George Mason University the Golden Age of Trade Essay
Description
Draw on Lectures 3&5 and associated readings. Consider Lecture 3 where we discussed the Golden Age of Trade (1870-1913) and how Furtado analyzed areas that exported tropical crops, temperate crops, and minerals. Also consider Lecture 5 on International Trade and Development. How did trade foster growth during the Golden Age of Trade? Why did structuralists/ dependency theorists like Furtado and Prebisch believe that exporting primary products would result in low levels of development? What happened to these kinds of exports during the Great Depression? What kinds of primary products did your country export during the Golden Age of Trade? How did it work out for them during the Great Depression?
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International Trade and
Development in Latin America
Read Franko, Ch3, pp. 58-61
Franko, Ch 7, pp. 192-198
Objectives of this section on Trade
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Introduce the Balance of Payments to better
understand the role of international trade
Take a brief look at International Monetary Theory
Review Classical & Neoclassical trade theory
? Smith
? Ricardo
? Hecksher & Ohlin (H-O)
Criticisms of Trade Models
Dependency Theory Attack on Trade Theory
Wrestle with the question of whether free trade has
been good or bad for Latin America.
Balance of Payments
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The Balance of Payments (BOP) is an official
accounting record of all the foreign
transactions, of a nations residents,
businesses & govts.
The Balance of Trade = Merchandise Exports
Imports;
Imports>Exports, a trade deficit;
Exports>Imports, a trade surplus
Balance of Payments
Payments (Debits)
? Current Account
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Imports
Travel abroad
Interest on foreign debt
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Capital Account
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Receipts (Credits)
? Current Account
Investment & loans
abroad by nationals
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Capital Account
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Cash Reserves Acct
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Exports
Tourism in country
Income from overseas
investment
Investment and loans
from abroad
Cash Reserves Acct
If the current account is in deficit, need investments & loans to bring in foreign
exchange to finance the deficit, otherwise cash reserves will be drawn down.
Balance of Payments
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Credit leads to a demand for domestic
currency.
Debit leads to a demand for foreign
currency.
Current acct + Capital Account = Official
Reserve Transaction Balance.
A current acct deficit could signal a future
fall in the exchange rate
What are exchange rates?
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Exchange rate price of one currency in
terms of another
The world is essentially on a flexible
exchange rate system, so
Exchange rates are determined by supply
and demand in the foreign exchange
market
Foreign Exchange in WSJ
Oct 11, 2016 NY foreign exchange trading in amounts of $1million
or more. The exchange rate can be states in either of two ways:
Country
In US $
In US $
Per US$
Per US$
Last
Prior
Last
Prior
Brazil (Real)
.3107
.3119
3.2183*
3.2065
Mexico (Peso)
0.0527
0.00528
18.9665*
18.9263
Japan (Yen)
0.00966
.00965
103.55*
103.61
Euro area (Euro)
1.1063*
1.1140
.9039
.8976
UK (Pound)
1.2242*
1.2362
.8169
.8089
*typically stated in this ratio
In Brazil the Real fell from prior day because the Real is worth fewer $; and
now, at the last day, it costs more Reales to buy a $.
The strength of a currency
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Appreciationa currency rises in value
relative to another currency (stronger)
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Depreciationa currency falls in value
relative to another currency (weaker)
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When a countrys currency is stronger, it buys
more goods from abroad.
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But exports also become more expensive.
Converting $ to Pesos & Pesos to $
Assume $1 = 13 pesos
In Mexico Taco cost 13 pesos:
pesos * $/peso= ?? $
13 pesos * 1/13 $/peso = $1.00
(Pesos in the numerator and denominator cancel, left with dollars.)
In U.S. Big Mac costs $2
$ * pesos/$ = ?? Pesos
$2 * 13 pesos/$ = 26 Pesos
(Dollars in the numerator and denominator cancel, left with pesos.)
What happens if the Peso appreciates?
Now $1 = 6.5 pesos
The taco is still 13 pesos, but
13 pesos * 1/6.5 $/peso = $2.00
It costs more in terms of dollars
Big Mac still costs $2
$2 * 6.5 pesos/$ = 13 pesos
but now its cheaper in pesos
Factors that can cause a currency to
appreciate or depreciate
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Interest rates increase the currency
appreciates
Inflation increases the currency depreciates
(PPP)
Demand for the countrys exports increases
the currency appreciates
Increases in productivity increase demand for
exports and strengthen the currency in the
long run.
