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The Fallacy of Composition and Developing Country Exports of Manufactures

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The success of the larger developing countries, which achieved high growth rates of manufacturers exports in the 1980s has allayed many policy makers' concerns about a potential fallacy of composition for manufactures exports and encouraged a wide range of countries to embark upon a similar course. This analysis highlight the importance of treating a problem such as the alleged fallacy of composition in a context of global general equilibrium with two way trade, and of specifying very clearly the source of the export supply shock which causes the export expansion. The welfare gains were found to be small and sometimes negative when terms of trade losses outweighed the efficiency gains obtained from liberalisation. In the presence of continuing import protection on manufacturing, the welfare gains were typically much larger. The critical difference emerged, when all developing countries expanded their production of manufactures exports. Instead of declining, the benefits to each individual region increased. The results of this initial study suggest that the incorporation of general equilibrium interactions and intra-industry trade may completely overturn the conventional view of the fallacy of composition. -from Author

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... 8 The earliest studies distinguish between primary sector and manufacturing exports. Exporting primary products, which suffer from unfavourable price trends and from great price variability, are suspected to associate poor growth performance (Rodriguez and Rodrik 2001), whereas the expansion of manufactured exports has been a vital source of growth for many countries (Cline 1982;Ranis 1985;Martin 1993;Cline 2010). Thanks to the increasing availability of highly disaggregated trade data, first in the OECD and then for other parts of the globe, the research focus has recently shifted to the product characteristics of exports. ...
... Poorest(GDP per Capita) producter of good 1988-19921993-19971998Code Country 1988-19921993-19971998 Africa Asia 1988-19921993-19971998Code Country 1988-19921993-19971998 CZE 1988-19921993-19971998Code Country 1988-19921993-19971998 LTU Springer Nature journal content, brought to you courtesy of Springer Nature Customer Service Center GmbH ("Springer Nature"). Springer Nature supports a reasonable amount of sharing of research papers by authors, subscribers and authorised users ("Users"), for small-scale personal, non-commercial use provided that all copyright, trade and service marks and other proprietary notices are maintained. ...
... Poorest(GDP per Capita) producter of good 1988-19921993-19971998Code Country 1988-19921993-19971998 Africa Asia 1988-19921993-19971998Code Country 1988-19921993-19971998 CZE 1988-19921993-19971998Code Country 1988-19921993-19971998 LTU Springer Nature journal content, brought to you courtesy of Springer Nature Customer Service Center GmbH ("Springer Nature"). Springer Nature supports a reasonable amount of sharing of research papers by authors, subscribers and authorised users ("Users"), for small-scale personal, non-commercial use provided that all copyright, trade and service marks and other proprietary notices are maintained. ...
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In this paper we first propose a proxy for early stage activity in a country’s exports based on product life cycle theory. Employing a conditional latent class model, we then examine the relationship between this measure and economic growth for 93 countries during the period 1988–2005. We find that the impact of early stage activity differs across three clusters of countries. And we find that GDP levels can predict the cluster and the sign of the coefficient in a non-linear manner. In the richest countries, exporting products that are in an early stage of their product life cycle is associated with higher growth rates. In contrast, we find a cluster of middle income countries with high growth rates that grow faster by exporting more mature products that are in the later stages of their life cycle. Finally, early stage activity has no significant impact on growth in the cluster of the poorest, developing countries. Countries in early stages of development should focus on acquiring market share in mature markets with routine technologies whereas emerging economies face the challenge of at some point switching from copying mature to inventing new products as they approach the global technology frontier. At that frontier they must join the advanced economies who specialise in early stage innovative products to stay ahead of increasing competition from abroad.
... 4 For a discussion of a model based on a social accounting matrix see Wang (1997). Martin (1993) uses data for 1987 in a global general-equilibrium model with three product groups (manufactured exports, other goods and services, and non-traded goods) and thirteen regions. He specifies the degree of substitutability between the products of different regions using a single elasticity of substitution assumed to be at a constant level of 3, and sets both the elasticity of transformation in production and the elasticity of substitution between composite commodities in consumption at a constant level of 1.5. ...
