d u c t in 1953 a g a in s t 30 p e r c e n t in 1 9 6 3 . T hus, o i l o c c u p ie s th e fo r e m o st p o s i t i o n i n I r a q 's e x p o r t t r a d e . The sh a r e o f o i l e x p o r ts to t o t a l e x p o r ts r a n g e s b etw een 9 0 -9 5 p e r c e n t , d ep en d in g on th e p erfo rm an ce o f n o n - o i l e x p o r t s , e s p e c i a l l y a g r i c u l t u r a l p r o d u c ts w h ich a r e s u b j e c t to c lim a t ic c o n d it io n s , and on th e r a t e o f in c r e a s e in th e demand f o r o i l in w orld m a rk et. S in c e Ir a q i s a p rim ary p ro d u cin g c o u n tr y , th e r e f o r e , i t i s an e x p o r te r o f raw m a t e r ia ls and an im p o r te r o f m an u factu red g o o d s. The demand f o r raw m a t e r ia ls , e x p e c i a l l y cru d e o i l , in th e European m ark et h a s in flu e n c e d th e d i r e c t i o n o f I r a q 's f o r e ig n t r a d e , in a d d it io n to I r a q 's h i s t o r i c a l t i e s w ith th e W est in g e n e r a l and w ith B r it a in in p a r t i c u l a r . As f a r a s th e b a la n c e o f paym ents i s c o n c e r n e d , i t sh o u ld be n o te d t h a t f o llo w in g th e la r g e paym ents d e f i c i t in 1 9 6 4 , b a la n c e was a t t a in e d in 1 9 6 5 r e p r e s e n t in g an im provem ent in th e paym ents p o s i t i o n in th e l a t t e r y e a r 286 o f ab o u t ID 21 m i l l i o n . The im provem ent was due e n t i r e l y to a r e d u c tio n o f th e same amount in th e d e f i c i t on th e n o n - o i l c u r r e n t a c c o u n t. In c r e a se d r e c e i p t s from th e o i l s e c t o r w ere o f f s e t by a d e c l i n e in n e t c a p i t a l in f lo w on governm ent a c c o u n t. The r e d u c tio n in t h e c u r r e n t a c c o u n t d e f i c i t was m a in ly th e r e s u l t o f a d e c l i n e in im p o rts o f ID 15 m i l l i o n , r e f l e c t i n g good c ro p s in 1965. The im proved a g r i c u l t u r a l s i t u a t i o n a ls o p e r m itte d in c r e a s e d e x p o r ts o f b a r le y , d a t e s , and s k in s . M oreover, expanded p r o d u c tio n c a p a c it y p e r m itte d an in c r e a s e in cem ent e x p o r t s . As f a r a s th e r e s t r i c t i v e sy stem i s c o n c e r n e d , i t i s to be n o te d t h a t s in c e th e n a t io n a l i z a t i o n m ea su res in J u ly , 1 9 6 4 , a t w h ich tim e a la r g e p a r t o f th e f o r e ig n tr a d e s e c t o r was t r a n s f e r r e d to th e p u b lic s e c t o r , th e im p ort sy stem h as b een s u b j e c t to a number o f c h a n g e s. H ow ever, i t i t s b a s ic f e a t u r e s i t rem ain s l i t t l e ch a n g ed , and th e r e l i a n c e on in d iv id u a l l i c e n s i n g o f tr a d e a s w e ll a s o th e r t r a n s a c t io n s c o n tin u e s in e f f e c t . Im port l i c e n s e s a r e g e n e r a lly is s u e d on a l i b e r a l b a s i s . H ow ever, th e r e i s a l i s t o f 70 ite m s w hose im p o r ta tio n i s p r o h i b i t ed f o r p r o t e c t i v e r e a s o n s , and a c e r t a in amount o f d is c r im in a t io n i s p r a c t ic e d u n d er b i l a t e r a l a rra n g em en ts. In c o n c lu s io n , a l l o c a t i o n s o f f o r e ig n exch an ge f o r im p o rts a r e made on th e b a s i s o f an an n u al f o r e ig n e x - change b u d g e t. In p r i n c i p l e , th e im p ort program i s d e s ig n a t e d t o r ed u c e th e d e f i c i t in th e b a la n c e o f p ay m e n ts, t o l i m i t im p o r ts o f lu x u r y and u n e s s e n t ia l g o o d s, to p r o t e c t d o m e stic in d u s t r y , and t o p r o v id e f o r a d eq u a te s u p p lie s o f raw m a t e r ia ls and c a p i t a l g o o d s r e q u ir e d f o r i n d u s t r i a l d e v e lo p m e n t. CHAPTER X IRAQ'S FOREIGN TRADE, PUBLIC FINANCE, AND ECONOMIC DEVELOPMENT P u rp o se and O r g a n iz a tio n The p u rp o se o f t h i s c h a p te r i s t o show th a t th e r e i s a h ig h c o r r e l a t i o n b etw een I r a q 's im p o r ts and th e f o r e ig n ex ch a n g e d e r iv e d from o i l e x p o r t s . T hus, I r a q 's c a p a c it y t o im p o r t, e s p e c i a l l y c a p i t a l g o o d s r e q u ir e d f o r d e v e lo p m e n t, i s a fu n c tio n o f o i l r e v e n u e s . The c a p a c it y t o im p ort d ep en d s fu n d a m e n ta lly upon th e volum e o f th e c o u n t r y 's e x p o r ts and th e p r i c e r e l a t i o n s h i p b etw een i t s e x p o r ts and Im p o rts. To e s t a b l i s h t h i s , th e term s o f tr a d e w i l l be exam in ed . S p e c ia l s e c t i o n w i l l be d e v o te d t o exam ine th e im p act o f th e o i l s e c t o r n o t o n ly upon th e d ev elo p m e n t p ro g ra m s, b u t a l s o upon th e G overn m ent o r d in a r y b u d g e t, a s o i l r e v e n u e s a r e d iv id e d e q u a lly b etw een th e d ev elo p m en t b u d g et and th e o r d in a r y b u d g e t. F i n a l l y , m on etary and c r e d it d e v e lo p m e n ts w i l l be d i s c u s se d to show th e r o l e o f th e b a n k in g sy stem in th e i n d u s t r i a l i z a t i o n p ro g ra m s. 2 gg H is t o r ic a l Background Today’ s I r a q i f o r e ig n tr a d e s t r u c t u r e i s m a in ly a r e s u l t o f th e h i s t o r i c a l t i e s w ith th e W estern w o r ld . S in c e th e n in e t e e n t h c e n tu r y , Ir a q h a s b een in flu e n c e d by th e i n d u s t r i a l , t e c h n i c a l , and e d u c a t io n a l sy ste m s o f th e W est. The m ost s t r i k i n g f e a t u r e o f t h e I r a q i economy i s th e dynam ic r o l e o f f o r e ig n tr a d e in s t im u la t in g g r o w th . And s in c e World War I I , th e o i l s e c t o r , f o r a l l p r a c t i c a b le p u r p o s e s , h as b een th e o n ly s tim u lu s to I r a q 's econ om ic g ro w th . I r a q 's i n d u s t r i a l i z a t i o n program s depend to a g r e a t e x t e n t on th e im p o r ts o f c a p i t a l g o o d s and o t h e r d u r a b le g o o d s r e q u ir e d f o r d e v e lo p m e n t. T h u s, f o r e ig n tr a d e i s th e m ost im p o r ta n t in d ic a t o r o f I r a q 's f u tu r e d e v e lo p m e n t. The s i g n i f i c a n t r o l e o f f o r e ig n tr a d e in th e econ om ic d ev elo p m en t o f Ira q i s r e f l e c t e d in i t s in c r e a s in g p e r c e n ta g e sh a r e in th e n a t io n a l in co m e, o r even in i t s f a s t e r r a t e o f grow th th an t h a t o f th e n a t io n a l in com e. B e fo re W orld War I , f o r e ig n t r a d e a c c o u n te d f o r 17 p e r c e n t o f th e n a t i o n a l incom e. A f te r th e w a r, th e c o n tr i b u ti o n o f th e f o r e ig n t r a d e s e c t o r to th e n a t i o n a l incom e in c r e a s e d a t a f a s t e r r a t e , e s p e c i a l l y when o i l 290 e x p o r ts become th e d o m in an t f a c t o r in I r a q 's f o r e ig n t r a d e in th e seco n d h a l f o f th e 1930*s . In 1939» f o r e ig n t r a d e a c c o u n te d f o r 30 p e r c e n t (e x c lu d in g o i l e x p o r ts ) and 53 p e r c e n t ( i n c lu d in g o i l e x p o r ts ) o f th e n a t i o n a l incom e. E x p o rt t r a d e a lo n e a c c o u n te d f o r 9 p e r c e n t ( e x c lu d in g o i l ) and 32 p e r c e n t ( in c lu d in g o i l ) o f th e n a t i o n a l incom e in 1 9 3 9 . Im p o rt t r a d e a c c o u n te d f o r 20 p e r c e n t o f th e n a t i o n a l incom e in t h a t y e a r . The i n c r e a s in g im p o rta n c e o f th e f o r e ig n tr a d e s e c t o r in g e n e r a l and th e o i l s e c t o r in p a r t i c u l a r was even m ore m a n if e s te d in 1950 when f o r e ig n t r a d e a c c o u n te d f o r 37 p e r c e n t (e x c lu d in g o i l e x p o r ts ) and 51 p e r c e n t ( in c lu d in g o i l e x p o r ts ) o f th e n a t i o n a l incom e. E x p o rt t r a d e ( e x c lu d in g o i l ) a c c o u n te d f o r 12 p e r c e n t o f th e n a t i o n a l incom e. I t s h o u ld be n o te d t h a t t h i s slo w in c r e a s e in th e p e rc e n ta g e s h a r e o f n o n - o i l e x p o rts in th e n a t i o n a l incom e i n d i c a t e s t h a t th e r a t e o f g ro w th o f th e s e e x p o r ts was a lm o s t e q u a l to th e r a t e o f g ro w th o f th e n a t i o n a l incom e. On th e o t h e r h an d , th e r a t e o f g ro w th in o i l e x p o r ts was n o t so h ig h d u r in g t h a t p e r i o d . Im p o rt t r a d e , how ever in c r e a s e d to a b o u t 2k p e r c e n t o f th e n a t i o n a l incom e f o r th e same p e r i o d . A f t e r 1952 o i l e x p o rts began to d o m in a te I r a q 's f o r e ig n t r a d e to a g r e a t e r e x t e n t . F o r ex am p le, th e s h a r e o f f o r e ig n t r a d e (e x c lu d in g o i l e x p o r ts ) was o n ly 291 38 p e r c e n t o f th e n a t io n a l incom e in 1957* The r e l a t i v e im p o rta n ce o f th e o i l s e c t o r can b e i l l u s t r a t e d from th e f a c t t h a t th e v a lu e o f f o r e ig n tr a d e ( in c lu d in g o i l e x p o r t s ) a c c o u n te d f o r 70 p e r c e n t o f th e n a t io n a l i n come in t h a t y e a r . A t th e same tim e , th e s h a r e o f o t h e r e x p o r ts d e c r e a s e d to * * p e r c e n t o f th e n a t io n a l in com e. The sh a r e o f im port tr a d e in c r e a s e d to 3^ p e r c e n t o f th e n a t io n a l incom e in t h e same y e a r . F i n a l l y , i t sh o u ld be n o te d t h a t th e in c r e a s in g d ep en d en cy o f I r a q ’ s economy upon th e o i l s e c t o r w as accom p an ied by a downward movement in th e term s o f tr a d e d u r in g th e p e r io d o f 1922-6**, w ith th e e x c e p tio n o f c e r t a in y e a r s a s w i l l be d is c u s s e d l a t e r . The Terms o f Trade As we h ave d is c u s s e d e a r l i e r , econom ic d ev elo p m en t a f f e c t s com m odity p r i c e s o f b o th im p ort and e x p o r t an d , in tu r n , th e term s o f t r a d e . The im p act o f econ om ic d ev elo p m en t i s r e f l e c t e d in ch a n g es in th e p a t t e r n s o f co n su m p tio n , p r o d u c tio n , su p p ly and p r i c e s o f f a c t o r s o f p r o d u c tio n , and th e d e g r e e o f c o m p e titio n and m onopoly in w o rld m a r k e ts. E q u a lly t r u e , movement in th e term s o f tr a d e a f f e c t s econ om ic d ev elo p m e n t in th e s e n s e t h a t an Im provem ent in th e term s o f tr a d e o f a c o u n tr y w i l l in c r e a s e th e im p ort c a p a c it y o f t h a t co u n try and v i c e 292 v e r s a in th e c a s e o f a d e t e r i o r i a t i o n in th e term s o f t r a d e . The p r e s e n t s e c t i o n d e a ls w ith th e term s o f tr a d e o f Ira q f o r two p e r io d s . The f i r s t on e w h ich i s more d e t a i l e d and a n a l y t i c a l c o v e r s th e p e r io d 1 9 2 2 -5 8 , ta k in g 1 9 3 8 -3 9 a s a b a se y e a r . The seco n d on e c o v e r s th e p e r io d 1959-6**, ta k in g 1961 a s a b a se y e a r . The f i r s t p e r io d h a s b een a n a ly z e d in a u n iq u e q u a n t i t a t i v e stu d y p u b lis h e d r e c e n t l y .* T h is s tu d y i s d is t in g u is h e d from o t h e r s t u d i e s in th e term s o f tr a d e o f d e v e lo p in g c o u n t r ie s in two w a y s. F i r s t , i t r e l i e s upon I r a q ’ s f o r e ig n tr a d e s t a t i s t i c s and n o t upon th e f o r e ig n tr a d e s t a t i s t i c s o f th e d e v e lo p e d c o u n t r ie s . S e c o n d ly , th e stu d y d e a ls w ith th o s e m ea su res o f th e term s o f tr a d e : g r o s s , n e t , and incom e term s o f t r a d e , u n lik e o th e r 2 s t u d i e s w h ich d e a l o n ly w ith th e n e t term s o f t r a d e . *M .S.H asan, Econom ic D evelop m en t o f Ir a q : F o r e ig n Trade and Econom ic D evelop m en t 1 8 6 4 -1 9 5 8 ( i n A r a b ic ) , ( B e i r u t : A l-M a k ta la h A l- A s r iy a , 1965)* C hapter V I I . 2 I f we l e t % and sta n d f o r e x p o r t -im p o r t- q u a n tit y in d e x , and ^ and E [ f o r e x p o r t-im p o r t p r ic e in d e x , th e n : G ross (B a r te r ) Terms o f Trade = Q j/Q e . An in c r e a s e in t h i s in d e x i n d i c a t e s t h a t g r e a t e r q u a n t i t i e s o f im p o r ts can b e o b ta in e d in ex ch a n g e f o r a g iv e n amount o f e x p o r ts : N et Terms o f Trade - Pe/ P i An in c r e a s e in t h i s in d e x i n d i c a t e s t h a t im p o r ts have becom e ch e a p e r r e l a t i v e t o e x p o r t s , th u s more im p o r t s can b e o b ta in e d f o r a g iv e n amount o f e x p o r ts : Income Terms o f Trade » Qe . Pe/ P i T h is in d e x m ea su res th e amount o f im p o rts t h a t can be o b ta in e d o r fin a n c e d o u t o f e x p o r t p r o c e e d s . 