Policy Implication of Globalization

Equation 23.24 indicates what policies are required for economic growth. The following analysis is based on the mathematical derivation presented in Appendix B.

Empirical results presented in Table 23.3 show that an increase in the wage of the home country relative to the rest of the world and inflation, whether it is domestically generated or transmitted from outside, lowers the home country's output growth. Increasing returns to scale, greater capital inflow, expansion of the world economy, and devaluation of the home currency will raise output growth.

Although data on 6 are not available for LDCs as a group, we can use South Africa for our purpose as a typical LDC, and given the fact that MDCs' growth is what they aspire to, we may infer that LDCs would benefit from policies that would hold down wage growth, thus increasing returns to scale, greater capital inflow, inflation control, expanding world economy, and currency devaluation. In order to raise l, the government has to make more effort in

Table 23.1 Estimation of Verdoorn Coefficient l

Country group

Period

Value of l

Low income countries Low income countries Middle income countries Middle income countries High income countries High income OECD countries World

1960-2003 1981-2003 1965-2003 1981-2003 1987-2001 1987-2001 1987-2001

Source: For the computation of l, see Appendix A.

Table 23.2 Estimation of Long Run Income and Price Elasticity of Imports and Exports, q, 4, — 4I

Country

Exports Income (ex) Price (hx)

Imports Income (em) Price (hm)

q

F

— 4I

Canada (M2)

1.69

-0.83

1.84

-1.02

0.97

-0.83

0.41

Chile

1.31 (SM)

-1.08

1.15 (H1)

-0.15

n.a.

n.a.

n.a.

(SM)

(H1)

China

1.2 (SM)

-3.13

1.2 (H1)

- 0.6

n.a.

n.a.

n.a.

(SM)

(H1)

Finland

2.0 (SM)

- 1.05

1.56 (H1)

- 0.46

1.00

- 0.51

0.26

(SM)

(H1)

Germany

1.86

- 0.66

1.88

- 0.60

1.00

- 0.26

0.13

(M1)

Japan

2.11 (SM)

- 1.27

1.35 (H1)

- 0.52

1.00

- 0.79

0.40

(SM)

(H1)

Japan (H2)

1.1

- 1.0

0.9

- 0.3

1.00

- 0.30

0.15

South Africa

0.66 (SM)

- 0.51

1.06 (H1)

- 0.8

1.00

- 0.31

0.16

(SM)

(H1)

U. K. (H2)

1.1

- 1.6

2.2

- 0.6

1.00

- 1.20

0.60

U.S.

1.04 (SM)

- 0.73

0.98 (H1)

- 1.05

1.00

- 0.78

0.39

(SM)

(H1)

U.S. (H2)

0.8

- 1.5

1.8

- 0.3

1.00

- 0.80

0.40

U.S. (M1)

1.54

- 0.99

1.94

- 0.92

1.00

- 0.91

0.46

U.S. (HM)

0.99

- 1.51

1.51

- 0.54

1.00

- 1.05

0.53

U.S. (B)

2.05

- 0.69

1.74

- 0.72

1.00

- 0.41

0.21

U.S. (A)

2.09

- 1.07

2.96

- 0.84

1.00

- 0.91

0.46

U.S. (GK)

1.01

- 2.32

1.84

-1.12

1.00

- 2.44

1.22

U.S. (M2)

0.92

- 1.44

1.26

- 0.52

1.00

- 0.96

0.48

Rest of OECD

1.75

- 0.83

2.03

- 0.49

n.a.

n.a.

n.a.

(M1)

(LDCs) (M1)

2.26

- 0.63

0.40

- 0.81

n.a.

n.a.

n.a.

OPEC (M1)

-1.27

- 0.57

1.07

-1.14

n.a.

n.a.

n.a.

Source: SM = Senhadji and Montenegro [44], Table 2, 266-271; H1 =Hong [45], Table 4.1, 9; H2 = Hopper et al. [46], Table 1, 7; HM = Houthakerand Magee [47], Table 1,113; B = Blecker [48], Table A-4,148 and Table A-6,151; A=Alterman [49], Table F and Table G; M1 =Marquez [50], Table 2, 75; GK=Goldtsein and Khan [51], Table 4.1, 1078 and Table 4.3, 1082; M2 = Magee [52], Table 1,180; n.a. = not available.

complementary investment in infrastructure and enhancing the coordination of private investment. The crucial condition, however, is that the income elasticity of demand for export must be sufficiently large, which means that the country has to invest in high income-elastic products. The greater the increasing returns to scale or the greater the price elasticities of demand for imports and exports, the greater the required income elasticities. The magnitude of income elasticities

Table 23.3

Effects of Various Economic Variables on BP Equilibrium Income

Expanded

Increase in

World

Wage

Increase in

Capital

Economy

Country (!)

Increase (2)

l (3)

Inflow (4)

Inflation (5)

(6)

Devaluation (7)

Canada

C

+

+

C

(M2)

Chile

C

+

+

C

China

C

C

-

C

+

Finland

C

+

+

C

Germany

C

+

+

C

(M1)

Japan

C

+

+

C

Japan

C

+

+

C

(H2)

South

C

+

+

C

Africa

U.K. (H2)

C

+

+

C

U.S.

C

+

+

C

U.S. (H2)

C

+

+

C

U.S. (M1)

C

+

+

C

U.S. (HM)

C

+

+

C

U.S. (B)

C

+

+

C

U.S. (A)

C

+

+

C

U.S. (GK)

C

+

+

C

U.S. (M2)

C

+

+

C

Rest of

n.a

n.a

n.a

n.a

n.a

n.a

OECD

LDCs

n.a

n.a

n.a

n.a

n.a

n.a

OPEC

n.a

n.a

n.a

n.a

n.a

n.a

Source: The computation is based on Table 23.2. Note: " — " = lower output growth and " + " = higher output growth. The precise conditions are given in Appendix B.

Source: The computation is based on Table 23.2. Note: " — " = lower output growth and " + " = higher output growth. The precise conditions are given in Appendix B.

relative to returns to scale coefficient l and price elasticities holds the key to growth. They reflect the consumer preferences and development strategy adopted by the government which must guide and coordinate investment in the target industries in the initial phase, when the market fails to put the economy on a self-sustaining development path. Emphasis on high technology-intensive products (office/data processing/telecommunications equipment, televisions, transistors, turbines, power-generating equipment, pharmaceuticals, aerospace, optical/measuring instruments, cameras) would offer better growth prospects than low technology-intensive ones (textile fabrics, clothing, headgear, footwear, leather manufactures, travel goods, pottery, simple metal parts, furniture, jewelry, toys, plastic products) because the former have high income elasticities and tend to grow faster in trade [53].

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