... On the basis of this finding, Martin rejects the fallacy of composition argument. Martin's (1993) analysis improves on earlier studies particularly in two respects. He emphasizes that trade liberalization leads to an increase of trade in both directions between developed and developing countries, thereby stimulating developed countries' exports and raising their per capita income levels. ...
... On the other hand, his analysis has important shortcomings in particular regarding the very broad product classification, the high and constant elasticities of substitution between products from different regions, and the lack of taking account of adjustment costs in developed countries. As Martin's (1993) paper shares these shortcomings with other studies based on general-equilibrium models, they will be discussed in more detail in section III.C below. ...
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This paper reviews the literature on the fallacy of composition with an emphasis on labour-intensive manufactures. It briefly addresses the protectionist and the partial-equilibrium versions of the argument before focusing on general-equilibrium considerations and the debate on the manufactures terms of trade of developing countries. The review indicates a potential fallacy of composition problem in labour-intensive manufactures, where competition among different groups of developing countries for export market shares may constitute a new form of the fallacy of composition. The likelihood of a country that exports labour-intensive manufactures to become subject to the fallacy of composition rises with the increasing integration of several strongly populated low-income countries into world markets, while it declines with continuous structural change and favourable aggregate demand conditions particularly in developed and the advanced developing countries. Copyright Blackwell Publishers Ltd 2002.
... The earliest studies distinguished between primary and manufacturing exports. Exporting primary products, which suffer from unfavorable price trends and from great price variability, can be suspected to lead to poor growth performance (Rodriguez and Rodrik, 2001), whereas the expansion of manufactured exports has been a vital source of growth for many countries (Cline, 1982;Ranis, 1985;Martin, 1993;Cline, 2010). Thanks to the increasing availability of highly disaggregated trade data, first in the OECD and then for other parts of the globe, the research focus has recently shifted to the product characteristics of exports. ...
... What institutions will pass that test is and empirical matter and left for further research. 1988-19921993-19971998Code Country 1988-19921993-19971998 ...
... What institutions will pass that test is and empirical matter and left for further research. 1988-19921993-19971998Code Country 1988-19921993-19971998 ...
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In this paper we first propose a proxy for the maturity of a country’s export bundle based on product life cycle theory. Employing a conditional latent class model, we then examine the effect of maturity of countries’ exports on their economic growth for 98 countries over the period 1988 to 2005. We find that this effect is different across three endogenously determined growth regimes and that real GDP per capita predicts the regime membership. We show that the richest countries grow faster when they specialize in less mature products in an advanced country regime. The effect of maturity turns insignificant for the least advanced countries in our developing country regime. And at intermediate levels of GDP per capita, in an emerging country regime, countries grow faster and exhibit strong convergence by exporting more mature products. Our results confirm earlier evidence that what you export matters for growth. But more importantly, our analysis shows that when you export matters too. Countries in early stages of development should focus on acquiring market share in mature markets with routine technologies whereas emerging economies face the challenge of at some point switching from mature to new products as they approach the technology frontier. At that frontier they must join the advanced economies who continuously switch into (increasingly) less mature innovative products to stay ahead of increasing competition from abroad.
... The structure of trade can be critical to long-term growth (Lutz and Ndikumana, 2007). Some studies examined the effect of exporting manufactures on growth if all (or most) developing countries try to export manufactures—the fallacy of composition (Cline 1982Cline , 1984Cline , and 2008 Ranis, 1985; Martin; 1993). Others focused on the composition of exports and its impact on growth and development. ...
... The structure of trade can be critical to long-term growth (Lutz and Ndikumana, 2007). Some studies examined the effect of exporting manufactures on growth if all (or most) developing countries try to export manufactures—the fallacy of composition (Cline 1982Cline , 1984Cline , and 2008 Ranis, 1985; Martin; 1993). Others focused on the composition of exports and its impact on growth and development. ...
