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Trade and Development(IPE I)
Summer term 20189
(6 credit points)
Wednesday, 10:15 – 11:45, Carl-Zeiß-Str. 3,
SR 113
Master Program
Prof. Dr. Andreas Freytag
LS Wirtschaftspolitik
FSU Jena
© Freytag 2019 1
Aim of the lecture
Based on the theoretical fundament built in the lectures “Public Choice”
and “International Trade”, the lecture “International Political Economy I:
Trade and Development” aims at improving students’ understanding of
global trade policy and the development process in less developed,
emerging and transition countries.
The integration into the global division of labor has proven crucial for the
development process in the West and in the Rest. Therefore, the lecture
combines trade policy aspects with development policy and global
governance. Political economy is important to understand the slowness of
development and the obstacles to combat poverty as well as to solve
global problems such as climate change and transnational terrorism.
Economic analysis provides powerful tools towards such a better
understanding of the development process against the background of a
global trading order and its backlashes.
2© Freytag 2019
Tutorial:
Christoph Dörffel, M.Sc.
Room: SR 4.119
Thursday, 12.15 a.m., beginning April 25, 2019
Students have to solve small problems in exercises and discuss the
solutions. In addition, some seminal academic and policy oriented papers
will be distributed, which should be read and discussed in the tutorial.
Written Exam: 30.7.2019, 10-12, HS3
3© Freytag 2019
Programme Announcement
The lecture on June 19, 2019 is cancelled.
Instead, on June 21, 2.15 p.m., there will be a lecture by
Prof. Razeen Sally, Ph.D., Lee Kuan Yew School of Public Policy,
National University of Singapur
“Capitalism in Asia: A Schumpeterian Perspective“
Venue: Senatssaal der FSU
This lecture is relevant for the exam.
4
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Outline
1. Introduction
2. Aspects of Global Governance
3. Aspects of Development
4. Trade and Development
5. Development 2019: What Role for Trade and Trade
Policy?
5© Freytag 2019
Literature
Acemoglu, D., S. Johnson and J.A. Robinson (2001), The colonial origins of comparative
development: An empirical investigation, The American Economic Review, Vol. 91(5),
1369-1401.
Bhagwati, J. and R.E. Hudec (1997): Fair Trade and Harmonization, Volume 1, Economic
Analysis (Cambridge, London: MIT Press).
Bhagwati, J. and R.E. Hudec (1997): Fair Trade and Harmonization, Volume 2, Legal
Analysis (Cambridge, London: MIT Press)
Binns, Tony, Alan Dixon and Etienne Nel (2012), Africa – Diversity and Development, London
and New York.
Biermann, Rafael and Jochim A. Koops (eds.) (2017) The Palgrave handbook of Inter-
Organizational Relations in World Politics, London.
Collier, P. (2018), The Future of Capitalism, London: Pengiun.
Corden, W.M.(1971), The Theory of Protection, Oxford.
Corden, W.M. (1974), Trade Policy and Economic Welfare, Oxford.
Deaton, Angus (2013), The Great Escape, Health, Wealth, and the Origins of Inequality,
Princeton: Princeton University Press.
Dettmer, Bianka, Fredrik Erixon, Andreas Freytag and Pierre-Olivier Legault-Tremblay (2011,
The Dynamics of Structural Change – The European Union´s Trade with China, The
Chinese Economy, Vol. 44, No. 4, 42-74.6© Freytag 2019
Doucouliagos, H. and M. Paldam (2009), The aid effectiveness literature: the sad results of
40 years of research, Journal of Economic Surveys, Vol. 23(3),433-461.
Doucouliagos, H. and M. Paldam (2010), Conditional aid effectiveness: A meta-study,
Journal of International Development, Vol. 22(4), 391-410.
Draper, P., H. Edjigu und A. Freytag (2018), Analysing Intra-African Trade – AfCFTA: Much Ado About Nothing, world Economics, Vol. 19, Nr. 4, Dezember, S. 55-74.
Draper, P. and Freytag A. (2008): South Africa’s Current Account Deficit, SAIIA Trade Policy
Report No 25, Johannesburg, 2008.
Draper, P. A. Freytag and S. Al Doyaili (2013), Why Should Sub-Saharan Africa Care about
the Doha Development Round? Economics: The Open-Access, Open-Assessment
E-Journal, Vol. 7, 2013-19. http://dx.doi.org/10.5018/economics-ejournal.ja.2013-19 .
Easterly, W. (2005), The White Man‘s Burden, Why the West's Efforts to Aid the Rest Have
Done So Much Ill and So Little Good, London.
Ellerman, David (2005), Helping People Help Themselves - From the World Bank to an
Alternative Philosophy of Development Assistance, Ann Arbor: The University of
Michigan Press.
Feenstra, R.C. und A.M. Taylor (2008), International Economics, New York.
Frankopan, P. (2018), The New Silk Roads, London: Bloomsbury Oublishing.
Freytag, Andreas (2008), That Chinese Juggernaut - Should Europe Really Worry About its
Trade Deficit With China?, Brussels: ECIPE Policy Brief 3/2008.
Freytag, A. and G. Pehnelt (2009), Debt Relief and Changing Governance Structures in
LDCs, World Development, pp. 62-80.7© Freytag 2019
Glaeser, E., R. La Porta, F. Lopez-de-Silanes and A. Shleifer (2004), Do institutions cause
growth?, Journal of Economic Growth, Vol. 9, 271-303.
G20 (2010), The Seoul Summit Document, http://www.seoulsummit.kr/outcomes/,
http://www.g20.org/Documents2010/11/seoulsummit_declaration.pdf
Haberler, Gottfried v. (1933), Der internationale Handel, Nachdruck 1970, Berlin et al.
Harrison, A. and Rodríguez-Clare, A. (2010), Chapter 63 - Trade, Foreign Investment, and
Industrial Policy for Developing Countries, In: Rodrik, D. and Rosenzweig M.,
Editors, Handbook of Development Economics, Elsevier, 2010, Volume 5, Pages
4039-4214.
Krugman, P.R. , M. Obstfeld and M. Melitz (2015), International Economics, 10th edition,
Boston et al.
Markusen, J.R., Melvin, J.R., Kaempfer, W.H., Maskus, K.E. (1995): International Trade,
Theory and Evidence (USA: McGraw-Hill).
McKercher, Brian J.C. (ed.) (2019), Routledge Handbook of Diplomacy and Statecraft,
London and New York.
Reinhart, C.M. and K.S. Rogoff (2010), Growth in a Time of Debt, The American Economic
Review, Vol. 100(2), 573-578.
Rodriguez, F. and D. Rodrik (2000), Trade policy and economic growth : a skeptic's guide to
the cross-national evidence, NBER macroeconomics annual, Vol. 15, 261-325.
Röpke, W. (1979): Internationale Ordnung – Heute, 3rd edition, Bern, Stuttgart.
Rosling, H. et al. (2018), Factfulness: Ten Reasons We’re Wrong about the World – And
Why Things are Better than You Think, London: Spectrebooks.8© Freytag 2019
Sala-i-Martin, X., G. Doppelhofer and R.I. Miller (2004), Determinants of long-term growth:
A Bayesian Averaging of classical estimates (BACE) approach, The American
Economic Review, Vol. 94(4),813-835.
Sally, R. (1998): Classical Liberalism and International Economic Order, London.
Sally, R. (2008): Trade Policy, New Century. The WTO, FTAs and Asia Rising, London,
Institute for Economic Affairs.
Sally, R. (2011), The Crisis and the Global Economy: A Shifting World Order, ECIPE
Occasional Paper No. 3/2011, Brussels, ECIPE.
Schneider, Friedrich und Dominik H. Enste (2000), ‘Shadow Economies: Size, Causes and
Consequences’, Journal of Economic Literature, Vol. 38, pp. 77-114
Sen, A. (1988), Chapter 1: The Concept of Development, Handbook of Development
Economics, Volume 1, Elsevier, 1988, Pages 9-26.
Spufford, Francis (2010) The Red Plenty, London: Faber and Faber Ltd.
Todaro, Michael P. and Stephen C. Smith (2015), Economic Development, 12th edition,
Harlow (England) et al.
Van den Bossche, Peter and Werner Zdouc (2017), The Law and Politics of the World
Trade Organization, 4th edition, Cambridge: Cambrdidge University Press.
Williams, David (2012), International Development and Global Politics, London und New
York.
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Internet-Addresses (Selection)
OECD: http://www.oecd.org
Weltbank: http://worldbank.org
Welthandelsorganisation (WTO): http://www.wto.org
Internationaler Währungsfonds.: http://www.imf.org
Europäische Kommission: http://europa.eu.int/comm/trade/
Office of the United States Trade Representative: http://www.ustr.go
United Nations Conference on
Trade and Development (UNCTAD): http://www.unctad.org
Global Trade Alert: http://www.globaltradealert.org/
VoxEU: http://www.voxeu.org
Centre for Economic Policy Research (CEPR): http://www.cepr.org
European Centre for International
Political Economy (ECIPE): http://www.ecipe.org
South African Institute of International Affairs (SAIIA): http://www.saiia.org.za
Peter G. Peterson Institute for International Economics: http://www.iie.com
Cato Institute: http://www.cato.org
Global Trade Analysis Projekt: http://www.gtap.org
Attac (NGO): http://www.attac.org
Oxfam(NGO): http://www.oxfam.org
World maps:: http: //www.worldmapper.org
Alan Deardorff‘s Website: http://www-personal.umich.edu/~alandear/glossary/
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1. Introduction
Since the end of the Cold War, global integration has much increased:
strong increase in trade;
division of labor includes emerging and transition countries;
fragmentation of production processes (global value chains)
the latter also participate increasingly in capital transfers;
global imbalances have emerged: problem?;
LDCs still do not develop as needed to combat poverty and hunger;
the awareness of global environmental and climate problems has been
rising;
the level of individual freedom and political rights is still too low on a
global scale.
The following slides document parts of these developments.11© Freytag 2019
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Figure 1.1: World GDP and Trade 1960-2017
Source: World Bank Database
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Source: IMF WEO, Oktober 2015, S. 121
Figure 1.2: World trade as share of GDP, 1990-2014
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Source: World Development Indicators, April 2019
Figure 1.3: Exports of goods and services (% of GDP), 1960-2017
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Figure 1.4: Transportation and communication costs since 1930
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Figure 1.5: Intercontinental trade flows
Source: DHL, Annual Report 2014
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Figure 1.6: Trade Growth Driven by Asia & Europe, Definitely
Not by Africa
Source: WTO, World Trade Statistical Review 2018, p. 32
17
Contributions to world trade volume growth by region, 2011-2017
(Annual percentage change)
6 Exports 6 Imports
5 5
4 4
3 3
2 2
1 1
0 0
-1
2011 2012 2013 2014 2015 2016 2017
-1
2011 2012 2013 2014 2015 2016 2017
North America South America a Europe North America South America a
Europe
Asia Other regions b World Asia Other regions b
World
a Other regions comprise Africa, Middle East and the Commonwealth of Independent States (CIS), including associate and
former member states. b Refers to South and Central America and the Caribbean. Source: WTO-UNCTAD estimates, WTO Secretariat calculations
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Figure 1.7: Managing the noodle bowl (hard disc produced in Thailand)
Source: Baldwin, Richard (2006), Managing the Noodle Bowl: The fragility of East Asian Regionalism, Graduate Institute of
International Studies, Geneva.
18© Freytag 2019
Figure 1.8: Elements of the Global Value Chain
Source: Stan du Plessis, University of Stellenbosch, based on The Planet Money T-Shirt podcast 19© Freytag 2019
Figure 1.9: Global value chain participation 1995-2013
Source: WEO Fall 2016, p. 82 20© Freytag 2019
Source: UNCTADSTAT 2018, p.54
21
Table 1.1: Inward and outward FDI stock by group of Economies
2012/2017
Group of economies
Inward stock Outward stock
Value Ratio to GDP Value Ratio to GDP
(Billions of US$) (Percentage) (Billions of US$) (Percentage)
2012 2017 2012 2017 2012 2017 2012 2017
World 22 877 31 524 31 39 22 786 30 838 31 39
Developing economies Developing
economies: Africa Developing
economies: America
Developing economies: Asia and Oceania
Transition economies
Developed economies
7 365 10 353 27 33 4 046 6 898 15 22
658 867 28 39 177 366 8 18
1 896 2 194 32 38 631 813 11 14
4 811 7 292 26 31 3 238 5 720 17 24
726 840 25 39 374 442 13 22
14 787 20 331 33 44 18 365 23 498 41 51
Selected groups
Developing economies excluding China
Developing economies excluding LDCs
LDCs
LLDCs
SIDS (UNCTAD)
HIPCs (IMF)
BRICS
G20
6 532 8 863 35 45 3 514 5 416 19 28
7 170 10 028 27 33 4 023 6 857 15 22
182 312 23 29 23 42 4 6
261 370 37 52 35 48 6 9
38 47 52 64 3 3 4 4
176 310 35 51 13 18 3 4
2 391 3 243 15 18 1 365 2 649 9 14
17 319 23 586 27 34 18 684 25 311 29 37
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Figure 1.10: FDI Inflows, annual, 1990 -2017, in trillion current US$
Source: UNCTAD 2018
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Figure 1.11: Tariff rates, applied, simple mean, manufactured products (%)
Source: World Development Indicators, March 2017
0
2
4
6
8
10
12
14
16
18
20
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
World OECD members Low income High income Middle income
23© Freytag 2019
Figure 1.12: Average tariffs in EME 2008 (bound and applied)
Source: Freytag, Andreas and Sebastian Voll (2009), Liberalise now! – The only chance for emerging economies to become a major player, www.voxEU.org of March 25, 2009.
0
10
20
30
40
50
60
70
%
Brazil China India Russia South Africa
Agriculture,
Foodstuff
Raw Materials,
ChemicalsMachinery,
Transports
Textiles,
Apparel
Bound Tarif line, WTO
Applied tarif
0
10
20
30
40
50
60
70
%
Brazil China India Russia South Africa
Agriculture,
Foodstuff
Raw Materials,
ChemicalsMachinery,
Transports
Textiles,
Apparel
Bound Tarif line, WTO
Applied tarif
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Source: UNDP, Human Development Report 2018, p.29
Table 1.3: Human Development Index 1990-2017
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Source: UNDP, Human Development Report 2018, p.3
Figure 1.13: Human Development Index value by country group 1990-2017
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Despite these mostly positive developments, there have been recent
backlashes:
rise in protectionism after the global financial and economic crisis
populist movements all over the planet
new European nationalism (e.g. Hungary, Poland)
conflicts in many developing regions
Trumponomics
Brexit
anti-TTIP movement as an example for hysteric anti-
globalization impulses
demise of multilateralism?
technological developments (Industry 4.0) that may lead to de-
globalization
Open question:
Belt-and-Road-Initiative: Challenge of Chance?
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Source: German Council of Economic Experts, Annual Report 2016/17, p. 158
Figure 1.16: Global trend populism #1?
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2. Aspects of Global Governance
2.1) Theoretical aspects
Since the world is increasingly integrated, economic (but not only
economic) policies have become increasingly interdependent.
• Problems of the global common,
• global public goods (financial stability, climate protection, environment),
• global responsibility for poverty reduction.
Therefore, the term global governance has become increasingly important
in politics. What does it means?
International rules (trade, financial markets, environment, social
policies, fiscal policies, monetary policy, …)
policy coordination, e.g. in the financial and economic crisis
common international policy 29© Freytag 2019
High spillovers
High uncertainty
about policy
response
Low spillovers
Low uncertainty
about policy
response
Coordination
unneccessary
Coordination
harmful
Coordination
riskyCoordination
useful
It is politically difficult to come to global governance, as countries don’t
want to give up sovereignty. Sometimes, global solutions cause more
harm than benefits. However, there are indeed problems demanding
global solutions. What are the criteria for a global solution?