Classical and Neoclassical Trade Theory
An Overview
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Adam Smith Classical
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David Ricardo — Comparative advantage
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Vent for surplus
Dynamic opportunities
Also a Classical economist a bit later than Smith.
Heckscher & Ohlin Neoclassical trade
theory a new twist on Ricardo
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(1950s)
Adam Smith, Wealth of Nations, 1776
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Proposed these advantages of trade, which
are different than Ricardos Comparative Adv:
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Vent for Surplus
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Dynamic opportunities for learning and increasing
human capital
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Existence of idle land and labor to produce goods
already in surplus
Trade provides the vent and employs resources
otherwise not fully employed
Ricardos model assumes full employment
Ricardos model is a static model at one point in time
So these are additional reasons, beyond
Ricardo, why trade leads to growth.
Revisiting David Ricardos
Principle of Comparative Advantage
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A countrys or persons ability to produce a
good at a lower opportunity cost than some
other country or person.
Comparative advantage vs absolute
advantage
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John could have an absolute advantage in two
trades carpentry & brain surgery.
Bob is less talented, but Bob has a comparative
advantage in carpentry because his opportunity
cost is low. Johns opportunity cost of practicing
carpentry is very high.
Ricardos Model
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Single resource
labor
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Labor is fully
employed
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The PPC is a
straight line
Slope of PPC reflects difference in techn
Lat Am vs Industrialized World
Heckscher-Ohlin (H-O) Model & Factor
Endowments
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Assumes:
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All countries have access to same techn
Countries endowed with dif factor supplies
Some goods (like ag) are labor intensive
Other goods (like mfg) are capital intensive
Concludes:
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Capital abundant countries should produce the
capital intensive goods.
Labor abundant countries should produce the
labor intensive goods.
H-O Predictions
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Specialization is not complete because the PPC
is bowed out in each country
Factor prices will be equalized with International
trade wages rise in labor abundant country.
This is called the Factor Price Equalization
Theorem.
As factor prices equalizes, trade promotes
increasing equality between countries. NB!!!
(Maybe it worked between China & the U.S.
Wages fell in U.S. and rose in China with
increased trade.)
Objections to assumptions of the Neoclassical trade models
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Resources are not fixed (human capital can
increase), fully employed, and internationally
immobile
Technology is not fixed nor freely available, it
changes
Consumer tastes not fixed either — respond
to advertizing
Factors are not perfectly mobile within the
countries
Objections cont.
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Models implicitly assume perfect competition,
but we have monopoly and oligopoly patterns
Big role of govts in international trade is
ignored
Exports are not = to Imports as the models
assume.
So who really gets the gains from trade?
Does trade promote equality? Or do the rich
countries get richer?
Other opposing theories
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Infant Industry arguments industry should
be protected till it gets it feet on the ground
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Raul Prebisch & Dependency theory of trade
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Argentine economist associated with ECLAC
(CEPAL)
Published his critique of trade theory in 1950
Prebisch was especially irritated by the factor
price equalization theorem
Prebisch theory in brief
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Emphasized the tendency for international
trade to further inequality among nations
Focused on the consequences of
technological progress
Pointed to the worsening of the peripherys
terms of trade Px/Pm
Encouraged industrialization for the periphery
Prebisch observed history
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19th century center produced mfg and
periphery exported raw materials growth,
but the strategy ran out of steam.
Great depression of the 1930s commodity
prices fell dramatically.
World trade fell in quantities & prices, value
fell by 50%.
Prices of primary products (crops & minerals)
fell the most so Latin America was hit hard.
Change in composition of world trade.
Prebisch further observed that
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In the Center, development was based on
technological progress and rapid
accumulation of capital. Capital/ labor
increased and human capital increased.
In the Periphery, development was based on
changes in overall demand responded to
demand for different crops or minerals. Little
improvement in technology or human capital.
Falling terms of trade — Px/Pm
Price of exports / Price of imports
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Engels Law: As income increases, % spent on
food declines.
Technological change in mfg reduced waste of
raw materials and found synthetics.
Markets for mfg were monopolistic and
oligopolistic prices were kept high.
Markets for raw materials were very competitive
and resulted in low prices.
Prebisch concluded that Latin America must
industrialize not export primary products,
whose prices would fall, while import prices rose.