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I perform Arellano-Bond GMM estimations using panel data over the period 1995–2008 and explore the growth effects of Africa's trade with China, distinguishing between the effect of imports and the effect of exports, and controlling for the role of export concentration. Four important results are obtained from the empirical analysis. First, there is no empirical evidence that exports to China enhance growth unconditionally. Second, the results suggest that export concentration enhances the growth effects of exporting to China, implying that countries which export one major commodity to China benefit more (in terms of growth) than do countries that have more diversified exports. Third, contrary to the widely held view that increasing imports from China would have a negative effect, the empirical results show that the share of China in a country's total imports has a robust positive effect on growth. Finally, the evidence suggests that there is an inverted-U relationship between exports to developed countries and growth in Africa. Overall, the results seem to provide support for the hypothesis of growth by destination (i.e., that where a country exports matters for the exporting country's growth and development). I draw on these findings to outline some policy implications.
... The expansion of China and India's trade differs from the expansion of developing countries' exports considered in much of the traditional development literature that focused on the deterioration in the terms of trade associated with expanding exports of primary commodities. China and India's trade growth involves, for instance, two-way trade in manufactures and services, which make the recipient countries the beneficiaries of improvements in efficiency in their trading partners (Martin 1993). It also involves fragmentation and global production sharing, where part of the production process is undertaken in one economy, and subsequent stages are undertaken in another (Ando and Kimura 2003; Gaulier, Lemoine and Unal-Kesenci 2004). ...
... The expansion of China and India's trade differs from the expansion of developing countries' exports considered in much of the traditional development literature that focused on the deterioration in the terms of trade associated with expanding exports of primary commodities. China and India's trade growth involves, for instance, two-way trade in 5 manufactures and services, which make the recipient countries the beneficiaries of improvements in efficiency in their trading partners (Martin 1993). It also involves fragmentation and global production sharing, where part of the production process is undertaken in one economy, and subsequent stages are undertaken in another (Ando and Kimura 2003; Gaulier, Lemoine and Unal-Kesenci 2004). ...
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Continuing rapid growth of China and India can be expected to raise incomes in Russia, but also to put adjustment pressure on Russian firms. The impacts of the rapid growth of China and India on the Russian economy are explored by examining a baseline projection using a global general equilibrium model, and then assessing the implications of higher-than-expected growth in China and India. The authors find that a major source of benefits to Russia is likely to be terms-of-trade improvements associated with higher energy prices - a quite different channel of effect from that for many developing countries that benefit primarily through expanded opportunities to trade directly with these emerging giants. Taking into account the likely improvements in the quality and variety of exports from China and India,the gains to Russia increase substantially. The expansion of the energy sector and the contraction of manufacturing and services are a sign of a Dutch disease effect that will increase the importance of policies to encourage adaptation to the changing world environment.
... The expansion of China's and India's trade is quite different from the expansion of developing country exports considered in much of the traditional development literature that focused on the deterioration in the terms of trade associated with expanding exports of primary commodities. China's and India's trade growth involves, for instance, twoway trade in manufactures and services, which make the importing countries the beneficiaries of improvements in efficiency in their trading partners (Martin 1993). Exports by China and India also involve fragmentation and global production sharing, where part of the production process is undertaken in one economy, and subsequent stages are undertaken in another (Ando and Kimura 2003;Gaulier, Lemoine and Unal-Kesenci 2004). ...
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... Furthermore, manufactured goods are frequently quite finely differentiated, allowing countries that are both net exporters of, say, machinery to have extensive two-way trade in machinery. In both situations, increased efficiency and competitiveness in one emerging economy are very likely of benefit both to other developing countries and to their industrial-country trading partners (Martin, 1993). In addition, the trade patterns of growing countries tend to be quite dynamic. ...
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The impacts of faster growth in China and India for Europe are analysed taking into account terms-of-trade effects, second-best welfare impacts and improvements in product quality and variety. More rapid growth in these giants could improve Europe's terms of trade, but second-best effects on energy markets could lower welfare unless these taxes are Pigovian. Whether growth arises from productivity or capital accumulation has important implications, with capital-driven growth involving higher energy and agricultural prices. When quality and variety growth are taken into account, the benefits to Europe are substantially greater. If agricultural protection in emerging Asia increases with growth, the impacts on Europe appear to be adverse but small. Oxford University Press and Foundation for the European Review of Agricultural Economics 2008; all rights reserved. For permissions, please email journals.permissions@oxfordjournals.org, Oxford University Press.