Transnational spillovers
certainty about the correct solution
Figure 2.1: Global
Policy Coordination
Source: Klodt, H. (1999), Internationale Politikkoordination: Leitlinien für den globalen
Wirtschaftspolitiker (Kiel: Kiel Institute for the World Economy).
30© Freytag 2019
2.2) The actors in global governance
Who are the main players in global governance (with a perspective on
Development)? The first to mention are international organizations.
Bretton Woods Institutions
International Monetary Fund
World Bank Group
World Bank
Other institutions
Regional development banks (Europe, Asia, Latin America, Africa)
World Trade Organization
UNCTAD
G8
G20
In addition, there are regional clubs such as the European Union, Mercosur,
NAFTA, the African Union, BRICS or IBSA. Their scope differs widely.
31© Freytag 2019
Bretton Woods Institutions
(1) The International Monetary Fund (IMF) is owned by the 188 member
countries, the shares determine the voting power. Current (shares) votes:
1. US ~ (17.46) 16.53 per cent, 2. Japan ~ (6.48) 6.16 per cent, 3.
Germany ~ (5.60) 5.32 per cent, …*
It gives adjustment help in form of a credit in situation of financial stress,
such as debt problems or balance-of-payments problems. The credit is
linked to policy reforms conditionality; these days institutions also
matter. From the IMF’s website:
“The International Monetary Fund, or IMF, promotes international financial stability and monetary cooperation. It also facilitates international trade, promotes high employment and sustainable economic growth, and helps to reduce global poverty. The IMF is governed by and accountable to the 189 member countries.**
*http://www.imf.org/external/np/sec/memdir/members.aspx
** http://www.imf.org/external/np/exr/facts/glance.htm
32© Freytag 2019
IMF lending instruments*
The IMF’s various loan instruments are tailored to different types of
balance of payments need (actual, prospective, or potential; short-term or
medium-term) as well as the specific circumstances of its diverse
membership. Low-income countries may borrow on concessional terms
through facilities available under the Poverty Reduction and Growth Trust
(PRGT).
Low-income countries may also borrow on concessional terms through the
Extended Credit Facility (ECF), the Standby Credit Facility (SCF) and the
Rapid Credit Facility (RCF) (see IMF Support for Low-Income Countries).
Non-concessional loans are provided mainly through Stand-By
Arrangements (SBA), the Flexible Credit Line (FCL), the Precautionary
and Liquidity Line (PLL), and the Extended Fund Facility (EFF), which is
useful primarily for medium- and longer-term needs.
*http://www.imf.org/external/np/exr/facts/howlend.htm for slides 35-36
33© Freytag 2019
Debt relief
In addition to concessional loans, some low-income countries are also
eligible for debts to be written off under two key initiatives.
The Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996
and enhanced in 1999, whereby creditors provide debt relief, in a
coordinated manner, with a view to restoring debt sustainability;* and
The Multilateral Debt Relief Initiative (MDRI), under which the IMF, the
International Development Association (IDA) of the World Bank, and the
African Development Fund (AfDF) canceled 100 percent of their debt
claims on certain countries to help them advance toward the Millennium
Development Goals (now Sustainable Development Goals).**
See also www.imf.org and below, section 3.
*http://www.imf.org/external/np/exr/facts/hipc.htm
** http://www.imf.org/external/np/exr/facts/mdri.htm
34© Freytag 2019
(2) The World Bank Group is focusing on structural problems of poor
countries (poverty reduction,…). From the World Bank’s website
“The World Bank Group has set two goals for the world to achieve by 2030:
• End extreme poverty by decreasing the percentage of people living on
less than $1.90 a day to no more than 3%
• Promote shared prosperity by fostering the income growth of the bottom
40% for every country
“The World Bank is a vital source of financial and technical assistance to
developing countries around the world. We are not a bank in the ordinary
sense but a unique partnership to reduce poverty and support development.
The World Bank Group comprises five institutions managed by their
member countries.”
Established in 1944, the World Bank Group is headquartered in
Washington, D.C. We have more than 10,000 employees in more than 120 offices worldwide.
Source: http://www.worldbank.org/en/about/what-we-do35© Freytag 2019
Their work is complemented by that of the International Finance Corporation
(IFC), Multilateral Investment Guarantee Agency (MIGA) and the International
Centre for the Settlement of Investment Disputes (ICSID).
Together, we provide low-interest loans, interest-free credits and grants to
developing countries for a wide array of purposes that include investments in
education, health, public administration, infrastructure, financial and private
sector development, agriculture and environmental and natural resource
management.”
IMF: macroeconomic imbalances and problems
World Bank: structural problems
A basic problem of the BW institutions for many years was their bureaucratic
behavior (fast growth of the administrative body) and overlap in their tasks.
See also www.worldbank.org and section 3, Meltzer-Commission, and
Freytag and Kirton 2016*
*Pushed toward Partnership: Increasing Cooperation between the Bretton Woods Bodies, R. Biermann and J. Koops (eds.), PALGRAVE HANDBOOK ON INTER-ORGANIZATIONAL RELATIONS, Chapter 38, 2016.
36© Freytag 2019
World Trade Organization
The World Trade Organization (WTO) was founded in 1994 based on the
General Agreement on Tariffs and Trade (GATT) concluded 1947. It
guards the world trade order and is based on several principles:
MFN
National treatment
Liberalization
Reciprocity*
Its progress is achieved in so-called trade rounds. The current round is
called Doha-Round and aims at reducing poverty via dismantling of
barriers to trade.
See also section 4
*Krugman, Paul (1997), What Should Trade Negotiators Negotiate About?, JEL March, pp.
113-120.
37© Freytag 2019
UNCTAD
The United Nations Conference on Trade and Development (UNCTAD) is
a UN institution based in Geneva. It aims at intensifying the trade relations
between the North and the Southern hemisphere.
It meets in general assemblies every four years.
Several working groups deal with a number of North-South trade problems
as well as with a New International Economic Order (NIEO); which aims at
changing the global trading system and add social aspects (and special
rules plus bufferstocks for trade in resources).
UNCTAD’s main tasks are in the area of consulting. Its practical impact
has been rather limited.
However, its data are useful.
38© Freytag 2019
G8*/ G20
The Group of Seven (main industrialized countries) was founded in 1975
with its first Summit in Rambouillet, France; as a G6 Summit; this meeting
was rather informal and dealt with macroeconomic coordination of its
members. In Birmingham 1998, Russia joined and made it the G8.
There are still no headquarter, secretariat and overhead. The Summits
have non-binding character and are declarations of will.
The Summits are prepared by ministerial meetings and by so-called
sherpas, The Summit declaration has normally already been written, when
the heads of state meet.
During its existence, the scope of issues was much broadened.
Development policy and global governance problem were in the focus
lately. Since 2010, the G8 Summit no longer is of focal interest.
*http://www.g8.utoronto.ca/
Hajnal, P.I. (1999), The G7/G8 System – Evolution, Role and Documentation
(Aldershot et al.: Ashgate). 39© Freytag 2019
The G20 has – at least in part - taken the G8’s position in the public.
It consists of the G8, i.e. the USA, the UK, Germany, France, Italy, Japan,
Canada and Russia) plus Argentina, Australia, Brazil, China, India,
Indonesia, Mexico, Saudi Arabia, South Africa, Korea, Turkey and the EU.
In 2019, Japan will host the G20-Summit (June 28-29, 2019, Osaka), from
the website:
Message from Prime Minister Abe
… At the Osaka Summit, Japan is determined to lead global economic growth by promoting
free trade and innovation, achieving both economic growth and reduction of disparities, and
contributing to the development agenda and other global issues with the SDGs at its core.
Through these efforts, Japan seeks to realize and promote a free and open, inclusive and
sustainable, "human-centered future society."
In addition, we will lead discussions on the supply of global commons for realizing global
growth such as quality infrastructure and global health. As the presidency, we will exert strong
leadership in discussions aimed towards resolving global issues such as climate change and
ocean plastic waste.
Furthermore, we will discuss how to address the digital economy from an institutional
perspective and issues that arise from an aging society. We will introduce Japan’s efforts,
including the productivity revolution amid a “Society 5.0” era, towards achieving a society
where all individuals are actively engaged… 40© Freytag 2019
Next on the list are NGOs. They claim to represent the civil society.
International organizations are said to be not legitimate
Legitimacy vs. participation!
Is an NGO a legitimate representative of the civil society?
One can distinguish different criteria of legitimation concerning:
the process of norm creation;
the justification of deviations from the norm;
the process of applying rules and norms;
the results themselves;
relation of norms;
acceptance in the (global) community.
To judge the NGOs criticism, international organizations can use the
criteria.
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NGOs are to be distinguished from interest groups, since they do not
follow their members‘ interests but deal with topics they regard as of
general interest or help certain groups.
They can be categorized:
According to motives:
• “Conformers“,
• “Reformers“,
• “Radicals“,
According to functions:
• Operational NGOs,
• Advocacy NGOs.
The radicals and/or advocacy NGOs shape the image of NGOs. The
more relevant action, however, is taken by operational NGOs.
42© Freytag 2019
2.3) The aftermath of the global crisis
One problem of the global economy is the exposure of small countries to
global shocks such as the 2007/2008 financial and economic crisis.
Although it started in the OECD, it had impacts on other countries.
How did the economic crisis in the developed countries affect the
emerging economies?
Until late 2008, it was thought that these two groups of countries could
remain decoupled. After that, however, some countries were negatively
affected by the crisis.
Thus, the crucial question is to what extent in general emerging
economies and developing countries are exposed to economic crises
elsewhere.
43© Freytag 2019
During the crisis, old controversies in the World Economy popped up again:
global imbalances, which are still debated (2019).
Judging from the G20 members recent rhetoric regarding imbalances, it
seems that at least the big G20 members still take a pure mercantilist
perspective which regards trade surpluses as good and trade deficits as bad.
Read such, the controversies follow an old pattern. The problem of course is
not one of intellectual capabilities. The inter-temporal logic is not very difficult
to grasp and probably well-known to the policymakers (and at least to their
advisors) involved.
President Trump’s attack of China, Mexico and Germany can serve as an
example.
Additional reading: Corden, M. (2011), Global Imbalances and the Paradox of Thrift,
www.voxeu.org, April 11, 2011.
44© Freytag 2019
US against China
The United States’ (US) government accuses the Chinese government of
fostering a trade surplus with the help of an undervalued currency (mostly
incorrect) and subsidized SOEs (mostly correct).
President Trump: ‘China steals jobs!’
They are neglecting the problems a country buys when pursuing a
competitive devaluation (Freytag, 2008).
Inflation increases in the long run and relevant imports become
increasingly expensive. At the same time, the economy sells its value
added for too low a price.
Apart from that, the degree of undervaluation is still subject to discussion;
some observers even question its existence whereas others dispute the
size. The estimation move between 5 and 40 per cent. The political
standpoint of the observer is not irrelevant. Today a competitive
devaluation cannot be seen.45© Freytag 2019
The G20 put the recovery from the crisis on its agenda in its meeting in
Seoul on November 11/12, 2010:
Seoul Action Plan, including commitment to:
macroeconomic policies including fiscal consolidation etc
structural reforms
Mutual Assistance Plan to promote external sustainability
modernized IMF
global financial safety nets
financial regulatory framework
partnership with low income countries (LICs)
helping SMEs to finance
completing the Doha Round (see section 4)
The role of global imbalances is addressed very reasonable in the Seoul
Summit Document (point 12, on p.3).
46© Freytag 2019
The Seoul Summit Document also contains the so-called Seoul
Development Consensus for Shared Growth based on six core principles:
economic growth is regarded as the foundation of development;
one-size fits all policies are to be avoided;
systemic issues are in the focus;
the private sector is regarded as central to achieving the objectives;
the G20 wants to complement other development agencies;
blockages to growth should be removed.
This all sounds very reasonable and balanced. However, agriculture is not
even mentioned (!) and almost six years after the Summit in November
2010 most remains yet to be delivered; some progress has been made on
the WTO Ministerial in Nairobi in December 2015.
47© Freytag 2019
The good news is that open protectionism could be contained after the
crisis; most measures were aiming at domestic support, nevertheless
distortive (GTA 2011).
What can we learn for the process of global governance?
1. Emerging economies have gained weight in global governance;
2. they are taken more seriously by the West;
3. they should take this opportunity to provide clear leadership, e.g. with
respect to the global trade agenda;
4. it is particularly the so-called “behind-the border-protectionism” that is
to be feared;
5. if WTO is to be reformed, the emerging economies such as BRICS
should be more active;
6. Old Europe seems still weak and self-referenced to take an
international initiative;
7. The US is currently despising multilateralism.
48© Freytag 2019
2.4) Current state of the global economy
• Solid growth experienced on average.
• Recession is looming.
• European fiscal and monetary crisis not yet finished. Rather, it
seems that it is just put on hold.
• The ECB has flooded Euroland with money and thereby prevented
policy reforms where needed; alternative interpretation: necessary
monetary policy measures.
• A Japanese scenario (Zombie economy) for Euroland is more likely
than ever.
• Aftermath of refugee crisis in Europe, the unfinished Brexit and
Trumponomics add to insecurity.
• Russia remains economically fragile.
• China’s growth has reached a limit.
• Brazil is in its severest crisis since decades.
• Political turmoil have added to economic problems (Venezuela,
Turkey, South Africa).49© Freytag 2019
2.5) Conclusion
Global governance is still very much Western oriented, despite the
increasing weight of emerging economies.
What role for China and the New Silk Roads?
Role of the US is increasingly unclear.
Global governance lacks enforcement mechanisms.
The G8/G20/GSomething is ineffective.
It rather seems to be a political economy driven enterprise.
However, the world is in need of global commitment in order to provide
global public goods such as financial stability as well as environmental
and climate protection and in order to avoid global problems of the
common.
50© Freytag 2019
3. Aspects of Development
This chapter is about a systematic analysis of economic problems in
developing countries on the basis of theoretical considerations we will
discuss in the following. It focuses on the consideration of undesirable
economic policy developments which cause the observed problems.
Outline:
3.1: MDGs & SDGs
3.2: Development problems
3.3: Development theories
3.4.: Approaches of development policies
Trade related problems will be discussed in chapter 4. Therefore, they shall
not be considered here, especially as it is difficult to identify the role foreign
countries play for specific problems.
First we discuss the Millennium Development Goals (MDG) as formulated
by the United Nations, followed by the Sustainable Development Goals
(SDGs). 51© Freytag 2019
52
Narratives of Development and their Consequences
The development problem is also a problem of the according
narratives
In Germany, Africa is mostly seen as the continent of the fours Cs:
• Crisis
• Corruption
• Conflict
• Catastrophes
Is this the way Africans see themselves?
See also: https://www.youtube.com/watch?v=HurBJCy_wz8
The German business community is reluctant to invest in Africa.
© Freytag 2019
3.1) Millennium Development Goals and Sustainable Development
Goals
In September 2000, the goals were given by the United Nations with the
Millennium Declaration. The purpose is the elimination of extreme poverty
in developing countries.
Results?
http://data.worldbank.org/mdgs
53© Freytag 2019
The MDG Results
From the Millennium Development Goals Report 2015
• Goal 1: Eradicate Extreme Poverty and Hunger
• Extreme Poverty declined from 47% in 1999 to 14% in 2015 (less
than 1.25$ a day). That is a decline from 1.926 bn people to 836 m
• Proportion of undernourished people in developing regions almost
halved, from 23.3% in 1990 to 12.9% in 2015
• (nearly fulfilled)
• Goal 2: Achieve Universal Primary Education
• The number of out-of-school children of primary school age
worldwide fell by almost half, to an estimated 57 million in 2015,
down from 100 million in 2000
• (not fulfilled but improvements)
• Goal 3: Promote Gender Equality and Empower Women Education
• Gender parity in primary school has been achieved in the majority
of countries.