293 I t sh o u ld a ls o be n o te d t h a t I r a q ’ s Im p orts a r e t r e a t e d on th e b a s i s o f C .I .F . and i t s e x p o r ts on F .O .B . b a s i s . T hus, th e term s o f tr a d e r e f l e c t th e p ic t u r e m ore r e a l i s t i c a l l y th an in th e c a s e o f o t h e r d e v e lo p in g c o u n t r ie s . The g e n e r a l tr e n d in th e n e t term s o f tr a d e (e x c lu d in g o i l ) was u n fa v o r a b le f o r th e p e r io d 1 9 2 2 -1 9 5 8 w ith th e e x c e p t io n o f 1 9 3 3 -3 7 d u r in g th e G reat D e p r e s sio n and d u r in g th e p e r io d o f World War I I . H owever, th e im p rove ment in th e n e t term s o f tr a d e d u r in g 1 9 4 0 -4 5 was a c com panied by a d e t e r i o r i a t i o n in th e incom e term s o f tr a d e due to th e f a l l o f w o rld tr a d e d u r in g th e war p e r io d . I t sh o u ld a l s o b e n o te d t h a t th e d e t e r i o r i a t i o n in th e n e t term s o f tr a d e was ev en g r e a t e r d u r in g th e p o s t-w a r p e r io d e s p e c i a l l y t h e seco n d h a l f o f th e 1 9 5 0 * s when th e in d e x f e l l from 8 4 d u r in g 1 9 4 6 -5 1 to ab o u t 71 d u r in g 1 9 5 3 -5 8 ( s e e T a b le 3 9 ) . I f o i l e x p o r ts w ere in c lu d e d , th e d e t e r i o r i a t i o n in n e t term s o f t r a d e , c o n tr a r y t o w hat on e e x p e c t s , was ev en g r e a t e r th a n t h a t o f n o n - o i l e x p o r t s . The in d e x o f t h e n e t term s o f tr a d e o f n o n - o i l e x p o r ts was 71 d u r in g 1 9 5 2 -5 8 w h ereas t h a t in c lu d in g o i l was 52 d u r in g t h e same p e r io d . The same tr e n d h o ld s f o r th e p e r io d 1 9 5 9 -6 4 ( s e e T a b le 4 0 ). T h is phenomenon can b e a t t r ib u t e d t o t h e f a c t t h a t w h ile p r i c e s o f I r a q ’ s e x p o r ts and im p orts a r e d eterm in ed by th e demand and su p p ly in w orld m a rk et, 294 p r i c e s o f cru d e o i l a r e d e term in ed by th e m ajor o i l com p an ies c o n t r o l li n g t h e w orld m a rk et. F i n a l l y , i t i s i n t e r e s t i n g to n o t e t h a t P r e b is c h T h e s is f in d s su p p o r t in I r a q ’ s e x p e r ie n c e . T h is can be r e a l i z e d i f on e com pares B r i t a i n ’ s term s o f tr a d e w ith t h a t o f I r a q ’ s . T h is i s e s p e c i a l l y s i g n i f i c a n t a s B r it a in h a s a lw a y s b een I r a q ’ s m ajor tr a d e p a r t n e r . B r i t a i n ’ s n e t term s o f tr a d e and t h a t o f I r a q ’ s w ere m oving in o p p o s it e d i r e c t i o n s , t h a t i s , f a v o r a b le f o r B r it a in and u n fa v o r a b le f o r Ir a q d u r in g th e w h o le p e r io d o f 1 9 2 2 -5 8 ( s e e T a b le 4 1 ) . I r a q ’ s C a p a c ity to Im port The p u rp o se o f t h i s s e c t i o n i s t o a n a ly z e th e grow th o f I r a q ’ s c a p a c it y t o im p ort and th e sh a r e o f e x p o r t e a r n in g s , e s p e c i a l l y o i l r e v e n u e s , in th e b a la n c e o f paym en ts s in c e th e o i l s e c t o r i s th e d e te r m in in g f a c t o r o f t h e c a p a c it y t o Im p o rt. The c a p a c it y to Im port sim p ly m eans th e su p p ly o f f o r e ig n ex ch a n g e a v a i l a b l e t o f in a n c e im p o r ts . T hus, ch a n g es in im p ort c a p a c it y due t o f l u c t u a t i o n s in th e s u p p ly o f f o r e ig n ex ch a n g e r e s u l t i n g from f lu c t u a t io n s in f o r e ig n dem and, w i l l u n d o u b te d ly a f f e c t th e c o u n tr y ’ s lo n g -r u n d ev elo p m en t p rogram s. S in c e 1 9 5 2 , o i l r e v e n u e s have in c r e a s e d g r e a t l y a s 295 a r e s u l t o f r i s i n g p r o d u c tio n and e x p o r ts (w ith th e e x c e p t io n o f 1 9 5 6 -5 7 du e th e S uez C r i s is and th e d e s t r u c t io n o f I r a q i p i p e l i n e s in S y r ia ) a s w e ll a s o f th e a g reem en t in th e term s o f p aym en ts rea ch ed b etw een th e I r a q i Governm ent and th e f o r e ig n o i l co m p a n ies. The tr e n d in I r a q ’ s c a p a c it y to im p ort i n d i c a t e s d e c i s i v e l y t h a t th e e x p a n sio n in t o t a l c a p a c it y to im p ort h as b een due t o t h e in c r e a s e in o i l e x p o r ts s in c e th e e a r ly 1 9 5 0 's . T hus, th e d o m in a tin g r o l e o f o i l in I r a q ’ s e x p o r ts s u g g e s t s t h a t th e c a p a c it y to im p ort r e f l e c t s a lm o s t e x c l u s i v e l y th e f o r e ig n exch an ge ea rn ed from o i l e x p o r t s . I t f o l l o w s , t h e r e f o r e , t h a t I r a q ’ s f o r e ig n ex ch a n g e d e r iv e d from o i l e x p o r ts c o n s t i t u t e s th e d e te r m in in g f a c t o r o f t h e c o u n tr y ’ s econ om ic g ro w th , s in c e o i l r e v e n u e s make i t p o s s i b l e to im p ort c a p i t a l g o o d s and o t h e r d u r a b le g o o d s n e c e s s a r y f o r d ev elo p m en t and a ls o d e t e r m ine th e volum e o f in v e stm e n t and d o m e stic demand. I r a q ’ s a b i l i t y t o p ay made i t p o s s i b l e to expand th e u s e o f m ach in ery in a g r i c u l t u r e . Im p orts o f consum er g o o d s a ls o in c r e a s e d t o s a t i s f y th e in c r e a s in g d o m e stic demand a s s o c ia t e d w ith th e in c r e a s e in p u r c h a sin g pow er a s a r e s u l t o f in c r e a s e d governm ent e x p e n d itu r e , b ro u g h t a b o u t by t h e exp an d in g o i l e x p o r t s . Im p orts c o n tin u e d t o in c r e a s e d u r in g th e w h o le 296 p e r io d o f 1 9 5 1 -6 5 w ith th e e x c e p tio n o f t h e y e a r s 1958-59 and 1 9 6 3 * The f a l l i n Im p o rts i n 1958-59 was due to th e f a c t t h a t th e g o v ern m en t Im posed t i g h t r e s t r i c t i o n s on im p o rts to re d u c e th e d e f i c i t in th e b a la n c e o f p ay m en ts w hich had d e v e lo p e d d u rin g th e y e a r s 1956-57 a s a r e s u l t o f th e Suez C r i s i s w hich c a u se d a l a r g e r e d u c tio n i n o i l e x p o r ts . I t s h o u ld a ls o b e n o te d t h a t th e g o v e rn m e n t, e s p e c i a l l y a f t e r th e B e v o lu tio n in 1 9 5 8 , a d o p te d some m ore m e a su re s t o p r o t e c t th e e x i s t i n g d o m e s tic i n d u s t r i e s and to e n c o u ra g e th e s e t t i n g up o f new im p o rt-c o m p e tin g i n d u s t r i e s . The in o r e a s e in im p o rts i n i 960 t o ID 12*t m i l l i o n , an in o r e a s e o f 25 p e r c e n t a g a i n s t th e 1959 l e v e l was p a r t l y due to t h e l i b e r a l im p o rt p o l ic y w hich th e g o v e rn m ent a d v o c a te d to w a rd s th e Im p o rts o f consum er goods a s a r e s u l t o f th e d e c r e a s e in a g r i c u l t u r a l o u tp u t. I t s h o u ld be n o te d , t h e r e f o r e , t h a t th e i n c r e a s in g tr e n d and c h a n g e s i n th e c o m p o s itio n o f I r a q 's im p o rts r e f l e c t e d g r e a t l y t h e I n d u s t r i a l i z a t i o n and im p o rt- s u b - s t i t u t l o n p ro g ra m s. T h is can b e o b se rv e d from t h e f a c t t h a t im p o rt o f c a p i t a l goods in c r e a s e d a t a r a p i d r a t e s in c e 1951* Im p o rts o f c a p i t a l good r e p r e s e n te d a b o u t 21 p e r c e n t o f t o t a l m e rc h a n d ise im p o rts in 1951 as com pared w ith a b o u t 50 p e r c e n t in 1965 ( s e e A ppendix T ab le 3*0 297 F i n a l l y , t h e h ig h c o r r e l a t i o n b etw een Im p o rt t r a d e and o i l re v e n u e s d e r iv e d from o i l e x p o r ts seem s to I n d i c a t e t h a t o i l re v e n u e s a r e th e o n ly Im p o rta n t v a r i a b l e s a f f e c t i n g n o t o n ly th e l e v e l o f I r a q 's Im p o r ts , b u t a l s o th e r a t e o f econom ic g ro w th . P u b lic F in a n c e and Econom ic D evelop m en t B u d g e ta ry D evelopm ents I r a q 's p u b l ic s e c t o r f i n a n c i a l a c c o u n ts In c lu d e In a d d i t i o n t o t h e o r d in a r y and d e v e lo p m e n ts b u d g e ts , th e su p p le m e n ta ry b u d g e t o f se m i-In d e p e n d e n t governm ent a g e n c ie s and th e a c c o u n ts o f In d e p e n d e n t p u b l i c a g e n c ie s . In J u l y 1964 th e b u d g e ts o f th e new ly e s t a b l i s h e d Econom i c O r g a n iz a tio n and t h e O r g a n iz a tio n o f Banks w ere ad d ed to p u b l ic s e c t o r a c c o u n ts . D e f i c i t s In th e su p p le m e n ta ry and In d e p e n d e n t b u d g e t w h ile s u r p lu s e s are a l l o c a t e d to th e o r d in a r y and d e v elo p m e n t b u d g e ts to th e e x te n t t h a t th e y sire n o t u se d f o r I n c r e a s e s in c a p i t a l o r r e s e r v e s o f th e a g e n c ie s . P r o f i t s o f t h e n a t i o n a l i z e d I n d u s t r i e s and com panies a r e t r a n s f e r r e d to th e Econom ic O rg a n iz a t i o n a n d , a c c o rd in g to Law, 25 p e r c e n t o f t h e s e p r o f 1 s t are a l l o c a t e d to th e o r d in a r y b u d g e t w h ile t h e re m a in d e r I s to b e u se d f o r v a r io u s s p e c i f i e d p u r p o s e s . The 1 9 6 4 -6 5 b u d g e t a c c o u n ts I n d lo a te t h a t re v e n u e s o f th e o r d in a r y b u d g e t am ounted to ID 146 m i l l i o n com 298 p a re d K ith ID 12? m i l l i o n in 1 9 6 3 /6 4 . The m ain i n c r e a s e s w ere in o i l re v e n u e s and from c u sto m s and e x c is e ta x e s (18 p e r c e n t ) . T h is was due to a l a r g e in c r e a s e i n im - r p o r t s in 1 9 6 4 /6 5 a s im p o rt d u t i e s on a num ber o f commod i t i e s had b een r a i s e d in J a n u a ry 1 9 6 4 . The in c r e a s e in incom e t a x r a te s * e f f e c t i v e from S e p te m b e r, 1 9 6 4 , a s w e ll a s stam p d u t i e s r e s u l t e d in a s m a ll r i s e in re v e n u e s from t h e s e s o u r c e s . In 1 9 6 5 /6 6 re v e n u e s o f th e o r d in a r y bud g e t am ounted to ID 177 m i l l i o n . The m ain In o r e a s e o v e r t h e p re o e d ln g y e a r was i n o i l r e v e n u e s . H ow ever, o r d in a r y e x p e n d itu r e s am ounted to ID 172 m i l l i o n i n 1 9 6 5 /6 6 com p a re d w ith ID 177 m i l l i o n in 1964/65* T h is m eans t h a t t h e r e was a s u r p lu s o f ID 4 .8 m i l l i o n in 1 9 6 5 /6 6 w h e rea s t h e r e was a d e f i c i t o f ID 31 m i l l i o n i n 1964/65* I t s h o u ld b e n o te d h o w ev er, t h a t th e o r d in a r y b u d g e t h a s a lw a y s m a in ta in e d a d e f i c i t s i n c e 1 9 5 3 /5 4 w ith th e ex c e p tio n o f th e y e a r s 1 9 5 5 /5 6 , 1 9 6 1 /6 2 , and 1965/ 6 6 . The a c c u m u la te d d e f i c i t f o r th e p e r i o d p r i o r to 1 9 5 1 /5 2 and up t o 1 9 6 5 /6 6 am ounted t o ID 95 m i l l i o n ( s e e A ppendix T a b le 4 2 ) . In c o n t r a s t th e a c c u m u la te d s u r p lu s o f th e d e v elo p m e n t b u d g e t f o r th e p e r io d from 1 9 5 0 /5 1 up to 1 9 6 5 /6 6 am ounted to ID 6 7 .7 m i l l i o n ( s e e T a b le 4 5 ) . In v e s tm e n t E x p e n d itu r e s . E x p e n d itu re s o f th e C e n tr a l G overnm ent in r e o e n t y e a r s i n t r a n s p o r t , com m u n ic a tio n s and c o n s t r u c t io n am ounted to 7 0 -7 5 p e r c e n t 299 o f t o t a l d e v elo p m e n t e x p e n d itu r e s ( s e e T a b le 4 6 ) . The 1 9 6 4 -6 5 b u d g e t p r o v id e s f o r h ig h e r a l l o c a t i o n s f o r In d u s t r y and a g r i c u l t u r e , r e p r e s e n t i n g a b o u t 40 p e r c e n t o f t o t a l p r o j e c t e x p e n d itu r e s , b u t a c t u a l e x p e n d itu r e s In th e s e s e c t o r s c o n tin u e d to show a s u b s t a n t i a l s h o r t f a l l com pared w ith b u d g e t e s t i m a t e s . H ousing and c o n s t r u c t io n was th e o n ly s e c t o r w ith In v e s tm e n t w h ich a b o u t e q u a lle d t h e b u d g e t e s tim a te and a s a c o n seq u e n ce o f t h e s h o r t f a l l In t h e o t h e r s e c t o r s I t s r e l a t i v e s h a r e In d ev elo p m e n t e x p e n d itu r e s am ounted t o 53 p e r c e n t com pared w ith 27 p e r c e n t o r i g i n a l l y p la n n e d ( s e e T a b le 4 6 ) . The d e v elo p m e n t p la n f o r 1 9 6 5 /6 6 -1 9 6 9 /7 0 came I n to e f f e c t A p r il 1 , 1965* p ro v id e d f o r t o t a l In v e s tm e n t o f ID 832 m i l l i o n (e x c lu d in g In v e s tm e n t by f o r e i g n o i l c o m p a n ie s), w hich w ere e s tim a te d to r e s u l t I n an a v e ra g e a n n u a l g ro w th r a t e o f 8 p e r c e n t In GNP. The g ro w th In p r i v a t e c o n su m p tio n I s to b e l i m i t e d to a y e a r l y a v e ra g e o f 5 .5 p e r c e n t In o r d e r to p r o v id e f o r an I n c r e a s e in p u b lio c o n su m p tio n o f 8 p e r c e n t . I t was assum ed t h a t th e b a la n c e o f p ay m en ts s u r p lu s on goods and s e r v i c e s w ould grow a t an a n n u a l r a t e o f 8 p e r c e n t . The p r o j e c te d In v e s tm e n t program I m p lie s a n a n n u a l r a t e o f g ro w th In In v e s tm e n t o f a b o u t 17 p e r c e n t , w ith g r o s s d o m e s tic o a p l t a l f o rm a tio n r i s i n g to ID 208 m i l l i o n i n 1 9 6 9 /7 0 ( 2 2 .5 p e r c e n t o f GNP) com pared w ith ID 82 300 m i l l i o n (1 2 .7 p e r c e n t o f GNP in 1 9 6 3 ) . The p r o j e c te d flymuAi p h a s in g o f t h e in v e s tm e n t pro g ram in d ic a te d m a jo r I n c r e a s e s in th e f i r s t two y e a r s and a l e v e l l i n g o f f in th e l a s t t h r e e y e a r s . The In v e s tm e n t program in c lu d e d ID 181 m i l l i o n to b e I n v e s te d by th e p r i v a t e s e c t o r ( a b o u t 90 p e r c e n t in c o n s tr u c tio n and t r a n s p o r t ) and ID 79 m i l l i o n b y o f f i c i a l e n t i t l e s and n a t i o n a l i z e d i n d u s t r i e s (3 0 p e r c e n t in c o n s t r u c t io n and 50 p e r c e n t in i n d u s t r y ) . T h is r e p r e s e n t s ID 52 m i l l i o n on a y e a r l y a v e ra g e f o r th e p r i v a t e and o f f i c i a l e n t i t i e s s e c t o r s . F in a n c in g o f t h e s e in v e s tm e n ts w i l l b e m a in ly from t h e i r own s a v in g s . The c e n t r a l governm ent in v e s tm e n t p ro g ram am ounted to ID 561 m i l l i o n ( in c lu d in g f o r e i g n b o rro w in g ) o r a y e a r l y a v e ra g e o f ID 112 m i l l i o n com pared w ith ID 60 m i l l i o n in 1 9 6 4 /6 5 ( s e e T a b le 4 6 ) . From p r e v io u s e x p e r ie n c e , a s h o r t f a l l o f 2 5 -3 0 p e r c e n t i n governm ent in v e s tm e n t i s e x p e c te d due m a in ly to in a d e q u a te p r o j e c t p r e p a r a t i o n . On th e b a s i s o f t h i s s h o r t f a l l , f in a n c in g r e q u ir e m e n ts w ould be l im i te d to a b o u t Id 420 m i l l io n com pared to t h e p la n e s tim a te s o f ID 561 m i l l i o n f o r th e f i v e - y e a r p e r i o d . T h ere m ig h t s t i l l b e some d i f f i c u l t y in s e c u r in g t h i s f in a n c in g i f i t i s to oome from 50 p e r c e n t o f o i l re v e n u e s a l l o c a t e d to t h e d e v elo p m e n t b u d g e t. H ow ever, i n th e l a s t t h r e e y e a r s , r i s i n g o r d in a r y e x p e n d itu r e s have n e c e s s i t a t e d a l l o c a t i o n s 301 o f m ore th a n h a l f o f o i l re v e n u e s to t h e o r d in a r y b u d g e t. A ssum ing t h a t t h e e s tim a te d f o r e ig n b o rro w in g o f ID 95 m i l l i o n I s f u l l y r e a l i z e d , th e s u r p l u s o f g o v ern m en t o v e r o r d in a r y e x p e n d itu r e s w i l l hav e to b e r a i s e d In t h e l a s t f o u r y e a r s o f t h e p la n fro m ID 20 m i l l i o n In 1 9 6 5 /6 6 to an a n n u a l a v e ra g e o f a b o u t ID 55 m i l l i o n . So f a r f o r e i g n lo a n com m itm ents f o r th e p la n h av e am ounted to ID 4 0 .8 m i l l i o n ln o lu d ln g ID 30 m i l l i o n from th e U .S .S .B ., ID 2 .6 m i l l i o n from t h e E x p o rt-Im p o rt Bank, and ID 8 .2 m i l l i o n from th e IBBD. M o n etary and C r e d it D e v elo p m en ts. The money su