... Second, Spence (2011) mentions that this problem may not be binding for large economies such as China and India. Several commodities may also be exempted from this logic, such as several agricultural products (e.g., cocoa, coffee, tea, vanilla, etc.) and other commodities (e.g., copper and oil) ( Schiff 1994;Goldine et al. 1993;Martin 1993;Coleman and Thigpen 1993). Coleman and Thigpen (1993) show that in the case of cotton exports from SubSaharan Africa (SSA), no adding-up problem is likely to be present because SSA represents a small percentage of the world cotton market. ...
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The possible causes of the middle-income trap phenomenon are diverse, and the difficulty in sustaining export growth, particularly in small open economies in the South (developing countries), can be one such cause. Exports from the South tend to be subject to the adding-up problem, which several studies have argued to happen because of the limited market size in the North (developed countries). The present study revisits the adding-up problem by dealing with diverse factors as determinants of export growth. It considers the following variables: undervaluation to represent the exchange rate effect, the top five trading partners' weighted GDP growth to represent the market demand effect, and wage-productivity gap to represent the price-cost effect. This research introduces this new variable of wage-productivity gap as a factor, and finds that the adding-up problem occurs not because of the limited market in the North but because of the wage-productivity gap (i.e., low productivity relative to the ever-increasing wage rates) in the South. Moreover, undervaluing currency does not significantly improve the aforementioned condition.
... Increased productivity and trade liberalization in China both increase the country's demand for imports and raise investment and welfare in China's trading partners. Martin (1993) shows that a productivity shock in manufactures and services, for which there is a lot of two-way trade, is more likely to raise welfare in country's trading partners than is trade liberalization. Given the substantial productivity gap that exists between local and foreign firms, the new FDI flows are very likely to raise China's productivity. ...
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The industrialized and newly industrializing economies (NIEs) in East Asia will benefit from China's WTO accession, and the developing economies in the region may incur small welfare losses. China will increase its demand for high-end manufacturing products from Japan and the NIEs and farm products, natural resources, and manufactured goods from developing East Asia. New foreign investment may flow into these expanding sectors. The overall impact on foreign investment is likely to be positive in the NIEs but negative in developing East Asia. The NIEs may face heightened competition in global markets as China's comparative advantage shifts into high-end products. (JEL "F11", "F13", "F15") Copyright 2005 Western Economic Association International.
... In many cases, developing country expansions have not caused adverse shifts in their terms of trade because their trade has embraced new products and quality ladders in ways not captured by our model. See the literature on the developing country exports fallacy of composition argument, that includes Lewis (1952), Grilli and Yang (1988), Martin (1993), Singer (1998) andMayer (2003). already discussed. ...
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... This diversification of exports and shift away from commodities has many important advantages. In particular, it helps reduce the volatility of export returns, and diminishes the concerns about potential price declines as exports expand (Martin 1993b). As Mayer (2001) notes, this is particularly the case for developing countries that are able to promote shifts to more capital and technology intensive exports by promoting capital accumulation and increasing the skill levels of their workforces. ...
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... The expansion of China's and India's trade is quite different from the expansion of developing country exports considered in much of the traditional development literature that focused on the deterioration in the terms of trade associated with expanding exports of primary commodities. China and India's trade growth involves, for instance, twoway trade in manufactures and services, which tend to make the recipient countries beneficiaries of improvements in efficiency in their trading partners (Martin 1993). It also involves fragmentation and global production sharing, where part of the production process is undertaken in one economy, and subsequent stages are undertaken in another (Ando and Kimura 2003;Gaulier et al. 2004). ...
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... The expansion of China and India's trade is quite different from the expansion of developing country exports considered in much of the development literature. It involves, for instance, two-way trade in manufactures and services, which make the recipient countries the beneficiaries of improvements in efficiency in their trading partners (Martin 1993). It also involves fragmentation and global production sharing, where part of the production process is undertaken in one economy, and subsequent stages are undertaken in another (Ando and Kimura 2003; Gaulier, Lemoine and Unal-Kesenci 2004). ...