• (not fulfilled but improvements) 54© Freytag 2019
• Goal 4: Reduce Child Mortality
• The mortality rate of children under-five was cut by more than half
since 1990.
• (not fulfilled but improvements, goal was reduction by ⅔)
• Goal 5: Improve Maternal Health
• Since 1990, maternal mortality fell by 45 percent worldwide.
• (not fulfilled but improvements, goal was reduction by 3/4)
• Goal 6: Combat HIV/AIDS, Malaria and other Diseases
• Over 6.2 million malaria deaths have been averted between 2000
and 2015.
• New HIV infections fell by approximately 40 percent between 2000
and 2013.
• By June 2014, 13.6 million people living with HIV were receiving
antiretroviral therapy (ART) globally, an immense increase from just
800,000 in 2003.
• Between 2000 and 2013, tuberculosis prevention, diagnosis and
treatment interventions saved an estimated 37 million lives.
• fulfilled (except universal access to HIV/AIDS treatment)55© Freytag 2019
• Goal 7: Ensure Environmental Sustainability
• Globally, 147 countries have met the MDG drinking water target, 95
countries have met the MDG sanitation target and 77 countries
have met both.
• Worldwide 2.1 billion people have gained access to improved
sanitation. 2.4 bn still use “unimproved sanitation facilities”
• 98% of ozone-depleting substances eliminated
• Major improvements made, but: “integration of principles of
sustainable development into country policies” and reduced loss in
biodiversity clearly not fulfilled (e.g. carbon emissions increased by
50% since 1990)
• On the other hand: hard to measure, “sustainable development” is
a moving target
• Goal 8: Develop a Global Partnership for Development
• Official development assistance from developed countries
increased 66 percent in real terms from 2000 and 2014, reaching
$135.2 billion.
• Goal was no “hard target”, so more or less fulfilled
http://www.cl.undp.org/content/undp/en/home/librarypage/mdg/the-millennium-development-
goals-report-2015.html56© Freytag 2019
The post-2015 Agenda: 17 Sustainable Development Goals
The UN has adopted new goals at the Sustainable Development Summit in
September 2015 (https://sustainabledevelopment.un.org/sdgs).
• End poverty in all its forms everywhere
• End hunger, achieve food security and improved nutrition, and promote
sustainable agriculture
• Ensure healthy lives and promote wellbeing for all at all ages
• Ensure inclusive and equitable quality education and promote lifelong
learning opportunities for all
• Achieve gender equality and empower all women and girls
• Ensure availability and sustainable management of water and sanitation
for all
• Ensure access to affordable, reliable, sustainable and modern energy
for all
• Promote sustained, inclusive and sustainable economic growth, full and
productive employment, and decent work for all57© Freytag 2019
• Build resilient infrastructure, promote inclusive and sustainable
industrialization, and foster innovation
• Reduce inequality within and among countries
• Make cities and human settlements inclusive, safe, resilient and
sustainable
• Ensure sustainable consumption and production patterns
• Take urgent action to combat climate change and its impacts (taking
note of agreements made by the UNFCCC forum)
• Conserve and sustainably use the oceans, seas and marine resources
for sustainable development
• Protect, restore and promote sustainable use of terrestrial ecosystems,
sustainably manage forests, combat desertification and halt and reverse
land degradation, and halt biodiversity loss
• Promote peaceful and inclusive societies for sustainable development,
provide access to justice for all and build effective, accountable and
inclusive institutions at all levels
• Strengthen the means of implementation and revitalize the global
partnership for sustainable development.58© Freytag 2019
3.2) Development problems
In this context, following (often interrelated) problems are identified to be
of special relevance for this lecture (not all problems occur everywhere):
1. Public finances: Public revenue situation, Indebtedness,
inflation
2. Weak markets: Labor market
Market efficiency – motivation
Factor shortage – capital markets
Information and communication, infrastructure
Resource curse, Dutch disease
3. Dual economy: Urbanization vs. rural underdevelopment
Distribution problems
4. Health/education: Poor human capital formation
AIDS/HIV and other epidemic diseases
Access to water and electricity
5. Weak institutions: Corruption & shadow economy
Low economic freedom and political rights
Poor governance 59© Freytag 2019
a. Public finances
The public revenue situation in developing countries depends on:
Economic cycle
Level of debt
Possibilities for savings
Quality of tax and fiscal authorities
Attitude towards taxation
Structure of taxation (direct, indirect, tariffs, social security
contribution)
Monetization of the economy, leading to inflation, reducing real
revenues again.
60© Freytag 2019
Developing countries differ from developed ones in the context of the
relative level of revenues as well as in the context of the taxation structure.
Problem # 1: Amount of public revenues
The share of public income stemming from direct taxation is considerably
lower in developing countries than in OECD-countries.
On the contrary, the share of revenues stemming from tariffs and indirect
taxation are considerably higher: in 1993, tariff revenues made up approx.
35 percent in developing countries and only approx. 1,5 percent in
developed ones. For the BNLS countries of the Southern African Customs
Union (SACU) the share is even higher.
Government Revenues as
% of GDP (1994/2014)
Africa (w/o Northern Africa) Rest of the World
Total 23.4/24.3 29.1/33.7
Taxes 14.8/17.2 17.1/19.5
Trade 7.7/3.1 2.4/1.8
Source: IMF World Revenue Longitudinal Data (WoRLD), own calculations
61© Freytag 2019
Currently, this structure establishes opposition against EPAs (see below,
chapter 4)
Another third of the revenues in developing countries stems from indirect
taxation. Revenues from social insurance are rather low.
Problem # 2: Incentive effect of public revenues
Tariffs Interest in welfare reducing protectionism
In the USA, the federal level until 1913 relied on tariff revenues as major
source for its spending. An amendment in the US constitution on the
initiative of Congressman Cordell Hull in 1913 changed this; it allowed the
federal level to raise income taxes.
See also chapter 4.
Indirect taxes Investment preferred to the disadvantage of consumption;
easy handling for authorities; but regressive distribution poverty
62© Freytag 2019
A poor revenue situation leads to indebtedness under the assumption of
constant expenditures and the need to refer to foreign lenders.
Possible lenders are
international organization,
international banks and other private creditors,
national public and private banks/financial institutions as well as
national central banks (monetization).
In general, public debt needs not to be rejected per se as long as it is
sustainable, i.e. used to finance long-run investments.
However, excessive debt without investment-related purpose decreases
future public scope for measures (increasing level of debt burden!).
63© Freytag 2019
Particularly problematic are debts in convertible foreign exchange as a
large proportion of export revenues needs to be used for debt service
foreign exchange control debt overhang
The debt crises of the 1980s and 1990s illustrate these problems.
Oil price shock M X-M capital imports debt
For oil exporting countries the investment of additional revenues as credit
has been a profitable investment (unavoidable, considering the
intertemporal theory of the balance of payment).
Usually, foreign debt is seen in relation to a country‘s exports (goods and
services).
Between 1980 and 1999, the amount of foreign debt in low and middle
income countries increased from 88.4 percent to 136.6 percent of total
exports; the debt service increased from 13.5 percent to 18.6 percent of
exports. Main debtors are Latin American countries.
64© Freytag 2019
Figure 3.1: Last 40 years a large debt (per GDP) cycle in the LDC world –
70 countries with full data
Source: Freytag, A. and
M. Paldam (2011) Comparing
good and bad debt,
GFinM- Working Paper, also
for Figure 3.2.
Economic growth is
necessary to serve
the debt service
vicious cycle debt overhang.
In addition: Foreign debt decreases pressure to address problems
Foreign debt decreases saving efforts
Short-term debt long-term projects
High capital intensity of projects65© Freytag 2019
Figure 3.2: Public debt and growth – a negative correlation
66© Freytag 2019
Following additional factors contributed to the debt crisis of the 1980s and
1990s :
Oil price shock;
insufficient economic policy of the debtor countries (“institutions
matter“), see below;
moderate world economical conditions accompanied with the
breakdown of demand of developed countries as well as with
protectionist reactions of OECD-countries
US-economic policy with high interest rates
(“Reagonomics“);
misjudgment and moral hazard of private banks.
Not all countries were affected by all of these factors in the same way.
Especially countries, which created prerequisites for stable and nonvolatile
export revenues, were affected less. Overall, the debt crisis is explained
appropriately by these factors.
Source: Hemmer, Hans-Rimbert (2002),..., pp. 1004-1013. 67© Freytag 2019
In single cases, governments refer to the printing press to solve the
budgetary problems, causing inflation:
dM + dv = dP + dY
risk of hyperinflation
Inflation is barely a problem in Africa, Zimbabwe being the recent
exception. Inflation in 2008 was around 2 billion per cent, with a new threat
in 2019. Sub-saharan African average in 2018 was 8.5 per cent.*
Inflation is mainly a problem of Latin American countries which needs to
be seen in association with the debt crisis.
Currently, the IMF prediction for Venezuela is an inflation rate of 929,789.5
per cent for 2018 (and 10,000,000 per cent for 2019).*
Inflation is undoubtedly identified as an impediment to growth.
* IMF (2019), World Economic Outlook, April 2019, p. 167 and p. 166, respectively.68© Freytag 2019
b. Weak markets
In developing countries, often the labor market is not organized well. In
many countries, unemployment insurance and employment service are not
existent. Skillfully regulated labor conditions, like known in developed
countries, are not generally observable.
Dualistic economic structure with traditional sector (Lewis-model,
see below)
Migration into cities / slum building process of urbanization
High capital intensity of many investments leads to unemployment
As of the lack of statistical measures, unemployment rates are less
convincing in developing countries.
69© Freytag 2019
The role of entrepreneurship for economic development is undeniable.
Entrepreneurial capability is needed to guarantee market efficiency.
As a reminder, the role of entrepreneurs:
New products
New processes
New markets
New sources for intermediate
Reorganization of whole industries
This holds also for developing countries!
70© Freytag 2019
To develop entrepreneurial initiative in developing countries, following
factors are relevant:
Economic order
Religion
Motivation and commitment – minorities
Developing countries often do not witness enough entrepreneurial
initiative. Entrepreneurial spirit often is stemming from minorities, which
may cause ethnical problems. In addition, there is a lack of institutions,
governance and of economic order.
Moreover, in most developing countries competition policy has only been
existent since a few years (if at all) monopolization.
71© Freytag 2019
Capital markets, too, are characterized by duality in developing countries:
In rural areas informal capital and in urban areas formal credit sectors
exist. In addition, in many countries there is no or only an incomplete
cadastral land register (de Soto problem).
Public regulation and industrial policies distort formal capital markets.
Facilitation of rural areas with low interest rates (savings ↓);
Lacking credit facilities for small enterprises and households
(Stiglitz/Weiss problem);
Favoritism of large-scale investors;
Discrimination against small enterprises (see b).
Instruments are interest rate subsidization, bail-outs, interest rate fixation
at the expense of savers. The result are obvious: very small capital
market; insufficient savings; insufficient lending.
The market for micro-credits could not solve that problem either.
72© Freytag 2019
USA: -736.8
China: 363
Emerging Europe:
-121.5
Oil exporters
423.5EU: -202.8
Developing
countries
630.9 Sub-Saharan
Africa: 1.6
Japan
212.8
Capital
SA: -17
Figure 3.3a: Global imbalance in 2007: Current accounts in billion US-$
Source: IMF, World Economic Outlook April 2008.
73© Freytag 2019
USA: -468.8
China: 49.2
Emerging Europe:
-44.4
Oil exporters:
274.5
EME + Developing
countries: -23.7
Sub-Saharan
Africa: -42.6
Japan: 174.1
Capital
SA: -12.4
(World: + 348,2); implications?
Source: IMF (2019), World Economic Outlook April 2019
Figure 3.3b: Global imbalance in 2018: Current accounts in billion US-$*
EU: 388.0
“other advanced
economies” excl. EA &
G7” : 345.7
74© Freytag 2019
USA: -410.6
China: 209.8
Emerging Europe:
-54.4
Oil exporters:
332
EME + Developing
countries: 197
Sub-Saharan
Africa: -55.2
Japan:
24.3
Capital
SA: -19.1
(World: + 366.9); implications?
Source: IMF (2015), World Economic Outlook April 2015
Figure 3.3c: Global imbalance in 2014: Current accounts in billion US-$*
EU: 321.5
75© Freytag 2019
Information, communication, Infrastructure
Developing countries often lack the necessary infrastructure for ICT, but
also for transportation and business services
This implies a lack of:
• harbors,
• airports,
• roads and railways,
• other networks (energy, communication, banks).
But also
• Financial services,
• business services (tax advisors, consultants etc.)
76© Freytag 2019
Abundance of natural resources: a curse rather than a blessing?
Why are resource rich countries poor and resource poor countries rich?
An Example: Oil resources in Mill. tons GDP per Capita (in US-$)
2013 2017
Venezuela ca. 65 000 12,237 n.a.
Canada ca. 57 000 52,418 45,032
Russia ca. 34 000 16,007 10,743
USA ca. 24 000 52,782 59,513
China ca. 20 000 7,077 8,826
Brazil ca. 14 000 12,216 9,821
Saudi-Arabia ca. 12 000 24,934 20,849
(The external value of the US-dollar in 2017 was about 20 per cent higher
than in 2013)
Other examples: Denmark is rich (cold and no resources); DRC is poor
(abundant resources, hot). How that?77© Freytag 2019
Resource Curse, Dutch Disease
Abundance of commodities and minerals is often regarded as beneficial.
However, instead of providing prosperity and wealth, natural resources
cause poverty and conflict:
Resource Curse:
• Corruption
• Civil conflict
• Conspicuous consumption (voracity effect)
• Lack of education investment
• Lack of innovation
Dutch Disease:
• Sales of resources cause revaluation of domestic currency
• This causes deindustrialization
78© Freytag 2019
c. Dual economy, Income Distribution
Urbanization is a world-wide phenomenon, not only in industrialized
countries.
Cities grow mega-cities?
brain drain in rural areas
dualistic economic structure with traditional sector and
modern sector
Centers are connected with the world economy (GVCs), the rural areas
are disconnected; relative prices deviate. Market economy in the center,
traditional economy (barter trade etc.) in the periphery.
Vicious circle: with brain drain it becomes worse.
However: modern communication technologies mitigate this problem.
79© Freytag 2019
Income Distribution is rather skewed
The income distribution in developing countries is often particularly unjust.
High inequalities create other - mainly political - problems like:
futile distribution battles and
civil war-like conflicts.
Insofar, inequality is an impediment to development. The Kuznets-curve
argues against that (only theoretically) inequality follows a inverse U-
shape.
Figure 3.4: The Kuznets Curve
Inequality
GDP per
capita 80© Freytag 2019
d. Education and Health
The labor market problem is also an education problem. According to
newer studies*, cognitive abilities need to be analyzed (instead of years of
schooling).
In this context, the term “cognitive ability” refers to measurable
mathematic, scientific and reading ability. Two results:
Cognitive abilities can explain individual income, income distribution
and growth rates very well.
If years of schooling are taken as indicator for educational quality
instead of cognitive abilities, the education problem in developing
countries is underestimated.
Skills and ability of teachers is contributing to pupil’s success**
* Hanushek, Eric A. and Ludger Woessmann (2008), The Role of Cognitive Skills in
Economic Development, JEL, Vol. XLV!, 3, pp. 607-668.
** Bietenbeck, Jan, Marc Piopiunik and Simon Wiederhold (2015), "Africa's Skill Tragedy:
Does Teachers' Lack of Knowledge Lead to Low Student Performance?", CESifo Working
Paper No. 5470, August 2015. 81© Freytag 2019
A pressing problem is the increasing spread of epidemic diseases, e.g.
Ebola, Malaria, HIV contagion, in many developing countries – especially
in Sub-Saharan Africa.
