The linkage effects of raw material processing in economic development: A survey of modeling and other approaches

Processing of primary raw materials has become an important and widely recommended strategy for economic development. Yet, even as the councils of many LDCs call for primary commodity producers to gain greater participation in downstream activities, there remain doubts on fundamental questions:What comparative advantage and what disadvantages do processing activities have in the LDCs?What linkages do processing activities offer?What is the potential contribution of processing to economic goal attainment in the LDCs?In this article we survey the material on processing, particularly with respect to modeling direct and indirect linkages between processing and the LDC economies. The article examines the following topics: (1) the literature on processing in economic development; (2) modeling processing linkages; and (3) outstanding questions regarding processing linkages.We focus on quantifiable linkages between the processing industry and the rest of the economy. There is also the possibility of other linkages, such as the development of entrepreneurship and management talent and technology, that are more difficult to quantify. It is important to distinguish between micro linkages, which refer to the direct impact on supplier and user sectors, and macro linkages, which include indirect general economic effects transmitted through government revenue and expenditures, the money supply, and foreign exchange availabilities.     

The economic policy mix, policy cooperation, and protectionism: Some aspects of macroeconomic interdependence among the United States, Japan, and other OECD countries

In this paper we examine the macroeconomic interdependence of Japan and the United States using the McKibbin-Sachs global (MSG) simulation model of the world economy. Our goal is to determine how shifts in macroeconomic policies in the United States or Japan affect the other country as well as the rest of the world. In particular, we examine the following three issues: (1) the likely macroeconomic ramifications for the United States, Europe, and Japan of significant budget cuts in the United States; (2) the macroeconomic implications of a protectionist tariff imposed by the United States; and (3) the scope for policy coordination among the United States, Japan, and Europe.     

Multilateralism under threat: Causes,impact, and the policy debate on government intervention in trade

Several forces fostered trade liberalization since the end of World War II. Production and trade interacted quite favorably during the period. In the past quarter century real income in the OECD economies grew at almost 4% yearly, while the volume of export increased by almost 7 percent. However, in the first half of the 1980s, the chemistry of the situation seems to have changed as protectionist tendencies developed almost everywhere in the world. The very same multilateral nature of the world trading system is under threat, as illiberal discriminatory practices are being implemented bilaterally and, even more often, unilaterally. What are the forces at play to increase the pressure towards government intervention in trade? The paper reviews (i) macroeconomic issues and policy situations, as well as (ii) structural issues concerning the working of the economic systems of industrial countries. The pressure for trade intervention in the U.S. is addressed separately with respect to Europe, given the structural and cyclical differences between the two economies The case of Japan is dealt with with reference to the alleged interrelation between Japan's international competitiveness and its macroeconomic policies. Matters of more direct concern to the LDCs are covered at the end of the paper, with emphasis placed on the restructuring process under way in response to, and as a consequence of, the external debt. The paper ends with a recommendation to all countries to make efforts to preserve and strengthen the multilateral and liberal foundations of the international trading system.     

The bureaucratic response to economic fluctuation: An econometric investigation of Hungarian investment policies

This paper develops bureaucratic response functions within a “deviation from trend” econometric model to determine those factors that were related to fluctuations in aggregate investment finding and in the sectoral distribution of that aggretate during 1960–1975. Investment in buildings and investment in machinery are analyzed separately. On the national level, investment funding is found to respond to indicators of well-being, plan targets, bottlenecks, and foreign trade variables. Sectoral investment funding is based mainly on priority considerations.     

A computable prototype model of economic development

Economic development models need to advance beyond the two-gap type capital-output models of growth. This paper presents a prototype model of economic development where development is defined more broadly than aggregative output growth in terms of four objectives, namely, income, consumption, distribution, and employment. It is in keeping with the basic needs approach recently developed by the World Bank and other international organizations.The model formulation is based on the dualistic theory of capital formation and structural change. The specification is on the supply side. A novel aspect of the model is that it incorporates the role of education, health, and nutrition in economic development. Further it makes use of cross section data, which is unusual in model building.The model is put to illustrative use to generate dynamic policy multipliers of education and health expenditure. The results do not support the Malthusian fears that increased health expenditure would cause massive unemployment and reduce the standard of living in LDCs.     

