Impoverishment growth

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The term impoverishment growth denotes the overcompensation of prosperity-increasing growth effects through prosperity-reducing terms-of-trade effects. The terms of trade serve here as an indicator of the economic prosperity of a country.

Impoverishment growth means that despite economic growth and technical progress, the country's level of prosperity is falling. It is a term used in foreign trade and is mainly used in connection with developing countries.

The fact that growth can ruin an economy is a paradox first mentioned in the post-war discussion about the dollar shortage by John Richard Hicks in 1953.

Since then, many economists have attempted to analyze the effects of growth on the terms of trade of developing countries, yet poverty growth is viewed as a theory rather than a real world problem.

definition

The word impoverishment growth is made up of the terms "impoverishment" and "growth". Impoverishment in this context can be seen as a loss of social welfare . such as B. the fall in real income or job losses can be understood. The term growth here stands for export specialization and export expansion in the countries concerned. For the countries concerned, this means that when they export, they limit themselves to one product and manufacture it in large quantities.

One also speaks of impoverishment growth when a country expands the production capacities of an export good, but at the same time the prices for imported goods rise. Although the country produces more, it is becoming impoverished because the prices of imported goods rise faster than the profit made from additional exports.

Theoretical approach according to Bhagwati

Jagdish Bhagwati demonstrated the conditions for impoverishment growth in 1958 in his article "Immiserizing Growth: A Geometrical Note" using a 2-country-2-goods model. He made it clear that this phenomenon can also occur in a stable market environment.

According to Bhagwati, two extreme conditions are necessary for this growth. On the one hand, growth must be very export-heavy, and on the other hand, this growth must be accompanied by relatively inelastic supply and demand functions. This means that the supply and the demand are relatively constant despite rising prices, which is especially the case for staple foods or fuels. The growth in impoverishment is largely taking place in developing countries , as these are mainly suppliers of primary goods and are economically dependent on the export of these goods. Under the conditions that the price ratio on the world market does not remain constant and the income elasticity for agricultural products in the buyer countries is relatively low, export prices in developing countries will fall despite the expansion of production (specialization in export). At the same time, the demand in the industrialized countries for their own export goods is usually growing faster than the demand for primary goods. As a result, there is more often a rise than a fall in the prices of imported goods in developing countries.

These two factors, the rise in import prices and the fall in export prices, combine to worsen the terms of trade in developing countries. This development often results in a shift in production. The export is reduced and which are actually increasingly want to import products themselves produced. Finally, welfare has sunk below the level that was achieved before the export expansion. So the economy and the population are worse off than before. This is because the rate of decline in the terms of trade is greater than the rate of growth in gross domestic product . This means that domestic growth is no longer sufficient to maintain the previous import volume, since exports would have to increase for every additional good imported. This model describes a transfer service which requires market instability.

Causes and consequences

If the production costs fall, for example due to technical progress, the country can expand its capacities and thus the supply volume. Due to the inelastic demand, the demand increases disproportionately to the price reduction. The larger supply cannot compensate for the lower prices and thus the export revenues decrease. In this case, lower export revenues mean that the country also has less foreign currency available to meet its obligations from services from abroad, i.e. to pay for the imported goods. New borrowing needs to be increased to meet these obligations. The country works with more and more outside capital, has to service interest and therefore has less equity. These developments have a negative impact on incomes and employment in the country under consideration, and the country becomes impoverished. Similar approaches can be found in the Prebisch-Singer thesis . If import goods prices do not fall in the wake of the fall in the price of export goods, the terms of trade rate deteriorate and the country suffers more losses than profits despite increased production.

A second cause of the growth in poverty is the specialization in one or only a few export goods. Poor harvests or insufficient raw material stocks reduce the supply on the world market, which leads to an increase in the price of export goods. At the same time, demand is falling due to the now more expensive primary goods. Fewer products can be sold and export earnings fall, which again leads to lower wages and a decline in employment.

Furthermore, a worldwide free trade policy, i.e. trade without tariffs and import quotas, favors the developments described above. The lack of tariffs on imported goods cannot counteract a global decline in prices with increasing supply quantities.

example

In the early 1990s, the World Bank began to drastically promote coffee production in Vietnam , especially in Dak Lak Province, through financial support. This promotion led to an expansion of the arable land from 155,000 hectares in 1995 to 550,000 hectares in 2001 and increased the country's coffee exports from 4 million bags to 14 million bags. Thus, within a few years Vietnam had become the second largest coffee exporter in the world and, thanks to the financial support and low wages, was able to flood the world market with cheap coffee.

Development of the coffee price

This led to an oversupply on the world market and caused an international price drop for coffee, which triggered the global coffee crisis in 2000/2001. Since only 4% of the coffee harvest in Vietnam is consumed itself, there was an extremely export-heavy domestic growth . Added to this were the limited options for further processing, as a result of which mainly green coffee was exported, for which farmers worldwide received an average of 6.5% of the consumer price. However, this could no longer cover the costs of the cultivation and the population became poorer and poorer. This growth caused such a sharp drop in the terms of trade that Vietnam was worse off after the expansion of exports than before. This process is known as impoverishment growth.

Vietnam is only recovering slowly from the coffee crisis, but so are the other coffee producers. The consequences are expressed not only in extreme poverty and unemployment, but also in the destruction of the ecological balance. To restore the market equilibrium, among other things, the cultivation areas were diversified and in 2004 90,000 hectares of inferior coffee-growing areas were used to grow pepper, cocoa and cashew nuts.

criticism

In the specialist literature, the relevance of the impoverishment growth is highly controversial in reality. It's a very isolated model that neglects too many differences in the economic environment. Both the degree of organization of the trade unions and the formation of monopolies within a state have considerable effects on the terms of trade. For example, if a country is less unionized, immense wage pressure can arise, which in turn accelerates a deterioration in the income situation. In another country with a comparable situation, union support could support a more stable wage and income situation. The savings or consumption rate of a country also has an influence on how high the needs of the various goods are and thus favor the worsening of the terms of trade.