Women are particularly endangered; approx. 75 percent of HIV-infected
women in the world are living in Sub-Saharan Africa.
Reasons are as follows:
low income;
no access to medicine;
low educational level;
low social status of women (sexual habits, marriage with e.g. the
brother of the dead husband, forced prostitution).
Apart from the humanitarian tragedy, the spread of the virus and high
mortality rates are a major disadvantage for development (also for the
healthy). 82© Freytag 2019
The following results are observable:
low life expectancy;
income losses for private households;
destruction of families and increasing number of orphans;
problems for the private economy productivity ↓
weakening of the administration, of courts, health care, etc.;
decrease in human capital, loss of know-how.
Vicious cycle.
In addition and among others, the lack of surgical care is a problem. See
the Amsterdam Declaration on Essential Surgical Care.*
*(http://download-v2.springer.com/static/pdf/756/art%253A10.1007%252Fs00268-015-3057-
x.pdf?token2=exp=1432144481~acl=%2Fstatic%2Fpdf%2F756%2Fart%25253A10.1007%25252Fs00268-015-3057-
x.pdf*~hmac=34fedef322965d9a0cdad040262b8132f8b86a0d66136c222367c19184651fdb)
83© Freytag 2019
Only a (growing) fraction of the population in developing countries has
access to clean water and to sewerage.
Figure 3.5: Access to Clean Water 2015
84Source: https://worldmapper.org/maps/housing-wateraccess-2015/
© Freytag 2019
e. Weak institutions
What do we mean by institutions?
institutions vs. organisations
definition(s) of institutions
1) “…In ordinary speech it is another word for procedure, convention or
arrangement; in the language of books it is the singular of which the
mores or the folkways are the plural…. It is the institution in its role of
organizer which makes of this a social and not a monadic world.” (Walton
H. Hamilton 1932).
2) “…an institution may be defined as a set of socially prescribed patterns
of correlated behaviour… The term behavioural pattern my thought of as
two behaviours (or activities) correlated by a value)…” (Paul Bush 1987).
85© Freytag 2019
3) “An institution is a unique behavioural regularity spread out among
individuals or a pattern of diverse, but coinciding, possibly even mutually
dependent, behavioural regularities. It is displayed whenever the involved
individuals are faced with the same constituent situation of choice” (Ulrich
Witt 1989).
4) “Institutions… are the rules of the game in a society, or more formally,
are the humanly devised constraints that shape human interaction
….reduce uncertainty by providing a structure to everyday life.” (Douglas
North 1990).
Values and behavioural patterns (Bush 1987);
ceremonial vs. instrumental values (important distinction);
ceremonially warranted patterns
instrumentally warranted patterns
ceremonial dominance
spontaneous emergence and purposeful creation;
formal and informal.86© Freytag 2019
87
Figure 3.6: Williamson’s four interrelated levels of social and institutional analysis
Source: Williamson, O. E. (2000), The New Institutional Economics: Taking
Stock, Looking Ahead, Journal of Economic Literature, 38(3), p 595-613.© Freytag 2019
Corruption* is a crucial problem for most developing countries.
Corruption can be defined as taking advantage of an principal-agent
problem: The agent and a third party deceive the principal.
It is largely irrelevant whether or not the principal is the state or a private
individual/firm; although the main problem is corruption in public office.
Some authors concede certain positive effects to corruption, as inefficient
structures might be overcome
“Grease in the wheel”
However, corruption can strongly impede development, as crucial
institutional prerequisites for development do not emerge.
“Sand in the wheel”
* For more information, see the slides of Public Choice, Summer Term 2018
88© Freytag 2019
89
Theories of corruption
Necessary conditions:
• Discretionary power
• Economic rents
• Weak institutions
Causes of corruption:
• Economic and demographic factors
• Political institutions
• judicial and bureaucratic factors
• Geographic and cultural factors
Effects of corruption
• Efficient corruption (greasing the wheel)
• Corruption with a benevolent principal (helping hand)
• Self-enforcing corruption (social interaction)
• Corruption with a non-benevolent principal (grabbing hand)© Freytag 2019
How is corruption measured? CPI = Corruption Perception Index, which is
calculated and published by the NGO “Transparency International”:
“Transparency International (TI) defines corruption as the abuse of
entrusted power for private gain. This definition encompasses corrupt
practices in both the public and private sectors. The Corruption
Perceptions Index (CPI) ranks countries according to perception of
corruption in the public sector. The CPI is an aggregate indicator that
combines different sources of information about corruption, making it
possible to compare countries.”*
Alternative measures:
ICRG corruption index (www.prsgroup.com)
WGI corruption index (www.info.worldbank.org/governance/wgi)
In addition: experienced corruption, criminal statistics, latent variables,
newspaper databases, random audits of local governments
**Source: Transparency International (2015): http://cpi.transparency.org/cpi2013/in_detail/
http://www.transparency.org/files/content/pressrelease/2013_CPISourceDescription_EN.pdf90© Freytag 2019
Figure 3.7: Corruption Perceptions Index 2018:
Since its inception in 1995, the Corruption Perceptions Index, Transparency
International’s flagship research product, has become the leading global indicator
of public sector corruption. The index offers an annual snapshot of the relative
degree of corruption by ranking countries and territories from all over the globe.
In 2012, Transparency International revised the methodology used to construct
the index to allow for comparison of scores from one year to the next. For more
information, visit www.transparency.org/research/cpi.91© Freytag 2019
Corruption Perceptions Index 2018: 13 data sources were used to
construct the Corruption Perceptions Index (CPI) 2018:
1. African Development Bank Country Policy and Institutional
Assessment 2016
2. Bertelsmann Stiftung Sustainable Governance Indicators 2018
3. Bertelsmann Stiftung Transformation Index 2017-2018
4. Economist Intelligence Unit Country Risk Service 2018
5. Freedom House Nations in Transit 2018
6. Global Insight Business Conditions and Risk Indicators 2017
7. IMD World Competitiveness Center World Competitiveness Yearbook
Executive Opinion Survey 2018
8. Political and Economic Risk Consultancy Asian Intelligence 2018
9. The PRS Group International Country Risk Guide 2018
10. World Bank Country Policy and Institutional Assessment 2017
11. World Economic Forum Executive Opinion Survey 2018
12. World Justice Project Rule of Law Index Expert Survey 2017-2018
13. Varieties of Democracy (V-Dem) 2018
Source: https://www.transparency.org/cpi2018#methodology
92© Freytag 2019
-3
-2
-1
0
1
2
3
4
5
6
0
10
20
30
40
50
60
70
80
90
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
GDP Growth and Corruption Perception in Subsaharan Africa vs. the Rest of the World
CPI score (not SSA) CPI score (SSA) GDP p.c. growth (not SSA) GDP p.c. growth (SSA)
Sources: Transparency International, World Development Indicators, own calculations
Higher corruption associated with lower growth? (seems true for the most part)
Figure 3.8: Corruption Perception and Growth
93© Freytag 2019
Life in the Shadow*
Too highly perceived taxes or other aspects of government failure drive
individuals into the shadow economy (working hypothesis).**
Shadow economy legal activity performed in an illegal manner
Informal economy the sub-sector of the economy which is not taxed
and monitored
Particular relevant in developing countries
Empirical evidence shows an increase in the size of the underground
economy since the 1960s as well as the level being highest in Latin
America and Africa.
* For more information, see the slides of Public Choice, Summer Term 2018
** Schneider, Friedrich and Dominik H. Enste (2000), ‘Shadow Economies: Size, Causes and
Consequences’, Journal of Economic Literature, Vol. 38, pp. 77-114.
94© Freytag 2019
3.3) Development theories
a. Positive versus normative development theories
Positive theories aim at answering the question:
How can a certain stage of development be explained?
Normative development theories refer to the implementation of positive
theories to answer the question:
How can development be promoted?
In principle, the answers are given by the positive analyses. When
appropriate, we will discuss the normative conclusions of theory. In some
instances, a number of political recommendations can be declared as
theoretically obsolete.
95© Freytag 2019
b. Economic history approach
Historical regularities are shown. Ideal development stages, which are
accounted as generally valid for development processes, are the
methodical basis for these approaches.
Karl Marx and Walt W. Rostow (1960) are famous exponents. Rostow had
seen his model as alternative to Marx.
The stages are seemingly similar but very different in detail. Thus, the
particular stages are, for example, of different lengths.
Economic history approaches may provide illustrative descriptions of
possible development processes but their lack of theoretical foundation
and their empirical problems make these approaches ineligible to explain
the respective development status of a country and to give instructions.
96© Freytag 2019
Marx
Rostow
Critique
lacking theoretical foundation/ “iron law”
hardly empirically verifiable (Rostow)
empirically indefensible (Marx)
developed and developing countries hardly comparable
time
Prehistoric society
(primitive communism)
Slave
society
Feudalism Capitalism Socialism
Traditional
society
Preconditions
for take-off
Take-off Drive to
maturity
Age of high mass
consumption
97
Figure 3.9: Stages of Development
© Freytag 2019
c. Growth theories
Growth theories explain determinants for growth processes. Thus, these
theories are also of relevance for development policy.
A first model originates from Thomas Robert Malthus (1798), who
identified population growth as obstacle for growth.
Measures against population growth.
Growth is a supply side originated phenomena; it is a matter of production
potential. An economy’s supply side is determined by numerous factors.
Different theories address different determinants.
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Three-sector-hypothesis
Limits to growth and structural change
In 1972, the Club of Rome published the report “The limits to growth”
where it was stated that the present growth path could not be maintained
much longer. The thesis was established by five trends:
population growth
industrial production per capita
environmental pollution
natural resource stocks
food per capita
In doing so, the authors dismissed the consideration of structural change
and were already falsified in 1973.
99© Freytag 2019
The lecture and in particular the exercise will highlight some base lines of
the growth theories. Four types of models are differentiated:
Harrod/ Domar-Model (Post Keynesian theory)
Solow-Model (neoclassical Theory)
New growth theory
Unified growth theory
Thünen-Schumpeter-Paradigm
Whereas the first three categories regard balanced growth, the Thünen-
Schumpeter-Paradigm is explicitly unbalanced.
Literature: Herbert Giersch (1977),Konjunktur- und Wachstumspolitik in der offenen
Wirtschaft, Wiesbaden: Gabler; Herbert Giersch (1979), Aspects of Growth, Structural
Change and Employment – A Schumpeterian Perspective - , Weltwirtschaftliches Archiv, Vol.
115, pp. 629-652; Robert J. Barro und Xavier Sala-i-Martin (1998), Wirtschaftswachstum,
München u.a.: Oldenbourg.
100© Freytag 2019
Harrod/Domar-Model
Concentration on investment, which is of dual character, is the basis of
Post Keynesian growth theory:
demand
capacities.
Closed economies with fixed prices are assumed.
Economies grow dependent on their saving rate and thus, their investment
rate.
Technological progress and structural change are not relevant within this
model.
101© Freytag 2019
Solow-Model
A Cobb-Douglas-production function with exogenous technological
progress (“falls from heaven“) are taken as a basis.
As a result, the aggregate equilibrium growth rate depends on the growth
rate of labor force (dependent on population growth and exogenous
technological progress).
An increase of the saving rate increases the level but not the gradient of
the growth path.
Institutions do not matter; i.e. they are taken for granted.
102© Freytag 2019
New growth theories
New growth theories are an extension of neoclassical growth theories by
positive spillovers e.g. through:
investment into R&D
investment into human capital
As of these spillovers private gain from investments are smaller than
social gains. The leads to underinvestment.
This type of model seems to be relatively meaningless for developing
countries as it cannot be assumed that positive spillovers from these
countries lead to underinvestment and lower equilibrium growth.
Again: Institutions do not matter.
103© Freytag 2019
Unified growth theory
“Unified growth theory suggests that the transition from stagnation to
growth is an inevitable outcome of the process of development. The
inherent Malthusian interaction between the level of technology and the
size and the composition of the population accelerated the pace of
technological progress, and ultimately raised the importance of human
capital in the production process. The rise in the demand for human
capital in the second phase of industrialization, and its impact on the
formation of human capital as well as on the onset of the demographic
transition, brought about significant technological advancements along
with a reduction in fertility rates and population growth, enabling
economies to convert a larger share of the fruits of factor accumulation
and technological progress into growth of income per capita, and paving
the way for the emergence of sustained economic growth.”
Galor, Oded (2005), From Stagnation to Growth: Unified Growth Theory, in P. Aghion and S.
Durlauf (eds.), Handbook of Economic Growth (P. Aghion and S. Durlauf eds.), North-
Holland, from the Concluding Remarks, Section 7.
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Thünen-Schumpeter-Paradigm (Herbert Giersch)
Growth take place in space and time. Thereby structural change is crucial.
The steady state equilibrium is not within the focus.
Thünen-component:
With increasing distance towards the centre, economic activities lose in
intensity. Within the centre, agglomeration creates a stimulating socio-
economic atmosphere and positive externalities.
Schumpeter-component:
Agglomeration creates, both, negative externalities (e.g. environmental
pollution) and increasing prices for non-trading goods (partly relevant for
intermediates) etc.
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Negative externalities can be overcome through structural change and
technological progress. On this account, high-skilled labor and clever
people and an adequate atmosphere for innovation are needed. Although
not widely acknowledged, Herbert Giersch’s work is a fundament for much
of modern innovation research.
The relative importance of positive and negative externalities is also
dependent on economic policy. It is up to the government to create
convenient framework which gives incentives for entrepreneurial activity
and innovation. Such a framework includes (among others):
tax system (level and structure)
educational quality
infrastructure
intensity of regulation e.g. average length of licensing procedures)
property rights, rule of law etc.
106© Freytag 2019
These factors are of high relevance regardless of the stage of
development of the respective economies.
The center's capacity for innovation and capital accumulation is crucial in
the Giersch model. For the periphery, capital is relevant as complementary
factor for simple labor.
Capital accumulation (through savings) takes place in the centre. As not
the whole amount of savings is invested into high rent investments within
the capital rich centre, capital shifts to the periphery where the marginal
efficiency of capital (MEC) is, c.p., higher. The Thünen cone (Fig. 2.1)
becomes a volcano.
Impact on the balance of payments
In this way, there is an adjustment of the MECs of the centre and the
periphery.
107© Freytag 2019
Fig. 3.10: Thünen-Schumpeter-Income-Cone
GDP per
capita
MEC
+
distancedistance centre
108© Freytag 2019
The “dent” in the Thünen-Income-Cone
The adjustment of the MECs over the distance depends on several
factors:
How are regions/locations positioned in locational competition?
Are there exogenous shocks?
in the region
in other regions
After such shocks, the region/location again depends on the improvement
of the framework for innovation/imitation and attraction of internationally
mobile factors.
109© Freytag 2019
d. Dependency theory*
These approaches explain the underdevelopment of certain countries with
dependences of which these countries are normally not able to resolve
themselves.
• Lewis two-sector-model of structural transformation; traditional and
modern sector;
• Neocolonial dependence model;
• False paradigm model
• Dualistic-development thesis
These hypotheses were popular in the 1960s and 1970s, but lack a
theoretical foundation (except for the Lewis model). Later they were
replaced by the neoclassical counter-revolution and institutional
approaches.
Todaro, Michael P. (2000), Economic Development, 7th edition, Reading, Mass. et al.:
Addison-Wesley, pp. 84-94110© Freytag 2019
111
Source: Todaro, M. P., & Smith, S. C. (2009). Economic
development , (10. ed.). Harlow [et al.].
Figure 3.11: The Lewis Model of Modern-Sector Growth in a Two
Sector Surplus Labour Economy
© Freytag 2019
Summary of dependency theories
The reasons for underdevelopment are mainly of exogenous nature.
This has consequences for the political remedy!