Has the Terms of Trade fallen?
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Terms of trade for 24 commodities, excludes oil
Controversial
Very volatile
Depends on the
time period
chosen, the
methodology
This from Gillis,
(Economics of
Development)
shows little trend.
Summary
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In this lecture, Ive tried to provide background to
better understand the role of trade.
Weve also presented strong arguments why trade
can be good for growth.
We questioned whether H-O went too far. Does
trade really bring increasing equality around the
world?
Prebisch didnt think so from the perspective of the
1950s. He thought it was misguided to rely on
primary product exports as a long-term strategy.
Latin Americas Historical
Roots
From its Colonial History,
thru the early 20th Century
Read C&H Ch2, Franko, Ch2
Latin Americas shared history
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In this section well look at:
A shared colonial history from 1500-1800
The post-independence struggles of building
nation states in the 1800s
Similar trade policies and economic
relationships with the global economy in the
19th and 20th centuries
Our objective is to understand where Latin
America has been so that we can better
understand the world we all live in.
Historical Overview / Timeline
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Columbus landed 1492
300 years of colonial rule -?
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Colonial plunder and mineral extraction — 1500-1700
Hacienda production — 1700-1810
Wars for Independence — 1810-24
Entry into world economy as commodity exporters-1825-1870
Golden Age of international trade — 1870-1914
WWI 1914-1918 — stalled trade
1930s — Great Depression
WWII 1939-1945 — stalled trade
Historical Overview / Timeline
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Post WWII World Bank, UN, ECLA created
1950s-1960s — Dependency theory, ISI, Protected
Markets, but economic growth
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Jan 1959 Fidel Castro took over Cuba
April 1959 IDB established
1961 Alliance for Progress under Kennedy Adm
1970s — Growth by borrowing
1980s — Debt Crisis
1990s Market oriented reforms and
disappointments
2001-2015 Commodity prices boom & exports to
China
Colonial Latin America, 1500-1800
Compared to the U.S.
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U.S.
Sparcely populated
No gold found
Extensive river system
for transport
Good farm land
Local autonomy &
English common law
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Latin America
Large population &
highly developed
empires in decadence
Abundant gold & silver
Difficult geography
Farmland of less
interest
Spanish bureaucratic
control
The Spanish Bureaucracy
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Encomienda gave conquistadors power
over the native population
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For work in the mines
For work on the land
The conquistador became the encomendero
like a feudal lord a guardian & protector,
charged with instructing the native population
in the Roman Catholic faith
The repartida share of the farm output due
to the Spanish lord.
The Spanish Bureaucracy
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Mercantilism tight control over trade to
accumulate gold
Initially made Spain a global power
But later Great Britain grew strong with
improved technology
Overlapping bureaucracies
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The Spanish court
The military
The church
Poor foundation for sustainable
economic growth
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Excess rules impeded the development of
markets created inefficiencies as well as a
tradition of intervention in the economy
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Excess rules encouraged corruption a
legacy that is very difficult to escape from
Colonial Latin America, 1500-1800
Part I and Part II — Overview
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1500-1700 Exploitation of precious metals
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1700-1800 Rise of the agricultural estate
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Two phases were mostly reversed in Brazil
Colonial Latin America, 1500-1800
Part I
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1500-1700 Exploitation of precious metals
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Columbus was looking for gold and found it!
Growth poles around the mining towns
Population center gave rise to specialization and
trade to provide food, clothing, domestic articles
for the miners
Silver gave rise to better growth poles better
grade of ore the deeper one dug
Gold ran out more quickly
Most of the Indians died in poor conditions,
contracted European diseases
Incan Gold Works
Lots of gold and silver in Mexico and Peru, also gold in Hispaniola.
Silver Mining
Towns
Guanajuato Mexico ->
Potosi, Bolivia
Taxco, Mexico
Colonial Latin America, 1500-1800
Part II
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1700-1800 Rise of the agricultural estate
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Latifundio-Minifundio landholding
Commodity booms to respond to European
demands sugar, cocoa, tobacco, coffee
Healthier lifestyle
Two phases were mostly reversed in Brazil
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Gold found later: 1690, Diamonds 1729
Brazil was sparcely populated, imported slaves
earlier for sugar plantations
Sugar Cane
Columbus brought sugar to Hispaniola.
Sugar plantations peaked in the
mid-16th century there.