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This paper attempts to reconcile two major conflicting viewpoints regarding the effects of export expansion on economic growth. The first, export optimism, looks to supply factors such as international competitiveness with the view that a favourable export performance results in significant economic growth for a country. The second, export pessimism, argues that exports only contribute significantly to a country's economic growth when the external demand is favourable. Using the Expansion Methodology, the paper shows that the effects of demand and supply factors on the relationship between export growth and economic growth are about the same. The results suggest that while unfavourable demand weakens the aforementioned relationship, tropical countries can offset this by being competitive in their exports. They also caution against excessive weight being given to export-promotion by export optimists as the exports-growth relationship weakens considerably when the external demand falls.
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The timing of China’s and India’s demographic transitions and the implications of alternative fertility scenarios are explored here using a global economic model incorporating full demographic behaviour and measures of dependency that accurately reflect the changing proportion of workers, rather than working‐aged, in the total population. The baseline scenario confirms that demographic change in India may yield significant gains to future real per capita income, resulting from a continuing sharp decline in its total dependency ratio. For China, these gains are largely in the past, although the positive contribution of declining youth and working‐aged dependency to future per capita income will continue to offset the negative impact of rising aged dependency through to 2030. Whilst a policy change to foster higher fertility rates and hence more rapid population growth in China might ultimately ease its dependency burden, in the short run it will increase it. In any case, such a course is contradictory to the goal of delivering improvements in real per capita income. For India, we confirm that the benefits of further fertility reductions, in the form of increased real per capita income, are substantial.
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As the third decade of economic reforms in the People’s Republic of China (PRC) draws to an end, its remarkable growth performance appears almost unstoppable. Between 1995 and 2005, gross domestic product (GDP) and per capita GDP grew at average annual rates of 8.8% and 8.0%, respectively. The central Government’s ambition to raise the level of GDP in 2020 to four times the level in 2000, which requires an annual growth rate of 7.2%, seems well within reach. India’s economic reforms began in earnest in the early 1990s and, like the PRC’s, signal a systemic shift toward an increasingly market-driven economy. Despite the fact that India’s average annual GDP growth performance of 6% in the last decade is enviable by virtually any standards Indian authorities have increased their growth target to 8%, indicating some degree of disappointment with the growth rates achieved in the first decade of reforms (Ahluwalia, 2002). In both countries, there is no question that achieving high and sustainable rates of GDP growth is a major policy objective.
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Within the next decade, China’s labour force will begin to contract, while that of India will expand faster than its population. Relative labour abundance will bring higher capital returns and an increasing share of global FDI to India. Yet China may relax its One Child Policy further and India’s fertility could follow the pattern elsewhere in Asia and decline faster than expected. These linkages are explored using a global demographic sub-model that is integrated with an adaptation of the GTAP-Dynamic global economic model in which regional households are disaggregated by age and gender. Even with a two-child-policy, China’s growth is projected to slow in future with India becoming the fastest growing economy in the world on the strength of its continued population expansion. While GDP depends positively on fertility and per capita income negatively in both countries, the price of more GDP growth in terms of lost per capita income is lower in China than in India, a result that depends critically on India’s initially higher fertility, its higher youth dependency and the age-gender pattern of its participation rates. India therefore has considerably more to gain, at least in per capita terms, from further reducing its fertility
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This paper reports on the initial findings of the program of studies on the impact of developing-country exports of manufactures on the market of the principal industrial countries. A discussion of the liberal-protectionist balance leads to the conclusion that, while quantitative assessments have been made of the decrease of protection through tariff reductions in the 1970's, it has not been possible to measure the increases in protection resulting from various other measures. It seems that the resurgence of non-tariff protectionism in the 1970s has not destroyed the liberal gains of earlier decades. Analysis of market penetration suggests the industrial countries' market for LDC manufactures is large and still growing. It appears that the liberal-protectionist balance in the 1980s will be critical, particularly for lower income and less successful developing countries. Policies to make liberal attitudes to trade dominant are suggested.