Following obstacles to development are identified:
Underdevelopment and insufficient factor endowment
Underdevelopment and dualistic economic structures
Underdevelopment and international relations
Underdevelopment and population growth
112© Freytag 2019
These four approaches cannot be seen independently; 2 examples:
population growth factor endowment
international relations factor endowment
etc.
The analyses of these patterns shows that there is also an overlap with
other approaches, e.g. of growth theory and institutional theory; 3
examples:
factor endowment growth theory
factor endowment institutional setting
international relations institutional setting
etc.
113© Freytag 2019
Trade is anti-developmental in this perspective.
What are theoretical arguments arguing against trade as a positive
determinant of development?
uneven distribution of power among trading partners
backlash effects
decreasing terms of trade
cyclical variations of export revenues
trade barriers in OECD countries (including tariff escalation)
There are several difficulties in finding the theoretical quality of all these
arguments, see chapter 4.
114© Freytag 2019
International capital movement
Following the Giersch-Hypothesis and the Harrod-Domar-Model, there is
no concern against international capital movements from a development
perspective.
Investments can close gaps and help to establish complementary
factors.
This is challenged by following arguments:
• Colonialization laid the foundation
FDI during the colonialization did not serve the aim of
transferring know-how or fostering industrialization:
Revenues stemming from FDIs were transferred back to the
home country.
• Further, investments aimed at the exploitation of these countries.
115© Freytag 2019
This argumentation is theoretically not convincing. It is difficult to
distinguish between problems related to FDIs as such and conditions in
developing countries (e.g. MEC).
Therefore, a theoretical analysis of development political pros and cons of
FDIs is necessary; without considering basic problems related to the
process of industrialization (which are existent in any case):
Pro:
increase of the investment ratio;
increasing employment of other factors;
increasing possibility to gain foreign exchange;
saving of foreign exchange with FDIs on internal markets;
know-how-transfer and human capital building;
integration into GVCs.
116© Freytag 2019
Contra:
technology not appropriate for factor endowment i.e. impact on
employment is low;
poaching;
factor use within the destination country too low (especially for
internal FDIs);
crowding out of domestic competition is possible;
human rights abuses;
profit transfer hampers the formation of savings.
An unambiguous statement on the assessment of FDIs is not possible.
Instead, a precise analysis for each case is necessary.
BUT: How is it possible to attract “reasonable” investment?
Which role has the foreign country (Investment guarantees?) and which
the domestic one (Institutions?)? 117© Freytag 2019
Conclusion: What do the dependency theories contribute to the
explanations of underdevelopment?
Several aspects are indeed adequately considered, e.g.
institutional weaknesses
the role of dualistic economic structures;
the resource problem;
trade protectionism other countries;
educational vicious cycle;
the problem of building savings or of the capital export.
However, these arguments do not justify to attribute development
problems to external causes.
118© Freytag 2019
e. Institutional economic approaches
Elements relevant for the development of an economy is the economic
order:
constitutional quality / rule of law property rights
monetary order fiscal and tax system
social security political stability
competence and liability principle of competition /
existence of markets
existence of capital markets absence of corruption
economic freedom
These elements are linked with each other and interdependent.
119© Freytag 2019
The basic hypothesis argues that if such elements are lacking,
development problems are to be expected.
Examples:
lacking rule of law deters foreign investors;
as of lacking property rights plans and investments become less
profitable;
instability destructs the allocation function of (relative) prices;
lacking fiscal discipline leads to erratic tax systems and
encourages monetization of budget deficits;
social frictions have high opportunity costs such as the
constraint of peaceful labor division;
political instability has the same impact;
lacking markets reduce the potential for labor division and an
efficient resource allocation;
lacking capital markets inhibit loans and the efficient usage of
savings according to shortages;
120© Freytag 2019
According to de Soto*, poverty is not the crucial development problem.
Lacking credit markets and land register systems are responsible. Even
though developing countries are rich in real estate, these are not lendable
as of several reason (e.g. insufficiently defined property rights).
Institutions are relatively difficult to measure or to validate empirically. The
problem is to generate quantitative variables out of qualitative indicators.
For economic studies, institutions are mostly operationalized by using a
normalized index.
Sometimes, mortality, climate and geographical characteristics in the past
are used as proxies for institutions. If the mortality within a colony is low,
there is a high incentive for long-term investments; e.g. it is invested into the
legal state.
*de Soto, Hernan (2000), The Mystery of Capital - Why Capitalism Triumphs in the West and
Fails Everywhere Else, Basic Books, USA; http://ild.org.pe/publications/books/the-mystery-of-
capital.
**Rodrik, D., Subramanian, A., Trebbi, F. (2002): Intitutions Rule: The Primacy of Institutions
over Integration and Geography in Economic Development, IMF Working Paper (Washington:
International Monetary Fund). 121© Freytag 2019
f. Political economy approaches
Economic methodologies are used to describe political behavior. Political
decision makers are seen as individuals with own utility functions.
Who are the relevant political players in the case of developing countries?
Following are to distinguish:
domestic governments and interest groups
foreign governments and interest groups, especially in OECD or
G8 countries
development aid agencies, NGOs
International organizations, especially World Bank, IMF and WTO
Underlying hypotheses (no statement on facts) are identical for all cases:
Politics can be explained by the self-interest of political players.
From an economic viewpoint, this inhibits optimal development
policies.
122© Freytag 2019
From a normative perspective, political economic analyses allows only for
limited conclusions. This can be drawn back to the fact that normally the
same forces which cause the crisis out of rational consideration, need to
contrive reforms. The case is differently if external forces promote the reform
process:
Conditionality of aid
External nominal anchor (Exchange rate linkage)
Self-commitment via international agreements (WTO)
Power of law for international agreements (direct effect)
Moreover, political economy considerations allow a normative statement on a
reform of the international financial institutions (IFIs).
Meltzer Report proposes strict division of the tasks of World Bank and IMF
IMF: balance of payments crises
World Bank: development policy
The question for the conditionality is of relevance, and the amount of
available resources per project needs to be reduced. 123© Freytag 2019
124
Digression: Randomized Controlled Trials (RTCs)*
• RCT is an evaluation method, where a treatment (as part of
developmental program/policy) is randomly assigned among
participants.
• This experimental set-up allows for causal identification of the impact
the developmental program.
• RTCs are a relevant research method in current economic research.
• RCTs have become a standard tool for evaluating the impact of
developmental policy.
*Banerjee, Abhijit V., Abhijit Banerjee, and Esther Duflo. Poor economics: A radical
rethinking of the way to fight global poverty. Public Affairs, 2011, Chapter 1.
Banerjee, Abhijit V., and Esther Duflo. "The experimental approach to development
economics." Annu. Rev. Econ. 1.1 (2009): 151-178.
Cameron, Drew B., Anjini Mishra, and Annette N. Brown. "The growth of impact evaluation
for international development: how much have we learned?." Journal of Development
Effectiveness 8.1 (2016): 1-21.
Miguel, Edward, and Michael Kremer. "Worms: identifying impacts on education and health
in the presence of treatment externalities." Econometrica 72.1 (2004): 159-217.
© Freytag 2019
125
Figure 3.12: Number of published impact evaluation in international
development
Source: Cameron et al. 2015© Freytag 2019
126
What insights can Randomized Controlled Trails give us?
• Causal effect of a program, the effect the program has on a person
compared to the situation where that exact same person would not get
a treatment
• Obviously the counterfactual, the situation where, the exact same
person who received the treatment, does not receive the treatment,
cannot be observed
• By randomizing treatment, personal characteristics (age, income,
ability) will be on average the same for the people that receive the
treatment (treatment group) compared to the people that do not receive
the treatment (control group)
• In this way, randomization controls for the personal characteristics that
may influence the effect that characteristics have on a program
• If we do not randomize treatment, the impact of the treatment
comparing, by comparing measures before and after the program, may
suffer from selection bias
• Generalization?© Freytag 2019
127
Example of Randomized Controlled Trial
Foundation
• Intestinal Worms are prevalent under school-aged children in many countries
• They lead to lower levels of health (iron-deficiency anemia, protein-energy
malnutrition, abdominal pain) which can adversely affect school attendance
• Primary School Deworming Project in Kenya (Busia) was evaluated by using
RCT Method
• Treatment receiving medicine combined with health lectures on worm
prevention
• Treatment provided by Kenyan Ministry of Health and financially supported by a
Dutch Non-Profit (International Christelijk Stuenfonds Africa (ICS))
Randomization
75 schools were randomly divided into three groups (each 25 schools)
In 1998 group 1 was treatment group, while group 2 and 3 were control
In 1999 both group 1 and 2 received treatment while group 3 was still control
group
In 2001 all schools received treatment
In 1998 pupil characteristics are the about the same for all groups (average year
of birth, proportion of boys, attendance, self-reported frequency of being ill),
indicating that randomization worked© Freytag 2019
128
Results
• The treatment creates large positive health and school participation externality for
untreated Students
• Accounting statistically for the positive health externality, the school-based
deworming program increased primary school participation by 7.5 percentage
points
• Overall school absenteeism fell by 25%
• There was no effect on worm prevention behaviors (wearing shoes, contact with
fresh water)
• Calculated cost per treatment per child per year is 49 cents
• Calculated cost per outcome (increasing one child-year of education) is $3.25
• Highly successful and is an excellent program to scale
• The advantages of several RCTs is that we can compare their outcomes with
other studies by looking at calculated cost per outcome
• Other inputs may also increase education: Hiring an extra teacher, improving
access to textbook
• Another RCT found that the cost of hiring a teacher for an extra child-year of
education is $60
• Deworming is therefore almost about 20 times as effective in promoting
education as hiring more teachers
© Freytag 2019
3.4) Approaches of development policies
By taking theoretical considerations into account, chapter 4 is concerned
with the practical implementation of development policies. Following
measures are currently realized or discussed:
Internal reforms (e.g. capital market);
Measures for sustainability and leapfrogging;
Climate policy and development.
Support by international initiatives;
Debt relief (HIPCs initiative);
Development aid;
Trade and capital movement liberalization, increase of FDI
(chapter 4).
129© Freytag 2019
a. Internal reforms
Following latest discussions, many developing countries started internal
reforms.
If implemented, these reforms are mainly successful. Examples are Chile,
in part Argentina, Central and Eastern Europe and several Asian countries.
In Africa, only few examples for internal reforms are observable
(Mozambique, Burkina Faso). Reform elements are:
Institutional change
Capital markets and microcredits
others, such as
currency reform (stabilization program);
privatization and fiscal policy reform (often ignored)
pension policy;
trade policy.
130© Freytag 2019
Institutional change
How and why do institutions change?
crisis?
evolution?
revolution?
reform?
Is institutional change always discretionary? Does it follow regularities?
Forms: collective choice theories,
evolutionary theories,
blending evolution and design,
equilibrium view,
inertia, bounded rationality, role of history.131© Freytag 2019
Why do reforms happen sometimes and why not on other occasions?
Freytag and Renaud (Journal of Evolutionary Economics, 2007) analyse
the policy change from short-term to long-term orientation (rule-binding) in
economic policy, which is deemed to be favourable to economic welfare:
business cycle;
time consistency;
veil of ignorance.
Learning plays a major role in the concept. It is routed in prior knowledge
of the agents and their limited ability to process new knowledge
(information). The attention process is selective (shift effect vs. refinement
effect).
Let us take a realist’s perspective: short-term orientation.
Learning takes place according to experience; if the model works, change
is not necessary; otherwise, change may be considered (reluctantly).
132© Freytag 2019
Pathological learning (1-4) vs. active learning (5-9): a reform process:
(1) discretion poor economic performance (2) underground activities
and corruption (3) vested interests (4) deeper government
intervention
(5) cognitive dissonance; i.e. the model does not deliver (6) feedback to
interest groups, burden of proof being reversed (7) pressure on the
government (8) doubts in politics, as model seems to be ill-performing
(9) foreign support.
The level and role of active learning are positively dependent on…
… integration of a country into the world economy (pressure, images);
… positive experience with rules (competition rules, CBI, golden fiscal rule);
… good education;
… free media.
In other words: competition drives (institutional) innovations!
133© Freytag 2019
A reform agenda: The Washington Consensus
Fiscal discipline;
Redirection of public expenditures toward allocatively and
distributively efficient projects;
Tax reform (lower marginal rates, broader tax base);
Interest rate liberalization;
Competitive exchange rate;
Trade liberalization;
Liberalization of FDI inflows;
Privatization;
Deregulation (abolish barriers to entry and exit);
Secure property rights.
Critique initiated Rodrik to formulate the “Augmented Washington
Consensus“.
134© Freytag 2019
The “Augmented Washington Consensus“ contains additional elements
which characterize an economic order almost completely:
Corporate governance;
Anti-corruption;
Flexible labor markets;
WTO agreements;
Financial codes and standards;
“Prudent” capital-account opening;
Non-intermediate exchange rate regimes;
Independent central bank/ inflation targeting;
Social safety nets;
Targeted poverty reduction.
135© Freytag 2019
Educational policy as institutional reform
Hanushek and Woessmann (2008) derive following policy options from
problems which occur for developing countries as of lacking cognitive
abilities of people living in these countries:
• Institutional reforms;
• Accountability of school politicians ;
• Decentralized autonomy competition between school
authorities;
• Responsibilities for principles
• Right of choice for parents.
136© Freytag 2019
A crucial problem is the lacking financial endowment of small and
medium sized enterprises and entrepreneurs in developing countries. The
reason can found in imperfect and badly organized capital markets:
Capital market failure;
Fragmented capital markets;
Policy failure.
Especially small loans, which are affected by the so called credit rationing,
are concerned with these problems. Small enterprises are not considered
with for them favorable interests by the banks.
Adverse selection
Moral Hazard
137© Freytag 2019© Freytag 2019
Mircocredits as solution
With the help of subsidized microcredits a financial market is established.
Thereby, the special circumstances are considered. The focus is on
poverty reduction: women shall especially be supported. Mechanisms are
for example:
Cooperative models;
Group credit models;
Progressive Lending.
There are many positive experiences (e.g. in Bangladesh and Bolivia).
Nobel Peace Prize 2006 for M. Yunus (Grameen Bank)
138© Freytag 2019
Some projects are self-supporting and commercially successful. Within the
insurance economy exist thoughts on micro insurances.
Further there are technological innovations.
However, there also have been negative developments. The fast growth of
the markets led to irrational lending.
Often the credits are hard to repay. In fact a credit is still a credit.
Examples from the British press:
http://www.theguardian.com/global-development-professionals-
network/2013/nov/19/microcredit-south-africa-loans-disaster
http://www.bbc.com/news/business-11664632
139© Freytag 2019
b. Action for Sustainability and Leapfrogging
Basically, leapfrogging refers to the skipping of development stages
see also economic history approaches (Rostow)
Especially, the necessity of (environmental) sustainability of the
development process causes this approach being relevant.
Leapfrogging vs. catch-up development
A central question is: How are fairer living conditions without exploding
resource consumption possible? (Source: Wuppertal Institut)
As the process of industrialization is shortened or leapfrogged, natural
resource can be economized.
Besides the environmental advantages, conflicts of interests with
developed countries may be avoided if the participation of developing
countries in the international labor division is intensified without
pressuring traditional sectors in OECD-countries. 140© Freytag 2019
The structural change which is necessary in industrial countries – especially
within the so called low wage labor market – is better managed.
However, it needs to be secured that developed countries open their
markets for alternative goods and services. One possibility for leapfrogging
is to support modern marketing forms (e-commerce) and to create new
markets and new forms of labor division, respectively.*
The problem is the financing and creation of needed network infrastructure;
here, positive developments are observable for mobile telephony.
Further, these activities need to be included into the global labor division.