Another point of criticism of this model is its empirical verifiability. In this way, the thesis of long-term falling prices could be partially refuted. The fall in the price of primary goods compared to industrial goods does not apply to all goods. In the case of wood, tobacco and tin, a long-term price increase could even be observed, whereas no long-term price trend could be demonstrated for coffee, cocoa, copper and zinc.

literature

  • Willi Albers et al. (Hrsg.): Concise dictionary of economics . (HdWW). Volume 2: Education to Financial Equalization. Unabridged study edition. G. Fischer et al., Stuttgart et al. 1988.
  • Jagdish N. Bhagwati : Distortions and Immiserizing Growth: A Generalization. In: The Review of Economic Studies. Volume 35, No. 4, 1968, pp. 481-485, doi: 10.2307 / 2296774 .
  • Jagdish N. Bhagwati: Political Economy and International Economics. Edited by Douglas A. Irwin . The MIT Press, Cambridge MA et al. 1996, ISBN 0-262-52218-7 .
  • Jagdish N. Bhagwati, Arvind Panagariya, Thirukodikaval N. Srinivasan: Lectures on International Trade. 2nd Edition. The MIT Press, Cambridge MA et al. 1998, ISBN 0-262-52247-0 .
  • Georg Dybe: Regional economic change. The view of evolutionary economics and the "New Growth Theory" (= urban and regional sciences. Volume 2). LIT-Verlag, Münster 2003, ISBN 3-8258-6766-8 (also: Berlin, Free University, dissertation, 2002).
  • Harry G. Johnson: Increasing Productivity, Income-Price Trends and the Trade Balance. In: The Economic Journal . Volume 64, No. 255, 1954, pp. 462-485, doi: 10.2307 / 2227741 .
  • Harry G. Johnson: The possibility of income losses from increased efficiency or factor accumulation in the presence of tariffs. In: The Economic Journal. Volume 77, No. 305, 1967, pp. 151-154, doi: 10.2307 / 2229373 .
  • John R. Hicks : An Inaugural Lecture: I. Introductory Remarks. II. The Long-Run Dollar Problem. In: Oxford Economic Papers. New Series Volume 5, No. 2, 1953, ISSN  0030-7653 , pp. 117-135, JSTOR 2661971 .
  • Bernd Kempa: International Economics. Kohlhammer, Stuttgart 2012, ISBN 978-3-17-020812-4 .
  • Paul R. Krugman , Maurice Obstfeld : International Economics. Theory and Policy. 6th edition. Addison-Wesley, Boston MA et al. 2002, ISBN 0-321-11639-9 , p. 196.
  • Thieß Petersen: impoverishment growth. In: Business Studies. wisu. Journal for training, exams, career entry and advanced training. Volume 39, No. 2, 2010, ISSN  0340-3084 , pp. 200-206.
  • Kenneth A. Reinert, Ramkishen S. Rajan, Amy Jocelyn Glass, Lewis S. Davis (Eds.): The Princeton encyclopedia of the world economy. 2 volumes. Princeton University Press, Princeton NJ et al. 2009, ISBN 978-0-691-12812-2 .
  • Gerhard Rübel : Basics of real foreign trade. Oldenbourg Wirtschaftsverlag, Munich et al. 2004, ISBN 3-486-27560-7 (2nd, fundamentally revised edition. Ibid 2008, ISBN 978-3-486-58770-8 ).

Web links

Individual evidence

  1. ↑ See Jagdish N. Bhagwati, Arvind Panagariya, Thirukodikaval N. Srinivasan: Lectures on International Trade. 2nd Edition. The MIT Press, Cambridge MA et al. 1998, ISBN 0-262-52247-0 , p. 369.
  2. ↑ See Paul R. Krugman, Maurice Obstfeld: International Economics. Theory and Policy. 6th edition. Addison-Wesley, Boston MA et al. 2002, ISBN 0-321-11639-9 , p. 196.
  3. ↑ See Harry G. Johnson: The possibility of income losses from increased efficiency or factor accumulation in the presence of tariffs. In: The Economic Journal. Volume 77, No. 305, 1967, pp. 151-154.
  4. ↑ Inelastic demand. In: Fabian Simon: Understanding accounting. 2014 (Accessed October 14, 2015)
  5. ^ Gerhard Rübel: Basics of real foreign trade. Oldenbourg Wirtschaftsverlag, Munich et al. 2004, ISBN 3-486-27560-7 , pp. 92-94.
  6. ↑ a b Thieß Petersen: Impoverishment growth. In: Business Studies. wisu. Journal for training, exams, career entry and advanced training. Volume 39, No. 2, 2010, pp. 200-206.
  7. ↑ a b Ulrich Delius: Human Rights Report No. 39. Website of the Society for Threatened Peoples. (Accessed June 11, 2015).
  8. ↑ Gerard Greenfield: The coffee crisis, Vietnam's fault? (Accessed June 11, 2015).
  9. ↑ Oxfam, Germany: Bitter! Poverty in the Coffee Cup (Retrieved June 12, 2015).
  10. ^ Gerhard Rübel: Basics of real foreign trade. 2nd, fundamentally revised edition. Oldenbourg Wirtschaftsverlag, Munich 2008, ISBN 978-3-486-58770-8 .
  11. ↑ Bernd Kempa: International Economics. Kohlhammer, Stuttgart 2012, ISBN 978-3-17-020812-4 .