Cacao
Chocolate was an important
beverage in Mexico & C. America
long before the Spaniards. Big trade
among indigenous people.
Caught on fairly quickly in Europe
with addition of sugar.
Tobacco
One of first things Colombus noted about
the Taíno indians in Hispaniola.
Introduced in Europe in the mid-16th century.
Already cultivated in the new world.
Coffee
Native to Ethiopia
Unknown in Latin
America before
1720s when it was
introduced in
the Caribbean
and in Brazil.
It was already becoming popular in
Europe.
Bananas
Native to Asia
Some say it
came to Lat Am
In 15th & 16th
centuries.
Became impt
in the 1870s to
feed railroad
workers — soon
after an export
the banana
republics of C.
America were
born. (United
Fruit.)
Guano
Trade boom in mid-19th century
The Early 19th Century – Overview
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The role of Great Britain and the Industrial
Revolution
Wars for independence 1810-1824
the building of nation states
the beginnings of free trade and the entry into
the world economy 1825-1870
Spain fell and Great Britain rose
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While Spain exploited its colonies for gold
and silver, Britain developed new technology
— especially in textiles
England gained power rapidly
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major supplier of mfg
substantial control over world shipping
major financial power
Adam Smith: the Wealth of Nations, 1776
Britain helped to finance the wars for
independence in Latin America
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Britain & Latin America eager to trade
The struggles of the new nation states
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Power shifted to landowners and merchants
The privileges of power
Coupe and counter coupes
New nation states also coping with:
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decline of church power (education also declined)
decline in mining and the taxes obtained from it
decline in domestic artisans which could not
compete with international competition.
default on loans (hard to get new loans)
Golden Age of Trade (1870-1914)
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Technological change in the mid-19th Century
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Railroads –1838 first railway in Cuba open for
sugar production
Telegraph for communication
improved tech for shipping and mining
England dismantling protection and opening
doors to raw materials from abroad
Industrialization and growth in U.S. led to
increases in demand for industrial minerals &
tropical Latin American goods
Tremendous growth from specialization
and trade Ricardos Comparative Adv
Latin America must give up 50 units of Ag to produce 5 units of Mfg. But the
UK gives up only 10 units of Ag to produce 50 units of Mfg. UK opportunity
Cost of producing Mfg is much less.
Tremendous growth from specialization
and trade Ricardos Comparative Adv
If both Lat Am and the UK specialize in the good they produce at lowest
opportunity cost, the World can produce much more than if they each produced
some of each good.
Latin Americas role as exporter of raw
materials (as described by Celso Furtado)
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Temperate Agricultural commodities — grains
and beef from Argentina, Uruguay, wheat from
Chile
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Tropical Agricultural Products — sugar,
tobacco, coffee, cocoa, bananas
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Mineral products — industrial metals: lead, iron,
tin, copper, tin, Chilean nitrates
Temperate Agricultural commodities
Seemed to produce the most growth
i.e. Argentina did well 1870-1914
? By 1905 exported more beef & mutton to Britain
than the U.S. new methods of refrigeration &
processing
? Extensive building of railroads, port facilities,
meatpacking houses
? Temperate products, low income elasticity fewer
price swings
? Could benefit from new technology produced in
the United States & Europe
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Tropical Agricultural Products
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Railroads provided benefit, but mostly went to
ports, rather than uniting the country.
Infrastructure required for tropical products
was less complex.
Competed with other colonial regimes where
prices and wages were low.
Income elasticity was higher subject to
price volatility
Less development of new technology, little
increase in human capital
Mineral Products
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Often dominated by foreign capital
investment
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Became capital intensive enclave economies
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Provided minimal stimulus to the overall
economy according to Furtado
Effects of the WWI & Depression
according to Furtado
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Latin America began to industrialize during WWI
cut off from imports
Great Depression brought a big drop in demand
for industrial goods and tropical luxury crops
not as bad for Argentina
Lack of trade during World War I protected
Argentinas infant industry.
Later in Lecture 6, well bring this up again when
we discuss Import Substitution Industrialization.
Summary
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This lecture has provided a broad overview of
the economic history of Latin America up to
the early 20th century.
Weve spotlighted Latin Americas role as an
exporter of primary products.
Weve also spotlighted things that may have
held back development in Latin America.
Now you can research how your country fits
into that history, for Paper 2.
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economics
Great Depression
Age of Trade
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