*Sources: Goldstein, Andrea and David O‘Connor (2000), E-Commerce for Development:
Prospects and Policy Issues, OECD Development Centre Technical Papers No. 164,
http://www.oecd.org/dataoecd/37/61/1922730.pdf
Bastos Tigre, Paulo and David O‘Connor (2002), Policies and Institutions for E-Commerce
Readiness: What Can Developing Countries Learn from OECD Experience?, OECD
Development Centre Technical Papers No. 189, www.oecd.org/dataoecd/17/38/2081349.pdf
141© Freytag 2019
A measure for leapfrogging is the promotion of electronic trade in
developing countries.
Starting point was the establishment of the DOT Force (Digital Opportunity
Task Force) by the G8.
Their task is the determine possibilities to close the digital divide. There
are no administrative task and authorities connected with the DOT Force
The DOT Force relies on so-called “Public-Private Partnership“, i.e. the
explicit integration of the private sector into public efforts.
Few concrete facts are known; political economic considerations
cannot be denied.
No spillovers existing.
142© Freytag 2019
In the last decades, a positive trend towards the utilization of mobile
telephony is observable.
Results of different empirical studies indicate a positive correlation
between an increase in mobile telephony penetration and an increase of
different development political indicators.
However, it is difficult to quantify the isolated effect of mobile telephony
penetration, but some positive effect can be observed and are increasingly
expected.
In Kenya for instance, a thriving industry develops functions, apps and
devices, see e.g.: http://www.safaricom.co.ke/.
The number of people connected with the world has dramatically risen.
143© Freytag 2019
144
0
10
20
30
40
50
60
70
80
90
100
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20172018*
Per
10
0 in
hab
itan
ts
mill
ion
s
Individuals using the Internet (in millions)
Individuals using the Internet per 100 inhabitants
Note: * EstimateSource: ITU World Telecommunication /ICT Indicators database
© Freytag 2019
Figure 3.13 Global numbers of individuals using the Internet,
total and per 100 inhabitants, 2001-2018*
145© Freytag 2019
82,0
75,970,9
57,853,2
51,7
22,0
0
10
20
30
40
50
60
70
80
90
100
Europe CIS** The Americas World Asia & Pacific Arab States Africa
*
Regions are based on the ITU BDT Regions, see: http://www.itu.int/en/ITU-D/Statistics/Pages/definitions/regions.aspxNote: * Estimate ** Commonwealth of Independent StatesSource: ITU World Telecommunication/ICT Indicators database
%
Figure 3.14: Percentage of households with Internet, by region, 2018*
138,1
120,6
108,2 108,1
96,8 91,6
73,5
0
20
40
60
80
100
120
140
160
CIS** Europe Arab States The Americas World Asia & Pacific Africa
Regions are based on the ITU BDT Regions, see: http://www.itu.int/ITU-D/ict/definitions/regions/index.htmlNote: * Estimate ** Commonwealth of Independent StatesSource: ITU World Telecommunication /ICT Indicators database
146
Figure 3.15 Mobile-cellular subscriptions per 100 inhabitants, 2015*
© Freytag 2019
147© Freytag 2019
136,8
120,0112,8 109,7 107,0
103,1
76,0
0
20
40
60
80
100
120
140
160
CIS** Europe The Americas Asia & Pacific World Arab States Africa
Regions are based on the ITU BDT Regions, see: http://www.itu.int/ITU-D/ict/definitions/regions/index.htmlNote: * Estimate ** Commonwealth of Independent StatesSource: ITU World Telecommunication /ICT Indicators database
Figure 3.16: Mobile-cellular subscriptions per 100 inhabitants, 2018*
Mobile telephony as transfer and distribution channel for economic processes:
E-Banking, realization of financial transactions via mobile phone and
PIN;
Payment system for remittances
Distribution of micro credits via mobile telephony (Kenya und
Tanzania)*
Mobile telephony as channel for of information
Circulation of market and price information, reduction of information
asymmetry between producer and intermediaries
Anti-illiteracy programs for rural levels of the population (Project ABC,
Niger)
E-health, disease-tracking systems etc.
Programs for the enhancement of health care of rural population,
telediagnosis, call for vaccination (e-Health, Western Africa)
Political information before general elections. Option to inform policy
critical population groups (Kenya, Tanzania...)
148© Freytag 2019
Tourism as determinant for development
A special problem of the concept of sustainability as well as of
leapfrogging is that this type of development reflects the preferences of
developed countries.
Preferences of people living in developing countries are not necessarily
considered; they want jobs and rising living standards.
environmental protection as superior good
Approach to the solution following Coase*:
Property rights for the exploitation of the environment are in the
procession of local people who is interested in considerate exploitation,
participates in financing trade of exploitation rights.
Coase, Ronald C. (1960), ‘The Problem of Social Cost‘, Journal of Law and Economics, Vol.
3, October, pp. 1-44.
149© Freytag 2019
Tourism may bridge developing and developed countries’ preferences. It
creates jobs (often low-skilled) and has indirect effects on transportation,
manufacturing and crafting in developing countries.
Empirical studies show that developing countries have comparative
advantages in the tourism sector;
climate
abundant nature
historical sites
complementary labor
Thus, biodiversity can be interpreted rather as a location factor than as a
cost factor. It would be profitable to invest into biodiversity.*
Industrialization would be lowered and tertiarization promoted.
Still, the growth potential of tourism is limited.
*Freytag, A. and Chr. Vietze (2009). Biodiversity and International Tourism: A Story of
Comparative Advantage, The Open Political Science Journal, No. 2, pp. 23-34.150© Freytag 2019
c. Climate policy and development
Still, developing countries have only taken only poor efforts to solve
environmental problems. However, environmental problems and climate
change might cause serious developmental problems. There is a trend
bringing together development and environment: high potential for
renewable energy in developing countries.
Greening growth in Africa
However, global environmental problems require a global strategy for their
overcoming.
Environmental problems as global spillovers.
Market failure vs. government failure (Coase).
In principle, the Kyoto-protocol is such a strategy.
151© Freytag 2019
Kyoto-Protocol
Contracting parties (so called Annex I countries) agreed upon a collective
reduction of greenhouse gas emissions by 5.2 % (effective 1990) until
2012 (commitment period: 2008-2012).
Thereby, the individual commitments vary.
Basically, the reduction (measured in carbon dioxide equivalent) is
possible via avoidance and utilization of or the construction of sinks
respectively, i.e. through the utilization of soils and forest to bind
greenhouse gas. Three mechanisms exist:
Emission Trading
Joint Implementation
Clean Development Mechanism
152© Freytag 2019
Therewith, flexible (in spatial as well as temporal regard) and market
based instruments were established with which’s help negative spillovers
can be eliminated by simultaneously maintaining enough freedom for a
competition of systems.
However, there are a number of problems which may impede a consistent
global climate policy.
Hot Air
Increasing international air traffic
Calculation of the efficiency of reforestation
Sanctions
Attempt to implement a market based and source-specific global
environmental policy; further development in December 2007 in Bali,
Copenhagen 2009, Cancun 2010, Durban 2011, Paris 2015, Bonn
2017.
153© Freytag 2019
In December 2007, representative of 187 countries came together to
debate on the future of the climate policy. Negotiations were conducted
on how to guarantee a smooth transition after the end of the Kyoto-
protocol. Furthermore, measures on following topics were decided:*
• Adaption;
• Technology;
• REDD;
• IPCC;
• CDM:
• Storage;
• LDCs.
In Copenhagen 2009 no results were reached, in Cancun 2010 a
declaration of intent on the limitation of the temperature was reached.
*Press Release from the 15th Dec. 2007: UN Breakthrough on climate change reached in
Bali, http://unfccc.int/2860.php
154© Freytag 2019
Paris Agreement*
The objective following Article 2 is "enhancing the implementation" of the
UNFCCC through:[6]
• "(a) Holding the increase in the global average temperature to well
below 2 °C above pre-industrial levels and to pursue efforts to limit the
temperature increase to 1.5 °C above pre-industrial levels,
recognizing that this would significantly reduce the risks and impacts
of climate change;
• (b) Increasing the ability to adapt to the adverse impacts of climate
change and foster climate resilience and low greenhouse gas
emissions development, in a manner that does not threaten food
production;
• (c) Making finance flows consistent with a pathway towards low
greenhouse gas emissions and climate-resilient development."
Countries furthermore aim to reach "global peaking of greenhouse gas
emissions as soon as possible".
* https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXVII-7-
d&chapter=27&lang=en 155© Freytag 2019
Rules are comparable to the original protocol:
• Nationally determined carbon dioxide reductions;
• the agreement enters force only if 55 countries representing 55 per
cent of emissions ratify it;
• deadline was April 2017 (185 countries ratified as of June 2019,
http://unfccc.int/paris_agreement/items/9485.php);
• developing countries are also contributing (new);
• Green Climate Fund (100 bn US-$ annually)
support from developed countries;
• weak enforcement mechanism;
• despite the withdrawal from the Paris Agreement, the position of US-
administration unclear.
156© Freytag 2019
d. Support by international initiatives (examples)
Corporate Social Responsibility
Recently, companies are advised to not just orientate on entrepreneurial
goals. Moreover, the company would have a responsibility towards the
society.
The is the so called “Corporate Social Responsibility“ (CSR) which does
not only account for shareholder but to all stakeholder. These are:
the employees;
the environment;
the community;
others.
Legitimation and entrepreneurial significance of the demand for CSR are
not evident; possibly as marketing instrument
157© Freytag 2019
The Global Compact
The Global Compact was developed as part of the global economic
political assignments.
Trade policy lies within the responsibility of the WTO. The thesis is that
humanitarian and environmental concerns are poorly represented so far.
Public Private Partnership as part of the Global Governance.
Involved parties are UN-organizations, companies, NGOs.
The implementation involves four elements
Didactic forum
Dialogue
Leadership
Networks
158© Freytag 2019
The Global Compact comprises following principles:
1. Human rights
• “Businesses should support and respect the protection of
internationally proclaimed human rights; and
• Make sure that they are not complicit in human rights abuses”.*
2. Labor
• “Businesses should uphold the freedom of association and the
effective recognition of the right to collective bargaining;
• the elimination of all forms of forced and compulsory labor;
• the effective abolition of child labor; and
• eliminate discrimination in respect of employment and occupation”. *
159© Freytag 2019
3. Environment
• “Business should support a precautionary approach to environmental
challenges;
• undertake initiatives to promote greater environmental responsibility;
and
• encourage the development and diffusion of environmentally friendly
technologies”*.
4. Anti-Corruption
• “Businesses should work against corruption in all its forms, including
extortion and bribery”*.
*Source: United Nations (2011): United Nations Global Compact. Ten Principles.
http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html
160© Freytag 2019
Critical evaluation of the Global Compact
As a forum for dialog and measure for voluntary agreements, the Global
Compact can be positively evaluated.
Signaling!
From a humanitarian perspective, these principles are self-evident (but not
complied everywhere); therefore, their emphasis is necessary. It needs to
be highlighted for all concerned parties that the observance of these
principles is economically reasonable.
Mechanism of sanctions?
Business participants: 8.744 (315 Germans)
Non-business participants: 5.142 (81 Germans)
Success or failure?
161© Freytag 2019
e. Debt relief (HIPCs Initiative)
A big problem is the dept expressed in internationally convertible currency
of many developing countries.
To solve these debt crises, a number of propositions and initiatives were
presented, including above all debt relief and debt restructuring (e.g.
Jubilee 2000).
Central Institutions and initiatives:
Paris Club
London Club
HIPC Initiative of the Washington Institutions and the G8.
A state insolvency order is still lacking.
162© Freytag 2019
Especially the HIPC (Highly indebted poorest countries) initiative arouse a
high degree of international attention.
The HIPC initiative for the conditional debt relief was decided in 1996 and
extended by the G7/G8 in 1999; based on PRSP, debt relief is decided
after tow steps have met (completion point, decision point).
In total, 42 countries were ranked as HIPC, today they are 39, of which 36
reached the decision point (fully eligible) and 3 the completion point.
Aim of this initiative is the reduction of the debt level in relation to the
exports to approx. 150 percent.
At the G8 summit in 2005, a further debt reduction in the Multilateral Debt
Relief Initiative (MDRI) was decided; 18 countries are concerned.
The conditionality refers to aimed poverty reduction which is set within the
framework of Poverty Reduction and Growth Facility of the IMF.
Source: https://www.imf.org/external/np/exr/facts/hipc.htm163© Freytag 2019
How is the debt relief for HIPCs to be assessed?
It is disputable if debt relief is a good method to solve development
problems. If there are no changes in the economic policy, it is rather
contra-productive.
First, basic arguments for a debt relief:
Allocative arguments
fresh start, debt overhang
negative externalities, risk of contagion
Reforms political better enforceable (“dirty
work“)
politically required to increase the willingness of the political class
for reforms
Without international coordination, it will come to free-riding.
164© Freytag 2019
Basic arguments against:
Moral hazard in developing countries
Moral hazard in creditor banks
Support of corrupt regimes (von Fürstenberg 1999: “Butchering
Burundi“)
Distraction from important measures (“Aid by Trade“).
Further, it is reasonable to distinguish between structural and level
problems. If the interest share of the debt service is very low (which is the
case in many HIPCs), the debt problem is less urging. With and without
debt relief, it is solely the economic policy which counts; institutions
matter!*
* Source: Dluhosch, Barbara (1999), ‘The G7 and the Debt of the Poorest‘, in J.J. Kirton, J.P.
Daniels and A. Freytag (Hrsg.), Guiding Global Order, Aldershot et al.: Ashgate, pp. 79-91.
165© Freytag 2019
What drives debt relief?
The debt relief for developing countries barely follows economical
rationality, but instead a path dependency.
It is politically driven by governments in donor countries who
do not have to admit past mistakes;
achieve a political advantage and
can ignore other important topics.
The HIPC initiative increased the importance of institutional reforms.
Institutions matter in the 2000s.*
With the MDRI of the World Bank debt relief decisions are rather
politically driven again.**
* Freytag, A. and G. Pehnelt (2009), ‘Debt Relief and Changing Governance Structures in LDCs’, World Development, 2009,
pp. 62-80.
** Freytag, A. and J. Schmied (2019), Debt Relief and Good Governance: new Evidence in Developing countries for the
Period 1990-2013, Applied Econometrics and International Development Vol. 19-1 (2019) 166© Freytag 2019
f. Development aid
Development aid in the actual sense is the part of financial held which
builds on central determinants of development, namely:
Real capital,
Human capital and
Technical-organizational knowledge.
It is a resource transfer at special conditions.
Principal forms of development aid:
Financial aid (in Germany by the KfW),
Technical aid ( in Germany by the GIZ) and
Personnel aid (DAAD, CDG, DEG, GIZ).
167© Freytag 2019
The DAC approves only these resource transfers as development aid
which feature a grant share of 25%.
Furthermore, the transfer needs to fulfill certain requirements for the
promotion of the economic and social development., and the recipient
country needs to registered.
The DAC considers only public and non private development aid.
Germany gives approx. 0.5% of GNI as public development aid, the
biggest share as bilateral aid (in the narrow sense).
On average, the aid of all DAC-countries together amounts to 0.24% of
GNI (extreme cases are Denmark: 0.9%, and the USA: 0.17%).
China as non-DAC-country gives 0.35% of GNI.
Wanted are approx. 0.7%.
168© Freytag 2019
Terms of development aid
Project aid
Program aid
Food aid
Aid tying
Important is the review of the effectiveness of the development aid. The
KfW as well as the German government (http://www.deval.org/de/) use a
evaluation system for their purposes:
4 principle questions under the consideration of sustainability:
Effectiveness
Relevance
Efficiency
Undesirable side effects
169© Freytag 2019
Economic assessment of development aid
Lord Bauer (LSE), one of the world’s most famous development
economists, captured still valid points of criticism on development aid:
Aid promotes corruption;
aid contributes to the awareness of development stemming from
outside;
aid promotes rent-reeking at the expense of profit-seeking;
aid benefits elites;
aid comforts governments in donor countries and reduces efforts of
market liberalization;
in this way aid creates dependencies.
