Transcript Immiserizing growth

Immiserizing
growth
Paola Brumatti, Jurgita Miliukaite,
Valeria Parracino
The history of immiserizing
growth
 Economic growth is a concept referring to a
worsening in the conditions of a country.
 The scholar Bhagwati (1958) coined this
expression to indicate a growth that expands
exports and worsens the terms of trade
sufficiently that real income falls.
 Johnson (1955) had shown that a market
distorted by a tariff could lose in terms of
growth and had also, independently, worked
out various conditions referring to Bhagwati's
result.
The Standard Model of Trading
Economy (short summary)
 1. The terms of trade refers to the price of
exports relative to the price of imports.
 2. Export-biased growth reduces home
country terms of trade, reducing its direct
benefits of growth and increasing the
welfare of foreign countries.
 3. Import-biased growth increases home
country’s terms of trade, increasing its
welfare and decreasing the welfare of
foreign countries.
Generally speaking, free international
trade is considered to be positive for
the welfare of a country.
BUT: it might happen that the
combination of international trade and
economic growth decrease the
country’s welfare.
This phenomenon is know as “immisering
growth”, from the famous homonym
paper written in 1958 by Bhagwati.
In fact…
In fact, free trade is the best
economic policy for small
countries: their supply and
demande curves are slight in
the world market, so the terms
of trade is given and
unchanged .
Let’s assume that there is no
domestic industry which can
supply this good.
Key concepts of the graph
DD’ = domestic demand curve
B: price  the price is given, since
we assumed that the country is a
small one. That’s the reason why
they can import the quantity of the
good that they demand at price B.
A: equilibrium point in free trade
DAB: level of welfare
Now let’s suppose that the
country imposes an import fee
Key concepts of the graph
DD’ = domestic demand curve
E: new price with the import fee
C: new equilibrium point
DCE: new level of welfare.
EC: is the new quantity imported
The level of welfare is reduced ,
since the sum of the consumer’s
surplus (DCE) and the revenue of
the tariff (ECBF) is smaller than
the previous level of welfare.
Since a change in a small country’s
demand and supply doesn’t
change the world terms of trade,
the welfare of a small country
increases by an increase in the
domestic production.
With free trade there is no possibility
of immisering growth in a small
country.
What happens in the case
of a larger country?
But if the country is large
enough to influence the
world terms of trade, the
free trade is not the
optimal condition for
international trade.
Let’s assume that there is no
domestic industry which can supply
this good.
Key concepts of the graph
 DD’ : domestic demand curve
 FF’: supply curve of the foreign exporter
 A: world equilibrium price
 AB: domestic demand = AC supply from foreign exporter
 DBA: consumer’s surplus
 If the country imposes an import tariff, the new world
price will be H , and the new country price will be C.
 The new domestic demand is CE which equals to the
foreign supply, GH.
 The level of welfare is higher, since the sum of the
consumers’ surplus DCE and the revenue of the fee CEIH
is larger than the previous consumer’s surplus in free
trade DBA.
In fact we already know that an exportbiased growth tends to worsen a growing
country’s terms of trade.
The immiserizing growth occurs
when a strongly export-biased
growth is combined with very
steep RS and RD curves.
In this situation there is such a big
change in the terms of trade since
the initial positiv effects of the
growth are offset.
In other words, the immizering
growth occurs when the negative
variation of a good is larger than
the positive variation of its
production.
The immiserizing growth:
geometrical demostration
Key concepts of the graph
 A: production point
 C: new production point
 B: consumption point
 D: new consumption point
 Slope AB: term of trade
 Slope CD: new term of trade
 Welfare is indicated by the consumption
points. In the graph we can clearly see
that the point D represents a lower level
of welfare
Conclusion: a paradox
The paradox of the immiserizing
growth can occur, but in extreme
conditions: strongly export biased
growth must be combined with very
steep RS and RD curves, so that the
change in the terms of trade is large
enough to offset the initial favourable
effects of an increase in a country’s
productive capacity. That’s why the
immiserizing growth is mostly
considered as a theoretical point and
not a real-world issue.
Thank you
for your
attention
References:
 Immiserizing Growth <
http://www.business.uwa.edu.au/__data/assets/pdf_fil
e/0004/2283331/ZHANG-Xiaobo-Immiserizinggrowth.pdf > 2015-03-12, 20:00.
 Development of International Trade Theory (Takashi
Negishi)
 http://www.fses.uniba.sk/fileadmin/user_upload/editor
s/Studium/AE/International_Econ/Lecture_4.pdf
 https://archive.org/stream/optimalpoliciesi00bhag/op
timalpoliciesi00bhag_djvu.txt
 http://www.soc.duke.edu/sloan_2004/Papers/Memos/
Kaplinsky_immiserising%20growth_25June04.pdf