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The paper presents the early results of empirical work on trade among developing countries. The main conclusion is that non-fuel trade among developing countries, excluding capital surplus oil exporters, remained a remarkably stable share of their total trade between 1963 and 1977. This constancy does, however, conceal two interesting opposing trends: The share of manufactures exported to developing countries has been falling sharply, while that of non-fuel primary commodities has been rising, the latter largely because of the demands of the newly industrializing countries. Nevertheless, the dynamism of manufactures has meant that they make up an increasing share of trade among developing countries. Four particular points emerge from the evidence: (i) there is no obvious sign of a bias against trade among developing countries, except whatever effect their own commercial policies may have; (ii) the more inward-looking countries tend to send a higher proportion of their exports to other developing countries and regional integration strengthens this effect; (iii) exports of manufactures to developing countries are much more capital intensive than those to industrialized countries; and (iv) exports to developing country markets may not be the vital first stage for capital goods exports that is sometimes supposed.
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In this paper I use a cross-country data set to analyze the relationship between trade orientation, trade distortions and growth. I first develop a simple endogenous growth model that emphasizes the process of technological absorption in small developing countries. According to this model countries that liberalize their international trade and become more open will tend to grow faster. Whether this higher growth is permanent, or only a short-run result, will depend on the relative size of some key parameters. Using nine alternative indicators of trade orientation I find out that the data supports the view that more open economies tend to grow faster than economies with trade distortions. The results are robust to the method of estimation, to correction for errors in variables and for the deletion of outliers. I finally argue that future research in the area should move towards the empirical investigation of the microeconomics of technological innovations and growth.
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This paper examines the treatment of exports and imports, and external closure rules, adopted in recent single-country computable general equilibrium models of small economies. The paper presents a simple, one-sector analytic model which captures the major features of the multi-sector counterpart used in applied models. The paper derives graphical and algebraic solutions to the model and shows that, unlike some earlier external closures, this one gives rise to a well-behaved, price-taking economy. The model is also useful to illustrate the role of elasticities in popular trade-theoretic models that include traded and non-traded goods.
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A price endogenous numerical general equilibrium model of world trade is used to analyze terms of trade issues in the North-South debate. Seven regions are identified, the U.S., EEC, Japan, Other Developed, OPEC, New Industrialized, and Less Developed Countries. The model is benchmarked to a global 1977 micro consistent data set. In the central case analysis, protectionist trade policies in the North inflict an annual welfare loss on the South of around 30 billion dollars per year with an associated terms of trade deterioration of around 9%. The annual welfare cost to the South from northern trade restrictions is somewhat larger than annual North-South aid flows. Protection in the South, and the potential terms of trade impacts of differential growth, are also analyzed.
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China’s monetary policy applies to two sets of monetary policy instruments: (i) instruments of the Central Bank (CB), the People’s Bank of China (PBC); and (ii) non-Central Bank (NCB) policy instruments. Additionally, the PBC’s instruments include: (i) price-based indirect; and (ii) quantity-based direct instruments. The simultaneous usage of these instruments leads to various distortions that ultimately prevent the interest rate channel of monetary transmission from functioning. Moreover, the strong influence of quantity-based direct instruments and non-central bank policy instruments bring into question the approach of indirect monetary policy in general.
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The constraints imposed upon LDCs' export growth by international demand have been the subject of a long-standing controversy. In this paper we present estimates of manufactures export demand functions for 23 LDCs. We focus first on the constraints that the international environment imposes upon export growth for an individual LDC. To this purpose the small country hypothesis of an infinitely elastic export demand is tested and the claim that supply factors play a determinant role in affecting export performances is then assessed. We turn next to the constraints on global LDC growth and ask whether exports from LDCs complete mostly with Northern products or are better substitutes with exports from other LDCs. This allows us to assess the heuristic value of Cline's (1982) remark that a generalized outward shift in the LDCs' export supply schedule would be associated with an important decline in prices and would undermine the success of a widespread export-led strategy. We find that for a representative LDC a large share, almost 80 percent, of the benefits of devaluation on export revenues are made to vanish when other LDCs' competitors pursue similar policies.
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