Bauer’s conclusion: Public development aid is except for decentralized
projects and emergency aid counter-productive.
170© Freytag 2019
The theoretical insights of Peter Bauer were mostly confirmed by a meta-
analysis by Hristos Doucouliagos and Martin Paldam*. The authors
determine the impact of development on:
Investment: Increase by 25% of the aid, the remaining amount
trickles away (S↓);
Growth: low insignificant increase;
Growth (controlled): no effects
*Doucouliagos, Hristos and Martin Paldam (2009), The aid effectiveness literature. The sad
result of 40 years of research. Journal of Economic Surveys 23, pp. 433-61.
Grill, Bartholomäus (2005), Ach, Afrika, München: Goldmann.
Easterly, William (2006), The White Man’s Burden, London: Pengiun Books.
Paldam, Martin: Aid Effectiveness Literature Website, http://www.martin.paldam.dk/Meta-
AEL.php
171© Freytag 2019
In total, 141 studies with 1,777 regression equations were examined..
Besides the low effectiveness of aid, the literature shows that the results
depend on characteristics of journals and authors:
Ideology;
The authors’ past;
Institutional interests;
Publication policy.
The results are not undistorted.
The study can serve as warning for other scientists.
172© Freytag 2019
On the other hand, slightly positive effects of aid on democratic institutions
are observable.
Institutions: slightly positive effects *
Maybe, developing aid – as well as debt reduction – can be linked to
institutional reforms which then have an indirect impact.. The literature on
institutions and growth shows a positive correlation between both.**
Is this the reason why the united states reorganized their aid budget to
higher shares for the promotion of good governance
*Heckelman, Jac (2010), Aid and Democratization in the Transition Economies, Kyklos 63,
pp. 558-79.
**Glaeser, E.L., La Porta, R., Lopes-de-Silvanes, F., Shleifer, A., 2004. Do Institutions Cause
Growth? Journal of Economic Growth 9, pp. 271-303.
***Azpuru, D., Finkel, S.E., Pérez-Linán, Seligon, M.A., 2008. Trends in Democracy
Assistance. What has the United States Been Doing? Journal of Democracy 19, pp. 150-9.
173© Freytag 2019
Furthermore, case studies show that development aid is only helpful in
countries with functioning institutions, i.e. where good governance is
prevalent.
Botswana
Despite these results, development aid has recently been and shall be
extended. European countries, in particular Germany, have started a few
initiatives towards Africa (e.g. Compact for Africa, Marshall Plan with
Africa).
However: Myopia wrt aid and trade!
Infrastructure investment could well be financed with ODA.
A reason might be the extended engagement of China in Africa. This aid is
mainly without conditionality (no-strings-attached-strategy) and seems to
be mixed with business objectives (Silk Road).
174© Freytag 2019
4. Trade and Development
Chances for the outside world to enhance economic development of the
poorest are modest. Trade policy is probably the most promising policy
area as generally acknowledged by the Doha Round in 2001.
Aid by trade
development through trade
Doha Development Agenda
Aid4Trade
Outline of this chapter:
4.1) Introduction: Doha Development Agenda
4.2) Political Economy of Protectionism
4.3) Global Value Chains (GVC) : Four Changes
4.4) World Trade Order
175© Freytag 2019
4.1) Introduction: Doha Development Agenda
At the ministerial meeting in Doha in November 2001 a new tariff
negotiation round was started. The initially planned Millennium Round was
killed in the Seattle Disaster in November.
Central elements of the Doha Round:
• Accession of China and Taiwan;
• LDCs;
• Market access;
• Singapore Issues.
The Doha Development Agenda is an attempt to use trade policy and
further liberalization as trigger to development.
176© Freytag 2019
Doha Declaration
• Recession 2000 makes further liberalization necessary;
• development round, especially for LDCs;
• trade and sustainability;
• global policy-assignment, in particular ILO;
• Issues: agriculture
services
market access (NAMA)
Singapore issues
rules
environmental protection
e-commerce
Special and Differential Treatment
others
177© Freytag 2019
4.2) Political Economy of Protectionism
Protection means the selective protection of industries against import
competitors.
There are different relevant issues with regard to the theory of protection:
• Types of protection, measurement of protection
• Effective protection
• Effects of protection
• Arguments for protection
• Political economic analysis
We concentrate on the aspects relevant for developing countries
References: Markusen et al. (1995), …, Part III, particularly chapter: 15, 16, 17 and 20;
Corden (1971) and (1974), Haberler (1933), ..., 2. part.
178© Freytag 2019
a. Types of protection
A distinction is drawn between tariff and non-tariff protection.
Tariff ad valorem tariff
specific tariff
compound tariff
More important and from a dynamic perspective more relevant is the non-
tariff protection (Non-tariff-trade-barriers, NTTB)
Contingent import quota
voluntary export restraint
embargo on imports and exports
obligatory import (Affirmative Action)
179© Freytag 2019
Furthermore, there exist measures that do not set protection at the
border or rather do not apply to trade directly
Subsidies production subsidies
export subsidies
R&D subsidies
Fiscal policy preferential tax treatment of exports
fiscal disadvantages for imports
public enterprises
Capital controls multiple exchange rates
cash deposit
Restriction of FDI
180© Freytag 2019
Over time further protectionist methods- just as a public response to
private evasion strategies- have been established on purpose as well as
there are measures that merely take effect as such.
Miscellaneous anti-dumping policy
public procurement system
regulations
consumer protection abuse
“local content“ rules
veterinary regulation
administrative protectionism
„lax“ competition policy
Regional preferences
Measurement and comparability of effectiveness across instruments low.
181© Freytag 2019
b. Effective Protection
From the producer‘s point of view it is important to know the protective effect
of the measure. Is it sufficient to evaluate the measures only for the own
final products?
In this context not only the knowledge about the treatment of the own final
products is relevant but also the knowledge about the taxation of pre-
products by means of protection.
Focus is on the measurement of the added value‘s protection, which is
termed effective protection.
This distinction is relevant in trade policies, as it clarifies that the nominal
tariff protection does not give evidence about the protection of the domestic
added value.
182© Freytag 2019
c. Costs of protection: South Africa as an example
Reminder: trade protection in theory is welfare decreasing; exceptions are
justified by optimum tariff theory, infant industry arguments and strategic
trade policy arguments. In South Africa we see protection channels:
• exchange rate channel
• input price channel
• purchasing power channel
• retaliation channel
CGE-Model (GTAP): tariff reduction is welfare enhancing.
Measures: 5% tariff reduction, 3% (1%) reduction of administrative costs of
imports (exports)
GDP increases by 1.7 per cent
Freytag, Andreas (2011), Cumulative Costs of Trade Protection in the South African Economy,
SAIIA Occasional Paper No 80, http://www.saiia.org.za/images/stories/-
pubs/occasional_papers/saia_sop_80_freytag_20110301.pdf
183© Freytag 2019
d. General effects of protection
• distribution effects: redistribution from… to…:
1) exports imports
2) consumers producers
3) growing industries shrinking industries
4) employees in growing industries employees in shrinking
industries
5) tax payers protected actors
6) foreigners selected domestic citizens
7) poor people rich people*
• administrative burdens;
• loss of dynamics;
• Rent-seeking-activities (allocation of talent);
• counter lobbying;
• similar activities abroad.
184© Freytag 2019
PROGRESSIVEECONOMY
TRADE FACT OF THE WEEK | June 15, 2011
Tariffs are America's most regressive tax.
THE NUMBERS: Sample U.S. tariff rates -
Worldwide average, all goods: 1.7 percent
Cashmere sweater 4.0 percent
Wool sweater 17.0 percent
Acrylic sweater 32.0 percent
Hurting the poorest everywhere!
* Gresser, Edward and Daniella Markheim (2007), Cut Shoe Tariffs To Help Low-Income
Families (Washington D.C.: PPI),
http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=108&subsecID=900010&contentID=254538
185© Freytag 2019
Digression I: Intra-trade and RCAs
How to measure intra-industry trade?
Grubel-Lloyd-index
Bi = [(Xi + Mi) - |Xi - Mi|] / [Xi + Mi] * 100
If there are only exports or only imports for good i, there is only inter-
industry trade:
B = 0
If exports and imports equal each other, there is only intra-industry
trade:
B = 100
Is the knowledge on specialization patterns relevant?
186© Freytag 2019
How to determine comparative advantages?
It is difficult to empirically determine comparative advantages if there is
more than one good.
Therefore, the concept of the “Revealed Comparative Advantage“
(RCA) was introduced.
RCAi = ln [(Xi/Mi)/(ΣXi/ΣMi)] for i = 1…n
RCAi > 0 The domestic country has comparative
advantages for the production of good i.
RCAj < 0 comparative disadvantage for good j.
This allows for the determination of the international competitiveness
of certain countries which is especially interesting to analyze over time.
187© Freytag 2019
Digression II: Drivers of FDI – the traditional view
According to Dunning, FDI is driven by three aspects:
• Ownership
• Location
• Internalization
One may add market driven FDI, e.g.
Japanese car producers‘ distribution network in Europe.
Another aspect is tariff-jumping, e.g.
European car producers in protectionist Brazil in the 1960 and
1970s
188© Freytag 2019
4.3) Global Value Chains (GVC) : Four Changes
• A change of the relevant strategic focus from countries to networks,
GVCs, or firms reflects the trend that specialization intensifies and
comparative advantages are ever more dynamic.
• A change of the economic framework from industries to tasks and
functions; the relevant units of decision-making become smaller and
production processes are shared by small units. To understand this new
paradigm, input-output relations have to be analysed.
• A change of the relevant economic assets from (factor) endowments and
stocks to flows shows the enormous increase in speed and the dynamic
nature of production today; knowledge has to be written off faster and
acquired continuously.
• Finally, a change of relevant barriers and stimuli from public to private;
trade policy moves from taxing goods and services at the border to a
broader set of measures, which are complicated and interdependent.
Granting effective protection is getting more difficult. Private standards
may well replace official non-tariff trade barriers.
• These changes may occur individually or even jointly.189© Freytag 2019
Determinants and conditions for participating in GVC
• ‘Global network flagships’ as enablers of GVC:
multinational firms integrating their supply chains, knowledge and
customer base in GVC; they choose local suppliers in target
countries; criteria: ratings, quality, speed of response
• FDI as drivers of GVC:
an investment friendly environment is crucial; recent shifts in FDI
flows from secondary to tertiary sector trade in services
• Quality of infrastructure as a condition for participating in GVC:
transportation, telecommunication, finance and insurance
• Trading environment is determining
efficiency of border processes, customs practices and domestic
regulations have an impact on the competitiveness and thereby the
ability of firms to join GVC 190© Freytag 2019
The critical role of services
Services within GVC
• key linking elements within value chains to connect fragmented
production blocks
• competitiveness of goods supply chain dependent on efficient
services provision
• ‘producer services’ services which are used as intermediates
within production processes
Trade in services/Services supply chains
• advances in information and communication technologies facilitated
trading and unbundling of services outsourcing of services
• ‘new wave of globalization’ (Baldwin, 2006)
high potential for development
191© Freytag 2019
Implications
• barriers to both trade and an efficient service provision are
detrimental for potential participation in GVC
• costs of protection are even higher since imports increasingly feed
into exports
• first best environment for offshoring activities: free trade
• underscores the importance of trade facilitation to foster a country’s
participation in GVC
especially important for developing countries
identifying bottlenecks along their supply chain is crucial
--------------------
However: How does Industry 4.0 change this pattern?
192© Freytag 2019
Attempts to identify bottlenecks
Logistics Performance Index by the World Bank
(global benchmark indicator to identify trade logistics barriers)
Trade and Transport Facilitation Assessment by the World Bank
(in-depth assessment of logistical bottlenecks at the country-level)
Global Enabling Trade Index by the World Economic Forum
(assessment of trade policy, border administration, transportation and
communication, and general business environment)
193© Freytag 2019
Literature on GVC
Baldwin, R. (2006), The Great Unbundling(s), a report prepared by Richard Baldwin for the
Finnish Prime Minister’s Office (in context of EU presidency 2006).
Deardorff, A. V. (2001), International Provision of Trade Services, Trade, and
Fragmentation, in: World Bank Policy Research Working Paper 2548.
Draper, P., Freytag A. and S. Fricke (2013) ‘The Potential of ACP Countries to Participate
in Global and Regional Value Chains: A Mapping of Issues and Challenges’, A report
submitted to the ACP MTS Programme, December.
Ernst, D. and L. Kim (2002), Global Production Networks, Knowledge Diffusion, and Local
Capability Formation, in: Research Policy, 31, pp. 1417-1429.
Kaplinsky, R. and M. Morris (2003), A Handbook for Value Chain Research, prepared for
the IDRC.
Lanz, R,; Miroudot, S. and H.K. Nordas (2011), Trade in Tasks, OECD Trade Policy
Working Papers, No. 117, OECD Publishing.
Miroudot, S., R. Lanz and A. Ragoussis (2009), Trade in Intermediate Goods and Services,
OECD Trade Policy Working Papers, No. 93, OECD Publishing.
Sturgeon, T. J. and O. Memedovic (2010), Mapping Global Value Chains: Intermediate
Goods Trade and Structural Change in the World Economy, in: UNIDO
Development Policy and Strategic Research Branch Working Paper 05/2010.
World Trade Organization (2011), Trade Patterns and Global Value Chains in East Asia:
From Trade in Goods to Trade in Tasks, World Trade Organization, Geneva.
194© Freytag 2019
4.4) World Trade Order
The WTO* is the fundament of the world trade order, based on the well-
known principles: MFN
National treatment
Reciprocity
Liberalization
The GATT is unique in history. There is a tradition in unilateral liberalization
(Anti-Corn Laws, 1846) and de-liberalization (Smoot-Hawley Tariff Act,
1930) respectively.
Cordell Hull was responsible for the “multilatiralization” of trade policy.
• Hull formula
• United nations
• Federal income tax
• Abandoning of the Morgenthau plan
* For 4.4, see Van den Bossche and Zdouc (2017). 195© Freytag 2019
GATT
Round
Number of
involved
countries
Trade volume
in current
prices1
Share of
world
exports
Tarif
reduction in
per cent
Average
tariff rate
(per cent)
Genf (1947) 23 10 20 35 -
Annecy (1949) 33 - - - -
Torquay
(19501951)
34 - - 25 -
Genf
(19551956)
22 3 3 - -
DillonRound
(19601962)
45 5 4 - -
KennedyRound
(19641967)
48 40 21 35 8,73
TokioRound
(19731979)
99 300 19 34 4,73 / 6,34
UruguayRound
(19861993)
123 4.1802 992 35 4,34
1: in bn. USDollar; 2: only trade in goods; 3: imports of manufactures from industrialized
countries; 4: Imports from all countries. Source: Freytag, Andreas (2001), …, S. 144.
Table 4.1: GATT Rounds
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GATT, GATS, TRIPs and TRIMs
Extension of the contents of the old GATT by the transition to the WTO:
GATT has been modified
GATS has been added, comparable with GATT
TRIPs has been established; share of intellectual property of the
added value increases continuously. Simultaneously the disregard
of intellectual property grows.
trade policy dimension
entrepreneurial dimension
TRIMs came into force with the establishment of the WTO. It
comprises the abandonment of requirements on FDI.