p p ly r o s e by a b o u t 11 p e r c e n t In 1 9 6 3 » rem ain ed unchanged in 1964 and In c r e a s e d by 12 p e r c e n t in 1965 ( s e e T a b le 4 7 ) . T h is e x p a n sio n was m a in ly , and i n 1963 e x c l u s i v e l y , In o u rre n c y i n c i r c u l a t i o n r e f l e c t i n g p o l i t i c a l u n r e s t In 1963 and th e n a t i o n a l i z a t i o n m e a su re s in J u l y 1 9 6 4 . Sub s t a n t i a l g ro w th In th e incom e o f lo w -in co m e g ro u p s , w hich do n o t u s e b an k a c c o u n ts , c o n tr ib u te d to th e s h a rp r i s e i n c u rre n c y i n c i r c u l a t i o n In 1 9 6 5 . The r i s e In t h e i n come o f th e s e g ro u p s was a r e s u l t o f th e Im provem ent In a g r i c u l t u r a l p r o d u c tio n and a l s o th e r i s e in w ages and s a l a r i e s o f w o rk e rs in t h e n a t i o n a l i z e d I n d u s t r i e s . A lth o u g h th e money s u p p ly rem a in e d unchanged In 1 9 6 4 , t h e r e w ere m ajo r c h a n g e s in th e a s s e t s o f t h e b a n k in g sy ste m . F o r e ig n a s s e t s d e c lin e d s h a r p ly w h ile d o m e s tic 302 a s s e t s in c r e a s e d . R e f le c tin g t h e h ig h l e v e l o f a c t i v i t y in t h e f i r s t h a l f o f 1964 p r i v a t e c r e d i t r o s e s h a r p ly b u t d e c lin e d i n t h e seco n d h a l f a s th e n a t i o n a l i z a t i o n mea s u r e s o f J u l y 1964 r e s u l t e d in a d e c l i n e i n p r i v a t e s e c t o r a c t i v i t y . C laim s on th e p r i v a t e s e c t o r a ls o d e c lin e d a s a c o n se q u e n c e o f an a d m i n i s t r a t i v e t i g h t e n i n g o f c r e d i t by t h e com m ercial b a n k s a f t e r n a t i o n a l i z a t i o n . N et c la im s on t h e p u b lic s e c t o r r o s e s h a r p ly i n th e seco n d h a l f o f 1964 m a in ly b e c a u se o f an in o r e a s e in d e fe n s e e x p e n d itu r e s . The l a r g e d e c l i n e in n e t f o r e ig n a s s e t s in t h e f i r s t h a l f o f 1964 was d u e to I n c r e a s e d Im p o rt pay m en ts r e f l e c t i n g th e h ig h l e v e l o f p r i v a t e a c t i v i t y . In t h e l a s t h a l f o f th e y e a r n e t f o r e i g n a s s e t s c o n tin u e d to d e c l i n e , a lth o u g h to a l e s s e r e x te n t th a n i n th e f i r s t h a l f o f 1 9 6 4 . Money s u p p ly r o s e by a b o u t 12 p e r c e n t in 1965 w ith two t h i r d s o f th e I n c r e a s e in th e f i r s t h a l f o f th e y e a r . The m ain f a c t o r c a u s in g th e in o r e a s e d u rin g t h i s p e r io d w as a s h a rp r i s e in f o r e i g n a s s f c ts . P r i v a t e s e c t o r a c t i v i t y c o n tin u e d to be s l a c k w ith a f u r t h e r f a l l in c r e d i t u t i l i z a t i o n . The f a l l in f o r e i g n a ssfc ts and th e s h a rp r i s e i n c u rre n c y i n c i r c u l a t i o n re d u c e d f o r e i g n ex change r e s e r v e s a t t h e end o f D ecem ber 1965 c lo s e to th e l e v e l n e c e s s a r y to s a t i s f y th e p r e s c r i b e d n o te i s s u e c o v e r re q u ir e m e n ts (7 0 p e r c e n t in g o ld and f o r e i g n ex c h a n g e ). S u b s t a n t i a l b o rro w in g by th e p u b l i c s e c t o r from t h e C e n tr a l Bank In th e seco n d h a l f o f 1965 r a i s e d su c h b o rro w in g n e a r l y t o I t s l e g a l l i m i t . C e n tr a l bank le n d in g t o t h e p u b l i c s e c t o r I s l i m i t e d by t h r e e p r o v i s i o n s o f th e C e n tr a l Bank Law. The Bank may h o ld governm ent p a p e r up t o 30 p e r c e n t o f t h e n o te I s s u e , I t may ex te n d w ays and m eans f in a n c in g up to 10 p e r c e n t o f th e e s tim a te d c u r r e n t b u d g e t re v e n u e to be r e p a id by t h e end o f t h e f i s c a l y e a r , and I t may ad v an c e up t o th e e q u iv a l e n t o f t h r e e tim e s I t s c a p i t a l . T h ese c e i l i n g s , how ever, do n o t c o n s t i t u t e an e f f e c t i v e l i m i t a t i o n o r governm ent r e l l a n o e on th e b a n k in g sy stem a s b o rro w in g from commer c i a l b a n k s I s n o t s u b j e c t t o an y l i m i t a t i o n . The p u b l ic s e c t o r r e l i e d h e a v i ly on com m ercial b a n k s , w hose n e t c la im s on th e p u b l i c s e c t o r ln o r e a s e d by ID 1 1 .8 m i l l i o n In 1 9 6 5 . F o llo w in g th e n a t i o n a l i z a t i o n m e a su re s In J u l y , 1 9 6 4 , th e C e n tr a l Bank e x te n d e d a lo a n o f ID 5 m i l l i o n t o th e b a n k in g sy ste m I n o r d e r t o co m p en sate f o r t h e l a r g e w ith d ra w a l o f c u rre n c y from th e b a n k s . In a d d i t i o n , t h e C e n tr a l Bank lo w e re d , In S ep tem b er 1 9 6 4 , th e Commer c i a l b a n k s minimum r e s e r v e r e q u ir e m e n t, by w a iv in g th e re q u ire m e n t to d e p o s i t w ith th e C e n tr a l Bank governm ent s e c u r i t i e s am o u n tin g to th e e q u iv a le n t o f 5 p e r c e n t o f t h e i r d e p o s i t s . L a t e r In th e f a l l o f 1964 m ost o f th e 304 c u rre n c y w ith d raw n r e tu r n e d t o t h e b a n k s and th e C e n tr a l Bank I n c r e a s e d a g a in th e minimum r e s e r v e r e q u ir e m e n ts and w idened t h e d e f i n i t i o n o f th e b a s i s on w h ich minimum r e s e r v e re q u ire m e n ts w ere com puted by g r a d u a l ly I n c lu d in g d e p o s i t s h e ld by p u b l i c s e c t o r e n t i t l e s . M o reo v er, th e re q u ire m e n t r e l a t i n g t o g o v ern m en t s e c u r i t i e s was re lm - p o se d lm May, 1965* The f i v e s p e c i a l i z e d b a n k s In I r a q a r e th e R eal E s t a t e B ank, th e C r e d it B ank, t h e A g r i c u l t u r a l B ank, th e I n d u s t r i a l Bank and th e C o o p e ra tiv e B ank, The b a n k s ex te n d lo n g and medium te rm c r e d i t f a c i l i t i e s e x c e p t f o r th e C r e d it B ank, w hich g r a n t s s h o r t and medium c r e d i t m a in ly f o r co n su m p tio n p u r p o s e s . P r i v a t e s e c t o r o r e d l t e x te n d e d by th e s p e c i a l i z e d b a n k s r o s e by ID 8 .3 m i l l i o n In 1964 ( s e e A ppendix T a b le 4 8 ) . S p e c ia liz e d b a n k s a r e a llo w e d t o a o c e p t p r i v a t e d e p o s i t s b u t th e s e am ounted t o o n ly ID 1 .2 m i l l i o n by D eoem ber, 1965* S p e c ia liz e d b an k s f in a n c e t h e i r a c t i v i t i e s m a in ly from t h e i r own r e s o u r c e s and w ith fu n d s b orrow ed from t h e C e n tr a l Bank w hich In c re a s e d by ID 1 .5 m i l l i o n In 1965» and- from governm ent d e p o s i t s and c r e d i t , w h ich t o g e t h e r r o s e by ID 3*7 m il l i o n In 1 9 6 5 . Summary The m ost s t r i k i n g f e a t u r e o f I r a q ’ s f o r e i g n t r a d e 305 i s th e i n c r e a s in g d ep en d en cy o f t h e I r a q i economy on th e o i l s e c t o r . T h is can be s u b s t a n t i a t e d by th e f a c t t h a t in 1950 f o r e i g n t r a d e a c c o u n te d f o r 37 p e r c e n t ( e x c lu d in g o i l e x p o r ts ) and 51 p e r c e n t ( in c lu d in g o i l e x p o r ts ) o f th e n a t i o n a l incom e. In 1957* f o r e i g n t r a d e ( in c lu d in g o i l e x p o r ts ) a c c o u n te d f o r 70 p e r c e n t o f th e n a t i o n a l inoom e, w h e re a s th e s h a r e o f o t h e r e x p o rts d e c re a s e d to 4 p e r c e n t a g a i n s t 12 p e r c e n t in 1 9 50. I t sh o u ld b e n o te d t h a t t h e in c r e a s in g d ep en d en cy o f th e I r a q i econom y upon th e o i l s e c t o r h a s b een a c com panied by a downward movement i n th e term s o f t r a d e . T h is phenomenon can b e a t t r ib u t e d t o t h e f a o t t h a t w h ile p r i c e s o f I r a q 's e x p o r t s and im p o r ts a r e d eterm in ed by demand and su p p ly i n th e w orld m a r k et, p r i c e s o f cru d e o i l a r e d e te rm in ed b y th e m ajor o i l com p an ies c o n t r o l li n g th e w o rld m a rk e t. T h u s, th e " P r e b is c h t h e s is " f in d s p a r t i a l su p p o r t in I r a q 's e x p e r ie n c e . T h is can be r e a l iz e d i f B r i t a i n ' s term s o f tr a d e a r e com pared w ith t h a t o f I r a q ' s . T h is i s e s p e c i a l l y s i g n i f i c a n t a s B r it a in h as a lw a y s b een I r a q 's m ajor tr a d e p a r t n e r . The h ig h c o r r e l a t i o n b etw een Im p o rts and o i l r e v e n u e s seem s to i n d i c a t e t h a t o i l r e v e n u e s a r e th e o n ly im p o rta n t v a r i a b l e s a f f e c t i n g n o t o n ly th e l e v e l o f I r a q 's im p o r ts , b u t a l s o th e r a t e o f econ om ic g ro w th . The f a l l in t h e c a p a c it y t o im p ort in 1956-57 due 306 to t h e Suez C r i s i s l e d th e governm ent to Im pose s t r i c t r e s t r i c t i o n s on im p o r ts . As a r e s u l t , im p o rts f e l l by a b o u t 11 p e r c e n t in 1 9 5 8 . S in c e 1951> th e c o m p o s itio n o f I r a q 's im p o rts h a s changed g r e a t l y in f a v o r o f c a p i t a l g o o d s. The s h a r e o f c a p i t a l goods in th e t o t a l v a lu e o f im p o rts In c re a s e d from a b o u t 21 p e r c e n t in 1951 to 50 p e r c e n t in 1 9 6 5 . The e x p a n sio n in th e im p o rts o f c a p i t a l go o d s a f t e r 1951 oan b e a t t r i b u t e d to th e im p le m e n ta tio n o f d e v elo p m e n t p ro g ra m s sp o n so re d by th e new ly e s t a b l i s h e d D evelopm ent B oard w hloh was e n t r u s te d w ith 70 p e r o e n t o f o i l r e v e n u e s f o r econom ic d e v e lo p m e n t. The p u b lic s e c t o r in I r a q i s by f a r th e l a r g e s t i n v e s t o r i n i n d u s t r y . P r i v a t e s e c t o r In v e s tm e n t i s a lm o s t e x c lu s iv e ly in r e s i d e n t i a l c o n s t r u c t io n and t r a n s p o r t a t i o n . P r i v a t e s e c t o r In v e s tm e n t h a s b een p rom oted th ro u g h " th e I n d u s t r i a l P ro m o tio n Law ", w h ich p r o v id e s t a x and o t h e r i n c e n ti v e s f o r p r i v a t e In v e s tm e n t. I t s h o u ld a ls o be n o te d t h a t r a t e s o f i n h e r i t a n c e ta x e s h av e r e c e n t l y b een lo w e re d and a r e d u c tio n in incom e t a x r a t e s becam e e f f e c t i v e A p r il 1 , 1 9 6 6 . T h ese t a x re d u c t i o n s w ere in te n d e d to im prove p r i v a t e s e c t o r c o n fid e n c e and c o n s e q u e n tly , p r i v a t e in v e s tm e n t a c t i v i t y . I t sh o u ld a ls o b e added t h a t t h e I n d u s t r i a l Bank i s th e m ain in s t i t u t i o n p r o v id in g c r e d i t a t low i n t e r e s t r a t e s f o r 307 I n d u s t r i a l u n d e r ta k in g s in th e p r i v a t e o r m ixed s e c t o r s . T h u s, s tr e n g th e n in g o f th e r e s o u r c e s o f t h i s b an k i s s tr o n g l y recom m ended. F o llo w in g th e n a t i o n a l i z a t i o n m e a su re s in J u ly 1 9 6 4 , p r i v a t e a c t i v i t y s ta g n a te d and c r e d i t t o th e p r i v a t e s e c t o r d e c l in e d . B ut in th e seco n d h a l f o f 1965 th e d e c l in e was l a r g e l y a r r e s t e d . T h is was e s p e c i a l l y due to th e r o l e o f th e C e n tr a l Bank in I r a q i n e n c o u ra g in g th e co m m ercial b a n k s to expand t h e i r c r e d i t f o r i n d u s t r i a l d e v e lo p m e n t. I t s h o u ld b e n o te d , h o w ev er, t h a t th e d e c l i n e in c r e d i t t o t h e p r i v a t e s e c t o r p r o p e r was s h a r p e r th a n i n d ic a t e d by m o n e ta ry d a t a s in c e t h e l a t t e r con tin u e d to in c l u d e , i n th e p r i v a t e s e c t o r , c r e d i t t o th e n a t i o n a l i z e d e n t e r p r i s e s t o w hioh in c r e a s e d b an k f a c i l i t i e s w ere e x te n d e d . In c o n c lu s io n , I r a q * s i n d u s t r i a l i z a t i o n p ro g ram s depend to a g r e a t e x t e n t on th e im p o rt o f c a p i t a l goods and o t h e r d u r a b le go o d s r e q u ir e d f o r d e v e lo p m e n t. The c a p a c ity to Im p o rt, on th e o t h e r h a n d , d e p e n d s fu n d am en t a l l y on th e volum e o f th e c o u n t r y 's e x p o r ts an d th e p r i c e r e l a t i o n s h i p b etw een i t s e x p o r ts and Im p o rts . I t f o llo w s , t h e r e f o r e , t h a t f o r e i g n t r a d e i s th e m ost im por t a n t i n d i c a t o r o f I r a q 's f u t u r e d e v e lo p m e n t. CHAPTER XI SU M M A RY AND CONCLUSIONS Summary The m ain o b j e c t i v e o f C h a p te r I I was to show t h a t c l a s s i c a l t r a d e th e o r y and g ro w th th e o r y , a lth o u g h b a se d on d i f f e r e n t a s s u m p tio n s , can b e r e c o n c ile d to p r o v id e a new a p p ro a c h w hich can b e a p p li c a b l e to th e p ro b le m s o f econom ic g ro w th o f d e v e lo p in g c o u n t r i e s . T rad e th e o r y assu m es u n c h a n g in g c o s t and demand c o n d i t i o n s , w h ile g ro w th th e o r y assu m es t h a t in v e s tm e n t, in com e, and o t h e r v a r i a b l e s a r e c o n s t a n t ly c h a n g in g . To b e m ore u s e f u l in a dynam ic econom y, t r a d e th e o r y m ust b e r e c a s t in te rm s o f th e a s s u m p tio n s o f g ro w th th e o r y . The t a s k o f b r id g in g th e gap b etw een th e o r y and p r a o t l c e re m a in s . H ow ever, a num ber o f e c o n o m is ts have becom e im p a tie n t w ith b o th t r a d e th e o r y and g ro w th th e o r y ; th e y have made In v e s tm e n t d e c i s i o n s and recom m e n d a tio n s w ith o u t th e b e n e f i t o f e i t h e r s tre a m s o f th o u g h t, u s in g " r u l e s o f thum b" i n s t e a d . T hese d e c is io n 308 309 r u l e s have b een c a l l e d " in v e s tm e n t c r i t e r i a " and an e l a b o r a t e t h e o r e t i c a l s t r u c t u r e h a s b e e n b u i l t to j u s t i f y them on l o g i c a l g ro u n d s . The b e s t o f t h e s e c r i t e r i a a r e b a se d on t h e dynam ic a s s u m p tio n s o f g ro w th th e o r y . The m ain q u e s tio n a sk e d by t r a d e th e o r y i s "w hat s h a l l we p ro d u c e f o r e x p o rt? " The g e n e r a l answ er i s "p ro d u c e t h a t w hioh w i l l be th e m ost p r o f i t a b l e . " C la s s i c a l t r a d e th e o r y t e l l s u s to s p e c i a l i z e i n th o s e goods in w hich we have a c o m p a ra tiv e a d v a n ta g e ; b u t f o r d e v e lo p in g c o u n t r i e s we m ust d e f i n e t h i s in te rm s o f w hat th e e x p e c te d o r f u t u r e c o m p a ra tiv e a d v a n ta g e w i l l b e . The p r a c t i c a l q u e s tio n f o r d e v elo p m e n t i s t h l s t "w hat s h a l l we t r y t o p ro d u c e ? " The s im p le s t a p p ro a c h i s to c o n c e n tr a te on th e s o a r c e s t r e s o u r c e t c a p i t a l * and th u s s tu d y in v e s tm e n t. The answ er* th e r e f o r e * i s to p ro d u c e th o s e goods w hich r e q u i r e l e a s t c a p i t a l p e r u n i t o f o u tp u t. In o t h e r w ords* new in v e s tm e n t m ust be made in th o s e l i n e s o f p r o d u c tio n w here th e am ount o f o a p l t a l p e r u n i t o f o u tp u t i s s m a l l e s t . The c r i t e r i a i s c a l l e d th e "minimum o a p l t a l - o u t p u t r a t i o . " T h ere a r e m ore c o m p lic a te d r e c e n t v e r s io n s in th e s tu d y o f d e v e lo p m e n ta l econom ies* su c h a s l i n e a r p r o gram m ing and dynam ic m acroeconom ic m odels* b u t th e y a l l e s s e n t i a l l y come to t h e same c o n c lu s io n t "how to m axi m ize g a in o r m in im ize o o s t w ith in th e l i m i t s o f c e r t a i n c o n s t r a i n t s ." 