Trading Your Way to a Deluxe Apartment in the Sky

Is it possible for a non-developed economy to better its economic status and move into the realm of an industrialized nation through trade? This is the question Arslan Razmi of the UMass-Amherst economics department sought to address in his lecture “Moving Up the Ladder to escape the Adding Up Constraints.”

The lecture started with an interesting overview of how the world and economic trade theory has changed. He started by describing the classical system most of us learn about: “reciprocal demand.”

This is the ever-optimistic model that says as we buy goods from Indonesia, we create income in Indonesia, who then turns around and uses that new income to import our goods. Thus, leaving no imbalance in the trade between the two nations while at the same time not having to deal with any demand side constraints.

He followed up on this with a theory was new to me; called the “flying geese” model and like the classical approach this also maintains a rather rosy outlook on the situation for non-industrial nations.

It says that if we imagine the economic world as a ladder, the nations at the bottom are able to move up by selling their labor-intensive goods on the international market, build up an income basis, make wise investments and slowly move up the ladder into the medium-tech rung. And with their movement up they now become a source of demand for those still left in the labor-based rung, which allows them another path up the ladder themselves.

This theory seems all well and good especially if one examines it through the eyes of the Heckscher-Ohlin theory, yet it once again does not take into account any of the demand-side constraints that one would expect to see.

This all leads to the theory the Dr. Razmi sees at work in the world today; the Keynesian demand based model. This model is not quite as rosy as the other two, because in the current world of dominant and emerging markets, the emerging nations of the world are all forced to compete against each other for a share of the developed nation’s demand.

Thus, rather than Indonesia competing with itself to increase supply in the classical or “flying geese” models they are now competing against Taiwan, India, Thailand and all the other non-industrial Southeast Asian nations for a share of the US import market. And while this would not be a big deal if our economy was growing at 1000% a year, the economy only grows about 3-5% a year which means there is only a limited amount of market space and that if one nation is going to succeed in using exports to grow their economy, it will have to be at the expense of another nation; thus leading to the exposure of the “fallacy of composition” at work in export-led growth strategies. The implications of this are rather severe. First, the chance of nations suppressing workers’ wages in an effort to make their goods cheaper and overcome the demand constraints increases dramatically.

Also, the environmental impact would increase, as the nations have no desire to incur the added short-term cost of keeping the environment clean. Plus, it allows nations like the US and global organizations like the WTO to play an even larger role in influencing the economic path of non-developed nations.

While this topic could have lead to a very interesting lecture and discussion, Dr. Razmi’s failed to deliver. It was very appropriate that the talk was moved from the economics seminar room to the Lafayette 302 classroom, because throughout the entire lecture I felt as if I was sitting in my nightmare as an economics student; a professor standing in front rambling in a heavily accented voice, throwing up overhead slides of equation after equation which have no meaning to me and which he fails to explain what they represent or even why they are important. Maybe if I had already completed some graduate economics work in international economics I would have understood what he spent the majority of the session talking at us about. However, my spirits were lifted when an elderly lady walked in and had some stern words with Dr. Razmi and Prof. Sequino about going over on their allotted time in the room.