Exchange Rate Parity for Trade and Development: Theory, Tests, and Case Studies

by Pan A. Yotopoulos

• ISBN13: 9780521022620
• ISBN10: 0521022622
• Format: Paperback
• Copyright: 2005-11-10
• Publisher: Cambridge University Press

Summary

This book extends recent theories of incomplete markets to investigate empirically the appropriate balance between the market and the state in the trade relations between developed and developing countries. The conclusion is that in an ideal world government intervention in foreign exchange and trade is necessary in developing countries in the early stages and inevitably decreases as development occurs. Rationing of foreign exchange prevents a 'soft currency distortion' that commonly afflicts developing countries and can turn comparative advantage trade into competitive devaluation trade, with severe losses of income and welfare. Yotopoulos finds that the level of underdevelopment narrowly circumscribes and conditions the extent to which free-market, free-trade, laissez-faire can be beneficial, contrary to the mainstream policy paradigm as currently applied. The analysis and tests draw on empirical research from seventy countries and four extended country studies to confirm the usefulness and validity of the theoretical framework.

Table of Contents

List of Tables and Figures	xi
Preface	xv
Part I A review of the terrain
Introduction	3	(9)
Trade and development: The contours of the landscape	12	(26)
The classical foundations: The neoclassical tradition of development economics	12	(9)
The classical beginnings	12	(4)
The neoclassical edifice	16	(2)
The salient ideas of the orthodox development paradigm and the theoretical grounding of the neoclassical system	18	(3)
The structuralist critique	21	(7)
Unequal exchange	22	(1)
Factoral terms of trade and the pivotal position of agriculture	23	(5)
Class structure and economic development	28	(6)
Conclusion	34	(2)
Appendix: North-South convergence in a Lewis-type model	36	(2)
Incomplete markets and the ``new development economics''	38	(25)
Cases of incomplete markets	39	(5)
Capital goods markets	40	(1)
Credit markets	41	(2)
Insurance markets	43	(1)
Incomplete markets in foreign exchange	44	(8)
The systematic underpinning of market incompleteness in foreign exchange and trade: Ricardian productivity differentials	45	(4)
Incomplete exchange and trade in a quasi-Autralian model	49	(3)
Pitfalls and pay-offs of intervention in incomplete markets	52	(4)
Conclusion	56	(2)
Appendix: The Ricardo Principle	58	(5)
Part II Theory and empirical analysis
Market incompleteness in an open-economy LDC	63	(22)
A welfare model with tradables and nontradables	64	(13)
The closed economy	64	(2)
The open economy	66	(2)
Diagrammatics	68	(4)
The poor countries' Dutch disease	72	(2)
Dynamics	74	(3)
From nominal to real exchange rate: Is there an incomplete market?	77	(2)
Conclusion	79	(2)
Appendix: Constrained-equilibrium expenditure curve	81	(4)
The relationship between real and nominal exchange rates	85	(18)
Purchasing power parity and exchange rates	85	(2)
Measurement of real exchange rates	87	(6)
Absolute vs. relative purchasing power parity	88	(2)
External-terms-of-trade real exchange rates	90	(2)
Internal-terms-of-trade real exchange rates	92	(1)
Measurement of absolute purchasing power parity	93	(7)
Purchasing power parity prices and real exchange rates	96	(4)
Conclusion	100	(1)
Appendix: Extensions of purchasing power parity measurement	101	(2)
Empirical investigation of real exchange rates: Tradability and relative prices	103	(17)
The elements of tradability	103	(3)
International tradability and transaction costs	106	(2)
The empirical content of tradability	108	(3)
The criterion of tradability plus tradedness	111	(6)
The normalization procedure: A throwback to the law of one price?	117	(2)
Conclusion	119	(1)
An endogenous growth model of incomplete markets in foreign exchange	120	(38)
The structural model	121	(5)
The conventional endogenous growth models	121	(2)
An endogenous growth model with incomplete markets	123	(3)
Implementation of an endogenous growth framework	126	(4)
The dependent variable	126	(1)
The explanatory variables of primary interest	127	(1)
The stylized endogenous growth variables	128	(2)
The empirical analysis	130	(16)
Ordinary least squares results	130	(9)
Causality tests and alternative models	139	(3)
Causality: An interpretation of market incompleteness	142	(4)
Comparison with other studies	146	(4)
Why are the strong results surprising? Development policy failure and development politics failure	150	(3)
Conclusion	153	(1)
Appendix: Tables	154	(4)
Are devaluations possibly contractionary? A quasi-Australian model with tradables and nontradables	158	(33)
Review of the literature	159	(3)
A theoretical model	162	(8)
The model	163	(2)
Formal comparative statics	165	(5)
An empirical model of the pass-through	170	(13)
Diagrammatical definitions and measurement	170	(4)
Testable hypotheses and data	174	(4)
Empirical results	178	(5)
Conclusion	183	(3)
Appendix: The signs of the partial derivatives	186	(5)
Part III Successes and failures in development: Good/bad economics and governance
Japan: Overvaluation without rent-seeking	191	(33)
The aftermath of World War II	193	(1)
Overriding the foreign exchange and trade markets	193	(4)
Overvaluation of nominal exchange rate	193	(1)
Foreign exchange control and import policies	194	(2)
Export policies	196	(1)
Overriding the labor market and the role of domestic demand	197	(18)
Domestic demand	197	(4)
The unlimited supplies of labor and incomplete markets	201	(14)
Appropriate industrial policies	215	(3)
The role of the state	218	(3)
State-led capitalism	218	(1)
Administrative guidance	219	(2)
Conclusion: A nonrevisionist interpretation	221	(3)
The Philippines: Failure in policy and politics	224	(25)
The stage and the setting	224	(5)
Land concentration and land reform	224	(3)
Inadequate infrastructure	227	(1)
The basic policy regime	228	(1)
The policy tools	229	(6)
Persistent undervaluation of the exchange rate	229	(6)
Intervention policies for (or despite) undervaluation	235	(7)
Interventions for export-led industrialization	235	(4)
Interventions for export-led agricultural growth	239	(3)
Governance	242	(2)
The outcomes	244	(3)
Low productivity	244	(1)
Low labor-absorptive capacity	245	(1)
Low incomes	245	(2)
Conclusion	247	(2)
Financial integration and the refractory role of intervention: Uruguay and Taiwan	249	(33)
Agriculture	250	(9)
Taiwanese agriculture: The foundation of pluralistic development	251	(5)
Uruguay: Agricultural stagnation	256	(3)
Industrialization	259	(6)
Uruguay: The change in track and the spurts of growth	259	(2)
Taiwan: The train of industrialization and the locomotive of trade	261	(4)
Comparative evaluation of the growth in the real sector: The role of domestic demand	265	(6)
The tradable financial sector	271	(9)
Uruguay: The costs of asymmetric financial integration	271	(6)
Taiwan: Financial integration with exceptional circumstances	277	(3)
Conclusion	280	(2)
Summary, conclusions, and policy recommendations	282	(11)
Bibliography	293	(18)
Index	311