310 The Im p act o f f o r e i g n t r a d e on econom ic g ro w th can be summed up by a n a ly z in g th e r o l e o f e x p o r ts . T h is was th e t a s k o f C h a p te r I I I . E x p o rts may f u n c tio n a s a " s e p a r a te * economy ( o r th e th e o r y o f d u a lis m ) , w here e x p o r ts o f p rim a ry p r o d u c ts a r e f r e q u e n t l y made p o s s i b l e by f o r e i g n in v e s tm e n ts w h ich a r e m a in ly c o n c e rn e d w ith th e e x t r a c t i o n o f r e s o u r c e s a t low o o s t and s h o r t - r u n g ro w th e f f e c t s . In th e lo n g r u n , th e s e In v e s tm e n ts In e x t r a c t i v e i n d u s t r i e s a r e bound to b e I n s u l a te d from th e re m a in in g s e c t o r s o f t h e economy due to th e d e s i r e to m a in ta in s t a b i l i t y and c o n t r o l w ith in th e i n d u s t r i a l com pounds. I f e x p o r ts a r e a “l e a d in g s e c to r * o f th e economy ( t h a t i s t o s a y , i f th e s tim u lu s t o econom ic g ro w th comes from a b r o a d ) , th e n an i n o r e a s e in e x p o r ts may c a l l a t t e n t i o n to in v e s tm e n t o p p o r t u n i t i e s , and t h i s g u id e e n tr e p r e n e u r s to p r o f i t a b l e v e n tu r e s t h a t may n e v e r have o c c u rre d o th e r w is e . I f e x p o r ts a r e a “ la g g in g s e c to r * o f t h e eoonomy ( t h a t i s t o s a y , i f e x p o r ts l a g b e h in d d o m e s tic g ro w th due t o a f a l l i n w o rld demand f o r p rim a ry p r o d u c t s ) , th e n th e s tim u lu s t o econom ic g ro w th h a s to b e w ith in th e d o m e s tic econom y. In o t h e r w o rd s, th e d o m e stlo s e c t o r m ust le a d by a d o p tin g p ro g ram s f o r im p o rt-o o m p e tin g I n d u s t r i e s . I f e x p o r ts a r e a “b a la n c in g s e c to r * o f th e economy 311 ( t h a t i s to s a y , i f a d ju s tm e n t o f t r a d e k e e p s p a c e w ith d o m e s tic tr a n s f o r m a ti o n ) , th e n f o r e i g n t r a d e can f i l l t h e gap betw een c o n su m p tio n and p r o d u c tio n . In o t h e r w o rd s, f o r e ig n t r a d e can be u s e d a s a " s a f e t y v a lv e " to p r e v e n t s h o r t - r u n d i s e q u il i b r iu m i n d o m e stic s u p p ly . I t sh o u ld a ls o b e n o te d t h a t when e x p o r ts a r e th e l e a d in g s e c t o r o f th e econom y, th e g a in s from t r a d e w i l l le a d t o te c h n o lo g ic a l c h a n g e , c a p i t a l f o r m a tio n , and r e a l l o c a t i o n o f r e s o u r c e s . T h u s, t h e g r e a t e r th e g a in s from t r a d e , th e h ig h e r th e r a t e o f eoonom ic g ro w th . I t fo llo w s from th e p r e v io u s a n a l y s i s t h a t a s m ost d e v e lo p in g c o u n tr i e s d epend o n e x p o rt p ro c e e d s to e a rn t h e i r f o r e ig n e x o h an g e , e x p o r ts a r e th u s th e m a jo r dynam ic f a o t o r i n d e te rm in in g n o t o n ly t h e i r im p o rt o a p a c lty b u t a ls o th e l e v e l o f g e n e r a l econom ic a c t i v i t y . In t h e l a r g e r c o u n t r i e s (su o h a s I n d i a ) , and se m i- i n d u s t r l a l l z e d c o u n tr i e s (su o h a s M e x ico ), d o m e s tic i n v e s tm e n t i s a s Im p o rta n t a s e x p o r t s . B ut in many d e v e lo p in g c o u n tr ie s (su o h a s I r a q ) , e x p o rts a r e th e m ost im p o rta n t a c t i v e f a o t o r in g e n e r a tin g econom io a c t i v i t y o r a c c e l e r a t i n g th e r a t e o f econom io g ro w th . The -lo w g ro w th o f t h e i r e x p o r t s , i f n o t accom panied by th e d e v elo p m en t o f t h e home s e c t o r , w ould mean a slo w g ro w th in g e n e r a l . W hile t h e e x p o r ts o f i n d u s t r i a l c o u n tr i e s have in c r e a s e d f a s t e r th a n th o s e o f th e d e v e lo p in g coun 312 t r i e s a s a w h o le , t h e i r p r o d u c tio n h a s g e n e r a l l y In c r e a s e d even f a s t e r . T h e ir g ro w th r a t e te n d s t o b e h ig h e r th a n t h a t o f d e v e lo p in g c o u n t r i e s , d u e to t h e Im p o rta n c e o f e x p o r ts a s a d e te r m in a n t o f g ro w th In th e l a t t e r . I f t h i s d e s p a r l t y I n e x p o rt g ro w th c o n tin u e s , and I f d e v e lo p m ent on th e home f r o n t I s n o t v ig o r o u s ly p u rs u e d In th e d e v e lo p in g c o u n t r i e s , th e n th e gap In lnoom e l e v e l s b e tw een d e v e lo p e d and d e v e lo p in g c o u n t r i e s w i l l te n d to be w id e n ed . C h a p te r IV was c o n c e rn e d w ith t h e te rm s o f t r a d e and econom ic g ro w th . T h ere a r e d i f f e r e n t m e a su re s o f th e te rm s o f t r a d e . The s im p le s t o n e o f t h e s e i s th e " n e t te rm s o f t r a d e , " w hich r e f e r to th e r a t i o o f e x p o r ts and Im p o rts p r i c e s . An I n c r e a s e in t h i s in d e x l n d i o a t e s t h a t Im p o rts have become c h e a p e r r e l a t i v e t o e x p o r ts ; t h u s , m ore Im p o rts can be o b ta in e d f o r a g iv e n am ount o f ex p o r t s . The e x te r n a l t r a d e o f m ost d e v e lo p in g c o u n tr i e s i s c h a r a c t e r i z e d by w ide f l u c t u a t i o n s In th e te rm s o f t r a d e t h a t te n d to d e t e r i o r i a t e In th e lo n g - r u n . The re a s o n f o r t h i s I s t h a t p r i c e s o f p rim a ry p r o d u c ts a r e g e n e r a l l y s u b j e c t to v i o l e n t ch an g es from s e a s o n to s e a so n and from y e a r to y e a r , d e p e n d in g on t h e abu n d an ce o f t h e p r o d u c t; In a d d it i o n th e m a rk e tin g o f a g r i c u l t u r a l 313 i p r o d u c ts I s d i f f i c u l t to r e g u l a t e . The i n s t a b i l i t y in th e p r i c e s o f a g r i c u l t u r a l p r o d u c ts i n c o n t r a s t w ith p r i c e s o f i n d u s t r i a l p r o d u c ts w h ich a r e g e n e r a l l y s t a b l e , a t l e a s t in th e s h o r t - r u n , i s to a l a r g e e x te n t beyond th e c o n t r o l o f th e human w i l l ; a l s o , th e m a rk e tin g o f a g r i c u l t u r a l p r o d u c ts i s much 2 m ore d i f f i o u l t th a n m a n u fa c tu re d g o o d s. I n th e lo n g - r u n ho w ev er, p r i c e s o f a g r i c u l t u r a l p r o d u c ts move downw ards (w ith t h e e x c e p tio n o f ab n o rm al p e r io d s ) b o th a s a r e s u l t o f t e c h n i c a l p r o g r e s s w h ich l e a d s t o g r e a t e r p r o d u c ti o n , and o f th e low e l a s t i c i t y o f demand ( u n l ik e m a n u fa c tu re d g o o d s) f o r a g r i c u l t u r a l p r o d u c ts . T h u s, r e c e n t t r e n d s in m a rk e ts f o r p rim a ry p r o d u c ts h av e l e n t s u p p o rt t o econom ic t h e o r i e s w hich a rg u e t h a t d e v e lo p in g c o u n tr i e s s h o u ld d i v e r s i f y t h e i r e co n o m ie s, re d u c e t h e i r d ep en d e n ce on one o r two commod- T h ls i s b e c a u se o f t h e d i f f i c u l t i e s o f s to r a g e f a c i l i t i e s , a s when th e goods a r e p e r i s h a b l e o r a l s o b e c a u se t h e f a r m e r , d u e to h i s bad econom ic c o n d it i o n s , c a n n o t w a i t. 2 P i r s t , i n d u s t r i a l p r o d u c ts a r e e a sy to s t o r e ; s e c o n d , i t i s e a s y f o r th e p r o d u c e r s to com bine in monopo l l s t l c g ro u p s t o o r g a n iz e m a rk e tin g . I n th e o a se o f m ost a g r i c u l t u r a l p r o d u c ts i t i s e x tre m ly d i f f i c u l t to s u b j e c t them to su c h form o f o r g a n i z a t i o n ( e . g . , a c a r t e l ) f o r s e v e r a l r e a s o n s , p a r t i c u l a r l y b e o a u se o f th e l a r g e num ber o f u n i t s o f p r o d u c tio n w h ich i s a s s o c i a t e d w ith t h e common sy stem o f s m a ll s c a l e p r o d u c tio n in a g r i c u l t u r e . 314 l t i e s , a n d e m p h a s i z e l o c a l I n d u s t r i a l i z a t i o n . T h i s h y p o t h e s i s , w h i c h h a s b e e n p o p u l a r i z e d b y t h e L a t i n A m e r i c a n e c o n o m i s t P a u l P r e b l s c h , s u g g e s t s t h a t t h e i n d u s t r i a l c o u n t r i e s h a v e m a n a g e d t o b e n e f i t m o r e f r o m t h e a d v a n t a g e s f r o m t h e w o r l d - w i d e r i s e i n p r o d u c t i v i t y t h a n t h e d e v e l o p i n g c o u n t r i e s , a n d c a n n o t i m p o r t e n o u g h t o m e e t t h e r e q u i r e m e n t s f o r a h i g h e r r a t e o f g r o w t h . I n c o n c l u s i o n , t h e i n d u s t r i a l c o u n t r i e s h a v e a n o b l i g a t i o n t o s h a r e t h e f r u i t s o f t e c h n i c a l p r o g r e s s w i t h t h e d e v e l o p i n g c o u n t r i e s n o t o n l y t h r o u g h e c o n o m i c a i d b u t m o r e I m p o r t a n t l y i n t e r m s o f i n c r e a s i n g t r a d e w i t h t h e s e c o u n t r i e s f o r t h e m u t u a l a d v a n t a g e f o r a l l . C h a p t e r V d e a l t w i t h t h e p e r f o r m a n c e a n d p r o b l e m s o f d e v e l o p i n g c o u n t r i e s i n w o r l d t r a d e . R e c e n t t r e n d s i n t h e i n t e r n a t i o n a l t r a d e o f t h e d e v e l o p i n g c o u n t r i e s i n d i c a t e t h a t t h e i r p e r f o r m a n c e h a s n o t b e e n g e n e r a l l y e n c o u r a g i n g . E x p o r t s f r o m t h e s e c o u n t r i e s i n w o r l d t r a d e d e c l i n e d f r o m a b o u t 25 p e r c e n t i n 1 9 6 5 t o a b o u t 2 1 p e r c e n t i n I 9 6 0 a n d t o 1 9 . 5 p e r c e n t i n 1 9 6 5 » w h e r e a s e x p o r t s o f t h e d e v e l o p e d c o u n t r i e s i n c r e a s e d f r o m a b o u t 65 p e r c e n t i n 1 9 5 5 t o a b o u t 69 p e r c e n t i n 1 9 6 5 . I t s h o u l d a l s o b e n o t e d t h a t t h e d e v e l o p e d c o u n t r i e s a r e e a c h o t h e r ’ s b e s t c u s t o m e r s , w h e r e a s t h e d e v e l o p i n g c o u n t r i e s t o d e v e l o p e d c o u n t r i e s w e r e t h r e e a n d o n e - h a l f t i m e s a s g r e a t a s t h e i r e x p o r t s t o e a c h o t h e r i n 1 9 65. 315 T h e d e c l i n i n g t e n d e n c y o f d e v e l o p i n g c o u n t r i e s * e x p o r t s i n w o r l d t r a d e ( e x c l u d i n g o i l - p r o d u c i n g c o u n t r i e s ) i s d u e t o a n u m b e r o f l o n g - t e r m f a c t o r s , s u c h a s i n c r e a s e d c o m p e t i t i o n f r o m s y n t h e t i c s u b s t i t u t i o n , g r e a t e c o n o m i e s i n t h e u s e o f r a w m a t e r i a l s , t h e r e l a t i v e l y ' l o w i n c o m e e l a s t i c i t y o f d e m a n d f o r f o o d s t u f f s i n w o r l d m a r k e t , a n d t h e p r o t e c t i o n i s t p o l i c i e s e x e r c i s e d i n d e v e l o p e d c o u n t r i e s . S o m e e c o n o m i s t s a r g u e t h a t t h e l a g o f e x p o r t s o f d e v e l o p i n g c o u n t r i e s m a y b e a t t r i b u t e d e i t h e r t o s u p p l y - d e f l c i e n c y o r d e m a n d - d e f i c i e n c y o r s o m e c o m b i n a t i o n o f b o t h . A d v o c a t e s o f s u p p l y - d e f i c i e n c y s u g g e s t t h a t i n d u s t r i a l i z a t i o n p r o g r a m s e x e r c i s e d b y d e v e l o p i n g c o u n t r i e s i n v o l v e t h e c o n s u m p t i o n o f g r e a t e r q u a n t i t i e s o f t h e i r o w n p r i m a r y p r o d u c t s , t h u s r e s t r i c t i n g s u p p l i e s f o r t h e e x p o r t m a r k e t . P e r h a p s a m o r e c o n v i n c i n g e x p l a n a t i o n i s t h e d e m a n d - d e f i c i e n c y a r g u m e n t , w h i c h e m p h a s i z e s t h a t t h e m a i n r e a s o n f o r t h e l a g o f e x p o r t s o f p r i m a r y p r o d u c i n g c o u n t r i e s i s t h e l o w d e m a n d i n t h e w o r l d m a r k e t . A lth o u g h th e e x p o r ts from d e v e lo p in g c o u n tr i e s have In c r e a s e d l e s s r a p i d l y th a n w o rld t r a d e g e n e r a l l y , im p o rts in to t h e s e c o u n t r i e s have r i s e n f a s t e r th a n w o rld t r a d e . T h e ir im p o rts in c r e a s e d from $21 b i l l i o n in 1953 to $37*6 b i l l i o n in 19^5* A c o n s id e r a b le p o r t i o n o f t h e i r im p o rts c o n s i s t s o f c a p i t a l goods r e q u ir e d f o r 316 d e v e lo p m e n t. The d e f i c i t In th e b a la n c e o f t r a d e f o r th e p e r io d 1 9 5 6 -6 5 am ounted to # 1 6 .? b i l l i o n . The d e f i c i t in t h e i r c u r r e n t a c c o u n t i s e s tim a te d to be m ore th a n $11 b i l l i o n i n 1 9 7 5 . T h u s, d u e to th e f a c t t h a t d e v e lo p in g c o u n tr i e s w i l l c o n tin u e t o p r o v id e e x p an d in g m a rk e ts f o r im p o rts from d e v e lo p e d c o u n t r i e s , t h e r e i s a v a l i d c a s e f o r th e arg u m en t t h a t th e l a t t e r c o u n tr i e s m ust g r a n t m ore t r a d e c o n c e s s io n s t o th e fo rm e r c o u n t r i e s and buy m ore goods from them f o r th e m u tu a l b e n e f i t s o f a l l c o u n tr i e s in w o rld com m unity. F i n