Chapter 16 – Primary Exports, page 1 of 11• development/industrialization strategies:development strategy has followed a chronology starting with an emphasis on primarygood exports, switching to ISI, and then to manufactured export promotionthe emphasis on primary good export (including agricultural goods and minerals)started with colonialism; primary products have been a major source of income, but itwas believed that relying on primary products would not help a country develop unlessthe country implements an industrialization strategymany developing countries (including Mexico, Brazil, Argentina, Bolivia, Pakistan,India, Philippines, Indonesia, Kenya, etc.) implemented ISI as a strategy to makeimported manufactured goods expensive in order to promote domestic industry, underthe belief that domestic industries will eventually be able to produce cheaply andcompete at world pricesover the last 20 years, ISI has dropped out of favor because of the debt crisis of countriesthat followed ISI coupled with the success of countries that undertook manufacturedexport promotion; this has led to significant policy changes over the past 10 years• primary product exports:there are advantages and disadvantages of specializing in the export of primaryproducts:Disadvantages – there are four main problems with reliance on primary productexports: 1) declining terms of trade 2) fluctuating export earnings 3) ineffective linkagesto other sectors 4) “Dutch disease”:1. declining terms of trade:it is believed that the terms of trade for primary products will decline over time; thatis, over time it will take increasing amounts of an agricultural or mineral product topay for a manufactured goodthus, if the world division of labor consists of primary product producers andmanufactured product producers, a country will not want to continue to be aprimary product producer because the terms of trade will continue to decline forthem, and they will never escape povertyEngel’s law might explain why the terms of trade for agricultural products declineover time; according to Engel’s law, as income increases, a larger absolute amount ofincome is spent on food, but a smaller proportion of income is spent on food becausethe income elasticity of food is low; thus, if the supply of food rises steadily withtime, the price of food will decline because demand doesn’t rise as quickly as supplyas average income increasesadditionally, there is a limit to the price that can be charged for minerals becausebuyers of the minerals will be able to substitute away from using them if the priceChapter 16 – Primary Exports, page 2 of 11charged is too high (for example, buyers will use iron instead of copper, use plasticinstead of metal, learn how to make finer wires using less metal, etc.)although buyers of minerals could find substitutes, oil is an exception; oil exportinghas enabled some countries to achieve middle income statusthe prices of primary products are alleged to be variable and unpredictable, but therevenue earned from primary product export depends on both price and quantitysold; both of these can be variable with agricultural productsthere are three measures for the terms of trade – a) net barter terms of trade b)income terms of trade c) single factor terms of trade:a) net barter terms of trade – this is defined as the ratio of an index of thecountry’s export prices to an index of the country’s import pricesnet barter terms of trade = (index of primary product prices)/(index ofmanufactured tradeables prices)each index is a weighted average of the prices of imported or exported goods;the weight on each price depends on the importance of each product (such asits proportion of trade volume); the ratio is set to 100 in the base yearpage 638, figure 16-3 – the net barter terms of trade for primary products:this figure illustrates that the net barter terms of trade for primary productsfluctuates, but does not show a clear pattern, although there could be adownward trend toward the endpage 639, figure 15-4 – the net barter terms of trade for developing countries:this figure shows a definite downward trend for non-oil-exportingdeveloping countriesother studies have shown mixed results – a study by Cuddington showed nosustained trend for 24 primary commodities from 1900 to 1988; a study bySapsford and Balsubramanyam showed the terms of trade declined at anaverage rate of 0.7% per year; another study in the World Bank EconomicReview (1988) showed the ratio of an index of prices of non-fuel primaryproducts to an index of prices of manufactured products fell from 131 (1900)to 100 (1960) to 67 (1986); thus, there could be some support for the fear thatthe terms of trade are declining for developing countriesb) income terms of trade – the income terms of trade consider the purchasingpower of a country’s exportsincome terms of trade = meePQP= (revenue from exports)/ PmChapter 16 – Primary Exports, page 3 of 11Pe = price index of exportsQe = quantity of exportsPm = price index of importseven if the price of exports increases faster than the price of imports, theincome terms of trade will not decline if the quantity of exports increasesquickly enoughc) single factoral terms of trade:developing countries could possibly prevent the terms of trade fromdeclining through concerted action; they could create internationalagreements to fix prices, just like OPEC; because LDCs lack political powerand face large purchasing monopolies, some argue for a new economic orderwhere the UN helps developing countries raise the prices they receive fortheir goods2. fluctuating export earnings:some have seen unstable export earnings due to unstable commodity prices orquantities as a barrier to growth, for instance because it prevents governments fromhaving stable tax revenues to carry out development programs, such as to increasingexpenditure on education, health, etc. when its tax revenue is variablehowever, according to the permanent-income hypothesis, fluctuating exportrevenues might encourage saving; thus, unstable export earnings might not beharmfula country could stabilize its earnings by creating buffer stocks (this would only workfor nonperishable goods) and monitoring the supply to world markets; whenmarkets are saturated with goods, goods could be added to the buffer stock, andwhen markets are depleted, goods could be removed from the buffer stock and sentto the markets; however the cost of storage and