CHAPTER NO-12

Answer of question No-05 (Pages No 582 to 584)

Six basic assumptions of the traditional neoclassical trade model must be scrutinized:
1) All productive resources are fixed in quantity and constant in quality across nations
and are fully employed.
2) The technology of production is fixed (classical model) or similar and freely available
to all nations (factor endowment model). Moreover, the spread of such technology
works to the benefit of all. Consumer tastes are also fixed and independent of the
influence of producers (international consumer sovereignty prevails).
3) Within nations, factors of production are perfectly mobile between different
production activities, and the economy as a whole is characterized by the existence of
perfect competition. There are no risks or uncertainties.
4) The national government plays no role in international economic relations; trade is
carried out among many atomistic and anonymous producers seeking to minimize
costs and maximize profits. International prices are therefore set by the forces of
supply and demand.
5) Trade is balanced for each country at any point in time, and all economies are readily
able to adjust to changes in the international prices with a minimum of dislocation.
6) The gains from trade that accrue to any country benefit the nationals of that country.
We can now take a critical look at each of these assumptions in the context of the
contemporary position of developing countries in the international economic system. Some of
these criticisms form the rationale for other, non-neoclassical theories of trade and
development, including vent-for-surplus, structuralize, and North-South models.
Although the preceding argument is often overstated, it seems clear that if interregional
political rivalries can be transcended, increased regional cooperation among developing
nations offers an important component of a trade and industrialization strategy. In fact, the
share of developing-country exports going to other developing countries increased

dramatically from about 17% in the 1960s to over 40% in the 2000s. Explicit developingcountry policies, including free-trade areas such as ASEAN in Southeast Asia and Mercosur
in South America, are at least partly responsible for this trend. Of course, the trend also
reflects the development successes in Asia, many of whose economies have been growing
faster than those in North America and Europe in recent years. Renewed efforts are being
made in Africa, through the African Union and the NEPAD peer review program, but there is
a long way to go.

Answer of question No-13 (Pages No 596 to 597)

A traditional way to approach the complex issues of appropriate trade policies for
development is to set these specific policies in the context of a broader strategy of looking
outward or looking inward.30 In the words of Paul Streeten, outward-looking development
policies encourage not only free trade but also the free movement of capital, workers,
enterprises and students the multinational enterprise, and an open system of
communications. By contrast, inward-looking development policies stress the need for
nations to evolve their own styles of development and to control their own destiny. This
means policies to encourage indigenous learning by doing in manufacturing and the
development of technologies appropriate to a countrys resource endowments.
Basically, the distinction between these two traditional trade-related development strategies is
that advocates of import substitution (IS) believe that a developing economy should initially
substitute domestic production of previously imported simple consumer goods (first-stage IS)
and then substitute through domestic production for a wider range of more sophisticated
manufactured items (second-stage IS)all behind the protection of high tariffs and quotas on
these imports.
We may conclude, therefore, that the successful promotion of primary product exports in lowincome countries and for the benefit of the poor cannot occur unless there is a reorganization

of rural social and economic structures along the lines. The primary objective of any rural
development strategy is widely accepted to be first to provide sufficient food to feed local
people and only then to be concerned about export expansion.
Given the structure of world demands for primary products, the threat of local food shortages
and thus the desire of potential importers to focus on agricultural self-sufficiency, the
inevitability of the development of further synthetic substitutes, and the (tragic) unlikelihood
of significantly lower levels of agricultural protection among developed nations in light of the
stalled trade talks, the real scope for primary-product export expansion in individual
developing nations seems limited

Answer of question from video

During the period of rapid economic growth, the Korean government provided tax and
financial incentives and established export-promoting organizations. As a result of Export
Promotion (EP) policies, export values rose significantly. Beginning from the early 1980s, the
government changed the policy direction from direct subsidization of selective industries and
firms toward function-oriented support such as general support for R&D activities. The
transition from the LI to the HCI and then to technology- intensive industries led to the higher
value-added industrial structure and contributed to economic growth and trade specifically
export. Meanwhile, the rapid economic growth was accompanied by structural problems.
That is, the accumulated non-performing loans of commercial banks became one of the
causes of the economic crisis in 1998. Under the current WTO system which prohibits the
direct export promotion measures, Korea does not provide export subsidies in general that are
prohibited by the WTO regulations. Meanwhile, export incentives provided by the
government such as duty drawback and export insurance schemes are actively utilized. The

FTZs are in operation and expected to be strengthened mainly to attract FDI from abroad.
Exchange rate is no longer used to promote exports.
There are government-supported EP organizations. These types of EP can also be provided by
other developing countries. That is, the governments of developing countries would benefit
from maintaining and strengthening the appropriate institutions relating to EP such as the
export insurance and duty drawback schemes subject to the budget constraint, which are not
prohibited under the current WTO system. In addition, it would be necessary for the WTO
Members to think of the concrete ways of modifying the concerned WTO regulations in
favour of the developing countries use of EP policies from the viewpoint of distributional
fairness.