a l l y , i t s h o u ld a ls o b e added t h a t th e i n c r e a s in g d ep en d en cy o f d e v e lo p in g c o u n tr i e s on a few p rim a ry p r o d u c ts to e a rn t h e i r f o r e ig n ex ch an g e m akes t h e i r eoonom ies i n f l e x i b l e a s w e ll a s u n s t a b l e . In a d d i t i o n , t h e h ig h e r r a t i o o f e x p o r ts to n a t i o n a l incom e i n m ost d e v e lo p in g c o u n tr i e s i n d i c a t e t h a t i n s t a b i l i t y i n t h e i r e x p o r t m a rk e ts m akes lo n g -te rm d e v elo p m e n t p la n n in g a v e ry d i f f i c u l t t a s k , e s p e c i a l l y i f a c o u n try h a s no s u f f i c i e n t r e s e r v e s . C h a p te r VI was c o n c e rn e d w ith n a t i o n a l p o l i c i e s f o r im p o rt s u b s t i t u t i o n and e x p e r t p ro m o tio n and a p p li c a t i o n s to d e v e lo p in g c o u n t r i e s . An in d iv id u a l c o u n try h a s , a s a r u l e , l i t t l e c o n tr o l o v e r th e p r i c e s o f i t s e x p o r ts in th e e x te r n a l m a rk e ts o r o v e r th e te rm s on w h ich i t can 317 o b t a i n I t s Im p o rts . What I t h a s s i g n i f i c a n t c o n tr o l o f , h o w ev er, I s t h e e x te n t to w h ich Im p o rt s h a l l b e h in d e r e d from e n t e r i n g by i t s own a r t i f i c i a l b a r r i e r s . A ll c o u n tr i e s w h ich in th e p a s t have em barked upon l i n e s o f p r o d u c tio n a lr e a d y w e ll e s t a b l i s h e d e ls e w h e re have fo u n d th e m s e lv e s i n a s i m i l a r p o s i t i o n . I f th e i n t e r n a t i o n a l d i v i s i o n o f l a b o r , b a se d on c u r r e n t o r p r e d i c t a b l e com p a r a t i v e c o s t s , had b een re g a rd e d a s " g iv e n * , th e in d u s t r i a l i z a t i o n o f Germ any, J a p a n , and th e S o v ie t U nion w ould n o t h av e b een p o s s i b l e . S p e c i f i c a l l y , a c o m b in a tio n o f im p o rt d u t i e s , e x p o rt t a x e s , and s u b s id i e s a r e f r e q u e n t ly a d v o o a te d t o : (1 ) Im prove th e te rm s o f t r a d e , (2 ) a l t e r th e d o m e s tic d i s t r i b u t i o n o f inco m e, and (3 ) s t i m u l a te th e movement o f r e s o u r c e s i n t o se c o n d a ry p r o d u c tio n . T ra d e p o l i c y im plem ented by im p o rt t a x a t i o n te n d s to I n f lu e n c e th e te rm s o f t r a d e , in th e f i r s t in s ta n c e by re d u c in g th e demand f o r Im p o rts , th e r e b y re d u c in g th e p r i c e r e c e iv e d by th e f o r e i g n p r o d u c e r . A f t e r th e im p o s i t i o n o f t a r i f f s th e d o m e s tic consum er p a y s m ore f o r im p o rts w h ile th e f o r e ig n p ro d u c e r te n d s to r e c e iv e l e s s , th e d i f f e r e n c e b etw een t h e s e p r i o e s r e p r e s e n t s th e re v e n u e d i r e c t e d to t h e t a r i f f - i m p o s i n g g o v e rn m e n t. Im p o rt and e x p o rt d u t i e s may a ls o s e r v e a s c o u n te r c y c l i c a l m e a s u re s . U n lik e t h e ad v an ce d e p o s i t s te c h n iq u e 318 b o th o f t h e s e d u t i e s y i e l d governm ent re v e n u e s w hich m ig h t b e u se d to f in a n c e governm ent e x p e n d itu r e s . Im p o rt d u t i e s , h o w ev er, a r e a k in to th e I m p o s itio n o f ad v an ce d e p o s i t s In t h a t th e y o p e r a te on d o m e s tic money Incom e o n ly a f t e r t h e I n c r e a s e In e x p o r t e a r n in g s h a s a c c ru e d t o t h e p r i v a t e s e c t o r , and a s su c h c an o n ly p r e v e n t th e " s e c o n d a ry " r i s e In money lmcome. E x p o rt d u t i e s , on th e o t h e r h a n d , can b e d e v is e d t o p r e v e n t a l l o r p a r t o f t h e I n i t i a l I n c r e a s e In e x p o r t p ro c e e d s from b e in g t r a n s m it t e d t o t h e p r i v a t e s e c t o r . To t h i s e x te n t th e u s e o f e x p o rt ta x e s I s a s t r o n g e r m easu re th a n e i t h e r Im p o rt d u t i e s o r th e ad v an c e d e p o s i t te c h n iq u e . P r o t e c t i v e t a r i f f s have t o be u se d s e l e c t i v e l y on c e r t a i n p r o d u c ts t o e n c o u ra g e th o s e I n d u s t r i e s m ost l i k e l y t o su o c e e d ; th e y sh o u ld b e u se d In c o n ju n c tio n w ith o t h e r m e a su re s w hich can s t i m u l a te In v e s tm e n t. T a r i f f s m ust b e accom panied by t h e m o b il i z a ti o n o f c a p i t a l f o r econom ic d e v elo p m e n t and t h e e x p a n sio n o f th e d o m e s tic m a rk e t. E xchange c o n t r o l s a r e a ls o n e c e s s a r y t o p r e v e n t l i q u i d c a p i t a l from le a v in g th e c o u n try to e s c a p e t a x e s , o r t o se e k h ig h e r p r o f i t s a b ro a d . I t s h o u ld b e empha s i z e d , h o w ev er, t h a t exchange c o n t r o l s m ust n o t o n ly b e u se d to p r e v e n t su c h d r a i n s o f w e a lth , b u t a l s o t o en c o u ra g e i t s In v e s tm e n t i n th e d o m e s tic m a rk e t. 319 I f econom ic d e v e lo p m e n t p la n s a r e s u c c e s s f u l , im p o rt r e s t r i c t i o n s w ould n o t in v o lv e a d e o li n e i n t o t a l im p o r ts , b u t r a t h e r a change i n t h e i r c o m p o s itio n . By o o n t r a s t , t r a d e r e s t r i c t i o n s im posed by t h e i n d u s t r i a l c o u n tr i e s a r e l i k e l y to re d u c e th e volum e o f i n t e r n a t i o n a l t r a d e , f o r th e s e c o u u tr i e s a r e much m ore s e l f - s u f f i c i e n t th a n a r e th e l e s s d e v e lo p e d t r a d e p a r t n e r s . T h u s, th e a d o p tio n o f a f r e e t r a d e p o l i c y by t h e i n d u s t r i a l o o u n tr le s s h o u ld n o t be c o n tin g e n t upon t h e d e v e lo p in g c o u n tr i e s d o in g th e sam e. T hese c o u n t r i e s a r e n o t p re p a re d t o l e t m a rk e t f o r c e s d e c id e w h e th e r to b u i ld r a c e t r a c k s o r h y d r o e l e c t r i c p l a n t s , w h e th e r t o im p o rt lu x u r y a u to m o b ile s o r t r a c t o r s . I t s h o u ld a l s o b e em p h asized t h a t th e o n ly p r a c t i c a l and p ro m is in g a l t e r n a t i v e t o c o v e r a t l e a s t p a r t o f th e e x p e c te d h ig h t r a d e d e f i c i t l i e s in th e d ev elo p m e n t o f new e x p o r ts by d e v e lo p in g c o u n tr i e s and in th e a c c e p ta n c e o f su c h e x p o r ts by th e i n d u s t r i a l c o u n t r i e s . T h is p ro b le m , t h e r e f o r e , h a s become a w o rld -w id e i s s u e , e s p e c i a l l y s in c e th e f i r s t U n ite d N a tio n s C o n fe re n c e on T rad e and D evelopm ent h e ld in G eneva i n 1 9 6 4 . In c o n c lu s io n , i n d u s t r i a l i z a t i o n and t h e c o n se q u e n t in c r e a s e in th e l e v e l o f incom e o f d e v e lo p in g c o u n tr i e s may b e c o n d u c iv e to m ore t r a d e r a t h e r th a n to a c t a s i t s d e t e r r e n t . The id e a t h a t th e i n d u s t r i a l i z a t i o n 320 o f t h e s e c o u n tr i e s w i l l a f f e c t th e p r o s p e r i t y o f th e i n d u s t r i a l c o u n tr i e s a d v e r s e ly seem s t o be u n r e a l i s t i c in th e c o n te x t o f p r e s e n t e x p e rie n c e o f d e v e lo p in g c o u n t r i e s . C h a p te r V II d e a l t w ith th e r o l e o f m o n etary and f i s c a l p o l i c i e s in f o r e i g n t r a d e s t r a t e g y . In m ost d e v e lo p in g c o u n t r l e s f s p e c i f i c f i s c a l and m o n e ta ry m ea su re s h av e b een a d o p te d f o r in d u c in g i n d u s t r i a l d e v e lo p m e n t. The m ost common a r e t a x i n c e n ti v e s and e a s y c r e d i t . U s u a lly e x e m p tio n s from Im p o rt d u t i e s on m a c h in e ry and raw m a t e r i a l s u se d by th e i n d u s t r i e s , from a b u s in e s s t a x , o r from th e c o r p o r a te incom e t a x , e t c e t e r a , a r e g iv e n f o r s p e c i f i c p e r i o d s . L ib e r a l d e p r e c i a ti o n a llo w a n c e s , c a r r y in g o v e r i n t o s u b s e q u e n t y e a r s in c a s e o f l o s s e s i n th e c u r r e n t y e a r , a r e a l s o g e n e r a l l y o f f e r e d . When t h e r e i s o r e d i t c o n tr o l in d e v e lo p in g o o u n t r le s , u s u a l ly th e m o n etary a u t h o r i t i e s p e r m i t, o r even s u p p o r t, a m ore l i b e r a l e x te n s io n o f c r e d i t by com m ercial b a n k s t o im p o rt c o m p etin g an d e x p o rt i n d u s t r i e s . Som etim es r e d is c o u n t and r e f i n a n c e f a c i l i t i e s a t low i n t e r e s t r a t e s a r e o f f e r e d . The e f f e c t s o f t h e s e m e a su re s have to be w eighed a g a i n s t th o s e o f t r a d e and exchange m e a s u re s . F o r in s t a n c e , th e p o s i t i v e e f f e c t s d e r iv e d from t a x and o t h e r in c e n ti v e s may b e l a r g e l y o f f s e t by th e n e g a tiv e e f f e c t s 321 o f an o v e rv a lu e d e x ch an g e r a t e . T h u s, i t I s th e " t o t a l e f f e c t " o f a l l th e s e p r o t e c t i v e and I n c e n t iv e m e a su re s In th e f i e l d s o f t r a d e , e x c h a n g e , c r e d i t , t a x a t i o n , e t c e t e r a , v h lo h m a t t e r s In c o n s id e r in g th e t o t a l l e v e l o f p r o t e c t i o n . C hanges in m o n e ta ry I n s t i t u t i o n s an d f i s c a l s t r u c t u r e f a v o r a b le f o r i n d u s t r i a l d e v elo p m e n t a r e r e q u i r e d . F o r i n s t a n c e , th e te n d e n c y o f th e co m m ercial b a n k s to k eep a h ig h p e r c e n ta g e o f t h e i r d e p o s i t s i n l i q u i d form i s c o n s id e re d a s one o f th e m ain o b s t a c l e s in c a r r y in g o u t an e f f e c t i v e m o n e ta ry p o l i c y . I f co m m ercial b an k s cure to be a s s ig n e d a s i g n i f i c a n t r o l e in th e econom y, i t becom es n e c e s s a r y to in f lu e n c e t h e i r d e c i s i o n s . T h u s, t h i s to o c a u tio u s p o l i c y o f th e co m m ercial b an k s in d e v e lo p in g c o u n t r i e s s h o u ld b e m itig a te d b y an i n i t i a t i v e o f th e c e n t r a l b a n k s i n th e s e c o u n tr i e s t o g u a ra n te e th e com m ercial b a n k s a g a i n s t r i s k s e m a n a tin g from t h e i r le n d in g p o l i c y . I t i s to be n o te d t h a t t h i s p o l ic y was a d v o c a te d by th e C e n tr a l Bank o f I r a q a f t e r 1958 w hich l e d to th e e x p a n sio n i n b a n k in g c r e d i t f o r i n d u s t r i a l d e v e lo p m e n t. F i n a l l y , i t s h o u ld be n o te d t h a t e x te n s iv e and e f f i c i e n t u s e o f f i s c a l p o l ic y i s i n d is p e n s a b le to a c c e l e r a t e econom ic d e v e lo p m e n t. F i s c a l p o l i c y c a n t (1 ) a f f e c t t h e a l l o c a t i o n o f r e s o u r c e s , (2 ) a l t e r th e 322 d i s t r i b u t i o n o f in co m e, (3 ) p ro m o te c a p i t a l a c c u m u la tio n , and (4 ) r e s t r a i n i n f l a t i o n . C h a p te r V I I I d is c u s s e d t h e s t r a t e g y o f f o r e ig n t r a d e p la n n in g . P la n n in g o f f o r e i g n t r a d e in v o lv e s two d i s t i n c t b u t in te r c o n n e c te d o p e r a t io n s : th e a l l o c a t i o n o f e x p o rt-p ro m o tin g and i m p o r t - s u b s t i t u t i n g in v e s tm e n ts , and t h e a l l o c a t i o n o f th e c a p a c ity t o im p o rt. The aim i s f i r s t to m axim ize t h e c o u n t r y 's c a p a c ity t o im p o rt th ro u g h e x p o rt p ro m o tio n o r t o re d u c e i t s d e p en d e n ce on im p o r ts , w h ic h e v e r w i l l p ro v e m ore e f f i c i e n t by m aking th e b e s t from th e g iv e n in v e s tm e n t. The f i r s t a s p e o t p e r t a i n s to m acroeconom ic p la n n in g , th e se co n d t o o p e r a tin g f o r e i g n t r a d e . The r o l e o f th e e x te r n a l s e c t o r i n th e econom ic g ro w th o f d e v e lo p in g c o u n tr i e s i s d o m in a te d by two f a c t s : one i s th e te n d e n c y f o r th e e x p o rt e a r n in g s o f th e s e c o u n tr i e s ( e x c lu d in g o i l- p r o d u c in g c o u n t r i e s ) to in c r e a s e a t a v e ry low r a t e . The o t h e r i s th e e v id e n t n e ed o f t h e s e c o u n tr i e s f o r an e x p an d in g volum e o f c a p i t a l goods and s e r v i c e s r e q u ir e d f o r d e v e lo p m e n t. T h u s, th e e x te r n a l s e c t o r may be se e n a s a c h a n n e l th ro u g h w h ich th e im b a l a n c e s t h a t f r e q u e n t ly em erge i n th e d o m e s tic s e c t o r s o f th e economy can b e r e l i e v e d . I t s h o u ld a ls o be n o te d t h a t th e f u n o tlo n o f a dynam ic f o r e i g n t r a d e s t r a t e g y i s t o h e lp to r e a l i z e 323 im m ed iate and s h o r t - r u n n a t i o n a l o b j e c t i v e s . The im p o rt a n c e o f f o r e ig n t r a d e s t r a t e g y ste m s from th e f a c t t h a t no m edium -term p la n c o u ld f o r e s e e a l l e le m e n ts o f i n s t a b i l i t y o r random f o r c e s ; t h a t t a s k c o u ld b e b e t t e r p e r form ed o n ly th ro u g h p la n s c o v e rin g a s h o r t e r tim e p e r i o d , su c h a s a n n u a l p l a n s . T h is s t r a t e g y h a s b een r e c e n t l y a d v o c a te d in I r a q . C h a p te r IX d e a l t w ith th e s t r u c t u r e o f t h e I r a q i economy and i t s p a t t e r n o f f o r e i g n t r a d e . B eal n a t i o n a l incom e and r e a l p e r c a p i t a incom e have in c r e a s e d a t a n n u a l r a t e s o f 5*5 p e r c e n t and 3 p e r c e n t , r e s p e c t i v e l y , d u rin g t h e p e r io d 1 9 5 3 -6 3 . A g r ic u ltu r e p r o v id e s em ploym ent f o r m ore th a n 70 p e r c e n t o f th e t o t a l w o rk in g p o p u la tio n and a c c o u n ts f o r o n ly a b o u t 25 p e r c e n t o f t h e g r o s s n a t i o n a l p r o d u c t. M a n u fa c tu rin g (e x c lu d in g th e o i l s e c t o r ) a c c o u n ts f o r a b o u t 12 p e r c e n t o f th e g r o s s n a t i o n a l p r o d u c t. In d u s t r i a l o u tp u t expanded by a b o u t 12 p e r c e n t a y e a r d u r in g th e p e r io d 1 9 5 3 -6 3 . U n til t h e m i d - f i f t i e s , th e m anufac t u r i n g I n d u s tr y c o n s is te d o f a v e ry l i m i t e d ra n g e o f I n d u s t r i e s . S