Models of economic planning under uncertainty: A selective survey and appraisal

Uncertainty and risk have played significant roles in policy making, at the micro and macro levels, from formulation of policy models to their actual implementation in several countries. The impact of risk aversion on policy making has differedm however, both in magnitude and intensity. Thus, for less developed countries with large commodity exports, stabilization policies have played a role as important as those for income growth and employment; for centrally planned economies, the investment cycles leading to large-scale divergences of actual from planned targets in strategic sectors have led policy makers to consider the need for building adequate safety margins in the planning process. Finally, for developed economies, the applied theory of indicative planning and decentralization has stressed the various informational gaps and competing risks that may impede an efficient and cooperative solution between private and public sectors. A selective survey and appraisal of the planning methods as they relate to risk and uncertainty is attempted here for less developed, centrally planned, and developed market economies.     

Indexation of international commodity prices through international buffer stock operations

The developing economies have been advocating the indexation of the prices for their primary commodity exports by tying such prices to other relevant international prices, such as the prices of imports to the less-developed countries. We have used econometric models to simulate a program of indexation of the prices of the ten UNCTAD core commodities at their 1963 levels for 1963–1975. The results suggest definite difficulties in such a program. Most notably the order of magnitude of the costs of buffer stock operations and financing is likely to be prohibitive. Also the distribution of benefits and losses among the less-developed countries is quite arbitrary. Therefore we are very skeptical about indexation by buffer stock operations.     

Restructuring for import competition from developing countries,I: Labor displacement and economic redeployment in the United States

The widely-held belief that imports into America have been responsible for job losses in labor intensive industries is examined. It is shown that economic growth impacts on these industries, and that productivity growth and chaning demand patterns, have been quantitatively larger than changes in trade levels affecting employment in individual industries. It is concluded that protection can do very little to affect employment trends in affected industries.     

Policy modeling of foreign exchange rates

This paper is neither a complete survey of empirical work on exchange rate determination, nor a review of the ballooning volume of theoretical models. It is instead an attempt to classify the main alternative approaches to modeling exchange rates. I shall concentrate on approaches that can be used to assess the effects of alternative policies. There will be four further sections in the paper. The first three sections will each deal withthe structure, empirical support, and policy consequences of three main types of model: purchasing power parity models emphasizing the close and immediate relation of goods markets; interest rate parity models emphasizing the close and immediate international linkage of markets for financial assets; and structural balance-of-payments models that do not assume either of the above linkages to be so strong and immediate as to eliminate the other, and that hence require separate (but interdependent) modeling of trade and capital linkages in the determination of exchange rates. Each of these main categories has many rather distinct models within it, and some models are not easily classified into one of the three categories; I hope that the three-way split will nevertheless serve to make some distinctions that are important for policy modeling.In the final section I shall try to summarize the available model results that pertain to national and international policy choices under a system of more flexible exchange rates, and then to suggest where more or better model building might usefully increase the amount of information available to guide policy decisions.     

Resource reallocation under alternative trade regimes: A simulation of Turkey's entry into the EEC

A general equilibrium model that is applicable for simulating the directions in which resources would be reallocated under alternative trade regimes, in particular, a free trade regime, is developed and applied to the Turkish economy. Because of the likelihood that Turkey will gain full entry into the EEC, the model is also used to identify sectors in which Turkey may have a comparative advantage relative to the EEC countries and to estimate magnitudes of static gains from full entry. To provide some tests of important generalizations from the theory of customs unions, these estimates of static gains are compared with some estimates of total welfare effects of the entry of the United Kingdom into the EEC.     

Partial vs. general equilibrium analysis and choice of functional form: Implications for policy modeling

In formulating empirically tractable, economywide models, researchers are often forced to employ “convenient” functional forms. These forms embody restrictive maintained hypotheses. Alternatively, flexible functional forms may be utilized in a partial equilibrium setting. Estimation and incorporation of flexible functions into computable general equilibrium models is considerably more demanding of research resources. Assuming that shortcuts will continue to be necessary for researchers attempting to respond to current policy problems, this paper compares these two alternatives. Specifically, a general equilibrium model for New York State is employed to evaluate the relative performances of flexible partial equilibrium models and their more restrictive, general equilibrium counterpart. In the particular application considered, the former approach is found to dominate the latter.     