CHAPTER NO-13
Answer of question No-05 (Pages No 652 to 655)
OPEC petrodollars were recycled, starting with Middle Eastern oil export earnings being
deposited in U.S. and European banks, which then lent these dollar balances to developingworld public- and private-sector borrowers. Over $350 billion was recycled from OPEC
countries between 1976 and 1982. As a result of all these factors, the total external debt of
developing countries more than doubled from $180 billion in 1975 to $406 billion in 1979,
increasing over 20% annually. More significant, an increasing portion of the debt was now on
non-concessional terms involving shorter maturities and market rates of interest, often
variable rates. Despite the sizable increases in debt-servicing obligations, the ability of most
developing countries to meet their debt service payments during the late 1970s remained
largely unimpaired. This was primarily a function of the international economic climate
during that period. A combination of declining real oil prices as a result of inflation, low or
negative real interest rates, and increased export earnings narrowed current account deficits

toward the end of the decade and enabled developing countries to sustain relatively high
growth rates, averaging 5.2% during 19731979, through massive borrowing. Significant and
persistent trends was the tremendous increase in private capital flight. It is estimated that
between 1976 and 1985, about $200 billion fled the heavily indebted countries. This was the
equivalent of 50% of the total borrowings by developing countries over the same period.
Fully 62% of Argentinas and 71% of Mexicos debt growth are estimated to have resulted
from capital flight. In fact, some researchers have argued that the 1985 level of Mexican debt
would have been $12 billion (rather than the actual $96 billion) were it not for the huge
private capital flight.
Facing this critical situation, developing countries had two policy options. They could either
curtail imports or impose restrictive fiscal and monetary measures, thus impeding growth and
development objectives, or they could finance their widening current account deficits through
more external borrowing. Unable, and sometimes unwilling, to adopt the first option as a
means of solving the balance of payments crisis, many countries were forced in the 1980s to
rely on the second option, borrowing even more heavily. As a result, massive debt service
obligations accumulated, so that countries like Nigeria, Argentina, Ecuador, and Peru were
experiencing negative economic growth in the 1980s and consequently faced severe
difficulties in paying even the interest on their debts out of export earnings. They could no
longer borrow funds in the worlds private capital markets.

Answer of question No-07 (Pages No 655 to 657)

The basic idea was to stretch out the payment period for principal and interest or to obtain
additional financing on more favourable terms. Typically, however, such debtor countries had
to deal with the IMF before a consortium of international banks would agree to refinance or
defer existing loan schedules.
Relying on the IMF to impose tough stabilization policies, a process known as conditionality,
before it agreed to lend funds in excess of their legal IMF quotas, the private banks

interpreted successful negotiations with the IMF as a sign that borrowing countries were
making serious efforts to reduce payments deficits and earn the foreign exchange needed to
repay earlier loans. There are four basic components to the typical IMF stabilization program:
There are four basic components to the typical IMF stabilization program:
1) Abolition or liberalization of foreign-exchange and import controls
2) Devaluation of the official exchange rate
3) A stringent domestic anti-inflation program consisting of (a) control of bank credit to
raise interest rates and reserve requirements; (b) control of the government deficit
through curbs on spending, including in the areas of social services for the poor and
staple food subsidies, along with increases in taxes and in public-enterprise prices; (c)
control of wage increases, in particular abolishing wage indexing; and (d) dismantling
of various forms of price controls and promoting freer markets
4) Greater hospitality to foreign investment and a general opening up of the economy to
international commerce.
Less radical observers view the IMF as neither pro development nor antidevelopment but
simply as an institution trying to carry out its original, if somewhat outdated, mandate to hold
the global capitalist market together through the pursuit of orthodox short-term international
financial policies. Its primary goal is the maintenance of an orderly international exchange
system designed to promote monetary cooperation, expand international trade, control
inflation, encourage exchange-rate stability, and help countries deal with short-run balance of
payments problems through the provision of scarce foreign-exchange resources.

Answer of question from video

During the period of rapid economic growth, the Korean government provided tax and
financial incentives and established export-promoting organizations. As a result of EP
policies, export values rose significantly. Beginning from the early 1980s, the government
changed the policy direction from direct subsidization of selective industries and firms
toward function-oriented support such as general support for R&D activities. The transition
from the LI to the HCI and then to technology-intensive industries led to the higher valueadded industrial structure and contributed to economic growth. Meanwhile, the rapid
economic growth was accompanied by structural problems. That is, the accumulated nonperforming loans of commercial banks became one of the causes of the economic crisis in

1998. Under the current WTO system which prohibits the direct export promotion measures,
Korea does not provide export subsidies in general that are prohibited by the WTO
regulations. Meanwhile, export incentives provided by the government such as duty
drawback and export insurance schemes are actively utilized. The FTZs are in operation and
expected to be strengthened mainly to attract FDI from abroad. Exchange rate is no longer
used to promote exports. There are government-supported EP organizations. These types of
EP can also be provided by other developing countries. That is, the governments of
developing countries would benefit from maintaining and strengthening the appropriate
institutions relating to EP such as the export insurance and duty drawback schemes subject to
the budget constraint, which are not prohibited under the current WTO system. In addition, it
would be necessary for the WTO Members to think of the concrete ways of modifying the
concerned WTO regulations in favor of the developing countries use of EP policies from the
viewpoint of distributional fairness.