in c e th e n , some d i v e r s i f i c a t i o n h a s ta k e n p l a c e , m a in ly th ro u g h th e e s ta b lis h m e n t and e x p a n sio n o f a num ber o f r e l a t i v e l y l a r g e - s c a l e governm ent-ow ned e n t e r p r i s e s . I t sh o u ld a ls o be n o te d t h a t th e s t r u c t u r e o f o w n e rsh ip i n th e m a n u fa c tu rin g s e o t o r h a s ohanged co n - 324 s i d e r a b l y fo llo w in g th e n a t i o n a l i z a t i o n m e a su re s in J u l y , 1 9 6 4 . The s h a r e o f th e p u b lic s e c t o r in th e p a id up c a p i t a l o f m a n u fa c tu rin g i n d u s t r i e s r o s e from 53 p e r c e n t in 1963 to 76 p e r c e n t in 1 9 6 4 . On an a v e ra g e a n n u a l b a s i s , o i l p r o d u c tio n h a s grown a t a h ig h e r r a t e th a n th e r a t i o n a l p ro d u c t s in c e 1 9 5 3 . The o i l s e c t o r p ro v id e d a b o u t 60 p e r c e n t o f I r a q 's f o r e ig n exchange e a r n in g s in 1953 a s com pared w ith 80 p e r c e n t in 1963* and a c c o u n te d f o r a b o u t 20 p e r c e n t o f th e g r o s s n a t i o n a l p r o d u c t in 1953 a g a i n s t 30 p e r c e n t in 1 9 6 3 . T hus, o i l o c c u p ie s a fo re m o s t p o s i t i o n in I r a q 's e x p o rt t r a d e . The s h a re o f o i l e x p o rts in t o t a l e x p o r ts ra n g e s b etw een 90-95 p e r c e n t , d e p e n d in g on th e p e rfo rm a n c e o f n o n - o il e x p o r ts , e s p e c i a l l y a g r i c u l t u r a l p r o d u c ts w hich a r e s u b j e c t to c li m a t ic c o n d it i o n s , and on th e r a t e o f I n c r e a s e in th e demand f o r o i l in w o rld m a rk e t. S in c e I r a q i s a p rim a ry p ro d u c in g c o u n tr y , i t i s an e x p o r te r o f raw m a t e r i a l s and an im p o r te r o f m anufac tu r e d g o o d s. The demand f o r raw m a t e r i a l s , e s p e c i a l l y c ru d e o i l , in th e E uropean m a rk e t h a s in f lu e n c e d th e d i r e c t i o n o f I r a q 's f o r e ig n t r a d e , in a d d it i o n to I r a q 's h i s t o r i c a l t i e s w ith th e W est in g e n e r a l and w ith B r i t a i n in p a r t i c u l a r . As f a r a s th e b a la n c e p aym ents i s c o n c e rn e d , i t s h o u ld b e n o te d t h a t f o llo w in g th e l a r g e p ay m en ts d e f i c i t I n 1 9 6 4 , b a la n c e was a t t a i n e d In 1965 r e p r e s e n t i n g an Im provem ent In th e p ay m en ts p o s i t i o n I n th e l a t t e r y e a r o f a b o u t ID 21 m i l l i o n . The Im provem ent was d u e e n t i r e l y t o a r e d u c tio n o f th e same am ount In t h e d e f i c i t on th e n o n - o i l c u r r e n t a c c o u n t. In c r e a s e d r e c e i p t s from th e o i l s e c t o r w ere o f f s e t by a d e c l in e In n e t c a p i t a l In flo w on governm ent a c c o u n t. The r e d u c tio n In th e c u r r e n t a c c o u n t d e f i c i t was m a in ly th e r e s u l t o f a d e c l in e in Im p o rts o f ID 15 m i l l i o n , r e f l e c t i n g good c ro p s in 1965 . The Im proved a g r i c u l t u r a l s i t u a t i o n a ls o p e r m itte d in c r e a s e d e x p o r ts o f b a r l e y , d a t e s , and s k i n s . M o reo v er, expanded p r o d u c tio n c a p a c ity p e r m itte d an in c r e a s e in cem ent e x p o r ts . As f a r a s th e r e s t r i c t i v e sy stem i s c o n c e rn e d , i t I s to b e n o te d t h a t s in c e th e n a t i o n a l i z a t i o n m e a su re s i n J u l y , 1 9 6 4 , a t w h ich tim e a l a r g e p a r t o f th e f o r e ig n t r a d e s e c t o r was t r a n s f e r r e d to th e p u b l ic s e c t o r , th e Im p o rt sy stem h a s b een s u b je o t to a num ber o f c h a n g e s. H ow ever, in i t s b a s i c f e a t u r e s i t rem a in s l i t t l e ch a n g ed , and t h e r e l i a n c e on I n d iv id u a l l i c e n s i n g o f t r a d e a s w e ll a s o t h e r t r a n s a c t io n s c o n tin u e s in e f f e c t . Im port l i c e n s e s a r e g e n e r a lly I s s u e d on a l i b e r a l b e s. *. How e v e r , t h e r e I s a l i s t o f s e v e n ty ite m s w hose Im p o r ta tio n i s p r o h ib it e d f o r p r o t e c t i v e r e a s o n s , and a c e r t a i n amount 326 o f d is c r im in a t io n i s p r a c t ic e d under b i l a t e r a l a rr a n g e m en ts. In c o n c lu s io n , a l l o c a t i o n s o f f o r e i g n ex ch a n g e f o r Im p orts a r e made on th e b a s i s o f a f o r e ig n ex ch a n g e bud g e t p r ep a r ed a n n u a lly . In p r i n c i p l e , t h e Im port program i s d e s ig n a t e d to r e d u c e t h e d e f i c i t i n t h e b a la n c e o f p a y m en ts, t o l i m i t Im p orts o f lu x u r y and u n e s s e n t ia l g o o d s, t o p r o t e o t d o m e s tic I n d u s tr y , and to p r o v id e f o r a d eq u a te s u p p lie s o f raw m a t e r ia ls and c a p i t a l g o o d s r e q u ire d f o r I n d u s t r i a l d e v e lo p m e n ts. F i n a l l y , C hapter X a d d r e sse d i t s e l f t o I r a q 's f o r e ig n tr a d e and eco n o m ic d e v e lo p m e n t. The m ost s t r i k i n g f e a t u r e o f I r a q 's f o r e ig n tr a d e i s t h e in c r e a s in g depend en cy o f th e I r a q i econom y on th e o i l s e c t o r . T h is can b e s u b s t a n t ia t e d b y th e f a c t t h a t in 1 9 5 0 f o r e ig n tr a d e a c co u n ted f o r 37 p e r c e n t ( e x c lu d in g o i l e x p o r t s ) and 51 p e r c e n t ( in c lu d in g o i l e x p o r t s ) o f t h e n a t io n a l in co m e. In 1957» f o r e i g n t r a d e ( i n c lu d in g o i l e x p o r ts ) a c c o u n te d f o r 70 p e r o e n t o f th e n a t i o n a l Incom e, w h e re a s th e s h a re o f o t h e r e x p o r ts d e c r e a s e d to 4 p e r c e n t a s com pared w ith 12 p e r o e n t i n 1 9 5 0 . I t sh o u ld b e n o te d t h a t th e in c r e a s in g d ep en d en cy o f th e I r a q i econom y upon th e o i l s e c t o r h a s b een accom p a n ie d by a downward movement in th e term s o f t r a d e . T h is phenomenon can be a t t r ib u t e d t o th e f a o t t h a t w h ile 327 p r i c e s o f I r a q 's e x p o r ts and im p o rts a r e d e te rm in e d by th e demand and s u p p ly i n w o rld m a rk e t, p r i c e s o f c ru d e o i l a r e d e te rm in e d by th e m a jo r o i l com panies c o n t r o l l i n g th e w o rld m a rk e t. T h u s, th e " p r e b is c h t h e s i s " f i n d s su p p o r t in I r a q 's e x p e r ie n c e . T h is can be r e a l i z e d i f B r i t a i n ' s te rm s o f t r a d e a r e com pared w ith t h a t o f I r a q 's . T h is i s e s p e c i a l l y s i g n i f i c a n t , a s B r i t a i n h a s a lw ay s b e en I r a q 's m a jo r t r a d e p a r t n e r . The h ig h c o r r e l a t i o n b etw een im p o rts and o i l r e v e n u e s seem s t o i n d i c a t e t h a t o i l re v e n u e s a r e th e o n ly im p o rta n t v a r i a b l e s a f f e c t i n g n o t o n ly th e l e v e l o f I r a q 's im p o rts b u t a ls o th e r a t e o f econom ic g ro w th . The f a l l i n th e c a p a c ity to Im p o rt in 1 9 5 6 -5 7 due to th e Suez C r i s i s l e d th e go v ern m en t to im pose s t r i c t r e s t r i c t i o n s on im p o r ts . As a r e s u l t , im p o rts f e l l by a b o u t 11 p e r o e n t in 1958* S in c e 1951* th e c o m p o s itio n o f I r a q 's im p o rts h a s changed g r e a t l y i n f a v o r o f c a p i t a l g o o d s. The s h a r e o f c a p i t a l goods in th e t o t a l v a lu e o f im p o rts in c r e a s e d from a b o u t 21 p e r c e n t in 1951 to 50 p e r c e n t in 1965* The e x p a n sio n in th e Im p o rts o f c a p i t a l goods a f t e r 1951 can b e a t t r i b u t e d to th e im p le m e n ta tio n o f d ev elo p m en t p ro g ram s sp o n s o re d by th e new ly e s t a b l i s h e d D evelopm ent B oard w h ich was e n t r u s te d w ith 70 p e r c e n t o f o i l r e v e n u e s f o r eoonom ic d e v e lo p m e n t. 328 The p u b l i c s e c t o r I n I r a q i s by f a r th e l a r g e s t I n v e s t o r in I n d u s tr y ; p r i v a t e s e c t o r In v e s tm e n t I s a lm o s t e x c l u s i v e l y in r e s i d e n t i a l c o n s t r u c t io n and t r a n s p o r t a t i o n . P r i v a t e s e c t o r in v e s tm e n t h a s b e en pro m o ted th ro u g h Nth e I n d u s t r i a l P ro m o tio n Law* w hich p r o v id e s t a x and o t h e r i n c e n t i v e s f o r p r i v a t e in v e s tm e n t. I t s h o u ld a l s o be n o te d t h a t r a t e s o f i n h e r i ta n c e t a x e s have r e c e n t l y been lo w e re d and a r e d u c tio n in incom e t a x r a t e s becam e e f f e c t i v e A p r il 1 , 1 9 6 6 . T hese t a x r e d u c t io n s w ere in te n d e d to im prove p r i v a t e s e c t o r c o n fid e n c e and c o n s e q u e n tly p r i v a t e In v e s tm e n t a c t i v i t y . I t s h o u ld a ls o b e ad d ed t h a t th e I n d u s t r i a l Bank i s th e m ain i n s t i t u t i o n p r o v id in g c r e d i t a t low I n t e r e s t r a t e s f o r I n d u s t r i a l u n d e rta k in g s i n th e p r i v a t e o r m ixed s e c t o r s . T h u s, s tr e n g th e n in g th e r e s o u r c e s o f t h i s bank i s s t r o n g l y recom m ended. F o llo w in g th e n a t i o n a l i z a t i o n m e a su re s in J u l y , 1 9 6 4 , p r i v a t e a c t i v i t y s ta g n a te d and c r e d i t to th e p r i v a te s e c t o r d e c l in e d . B ut i n t h e seco n d h a l f o f 1965 th e d e c l in e was l a r g e l y a r r e s t e d . T h is was e s p e c i a l l y d u e t o th e r o l e o f th e C e n tr a l Bank in I r a q in e n c o u ra g in g co m m ercial b an k s to expand t h e i r o r e d l t f o r i n d u s t r i a l d e v e lo p m e n t. I t s h o u ld b e n o te d , h o w ev er, t h a t th e d e c l i n e in c r e d i t to th e p r i v a t e s e c t o r p r o p e r was s h a r p e r th a n I n d ic a te d by m o n e ta ry d a t a s ln o e th e l a t t e r con tin u e d to i n c lu d e , in th e p r i v a t e s e c t o r , c r e d i t to th e 329 n a t io n a l i z e d e n t e r p r is e s t o w h ich in c r e a s e d bank f a c i l i t i e s w ere e x te n d e d . In c o n c lu s io n , I r a q 's i n d u s t r i a l i z a t i o n program s depend t o a g r e a t e x t e n t on th e im p ort o f c a p i t a l g o o d s and o t h e r d u r a b le g o o d s r e q u ir e d f o r d e v e lo p m e n t. The o a p a c lty t o im p o r t, on th e o t h e r han d , d ep en d s fu n d a m e n ta lly on t h e volum e o f th e c o u n t r y 's e x p o r ts and th e p r i c e r e l a t i o n s h i p b etw een i t s e x p o r ts and im p o r ts . I t f o l l o w s , t h e r e f o r e , t h a t f o r e ig n tr a d e i s t h e m ost im p o r ta n t in d ic a t o r o f I r a q 's f u t u r e d ev e lo p m e n t. C o n c lu sio n s One o f th e m ain c o n c lu s io n s o f t h i s s tu d y i s t h a t f o r e ig n tr a d e p la y s a s i g n i f i c a n t r o l e in th e econ om ic g row th o f d e v e lo p in g c o u n t r ie s . T hus, h ig h e r r a t e s o f econ om ic grow th te n d t o b e a s s o c i a t e d w ith h ig h e r r a t e s o f e x p o r t g ro w th . C o n v e r s e ly , m ost o o u n t r ie s w ith lo w r a t e s o f e x p o r t grow th a l s o te n d t o h a v e , in g e n e r a l, lo w r a t e s o f econ om ic g ro w th . In an a tte m p t t o a c c e l e r a t e th e r a t e o f t h e i r econ om ic g ro w th , th e d e v e lo p in g c o u n t r ie s have to c r e a t e and s t im u la t e new I n d u s t r ie s t o a v o id , n r a t l e a s t to l e s s e n , th e d ep en d en cy upon a few p rim a ry p r o d u c ts a s a b a s i s f o r t h e i r i n d u s t r i a l d e v e lo p m e n t. In o r d e r t o f in a n c e t h e i r g ro w in g im p o rts and to 330 s e r v i c e t h e i r f o r e ig n b o r r o w in g s , th e d e v e lo p in g coun t r i e s w i l l h a v e t o a c h ie v e a r a p id and s u b s t a n t i a l In c r e a s e In t h e i r e x p o r t p r o c e e d s . F a ilu r e t o a t t a i n su c h an I n c r e a s e , o r t o r e c e i v e e v e r la r g e r f o r e ig n a i d , w ould Im pose a f o r e ig n ex o h a n g e c o n s t r a in t on t h e i r g r o w th , e v e n th ough t h e m ajor tr a n s fo r m a tio n r e q u ir e d I s In t h e i r I n t e r n a l econ om ic and s o c i a l s t r u c t u r e and In t h e i r c a p a c it y to s a v e and i n v e s t . Ira q I l l u s t r a t e s a m odel o f e x p o r t - le d g ro w th In t h e s e n s e t h a t o i l e x p o r t s p r o v id e a lm o st th e o n ly s tim u lu s f o r g ro w th . H ow ever, th e I n c r e a s in g d ep en d en cy o f t h e I r a q i economy upon th e o i l s e c t o r h as b een accom pan ie d by a downward movement In t h e term s o f t r a d e . T hus, t h e " P r e b isc h t h e s is " f i n d s su p p o r t in I r a q 's e x p e r ie n c e . In th e c u r r e n t w o rld s i t u a t i o n , s m a ll c o u n t r ie s r e c o g n iz e th e a d v a n ta g e o f tr a d e and w i l l c o u r t t h a t g r e a t pow er w h ich o f f e r s them th e b e t t e r t r a d in g advan t a g e s . The e x p e r ie n c e o f some d e v e lo p in g c o u n t r ie s s e r v e s to I l l u s t r a t e t h e h y p o th e s is t h a t tr a d e I s an Im p o rta n t d e te r m in a n t o f p o l i t i c a l l e a n i n g s . T h u s, Im p o r t r e s t r i c t i o n s on t h e p a r t o f g r e a t p ow ers may s e r v e t o a l i e n a t e t h e a f f e c t i o n s o f s m a ll d e v e lo p in g c o u n t r ie s . F i n a l l y , In o r d e r t o r e c o n s t i t u t e a dynam ic tr a d e th e o r y w hich I s t o b e more a p p r o p r ia te t o t h e p ro b lem s o f econ om ic grow th o f d e v e lo p in g c o u n t r ie s , t h e c l a s s i c a l 331 th e o r y o f i n t e r n a t i o n a l t r a d e n e e d s t o b e m o d ifie d by th e a s s u m p tio n s o f g ro w th th e o r y . T h u s, m ore r e s e a r c h n e e d s to be done t o s u b s t a n t i a t e t h e im p o rta n c e o f s u c h a th e o r y a s a b a s i s f o r i n d u s t r i a l d e v elo p m e n t o f d e v e lo p in g c o u n t r i e s . BIBLIOGRAPHY 332 333 BIBLIOGRAPHY Books Atallah, M. K. The Long-Term Movement of the Terms of Trade Between Agricultural and Industrial Pro ducts . Rotterdam: Netherland Economic Institute, 19557 B a la s s a , B. T rad e P r o s p e c ts f o r D e v e lo p in g C o u n t r ie s . Homewood, I l l i n o i s : R ic h a rd D. I r w in , I n c . , 1 9 6 ^ . B oeke, J . H. 