A general equilibrium model of domestic commerce in Mexico

In this paper we develop a general equilibrium model of the Mexican economy that focuses on the commercial sector, particularly retailing. Consumers purchase goods in different retail establishments, that sell differentiated goods at different prices. Where each consumer decides to make purchases depends on various price and locational considerations. The model has been calibrated to replicate the Mexican economy in 1977, the latest year for which a complete data set is available. We use it to analyze both the impact of the 1980 fiscal reform, a major policy charge for the economy as a whole, and that of a hypothetical development project aimed specifically at the commercial sector. Although our model was conceived and developed well prior to the current period of highly inflationary policies of the debt crisis, the latter was taken into consideration during both the simulations and their policy evaluation.     

The demand for protection against exports of newly industrializing countries

Exports of manufacturers from newly industrializing countries have increased dramatically in recent years. Yet, in the importing countries—largely the highly developed, “old” industrial countries—the NICs' exports constitute even now an almost insignificant proportion of total imports of manufacturers. Is there, then, some particular reason why the exports concerned seem to be strongly resented by the importing countries, and particularly likely to be faced with trade barriers? The paper examines this issue, and identifies four possible sources of demand for such protection: (1) the factor content of the NICs' exports—specifically, their relative intensity in unskilled and semiskilled labor; (2) the nature of the exported goods, which consist largely of final consumer goods rather than of machinery and equipment; (3) the NICs' lack of retaliatory power; and (4) the context of a relatively stagnant world economy, suffering from high unemployment, which the expansion of manufactured exports from the NICs has had to face.     

The Law of the Sea treaty and the regulation of nodule exploitation

The production of nonferrous metals from manganese nodules from the ocean floor has potential impact on prices of cobalt, copper, nickel, and manganese and on the earnings of land-based producers. These effects must be considered in the Law of the Sea negotiations. This article uses econometric models to evaluate the impact of nodule production on the LDC producers. We find that the price impact is greater for cobalt whose nodule production is very large relative to conventional output, but that the impact on LDC earnings is greater for copper and nickel.     

Are government deficits the prime cause of inflation?

We argue in this article that if government bonds are counted as part of private wealth, government budget deficits are a major cause of inflation, and the method chosen to finance the deficits (e.g., borrowing or monetary expansion) is of secondary importance. To illustrate this point we use a simple portfolio model that is then incorporated into a model of the Australian economy. The full model is specified in continuous time, and it is estimated by the full information maximum likelihood method (FIML) it is then used to simulate a number of fiscal shocks.     

An international trade model to capture linkages among supply-constrained economies

The development of a country's domestic and international markets depends on its own actions as much as on those of its trading partners. The study of market linkages is thus vital for policy making. Borrowing from the conceptual framework of Leontief's input-output analysis and from the national accounts equation, this paper presents a new model to calculate multilateral trade multipliers while minimizing data requirements. The novelty of the approach consists in the column-wise (supply-oriented) normalization of trade as opposed to the row-wise (demand-oriented) normalization that prevails in the literature. The explanatory power of the model has been successfully tested on data that refer to 1973–1974. Divergence from reality inevitably reflects the great fluidity that characterized trade during that period. Although most successful when applied to trade among supply-oriented economies (such as those of socialist or developing countries), at present empirical tests have been run only for a handful of OECD and OPEC countries.     

Efficiency of spatial price discovery for U.S. rice under different farm policies and economic conditions

Changes in the discovery of U.S. spatial milled rice prices due to the shift from stable economic conditions and government policy of supply control in the 1960s to the more variable economic conditions and market-oriented rice farm policy of the 1970s are investigated. Efficiency of the markets was evaluated in terms of the magnitude and speed of price adjustments over three different time periods. The efficiency of the price discovery process is of concern to policymakers because firms must receive price signals quickly and accurately in order to use their resources optimally.     

Simulation of a debtor country: The example of Colombia

A dynamic model, illustrated on Colombian data, simulates the functioning of an open economy under specified parametric conditions and selected policy scenarios. Unlike the usual two-sector models, the rate of growth of GDP is generated endogenously. Whereas related models perform sensitivity analysis for variations in parameters our procedure makes n possible to simulate policy alternatives under balance-of-payments pressure. The simulations explore the implications of policy options when debt services on inherited and new foreign indebtedness act as constraints on the debtor's growth, especially when new external borrowing is limited.