Example: “local content“ - rules
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Swiss formula (effective protection)
The Tokyo round tackled development unfriendly tariff escalation. Higher
tariffs are reduced relatively stronger. An example:
dti/ti = ti/(r+ti) with: t = tariff, i = sector,
r = fixed parameter
Example: r = 0,2
t = 0,2 dt/t = 0.50
t = 0,4 dt/t = 0.66
t = 0,1 dt/t = 0.33
Bound tariffs vs. applied tariffs
In the Uruguay round the share of bound tariff increased:
Share before and after the UR (1986-1994) before after
OECD 78 99
DCs 21 73
Transition countries 73 98198© Freytag 2019
Formation and structure of the WTO
Experiences from the GATT led to the foundation of the WTO on April 1st,
1994. In doing so, new developments in world trade were taken into
consideration, e.g. the increase of trade in services. The GATT has shown
strengths and weaknesses. The strengths include:
the systematic reduction of tariffs (table 4.1)
international discipline
relatively flexible response to the „new“ protectionism
The weaknesses of the GATT particularly include:
emergence of the new protectionism
weak sanction mechanisms
disregard of numerous sectors, e.g. agricultural markets, textile and clothing, services
non-consideration of intellectual property rights199© Freytag 2019
The Uruguay Round tried to address and to overcome these weaknesses
systematically.
Hence, an international organization was the result of the agreement.
Moreover the terms of contract were extended:
trade in goods, henceforth including the agricultural and textile
sector
trade in services
trade-related aspects of intellectual property rights some
plurilateral agreements
public procurement
investment protection
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Additionally the Dispute Settlement Mechanism (DSM) has been improved
significantly.
Key modification: Whereas under the GATT the result of a dispute
settlement procedure had to be accepted unanimously (quasi right of
veto), in the WTO the result can only be rejected unanimously.
Problem 2019: The US refuses to appoint new judges for the Apelate
Body. By the end of 2019, it will not be workable (two retirements due,
minimum number of judges not met).
Furthermore the “Trade Policy Review Mechanism“, which is a revisal of
the trade policy practices of all member states on a regular basis, has
been established.
Beyond that, the choices of the WTO-members are limited.
Single Package Approach
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202
Figure 4.1: WTO dispute cases 1995-2018
WTO dispute filings in 2018:
Total cases: 39
by the U.S.: 19
by China: 4
by Canada: 2
by Republic of Korea: 2
by Turkey: 2
by European Union: 1
by Pakistan: 1
by India: 1
by Morocco: 1
by Mexico: 1
by Russian Federation: 1
by Saudi Arabia: 1
by Armenia: 1
by Kyrgyz Republic: 1
by Peru: 1
In total: 584, Source: WTO
© Freytag 2019
WTO-Principles
‘Single Package’ Approach
Integrated Dispute Settlement Mechanism to control national trade policies
Agreement on goods:
- GATT 1947 & Results of
the UR
- Agreement of the Tokyo R.
& results of the UR
- Agreement on non-tariff
trade barriers
- TRIMS
Agreement on services:
- General agreements
- Appendixes:
- Exceptions of the most-
favored- nation principle:
- Migration of natural
persons
- Air transport
- Financial services
- Telecommunication
-Country lists:
-Granting of market access
and national treatment in
registered (bounded) sectors
Agreement on
intellectual property
rights
- Agreement on trade
related aspects of
intellectual property
rights
Additionally: Plurilateral agreements which differ from the ‘Single Package’ approach
Figure 4.2: Content structure of the WTO
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Decision Making
Standard procedure is called “Decision by consensus”
• Veto Power – deadlock?
• Conservatism
• Bigger role for larger members?
Special procedures affect the DSM and new members.
----------
WTO is a member driven organization: no right to initiate
----------
The WTO is a rather modest IO (budget ~ 200 mill CHF)
© Freytag 2019
The WTO has the following organizational structure*:
1. Ministerial Conference (meets every two years)
2. General Council (several times a year)
3. Goods Council
Services Council
Intellectual Property Rights Council
4. Specialized Committees, Working Groups and Working Parties
5. Secretariat (629 staff members, prepares the activities of 1.- 4., assists
developing countries, furthers the settlement of dispute, analyses
world trade, public relations)
WTO is small and successful, but still under pressure!
* http://www.wto.org/english/thewto_e/whatis_e/tif_e/org2_e.htm
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GATS and TRIPs
GATS (General Agreement on Trade in Services) as the first attempt to
inlcude services in the GATT-Discipline
There are four types of trade in services:
Mode 1: regular export (cross-border trade)
Mode 2: service consumption takes place abroad
Mode 3: Presence of the supplier abroad
Mode 4: Sending abroad of natural persons
Generally the principles apply, however, exceptions can be made:
exceptions of the MFN-principle, positive list, plurilateral agreement (4.
protocol).
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TRIPs (Trade Related Aspects of Property Rights) comprises:
Copyrights
Trademarks
Geographical indications
Industrial designs
Patents
Layout designs
Undisclosed information
TRIPS obligates members to protect intellectual property. Occasionally,
TRIPS is interpreted merely as a trademark protection programme;
problems are to be expected if patents are very expensive or prohibitive.
For example:
Basmati rice,
lifesaving, but expensive medication.
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Protection clauses (Art. VI and Art. XIX GATT)
The WTO provides for protection clauses against impairment.
Anti-dumping measures (Art. VI GATT)
protection clause (Art. XIX GATT)
The justification of impairment is in principle a contradiction in terms, as
foreign trade and structural change are inconceivable without the
impairment of some sectors (pecuniary negative externalities).
The Impairment of consumers due to the taking of protection measures
plays only a subordinate role.
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Anti-dumping policy
The world trade order explicitly considers the protection against dumping.
Dumping is an economic problem only when certain conditions are met:
sale of products abroad below the manufacturing costs
(predatory dumping),
sale from a protected domestic market (strategic Dumping)
The prevalent Anti-Dumping practice however proceeds differently. Having
prices in a foreign country below the ones in your own country constitutes
an act of dumping (compare art. VI GATT).
Within the framework of the WTO Dumping is thus defined as international
price discrimination.
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210
1995-2000
2001-2005
2006-2010
2011-2015
2016 2017 Total
Argentinia 80 64 48 46 1 2 241
Australia 34 37 13 48 5 14 151
Brazil 39 28 41 120 13 10 251
Canada 48 36 11 37 3 10 145
China 10 68 67 36 11 5 197
European Union
148 70 54 37 5 11 325
India 117 201 133 121 37 47 656
Republic ofKorea
28 18 24 13 3 4 92
Mexico 47 29 8 24 12 2 122
South Africa 88 15 9 137
United States 136 105 64 54 35 33 427
World 950 903 667 719 171 194 3604
Table 4.2: Anti-dumping Measures by Reporting Member 01/1995 - 12/2017
Source: WTO© Freytag 2019
211
0
50
100
150
200
250
300
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Figure 4.3: Anti-dumping Measures by year 01/01/1995 - 31/12/2017
Total: 3604
Source: WTO© Freytag 2019
Main elements of the Anti-Dumping Agreement
Determination of dumping Export price < standard value; export
price elsewhere; additionally: constructed price
Determination of the resulting damage
Definition of domestic industry
Initiation of proceedings and investigation
Requirements on the submitted evidence
Provisional measures
Price undertakings
Duration and examination of anti-dumping measures
Moreover: „de minimis“ – clause
"Sunset" – clause
But: no “public-interest“ – clause
no “lesser duty rule“
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Safeguard Clauses (Art. XIX)
These allow protection from damage by fundamentally "fair" imports.
The regulations regarding the protection clauses serve among other things
as proscription of so-called gray area measures, for example the voluntary
export self-restrictions that are by now illegal.
Main elements of the safeguard clause - Agreement
(as opposed to anti-dumping)
Rise in imports must be recent, sharp, sudden and significant
Serious injury or threat thereof, with clear causla effects
Non-discrimination (with exceptions)
Limiting the duration of use
Right of compensation (if necessary countermeasures)
Special provisions for developing countries
Prohibition and elimination of gray area measure
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Subsidies (Art. XVI GATT)
Subsidies are regulated in a special agreement. In the case of filing the
process is similar to the anti-dumping case. Basically, a distinction is made
between two types of subsidies:
Prohibited Subsidies to stimulate exports and to replace imports.
Debatable A country may file a damage by a subsidy of another country; if
this does not happen, the subsidy is considered to be accepted.
Subsidies in agriculture
Yellow Box trade-distorting measures, for example direct payments or
price-and sales-securing measures.
Blue Box classified as less trade-distorting measures; unlimited
expenditures for direct payments to farmers if these payments are linked to
"production-restrictive programs.“
Green Box classified as not at all or as minor market-distorting measures.214© Freytag 2019
Regional Integration yesterday: (Art. XXIV GATT)*
305 regional trade agreements
Customs unions vs. free trade areas
Effects:
• trade creation
• trade diversion
• trade deflection rules of origin (RoO), three methods:
• substantial transformation
• minimum value added
• definition of production process
Discrimination between members and non-members
* http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx
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Regional Integration today: TTIP et al.
TTIP and TTP are so-called mega-regionals, covering about a third of
world trade and almost half of world GDP each. In addition, the scope of
the planned agreements go beyond the WTO. In particular, agreements
about standards and investment protection clauses are considered. Since
value chains are more fragmented than “yesterday”, trade diversion is
unlikely.
Race to the bottom?
Or rather a race to the top?
Effects on member and third parties?
Effects on World trade order?
Relation US-China?
Freytag, A., P. Draper and S. Fricke (2014), The Impact of TTIP. Volume 1: Economic Effects on the
Transatlantic Partners, Third countries and the Global Trade Order, Berlin: Konrad-Adenauer-Stiftung.
Freytag, A., P. Draper and S. Fricke (2014), The Impact of TTIP. Volume 2: Political Consequences for EU
Economic Policymaking, Transatlantic Integration, China and the World Trade Order, Berlin: Konrad-
Adenauer-Stiftung.216© Freytag 2019
217
African Comprehensive Free Trade Area (AfCFTA)
March 2018: AfCFTA within African Union (AU) decided upon
Largest regional FTA in history, 52 Teilnehmer;
• comprises 52 AU-Members (Nigeria as important exception);
• effective, if 22 countries ratify (done in April 2019)
• trade in goods and servies;
• standards, RoO
Problems: overlapping structur rof egional agreements, to ambitious, infrastructur
problems,de-industrialization, agriculture.
Draper, P., H. Edjigu und A. Freytag (2018), Analysing Intra-African Trade – AfCFTA: Much Ado About
Nothing, World Economics, Vol. 19, Nr. 4, Dezember, S. 55-74.
© Freytag 2019
Environmental and social standards
A relatively new topic in the world trade order is environmental standards.
Requirements in terms of production technology
Import bans of certain products
Export bans (for example, protection of species)
Are such restrictions justified?
Environment (as well as social protection) as a superior good
The desire for a clean environment rises with rising incomes
Environmental problems are relatively unimportant in developing
countries
But: global problems on certain environmental goods
Global assignment: Jurisdiction over environmental policy?
Trade policy can not solve environmental problems!
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New players in the trade policy
Recently, with the NGO‘s, new players have come to the front in dealing
with trade policy. Major players are so far:
WTO / GATT and governments
Interest groups (industry, trade unions) and companies
This constellation caused criticism.
Initial hypothesis: The world trade order is part of the so-called global
governance. According to recent work in political science this has to be
restructured due to the decreasing influence of state actors. A greater
grassroots involvement is needed
assignment problem.
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In a way, a legitimacy deficit of the WTO is expressed in that statement.
Assuming this deficit was caused by two things:
1) Traditionally the main actors in international trade policy are the WTO
(GATT), national governments, interest groups and multinational
corporations.
How is the civil society represented?
2) The strict rule binding (including the dispute settlement mechanism)
deprives the work of the WTO of the control by democratically elected
parliaments.
How can the control be re-established?
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5. Development 2019: What Role for Trade
Policy?
Problems from the standpoint of developing countries wrt trade include:
Subsidies disciplines on agriculture; still the West is supporting its
agribusiness remarkably.
Policies affecting movement of workers and migration in general
(Marshall-Plan with Africa).
Mega-Regionals, AfCFTA.
Investment protection and conditionalities, e.g. in relation with
Mega-Regionals
Government procurement policies; only covered under a
plurilateral code mostly subscribed to by developed countries.
221© Freytag 2019
222
0
10
20
30
40
50
60
North America South and CentralAmerica
Europe Africa Middle East Asia
Wo
rld
Mer
chan
dis
e Ex
po
rt (
%)
Figure 5.1 : World Market Shares, selected regions
1963 1983 2003 2016 2017
Source: WTO© Freytag 2019
Generalized System of Preferences (GSP)*
GSP: OECD-countries grant developing countries low tariffs below
MFN-tariffs.
Market access shall be easier.
Originally (1971) planned only temporary, GSP was implemented
permanently in 1979. OECD countries have bound themselves through
domestic laws.
EU EBA (Everything but Arms)
Contonou Agreement
Economic Partnership Agreements (SADC, Cameroon)
USA AGOA (African Growth Opportunities Act)
* http://ptadb.wto.org/ptaList.aspx
223© Freytag 2019
The system showed only a few successes. Moreover, there have been
displacement effects.
Causes are among others:
Preferences often exclude truly relevant products;
Preferences are retractable at any time;
this can be connected to export success;
Concessions by developing countries;
Rigorous rules of origin;
Tariffs are substituted by NTBs;
Finally, there is no incentive to develop for LDCs; they vote for further
reduction of MFN-tariffs and refuse to open the markets on their parts.
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Market access
In total, the access to markets for suppliers from developing countries
is not easy.
Problems in accessing the markets are caused by:
GSP and its shortcomings;
Labeling requirements;
regional Free Trade Agreements;
sensible products.
Asche, Helmut (2015), Europe, Africa, and the Transatlantic. The North-South Challenge
for Development Policy, Heinrich-Böll-Stiftung.
Draper, Peter (2007), EU-Africa Trade Relations: The Political Economy of Economic
Partnership Agreements, Jan Tumlir Policy Essay No. 2/2007, Brüssel, www.ECIPE.org.
Messerlin, Patrick A. (2007), Assessing the EC Trade Policy in Goods, Jan Tumlir Policy
Essay No. 1/2007, Brüssel, www.ECIPE.org.
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226
Contributions to world trade volume growth by region, 2011-2017
(Annual % change)
Figure 5.2: Trade volume growth, selected regions
© Freytag 2019
Singapore Issues
The Singapore Issues are four topics which were on the agenda for
the Ministerial Conference in Singapore in 1996
Trade and investment
Trade and competition policy
Transparency in government procurement
Administrative trade facilitation
These topics burden the climate of the Doha-round. The EU distanced
itself from them in summer 2004. The failure of the Ministerial
Conference in Cancun can be directly associated with the topics.*
* Sally, Razeen (2004), ‘The End of the Road for the WTO? A Snapshot of International
Trade Policy after Cancun‘, World Economics, Vol. 5, No.1, pp. 1-14.
227© Freytag 2019
African Intraregional trade policy*
Can Africa develop faster through deeper internal integration? In
March, the African Union decided to form a Comprehensive Free
Trade Area (CFTA) including most members. The EU is a role model
for the AU.
What are the additional options to make the AfCFTA sustainable?
• GVCs vs. RVCs
• Factory Southern (Western etc.) Africa (import substitution?)
• Gateway model
• Flying geese model (South African firms as lead geese)
* Draper, Peter, Andreas Freytag, Soren Scholvin and Luong Thanh Tran (2016),
Is a ‘Factory Southern Africa’ Feasible? - Harnessing Flying Geese to the South African
Gateway, http://documents.worldbank.org/curated/en/2016/01/25840684/‘factory-
southern-africa’-feasible-harnessing-flying-geese-south-african-gateway
228© Freytag 2019
Trade and Development © Freytag 2017
229
Reform of the WTO?*
There is a debate about the future of the WTO; the G20 finance
ministers habe agreed on such a reform:
• Policy dialogue
• Plurilateralism
• DSM
• Right to initiate für the Secretariat
• Evaluation of the WTO
• Communications strategies
* Bertelsmann Stiftung (2018), Revitalizing Multilateral Governance at the World Trade Organization - Report of the High-Level Board of Experts on the Future of Global Trade
Governance, Gütersloh.