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"New Y o rk , 1 9 5 3 . 3^1 U n ite d N a tio n s : Econom ic S u rv ey o f A s ia an d th e F a r E a s t. 1 9 6 l“ B angkok, 1 9 6 2 . . The C a p it a l D evelopm ent N eeds o f th e L e ss D eveloped C o u n t r ie s . New Y ork. 19&2. ________ . Eoonomio finmmis s lo n f o r A s ia and th e F a r E a s t . New Y ork, 1 9 6 2 . . Eoonomio S u rv e y o f A sia and th e F a r E a s t . New Y ork, 1 9 6 3 . . W orld Econom ic S u rv e y . New Y ork, 1963 . ________ . Eoonomio B u l l e t i n f o r L a t in A m e ric a . V o l. IX , No. 2 , Novem ber, 1 9 6 4 . ________ • I n d u s t r i a l i z a t i o n and P r o d u c t i v i t y . B u l l e t i n 9, New Y ork, 1965• ________ . UNCTAD. Terms o f T rad e and th e C o n cep t o f Im p o rt P u rc h a s in g Pow er o f th e E x p o rts o f D ev elo p in g C o u n t r ie s . A P r e lim in a r y R e p o r t. New Y ork. M arch, 1 9 6 6 . S T A T I S T I C A L A P P E N D I X 3^2 TABLE 25 G RO W TH INDICES OP GROSS NATIONAL PRODUCT AT CONSTANT FACTOR COST PRICES BY INDUSTRIAL ORIGIN (1953 = 100 ) Compound G row th R a te 1953/1963 1953 1958 1961 1962 1963 (P e r C en t) A g r ic u ltu r e M ining and Q u a rry in g M a n u fa c tu rin g (* ) C o n s tr u c tio n W ater and E l e c t r i c i t y T r a n s p o r t, C om m unication an d S to r a g e P u b lic A d m in is tr a tio n and D e fe n se O th e r S e r v i c e s ' * G ro ss N a tio n a l P ro d u c t GNP ( i n m i l l i o n s o f d i n a r s ) G row th In d e x 100 104 114 133 94 - 0.6 % o f GNP 30 23 19 21 15 G row th In d e x 100 138 193 194 223 8 .4 % o f GNP 22 25 26 25 29 G row th In d e x 100 183 289 315 310 1 1 .5 % o f GNP 7 9 11 12 12 G row th In d e x 100 201 149 122 125 2 .4 % o f GNP 5 7 5 3 3 G row th In d e x 100 239 408 484 499 1 6 .7 % o f GNP 0.3 0 .8 1 .0 1 .0 1 .3 G row th In d e x 100 127 184 192 187 6 .0 % o f GNP 8 7 8 8 8 G row th In d e x 100 152 211 244 272 1 0 .5 % o f GNP 8 9 9 10 12 G row th In d e x 100 153 189 197 193 6 .9 % o f GNP 19 19 20 20 19 100 139 178 190 185 6 .4 285 395 506 541 528 VuJ V*) S o u rc e : M in is tr y o f P la n n in g . 1 . I n c lu d in g o i l r e f i n i n g . 2 . I n c lu d in g w h o le s a le and r e t a i l t r a d e , b a n k in g , in s u r a n c e , r e a l e s t a t e , and o t h e r s e r v i c e s . TABLE 26 PER CAPITA NATIONAL INCOME 1953-63 N a tio n a l Incom e ( I n m il l io n s d i n a r s ) P o p u la tio n i n M illio n s P e r C a p ita Incom e ( I n d i n a r s ) Y ear C u r re n t 1956 P r lo e s P r lo e s C u r r e n t % I n c r e a s e 1956 P r i c e s O ver P r e - P r i c e s % I n c r e a s e O ver P r e - c e d in g o e d ln g Y ear Y ear 1953 2 4 5 .9 265.2 5 .8 4 2 .2 -------- 4 5 .5 -------- 195^ 2 8 5 .8 3 2 2 .5 5 .9 4 8 .1 1 4 .0 5 4 .2 1 9 .1 1955 2 9 1 .2 3 0 1 .4 6 .0 4 8 .0 - 0 .2 4 9 .7 - 8.3 1956 3 3 7 .6 3 3 7 .6 6 .2 5 4 .6 1 3 .8 5 4 .6 9 .9 19 57 3 5 5 .4 3 5 1 .8 6 .3 5 6 .4 3 .3 5 5 .8 2 .2 1958 3 7 8 .7 3 6 7 .0 6 .4 5 9 .0 4 .6 5 7 .1 2.3 1959 3 9 6 .1 3 7 2 .6 6 .5 6 0 .5 2 .5 5 6 .9 - 0 .4 I9 6 0 4 4 9 .7 4 2 4 .1 6 .7 6 7 .4 1 1 .4 6 3 .5 1 1 .6 1961 4 8 5 .7 4 7 0 .3 6 .8 7 1 .4 5 .9 69.1 8 .8 1962 5 2 6 .5 5 0 3 .1 6 .9 7 5 .9 6 .6 7 2 .5 5 .2 1963 5 1 5 .4 4 8 9 .5 7 .0 7 2 .9 4 .0 69.2 4 .6 V jJ S ou rce: C en tra l Bank o f Ira q : Annual R eport 1 9 6 3 . ^ TABLE 2? SU M M A RY OP IRAQ'S FOREIGN TRADE ( I n m i l l i o n s o f d i n a r s ) Im n o rts E x n o rts R e -E ro o rts By O il O th e r C rude O th e r By O il T rad e Y ear Com panies Im p o rts T o ta l O il E x p o rts Com panies O th e rs T o ta l B a l. 1952 1 4 .4 3 4 7 .4 2 6 1 .8 5 7 9 .6 0 1 8 .7 8 __ __ 9 9 .5 7 3 7 .7 2 1953 1 3 .1 9 5 5 .5 0 68.69 120.70 1 9 .0 7 — — 1 3 9 .9 4 7 1 .2 5 195^ 5 .7 8 68.36 7 4 .1 4 1 3 4 .6 4 1 7 .9 7 — — 1 5 3 .2 1 7 9 .0 7 1955 6.27 90.88 9 7 .1 5 1 6 8 .1 3 1 5 .9 2 1.05 0.26 1 8 5 .3 6 8 8 .2 1 1956 7 .3 9 1 0 7 .1 6 1 1 4 .5 5 1 5 6 .6 4 1 3 .1 7 0.27 0 .4 5 1 7 0 .5 3 5 5 .9 8 1957 1 0 .3 7 1 1 2 .0 5 1 ^ 2 .4 2 1 1 3 .1 6 1 2 .8 8 1 .2 2 1 .1 4 1 2 8 .3 9 5 .9 8 1958 9 .9 8 9 9 .8 2 1 0 9 .8 0 1 8 5 .5 4 1 4 .2 5 1 .2 2 1 .2 3 202.23 9 2 .4 4 1959 1 6 .9 8 i 9 9 .4 0 1 1 6 .3 8 2 0 1 .6 7 1 1 .4 7 0 .4 2 2 .6 8 2 1 6 .2 4 9 9 .8 6 I9 6 0 1 4 .6 0 1 2 4 .3 5 1 3 8 .9 5 2 2 2 .6 3 7 .9 8 0.32 2.7 0 2 3 3 .6 2 9 4 .6 8 1961 1 2 .0 6 1 3 3 .5 3 1 4 5 .5 9 2 2 3 .0 9 7 .8 7 1 .4 3 3 .9 5 2 3 6 .3 4 9 0 .7 5 1962 1 .8 4 1 2 7 .7 3 1 2 9 .5 7 2 2 3 .7 4 1 9 .3 1 1 .6 3 2 .4 6 2 4 7 .1 4 1 1 7 .5 7 1963 1 .5 7 1 1 2 .4 6 1 1 4 .0 3 2 5 8 .9 7 1 6 .7 3 0 .9 0 2.26 2 7 8 .8 5 1 6 4 .8 2 1964 0 .7 1 1 4 6 .7 4 1 4 7 .4 5 2 8 1 .7 6 1 5 .2 9 0 .1 9 2.70 2 9 9 .9 4 1 5 2 .4 9 1965 0 .9 4 161.67 1 6 2 .6 1 2 9 3 .5 9 1 8 .1 2 0 .1 2 3 .1 2 3 1 4 .9 5 1 5 2 .3 4 1966 1 .0 0 1 7 5 .1 0 1 7 6 .1 0 3 0 8 .8 5 2 3 .2 4 0.06 3 .1 7 3 3 5 .3 2 159.22 S o u rc e : C e n tr a l Bank o f I r a q / Q u a r te r ly B u l l e t i n , A p r il- J u n e 1967* T a b le 29* p . 4 2 . VjJ - p- V n TABLE 28 IRAQ'S CRUDE OIL PRODUCTION, EXPORTS. AND REVENUES, 1933-68 P r o d u c tio n E x p o rts P e r c e n ta g e R evenues Y ear M i l l . Tons M i l l . Tons ( 2 ) to (1 ) M i l l . Tons 1933 0 .5 0 .5 100.0 0 .7 1934 0.6 0.6 100.0 0.8 1950 6.2 6.0 9 7 .0 6 .7 1951 8 .1 7 .9 9 7 .0 1 5 .1 1952 1 8 .0 1 7 .7 9 7 .0 3 3 .1 1953 27.2 27.0 9 9 .0 51.2 1954 29.6 2 9 .3 9 9 .0 5 7 .7 1955 3 2 .7 31.6 96.6 7 3 .7 1956 30.6 2 8 .5 9 3 .1 68.8 1957 2 1 .3 1 9 .9 9 3 .4 4 8 .9 1958 3 4 .9 3 3 .2 9 5 .1 7 9 .8 1959 4 0 .9 3 8 .9 9 5 .1 86.6 I 960 4 6 .5 4 4 .7 96.0 9 5 .0 1961 4 8 .0 4 5 .8 9 5 .3 9 4 .8 1962 4 8 .2 4 5 .9 9 5 .2 9 5 .1 1963 5 5 .6 52.2 9 0 .3 110.0 1964 6 0 .3 58.2 9 6 .5 126.0 1965 6 3 .1 6 0 .7 9 6 .1 1 3 1 .4 1966 66.6 6 4 .2 9 6 .4 1 4 0 .8 F ig u r e s f o r th e y e a r s 1933 and 1934 a r e e s t im a t e s . S o u ro e: C a lc u la te d from d a ta p r o v id e d by th e s t a t i s t i c s and r e s e a r c h d ep a rtm e n t. M in is t r y o f O i l , B aghdad. \ TABLE 29 DESTINATION OF OIL EXPORTS (V alu e I n M illio n s o f I r a q i D in a rs ) 1961______________ 1962_____________ 1963____________1964____________1965 A rea V alu e P e r - C e n t V alu e P e r - C e n t V a lu e P e r - C e n t V alu e P e r - C e n t V a lu e P e r - C e n t U n ite d Kingdom 3 1 .9 1 4 .3 3 6 .1 1 6 .1 4 0 .4 1 5 .6 5 5 .8 1 9 .8 4 9 .0 1 6 .7 O th e r S t e r l i n g A rea C o u n trie s 1 1 .6 5 .2 1 0 .3 4 .6 1 6 .3 6 .3 2 1 .8 7 .8 1 7 .2 5 .9 TOTAL STERLING AREA ^ 3 .5 1 9 .5 4 6 .4 2 0 .7 5 6 .7 2 1 .9 7 7 .6 27.6 6 6 .2 2 2 .6 U n ite d S t a t e s and C anada 6 .1 2 .7 0 .7 0 .3 0 .5 0 .2 0 .9 0 .3 7 .8 2 .7 E .E .C . C o u n trie s 1 3 2 .1 5 9 .2 1 3 5 .3 60.5 1 4 9 .8 5 7 .8 1 3 4 .0 4 7 .5 1 4 1 .9 4 8 .3 E .F .T .A . C o u n tr ie s 7 .2 3 .2 7 .3 3 .3 9 .2 3 .6 1 0 .1 3 .6 1 0 .6 3 .6 S o c i a l i s t i c C o u n tr ie s 1 .1 0 .5 1 .5 0 .7 1 .7 0 .6 1 .6 0 .6 2 .0 0 .7 A rab L eague C o u n tr ie s 0 .6 0 .3 2 .7 1 .2 2 .0 0 .8 2 .9 1 .0 5 .3 1 .8 O th e r C o u n trie s 3 2 .5 1 4 .6 29.8 1 3 .3 3 9 .0 1 5 .1 5 4 .6 1 9 .4 5 9 .7 2 0 .3 TOTAL 2 2 3 .1 1 0 0 .0 2 2 3 .7 1 0 0 .0 2 5 8 .9 1 0 0 .0 2 8 1 .7 10C .0 2 9 3 .5 1 0 0 .0 Sou rce: Com piled from v a r io u s Annual R ep orts o f th e C en tra l Bank o f I r a q . V m J I TABLE 30 OIL EXPORTS TO THE PRINCIPAL SEVEN COUNTRIES (V a lu e i n M illio n s o f I r a q i D in a rs ) 1963 1964 19 65 C o u n try V alu e C o u n try V alu e C o u n try V alu e P ra n c e 4 6 .7 U n ite d Kingdom 5 5 .8 U n ite d Kingdom 4 9 .0 I t a l y 4 3 .9 P ra n c e 4 0 .9 F ra n c e 4 8 .6 U n ite d Kingdom 4 0 .4 I t a l y 32.8 I t a l y 4 0 .0 W est Germany 2 7 .0 H o lla n d 2 7 .4 H o lla n d 2 4 .5 H o lla n d 2 3 .8 W est Germany 2 4 .7 W est Germany 2 2 .9 J a p a n 1 1 .6 J a p a n 1 4 .6 J a p a n 2 2 .0 B elgium 8 .4 S o u th A f r i c a 8 .7 B r a z i l 7 .8 TOTAL 2 0 1 .8 2 0 4 .9 2 1 4 .8 GRAND TOTAL 2 5 8 .9 2 8 1 .7 2 9 3 .5 R a tio o f T o ta l to G rand T o ta l 7 7 .9 7 2 .7 7 3 .2 S ou rce: Annual R eport o f th e C en tra l Bank o f I r a q , 1965. V j J ■ p - 00 TABLE 31 COMPOSITION OP EXPORTS^ (I n m illio n s o f d in a r s ) S B B s a B s e B r s s a a B B 8 B S s a B s r a B s s 8 B 8 9 s s a 1961 1962 1963 1964 1965 V alu e P e r C en t V alu e P e r C en t V alu e P e r C e n t V alu e P e r C ent V alu e P e r C e n t B a rle y 0 .8 1 0 .1 6 .1 3 1 .6 0 .8 4 .8 0 .5 3 .3 2 .2 1 2 .2 W heat m m a m - - 1 .1 5 .7 — — — — — — P u ls e s and F lo u r 0 .1 1 .3 0 .1 0 .5 0 .1 0 .6 0 .2 1 .3 6 .1 0 .6 D a te s 2 .8 3 5 .4 7 .1 3 6 .8 9 .0 5 3 .9 6 .2 4 0 .5 5 .7 3 1 .8 Raw C o tto n 0 .2 2 .5 0 .4 2 .1 0 .2 1 .2 0 .6 3 .9 0 .8 4 .6 Raw Wool 0 .9 1 1 .4 1 .1 5 .7 2 .1 1 2 .6 1 .8 1 1 .8 1 .7 9 .4 L iv e A nim als 0 .1 1 .3 0 .1 0 .5 — s a a f e — — 0.1 0 .3 S e e d s 0 .2 2 .5 0 .5 2 .6 0 .2 1 .2 0 .5 3 .3 0.2 1 .1 H id e s an d S k in s 0 .6 7 .6 1 .0 5 .2 1 .0 6 .0 1 .2 7 .8 1 .8 9 .8 Cement 0 .7 8 .9 0 .6 3 .1 1 .4 8 .4 1 .9 1 2 .4 2.3 1 2 .5 F o d d e r and S tra w 0 .4 5 .1 0 .4 2 .1 0 .5 3 .0 0 .5 3 .3 0 .4 2 * 2 ^ ) O th e r 1 .1 1 3 .9 0 .8 4 .1 1 .4 8 .3 1 .9 1 2 .4 2 .8 1 5 . 5 ^ TOTAL 7 .9 1 0 0 .0 1 9 .3 1 0 0 .0 1 6 .7 1 0 0 .0 1 5 .3 1 0 0 .0 1 8 .1 1 0 0 .0 1 . E x clu d in g o i l e x p o r ts & r e - e x p o r t s . Source:A nnual R ep orts o f C en tra l Bank o f I r a q . TABLE 32 DESTINATION OF EXPORTS^ (I n m illio n s o f d in a r s ) 1261 1262 1261 12§ a 1265 P e r ' P e r P e r P e r P e r A rea V a lu e C en t V alu e C en t V a lu e C e n t V alu e C en t V a lu e C en t U n ite d Kingdom O th e r S t e r l i n g A rea C o u n tr ie s 0 .2 1 .5 2 .9 1 8 .6 1 .1 2 .5 5 .9 1 3 .1 0 .9 2 .7 5 .6 1 6 .3 0 .7 3 .4 4 .8 2 2 .2 0 .7 3 .2 4 .0 1 7 .5 T o ta l S t e r l i n g A rea 1 .7 2 1 .5 3 .6 1 9 .0 3 .6 2 1 .9 4 .1 27 .0 3 .9 2 1 .5 U .S . an d Canada 0 .6 8 .1 2 .5 1 2 .7 2 .6 1 2 .8 0 .9 6 .4 0 .8 4 .3 E .E .C . C o u n trie s 0 .2 3 .3 4 .3 2 2 .4 0 .5 2 .9 0 .4 2 .4 0 .7 4 .2 E .F .T .A . C o u n trie s 0 .3 3 .5 1 .4 7 .2 0 .3 1 .7 0 .3 1 .7 0 .2 1 .3 S o c i a l i s t C o u n tr ie s 1 .8 2 2 .7 3 .5 1 8 .0 4 .4 2 6 .3 3 .0 1 9 .8 3 .4 1 8 .4 A rab L eague C o u n trie s 2 .9 3 7 .2 3 .7 1 9 .2 5 .4 32.0 6 .1 4 0 .0 8 .2 4 5 .1 O th e r C o u n tr ie s 0 .3 3 .7 0 .3 1 .5 0 .4 2 .4 0 .4 2 .7 0 .9 5 .2 T o ta l 7 .8 1 0 0 .0 1 9 .3 1 0 0 .0 1 6 .7 1 0 0 .0 1 5 .2 1 0 0 .0 1 8 .1 1 0 0 .0 1 . E x c lu d in g o i l e x p o r ts an d r e - e x p o r t s . S o u rc e : C om piled from v a r io u s A nnual R e p o rts o f th e C e n tr a l Bank o f I r a q . o TABLE 33 EXPORTS (EXCLUDING OIL) TO THE PRINCIPAL SEVEN COUNTRIES (V alu e I n m i l l i o n s o f d i n a r s ) 1963 1964 1965 V alu e V alu e V alu e L ebanon 2 .2 L ebanon 2 .5 L ebanon 2 .6 S o v ie t U nion 2 .0 P e o p l e 's C h in a 1 .8 U .A .R . 1 .9 U n ite d S t a t e s 1 .9 K u w ait 1 .6 P e o p l e 's C hina 1 .8 P e o p l e 's C h in a 1 .6 I n d i a 1 .5 K u w ait 1 .6 K uw ait 1 .3 U n ite d S t a t e s 0 .7 I n d i a 1 1 .3 U n ite d Kingdom 0 .9 S o v i e t U nion 0 .7 S o v i e t U nion 1 .0 I n d i a 0 .8 U n ite d Kingdom 0 .5 S a u d i A ra b ia 1 .0 TOTAL 1 0 .7 TOTAL 9 .3 TOTAL 1 1 .2 GRAND TOTAL 1 6 .7 GRAND TOTAL 1 5 .2 GRAND TOTAL 1 8 .1 R a tio o f T o ta l to G rand T o ta l 6 4 .0 R a tio o f T o ta l to G rand T o ta l 6 0 .9 R a tio o f T o ta l to G rand T o ta l 62,3 V j J Sou rcet Annual R eport o f th e C en tra l Bank o f I r a q , 1965. 'a 352 TABLE 34 COMPOSITION OF IRAQ»S IMPORTS, C . I . F . , 1951-1965 EXCLUDING IMPORTS BY OIL COMPANIES (V alu e i n m i l l i o n s o f d i n a r s ) Y ear Consum er Goods P e r - C en t C a p ita l Goods P e r - C en t T o ta l P e r - C en t 1951 3 4 .2 7 9 .2 9 .0 2 0 .8 4 3 .2 1 0 0 .0 1952 3 5 .0 7 3 .9 1 2 .4 26.1 4 7 .4 1 0 0 .0 1953 3 5 .5 6 4 .0 2 0 .0 3 6 .0 5 5 .5 1 0 0 .0 1954 4 2 .8 6 2 .8 25.6 3 7 .2 6 8 .4 1 0 0 .0 1955 5 5 .6 61.2 3 5 .3 3 8 .8 9 0 .9 1 0 0 .0 1956 63.8 5 9 .5 4 3 .4 4 0 .5 1 0 7 .2 1 0 0 .0 1957 71.0 6 3 .4 4 1 .0 3 6 .6 1 1 2 .0 1 0 0 .0 1958 6 0 .8 6 1 .0 3 9 .0 3 9 .0 9 9 .8 1 0 0 .0 1959 6 6 .8 67.2 3 2 .6 32.8 9 9 .4 1 0 0 .0 i 960 8 4 .7 6 7 .3 4 0 .6 3 2 .7 1 2 4 .3 1 0 0 .0 1961 8 9 .8 6 7 .4 4 3 .7 32.6 1 3 3 .5 1 0 0 .0 1962 7 8 .8 62.9 4 8 .9 3 7 .1 1 2 7 .7 1 0 0 .0 1963 6 0 .2 5 9 .3 5 2 .5 4 0 .7 1 1 2 .7 1 0 0 .0 1964 7 9 .7 5 9 .4 67.0 4 0 .6 1 4 6 .7 1 0 0 .0 1965 7 4 .3 4 9 .6 8 7 .4 5 0 .4 1 6 1 .7 1 0 0 .0 F ig u r e s f o r 1965 a r e e s t i m a t e s . S o u rc e : S t a t i s t i c a l A b s t r a c t , A n n u a l, C e n tr a l B ureau o f S t a t i s t i c s , M in is tr y o f P la n n in g , B aghdad, and C e n tr a l Bank o f I r a q , A nnual R e p o r ts . TABLE 35 COMPOSITION OF IMPOSTS ( I n m il l io n s o f d i n a r s ) B a s a B B s a s s s a s s a a a a B n E n B n B n a B B a a a B B a B B s a a B B i a n a a K B S K E B 1961 1962 1963 1964 1965 V alu e P e r C en t V alu e P e r C en t V alu e P e r C en t V alu e P e r C e n t V alu e P e r C en t S u g a r 7 .7 5 .3 5 .9 4 .6 4 .1 3 .6 1 0 .8 7 .3 1 4 .4 9 .0 Tea 8 .5 5 .8 8 .2 6 .3 8 .8 7 .7 8 .3 5 .6 4 .6 2 .9 C o tto n P ie o e Goods A r t i f i c i a l T e x t il e 3 .9 2 .7 4 .1 3 .2 4 .9 4 .3 5 .1 3 .5 5 .2 3 .2 P ie o e Goods 5 .2 3 .6 5 .3 4 .1 5 .0 4 .4 6 .1 4 .1 7 .9 5 .0 I r o n and S t e e l 1 5 .1 1 0 .4 1 2 .7 9 .8 8 .1 7 .1 9 .9 6 .7 1 3 .2 8 .1 B o ile r s and M ach in ery 1 3 .4 9 .2 1 3 .5 1 0 .4 1 3 .4 1 1 .8 1 2 .0 8 .1 1 5 .6 9 .8 V e h ic le s and P a r t s 9 .6 6 .6 9 .0 6 .9 9 .1 8 .0 9 .8 6 .7 8 .4 5 .1 E l e o t r i c M ach in ery C h em icals S t Pharm a 1 1 .2 7 .7 1 0 .9 8 .4 7 .8 6 .8 1 2 .6 8 .5 1 0 .6 1 0 .4 c e u t i c a l s 4 .7 3 .2 5 .6 4 .3 4 .8 4 .2 5 .0 3 .4 5 .8 3 .6 P a p e r and C ard b o ard 2 .6 1 .8 1 .8 1 .4 1 .9 1 .7 2 .2 1 .5 2 .8 1 .8 T im ber 3 .3 2 .3 3 .2 2 .4 2 .0 1 .8 3 .3 2 .2 4 .3 2 .7 C e r e a ls 1 4 .1 9 .7 4 .4 3 .4 2 .5 2 .2 9 .7 6 .6 2 .3 1 .4 V e g e ta b le O ils T an n in g and D yeing 1 .8 1 .2 1 .6 1 .2 2 .1 1 .8 2 .5 1 .7 5 .7 3 .5 E x tr a c t s 1 .4 0 .9 1 .4 1 .1 1 .3 ' 1 .1 1 .4 1 .0 1 .8 1 .1 W oolen P ie o e Goods 1 .7 1 .2 1 .5 1 .2 1 .0 0 .9 0 .9 1 .0 0 .8 0 .5 O th e r 4 1 .6 2 8 .4 4 0 .5 3 1 .3 3 7 .2 3 2 .6 4 7 .7 3 2 .4 5 0 .5 3 1 .8 TOTAL 1 ^ 5 .7 1 0 0 .0 1 0 0 .0 1 2 9 .6 1 1 4 .0 1 0 0 .0 1 4 7 .4 100.0 154.9 100.0 S o u rc e s: Compiled from v a r io u s Annual R ep orts o f th e C en tra l Bank o f Ir a q . V - 0 O x TABLE 36 DESTINATION OP IMPORTS^ (I n m illio n s o f d in a r s ) A rea 1961 V a lu e P e r C en t 1962 P e r V a lu e C en t 1963 P e r V a lu e C en t 1961* P e r V alu e C en t 1965 P e r V a lu e C en t U n ite d Kingdom 2 1 .3 1 5 .9 1 9 .6 1 5 .3 1 6 .6 1 4 .7 1 8 .2 1 2 .4 1 6 .7 1 0 .5 O th e r S t e r l i n g A rea C o u n tr ie s 2 1 .6 16.2 1 6 .8 1 3 .2 1 7 .9 16.0 2 2 .7 1 5 .5 1 7 .0 1 0 .6 T o ta l S t e r l i n g A rea 1*2.9 32.1 3 6 .4 2 8 .5 3 4 .5 3 0 .7 4 0 .9 2 7 .9 3 3 .7 2 1 .1 U .S . & Canada 1 6 .2 1 2 .1 1 5 .2 1 1 .9 1 2 .8 1 1 .4 2 1 .5 1 4 .8 1 9 .1 1 2 .0 E .E .C . C o u n trie s 2 8 .7 2 1 .5 2 8 .8 2 2 .6 2 2 .7 2 0 .2 2 8 .2 1 9 .2 3 2 .5 2 0 .3 E .P .T .A . C o u n trie s ! 9 .3 7 .0 1 0 .6 8 .3 8 .6 7 .6 9 .1 6 .2 1 0 .4 6 .5 S o c i a l i s t Cotin t r i e s 1 8 .4 13.8 2 1 .7 1 7 .0 2 3 .1 2 0 .5 25.2 1 7 .2 4 1 .1 2 5 .7 A rab L eague C o u n tr ie s l*. 8 3 .6 4 .7 3 .6 5 .8 5 .2 8 .6 5 .9 7 .9 4 .9 O th e r C o u n trie s 1 3 .1 9 .9 1 0 .3 8 .1 4 .9 4 .4 1 3 .2 9 .0 1 5 .2 9 .5 T o ta l 1 3 3 .5 1 0 0 .0 1 2 7 .7 1 0 0 .0 1 1 2 .4 1 0 0 .0 1 4 6 .7 1 0 0 .0 1 5 9 .9 1 0 0 .0 1 . E x c lu d in g Im p o rts by th e o i l c o m p a n ie s. S o u rc e : C om piled from v a r io u s A nnual R e p o rts o f th e C e n tr a l Bank o f I r a q . TABLE 37 IMPORTS PROM THE PRINCIPAL SEVEN COUNTRIES (V alu e I n m il l io n s o f d i n a r s ) 1963 1964 1965 V alu e V alu e V a lu e U n ite d Kingdom 1 6 .5 U n ite d S t a t e s 2 0 .1 U n ite d S t a t e s 1 8 .9 U n ite d S t a t e s 1 2 .4 U n ite d Kingdom 1 8 .2 U n ite d Kingdom 1 6 .7 W est Germany 1 0 .8 W est Germany 1 2 .5 W est Germany 1 5 .3 S o v ie t U nion 9 .3 S o v ie t U nion 7 .6 S o v ie t U nion 1 1 .8 C ey lo n 7 .8 C ey lo n 7 .6 J a p a n 9 .1 B elgium 4 .6 J a p a n 6 .1 C z e c h o s lo v a k ia 8 .7 P e o p le 5s C h in a ^ .5 B elgium 5 .8 P o la n d 7 .4 TOTAL 6 5 .9 TOTAL 7 7 .9 TOTAL 8 7 .9 GRAND TOTAL 1 1 2 .4 GRAND TOTAL 1 4 6 .7 GRAND TOTAL 1 5 9 .9 R a tio o f T o ta l R a tio o f T o ta l R a tio o f T o ta l to G rand T o ta l 5 8 .7 to G rand T o ta l 5 3 .1 to G rand T o ta l 5 5 .0 ^ E x c lu d in g im p o rts by th e o i l o o m p an ies. S o u rc e : A nnual R e p o rt o f th e C e n tr a l Bank o f I r a q t 1965 V jj V J\ V-n 356 TABLE 38 IRAQI BALANCE OF PAYMENTS FOR SELECTED YEARS 1952 19 55 1957 1966 CURRENT ACCOUNT E x p o rts - V i s i b l e (O il) 1 1 1 .3 1 6 9 .2 1 1 4 .4 3 0 8 .9 (O th e r) 2 3 .9 16.2 1 4 .0 2 6 .5 T o ta l 1 3 5 .2 1 8 5 .4 1 2 8 .4 3 3 5 .4 E x p o rts - I n v i s i b l e 1 2 .4 2 2 .3 27.8 3 4 .8 T o ta l 1+2 (E x p o rts ) 1 4 7 .6 2 0 7 .7 1 5 6 .2 ' 3 7 0 .2 Im p o rts - V i s i b l e (O il) - 16.8 - 6.3 - 1 0 .4 - 0 .9 (O th e r) - 4 6 .2 - 9 0 .9 -1 1 2 .0 -1 7 4 .5 T o ta l - 63.0 - 9 7 .2 -1 2 2 .4 - 1 7 5 .4 Im p o rts - I n v i s i b l e - 92.1 - 9 8 .0 - 7 2 .7 -1 8 8 .3 T o ta l 3+4 (Im p o rts ) - 155.1 -1 9 5 .2 -1 9 5 .1 -3 6 3 .7 B a la n c e o f T rad e V i s i b l e 72.2 8 8 .2 6 .0 160.0 T r a n s f e r P aym ents (N et) m m 0 .6 - 0 .1 - 0 .5 B a la n c e o f C u rre n t A ccount - 7 .5 1 3 .1 - 3 9 .0 6 .0 CAPITAL M OVEM ENT P r i v a t e C a p it a l Movement + 1 4 .8 + 7 .1 + 7 .1 - 7 .8 L oans a n d Long-Term O b lig a tio n s - 0 .7 - 2 .2 + 9 .1 + 0 .9 O th e r Long Term — - 3 .0 + 5*6 — B a la n c e o f C a p it a l Movement + 1 4 .1 + 1 .9 + 2 1 .8 - 6 .9 B a la n c e o f C u r r e n t and C a p ita l A cco u n ts + 6 .6 + 1 5 .0 - 1 7 .2 - 0.9 S o u ro e : C e n tr a l Bank o f I r a q , Q u a r te r ly B u l l e t i n , A p r ll- J u n e 1967, T a b le 3 4 , PP» 6 0 -6 1 . 357 TABLE 38 (C o n tin u e d ) 1952 1955 1957 1966 BALANCING ITEM + 4 .5 + 2 .0 - 2 .0 - 8 .0 M ONETARY M OVEM ENT1 F o r e ig n A s s e t s - 1 1 .1 - 1 3 .6 + 2 1 .4 _ 2 7 .4 M onetary G old — - 3 .0 - 1 .9 - 0 .1 S h o rt-T erm O b lig a t io n s — - 0 .4 - 0 .3 + 3 6 .4 B a la n c e o f M onetary Movement - l l . l - 1 7 .0 + 1 9 .2 + 8 .9 B a la n c e o f M onetary Movement and O th er Long-Term ( D e f i c i t o r S u r p lu s ) - 1 1 .1 - 2 0 .0 + 2 4 .8 + 8 .9 ^ A s s e ts : I n c r e a s e ( - ) D e c re a s e (+) L i a b i l i t i e s : I n o r e a s e (+ ) D e c re a s e ( - ) S o u rc e : C e n tr a l Bank o f I r a q , Q u a r te r ly B u l l e t i n , A p r il- J u n e 196?* T a b le 3 4 , PP» 6 0 -6 1 . 358 TABLE 39 IRAQ'S TERMS OP TRADE* 1922-58 ( 1938-39 = 100) Y ear E x c lu d in g O il I n c lu d in g O il G ross N et Inoom e G ro ss N et Incom e 1922-26 4 .3 3 6 .7 3 3 .3 1 3 4 .6 4 0 .8 1 .9 1927-32 2 7 .3 7 8 .5 6 6 .3 4 9 7 .2 76.6 3 .5 1933-37 5 9 .3 1 0 5 .7 1 2 4 .8 2 4 1 .9 9 3 .0 7 1 .4 193 8 -3 9 1 0 0 .0 1 0 0 .0 100.0 1 0 0 .0 1 0 0 .0 1 0 0 .0 1940-45 9 0 .4 1 0 9 .4 8 9 .9 7 8 .6 6 8 .6 5 4 .6 1 946-51 1 2 2 .8 8 4 .2 1 0 6 .7 8 0 .4 3 5 .3 6 4 .6 1952-58 1 7 7 .4 7 0 .9 9 5 .8 5 3 .6 5 1 .9 2 4 6 .9 S o u rc e : M. S . H asan , Eoonomio D evelopm ent o f I r a q * 1864— 1 9 5 8 . (1 9 6 5 ). T a b le s 3 2 - # . s e e PP. 3 9 1 -3 9 5 . 359 TABLE 40 UNIT VALUE INDICES OP IRAQ'S FOREIGN TRADE: 1959-64 (1961 = 100) SITC S e c t io n s 1959 I9 6 0 1961 1962 1963 1964 E x p o rts: T o ta l 105 103 100 101 101 100 Food 91 96 100 109 106 118 Raw M a te r ia ls 87 98 100 117 132 135 F u e ls 106 103 100 100 100 99 TOTAL L e s s F u e ls 91 97 100 109 111 120 I n p o r ts : T o ta l 100 102 100 95 94 103 F ood , E to . 104 105 100 88 85 114 Raw M a te r ia ls 100 101 100 96 98 100 M a n u fa ctu res 99 101 100 97 97 100 C h em ica ls 96 99 100 97 98 107 M ach ., & T r a n s. Equipm ent 99 99 100 99 103 100 O th er M a n u fa ctu res 99 103 100 95 93 99 Terms o f T rade: I n c lu d in g P etro leu m 105 101 100 106 107 97 E x c lu d in g P e tro leu m 91 95 100 115 118 117 S o u ro e : C e n tr a l Bank o f I r a q : A nnual R e p o rt 1 9 6 5 . 360 TABLE 41 NET TERMS OP TRADE FOR BRITAIN AND IRAQ: 1922-58 (1 9 3 8 -3 9 « 100 ) I r a q B r i t a i n Y ear Terms o f T rad e Y ear Terms o f T rad e 1922-26 41 1924 122 1927-32 76 1929 122 1933-37 93 1937 107 1938-39 100 1938 100 1946-51 25 1947-48 111 1952-58 52 1958 122 S ource* M. S . H a sa n , I b i d . . T a b le 34, p . 3 9 9 . 361 TABLE 42 REVENUES AND EXPENDITURES OP THE ORDINARY BUDGET (In thou san ds o f d in a r s ) F i s c a l Y ear R evenues E x p en d i t u r e s D e f i c i t ( - ) A nnual o r S u r p lu s (+) A ccum ulated 1 9 5 1 /5 2 3 7 .5 3 4 30,820 6 .7 1 4 (+) 2,062 _ ) 19 5 2 /5 3 5 0 ,5 4 3 4 4 ,4 8 0 6 ,0 6 3 (+) 4 ,0 0 1 + ) 1 9 5 3 /5 4 4 7 .7 2 1 5 0 ,1 5 7 2 ,4 3 6 ( - ) 1 .5 6 5 + ) 1 9 5 V 5 5 5 2 .1 7 9 5 3 ,7 9 8 1 .6 1 9 ( - ) 54 - ) 1 9 5 5 /5 6 6 5 .2 8 7 5 5 .2 7 9 1 0 ,0 0 8 (+) 9 .9 5 4 + ) 1 9 5 6 /5 7 6 2 .7 1 3 70,276 7 ,5 6 3 ( - ) 2 ,3 9 1 + ) 1 9 5 7 /5 8 6 1 ,8 5 1 7 3 ,8 2 1 1 1 ,9 7 0 ( - ) 9 ,5 7 9 - ) 1 9 5 8 /5 9 7 5 ,5 7 2 7 9 ,2 0 7 3 ,6 3 5 ( - ) 1 3 ,2 1 4 - ) 1 9 5 9 /6 0 8 9 ,7 2 4 1 0 0 ,1 6 7 1 0 ,4 4 3 ( - ) 2 3 .6 5 7 - ) 1960/61 1 0 3 ,6 1 4 1 1 4 ,2 8 6 10,672 ( - ) 3 4 .3 2 9 - ) 1961/62 120,700 1 1 9 ,1 8 8 1 ,5 1 2 (+) 3 2 ,8 1 7 - ) 19 6 2 /6 3 1 1 4 ,7 0 8 1 2 8 ,4 0 1 1 3 .6 9 3 ( - ) 4 6 ,5 1 0 - ) 1 9 6 3 /6 4 1 2 6 ,7 7 3 1 4 9 .0 2 5 22,252 ( - ) 68,762 - ) 1 9 6 4 /6 5 1 4 5 ,9 6 5 1 7 6 ,9 9 5 3 1 ,0 3 0 ( - ) 9 9 ,7 9 2 - ) 1965/66 1 7 7 ,0 5 1 1 7 2 ,2 1 4 4 ,8 3 7 (+) 9 4 ,9 5 5 — / S o u rc e : C e n tr a l Bank o f I r a q , Q u a r te r ly B u l l e t i n , A p r il- J u n e , 1967, T a b le 1 3 , p . 2 4 . TABLE 43 REVENUES OP THE ORDINARY BUDGET (In thousands o f d in a r s ) S o u rc e o f R evenue 1962/ 1963 1 9 6 3 / 1964 1 9 6 4 / 1965 1 9 6 5 / 1966 1966/ 1967 D i r e c t T axes an d D u tie s : O il R evenues 4 8 ,4 8 2 5 7 ,2 4 6 6 4 ,8 2 9 8 4 ,0 0 0 70,000 Incom e and L egaoy Tax 7 ,5 8 1 8 ,4 4 8 9 ,8 4 9 13,000 12,000 R e a l E s t a t e Tax 2 ,1 5 5 2 ,2 5 5 2 ,3 2 4 2,500 2,500 A g r i c u l t u r a l Land Tax 774 683 599 850 2,050 Stam p D u tie s 1 .2 0 5 1 ,2 8 8 2 ,1 4 2 2 ,4 5 5 2 ,7 5 3 TOTAL 6 0 ,1 9 7 69.920 7 9 ,7 4 3 102,805 8 9 ,8 0 3 I n d i r e c t T ax es: Custom s D u tie s 23,628 22,285 2 6 ,1 5 3 2 7 ,3 1 6 3 0 ,5 6 6 E x c is e D u tie s 1 2 .5 5 2 12,310 1 5 .0 5 1 1 4 ,6 8 4 1 9 .4 3 4 TOTAL 36,180 3 4 ,5 9 5 4 1 ,2 0 4 4 2 ,0 0 0 50,000 G overnm ent A g e n c ie s 1 8 ,3 3 1 22,258 25,018 4 5 ,1 1 4 2 9 .7 9 2 GRAND TOTAL 1 1 4 ,7 0 8 1 2 6 .7 7 3 1 4 5 ,9 6 5 1 8 9 .9 1 9 1 6 9 ,5 9 5 The f i g u r e s f o r 1966/67 a r e e s t i m a t e s . S o u rc e s C om piled from v a r io u s B u l l e t i n s o f th e C e n tr a l Bank o f I r a q . 363 TABLE 44 EXPENDITURES OP TH E ORDINARY BUDGET (I n th ou san d s o f d in a r s ) Type o f E x p e n d itu re 1962/ 1963 1 9 6 3 / 1964 1 9 6 4 / 1965 1 9 6 5 / 1966 1966/ 1967 N a tio n a l D e fen se and S e c u r i t y 4 9 ,3 0 1 81,292 6 7 .7 5 9 8 7 ,4 1 1 7 4 ,9 7 8 E d u c a tio n 32,432 3 3 ,2 9 6 3 4 ,6 9 4 4 3 ,0 0 0 4 5 .3 7 1 S o c ia l A f f a i r s 1,69 0 1,886 1 .9 3 6 1 .3 7 1 1 ,2 9 4 H e a lth 7 ,4 5 1 7 ,1 0 5 7 ,3 7 9 8 ,9 9 0 8 ,9 1 2 N a tio n a l G uidance ?64 772 1 ,2 3 3 1,666 1 ,4 2 9 F i n a n c i a l A f f a i r s 1 2 ,5 4 8 1 8 ,7 7 0 3 8 ,2 3 2 2 3 .9 5 3 2 4 ,9 5 3 Communi ca t i o n s 3 ,9 3 5 2 ,2 0 5 1 .2 0 5 1 .3 8 5 1 .2 4 8 F o re ig n A f f a i r s 1 ,2 8 5 1,386 1 .4 5 4 1 .4 7 5 1,298 A dm inis t r a t i o n and J u s t i c e 3 ,2 8 4 3 ,2 8 8 3 ,5 5 5 4 ,1 3 7 4 ,0 0 6 M u n ic ip a l A f f a i r s and Works 6 ,9 5 5 7 .7 2 5 7 .8 8 0 7 ,9 4 0 8 ,1 8 4 I n t e r n a t i o n a l O b lig a tio n s 235 419 511 1 .3 4 9 501 P e n s io n s 8 .3 0 7 9 .7 9 9 1 0 ,7 4 1 11,002 12,001 0 t h e r s 214 348 416 504 806 G rand T o ta l 1 2 8 ,4 0 1 1 4 9 ,0 2 5 1 7 6 ,9 9 5 1 9 4 ,2 3 3 1 8 4 ,1 4 3 The f i g u r e s f o r 1 9 6 6 /6 ? a r e e s t i m a t e s . S o u rc e : C om piled from v a r io u s B u l l e t i n s o f th e C e n tr a l Bank o f I r a q . 364 TABLE 45 REVENUES AND EXPENDITURES OF DEVELOPMENT BOARD, MINISTRY OF DEVELOPMENT AND ECONOMIC PLANS ( I n th o u sa n d s o f d i n a r s ) F i s c a l Y ear R evenues E x p e n d i t u r e s D e f i c i t ( - ) A nnual 3 u r p lu s (+) A ccum ulated 1 9 5 1 /5 2 7 ,4 6 7 3 ,1 3 1 4 ,3 3 6 (+) 4 ,3 5 8 (+) 1 9 5 2 /5 3 2 8 ,9 9 9 12.838 11,161 (+) 1 5 .5 1 9 (+) 1 9 5 3 /5 4 3 5 ,2 7 8 1 2 ,2 5 7 23,021 (+) 3 8 .5 4 0 (+) 1 9 5 4 /5 5 4 0 ,7 2 8 20,868 19,860 (+) 58 , 1*00 (+) 1 9 5 5 /5 6 60,762 3 4 ,0 2 5 2 5 .7 3 7 (+) 8 5 ,1 3 7 (+) 1 9 5 6 /5 7 5 1 .1 2 5 4 3 ,0 4 1 8,081* (+) 9 3 .2 2 1 (+) 1 9 5 7 /5 8 3 5 .8 7 3 5 7 ,4 1 5 2 1 ,5 4 2 ( - ) 7 1 ,6 7 9 (+) 1 9 5 8 /5 9 6 1 ,7 4 1 5 2 ,2 1 5 9 ,5 2 6 (+) 8 1 ,2 0 5 (+) 1 9 5 9 /6 0 32,070 9 4,022 6 1 ,9 5 2 ( - ) 1 9 ,2 5 8 (+) 1 9 5 9 /6 0 1 1 ,4 9 7 9 ,2 9 0 2 ,2 0 7 (+) 2 1 , 1*60 (+) 1960/61 4 7 ,6 7 8 4 7 .5 6 5 113 (+) 2 1 ,5 7 3 (+) 1961/62 6 6 ,6 8 4 6 6 ,9 1 8 234 ( - ) 2 1 .3 3 9 (+) 19 6 2 /6 3 7 0 ,0 3 3 5 9 ,2 9 7 1 0 .7 3 6 (+) 3 2 ,0 7 5 (+) 1 9 6 3 /6 4 67 .6 0 3 5 4 ,2 5 5 1 3 .3 4 8 (+) 4 5 .4 2 3 (+) 1 9 6 4 /6 5 76 , 1*68 7 5 .2 7 5 1 .1 9 3 (+) 4 6 ,6 1 6 (+) 1965/66 7 0 ,8 1 6 4 9 ,7 0 7 2 1 ,1 0 9 (+) 6 7 ,7 2 5 (+) S o u rc e : C e n tr a l Bank o f I r a q , Q u a r te r ly B u l l e t i n , A p r il- J u n e 1 9 6 7 . T a b le 1 6 , p . 2 7 . TABLE 46 CENTRAL GOVERNMENT DEVELOPMENT EXPENDITURES BY PRINCIPAL SECTORS (V a lu e I n m il l io n s o f d i n a r s ) D evelopm ent P la n 1962/63 1 9 6 3 /6 9 1 9 6 9 /6 5 1965/ 66 - 1969/70 V alu e P e r C e n t V alu e P e r C e n t V alu e P e r C e n t V a lu e P e r C e n t A g r i c u l t u r e 6 .3 11 4 .5 8 5 .0 8 1 4 2 .0 27 I n d u s t r y and M ining 1 0 .3 17 9 .5 18 1 2 .6 21 1 5 7 .0 29 T r a n s p o r t and C om m unications 1 5 .8 27 1 8 .3 35 1 0 .3 18 9 1 .0 17 H ousing and C o n s tr u c tio n 2 6 .4 45 2 1 .2 39 3 1 .1 53 1 4 3 .7 27 TOTAL PROJECT EXPENDITURES 5 8 .8 100 5 3 .5 100 5 9 .0 100 5 3 3 .7 100 Source* M in is tr y o f P la n n in g . O s T A B L E 47 M O N EY SUPPLY AND FACTORS AFFECTING M O N EY SUPPLY, 1 9 6 2-65 ( I n m i l l i o n s o f d i n a r s ) End of Period: 1962 Dec . 19*3 Ju n e D e c . 19& Ju n e D e c . 1965 Ju n e D ec. C u rre n c y Demand D e p o s its 7 9 .8 36.0 93.0 34.1 96.2 33.0 93.0 32.8 9 8 .7 30.5 106.8 32.6 112.6 32.3 Money S u p p ly 115.8 127.1 129.2 125.8 129.2 139.4 144.9 1 2 6 2 1s t H a lf 2nd H a lf 1964 1s t H a lf 2nd H a lf 1965 1s t H a lf 2nd H a lf Change i n Money S u p p ly Change i n F a c to r s A f f e c tin g Money S u p p ly : F o re ig n A s s e ts (N et) N et C laim s on P u b lic S e c to r C laim s o n P r i v a t e S e c to r Q uasi-M oney ( I n c r e a s e ) 0 th eir 11.3 12.1 2 .6 - 2 .6 0.6 ■ - 1.4 2 .1 • 5.5 7.1 4.3 ■ 2 .6 • 1.2 - 3.4 3.4 -12.7 - 7.7 3.7 13.9 11.1 - 4.3 - 3 .5 2 .0 - 2 .0 - 0.5 10.2 13 .0 6.2 7.5 - 3.6 2.1 5.5 - 12.5 26.5 - 0.2 - 3.2 - 5.1 S o u r c e : Q u a r t e r l y B u l l e t i n s o f t h e C e n t r a l B ank o f I r a q . V jJ O n On TABLE * 4 -8 BALANCE SHEETS OF SPECIALIZED BANKS ( I n m il l io n s o f d i n a r s ) 1962 1963 1961+__________ 1965___________ D eo. D eo. M arch Ju n e S e p t . D ec. M arch Ju n e S e p t . D ec. A s s e ts 1+8.2 50.7 52.2 C ash an d a t Banks 1.9 1.7 2.0 C laim s on G overnm ent C laim s on P r i v a t e S e c to r 1+2.7 45.3 46.5 O th e r 3.6 3.7 3.7 L i a b i l i t i e s 1+8.2 50.7 52.2 Demand D e p o s its 0.1 0.1 0.1 Quasi-Money 0.2 0.2 0.3 G overnm ent D e p o s its 8.6 9 .2 9 .2 C a p it a l A c co u n ts 26.5 32.2 32.0 C r e d it from G overnm ent 8.0 4.7 C r e d it from C e n tr a l Bank C r e d it from C om m ercial 3.4 2.8 3.3 Banks 0.1+ 0.8 — O th e r 1.0 0.7 7.3 53.7 55.5 58.3 59.1 60.4 62.8 65.4 1.6 1.0 1.3 1.2 1.0 1.2 1.9 0.3 0.1 0.1 __ — — __ 48.1 51.2 53.6 55.0 56.4 58.6 60.6 l+.O 3.0 3.3 2.8 3.0 3.0 2.9 53.7 55.5 58.3 59.1 60 .1 + 62.8 65.4 0.2 0.2 0.2 0.2 0.3 o.*+ 0.1+ 0.3 0.4 0.4 0.3 0.5 0.6 0.8 9.4 10.0 10.1+ 10.8 11.5 12.6 li+.o 33.0 33.0 33.6 33.8 34.1 34.6 34.7 — 2.3 2.2 2.3 2.3 2.3 2.3 4.7 5.5 5.0 5.1 6.3 6.7 7.1 «... 1.5 2.1 2.5 1.4 1.4 2.4 6.1 2.6 3.8 4.1 4.0 4.2 3.7 S o u r c e s C e n t r a l B ank o f I r a q . ' O N -o
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Al-Ameen, Abdul Wahab
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External Trade And Economic Growth In Developing Countries With Special Reference To Iraq
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Doctor of Philosophy
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Economics
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Brown, Alan A. (
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